January 2006 Archives

Readers of my blog know of my general interest in South America. In the past I have discussed how South America's political forces appear to be taking a turn toward the left.

In Street Insight (an expensive subscription site), Doug Kass (General Partner for Seabreeze Partners Short L.P.) wrote the following comments.

Our first and most consequential surprise was that the growing political instability in South America could have serious implications for the supply of a broad list of commodities, raising the spectre of cost push inflation.

Supportive of this concern were the results of the Presidential election in Chile over the weekend in which Michelle Bachelet of the Socialist Party claimed victory. A Bachelet win will bolster the shift to the left in Latin America, where socialist Evo Morales won the Bolivian election last month, and a Leftist also leads the polls in Mexico, Brazil, Uruguay and Argentina.

I think the change in political climate in South America warrants close attention.

For those serious about the markets, I encourage you to consider Street Insight.

Nicholas Wade wrote an informative article for the New York Times Scientists Discover Gene That Confers Sizable Risk of Diabetes (free registration required) concerning diabetes.

Scientists have discovered a variant gene that confers a sizable extra risk of Type 2 diabetes and that is carried by more than a third of the American population.

The finding is being reported on Monday in the journal Nature Genetics by researchers at Decode Genetics. The company specializes in finding the genetic roots of human diseases by studying the Icelandic population. Decode Genetics first found the genetic variant in Icelanders and has now confirmed the finding in a Danish and an American population.

An immediate practical consequence of the discovery, Decode's chief executive, Kari Stefansson, said, will be a diagnostic test to identify people who carry the variant gene. If they know of their extra risk, he said, they will have an added incentive to stay thin and exercise.

Given the prevalence of Type II diabetes, I thought this was an interesting article to read.

Henry Blodget. Remember him? Yes, he is the former (in)famous Merrill Lynch analyst who was so intimately associated with the go-go Internet era. Well, he is back, not at Merrill Lynch mind you, but at his own weblog Internet Outsider.

Blodget has two excellent articles regarding Google that deserve reading.

• $500. $600. $2,000. Do I Hear $10,000? $0?
• Google: The Bear Case

I completely agree with Blodget on his following comment.

Second, no one knows for sure what stocks are worth. No one. If you don't believe this, get a spreadsheet, project a hundred years' worth of cash flows for Google, and discount them to the present. Don't forget that Google could end up like Microsoft or like DEC (very different cash flows) and that an appropriate discount rate--one that compensates you for the risk to the cash flows--could range between, say, 7% and 20%. When you think you're done, change your assumptions a bit and see what happens to the "fair value." Change them again. Eventually, you'll probably conclude that the stock is worth somewhere between $25 (cash per share) and $1,000. Now pick your price target.

Blodget presents well reasoned arguments in an articulate manner. I highly recommend reading both articles.

I highly recommend reading in the Financial Times the Full text of Jerry York’s speech (subscription might be required).

York eloquently provides an roadmap that GM should follow to begin to address its problems. It is a long article, but well worth the read. Even if you are not interested in the GM situation, this article is a great case study on how to attack problems in a troubled company.

If I saw GM beginning to implement York's ideas in earnest, I would likely exit my short position and potentially go long the stock. His ideas are that good. But it takes a strong management team to recognize that there are no sacred cows and be willing to me significant shifts in business strategy.

Time will tell if GM's management has sufficient courage. In the meantime, I remain short GM stock.

John D. Stoll wrote a Dow Jones Newswire article the Wall Street Journal GM to Cut Prices on Most Models In Move Away From Incentives (subscription required).

DETROIT -- General Motors Corp. on Tuesday announced plans to slash prices on most of its models as part of an effort to better gauge what consumers are willing to pay and move away from the heavy incentives that confuse buyers and take a bite out of the auto maker's profits.

Separately, Jerome York, an adviser to investor Kirk Kerkorian, called on General Motors to cut its annual $2 a share dividend by 50%, a move he said would save GM about $566 million a year. He also pushed for a "substantial reduction" in payments to GM directors and urged pay cuts starting with top GM executives - with progressively smaller pay cuts down through the ranks, "with hopefully only a single-digit reduction necessary among the rank and file in plants and offices." Mr. Kerkorian's Tracinda Corp. is one of the auto maker's biggest investors.

There are new and different articles concerning GM almost daily. But in my view, nothing has really changed.

I have written previously that I believe price cuts and incentives will simply flow to the consumer. While GM might move more metal, it is likely to be profitless prosperity. And now we have York calling for a reduction in the dividend and pay cuts. I wonder if York wants to remain an outsider, instead of a director, because he can criticize more easily as an independent person.

I remain short GM shares.