Monday, November 15, 2010


GM Offering to Be Priced Higher

The GM IPO price is raised to a range of $32 to $33 a share.

I still like the deal.

Why the Bond Market Blast?

I'm hearing that the U.S.'s AAA rating could be challenged if the Bush tax rate reductions are made permanent.

The bond market is being hit by rumors that Moody's might be contemplating a statement that the U.S.'s AAA rating will be challenged if the Bush tax rate reductions are made permanent.

Recommended Reading

Run, don't walk, to read is the other side of the Bernanke/QE2 debate from Alan Blinder in The Wall Street Journal.

Bobbing for Apple's Announcement

Could it be that Apple is creating a giant data center that will house all its data in the cloud?

Here is a list of possibilities compiled by BayCrest Partners of what tomorrow's announcement might be:

* subscription-based music/TV service (been rumored since 2004);
* Ping social network integrated with Facebook (Ping and Twitter unveiled a cross-platform integration on Nov. 11);
* the long-awaited Beatles catalogue (the highest likelihood);
* expanded TV rental content (Currently only FOX and ABC allow $0.99 TV rentals);
* streaming iTunes from any computer or iOS4 via the cloud, which would be a major announcement, and thus very unlikely to be unveiled in this manner -- something of this nature would likely be introduced and showcased at a Mac-centric media event.

I personally think the announcement could be that Apple is creating a giant data center that will house all its data in the cloud.

Ben Bernanke Blooper Reel

Check out this interesting recap from Sourcewatch of Chairman Bernanke's misguided comments over the past five years.

As an example, here is an open letter by several leading investors and economists to Chairman Bernanke in opposition to QE2.

On this subject, here is an interesting recap from Sourcewatch of Chairman Bernanke's misguided comments over the past five years on derivatives, the financial crisis, housing and the economy:

On the Economy

* In February 2006, Ben Bernanke, as President Bush's Chairman of the Council of Economic Advisers, was responsible for drafting the Economic Report of the President, which claimed the following: "The economy has shifted from recovery to sustained expansion.... The U.S. economy continues to be well positioned for long-term growth." In this report, Bernanke projected the unemployment rate to be 5% from 2008 through 2011.

* On July 20, 2006, Fed Chairman Bernanke referred to the economy as "robust" and "strong."

* On February 15, 2007, Fed Chairman Bernanke said, "Overall economic prospects for households remain good. The labor market is expected to stay healthy. And real incomes should continue to rise. The business sector remains in excellent financial condition."

* On July 18, 2007, Fed Chairman Bernanke said, "Employment should continue to expand.... The global economy continues to be strong ... financial markets have remained supportive of economic growth."

* On February 27, 2008, Fed Chairman Bernanke said, "The nonfinancial business sector remains in good financial condition with strong profits, liquid balance sheets and corporate leverage near historic lows.... Projections for the unemployment rate in the fourth quarter of 2008 have a central tendency of 5.2% to 5.3%, up from the level of about 4.75% projected last July for the same period. By 2010, our most recent projections show output growth picking up to rates close to or a little above its longer-term trend, and the unemployment rate edging lower. The improvement reflects ... an anticipated moderation of the contraction in housing and the strains in financial and credit markets."

* On June 9, 2008, Fed Chairman Bernanke said, "The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so."

* On May 5, 2009, in front of the Joint Economic Committee, Fed Chairman Bernanke said, "Currently, we don't think [the unemployment rate] will get to 10%." In November the unemployment rate hit 10.2%.

On the Housing Market

* July 1, 2005: Bernanke, then President Bush's Chairman of the Council of Economic Advisers had the following exchange with CNBC:

CNBC interviewer: Ben, there's been a lot of talk about a housing bubble, particularly, you know, from all sorts of places. Can you give us your view as to whether or not there is a housing bubble out there?

Bernanke: Well, unquestionably, housing prices are up quite a bit; I think it's important to note that fundamentals are also very strong. We've got a growing economy, jobs, incomes. We've got very low mortgage rates. We've got demographics supporting housing growth. We've got restricted supply in some places. So, it's certainly understandable that prices would go up some. I don't know whether prices are exactly where they should be, but I think it's fair to say that much of what's happened is supported by the strength of the economy.

Interviewer: Tell me, what is the worst-case scenario? We have so many economists coming on our air saying, "Oh, this is a bubble, and it's going to burst. And this is going to be a real issue for the economy." Some say it could even cause a recession at some point. What is the worst-case scenario if in fact we were to see prices come down substantially across the country?

Bernanke: Well, I guess I don't buy your premise. It's a pretty unlikely possibility. We've never had a decline in house prices on a nationwide basis. So, what I think what is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit. I don't think it's gonna drive the economy too far from its full employment path, though.

* On February 15, 2006, Fed Chairman Bernanke said, "The housing market has been very strong for the past few years.... It seems to be the case, there are some straws in the wind, that housing markets are cooling a bit. Our expectation is that the decline in activity or the slowing in activity will be moderate, that house prices will probably continue to rise but not at the pace that they had been rising. So we expect the housing market to cool but not to change very sharply."

* On February 15, 2007, Fed Chairman Bernanke said, "The weakness in housing market activity and the slower appreciation of house prices do not seem to have spilled over to any significant extent to other sectors of the economy."

* On March 28, 2007, Fed Chairman Bernanke said, "The impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained."

* On May 17, 2007, Fed Chairman Bernanke said, "We do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system."

