Market Insights – May 30, 2012
“The soldier above all other people, prays for peace, for he must suffer and bear the deepest wounds and scars of war. But always in our ears rings the ominous words of Plato, that wisest of all philosophers: ‘Only the dead have seen the end of war’.” — General Douglas MacArthur, at his commencement address to the graduating class at West Point on May 12th, 1962.
Dear Clients and Friends,
Analysis and reflection over this past Memorial Day weekend produced these thoughts and observations. I thought you might enjoy them so here we go:
1) Memorial Day used to be called “Decoration Day” and originated after the American Civil War to commemorate fallen Union Soldiers. Southern ladies organizations and southern school children also decorated the graves of Confederate soldiers in May although the dates varied from region to region. (There is disagreement to this day between the North and South as to who’s original idea it was.)
2) Eugene Polley, the inventor of the TV remote died this last week at the age of 96. A native of Chicago, Illinois, Mr. Polley and his fellow Zenith engineer Robert Adler were honored with an Emmy Award in 1997 for their work in pioneering television remotes. During his 47 year career as an engineer, Polley earned 18 U.S. patents. At Zenith (now LG Electronics), he worked his way up from the stockroom to lead project engineer where he also credited with the development of the push-radio for automobiles and the video disk, a forerunner of today’s DVD.
3) Gina Rinehart is the richest woman in the world according to Australia’s BRW magazine. The Australian mining magnet has a net worth of $29 billion. Ms. Rinehart’s fortune has tripled over the past year – at the rate of more than $1 million per hour – due to the mining boom in Australia and strong commodity prices. Apparently it’s not easy at the top – even with $29 billion. Ms. Rinehart’s children are suing her for control of the family empire in addition to a number of Aboriginal landowners who have filed suit against Ms. Rinehart claiming underpayment of royalty interests.
4) According to Forbes, 104 of the world’s 1,226 billionaires are women. That’s about 8.5% even though women make up nearly 50% of the world’s population. At the millionaire level in the United States the numbers are a little different where 43% of American millionaires are women. Some behavioral economists and wealth experts say there are two reasons and they are inter-connected. First of all, women tend to be more risk-averse than men (over the years it has been proven that women’s risk adjusted investment returns have consistently beat men’s returns by over 1% per year). Becoming a billionaire usually requires starting a company and starting a company usually requires substantial risk so women’s risk aversion may be a factor. Secondly, according to Maria-Elena Lagomasino of Genspring Family Offices, creating billionaire-level wealth requires “absolute focus” on a business or idea for many years and women often have to make a decision about having a family. “People at the billionaire level have to eat, sleep and breathe their business. That’s difficult to do when you are also building a family in the early years” Ms. Lagamasino adds.
5) We all realize the IPO of Facebook was a mess. Morgan Stanley handled the deal poorly, pulled its support of the stock @ $35 and may have even intentionally discriminated against some its own clients regarding the dissemination of information at a critical time. The NASDAQ badly botched the initial trading in the stock and wound up costing market makers and clearing firms millions.
6) Facebook remains un-investable to me for a number of reasons, some of which include: Philosophy – The company is run by a 28 year old who favors a social mission above profits (at a crucial road show, Zuckerberg hid out in a bathroom and forced the audience to wait until he was ready to come out. When he did emerge, he took the stage wearing a hoodie pulled up over his head). Business and Profit trends – Revenue growth continues to decelerate (down 10% q/q) and display advertising revenue trails Google by a big margin. The low hanging fruit of a 50% operating margin may have already been harvested and cash flow is now negative as the company spends to grow. Private Equity – There is nothing left for the common shareholder. According to Rich Karlgaard of Forbes.com, “The pig pile of private equity firms and celebrity Silicon Valley angel investors took it all out earlier on in the game” Necessity of the product – Again to quote Karlgaard, “ Facebook is not necessary. Investing in tech companies is never easy. The key is not P/E ratios but necessity. Intel, Google, IBM, Oracle, EMC, SAP, Accenture and F-5 systems all have something in common……the world’s economy depends on them. Facebook is not integral to the global economy and its cool brand is fading as those older than 25 begin to suffer from Facebook boredom.”
