NY Times Article on Tobacco Taxes

Wow, haven't done Blogger in quite a while.

That said, I stand totally VERKLEMPT (spelling?) on the NY Times article on Tobacco taxes, and how "roll your own" tobacco leaf companies like McClintock are getting around the Obama Administration's taxes on cigarette tobacco.

Why? Not for the reasons you think. Just for what I think, I guess.

Look, Obama smokes. And he is one of the privileged class -- like you, me, anybody who is wise enough to read this -- who can afford to smoke in this era of "tax the smokers".

Apparently, it's perfectly fine and okay to give government workers (in these times) gold-plated pensions, salaries that exceed the private sector's wages, and so on. God forbid these valiant "public servants" endure tough times like the rest of us, have to fret about the viability of their jobs, or worry about their next mortgage payment.

Nay, government employment (federal, state, local and education) will continue apace. Employees in such jobs will continue to garner what to all others amount to gilt-edged benefits -- solid healthcare with negligible co-pay, inviolable defined-benefit pensions, etc.

And the rest of us, those not on the government teat, who try to produce the wealth necessary to support the taxes that provide for these dedicated "public servants' -- apparently must acquiesce. Since, presumably (ironic here), our efforts are not as valuable or noteworthy as those brave "public servants"...

Ya know, "public servants" doesn't mean what it did when my father was alive... but I have to admit, my Dad saw this coming.

When during the late stages of the Vietnam War, he saw half of my cousins get Master's degrees in Education so they could be exempt from the Draft, dear old Dad said, "Just watch. They are taking public education away from the old schoolmarms, and pretty soon, it's going be all about teachers who want to make more money, because they have Master's degrees and think that they are somehow owed it."

Which is exactly what happened. Teaching our kids went from a second-career Mom or spinster -- who knew what little terrors kids really were, because the spinsters/Moms had life lessons -- to a "highly educated professional" who somehow "understood children" because they had "advanced degrees".

Advanced degrees is mostly a myth in this realm, quite honestly. Sure, it's neat and helpful to have an advanced degree in Education from a real "name" college, say UC Berkeley or similar. Your children might benefit from a teacher who has the intellectual capacity to obtain such a degree. But most of these "advanced degree" teachers don't get their Master's from perceived "great-institutions". They get them from the path of least resistance institutions, and they do so because a "Master's" from anywhere is more lucrative than a simple Bachelor's from somewhere.

In other words, most of these teachers are in on the scam.

I had a great argument recently with a former Assistant Principal of a California High School. She was being paid $120K per year before she retired (with full benefits). She said, "You couldn't do my job." I said, "You're right, I couldn't. But I never wanted to. But I would think, that with the benefits and salary that you rose to, somebody else out there could have done your job as well as you did." And I went on with a long list of names, of other people that we mutually knew who had the temperament and ability to have done her job, but who worked in the private sector for less money or benefits.

To which she acquiesced. As in, you're right, other people could have done that job... but I was the lucky one who exploited the opportunity. in other words, FYJIGM... which in Los Angeles city worker parlance, I am made to understood, stands for "Fuck You, Jack, I Got Mine".

This is a long-winded post, so I will bring it back to the leaf tobacco companies, and President Obama.

Our government today stands ready to make certain people a privileged class. If you can afford it, you are privileged. If you cannot afford it, and try to "roll-your-own" (that is, try to make the best out of a bad situation, but continue on with your own pursuit of happiness and liberty), this Government will still try to find you out and make it uneconomic for you to enjoy said liberties.

This state of affairs is WRONG. It smacks of "serve the government BORG", at the expense of one's self.

This new tobacco tax is WRONG from the days of George Washington.

Even George Washington, who suppressed the Whiskey Rebellion of 1794, would understand that -- you know what?, gasp -- Americans like their liberties. They LOVE their liberties.

And the governments' trying one way to tax something is at first "okay, reasonable enough". But then their governments' trying another "something", and later our governments incessantly hammering at something that Americans enjoy, and want to be part of our liberty... at some point, goes against the "life, liberty and pursuit of happiness" doctrine (that Jefferson, an anti-Federalist, as opposed to Washington, wrote in).

Question: what can happen next? The government decides that you can't grow your own tobacco, and smoke it on your own land, without being taxed exorbitantly?

Question: How is this any different than your raising your own Hogs (you know, bacon fat is bad for you), or growing your own Celery (too much salt content, perhaps)?

As Wikipedia states, even George Washington's "internal war" was unsuccessful: "The hated whiskey tax was repealed in 1803, having been largely unenforceable outside of Western Pennsylvania, and even there never having been collected with much success."

