Monday, January 12, 2009

More Barron's

I'm going to continue with on more excerpts from the Barron's interview along with some commentary:

Mario Gabelli: In 15 days we will have a new leader who is going to re-brand America. His first priority as CEO of the country is to create jobs and insure that no adult is left behind in this economic system. ..... The missing element is confidence. New tax laws are going to help with that. The working person is going to get a financial stimulus, and even under the most bearish scenarios 91% of those who can will be working in December 2009. You're going to see an investment-tax credit and a change in depreciation, encouraging small businesses to make capital investments. On Sept. 15 somebody shut off the lights for the business person. It has been hell since. We need to go from this hell for businesses to a kind of purgatory. More spending on investments and the possibility of a lower tax rate for corporations would send an interesting message to the business world.

That's nice, but what happens now?

Gabelli: Come April or May, the numbers will be a lot better than in the fourth quarter. Car dealers tell us they are starting to sell cars, but the buyers still need financing. Yes, unemployment is going to rise. But once a new president comes in and enacts fiscal stimulus and promises tax cuts, things will start changing. Once businesses see some stability, they can start planning and looking at cost efficiencies.

As far as corporate earnings go, an enormous tsunami hit the economic world. It is no different than labor strikes in the 1960s. When the steelworkers struck, did you base stock multiples on the absence of earnings, or step back and ask what normalized earnings would be over an economic cycle. And shouldn't the P/E multiple expand to account for depressed earnings?

This really hits the new administration's top priority on the head: right now there is no confidence in much of anything. This situation started in the credit markets and has now spread to the economy as a whole. I personally think it was a primary reason why McCain lost the election: people were simply sick of the way things were and wanted something different.

Now the new administration has to deliver. Assuming they start to make good on their promises the consumer could start feeling better. Personally, I still think we'll see a weak first half followed by a fair second-half. But that assumes that Washington gets on track and actually does something positive. Without that, we've got serious problems.