* On February 27, 2008, Fed Chairman Bernanke said, "By later this year, housing will stop being such a big drag directly on GDP.... I am satisfied with the general approach that we're currently taking."

On the Financial Crisis

* On February 15, 2007, Fed Chairman Bernanke said, "The Federal Reserve takes financial crisis management extremely seriously, and we have made a number of efforts to improve our monitoring of the financial markets to study and assess vulnerabilities, and to strengthen our own crisis management procedures and our business continuity plans."

* On February 28, 2008, Fed Chairman Bernanke said, "Among the largest banks, the capital ratios remain good, and I don't expect any serious problems ... among the large, internationally active banks that make up a very substantial part of our banking system."

* On July 16, 2008, Fed Chairman Bernanke said that Fannie Mae (FNM) and Freddie Mac (FRE) are "adequately capitalized" and "in no danger of failing." Since then, Fannie Mae and Freddie Mac have received a $200 billion bailout and have been taken over by the federal government.

On Derivatives

While Warren Buffett warned that derivatives were "financial weapons of mass destruction" that pose a "mega-catastrophic risk" to the economy in 2003, Bernanke supported the deregulation of these risky schemes.

* In November of 2005, Mr. Bernanke was questioned by then-Senate Banking Committee Chairman Paul Sarbanes:

Sarbanes: Warren Buffett has warned us that derivatives are time bombs, both for the parties that deal in them and the economic system. The Financial Times has said so far, there has been no explosion, but the risks of this fast-growing market remain real. How do you respond to these concerns?

Bernanke: I am more sanguine about derivatives than the position you have just suggested. I think, generally speaking, they are very valuable. They provide methods by which risks can be shared, sliced and diced, and given to those most willing to bear them. They add, I believe, to the flexibility of the financial system in many different ways. With respect to their safety, derivatives, for the most part, are traded among very sophisticated financial institutions and individuals who have considerable incentive to understand them and to use them properly. The Federal Reserve's responsibility is to make sure that the institutions it regulates have good systems and good procedures for ensuring that their derivatives portfolios are well managed and do not create excessive risk in their institutions.

* On February 27, 2008, Fed Chairman Bernanke said, "If you have two investment banks doing an over-the-counter derivatives transaction, presumably they both are well-informed and they can inform that transaction without necessarily any government intervention."

* On July 10, 2008, Fed Chairman Bernanke said, "Since September 2005, the Federal Reserve Bank of New York has been leading a major joint initiative by both the public and private sectors to improve arrangements for clearing and settling credit default swaps and other OTC derivatives.... I don't think the system is broken, but it does need some improvement in execution.

Buy General Motors

At a proposed IPO price of between $26 and $29, General Motors shares are very attractive.

The company has dramatically transformed its balance sheet.

General Motors is positioned well and an inexpensive way to participate in emerging markets.

The company has embarked on a meaningful cost-savings program and is poised for above-average cash flow and profit growth. The stock is an inexpensive way to participate in rapid emerging-market growth.

Based on 2011 estimated EPS of $5.40 per share, up from $3.00 in 2010, and 2011 estimated cash flow of $16.0 billion, up from $12.7 billion in 2010, my year-end 2011 target is $55 a share, or only 4.1x my preliminary 2012 estimate of $7.20 a share (well below OEM comps).


General Motors is the outgrowth of a 363 Sale under the U.S. Bankruptcy Code, under which the company acquired all the assets and assumption of certain of the liabilities of The General Motors Corporation.

GM is a global company with 70-plus assembly facilities and 85-plus manufacturing facilities, with over 21,000 independent dealers in over 120 countries around the world. Its product offerings are broad and include passenger cars, light trucks, SUVs, vans and crossover vehicles, representing slightly under 12% of worldwide vehicles sales.

The company has a 19% market share of the U.S. auto industry, with 72% of the company's sales generated outside the U.S.

The Case for General Motors

* Markedly improved financial position. The new GM's financial position no longer resembles the old GM, as total debt and other liabilities have been extinguished by $93 billion.

* An aggressive cost-savings strategy will maintain operating margins above historical averages. An aggressive cost-savings program portends a sustained high-level of operating margins. Earnings before interest, taxes, depreciation and amortization (EBITDA) margins should exceed 12.0% by 2012 vs. 9.8% in 2010. Gross margins are forecast at 14.5% vs. 12.5% for full year 2010.

* Emerging market exposure is meaningful. With 40% of the company's sales in high-growth, emerging, non-U.S. markets, General Motors is positioned well and an inexpensive way to participate in emerging markets.

* Excellent short-term profit picture. GM reported $3.5 billion of cash flow in third quarter 2010, cash flow year-to-date of $10.5 billion and 12-month trailing of $11.5 billion. Given management's guidance on the conference call, full-year 2010 revenue, EBITDA and free cash flow should total $131 billion, $12.7 billion and $5.3 billion, respectively.

* Industry auto sales are depressed, and intermediate-term expectations are low. Worldwide automobile industry sales are depressed and future expectations are modest. A steady albeit slow improvement in industry sales provides a broad runway of growth for General Motors.

* Inexpensive valuation. At an estimated IPO price of $26 to $29 per share, General Motors' enterprise value to EBITDA is only 4.5x, 3.6x and 2.9x 2010, 2011 and 2012 respective estimates. The company's P/E is less than 6x 2011 estimates and approximately 4x 2012 estimates. On a post-exchange basis, free cash flow yield estimates for 2011 and 2012 are at 11.5% and 15.9%, respectively.

long AAPL

No comments: