Motley Fool Money - Motley Fool Money: 04.03.2009

Episode Date: April 3, 2009

Unemployment rises to its highest level since 1983. G20 leaders agree to toughen up and pay up. President Obama shows some tough love to US automakers. And rumors swirl that Google may be sweet on Twitter. So what does it mean for investors? We’ll analyze those topics, offer a few stock ideas, share a few beefs, and take a long, hard look at a what a “pig-in-a-poke” really means.  Learn more about your ad choices. Visit megaphone.fm/adchoices

If you're a small business owner, you already know what it takes to keep everything moving. You're juggling customers, invoices, and about 100 decisions every day. Thankfully, taxes don't have to be one more thing on that list. With Intuit TurboTax, you can get your business taxes done for you with a full service expert. TurboTax matches you with your dedicated tax expert. Who knows your industry understands your business write-offs and gives you the personalized advice your business deserves. Upload your documents right in the app, hand everything off, and still feel like you're in the loop the whole way through. You can even get real-time updates on your

expert's progress right in the app, which makes it so much easier to stay on track. And you can get unlimited expert help at no extra cost, even on nights and weekends during tax season. Visit turbotax.com to get matched with an expert today, only available with TurboTax full service experts. Welcome to Motley Fool Money. We're here to talk about some of the week's big business news, offer up some stock ideas, and share a few beefs. I'm Chris Hill, and I'm joined by Motley Fool's senior analyst James Early and Seth Jason

in studio and Shannon Zimmerman in New York City. Guys, thanks for being here. Good to be with you, Chris. All right, a lot to talk about this week, starting with the news on Friday that the unemployment rate has risen to 8.5% the highest since 1983. Shannon, what do you think? Let's start with the market, Chris. It was a good week for the market. And it's a great blues line. Been down so long, looks like up to me. And I think that dynamic is at work here. The market

has been down so long that anything even vaguely positive can have a big impact. And the data that has sustained the rally, even beginning last week, it was pretty vague, modest growth in home sales and uptick and orders for durable goods. And both of those data points probably stem from deeply discounted pricing. And this week we had some auto sales data that was also, you know, mildly positive, that to me was more meaningful because it may indicate that the provisions that are in the stimulus bill and you get a state tax break for auto purchases may be having an intended effect. But overall, I think the market just desperately wanted a reason to bounce back from its oversold levels. And the recent economic news was mildly encouraging, but for my

part, I'm still cautiously pessimistic, not least because of unemployment. So personal income is down, unemployment is up, consumers aren't spending, and businesses aren't selling in a way that they need to. And so that's a recipe for increasing unemployment. I'm in Manhattan for a conference. And a couple of interesting speakers, Sam Stovell, who's the chief investment officer from, or the chief investment strategist, rather, for Standard & Poor's, and then Leo Prohousky, who is the Bank of New York chief investment officer. And the consensus emerging from their presentations was that unemployment probably has further to go up to around 10%, but that in the fourth quarter of 2009 is when the market will begin.

end to turn, and that will occur in tandem with unemployment spiking. James, a lot to chew on there. Take your pick. Yeah, Chris, what we're seeing right now is sort of the economic equivalent of mixed precipitation. We can go either way. It could change back to snow, go to rain. You know, we've got, and believe me, I want a turnaround so bad, my teeth are chattering. I mean, there's a lot of anticipation building here.

We've seen, and so do a lot of other investors, and I think that's part of why we're seeing the volatility that we're seeing. We've had factory goods orders up, retail sales, all. auto sales, home sales, bank profits, a lot of positive tidbits. But this unemployment I consider to be a pretty big negative tidbit. Obviously, it's going to take some spending out of the economy, which is going to hurt all those securities that are based on home loans and whatnot. I think we're looking at a market that has confirmation bias.

In other words, this week, everyone was looking for good news and forgetting that, earlier in the week we had a piece of absolutely rancid news that has a huge impact, which is that the K. Schiller Home Price Index showed that house prices, existing home prices, we're dropping at a record rate, again, more than 19% is the velocity of the decline we're seeing in prices year over year. And that actually has a huge effect on how wealthy people feel, on how much they're going to spend, and of course, on how much all those toxic securities out there are worth. Yeah, those are all important points. And we should remember, too, that GDP was revised down for the fourth quarter of 2008. I don't see anything

on the economic data horizon to suggest that that trajectory is going to change anytime. soon. Well, the news with the most photo ops was certainly the G20 leaders meeting in London. They agreed to toughen up financial regulations and increase funding for the IMF. James, what does that mean for investors? Chris, I think the G20 summit is kind of a big gimmick. These guys... Hence all the photo ops? Yeah, a lot of photo ops. I'm looking at a great big photo here in the Financial Times.

