It is a strange sight to see the Dow Industrials trading at 6,700. That’s still a level from 1997. And it still indicates that people don’t want to own stocks. At this point, it seems to be as much about available capital for investment as a willingness to invest.
Valuations are low, the Dow is trading with a p/e of around 20. But that’s still not as low as it’s been during past recessions.
Still, it might be helpful to add some flavor to the current p/e ratio of the Dow. Consider that Citigroup and Bank of America don’t have earnings. Neither do Ford, GM, Alcoa. It’s safe to say that earnings at JP Morgan, American Express, Goldman Sachs and GE are hanging by a thread.
Obviously, any earnings associated with lending are seriously impaired, at best. But it’s also obvious that at some point, earnings from lending will return. And the p/e for the Dow and other indices will drop substantially.
It’s how long it will take to see a resurgence of lending earnings that’s the question.
*****We’ve got a showdown of economic heavyweights brewing between PIMCO’s Bill Gross and NYU economics professor Nouriel Roubini. Roubini is the champion of nationalization of zombie banks. Gross is in favor if continued bailouts from the government.
The difference in opinion is fundamental. Gross is an investor. He prefers to see any solutions maintain current equity structures. It’s also no coincidence that Gross and Co. are advising the government on its handling of Bank of America.
Roubini is an economist. His perspective is not driven by any sympathy to current shareholders. He wants to see the economy moving again. And in his opinion, nationalization of zombie banks is the quickest means to that end.
To the "let ’em fail" crowd, nationalization should be your preferred solution. Nationalization removes current management, wipes out shareholders and puts the banks back in the hands of stronger private ownership. Zombie banks would likely be in government hands for a matter of a few days – just long enough to strip out the impaired assets. I guarantee there’s no shortage of private equity groups eager to buy a healthy bank with a strong brand name.
*****I’m starting to suspect that CEOs like Bank of America’s Ken Lewis would make pretty savvy politicians. It seems to me some of these execs have done a terrific job of inflaming the populist association of nationalization with communism.
By invoking the evils of nationalization, we now feel that sinking another $30 billion into AIG and $25 billion into Citigroup is a better alternative.
And maybe it is.
I also got to thinking that maybe it was all Paulson’s fault. That it was a mistake to bring the Wall Street perspective on deal-making into thegovernment’s financial dealings with failing companies. Taking preferred stock and warrants in exchange for loans isn’t exactly laissez-faire capitalism.
Unless it’s acceptable for the government to think of itself as a capitalist entity, with taxpayers for shareholders.
As the lender of last resort in broken capital market, maybe Americans would feel better if the government had kept its nose out of business and simply handed over the cash. Somehow, I doubt it.
I think, as taxpayers, we want to be compensated for the risk we believe we are assuming in bailing out AIG and Citigroup.
***** When the government lent Chrysler $1.3 billion in 1979, it received 14.4 million warrants for Chrysler stock in exchange. So Paulson had precedent on his side.
And it’s reported that Chrysler asked for the warrants back in 1983, but the adverse reaction from American taxpayers caused Chrysler to withdraw its request.
But through his calculated use of the "n" word – nationalization – Lewis has made sure that he won’t be taking any Iacocca-like $1 dollar a year salary. Lewis destroyed billions in shareholder value, but he’s still getting his.
I should probably apologize for continuing to bring up the nationalization thing. I don’t advocate it is the only way out of this financial mess, even though I do think banks are holding onto impaired assets and delaying the recovery process because they think prices will eventually recover.
Besides, Obama and Geithner have made it pretty clear that they want the banks in private hands. Of course, that’s what Bush and Paulson said about Fannie Mae and Freddie Mac, too.
*****Finally, with the recent sell off, I simply have to think it’s a good idea to dip a toe in the stock market pool. Yesterday I mentioned a few stocks that we like at Daily Profit: Graham Corp (AMEX:GHM), CardioNet (Nasdaq:BEAT), SXC Health Solutions (Nasdaq:SXCI) and Emergent BioSolutions (NYSE:EBS).
*****The next Recovery Portfolio video conference is coming up on March 10, 2009 at 6 pm Eastern time. Given the recent stock market declines, we thought it would be timely to update out outlook for 2009 and give you the latest on where we see opportunity. You can register at the following link:
*****That’s it for today.