Tuesday, November 11, 2008
(Cont'd from above)...

Jim (cont'd):    They obviously didn't see oil going all the way up either...

If currencies and commodities are playing havoc with Procter & Gamble's recession-resistant business, I mean, you can only imagine what's happening to the lesser companies that make these goods...

They're all caught in a vise between currency and commodity costs... Consider it, our friend, "Scylia" and our friend, "Charybdis" and they didn't see it coming (where Scylia and Charybdis basically represent a choice between two evils).

How about the assumptions made by the life insurers?... I mean, here I'm talking about the Hartford (HIG) and Prudential (PRU) and Lincoln National (LNC) and MetLife (MET) and Principal Financial (PFG)?... Those stocks were just crushed today... Don't buy, don't buy... They were decked, courtesy of a group downgrade by Goldman Sachs... which said that all of these companies may need to raise capital, in part because they'll need to make good on annuity guarantees they made to you... Assumptions. They made the wrong ones. Frightening stuff.

In some cases, the companies just didn't forecast this kind of decline in stocks, so they may not have the cash to pay off in your stock-based annuities, unless they raise capital.

These companies also invested heavily in commercial real estate. And, with rates coming down there, they can't rely on their investments to tide them over. They got the wrong assumptions on the stock market appreciation, and they got the wrong assumptions on commercial real estate too.

How about the decline in crude for the oil companies?... Did they see it coming? It was a nice gradual move up, and then it spiked... But then it's fallen through the floor...

No. Many of these companies in the last two years made assumptions that oil would stay high. Now they're cancelling drilling budgets and crushing companies that provide oil service... companies with stocks that are all heavily owned by hedge funds gone wild... Now the hedge funds keep selling and selling and selling... They have no choice.

Oil's going to $50 a barrel now, something that none of the producers saw coming. They made the wrong assumptions... and the industrial consumers have yet to reap the benefit of lower prices.

Or how about the spiking commodity costs that wrecked the bottom line of a really great company, Tyson Foods (TSN), the meat and poultry company, because it costs too much to feed the animals... and the ensuing blood of chickens, because they had to be slaughtered en masse, rather than be fed, caught them by surprise. If it costs more to feed, (they) make less at the store... a disaster... one they just assumed wouldn't happen. They made the wrong assumptions, and that's why that stock has gone to $5. Ouchy...

How about the horrific slowdown in the once unbelievable, invincible China?...

No industrial company that does business in China saw that coming... none. Certainly not the steel or iron ore or aluminum or copper smelters... No copper company saw copper falling to $1.60 and change, where it got to today... All the way back to 2005, because wasn't China going to use a massive amount of copper?...

They almost all started major projects based on the assumption that copper prices would currently stay north of at least $2.50... maybe go to $4. They will lose money on all these projects now.

We assumed the lower gasoline prices would make the consumer spend again. But the consumers are all so worried about the appalling losses in their 401Ks and the value of their homes that they have yet to take advantage of the monster decline in gasoline prices. So the restaurants need to cut prices. They haven't. And the retailers have way too much inventory, so they have to run huge sales and make a fraction of what they thought they would, if not lose money... That's why J. C. Penney (JCP) goes from $51 to $19.... Saks Inc. (SKS) from $23 to $4... They made huge assumptions about your demand and the assumptions were wrong.

Now the two big assumptions of the era...

That housing prices will never go down... let alone go down big... and that unemployment will not get to 10%, where all bets are off...

It seems as though every bank assumed that house prices would permanent ally appreciate, and either lent to borrowers who are undeserving whom they felt could flip the houses, or bought bonds made up of mortgages that are now defaulting like mad. The banks thought they were insured, but the insurers, in many cases, made the wrong assumptions about defaults, and now they're not making good on their promises... and that means the case of like AIG (AIG), which... the taxpayers enriched AIG, and allowed them to pay off on a lot of bad bets that never should have been made, because they made the wrong assumptions.

Even then, everything was going to be fine, as long as unemployment didn't spike. We get unemployment spiking... and that means a huge wave of foreclosures that cannot be stemmed by the very positive Fannie Mae and Freddie Mac forgiveness decision that they made today at 2pm. Good plan but, if unemployment goes up, every assumption that's made about housing and foreclosures... out the window, along with the gigantic number of auto loan and credit card defaults. The auto companies made the wrong assumptions. The credit card companies made the wrong assumptions.

In short, you're witnessing a market where almost every major management team in this country made the wrong assumptions about their customers, their borrowers, the price of housing, their lenders, their raw costs and their currencies.

Everyone got it wrong. Everyone. Which is why, when we think things look so darn cheap, we keep getting surprised about how badly companies are doing. They're doing badly because the assumptions are all wrong. And, for the most part, continue to be wrong to this day...

Alright, I'm going to give you a silver lining, because that was unremittingly negative and, therefore, you're probably thinking, oh jeez, that was bad...

But there's one assumption that will always remain true...

When commodities come down in price as they have... ultimately... and that's out in time... but, ultimately, it's good for you... and good for all the businesses that aren't involved in the commodity business. We just haven't seen that upside yet.

And the bottom line is...

●  ●  ●  ●  ●

Jim's comments AFTER the interview:     ...that, until we do, we'll see more of this negative action, more losses in your portfolio... and, as the companies adjust to the new, crazy world we live in, and finally get the assumptions right, not wrong.


[verbatim recap]

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