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Saturday, November 08, 2008


Election Aftermath

We nailed the election, mainly because of our conclusion that there was a 6-1 likelihood that the polls were right. I have my faithful readers to thank for correctly confirming my belief that this would occur. As a result, I won our company contest for coming the closest on Obama's electoral vote count (missing by only 2) and also nailed the Governors exactly and almost exactly, the Senate and House breakdowns as well. But there was no great science to it - you just had to recognize this would not be a GOP year; Americans reliably vote their wallets and pocketbooks.

One thing John McCain did win was the most gracious loser award and I would join him in hoping that the new President has a successful term in the sense that his policies and decisions inure to the country's benefit. Dems might keep that sentiment in mind for the next time they lose, unlike their attitude the last two times.

In fact, whether Mr. Obama does succeed very likely depends on the choices he makes now in selecting his inner circle, cabinet officers, and key regulators. Considering that regulation of the financial services industries must be reconfigured from top to bottom, these choices are of the greatest importance.

The selection of Congressman Emanuel as Chief of Staff can be considered a good start, his partisan record notwithstanding, and we can hope that Robert Rubin and Paul Volcker will return to Washington. Preferably, I would not object to Rubin returning to Treasury, although it looks more like Larry Summers has the inside track. Governor Richardson as Secretary of State would not be a bad choice. I assume Governor Patrick will also get an important slot. One person I am not looking forward to seeing in the Administration is Clinton Labor Secretary Robert Reich, but I'm afraid he is also Washington bound. Ditto for lightweight economist Laura Tyson.


Meanwhile, Republicans in general and Conservatives in particular need to do some soul searching concerning their failures over the last election cycle. First and foremost, they blew it when they had Congressional majorities by ignoring the significant planks in the Gingrich Contract with America. Simply put, they displayed the same arrogance and extravagance they always hated during the long hegemony of the Dems. The earmarks, the log rolling, the refusal to include Dems in the committee process, and worst, the failure by the President to veto a SINGLE spending bill directly led to their return to the minority.

As for the election, the Dems simply outflanked the GOP in fund raising, voter registration, use of resources, especially the internet, and so on. Campaign execution was a mismatch, not just on the Presidential level but all up and down the ballot. The GOP needs to be so much more articulate in explaining its positions and why they are better for our people in the long run.

And the GOP needs to completely refocus its message to the Hispanic community, a natural constituency for Republicans that has been totally alienated from the party. The appeal to the Know-Nothing, xenophobic crowd on immigration and border security seems almost to have been designed to discourage Hispanic affiliation with the party.

So the GOP needs to rebuild, re-articulate, and redefine itself. They start, luckily with 42 Senators (possibly 43 if Lieberman joins the caucus), pending a result or two still in question. They also have three young potential megastars to turn to in 2012 and beyond: Gov. Palin, Gov. Pawlenty, and Gov. Jindall of Louisiana. Those burying the GOP should remember that the GOP was buried in 1964 (but won in 68); the Dems were buried in 72 (but won in 76); the Dems were buried again in 88 (but won in 92). So the parties take turns in 8 or 12 year cycles for the most part (unless you get someone as bad as a Carter). Except for the Jeffersonians in 1800-1824, the Civil War and Reconstruction Republicans, and FDR/Truman 1932-1952, no party has held the Presidency for more than 12 consecutive years.

It sure was an ugly market last week as the two down days badly overshadowed the two up days. The market is absorbing the reality that the economic ills are moving from the devastated financial sector to the services, retailers, and manufacturers. In short, few will be spared and the unemployment numbers reflect the severity of the recession.

It is a fact that lenders are still not lending, balance sheets are shrinking because of the need to deleverage, and that means that companies that need to roll over their maturing debts may find that credit is just not available at any price. This is why most of the companies on my buy/hold list have low debt to equity ratios, or no debt at all. I only wish that I had made my debt criteria even tighter. A very good op ed piece in today's WSJ made the case that the deleveraging is only half over. That is why the hedge funds continue to use every rally as a selling opportunity.

Debt avoidance is also a good strategy for consumers. You need to have little or no debt. Pay down your mortgage if you can, eliminate your auto loan, and above all, do not buy stocks on margin. You want to minimize the hold other entities have on you in this environment, and that's what debt represents. Credit card debt should be paid down first before any other loans. Credit card interest rates and late payment penalties border on usury; they represent a very expensive way to finance a lifestyle.

On the other hand, charging purchases and paying the bill by the due date represents free credit, and that really makes sense.

There has been the usual flood of third quarter earnings reports, and I have been reviewing the balance sheets usually presented with them with more care than usual. A lot of commentators have remarked about the single digit price/earnings (p/e) ratios as an indicator of value, but followers of this blog know that I all but ignore earnings statements, and stopped paying much attention to p/e's a long time ago. Most companies have not yet fully experienced the hit to earnings that the recession will provide, so the denominator of the p/e ratio is suspect. As companies earn less, or move to losses, their p/e 's swell, or become not available when earnings go negative. The p/e ratio you usually see is backward looking, with the "e" representing the last four quarterly reports.

Balance sheets are what I am interested in, and more important than ever in the current environment. In addition to the two ratios I always study (price to book and debt to equity), I am also looking to see changes in soft assets (good will and intangibles), and understanding the debt structure (long term versus short term) of the company. Obviously, hard assets are better than soft assets. As debt moves into short term status, you want to know that liquid assets are there to pay it off or the arrangements are in place to roll it over.

In a future post, I will take a couple of balance sheets from this earnings period and review them. Analysts like David Dreman have long advocated a low p/e strategy in their value approach only to be burned in recessions when p/e's are just too misleading. True value emanates from the balance sheet.

Last Monday, I bought 200 shares of Quanta (PWR), the wind power play, at 19.73. Wednesday, I bought another 100 shares of Belden (BDC) for my IRA at 21.25.

Do not forget changes in inventory and payables.

Hail Freedonia!
Rufus T. Firefly
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