Galbraith continued:
Exhibit 2
Cash Hoards on the Rise
Gross Cash / Market Cap 18 Year Average 2002
Information Technology 8.9% 15.7%
Utilities 4.7% 11.6%
Consumer Discretionary 9.1% 9.5%
Health Care 6.6% 8.5%
Telecom Services 2.8% 7.9%
Industrials 7.1% 7.0%
Materials 4.7% 5.3%
Energy 7.3% 3.8%
Consumer Staples 4.0% 3.2%
S&P 500 ex Financials 6.5% 8.7%
Source: Morgan Stanley Research
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Pension funding issues will bankrupt the entire S&P 500.
The current wave of new paradigmitis has quickly moved
from the wonders of all things fiber-optic to the impending
decline of Western civilization based on pension-funding
issues. Again, pension-funding issues are not trivial at the
micro level. Indeed, our guess is there will be a number of
companies facing the prospect of bankruptcy given truly
staggering employee liabilities. In our view, however, far
too many investors are now using a wickedly broad brush to
capture what is a decidedly company-specific (and quite
complex) investment issue. Trevor Harris and team recently
wrote a very instructive piece on the pension issue
(see Yawn or Yell? What To Do About Pensions). As they
note, understanding where the big pension issues lie is
critically important. For some companies, the outlook is
likely more diabolical than what current securities prices
anticipate. For others, the risks are manageable. So how
is the market thinking about the issue? Well, the combined
market cap of the 25 companies identified as having the
most prominent pension funding issues is roughly $100
billion — or about 1.4% of the total S&P 500 capitalization
— roughly equal to the size of Cisco.
----------------
Exhibit 3
Someone Understands Companies Have Pension Issues
Company Mkt. Cap Company Mkt. Cap
Boeing 21,679 U.S. Steel 1,195
General Motors 18,584 Delta 1,085
Ford 14,809 Cummins 938
Raytheon 11,109 Hercules 887
Xerox 6,390 Avaya 824
Lucent 6,164 Visteon 809
Delphi 4,297 Goodyear 715
Georgia Pacific 3,730 Allegheny Energy 705
Unisys 2,990 CMS Energy 620
Goodrich 1,802 AMR Corp 410
Navistar 1,450 McDermott 269
Boise Cascade 1,392 Allegheny Technology 223
Dana 1,255
Total 104,332 % of S&P 500 Mcap 1.4%
Source: Morgan Stanley Research. S&P 500 companies with largest pension
deficits as a percentage of market cap.
---------------------------
No company in America will ever again raise prices.
As best we can discern, there seems to be ubiquitous
agreement among investors that absolutely no corporation
in America will ever again raise prices. Given high levels
of excess capacity in a number of industries, our guess is
pricing power will remain ephemeral (a euphemism for
non-existent) in many areas. Others areas, however, have
produced meaningful price increases recently. In fact, try
telling a recently hospitalized, cereal and hot dog eating
writer with two college kids, a sick dog, a recently buried
Aunt Edna, ready to gas up his Hummer on the way to a
corporate board meeting, that price increases are absent
(Exhibit 4). Further, with capital expenditures remaining
punk and employment declining in many service areas,
companies are dealing reasonably intelligently with excess
capacity. At a personal level we are morbidly heartened
(albeit nervously) by the New York Post’s recent series of
Wall Street Strategist “Death” Watch articles. Again, the
issue is not that pricing power is alive and well everywhere
— it ain’t. On the other hand, the market is nowhere near
as bereft of price increases as some would suggest.
--------------------
Exhibit 4
No Pricing Power?
Product Price Increase
Pulp $20/ton NBSK price increase 2/03, $40/ton increase 3/03
Cereal Kellogg increased US cereal product prices 2%, General Mills followed suit
Coated Paper $40/ton increase 1/03 (following 10/02 price increase)
Director Ins. Chubb's D&O rates up 140% for public companies, 35% for private/non-profit
Education Education (CPI) up 6.5%, college tuition up 7.3%, textbooks up 6.8% in the last year
Frankfurters Frankfurter prices (CPI) are 11.1% higher than a year ago
Funeral Services Funeral expenses (CPI) up 4.4% in the last year
Gasoline Gasoline prices (CPI) up 31% in the last year
Healthcare Medical costs up 11.3%, fully insured premiums up 13.1% on average in 2002
Hospital Services Outpatient hospital services (CPI) up 12.5%, inpatient services up 8.4% in the last year
Motor Vehicle Ins. Motor vehicle insurance (CPI) up 9.3% in the last year
Newsprint $50/ton increase effective 3/03
Postage Postage prices (CPI) up 10.5% in the last year (USPS hopes for more)
Veterinary Services Veterinary services (CPI) are up 6.0% in the last year
Chemicals Ethylene prices up 49%, propylene up 51%, styrene up 100% in the last year
Source: Corporate Reports, Morgan Stanley Research
------------------------------------------
Occasionally, we are as guilty as the next guy of throwing
around sweeping generalizations. Frankly, they are analytically
easy. As we noted a few weeks back (Mr. Top
Tick?), though, our read of things today is that much of the
opportunity lies at the micro level. As more investors
dogmatically dig in with macro views that may result in
false comfort from compositional assertions rather than
analysis, our guess is micro opportunities are rising. The
ubiquity with which market participants seem to be holding
a monolithic view on consumers, debt, pensions, and pricing
power suggests more babies are being jettisoned with
the bath water. A good place to start on the micro front is
the low relative price of quality today. A number of
AAA-rated companies (AIG $48.77, GE $23.81, Fannie
Mae $63.01, Merck $51.79, Freddie Mac $54.07, Pfizer
$29.14, Exxon Mobil $34.78) continue to trade at levels
equal to or below the market. Micro rules!
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