Phil Town

A view from Singapore

I spoke yesterday at an investors conference in Singapore. What surprised me a bit here is the fear level. Asians have been on a roll and Singapore, a financial island in a sea of statist thieves, benefits disproportionately. Good times in Asia are very good times in Singapore. So why all the concern. Perhaps they know something we don't. What if the Dragon is slowing down dramatically? What if the PIGS overfeeding (Portugal, Italy, Greece, Spain) has spread to Hungary, France and others? What if the USA is found to be the biggest Hog of all?

 

Who knows, right? But watch out if you are still not in cash. Lots of red arrows out there signaling money sneaking out the door. Is the theater on fire?

 

Well, there is certainly some smoke. Unemployment numbers are not good. Industrial numbers are sliding. In my opinion, US debt is on a track to hit Greek levels in 2 years and is already 50% above what the Eurozone would consider dangerous.

 

Obama wants more unions, more regulators, higher energy prices. He is now criminalizing oil drilling errors and derivative mistakes on Wall Street. He is penalizing small biz job creation with taxes and health care while misleading the public about GM repaying its loan. The stimulus money created zero jobs net but it nationalized a car company to the detriment of its competitors.

 

The world is watching. And it's starting to get scared of what all this means. What does that mean for us? I think it's time for us to tighten our requirements, know your 4Ms and be happy in cash if you're not certain you are buying $10 for $5.

 

Now go play!

- Phil Town

 

M is for Management

One of the toughest jobs we have as investors is to choose a good management team to invest in.  Picking the jockey can be as important as picking the horse. 

A Rule #1 investor does it with passionate, honest, self-effacing - people who are committed to the business over themselves. Think Steve Jobs at Apple.  Well, except for the self-effacing part.  So think the CEOs running virtually all of Buffett's private companies.  They are all rich, but they keep working hard because they love their businesses. 

A great example of a bad example is Rick Wagoner at GM.  I've never met Rick.  He played b-ball at Duke.  Who knows, maybe I'd like him.  Maybe he had issues at GM that no one could fix.  I don't know. 

What I do know is he failed the shareholders on a scale rarely seen in history.  And it's not like he's new to the business: He was appointed the Chief Financial Officer in 1992. He's been at or near the top of the business now for 17 years. GM's problems must be laid at his feet.  But why has it taken all these years to fire him?  Didn't GM have a board of directors?

GE CEO Buys Stock... So Buy GE, Right?

The other day, Mike left a comment here on the blog about GE. Here's a quote from his comment (taken from Bloomberg):

Last year was “a tough year, and we expect 2009 to be even tougher,” Immelt wrote.

The CEO, while accepting responsibility, made it clear he intends to see GE through the crisis. Today, as GE shares dropped to the lowest price since May 1993, he bought 50,000 shares in a show of confidence.

“The current crisis offers the challenge of our lifetime,” Immelt said. “I’ve told our leaders at GE that if they are frightened by this concept, they shouldn’t be here. But if they’re energized, and desire to play a part in transforming the company for the future, then this is going to be a thrilling time to be a part of GE.” [By Rachel Layne, Bloomberg]

Hey, you gotta like it when a multi-millionaire puts up his own money to buy 50,000 shares.  Now if he mortgaged his house and bought 5,000,000 shares I'd get excited.  And check out the financials on GE, right?  Notice the debt has doubled twice in the last ten years while earnings and sales and book value have doubled once or less.  And it would take about 35 years to pay it off out of cash flow.  Red flag there.  Not to mention a 3% ROIC. 

And what were they doing with the debt?  Over 60% of it went to pay dividends or buy stock.  WHAT???

They were borrowing money to prop up their stock price?  You gotta be kidding!  And worse, like GM, they were borrowing to pay dividends.  That is almost criminal. 

No CEO should pay dividends because investors expect one.  They should pay a dividend because they have cash they can't invest with a high enough return.  Period.  Anything else is semi-fraudulent and certainly misleading.

In other words, GE was either being run into the ground by incompetence or by traitors who were acquiring businesses that didn't pay off.  So traitors or incompetents.  Either way, unless they change management, how is this going to improve?

It's cheap, but it also has almost no equity at all right now.  Debt is 5 times the equity.

Phil Town says, "Now go play".

RULE #1 QUESTION OF THE WEEK: WHAT IS A COMMODITY STOCK?

Somehow Monday came and went and I forgot the 9 a.m. post.  Here it is, with my apologies. David had a question about how to identify a commodity stock. Read on:

Hi Phil,

Here's a question that you may want to touch on in a blog entry. I know Rule #1 investors do not trade in commodities so I recently dropped UNT because it is resource based (thankfully at a small profit). I am wondering what constitutes a commodity in your eyes. I've been reading Robert G. Halstrom's "The Warren Buffet Way." He includes (p.71 ) automobiles, computers, airline service, banking and insurance as commodity-type stock. Based on Halstrom's assertion, I imagine we should stay away from Honda (HMO) or IBM even if they had excellent numbers and their share prices fell to an acceptable MOS. Would you agree?

David Brien