7) On to the soon to be ancient land of Greece and a few cool economic facts from the land of mythology: The U.S. economy produces more GDP in 8 days than the entire economy of Greece does in a full year ($335 billion). Since the fourth quarter of 2007, the GDP of Greece has shrunk by 16%, a stark contrast to China’s economy which has grown by 46% over the same period. All of the companies in Greece together earn a combined $15 billion of profits, which is less than JP Morgan will earn in 2012 (even with the most recent trading fiasco).
8) Why are the global markets so upset over a country so economically inconsequential? The fear is that if Greece exits the Euro in a disorderly manner, the ensuing chaos would spread to Spain and possibly Italy, again putting liquidity pressure on the banks of those countries. Weakened banks lead to weaken economies which lead to recession and since Europe represents 24% of global trade, the fear is that a European recession could become a world-wide recession.
9) Doug Kass and I remain convinced that there are ample tools to ring fence Greece. An ECB cut in interest rates, the continued infusion of Euros to the banks combined with more aggressive purchases of sovereign debt and EU backed bank deposit guarantees, would go a long way to calming market nerves.
10) Despite the European uncertainty, U.S companies are taking advantage of opportunities. Eli Lilly is investing 330 million euro in a new plant in Cork, Ireland. G.E. is spending 30 million euro to invest in new research and development in energy, aviation and medical technology in Germany. In Paris, Google just inaugurated its new headquarters for southern Europe, the Middle East and Africa.
11) It looks like China may have seen enough slowing of their economy. They also are keeping a watchful eye on Europe where a disorderly Greek tragedy would cause a whopping 1.7 % drop in Chinese GDP. Look for them to lower their interest rates.
12) According to new research out of the U.K., China is now the largest grocery market in the world consuming $970 billion in groceries on an annual basis (the U.S. was second at $917 billion). The growth has come from an evolving Chinese diet: away from rice and pork and into dairy products, wheat, whole grains, and red and white meat.
13) Stanford University economist, John Shoven says that delaying Social Security benefits might be the best investment deal for retirees. When the trade-off is calculated like an investment return, an un-married 62 year old man who delays benefits until age 67 gets a payoff equivalent to a 5 year bond paying 3.2% per year. For a woman, it’s a 4% return. It gets better for married couples: If the higher-earning spouse delays benefits from age 62 to 70, but begins collecting spousal benefits at age 66, the return is equal to owning an 8 year, 7% bond. When considering inflation and tax advantages, the taxable equivalent yield becomes nearly 10%.
14) Ford Motor CFO, Bob Shanks says that May’s auto sales are very good and should equal a 14 million annualized rate.
15) Toll Brothers (largest builder of homes priced at + $400,000) says that delivers during the February-April period rose 14%. Signed contracts rose 47% and backlog jumped 49%.
16) Paint manufacturer Sherwin-Williams recently increased its earnings forecast for 2012 citing renewed demand from home builders and remodelers.
17) The Case-Shiller home price index showed that existing home prices rose in 12 of the 20 markets covered by the index. Prices rose in Tampa and Miami and for Las Vegas, the worst market in the index….prices actually remained flat and did not fall for the first time in 4 years.
18) Last week, The University of Michigan Consumer Confidence number showed the highest print (79.3) since 2007. This number should bode well for continued robust consumer spending.
19) Back in mid-April, the shareholders of banking giant Citigroup said NO to the proposed $15 million pay package for CEO Vikram Pandit. Brian Wenzinger, whose firm owns 5 million Citi shares voted NO to the raise. Says Wenzinger, “CEOs deserve good pay but there’s a difference between good pay and obscene pay.” In THIS case…well said Brian.
20) At the end of the Memorial Day weekend, Real Clear Politics showed Obama with 2.1% lead over Romney. RCP conducts its research based on the results of over one dozen polls (both left and right leaning).
I hope that everyone had a restful and reflective Memorial Day weekend as well.
Sources: CNBC, Real Money, Doug Kass, Real Clear Politics, Newsweek, Forbes.com, The Wall Street Journal and the National Center.org
Ken Beach, President of Cascade Investment Group, member FINRA & SIPC. Cascade Investment Group is not a tax or legal advisor. You should always consult with your tax advisor or attorney before taking any actions that may have tax consequences.