In a tremendous lifetime of service to others, the only stain (as Americans) that one could ascribe to the Father of Our Country, George Washinton, is his supression of the Whiskey Rebellion. It is in that one solitary action that George Washington forgot that the United States of America is made by and for the benefit of the People of this Country.

It is not made by the Government, nor those who work for the Government. It is for the People.

The end.

Why China Can’t Lead

By Patrick Garot – 26 March 2009

The market sure picked up since my March 4 (here) and March 9 posts (here). If you've played along, it is time for you to harvest some rocket gains… but that is not the subject of this article.

Instead I will discuss China. I like James Quinn's diarizing on America's fade-out (here) as brain food, but I just don't see it. The question is leadership. What another nation can lead?

Well, Europe has not come to terms with flailing banks (see Harrison's post here). Japan continues on its real, demographically-driven, low demand fade-out. Oil rich Middle Easterners invest, but don't invent. Korea and Taiwan are small, and hurting on export declines.

Some think that this leaves China (see here) to lead the world into the future. But China can't lead, and won't for decades, if ever.

The Bottom 80%

Consider the USA in 1965. Manufacturing hums along. 160 million folks, most productive and decently educated. A growing service sector, expanding institutions, prosperity. Now add an event whereby the US expands its borders to encompass all of poor Latin America and Africa. Then strip out those regions' natural resources, and you have China today.

China has 1.3 billion people. While 562 million (42%) are listed as "urban", in truth there are 180 million in the metro areas that wow westerners – but a third of those are in slums and shantytowns that most westerners don't see. The chart below gives you estimates of life in China for the bottom 80% -- on a purchasing power parity basis, this 80% average $11.58 per day to fulfill all of their needs.

 

The truth is that China is two nations. One is booming, fast-moving and sophisticated. The other copes with a poverty equivalent somewhere between today's Laos, Syria, and The Congo – except without the natural resources of those nations, as much of western China is non-arable desert or mountain.

No Domestic Demand

China's bottom 80% earns $4.48 per day in USD: peasantry amounts. After food, shelter and education are paid, less than $2 is left for "desires" that are often priced in dollars – say, an iPod or a netbook manufactured in China.

China's elegant solution since Deng was to mimic early Asian "tigers" with an export-led tide. Thus the bottom 80%'s per-capita income grew from $1.65 per day in the early 1990s, to $4.48 today. Deng's solution worked.

But China can lead? Nations that can lead must be strong inside and out. And Deng's solution hinged on two things: the assent of Western nations to buy stuff made in China, and cheap labor, from attractive currency rates.

A Manipulated Currency

In January 1990, the Yuan was Y4.73 to the dollar. By January 1994, the Yuan was cheaper at Y8.47 per USD. From 1994 all the way to December 2006, the Yuan stayed above 8 to the USD. Since, the Y/USD rate has been managed down -8% in 2007, and -7% in 2008, to Y6.83 today.

China's economic growth has been a Faustian bargain. The BoC manipulated forex so the Yuan stayed eight to the dollar even as the China-US trade imbalance grew tenfold. Exports sucked out dollars from the US. Now China had to offload dollars, so it bought the "safest" dollar-denominated assets like Treasuries and Fannie and Freddie CMBS, to keep this great game – or Ponzi scheme, you could say if you were average Chinese – going.

As Milton Friedman might say: "You get what you get." In Yuan terms, these assets' value has sunk -15% since 2006 just by forex. If our Fed inflates us out of today's crisis, there could be another -15% or more writedown that China will take on US long bond holdings.

Losses on dollar-assets impact China's wealth position, so its economy. "Truth-time" puts forex back to Y4.7 to USD, if not Y3.5. China's instant losses on dollar-assets in that scenario run to 25% of its GDP, or 40% to 45% if Euro-zone writedowns are included. That is, China would get the same wealth haircut the West just got – but China's agony would be worse, with its less developed, less balanced economy.

China has no solution to its self-inflicted "bubble" of manipulated forex. Keep managing the Yuan, hope Western demand returns, then have to pour good money after bad into the West. Or let the Yuan float, take a massive wealth hit, then watch Western firms unbolt every Milacron from every factory floor, as labor unrest takes hold.

The People's Party

A client of mine wintering in Europe is insufferable. When I ask what the vibe is on the streets of Paris, Berlin or Zurich, he says: "They don't know they're in trouble yet, their government hasn't told them."

