May 12, 2009

Global Market Comments
May 12, 2009


Featured Trades: (GE), (GM), (LSE-AJG)

1) Is your bank giving you the cold shoulder on your last loan application, not retuning your phone calls, or asking for interminable documentation? Just bypass them. Try an online peer to peer bank, the Internet's answer to the financial crisis. With massively expensive branch networks, 19th century loan processing, inches of closing documents, and a boatload of regulation, banks are ripe for cannibalization by low cost predators. I had a chance to speak to several of these entrepreneurs at the recent Finovate Startup 2009 conference in San Francisco. The simplest model matches a one page online loan application and FICO score with a single lender at interest rates of around 9%, plus a small fee. More advanced organizations pool borrowers and lenders, and offer secondary markets for loans, if you want to cash out before maturity. Prosper was the oldest present, and unfortunately was early enough to get sucked into the subprime debacle. They have since relaunched their product with tightened lending standards. Lending Club came next, followed by Pertuity Direct and National Retail Fund. People Capital is pursuing a niche market matching up student borrowers with lenders. We are not far off from the sector being viewed as a new alternative asset class, with the total loan book now exceeding several hundred million dollars. Watch this space.

bank1.jpg picture by sbronte

2) I met Jack Welch last night, the legendary retired CEO of General Electric (GE). 'Neutron' Jack gets the credit for boosting the market cap of GE from $13 billion to $400 billion in 20 years, turning it into a Wall Street darling in the process. The 'hedge fund that makes light bulbs' is the last big industrial finance company standing, and when the market turns it will make a fortune, because there is no competition left. Jack is currently on the board of a private equity firm and several Internet media start ups. He gives Obama an 'A' for leadership and communication, but believes his economic policies are seriously flawed. They are based on a 4% annual growth assumption for the next decade. We never managed to achieve that rate during the go go days of the eighties and nineties, let alone attempt it during a new age fraught with deleveraging and frugality. If we get only 2.5% instead, the deficit will explode from $13 trillion to $30 trillion, at which point 'we will be cooked.' Who knew Jack was a closet gold bug, dollar bear, and inflation hawk? Jack thinks GM should be allowed to go bankrupt, and the current arrangement where the UAW gets the company and the bond holders get pennies on the dollar is 'bizarre.' Jack was passing through San Francisco at the end of a national tour promoting his wife Suzy's new book '10-10-10', which is about how to create a 'values driven life.' In his heyday, Jack was considered the best manager in the country. Never one to mince words, he is an absolute terror now that shareholder feelings are no longer a consideration.

lighbulb4.jpg picture by sbronte

3) Insider buying and selling is supposed to be a great leading indicator of a company's fortunes. Bob Lutz, vice chairman and head cheerleader of General Motors (GM), has sold 81,000 shares of his holdings in the troubled car maker at $1.61/share, reaping a mere $131,000. Only 18 months ago, the shares were worth $3.4 million. With Bob, the great killer car that was going to save the company was always coming out next year, and this went on for 30 years. Bob is an ex Navy pilot, and in his free time flies and maintains his vintage jet fighter. Good thing we don't reward failure.

cars5.jpg picture  by sbronte

4) To give an idea of the market's new appetite for risk, look at Japanese small cap stocks. This sector was one of the worst hit in the recent melt down, but historically it outperforms by a large margin in the first 12 months after the end of a recession. Once their survival is no longer in doubt, these often debt dependent stocks rocket on any improvement in the economic trend. This is the only time I ever hire outside managers, because I haven't the patience, the manpower, or the expertise to scour over the balance sheets and earnings statements of hundreds of obscure little niche companies, especially when they are written in in Japanese. I have always been a big cap player because I have dealt with investors who had to get $100 million to work in the market in a hurry, an impossibility in the small cap arena. One who does this magnificently is my old friend Ed Merner who runs the Atlantis Japan Growth Fund (LSE-AJG) traded in London. It has been on a real tear for the past month, and at $7.80 is at a bargain basement 18% discount to its NAV of $9.47, if you are lucky enough to find shares to buy.

Atlantis Japan Growth Fund

Atlantis-1.gif picture by sbronte

Japangeisha2.jpg picture by sbronte


'We almost lost the country in September,' said Jack Welch, former CEO of General Electric.

GeneralElectrc.png picture by sbronte