Guest Blog Topics & Sector Bets
(7/19/2005)
Had a great time yesterday as the Guest Blogger for the CNBC Squawk Box’s blog (squawkblog.com). In case you missed it, here are the topics and sector bets I blogged about:
1. Rubber Boat CEOs
Maria Bartiromo interviewed Ed Gallup, Immucor Chmn. & CEO. It is so refreshing to see a CEO who not only knows every number about his business and has specific, numerical objectives for his company’s sales objectives. The kind of guy you’d like to have with you when you invade China in a rubber boat. Very impressive.
I’m interested in your opinions about other Rubber Boat CEOs you have seen on Squawk Box or elsewhere. Who do you think does an especially good job explaining their company to investors, as well as operating their company?
2. On Citigroup & BofA Results
I think the contrast between weak Citi and strong BofA results today is partly a reflection of the different markets they have targeted. As Marc Oken, BofA’s CFO, said on the show this morning, they are mainly a U.S. bank. The U.S. economy is very strong and credit risk is declining sharply. BofA is a good way to bet on the U.S. growth story.
Also, as I have been writing recently, the big story lately has been the strong performance of the U.S. small caps, driven by a dramatic acceleration of business loan availability to private, middle market, companies in the U.S. BofA is a big lender to this market; their middle market loans grew 12% in today’s numbers. In that sense, BofA is a proxy for the small cap bet.
Finally, Citi talked about the lousy trading and capital markets last quarter. This reveals something I worry about. Since Gramm-Leach in 1989, big banks have generally shifted capital out of lending, into capital market activities, which have a much higher ROE (when things go right). But trading and capital market revenues are not sustainable; neither are the earnings they generate. This shift toward capital market strategies, to me, makes bank earnings less sustainable, and over long periods shold weaken multiples. That makes me like the small banks more than the large ones while this is going on.
I do not own either stock personally, but I but own DVY – which has shares of both
3. The Next iPod – Hearing Aids For Boomers
Boomers are aging, losing their (our) hearing, are vain and insecure. How about an IPOD that doubles as a hearing aid so a n Old Boomer can look cool and hear what people are saying at the same time?
4. Economy Stronger Than Dirt
Maria interviewed Kevin Kliesen, National Association for Business Economics, about the NABE Survey of the U.S. economy. The NABE survey is right on the nose. The U.S. economy is stronger than dirt. That’s why the broad market (SPY) is doing well and the small caps (IWM, IJR) are on a tear.
5. Genentech Blindness Drug Plus Viagra = Happiness
Here’s another aging baby boomer play. Genentech is announcing a new cure for aging blindness today. This is great news for the guys who have been taking Viagra. Seems to me that you should be able to take both together; then you could have sex and see what you are doing at the same time.
PS: A recent poll of all the men who went blind from taking Viagra showed that 100% of them said that it was worth it!
6. On Capital Flows
What we can do that might turn around the flow of capital out of the U.S. to China?
That’s exactly the right question. Yesterday I told the governors at the National Governors Association annual meeting that we are not competing for jobs with China, we are competing for capital.
The dirty secret most Americans don’t know is that the core of the impact on the U.S. trade accounts is not cars or shoes, it is technology. U.S. regulatory policies have shut down capital spending in telecom while China has made telecom capital spending a priority. China is also targeting incentives for our best technology companies to relocate there. Not good. U.S. technology and telecom equipment companies are moving to China at a record pace.
To stop that we need to first repair our policies so we are not driving companies to leave. Congress is rewriting telecom laws now; hope they get it right.
7. China Investing—Will China Stay Strong?
Fundamentals for China growth are still very strong, and should be 8-9% for next year or two. The risk is that political pressure within the U.S. is making our government do things that cold interrupt China’s growth. Last week the Commerce Dept. embargoed Chinese cotton goods, for example. Another example is U.S. talk of tariffs, and our pressure to revalue the currency. If China growth stopped, even for a short while, commodity prices would drop like a stone. So, while China still looks good, I think we should be a little careful not to have too much exposure there today.
8. Sector Mix & ETFs
Sam Stovall’s interview on Squawkbox (7-18) recommended a sector allocation based on a strong U.S. economy. Reminder that asset allocation across security classes, countries, and sectors may be responsible for as much as 90% of total portfolio returns. I like the ETFs as a way to place those bets.
9. Maytag Deal
The bidding war for Maytag is continuing. Things to watch for. A board of directors will have a hard time turning down a bid from a strategic acquirer (Whirlpool) in favor of private equity bidders. Their main concern will be the risk of a busted deal, where they pick a buyer then the buyer either fails to close or re-trades the price lower at the last minute. Both are easier with a strategic buyer. Deal issues and shareholder value will dominate xenophobia in the directors’ minds.
10. Little Screens, No Engineers
Music videos on iPods with tiny screens? One squawkblogger suggested that the next generation would be better off reading a book or newspaper so they might learn something.
The point is well taken. Education is THE issue for the country. This year China will graduate 350,000 engineers, more than the U.S. + Japan + Germany. The U.S. will graduate just over 50,000.
FYI, there is a Korean government agency, ETRI, that has 1500 engineers working on those little screens Joe Kernan talked about. They have also developed a wireless standard called WIBRO that will allow a commuter to watch a real-time TV broadcast on a train going 60 miles per hour.
Time for us to quit whining and get back to work.
11. Index Composition
One commenter wondered if it time for the Dow Jones to do a major rebalancing since all the names added in the recent years have been losers.
That’s right– which points to a weakness in all the top-size-tier index portfolios. A company gets put into a top tier index because it went up LAST YEAR. So it is a momentum buyer’s portfolio. May be one of the reasons madcap and small cap indexes have done so well.
Here’s an idea. Why don’t we create an index based on the intrinsic value of the stocks in the Dow or S&P. That way we would not put a stock in just because its price has gone up.
12. Big Exit Packages – What Do You Think?
Good FT article this morning (7-18) on Morgan Stanley exit packages. Co-president Stephen Crawford got $32 million when he quit. David Sidwell will get $21 million if he is terminated as CFO or resigns for good reason, according to the Financial Times. Mitch Merin and John Schaefer have also been given new guaranteed packages.
I think big parachutes for executives suck; they are a sign the board is not doing its job. Would love to hear nominees for the Exit Package Pig of the Year prize.
I will start by nominating Gilette.
13. I own SPY, IWM, IJR as well as call options on IWM.
Want to close with two bets I like. My two largest positions are small cal U.S. stocks (IWM) and dividends (DVY).
I like small caps because they are the epicenter of the turnaround in bank lending. From November, 2000 banks loaned businesses minus $230 billion, From a year ago, bank loans have increased by $120 billion. Increased loan availability is dramatically improving the performance of small companies and will continue to do so for the next year. I own both IWM and IJR.
Dividends will dominate total returns over the next decade, due to tax law changes two years ago, due to changing capital structures as managers adapt to the new tax rates, and due to investor hunger for income. There are also signs this is starting to happen in Japan. I own DVY.