Sunday, December 28, 2008

Cure for a Lush: A limitless supply of alcohol?/SYK a short?/WaMu: Just another example Socializing risk and Privatizing rewards

If I was paying someone to come up with a short idea, I would hope for a better idea than Stryker. Stryker did reduce guidance recently for 2008 to $2.82 to $2.84 excluding a restructuring charge. This was about three cents or so below analyst's expectations of $2.87. The guidance was due to a rapid contraction of hospital budgets. MarketWatch 

In the interview in Barron's, Mark Roberts expects a 30 price on a mere 9 times his estimate of $2.95 for 2009, or close to no growth from currently anticipated 2008 earnings with a low multiple attached to the pessimistic forecast to boot. It is possible that many discretionary  hip and knee replacements will be postponed.  Some investors may be disappointed by the short term impact on Stryker's (SYK) business caused by the economic downturn. With SYK already cut in half from its yearly high and now selling at around 14 times 2008 estimate, I would not be trying to catch a few points more points on the downside myself. I can only say that a 30 dollar price tag on Stryker, which is just 9 times Roberts' distressed earnings estimate for 2009, will have at least one buyer that I know well.  Currently, the consensus for 2009 is $3.19 

Sometimes I read a column by a liberal columnist  that contains a kernel of conservative thought. The column by Bob Herbert in the Saturday NYT is an example. Mr. Herbert opines that both the American government and its citizens need to quit being "stupid," Herbert's word so don't blame me, and come to a realization that both the government and its citizens need to stop spending money that is not there. That sort of sounds like a fiscal conservative, so I was temporarily impressed by Bob's conversion. After sounding the clarion call for fiscal restraint and fiscal responsibility, Herbert ends the column with a liberal flourish of recommendations requiring an acceleration of spending money- which is still not there- on programs that he favors. Bob, the money is not there!

It is curious though that the solution to the current economic crisis, which was caused by irresponsible borrowing, is to borrow tons and tons of more money, as the Government is doing now. The budget deficit for the current fiscal year will likely be in the trillion dollar neighborhood, give or take a couple of hundred billion, but hey who is counting billions anymore. The Fed had increased its balance sheet from about 900 million to 2.2 trillion dollars, not yet considered by the world as funny money, and has used its power to create money- that is not there- to bail out financial institutions who borrowed excessively and invested unwisely, primarily to benefit a few individuals who will keep the rewards of their stupidity while socializing the risks.  

Some pundits criticized Fannie and Freddie because the risk was socialized while the rewards were privatized. But that is exactly what is happening today in corporate America. What are the names of the few individuals who received hundreds of millions yearly for writing credit insurance using AIG's credit at the companies London unit, and who is now paying for their stupidity? Why not plaster their photos on the front page of every newspaper in the country everyday for about a month and on the national and local TV news during sweeps? 

And, isn't it interesting that the real estate bubble occurred just after the implosion of the Nasdaq and internet stock bubbles? I wonder how many citizens fully participated in both. It must be some kind of sport. I did not participate in either and I still have my money. Was anything at all learned from what happened in 2000 to 2002 before embarking on yet another bender when the prior one was still in a deep hangover? And, as some have said, the solution being pursued now is to give the drunk more booze, virtually all the booze that he craves, in an effort to cure him of his alcoholism.  It is almost like a sizable segment of our population is in need of serious adult supervision and at least ten years of counseling. Bill Gross seems to think that the American public has been singed by the current crisis and will restrict their buying habits for years to come, as my father's generation did who lived during the Great Depression. Maybe, he just might be right---- for the next six months. 

The latest story in the NYT series The Reckoning focuses on what went wrong at Washington Mutual.

