February 12, 2010

Global Market Comments for February 12, 2009
Featured Trades: (DEO)

1) Those who believe that the wine and spirits business is recession proof should take a look at UK based Diageo (DEO). Its shares just hit a new low for the year of $50, down 42%. Although the giant purveyor of alcoholic beverages posted profits up 18% in the recent half, CEO Paul Walsh says that a consumer in retreat is forcing him to scale back expectations for this year.  The UK firm is hoping to limit the damage by restructuring to cut costs. There is no doubt they have buyer's remorse for the many wine labels it acquired at premium prices in recent years, including Rosenblum, Blossom Hill, Sterling, Acacia, and Chalone. The economic collapse has been so rapid and so severe, that old, trusted models for predicting consumer behavior are now useless. Shoppers are trading down to less expensive labels, and it is harder to realize higher prices on everything. People are going out to drink less, but taking beverages home for consumption more. Shoppers are more inclined to buy well known brands, and less prone to risk limited disposable income on experimenting with unproven new brands. Of course the world's largest owner of alcohol brands would say this, talking his own book.

Diageo-1.png picture by sbronte

2) In excessively focusing on our own problems here in the US, it is easy to miss an economic collapse of Biblical proportions that is going on in Japan. Q4 GDP is coming out next week, and the median forecast is -12%, with more dire numbers of -15% out there. This is four times the rate of decline we saw in the US. The global economic shut down is heavily concentrated in the auto industry, of which Japan is the largest exporter. My old friend IMF managing director Eisuke Sakakibara, known as 'Mr. Yen', does not see a recovery for two more years. The country has no ability to convert from an export led to a domestic demand economy in the short term. Bubbles are long in building, and long in deflating. As Vice Minister of Finance in Japan during the lost decade of the nineties, he should know.

3) Why don't we accept the wisdom of crowds and accept the market's judgment that the big banks are worthless? Let them all go bankrupt. With Bank of America (BAC) and  Citigroup (C) down 95% from their peaks, shareholders have already been wiped out. All we are arguing about here is whether they should be allowed to come back in the next economic recovery. The Geithner bailout plan missed a golden opportunity to shock us all to our senses. Whatever happened to creative destruction? Let the weak banks go, and they will be replaced by stronger, better managed ones without any government involvement at all. Let the natural Darwinian survival of the fittest run its course. I watched with chagrin while Japanese banks pretended they were solvent for 15 years. Everyone in the country suffered as a result, and a whole generation's worth of economic growth was lost.

4) Notice how the campaign against hedge fund short sellers has quietly slithered back into the hole from which it came. It turns out that many of these banks were worthless after all. Hedge funds have in fact been one of the few sectors of the financial system that has not taken government bailout money. For this they got hit with the ill conceived short sale ban, which cost many players big money.


'Perfect can't be the enemy of the necessary,' said President Obama about the just passed stimulus bill.