Wednesday, September 28, 2011

The Economy's Coffin Corner

At times, it seems like our government in economy is at a "coffin corner".

From my vantage point, it doesn't seem like the government can stimulate the economy much more than it already has, without quite literally flooding the streets with money. Additionally, with the downgrade of US credit, it is hard to see there being the borrowing that we have historically ben used to. Yet, on the flip side, it doesn't seem as if they can cut off the Keynesian spending binge by pulling trillions of dollars out of the economy- printed, borrowed, or otherwise, without some pretty disastrous effects.

Lost decade? Take a look at a chart for the S&P: we have lost the better part of 15 years. That said, Dell and Microsoft trading at single multiples of earnings should make for a nice bull case. Individually, there are a ton of really nice stocks out there.

Disclosure: None. This is not advice or a recommendation of any kind. Always do a ton of your own research in regard to anything that I say, do, write, or so much as even think about.


Michael M said...

If companies generally can't grow long-term revenue much, but can borrow at ultra-low rates, won't we see a wave of m&a once the current level of anxiety settles down? And if so, do you really want to own an ultra-lean, not for sale company like Dell?

jeff said...

I will preface this by saying that I don't own Dell (or anything else I mention), though, there are a lot of fund managers out there that seem to. Here is my logic for why someone would own them (or, why I might if I managed a few billion dollars). At present prices, the equity of Dell and Microsoft probably act more like a bond than anything else. A single digit P/E for these tech companies? Who would have ever thought that would happen! If you are looking for a company to earn a nice bit, especially when seeing the price you pay for both of these, and a few others (say, WMT)... If any of them are trading at 10x earnings and can grow their profits at any sort of a reasonable rate, you are looking at a nice double digit annualized return. Not bad. And if the market tanks and they go down in price, you are blameless; like the old adage "no one gets fired for buying IBM..."

While there are exceptions, I do have trouble seeing why the vast majority of people would want to be in bonds at prices like this. WMT has bonds that are yielding less than the dividend on their common stock!

You are right, it would seem that we will see a wave of M&A, dividends, or buybacks at some point; behemoths like Dell and MSFT can't keep al their cash forever.

Again, personally, I don't own any of these, as, I think there are better bets out there (Bets!? Is that a hint at one of my favorite companies?)