The common element in the failure of WaMu and the disintegration of other major financial firms is incompetence at the highest management levels. It is really scary to see the lack of good judgment, more appropriately anything that could be characterized fairly as judgment, at the center of so many financial firms. Was it really true that Chuck Prince did not know what a CDO was or Citigroup's 43 billion dollar exposure to the toxic waste until it was too late to do anything other than shout "uncle"? ("He didn't know a C.D.O.  from a grocery list " according to a former executive. ) The quest for profits by whatever means possible resulted in risk taking that defied common sense. The standard set by the former CEO at WaMu was to "pump out loans while disregarding borrower's incomes and assets". As a result of incompetent leadership and the encouragement of a culture motivated with inappropriate and frequently self-defeating objectives or incentives, WaMu deserved to fail.  AIG and Citigroup deserve to fail.  

A few people at the top can destroy even the largest company, and shareholders will never be able to rely on the Board of Directors to do their job in any meaningful way. Yes, the Board can be counted on to fire the CEO, after paying him 88 million dollars between 2001 to 2007,  as the bank is burning to the ground, the kind of fire that can only be watched since the structure is too far gone when the fireman arrive to put it out. But how many institutions have been saved by usually inept Board of Directors before the damage, inflicted by a few individuals at the top, becomes irreparable? Bill Nygren apparently never wised up in time either. BusinessWeek 

In Michael Lewis' new book, which I am now reading, a story is recounted of someone buying a house for 1.157 million in 2005 with a $275 down payment, refinancing it with some funky mortgage that transfers all of the risk to the lender, and then two years later takes out a home equity loan for $491,000. The story is recounted in the NYT book review from Sunday.

Now, if anyone is foolish enough to lend with those standards, loosey goosey is a too kind and exceedingly generous description, why exactly are they being bailed out? This would be comical if it was not so very typical in the bailout nation in need of a bailout.

My main question is now, as it has been for months, the same:  how long will the world finance America's fiscal irresponsibility, a borrow and spend, something for nothing mentality? Sometimes, I fear that Uncle Ben will hold a treasury bill auction  some Monday and no one will show up.  Isn't this debt binge just some kind of Ponzi scheme, just bigger than anything Bernie ever dreamed of doing?

When a treasury bill auction is held some Monday and no one shows up, it will then be too late, the house will already have burnt to the ground.   

Someday, during my lifetime, I would expect that the debt of the U.S. to be downgraded way below its current AAA status. Possibly at some time in the distant future, Americans will become concerned about a 500 billion dollar annual interest payment on the national debt, maybe when the interest payments expand to a trillion just because interest rates had to rise to attract reluctant foreigners to buy our paper.  That hope, not based on any existing observation of actual events, may seem optimistic for even a delusional pollyanna. I for one would not mistake something that is working here and now as a guarantee for what the future will hold. Gold and silver will remain a constant part of my asset allocation for the foreseeable future.    

The decision by Kuwait will cause me to avoid buying both the common stock and bonds of Dow Chemical.

I was already concerned about the 15.3 billion dollar price tag Dow was paying for Rohm & Haas and the cancellation of the 7.5 billion dollar payment by Kuwait makes Dow look even more dicey to me. I no longer have a position in Dow. Notable News 10 23 2008

I have worked hard this year to lose money.  My only consolation is that I have once again beaten the S & P 500, handily this year, with less volatility and risk. It looks like a down 15% year. The positives were my higher than normal cash allocation, my individual bond selections (including TCs and preferred stock issues),  all of my bond ETFs (some sold for a good profit like BND, BSV, & BWX, with the later one only bought back), my short term trading of stocks, and my forays into the double short ETFs during the first nine months (unfortunately none held after the Lehman bankruptcy). The main negatives were all of my stock and closed end funds with 50% losses being sort of the norm and the Loomis Sayles bond mutual funds. My worst hold for an individual security that I kept for the entire year was BAC.  I need to have some forced introspection on that one.

I still have both short and long term capital gains. In a year this bad, I see no reason to have a net in either of those categories. To offset most of what is left, I will make the best use that I can of the failed investment in one of my two Loomis Sayles' bond mutual funds, down almost 25% this year. I can at least reduce my tax bite by selling it now. In effect I will be netting their significant failures as managers of a bond portfolio in 2008 with my realized gains from individual bond selections this year.  But it was my failure in selecting this fund. 

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