It's worse in the PRC. The average under-informed Chinese depends on government to direct, manage and assume the risk for everyday life (except healthcare, for which Chinese families must hoard cash).

There is a great misunderstanding of the People's Party. The Party is Populist. It bows to the bottom 80%'s needs above all. But the Party is not monolithic. Current leaders must do what is "good for the people" (the 80%), or more populist figures gradually assume power, and quietly remove the old guard. Deng was such a figure, a master in orchestrating this dance.

Can the Party let banks and state-run firms fail? Many should be failing now: if they marked down their dollar-assets, Shanghai real estate, and loans to 50%-utilized factories, hundreds would fit any definition of "insolvent". But in the Party's China, this cannot happen. If the banks go under, the jobless grow too many, new, more Populist leaders will emerge. And power within the Party is everything in China.

So current Party leaders are in the hind-end spot of following the west, and hoping for our recovery. There's nothing else for them. BoC Governor Zhou's call this week for a new "world reserve currency" to replace the dollar (here) is only a bleat from the Party's future sacrificial lamb.

Law and Education

Anyone who does business in China will tell you contracts mean little, judges reflect the Party, and it is a land of a hundred excuses, lies and slights veiled as misunderstandings. Rule of Law means nil. As much as we in the West seem to invent laws everyday to cope with this crisis, we still adhere to process. And when even process gives out, there remains the ballot box. Not so in the PRC.

China's education system is producing a wealth of technical professionals like engineers, but to look at abstract numbers lacks context. China does not produce the smartest or most creative of these, nor does it produce a large share relative to its 1.3 billion population. In fact, the bottom 80% are under-educated: only 9 years compulsory education is provided. China spends just 2.5% of GDP on education, ranking it 155 out of 182 nations. Contrast this to Argentina's 3.8% or Brazil's 4.0%.

Historical Precedent

In 1989, Sony Chairman Akio Morita published "The Japan That Can Say No" (here), which asserted that the West depended so much on a "smarter" Japan, that all Japanese should shed views of their country as a "poor island nation with few natural resources", and embrace their own "innate superiority".

We saw how that movie played. Trade runs two ways. In Japan's case, its hoard of dollars led to a giant asset bubble and two lost decades. In China's case, its dollar and Euro hoard may find a different path, but the outcome will be the same. Huge overpayments for in-vogue assets of the day (for the Japanese, Columbia Pictures, Rock Center, Pebble Beach; for the Chinese, natural resources firms).

It's called "trade" for a reason. A manipulated currency, a one-way street, comes back to haunt.

China Can't Lead

For each photo of the glitzy Shanghai Bund, imagine six photos of Mexico, Kenya or Cambodia beside it. Such is the PRC that the Chinese know – 14% glitter, 86% hardship or worse.

China has wealth in sheer numbers, but since most folks subside in poverty, this wealth is opportunity, not reality. China and its Party remain reliant on the ability and assent of other nations to raise the tide for its bottom 80%.

While we can expect a rotation that has China trading more to resource-rich Latin America and Africa, China's biggest markets still will be where the numbers are – the US and Western Europe – for decades to come.

China can't lead because it is mostly poor. It can't lead because its snarky forex plan haunts it. It can't lead because of its Party's dynamics. It can't lead because, like Japan before it, it has yet to learn that "trade" isn't run as a scam, but goes two ways.

Which, in the case of a few Chinese engineers I've used, means actually paying for their copies of Office and Autodesk… too much to ask? When that happens, I'll know the Chinese century may be beginning.

 

 

 

 

 

Questioning the Relevance of Abercrombie - Patrick Garot

New article published on Seeking Alpha is here.

Last Saturday was a sunny one in Carlsbad, CA., ground zero of diminished wealth effects with declines in home values and retirement savings, rising taxes and job insecurity. Here in California, our higher highs tend to lead to lower lows, but we also lead the nation in sea-changes, too.

Still, the mood was good out on the town. But inside the Abercrombie & Fitch (ANF) stores at both the Plaza Camino and University Towne Center malls, the mood was decidedly glum.

No purchases. Few teens. You could smell the sea change.

“The highest quality, casual, All-American lifestyle clothing for aspirational men and women,” boasts Abercrombie’s website. Worried as I was – perhaps our teens no longer aspire? – I decided to ask my nieces, nephews and their friends about A&F, and their relationship with the brand.

One 15 year old girl whose moneyed parents hail from Rancho Santa Fe said, “It (Abercrombie) is not appropriate.” That about summed up the comments that I got from my empathetic nieces. The thought here ran that when your friends’ families are suffering, it’s no longer cool to flaunt a $70 sweater with a $190 pair of jeans.

