On October 17th a new bankruptcy law went into effect, which will make it more difficult for individuals to file for bankruptcy protection. In the final weeks prior to 10/17, bankruptcy filings soared. According to the Washington Post, bankruptcy filings reached an unprecedented level, averaging 13,000 per day.
Not to be outdone by individuals, corporate bankruptcies have also increased…
Delta and Northwest Airlines, the nation’s 3rd and 4th largest airlines, recently filed for bankruptcy protection as well. According to the Wall Street Journal, more than 100 airlines have filed for bankruptcy protection in the last twenty-five years.
On October 8th Delphi Automotive filed the largest bankruptcy protection case in the history of the U.S. automotive industry. Despite recent concessions from the United Auto Workers union, even venerable General Motors is on shaky financial footing having lost over a billion dollars in the most recent quarter.
Better life through bankruptcy?... Whether corporate bankruptcies continue at the present pace remains to be seen, but I do think they are symptomatic of a structural cost disadvantage that corporate America struggles with relative to its global competition. This disadvantage is due to burdensome health care and retirement benefits, as well as higher wage rates. As global competition intensifies, the pressure on high cost producers in every industry will increase.
Meanwhile, financial developments at the federal government are troublesome as well. The world’s perpetual ATM machine, also known as the U.S. Senate, is ready to pump tens of billions into the Hurricane recovery efforts, which could send the budget deficit soaring above $500 billion over the next couple of years. In all political fairness, President Bush seems to believe in an open-ended checkbook as well. According to the national debt clock, the amount of public debt is only a few billion shy of $8 trillion dollars. That’s an increase of approximately $1.6 billion per day over the last year.
The tab for the global war on terrorism is approaching $350 billion since 9/11, with no clear end in sight. There are those who believe that Al Qaeda’s strategy is to prolong the global terrorist battle until they bankrupt us. Can that happen?
And for good measure, the United Nations has a goal of eradicating global poverty by 2015. How many U.S. dollars will be committed to this admirable goal remains to be seen.
All of which begs the question – How are we going to pay for all these worthy causes? Should the United States be the great checkbook for all the world’s problems? Or should we “just take care of our own,” as others suggest? Is that even possible in a global, interconnected world?
How these questions are answered will have a profound impact on the investment markets over the foreseeable future. Future trends in inflation and interest rates, and ultimately economic growth, will be affected by current fiscal and monetary policy.
It is certainly admirable that the vast majority of our country cares about the plight of the unfortunate around the world and those struggling within our own borders. But a financial predicament can occur when we expect our government to solve every problem, and it can be worse when our elected officials are willing to spend whatever is necessary to fix whatever is wrong anywhere in the world. It has to be possible to be charitable without being irresponsible. Ultimately some one has to pay for excessive borrowing that results from living beyond our means. Unless, of course, we just declare bankruptcy…
Bankruptcies notwithstanding… Corporate success will continue to be driven by a delicate balance between relentless cost control and new product innovation. In this respect, it is clutch time for corporate management. My sense is that business headlines will continue to illustrate successes and failures as managements navigate this economic tightrope. From a portfolio perspective, our decision process is focused on differentiating between the two.
And this is how we do that… To begin with, we look for companies that are proficient at continually driving costs out of their business. Dell Computer and Wal-Mart both enjoy cost advantages in their respective industries through a relentless focus on reducing expenses and rationalizing inventory. At the same time, it is also critical that companies balance cost efficiency goals with productive reinvestment of cash flow. In a global economy innovation is essential, but it involves more than developing new products. It requires the ability to develop, produce, and market innovative products and services at an affordable price to diverse consumers on a global basis. Procter and Gamble has shown this ability through its success in marketing different products and packaging sizes tailored to meet the diverse consumer needs throughout the global economy. P&G is the number one consumer packaged goods company in seventeen developing markets including Russia, China, and Mexico (source: P&G).
In our view, companies must succeed at both cost control and innovation, in order for them to out perform their peer group on a long-term basis. Our goal, as it has always been, is to own a portfolio of high quality companies who can win the competitive battles within their respective industries.
