Day: September 8, 2008

How Much Can the US Government Guarantee?

How Much Can the US Government Guarantee?

There are irregular miracles from God, the Creator of all, but there is no magic.? The US government can step forward and say, “We guarantee the liabilities of Fannie and Freddie, and take control of the companies.”? But who guarantees the US government?? In the economic world, there is always a cost for every action.

Yes, the US government will continue to borrow from the Saudis and their allies, who appreciate our military actions constraining their Shi’ite adversaries, and supporting their own regimes.? China wants to continue to “grow,” and they don’t care if they are paid back in “funny money” for now, buying Treasury securities with excess dollars.

The US Dollar rallied today, even as the government absorbed liabilities that are uncertain as to size, even though I think the eventual cost will be less than $200 billion.

Who doesn’t want to be guaranteed by the government?? The auto companies are in line, can I get in line too?? I could do amazing things with a $50 billion credit line from the government.? I would assemble a small empire of undervalued companies with earnings yields higher than what I would have to pay Uncle Sam in interest.

My point is this: when you take into account the structural deficit, funding for the wars, social security currently on the balance sheet (but not its increase in liabilities), Fannie and Freddie, and future demands for bailouts of homeowners and auto companies, where does the bailout stop?? Where does the willingness of foreigners to buy Treasury debt end?

I don’t know, and this is the biggest question facing the global debt markets now.? A century from now, a fellow resembling James Grant will write several popular books explaining the decadence of the era, and how the US squandered its leading position in the world by borrowing too much.

So, call me skeptical of the US Dollar and Treasury rallies today.? Those should reverse soon.

When Good Things Happen to Bad Stocks

When Good Things Happen to Bad Stocks

I’ll write something more about Fannie and Freddie at a later time.? Things have worked out there largely as I expected.

What I did not expect is that the market would be up a lot on a day like today.? I did expect that Treasuries would be down.? After all, there are more claims on the Treasury now than before.

Why should the market be up?

  • The possibility of lower mortgage rates, which will help those that can put money down on a new home, and those that can refinance within conforming limits.
  • Risk is shifted off the balance sheets of lending institutions that held the senior debt of the GSEs.
  • A big uncertainty is resolved.? (And the next uncertainty has not arrived… yet.)

Now, as for me, I am probably having my best relative outperformance day ever, and it is due to one stock in my portfolio: Gehl.? As the AP says, “Construction and farm equipment maker Gehl Corp. said Monday it is being purchased by its largest shareholder Manitou BF SA for $450 million, or $30 per share.”? 120% premium to the Friday close.? I can live with that. 🙂

I don’t play for takeovers, particularly not in this environment where financing is scarce.? But in value investing, if you have reasonable financed assets trading at a discount to their value, takeovers will sometimes come, though rarely at premiums like this deal.? Wow.

There’s one more thing I would like to point out here.? I sometimes get a little criticism for not having an automatic sell rule.? My first purchase of GEHL was around $20.? I averaged down twice.? Each time I reviewed the position, and concluded financing was adequate, though short-term earnings did not look promising.? I concluded that over a 2-3 year timeframe, I would probably be rewarded, or not lose much.? If I had used a mechanical sell rule, I would not have gotten the good side of Gehl.? (And, for those that keep score, this gain almost pays for the loss in Deerfield.)

That’s how it goes.? I could not predict this incident, and I have enough bad things that happen that I also can’t predict.? But in a well-diversified portfolio of cheap, well-financed stocks, there can be room for good surprises.? I just happened to get a big one today.? (And, it puts me in the plus column for YTD performance.? What a tough year for the market.)

Full disclosure: Flat GEHL — my limit orders got lifted as I wrote this…

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