Meanwhile, teen boys were enthused at Abercrombie’s lower relevancy to girls. “I’ve got better ideas for my money,” groused one. “I wore (A&F) only because I got gift cards,” said my nephew Chris (17). This holiday, Chris received no Abercrombie cards, but did get $250 worth of GameStop gift cards.

Parents around these parts confirmed the new ethic of their kids. Teen girls, if they even stay in the ANF family, are trading down to lower-priced Hollister. Teen boys were glad to be rid of A&F; they wore it because women told them to. Parents, with a new “recession” excuse to control the family spend, couldn’t be happier. One mom related that she stocked up at American Eagle’s pre-Christmas sales, and told her daughter (18) that she wouldn’t get any new clothes until her July birthday. Surprisingly, she said, her daughter was fine with that.

The implications for ANF stock are steady and consistent erosion of margins, profits and cash flows. ANF will experience decreasing brand loyalty – not just in its core group today, but in the future, as new teens (today’s tweens) absorb from older siblings that A&F merchandise is just not as cool.

This persistent erosion has yet to be valued into ANF stock. ANF today trades at $20-$21.

My background, incidentally, is this: my father was in retail, the President (albeit not CEO) of a mid-sized Abercrombie-like concept back in the mid 1970s (good ups) into the early 1980s (it ended in bankruptcy).

My father taught me two things in life. The first, “never get into retail”; this, as all retail concepts die, and the higher the retail flyer, the bigger its crash (Sharper Image, anyone?). The second, “you better ask your mother”.

Well, though my mother was no Wall Street analyst, she was herself a retail exec (women’s wear buyer) who would understand the following.

• Ultra-high margins are not sustainable in a recession. Management’s assertion that it would hold the line on its 67% gross margin is being revealed as false on Abercrombie.com, where this year’s Spring Lines are priced 10% to 15% lower than last year’s.
• “Aspirational” mid-luxury products – particularly clothing, where ready substitutes are available – take a big hit in a recession. Most often, these hits require a complete re-think of a retailer’s business model.
• The momentum of a retailer who “grows up” in good times, like ANF, is cut off at the knees in bad times. The aspirational draw – big stores in pricey malls, in the priciest locations within those malls– acts as the worst form of leverage (the cost of existence) in bad times.
• The ego of a visionary founder works against the company. Michael Jeffries is a great salesman and marketer. But he may need to learn humility… as Ralph Lauren will tell you he got in two different recessions (early 1980s, early 1990s), in order to ride out the third (early 2000s).
• Cash is king in retail. And cash is eroding at ANF, and you would be a fool not to recognize it.

In the fall (Q3) of 2008, ANF’s back-to-school free cash flow (cash from operations less capital expenditures, per its 10-Q) was a negative -$20 million. In 2007, that Q3 number – you have to calculate the change between Q2 and Q3 – was a positive +$219 million. The YoY delta is a whopping -$240 million negative.

Mind you, this 2008 back-to-school disaster was before Christmas, and before the Feds told us we had been in a recession.

ANF’s analyst coverage is miserably trailing such signs. As I write this, Analyst Estimates on Yahoo (27 analyst universe) show an average estimate of $0.97 for the current quarter, with the low estimate at 80 cents per share. This is after management warned on January 9, 2009 that “net income per diluted share for the fourth quarter will be SIGNIFICANTLY BELOW (caps mine) the $1.00 to $1.05 per diluted share guidance previously issued”.

Obviously, most of these analysts can’t be bothered to update, have never worked in retail, or don’t talk to teens and their parents. “Significantly below” in retail (as in tech) means floods, fire and locusts. It means EPS down 40% or 50% against guidance, or more. Whatever the EPS– 97 cents, 80 cents, or my belief, 50 cents – that is against last year’s Q4 EPS of $2.36.

The analysts also are behind the curve on ANF’s vaunted “cash reserves”. Per the10-Q filed for Q3, ANF’s cash plus investments declined from $648 million in 2007, to $559 million. But $100 million of 2008’s cash was borrowed – the first time since January 1998 that ANF had tapped debt or a line of credit. Further, $262 million of those investments were in ARS (auction rate securities), which ANF recently classified as “Level 3” (management decides how to value them).

Add it all up – the $90 million decline from last year’s Q3 to this year’s, the $100 million borrowed to pump up cash on the left side of the balance sheet, and a mark-to-market loss on the ARS of, say, $40 million or so – and what you have is a Q3-to-Q3 decline in cash of negative -$230 million.

