The sacred Olympic flame finally reached the top of Mt. Everest, after a long and secret journey, as one of the triumphant climbers shouted boastfully, “Long Live Beijing!” That is sort of amusing given that the Chinese state media had down played the historic event in fear of political unrest. It makes me wonder if the 22 Tibetans and 9 Chinese climbers were looking around to see if the rest of the world was applauding or if the rest of the world was looking for an opportunity to protest.
I think that might describe the mind set of a lot of CEOs today as they struggle to be boastful yet secretive at the same time.
What is there to boast about?... Well, mega mergers for one thing. Delta and Northwest are merging to create the largest airline in the world. Meanwhile, an American icon, WM Wrigley is combining forces with Mars, Inc. to form the world’s largest candy maker with leading market shares in gum and chocolate.
While each mega merger will have to be evaluated on its own merits, a few important generalizations can be made. First, the increased merger and acquisition activity reflects the balance sheet strength and powerful cash flow that is evident at many large-cap corporations, with the obvious exception of the financial sector. With a war chest of cash, corporations are searching for the right partner to more effectively compete in an increasingly challenging global economy. More aggressive shareholder activists are also adding fuel to the M&A fire.
At the same time, mergers of this magnitude always raise interesting questions. Did they acquirer pay too much? Will the respective management teams work together effectively? Are the two corporate cultures compatible? And last but not least, what will their key rivals do in response? In the case of Wrigley and Mars, I have no doubt that the executives at Hershey, Cadbury and Nestle are pondering their next strategic move to counter the Wrigley/Mars juggernaut.
The secret is out…no one really knows… Meanwhile, the losses continue to mount in the financial sector, with the latest announcement by AIG of a $9.1 Billion write-off in their first quarter earnings release. Let’s back up a moment. I think it is important to realize that mark to market losses in a distressed market do not necessarily equate to actual losses as some of these write downs may eventually be reversed. AIG management was quick to point out that they believe a significant portion of these write-offs, now totally close to $20 billion, will be recouped over the life of the securities.
The problem that AIG and other financial services companies face is that no one really knows when the write downs will peak, let along when and by how much they will ultimately be reversed. And it is this admission from management, as well as analysts, that the extent of the mortgage and debt write-downs remains unknown, that is most unnerving to investors. The known, no matter how awful it might be, is always preferable to the unknown. Not surprisingly, given the environment, investors remain skittish, particularly in regard to financial stocks. We remain cautious on the sector, as well.
Are we braced for Barack Obama vs. John McCain?... That would seem to be the logical call today. Obama boasts about change, but there seems to be a secret side to the relatively inexperienced politician. The best any investor can ever hope for out of Washington, DC is gridlock. That, in itself, is no reason to boast.
Did you plug in your car today?... Almost all signs point to higher oil prices in the foreseeable future. Consumers are annoyed but continue to cruise the streets in their SUVs. My sense is that $5 per gallon, or higher, will begin to change behavior. If that is correct the US auto manufacturers are at a distinct disadvantage, as they are lagging in terms of hybrid vehicle technology. A startling revelation, I know…
Which leaves investors with hope… Hoping they own the right stocks in the midst of all the merger and acquisition activity. Hoping for gridlock in Washington. Hoping for technological breakthroughs in alternative energy. While hope is a good thing, generally speaking, we’d like to be better than hopeful. For us that means utilizing our investment process to identify industry-leading companies in attractive industries, and buying them at the most opportunistic price. And it means delivering performance and service that is worthy of boasting about, even if it is not in our nature to do so.