1.1 billion global boost agreed. But as the Times itself reported, if you dig in, there's almost no new money. This is money these countries were contributing already. They just sat around and talked about it. I think the big divide, basically, is between sort of the European socialists in the U.S., no surprise there. If there's one thing socialists love, it's to feel vindicated on something, and the Europeans are pushing for a lot more regulation. The U.S. is pushing for more stimulus. So it was good in the sense that nothing disastrous happened, but frankly, I don't see what the big deal here is.

Can I take a few more swings at our friends in Europe? Not that I don't love Europe. I'm not going to stop you, Seth. But James took a few swing at the Socialists. Can I just take a quick swing at the European tightwads? One of the problems we have, and this is a global problem. We can talk about global tightwads, is the fact that you have these highly industrialized, very large economies like Germany or China or Japan or even Korea,

who have had bad experiences in the past with debt. And so they insist on running surpluses all the time. And when you do the balance sheet of the entire world, if somebody has got that huge amount of surplus, then somebody else has to be on the hook for borrowing. And unfortunately, the way it is that's just been the U.S. going forward. And that's been probably the major problem. All right. Moving on, the board that sets accounting rules in the U.S., cleverly named the Financial Accounting Standards Board,

voted this week to relax mark-to-market requirements. So, James, financial firms will now be able to report higher values for some. toxic assets. Does this make financial stocks more attractive? Chris arose by any other name, or maybe I should say a latrine by any of the name, is still going to smell the same. Here, the FASB, the U.S. Standards Board, basically caved to Congress and to financial firms in allowing some leeway in valuing toxic assets. Now, the good news, from my perspective, as sort of a mark-to-market guy, is that there was not nearly as much leeway as I would have thought, which is good. You didn't see a big, first

you saw the banks up big on this news and they went back down. This is going to do a couple of things. This will help their earnings as they add some value to these assets and that those earnings will spill into their equity base. But the key point to note is these assets haven't changed. We talked about unemployment earlier in the podcast, and if that keeps getting worse and these underlying securities aren't collecting the money that they're based on, you know, the value hasn't changed.

In fact, it could even get worse. So, yeah, I mean, it's basically, it's, it's, it's, It's window dressing. I don't see it as a major economic driver. It's a minor positive at best. Well, I look at this as the proverbial pig in a poke. And without going too far down that road with James, I thought I would just instead talk a little bit about the pig in the poke in general.

Apparently, this is a medieval saying that goes back to the time when if you were out looking for a suckling pig at the market, you were going to have yourself a barbecue. The shucksters out there might try to sell you a cat in the bag. instead of a pig. So apparently if you look to Wikipedia, which is the fond of all knowledge, the font of all knowledge, most of the variations of pig and a poke are actually cat in a sack. Or if you're in Portuguese, cat instead of a rabbit. I guess they didn't have enough pigs in Portuguese. So I'm just going to go out with a final comment, which is that if you really want to complain about this to your friends and talk about how nobody knows what these securities are worth, you should really go with the variation that you see in Thailand via Wikipedia,

which is to buy a water buffalo, which is out in the swamp. Nice, Shannon. Is there any way you can improve on that? No, I do think James and Seth are both correct, as they often are, but in the near term anyway, financial stocks may be somewhat more attractive, although maybe that's all priced in. In terms of the practical impact, it's next to nothing. So the assets may be valued higher, and so magically their balance sheets look healthier,

but investors don't want to buy those toxic assets because they remain toxic and for valued, what's the impact? I think that it's nil. As investors, you don't want to buy the cat in the sack. All right, some tough love for Detroit. Earlier in the week, President Obama asked the CEO of GM to step down and gave the company 60 days to work out its problems or face bankruptcy. He also gave Chrysler 30 days to work out a merger with Fiat. Guys, what do we think about the tough love that the president's showing Detroit? It's a day late in the dollar short, but I'm all for it. You know, we need to do this a long time ago. These are duds as companies.

