Streetwise for Sunday Sept 14, 2008

Streetwise

Lauren Rudd

Sunday, September 28, 2008

The World Is Not Coming To An End

"The budget should be balanced; the treasury should be refilled; public debt should be reduced; and the arrogance of public officials should be controlled." -Cicero. 106-43 B.C.

If you are worried about your investments, relax. The world is not coming to an end. Yes, it looks like high noon on Wall Street as Treasury Secretary Paulson and Federal Reserve Chairman Bernanke sit eye-to-eye with Congress. Hands on microphones, they chafe over the decision by Congress not to rubber stamp their request for Paulson’s coronation.

The earlier moves of the fearsome duo were only foreplay. Now Paulson and Bernanke are ready for some serious early holiday shopping...at taxpayer expense. Reminds me of a scene from “The Money Pit,” with Tom Hanks, where a building contractor tells Hanks, “Hurry up and give me the money before I change my mind.”

Meanwhile, Bush administration officials continue to warn of a looming economic disaster, an Apocalypse akin to the Great Depression of the 1930s if Congress fails to act swiftly.

Largesse is certainly no stranger to the hallowed halls of Congress. The sticky wicket is that the entire House of Representatives and 35 senators are up for reelection, while a recent poll shows public opinion 55% to 31% against a bailout, despite the consequences. Furthermore, on Nov. 4, even the most brain-dead electorate can remember what happened five weeks prior.

On Wall Street, the holders of toxic subprime debt have been crying that they are unable to properly value their holdings because the market for garbage is nonexistent. Paulson and Bernanke et al plan to estimate what the value of this same debt will be many years hence and then pay that future price...today.

Institutions, such as Goldman Sachs and Morgan Stanley, will be among the greatest beneficiaries, while your local bank will likely see limited assistance because they have not had to write down nearly as great a volume of assets.

The sacrificial lamb in all this is SEC Chairman Christopher Cox. Actually, the SEC was simply following the anti-regulatory laissez-faire lead of the Administration and Congress. Sort of like elephants on parade, each using its trunk to hold the tail of the one in front as they trundle along. The participation of Paulson is understandable, but distinguished Princeton professor Bernanke...Et tu Brute?

So what happens when everything plays out; how will it affect you, the individual investor? The tremendous increase in government debt will mean higher interest rates, rising inflation and a devalued dollar. After congress acts, Wall Street will settle down and get back to business. Stock prices should begin a slow crawl upward, with nothing exciting happening until January. In the interim, you should be looking for bargains because Wall Street is on sale as never before.

A good example is Staples. A year ago I projected earnings of $1.43 and a share price of $24.25. The shares are recently traded at $23.19 and the company earned $1.42 per share.

For the second quarter ended Aug. 2, Staples earned $150.2 million, or 21 cents per share. That's down from year-ago numbers of $178.8 million and 25 cents per share. Sales increased 18 percent to $5.07 billion from $4.29 billion a year ago, although same store sales fell 7 percent in North America. The good news is that the company’s July acquisition of the Dutch company, Corporate Express NV, should drive earnings higher going forward.