And again, this is before the disaster of this year’s Q4, where same store sales were -28% in November, and -24% in December (December’s SSS number was obtained, per DA Davidson analyst Crystal Kallik, only by ANF’s starting clearance sales with heavy discounts on Christmas Eve).

My parents lived the problem with “aspirational” retail. In a lasting recession, you can’t go forward, and you can’t go back. Your pricey rental agreements are locked in, and so long as you have an ounce of cash, your landlords demand it. The virtuous cycle that works in boom times – great spaces, great marketing, soaring margins – kills you in bad times.

If our recession is short, ANF is fairly valued today. If – and it looks like this is the case – the recession is long-lasting, and families continue to deleverage, ANF’s whole model has to be re-thought. All the signs point to such danger ahead. The California teens and their parents are telling us something, and this is that Abercrombie – its wares, and its stock – is not such a good value after all.

article has 5 comments

• Jan 14 10:07 AM

Insight is right on. Having worked as a Wall Street retail analyst for 50 years before retiring I've seen this movie before. All hot brands eventually become tired (although years later they may possibly be rejuvinated) with a prolonged weak consumer backdrop frequently the catalyst. What was once "in" in terms of higher price point brands, becomes "out" during extended periods of economic distress.

Post-Game Analysis or Pre-Game Calls

After last year's Super Bowl, every sports analyst could tell you exactly how the New York Giants beat the New England Patriots. Prior to the game, however, 98% (literally!) of these same analysts were predicting that the Patriots would triumph, in some cases by 20 points or more.

It is the same with the Great Asset Crash of 2008. Every Wall Street paragon or kid now can tell you why the bubbles popped. They can tell you why RIM deserves to trade down 70%, or why Citicorp is in the single digits. Even most managers and traders who are now feted for supposedly having "seen all this coming", if you examine their resumes, are the perpetual contrarians or bears. So they are naturally disposed to have seen all this coming… they would have bet against the herd regardless.

With all of the above types, they live in a narrowly-defined "reality". Understanding this "reality" – which serves them well in normal times – is a function of their training, experience and expertise. The Wall Street paragons are essentially plumbers of the money world as it was defined.

That is why nobody really knows anything today. Training, experience and expertise are out the window when the definitions of "reality" shift.

As I noted previously in this column, "Paper Is Dead". Financial Paper – the promise to pay – is dead today. The governments of the world have made paper meaningless for a few years – probably better that, than the world economy just completely comes to a stop.

Unfortunately, all the Wall Street guys trade paper. What they are trading is not what they think in a "paper is dead" world.

Today's trades of paper are trades for a promise to pay, if everything works out, at some future and unknown point (say 3 or 4 years down the road). That is why every stock is beginning to be priced at "call option" prices. You might as well own a bunch of LEAPS (long-dated options) rather than common stock.

Nice thing of all this is, we are still the United States. That's cool. We are the best creators and imaginers, we are not going to get invaded, and we still produce the vast majority of our own energy. We need to do more for manufacturing (see below), but if you have one market to own, it's still here.

 

No Thanks to OPEC

 

Thirty years later, they got it wrong again. You would think that they are students of history, with their Harvard, Oxford, Cambridge and Yale degrees. You would think that they wouldn't have done what they did in the 1970s, with their consultants from London, Houston, Manhattan, Tokyo and Hong Kong.

But they did it again, thirty years later. They took their spigots of beautiful cash that fountain from the desert, and turned this ATM into a limping dinosaur that barely will supply their countries' social safety nets.

In the Western world, we have another recession underway. In many OPEC countries, they will see great depressions.

Was it arrogance? Greed? A chance for OPEC to show us westerners who will swing the big mack in the future?

Whatever it was, OPEC, your best-laid plans didn't work. You chose to ignore what was good for your customers – maybe oil at $85 per barrel, say? – and you drove them out of business.

You are a bad Mafia, OPEC, the crew that the Capo does not respect. You are an untrained loan shark, and you squeezed the little guy too hard.

Ah, but the laughter. The sublime irony that the West will enjoy… at least through our current tears.

At $85 oil, OPEC, you could have owned the world in two decades. At $140 oil, you crashed your own investments in Fannie and Freddie paper, the US stock market, and American and European property. All of which is also crashing the property values in your slice of the world. Worse, you awoke the sleeping giant, you elected Barrack Obama, and oil consumption will never be the same again.