You know, we're throwing good money after bad, propping them up. They need this. They need this pain. We need them to go bankrupt. So we can reorganize them properly, and then we'll see. Well, wait a minute. But is there a double standard here? It's like, you know, if you're an automaker, we're going to slap you down with bankruptcy.

But if you're a bank, we're just going to give you a time out. Oh, of course, it's a double standard. But you needed the outrage to come, you know, you needed the outrage on the bank. CEOs and the AIG bonuses and everything. I mean, poor, I almost feel sorry for Mr. Wagoner, not that I think he was doing a particularly good job or even a particularly bad job by the standards of how badly some CEOs have screwed up their businesses. He just happened to be the guy who was in the crosshairs at the wrong time.

And so, yeah, he's got to go. But more than that, all of the stakeholders in these reorganizations are going to have to come to the table and give something up. And right now they've been playing chicken. And I really do believe that the only way for this to get fixed is for the government to grab hold of them and divvy out the meager leftovers and say, all right, now back to it. Shannon, you get the final word. Well, so one of the New York papers is called President Obama a micromanaging autocrat

for going so far into the operating weeds with these initiatives. But I'm personally very glad to see such substantial strings attached, and I do wish that we had been as rigorous with the bank bail outside of this as well. Some folks are making the argument that, you know, so here's your opportunity to let this dinosaur industry fade away because, you know, the day of reckoning has arrived. But given how fragile our economy is, that seems like a fairly academic argument to me, sort of capitalist purism, but with no regard for the practical impact, there's a whole ecosystem around the auto industry. And it wouldn't just be the manufacturing jobs that would be lost. And so it may be the case that eventually the industry does need to go belly up, but if it can reform itself and build fuel-efficient cars that consumers want to buy, that'll be a great thing. And if not, it will go away. Just right now, it's not the moment for it.

And I'll just add one point on Shannon's point. And this is, nobody knows for sure, but these companies have been losing so much money so quickly. They've been not creating value, not neutral, but destroying value. In other words, it would be better for the employees if we literally just gave them cash versus funneling it through GM. And I wonder if the same thing is true for not only the automakers, but sort of the ancillary players as well. So, you know, I would maybe ultimately there is benefit to bailing them out for these other players, but it might almost be better for them if we just paid them money directly, not that that would ever happen, but I guess my point is there's such value-destroying enterprises, we have to do something.

One point in connection with what James was just saying. Now, GM had much bigger problems than Rick Wagner, and one of the, maybe the biggest problem was that it's not being run for investors or for consumers, is being run for its retirees. There's a moral issue here as well. How are we going to deal with the obligations that company made to its focus? who are now in retirement, receiving their pension, that's going to be a huge part of the conversation around this. Well, the taxpayers are going to pick up the tab there.

I'm just going to close quickly with one final comment on the memo that I read on GM. I was actually impressed with the administration, which has gone a little far, I thought, at some points of talking about fuel efficiency and hybrids and things. And the fact of the matter is that hybrids are going to cost these car companies money for the foreseeable future. So if you say to them, you need to have more hybrids, you need to have more fuel-efficient cars, and you need to make more money, you're at cross-purposes. And the memo that the government published on this did acknowledge that, which I thought was pretty impressive.

All right. Finally, the tech media is a buzz with rumors that Google is gearing up to buy Twitter. So, guys, what's your seven-word Twitter take on the possibility of Google buying Twitter? I think those were seven words. Why not you bought that worthless YouTube? James? First, my seven letters are R-O-F-L-M-A-O, if you're a Twitter guy, you know what that means. My seven words might be, might work, but it won't be cheap.

Shannon? All right, so I have seven words, and not only did I can press it to seven, but it rhymes. Too big to fail, check in mail. Fantastic. All right, it's time for what's your beef. Time to tee off on a stock, a person, a company, anything in the financial world that's got your beef. Go ahead. My beef is going to be the nation's beef soon enough.

