April 23, 2009

1)?? I have to confess that when my alma mater, Morgan Stanley (MS), announces earnings, it still tugs at the heart strings. We endlessly outperformed expectations, but laughed because we knew there were tons of latent profits sitting on the back books. The stock would rocket to trade at a luxurious five times book. We were the invincible Masters of the Universe. Things have changed a little bit since the eighties. Today the company said it lost $190 million in Q1, and that revenues plunged from $7.92 billion to $3.04 billion. The dividend was cut 82% to a paltry five cents a share, and the stock backed off?? 9%. Those coupon clipping retired Morgan MD's have got to be pissed. I have to confess that 'risk adjusted returns' is a term that is new to me when applied to corporate earnings. The venerable white shoe company disclosed so many special onetime only provisions it almost earned a place in the Guinness Book of Records. Bizarrely, it lost money on marks because its own debt is now trading higher than three months ago, wiping out unrealized gains on the theoretical short. Mark to market can be a bitch. Guess what? Lower risk taking means fewer profits. Thank goodness I'm not there anymore, now that the salad days are a distant memory. CEO John Mack should have stayed at hedge fund Pequot Capital, where he would no doubt now be reaping an astronomical bonus. But those of us who know John will tell you it was never about the money with him. He had to be the biggest, baddest boy on the block, the Master of the Masters of the Universe. If you had to name two firms that are going to survive this mess they are MS and Goldman Sachs (GS). They are, after all, still the smartest people in the room. Do I need to point out that the stock is up 430% from the October low?

2) CEO Mike Jackson of Autonation, the world's largest car seller, has the best read on this market of anyone. Annualized sales are now at 9.5 million, a 60 year low on a per capita basis, and down from a high of 20 million a few years ago. A six month shut down of the car loan securitization market is to blame. Today General Motors (GM) announced a nine week total shut down of its plants this summer to deal with backbreaking inventories, and also possibly to anticipate a chapter 11 filing. But ultimately, we are creating enormous pent up demand. Some 13 million cars are scrapped each year, and another million new households are established, creating a 'natural' market for 14 million cars a year. The bigger question is who will be left standing to capitalize on this. The US car market could be owned by foreign manufacturers by the time a recovery comes around.

3) Anyone who had doubts about where the future of equity investment lies, should check out international index moves since March 9. Although the US enjoyed a 26% leap, the best in 70 years, it ranked only 25th globally. The top performers list is dominated by emerging markets. The Ukrainian stock market was up 67%, followed by Puerto Rico, 53%, Romania, 49% and Peru, 49%. Next are Russia, Vietnam, Hong Kong, Pakistan, Egypt, Greece, India, the Czech Republic, Saudi Arabia, Spain, Singapore, Taiwan, Argentina, Mexico, Turkey, Israel, and Croatia. Granted, many of these markets moved so much because they are illiquid. But looking at the list, I get a strong whiff of commodities, energy, and international trade, themes I believe will dominate for the next decade. The new big trend has shown its hand. Do you want to own stock in a country that is growing 1%-2% a year, or 8%-10%? Smart investors will use this rally to lighten up on the US and increase holdings in higher growth emerging markets. Or you can buy the iShares MSCI Emerging Markets ETF (EEM). I wonder if Rosetta Stone (RST) offers a language program in Ukrainian?

4) The transportation market is in the process of getting fragmented beyond all recognition. There are at least a half dozen different technologies to power cars with electricity under construction.?? Better Place is building stations in San Francisco, Hawaii, Israel, and Denmark to swap out 1,000 pound batteries in a car wash type set up. The Renault-Nissan Alliance is building fleet charging stations in Portland and Phoenix. The Chevy Volt is going to count on an overnight charge from a standard wall outlet. There are choices for 110 volt versus 220 volt, slow versus quick charges, and solar options. Massive government subsidies are upending commercial considerations. It is reminiscent of the early 1900's, when steam, electric, diesel, biomass, and gasoline power options competed on a level playing field for consumers' attention. In the end, gasoline won out because it was the cheapest and delivered the most energy per unit, but it took 20 years to sort out. I wonder how the hapless car buyers without the PhD's in engineering are going to deal with all of this? This is a much bigger call than choosing VHS over Betamax, because owning a dead end technology could cost you $50,000. I bet a used Stanley Steamer didn't fetch much in 1925 when gas stations made it to every street corner. Are we all going to have to haul around a trunk load of power adapters like we already do for cell phones, Blackberries, and laptops? Are we even going to need cars, or will they end up as toys of the idle rich and hedge fund managers?

QUOTE OF THE DAY

'Consumers are not going to buy a $40,000 electric car when they can buy a comparable car for $15,000 to $20,000 with some oil consumption,' said Nissan CEO Carlos Ghosn, dismissing the competitive threat posed by the General Motors (GM) Volt.