Maybe it was great fun to think about Americans paying for $140 oil. Maybe you laughed after the American President not only warned you about this, but actually – and without precedent – pleaded for relief. Maybe you didn't see the foreclosure signs around Stockton, California, where common folks struggling to pay their mortgage were suddenly hit with $500 per month gasoline bills.

You did it all, kid. You may have wounded us, but you crashed your own plane in the process. Our pain is deep. Your pain will be far greater and far longer.

 

Paper Is Dead

Paper Is Dead

Financial paper is a promise to pay. Consumer or Company Debt is a promise to pay so much at certain intervals. Sometimes this promise is ordered and orderly, as in corporate bonds. Sometimes this promise (consumer credit card debt or commercial paper) is free-floating.

In any event, paper is only a promise.

Corporate common stock is similarly a promise to pay… as in, you get what is left after all of our firm's other promises. Any CPA can tell you that.

Corporate promises have gone out the window. The (increasingly jumbled) government intervention – thanks, Hank, for today's press conference – has made it such that ALL companies's promise to pay is suspect. This is the moral hazard of which we have been warned. If GM is let out of its promises, why not KBH (KB Homes)? Why not Comcast Cable?

Why not any other company that has issued "paper"? Isn't today's wisest choice for any established company's MBA to urge a rush to the bottom? That is, show a terrible "loss" at company XYZ (why not General Mills, Sun Micro, or General Dynamics), and apply to suckle at the government's teat?

There are two answers. The first is that is that the broad market for paper – or the promises of established companies to pay – is dead.

The other answer is that the real money is going to be made by brand new companies that don't have any traded "paper" out. These are the simple start-ups who have to meet their obligations, because their very existence is dependent upon such. They are start-ups who cannot rely on any interventionist government to come through with today's or yesterday's bailout.

You can look around at the supposed paragons of today's economy for the Who's Who list of companies or brands that were started in similarly "bleak" environments. They are Intel. Cisco. Apple. Snapple. Charles Schwab. Bank of America (formerly MBNA).

Welcome to the new economy.

Let the creative destruction begin.

And all praise this creative destruction. Those start-ups who choose to battle on, in today's heavy fogs, will be the brands and companies that drive the world of tomorrow.

 

Patrick Garot – November 12, 2008

Prophetic

Emails I Wrote.

This one is from October 7, 2008.

Gents:

Okay, so you know that my belief is that the market still has something

left to give, and any bounce back is a day-trading rally where funds

immediately sell into any strength that they can find.

(Incidentally, when I started writing

this missive this morning, the Dow

was up 100 points, so my call about

the market going down to 8500-8200

seemed a lot gutsier. DJIA closed the

day at 9,447, down -508 points.)

Here are some ideas for when

the market begins a snap back.

Any one of these, if you get it at the

buy price window, may make a nice

add to the portfolio. If they don't

get down to that level, don't buy.

Even if they do, re-evaluate the

thesis.

GOOG (Google, currently 356, year range

is 356 to 756, PE is 23X)

Google is out of fashion because it's

essentially an advertising shop now.

It doesn't make any money from its

other investments (YouTube, eg), and

its GoogleDocs (competitor to Windows

Office) is a non-starter.

That said, the Internet remains a good

advertising tool relative to big media

for mid-sized businesses, even in

recessions.

I look for Google to dip back around

260 to 290, at which point it becomes

just too damn cheap for people to

not take notice, and bid it up again.

Even if earnings fall 30%, at 280 it

would still be priced at PE 25X, and

the bet on GOOG's future is cheap.

GS (Goldman Sachs, 115, range 86-250,

forward PE is 8.5X, but nobody really

knows)

Goldman is still the pre-eminent bank,

and you have heard me say that this

whole bailout is a Goldman bailout,

because they bet right, by and large,

but just don't have anyone to collect

their "wins" from. Buffett is in at

115 per share. That provides in

market psychology a bottom-feeler.

But when the market falls even further,

even Goldman and Buffett will likely

not be immune… especially when the

regular market recalls that Buffet's deal is a

first-preference, whereas the common

is left hanging out to dry.

Look for GS to fall to the 60s or 70s at

some point. Why that number? At that

point, it becomes a good L-T bargain.

Below that point, it becomes a better

bargain. Above that point, we might

miss it, but there are other opportunities.

I don't think that GS's having to become

a "bank" is going to be too big a drag on

GS's profits. GS will just do what it does

best with less leverage. The world needs

GS to be in the trading business, and don't

think that the western world doesn't know

that.