When I saw this morning in the headlines that you've got some familiar suspects, your J.P. Morgan's, your city groups, and others who want to take part in the bailout. So in other words, the people who had all the terrible securities who needed the government infusion are now lining up trying to figure out how they can get giant chunks of leverage in order to go back and buy this junk from each other and even go so far as, I don't know, package it up and chop it up and sell it to clients all over again. It's the height of lunacy. It's kind of surreal when they're buying each other's toxic assets. Yeah, well, it's the whole way, I mean, that's why Iceland went to pot. Everybody's selling stuff amongst each other

claiming it was worth more than it was. And nothing's changed. It's just this, you know, program that's letting him do it. Well, free money will make you do a lot of silly things. Shannon? Well, just to piggyback on that point, that's exactly right. So it's interesting that you have a bailout plan for a problem that actually is the problem that's the problem that's all over again. It's just bizarre and it's sort of heavy meta at some point. My beef, though, is the return of what I thought was something that had been repressed for good, this notion of decoupling. From the wealth form, though, it seems like it's making a bit of a comeback, and some folks are suggesting that, you know, going forward, global equity markets are going

to be moving with a lot of independents relative to one another. And there was one person on a panel toward the end of the day, and she was making the case that, you know, emerging markets, particularly China and India and Brazil are the places to be and that more developed markets, including our own, are just kind of going to move sideways for the next five to 10 years. And my own take on that is that that's a very sort of 20th century kind of analysis, given how tightly interconnected global economies have become. You know, one nation's economic health requires robust markets to sell into. So I think that, you know, while there will always be areas of outperformance and underperformance,

anything that you could actually call it decoupling is kind of a fantasy land nowadays. I think the last 12 to 18 months bear that out, and I think the next 12 to 18 months and beyond will bear that out too. All right, Shannon, I'm going to stick with you as we close the segment with one stop on your radar for the next week. Could be good reasons or bad? Well, it's Vasco Data Security International. It's a financially rock-solid company with a great business line, as its name suggests. It secures computer systems for corporate customers and the government as well. It's been very tightly correlated with the meltdown and now the bounceback of the financial sector

because a number of its customers are banks. It provides security for online transactions. I think that's been overdone. And so the stock has just been beaten down because it's been regarded as a financial, but it actually has a much more diversified revenue stream than just that. So right now, given how it's trading, it has a single-digit priced earnings, which is just a fraction of its five-year historical average, looks cheap next to industry competitors as well.

So it's sort of a two-for-one. It's a great, I think, an interesting company for the long haul. But in the near term, if the financials recovery is sustainable, it's an interesting bank shop play on that because the same correlation that brought it down over the last year is likely to bring it back up as well. It's a good thing we didn't restrict you to a seven-word Twitter take on that one. All right, James, one stock on your radar.

Chris, if folks out there are long-term oil bulls, and I am, you know, we've seen oil come back up lately with some of the good news with the economy. One stock to checkout is a company called Sassall. The ticker is SSL. This is a South African company that turns coal into liquid fuel. It uses technology that was developed or at least refined by Nazis in Germany and later or further refined by apartheid-era South Africans. In other words, people who had a lot of coal, but not a lot of friends. It tends to be useful for exactly for countries that have much coal, not a lot of access. to liquid fuel.

South Africa uses it hugely, but higher fuel prices are going to increase the desirability of this worldwide. And they started to kind of get ramping up previously with sort of the last rise in gas prices. That's fallen off. But if they come back again, Sassol will win big. Seth? I'm going to make with the tough love for a company that we talk about a lot at the Motley Fool and over at Hidden Gems, which is Middleby,

which is a big maker of ovens, food processing, cooking. cooking cookery friars, things like that. They've been doing a pretty good job, has swallowed some big acquisitions as of late, have done a good job. But the proxy statement just came out, and the CEO pay is absolutely egregious. It has gone beyond questionable to downright suspicious.

And we're going to have to have a talk with the folks at Middleby, and I recommend that anybody out there who's a Middleby fan, go quickly to that proxy statement and take a hard look at what the CEO is earning because although they've been doing a good job, I don't like the incentives and I don't like the total amount of pay. Commercial ovens, the next Wall Street. Yeah. Okay, Seth Jason, James Early, Shannon Zimmerman. Guys, thanks for being here. You're welcome. Thank you, Chris. Thanks for listening to this edition of Motley Full Money. As always, people on this program may have interest in the stocks they

talk about. Don't buy ourselves stocks based solely on what you hear, do your homework and make your own decisions. And remember, the conversation continues 24-7 at fool.com. I'm Chris Hill, and we'll see you next time.