POST OF THE DAY
The BMW Method
Optimism from Wachovia Speaker

Related Links
Discussion Boards

By BuildMWell
March 19, 2008

Posts selected for this feature rarely stand alone. They are usually a part of an ongoing thread, and are out of context when presented here. The material should be read in that light. How are these posts selected? Click here to find out and nominate a post yourself!

I attend a monthly meeting where we have an invited speaker who discusses all sorts of investing ideas. For instance, next month we will hear a presentation about firearm collecting.

This past week at the meeting an economist with Wachovia Bank was the speaker. He reiterated the bank's view that we are not necessarily in a recession. He did not say a recession is impossible, but he pointed out some facts that led him to suspect that we are not headed there.

The reason that Wachovia believes a recession is not imminent, is that there are three factors that are present this time around that have not been there in past recessions. This time around, unemployment is low, interest rates are low and dropping, plus there is a feeding frenzy of bottom fishers on any price drop in the markets. The speaker called it the 3-F's...Fiscal policy, Full employment and Feeding frenzy. He could not find a time in our history where those factors were in place and a recession actually occurred.

He was quick to say that a recession is only apparent in the rear view mirror because we have to recognize two consecutive quarters of negative GDP growth. The fourth quarter of 2007 showed over 4% positive growth...but he said we are definitely slowing. How much and for how long is the question? He doesn't see recession as "necessary" due to the Fed action, the stimulus package that will soon flood America with rebate checks, steady high employment levels and plenty of ready capital to take advantage of low stock prices. There are Trillions of dollars sitting on the sidelines awaiting any sign of a turn.

He thinks the main reason many people are thinking we are in a recession is because that is what is beaten into their heads every day by the media. Maybe the talking heads can create a recession, but there is no real reason for it. Actually, the S&P 500 earnings are indicating a market P/E of 14, which is historically low and the 10-year Treasury is at 3.45%...the lowest in almost 60 years. The Treasuries are priced with a P/E of 29...but all indications say their yield will be going even lower in the short run. This is not a sign of recession.

The other factor that no one will address is the weak dollar. Our exports are soaring and the profits of American multi-nationals are too. He says that everyone talks about the weak dollar, but they really are not that concerned because of the positive effects on business. What we need is full employment and good profitability...both are right in front of our eyes and the media has chosen to ignore it.

On the sub-prime mess, in answer to a question that I asked, he said that the write-downs are largely inflated due to Sarbanes-Oxley. Instead of possibly taking a "perp-walk" most financial managers chose to over-state the problem to put a figure on paper. They will not know the true extent of the problem until this all shakes out concerning foreclosures, the interest rate situation stabilizes and all of the refinancing is done. But, the numbers are too high if anything.

The goal of the financial organizations is to have a viable person making house payment that are affordable. That is a win-win. However, the "safe" answer today is to over-state the problem, write down the "hypothetical losses" and to stay out of jail. If they have to adjust the write-downs upward in the future, no one will complain as the earnings improve accordingly. We cannot blame management for being conservative with their estimates, can we?

Meanwhile, the fed is trying very hard to not bail out the speculators who tried to game the system. They need to be hurt and lose their investment while the people who really want to own their own home can find a way to make it happen. If the appraisals or the documentation was fraudulently presented, the law will deal with those too. This will take some time to be resolved, but he assured us that it is happening right now. Each situation has to be evaluated and managed properly. Meanwhile, Wall Street is using the lack of detailed answers to beat down the financials to irrationally low levels.

Someone asked him about buying Wachovia stock. He said that he was forbidden to talk about that. But, he said he could legally tell us all we needed to know. He re-confirmed that Wachovia management has been saying about the soundness of the dividend. He also said that Wachovia management has been buying shares like crazy...and so is he. That is on the public records, so he was not telling us anything we could not find for ourselves if we just looked.

So, a 9% yield is NOT something to fear. It is a gift for Mr. Market. The speaker did not say that...I said that.

I was encouraged by the presentation and thought the speaker was telling it like it is. He sees this whole thing up close and personal which is good enough for me. He was not at the club to sell us anything...we invited him to speak to us.