News & Insights
Darwin Had a Point
The stock market continued to struggle last quarter with the same issues that characterized 2008. The necessary unwinding of the unprecedented excesses built up in the credit market continues to manifest itself in numerous ways. Among the most intriguing casualties is General Motors.
GM stands on the precipice of bankruptcy, the victim of its own hubris and incompetence. What a spectacle: a chief executive making millions and a union chieftain representing pensioned workers with salaries averaging $90,000 begging the American people-- whose average compensation is closer to $40,000-- for funds to avoid bankruptcy.
Most of us had no idea that cosseted CEOs and indulged union workers had the right, much less the gall, to ask waitresses, teachers, middle managers and entrepreneurs for money to save them from the consequences of their collective failure. The Gulfstream ride back to Detroit after the public reaction must have been confusing. The dismissal of the GM CEO by the federal government is appropriately humiliating. Hopefully the union boss is next. In a few months, Chrysler will likely be no more and GM will be just a remnant of the world-changing company led by the great Alfred P. Sloan over a half a century ago. But as Mark Twain might say, reports of the death of the American auto industry are greatly exaggerated.
In California, Tesla Motors is about to launch its second model as a follow up to its successful all electric powered Roadster. There is a waiting list. Tesla’s cars were developed on the equivalent of GM’s executive dining room annual budget. It has produced two commercial electric cars in the time it has taken GM to develop its new electric model, the Volt. Ford is soldiering on without government assistance, having managed the downturn better than its cross-town rivals. Both Ford and Tesla show that creativity, innovation and just plain good management are alive and well in the U.S. car business. Slow incompetent firms like Chrysler and GM are naturally subject to failure. This is the way it should always be in a healthy capitalist economy. Washington should resist the temptation to do anything more than just help clean up after the likely breakup of Chrysler and GM. The U.S. car business will emerge from this crisis leaner, more efficient, and more competitive just like the steel industry when it was given up for dead just two decades ago.
Stocks Bonds and Cash
Meanwhile the stock market is enjoying its first substantial rally of 2009. There is a whiff of good news in the economy and much cash on the sidelines itching to be put to work. In our view the market is still significantly undervalued, but we would not be shocked if the market traded aimlessly between the low prices of three weeks ago and levels even 20% higher than current levels. Until analysts are able to more reliably estimate earnings of the market bellwethers, there will be little for money managers to hang their hats upon other than the spectacle of the capitalists’ and politicians’ uneasy, and hopefully temporary, romance. The highest quality U.S. businesses with the cleanest balance sheets and safest dividends provide a good way to invest in this uncertain and mildly positive environment. Stocks in emerging markets also offer good value. At current prices the prospective returns on stocks are as attractive as they have been in years even if the economic recovery is weaker than past recoveries.
We believe treasury securities to be overvalued and unattractive with the exception of inflation linked bonds, which represent a good insurance policy against possible future inflation as do mining stocks and commodities. Investment grade bonds offer a good risk/reward trade off at current prices and even “junk” bonds offer a reasonable speculative play on an economic recovery at these much reduced levels.
The Altavista Investment Team – Spring 2009