In the past there were investment benchmarks that a serious investor could examine before making a decision on what stock to buy. Classic fundamental benchmarks were discounted cash flow, free cash flow, price earnings ratio, book value and other value determining measures. Technically-oriented investors could examine 50 and 200 day moving averages, support and resistance lines, short sales coverage ratios, accumulation and distribution patterns among a myriad of indicators. That was the world that existed pre-autumn 2008. Then the new “Save the World” trio of Paulson, Bernanke and Geithner took unprecedented steps of direct government intervention to pick stock market winners and losers. Add the Obama administration’s aggressive interventional programs such as healthcare, unionization and energy. We have now transformed from a free market economy where companies rise and fall on their business acumen to a state dominated economy where success is determined by political acumen.
We have turned classical economics on its head. In the market place, weak companies with political connections are saved and efficient companies are punished. I will return to the punishing of efficient companies later in this posting.
Much has been written about the financial industry. But examine the automobile industry and the unprecedented level of government intervention. The government has demonstrated that it will stop at nothing to “save” the Big Three American automakers and their union jobs. First, at the expense of creditors, government has intervened in the bankruptcy process to ram through pre-packaged bankruptcies and reorganizations. Government now appoints management and favors unions. It also guarantees new loans so these companies can borrow at favorable interest rates.
With the government firmly entrenched in the car business why not have a cash for clunkers program? Demand is artificially stimulated for a short period of time under the guise of better gas efficiency and economic stimulation. A few obvious flaws with this program: 1) we may have merely shifted future demand to the present with an almost certain drop in future demand; 2) politically we cannot limit the program to the Big Three since many of the most fuel efficient cars are foreign made by companies such as Toyota and Honda, thereby adding to our trade deficit; 3) many of the “clunkers” were probably quite serviceable vehicles and owned outright with no debt. Instead, we have induced consumers to take on more debt and 4) if we are truly interested in fuel efficiency why are encouraging an auto-centric, long commute, shopping mall culture when mass transit is woefully inadequate.
I have only picked one set of companies, the US Big Three, but this type of interventional behavior knows no bounds: GE, AIG, money center banks, credit card companies, builders, airlines, money market funds and the list is virtually endless. All an industry needs is a good lobbyist, some union support or an “End of the World” story and the government coffers are emptied. It beats the hard work of developing new products and services, funding these new products and services, marketing, billing and collecting that real world companies face without government intervention. The efficient company must compete in the capital markets for scarce capital with these government supported enterprises. The efficient company must pay more for such capital, which is the lifeblood of the business, which ultimately is reflected in product and service pricing, profit margins and ultimately stock market valuation.
As we go forward, technical and fundamental analysis is probably useless. What is needed is a bona fide political analyst to help with the next company to be showered with government largess. Perhaps we need a new index – Government Owned and Dominated 500 – the Deity index. There must be an investment bank (with assistance from the Treasury) already cobbling together an exchange traded fund. I would submit it is near impossible to safely invest in the US equity markets when the playing field has shifted from economics to politics.
Note -Nothing in this post or blog constitutes investment advice. Consult your own investment adviser for such advice.
loading...