As for the potential brain drain from GS

to hedge funds, PE funds, etc…. forget

about it. Ain't gonna happen. First off,

both types of funds are screwed right now,

and they're not taking on any new employees

or partners. They're getting hit by with-

drawals and liquidations, and their profit pie

is done shrunk. Secondly, daddy Goldman

is going to seem a very nice place for their

current employees to weather the storm.

Finally, all of GS's formerly rich employees

with GS stock options are no longer so rich,

and (being great competitors, because

that's who GS hires) they want every chance

to get GS's stock price back up again.

BAC (Bank of America, 26, range 18-53,

forward PE is 8X, but nobody really knows)

B of A is going to fall further, and how much

further nobody really knows. Their balance

sheet is still a mess, despite their deal-making.

That said, they do have some good profit

engines, and their Countrywide purchase

is going to produce some value after the

initial 2008-9 pain. The Merrill Lynch purchase

is also a giant question mark.

You have to wonder whether Ken Lewis is

just in the business of being too big to fail,

with these deals. The next 2 months with

more market distress will be a proving ground,

but absent any new bad news during this

time period, BAC may just make it through.

BAC is an opportunistic long-term hold ONLY

at the right level. That level would be around

15 or so. If it never gets down to that level,

there are other opportunities. It's a weird

stock at a weird time, so you have to beware

on this one. For instance, yesterday it was

at $32. Today it's at $25.70. A drop of -20%.

(they slashed their dividend by half)

This is without short-selling being allowed.

Further, they can't seem to finalize their

new stock sale at $23 per share, even.

Just wait until a few weeks out, when the

shorts can finally get ahold of them again.

PBR (Petrobras, 31, range 28-77, forward

PE is a ??, trailing PE is 13X, and forward

PE is expected to be better.)

This stock has just gotten slammed by

virtue of being in the BRIC countries when

the market is plummeting. Not to mention

being in the Oil business when Oil is sitting

at $87/bbl amid global recession.

So expect this one to fall further, sadly.

But the plain fact is that oil is just going to

be more expensive five to ten years from now.

Petrobras is sitting on huge reserves, may

have a huge find in the Atlantic Ocean

(largest discovered field since the North Sea),

and even if oil falls back to its 2005 levels,

that year they were still making $10.3 Billion,

or $2.35 per share. At $21-23 per share or so,

their stock begins to look very cheap to me,

around 10X.

The biggest risk is their financing. I have to

do more work on that. Their Portuguese

balance sheet is impossible to read, and their

English-language version is equally opaque.

DIS (Disney, 26.75, range 26-36, forward PE

is 10.8X).

Disney is getting hit by worries over ad

spending for its media, consumer spending

for its movies and TV divisions and its

ancillary products (licensed clothing, etc.),

and travel spending for its theme parks.

In other words, the perfect storm for a

bad showing from a consumer-discretionary

spending stock. However, it is Disney…

Their treasury function is excellent: they

have a lot of long term debt on their BS

financed at very attractive rates, and not

a lot of short term debt. ($12 B of long-term,

only $2B of short-term, which includes

near term maturities of long-term debt).

In other words, they borrow like us, which

gives me great comfort that they're not going

to have to go out into the CP markets.

I look for Buffett or Chinese to start buying

this thing more aggressively as soon as it

falls to around $22. Yes, their earnings are

going to get hit. They may in fact get

halved or more before this is all done. But they

are Disney, and they are not going out of

business.

NKE (Nike, 59, range 51-71, forward PE is

13.1X)

Nike may have some space to fall further.

A realistic "opportunity target" is around

$35-40. It may not fall to that level, and so

be it. But if it does, it will represent an

attractive buy.

Thesis that NKE will break bad is by looking

at the Bollinger Bands and the 100 day

moving average, which has turned

negative. NKE has held up pretty well

in the downturn, but it looks to break

down through these technicals as the

market turns "even worse".

The Wall Street bet is that NKE is a

"last place to run". My bet is that the

Street will sit up and realize that NKE is

not as "final" of a place to run as Philip

Morris and P&G in discretionaries.

But Nike has NO long-term debt, and NO

short-term debt. They really never have

had any debt since the mid 1990s. Great

balance sheet for these troubled times.

So NKE will stay in business for sure. The

question, ergo, is their earnings. If we go

as far back as 2001, their EPS was $1.08 per

share, but that was with margins at 39%,

and sales at $10B.

For the year ended May, 2008, Sales are

now $18.6B, and margins are 45%.

Cut sales by around 30%, and take margins

back to 39%, and you wind up with Sales

at $13B, and EPS of approximately $1.80.

