Politicians are always great at selling what is possible. How many times have we heard an elected representative say, 'Wouldn't it be great if we did that?' or 'We need to do this now, pass such and such a bill.' Hypothetical s like, 'We need to end world hunger,' are also a common wish. If you prefer the world in a way which is more 'traditional', accepting and facing the inevitable typically works better, especially if you are part of the business world. The October jobs report came out yesterday with a strong 271 thousand number, far greater than what was expected (185K). Also of note was the increase in average hourly earnings, up .4% versus the expected .2%. Many investors have long had a difficult time acknowledging interest rates need to go up. Oh, have they fought it, wished it were not the case, and postponed the inevitable (some might even say the Federal Reserve Board, that is). However, adopting Welch's mantra, let's 'face the music'. Lift off is upon us, and probably in December. Fed funds futures now indicate there is a 70% chance of a rate increase, and the only data point left to change things would be the November jobs report, released during the first week of December. Mr. Welch was a dominant business leader for a long time and his wisdom is good advice for many situations, the current investment climate included.
One notable event taking place this week was Facebook (O:FB)'s earnings report. I am not referring to their whopping growth rate, impressive mobile and video user numbers, or nascent entry into virtual reality efforts. All are nice, and having a soft spot for prodigious amounts of cash flow is something any investor should be guilty of. No, what I noticed was the fact that hoody central, the big FB, is now valued by the market in excess of Welch's ex, the dominant industrial conglomerate called General Electric (N:GE). When you consider Facebook has not been public for very long, less than five years, this is an astounding fact. Whether it is sustainable is a completely different question. In looking at these market multiples (300 billion market cap plus), Zuckerberg's behemoth is priced to grow at high rates for forever (nearly 40X future earnings). Forever is quite a long time, lots of places a company can stumble. Yes, they are well positioned. Yes, they have over 1.5 billion users. Got it. It has whooped the market all year long. Me comprende. Legitimately worth more than GE. Uh, no.
Two companies which also took it on the chin were Men's Where house and Valeant, yet again. The chain which made the slogan, 'Who Loves Ya, Baby?' acquired Jos. A Banks and is having trouble with it's discounting strategy. Wall Street had no problem marking the stock down, take a big breath now, 43% in one day. Valeant continued to go down, down, down, and Bill Ackman is taking notice, in a big way. You would, too, if you were down over a billion on the position. These situations highlight the harsh nature of what happens to a company if they miss earnings estimates. You see a company lose 20% or more of the value in one day, which is very difficult to come back from, at least in terms of stock appreciation. It happens on a regular basis, which is why there is opportunity in investing. However, when it happens to positions you own, it is frustrating and disappointing, as well as the ultimate learning experience. Nearly everyone in the market, even great investors like Buffett, Malone, Munger, Ackman, Einhorn, etc, gets shelled on something. No portfolio is 100% risk free. Unless, of course, you are in cash. What is the return on that again?
In the technology world, NVIDIA Corporation (O:NVDA) had a nice earnings report and Wall Street rewarded the GPU designer with a healthy pop. On the opposite side of the spectrum, Qualcomm (O:QCOM) disappointed with guidance and took a beating. These two semiconductor companies illustrate the fundamental challenge investors face when trying to consider where to allocate capital in the chip sector. Qualcomm has long been the better investment, but the changing landscape of the market makes it appear Nvidia is in the sweet spot for future growth. One answer would be to own both. Easy, right. Yes, but you only have so much capital, and which one gets the greater allocation? Not as simple as it appears. Thanks, I knew you were concerned as it is a difficult choice.
It was interesting watching Rachel Maddow have a sit down, er love fest, with the Democratic candidates last night. The same issues addressed, all with a decidedly, er, liberal perspective. Of note was a question asked to chill Hill about the influence of technology companies on government policy. Given the cash hoards at Apple (O:AAPL) ($200 billion), Google (O:GOOGL) ($75 billion) and Facebook Inc (O:FB) ($15 billion), they certainly can afford to pay the best lobbyists. Of course, Mr. Sanders wants corporate influence out of politics. As long as it is not high tech influence that is, right Bernie?
On Tuesday, Republican candidates will go at it again on the Fox Business channel. I suspect Neil Cavuto and Maria Barteromo will do a nice job handling the moderator jobs. It is becoming evident the biggest obstacle for Republicans may be themselves, especially from the conservative media. Ingraham, Rush, Hannity, they all have huge audiences and influence. No candidate is perfect from a policy perspective, and all have areas which might not fit the specific hosts view of the world. Still, someone has to be the nominee, and find a way to win. Republicans don't win, you get 4 more years of Hillary. What did Lincoln say, a house divided? Adopting Mr. Welch's philosophy is certainly applicable to the current political climate as well. Thanks for reading the blog this week.
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