At a buy price of $38, $1.80 EPS yields a

buy at 21X EPS. That's given a very down

global sales market. You still would have

appreciation potential as sales re-increase,

and margins grow again.

It's one to watch.

INTC (Intel, 16.59, range 16-28, 13X trailing

PE, 11X forward PE)

Someone is going to make a very lot of

money in INTEL when it drops to $12-ish per

share. They have virtually no long-term

debt (only $2.6B), and they will be in

business for a very long time to come.

They will announce some very bad news

in the coming months. It will probably be

that (a) sales have slowed down significantly

since no corporations are buying big data

server "blades" and (b) there may be some

shock to their $4.3B "short-term investments"

portfolio, because that was in Commercial

Paper – maybe to Wachovia, who knows? –

and Floating Rate notes – maybe with Lehman,

who knows?

So look for the plummet. But when the plummet

happens, it will be a total over-reaction. Wall

Street will probably wipe out $15B of market cap

value in response to INTC's writedown of $3B of their

investments.

You will not get a chance to buy Intel for the low

teens again, other than during this potential window

of opportunity.

GE (General Electric, 20.52, range 20-42, 10X

forward PE but who knows?)

When the market hits 8200, this will be the

time for GE… because it will probably be

selling at around 13-15. If it never goes there,

don't buy it.

As you have heard me say, the commercial paper

component of the Gov bailout is the "GE Bailout".

GE is so fucked in so many ways that nobody really

knows what the hell is going on, and Immelt has

been suspiciously off the airwaves for a

very long time. Their short-term debt,

for instance, is a whopping $200 Billion…

mostly that's short-term CP, kids. How does

anyone push through that sort of CP in

today's world?

The Buffett deal is another suspect one.

Basically, he got a great win and GE got

the right to prop up its stock price for a

few days.

It ain't going to work in the long-term,

but the Great CP Bailout might help.

They still have a hell of a conglomerate,

and a great future. If the shit really hits

the fan, look for analysts to start slicing

and dicing what the break-up value of

GE is.

There should be a lot of anxiety with

GE, and there is. There is no silver lining

that I see. You've got to believe only

in future opportunity, and a rebirth of

short-term CP markets.

In the meantime, look for the stock to

go down, down, down. And when it

hits 15 or so, re-evaluate the thing.

CSCO (Cisco, 18.75, range 18-34,

forward PE is 12X but who knows?)

Great business, even if they do have

long term debt of $6.3B. They don't

seem to have any debt renewals in

the next 12 months, but if they did,

they could make it up out of their

true Cash Stash of $5.1B.

Also, did I mention that they show

short-term investments of $21B…

Typically, that sentence would come

with an exclamation mark(!).

Today, however, as to what's in there, per

Cisco's 10-K…

Fixed Income Securities

At any time, a sharp rise in interest rates or credit spreads could have a material adverse impact on the fair value of our fixed income investment portfolio. Conversely, declines

in interest rates, including the impact from lower credit spreads, could have a material adverse impact on interest income from our investment portfolio. Our fixed income

instruments are not leveraged as of July 26, 2008 and are held for purposes other than trading.

We monitor our interest rate and credit risks, including our credit exposures to specific rating categories and to individual issuers. There were no impairment charges on our investments in fixed income securities in fiscal 2008, 2007, or 2006. The following tables present the hypothetical fair values of fixed income securities, including the effects of the interest rate swaps discussed further under "Interest Rate Derivatives" below, as a result of selected potential market decreases and increases in interest rates. Market changes reflect immediate hypothetical parallel shifts in the yield curve of plus or minus 50 basis points ("BPS"), 100 BPS, and 150 BPS. The hypothetical fair values as of July 26, 2008 and July 28, 2007 are as follows (in millions).

In other words, Cisco may sit up

and find that their counter-parties

are gone, and/or their "investments"

are now 55 cents on the dollar.

The call is, the day after that day of

reckoning, when Cisco has to take

a $6.1B extraordinary loss, thereby

wiping out its entire fiscal year 2009

profit, is probably the day to buy CSCO.

Overall…

More pain is yet to come.

Just check out Intel and Cisco. These well run

businesses have hoarded cash, and dropped

a bunch of money into their Treasury

function, so some Wharton MBAs could buy

"Secure, yet High-Yielding" fixed income

investments… like, oh, Fannie, Freddie,

& Sallie paper… and corporate bonds of

"AAA-rated" companies… and those Lehman

auction rate securities… and… oops…

we fucked up.

We live in "interesting times". They are

getting more interesting every day.

Best,

Patrick