Sunday, October 08, 2006
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Financial Columnists
Fear Will Fade
Kenneth L. Fisher, 10.16.06, 12:00 AM ET
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Readers didn't much believe me last month when I said the Republicans wouldn't lose Congress in November. If I'm right and these skeptics are wrong, fears of a big political fallout will fade--which is bullish--and you should buy now before the fear fades. No surprise that readers have this view, since the media are close to unanimous in decreeing that the probability of a Democratic victory is high.
But in a national election, structure trumps popularity. Structure means things like which seats don't have an incumbent running, which party has more Senate seats up for reelection, which party has more money in the bank. These factors count more than the fact that George Bush is unpopular. I predict that the GOP will lose seats but not enough seats to lose either house of Congress.
What if I'm wrong? There are only three possibilities. One is that the Democrats win one house but not both. Another is they win both houses but with weak majorities. The third is a Democratic landslide.
With the first two, the outcome is gridlock, the mirror image of what we had in the late 1990s, when Republicans had Congress and Bill Clinton was President. The market loves gridlock. Nothing gets done. That is, we have no tax or regulatory upheavals.
For structural reasons, I believe there is zero chance the Democrats will win by an amount greater than gridlock--by enough, in other words, to override a Bush veto. There just aren't that many iffy seats. Not even close.
Still, suppose I'm wrong. Look ahead. We are only three months away from the third year of George Bush's term. In the entire history of the S&P 500 there have been only two negative third years of any President's term. They were both long ago: in 1931, in the midst of the 1929--32 crash, and in 1939, as we entered World War II. Both very weird and unusual times.
All other third years were double-digit positive, except single-digit positives in 1947 and 1987. The average return in third years is 20%. In fact, there have been only five negative S&P 500 years in the back half of presidential terms. Market risk is highest in the front half of Presidents' terms, which is historically when most attempts at redistributive legislation have occurred. Once the midterms are over, it gets better. It will be no different in 2007. If the S&P 500 is up, the world market will be, too. Good times are close at hand. The time to buy is now, before the perception of political risk fades.
Germany's SGL Carbon (6, SGG) has fallen 33% since May and has yet to recover as it supplies primarily the hard-hit steel and semiconductor industries with carbon and graphite products, which include electrodes, laboratory components and furnace linings. If the economy doesn't roll over, SGL Carbon is too strong not to bounce back. It sells at 80% of sales and 15 times 2007 earnings.
The Chinese stock market fell in 2003, 2004 and 2005. China Netcom Group (36, CN ) didn't suffer that fate and in fact was in public hands only for the third of those years. Still, in that backdrop you can buy it at only one times revenue, seven times trailing earnings and three times cash flow (in the sense of net income plus depreciation).
With $10 billion in revenue and 120 million voice customers and 13 million broadband customers in ten northern provinces, it is one of China's biggest telecom firms and will move up smartly when the Chinese market recovers.
Switzerland's Adecco (nyse: ADO - news - people ) (15, ADO) is one of the world's biggest temporary-staffing firms. It has 4 million workers on call in 6,600 offices in 70 countries. It is the number one or two player in most of the largest markets. The company is an economic hedge, because the more firms fear a slowdown, the more they shift to temp workers. Adecco sells at half of annual revenue and 17 times 2006 earnings.
First Horizon National (nyse: FHN - news - people ) (39, FHN ) is the biggest Tennessee bank and limps along in 40 other states, with its prime strength in the South. The stock, which was $47 two years ago, has been hit recently by sagging mortgage spreads and the settlement of a class lawsuit tied to loan fees. At 12 times decreased 2007 earnings and 8 times what a reasonable management could earn, it is eminently affordable. Don't be put off by the board's feeble attempt at a poison pill. While you wait for a takeover bid, you get a 4.6% dividend yield.
Britain's Tomkins (18, TKS) is worth more dead than alive. Break apart the divisions selling building products, consumer products, fluid control systems and auto equipment and you get $40 a share. P/E, 11; yield, 4.5%.
Kenneth L. Fisher is a Woodside, Calif.-based money manager. Visit his homepage at www.forbes.com/fisher.
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Financial Columnists
Fear Will Fade
Kenneth L. Fisher, 10.16.06, 12:00 AM ET
More From Kenneth L. Fisher
pic
The Google Industrial Complex
Asia's REIT Push
The $100 Million Club
A Dangerous Game
Video Fixation
Complete Contents
Related Quotes
ADO 15.00 - 0.19
FHN 38.42 - 0.42
FHN 38.42 - 0.42
Readers didn't much believe me last month when I said the Republicans wouldn't lose Congress in November. If I'm right and these skeptics are wrong, fears of a big political fallout will fade--which is bullish--and you should buy now before the fear fades. No surprise that readers have this view, since the media are close to unanimous in decreeing that the probability of a Democratic victory is high.
But in a national election, structure trumps popularity. Structure means things like which seats don't have an incumbent running, which party has more Senate seats up for reelection, which party has more money in the bank. These factors count more than the fact that George Bush is unpopular. I predict that the GOP will lose seats but not enough seats to lose either house of Congress.
What if I'm wrong? There are only three possibilities. One is that the Democrats win one house but not both. Another is they win both houses but with weak majorities. The third is a Democratic landslide.
With the first two, the outcome is gridlock, the mirror image of what we had in the late 1990s, when Republicans had Congress and Bill Clinton was President. The market loves gridlock. Nothing gets done. That is, we have no tax or regulatory upheavals.
For structural reasons, I believe there is zero chance the Democrats will win by an amount greater than gridlock--by enough, in other words, to override a Bush veto. There just aren't that many iffy seats. Not even close.
Still, suppose I'm wrong. Look ahead. We are only three months away from the third year of George Bush's term. In the entire history of the S&P 500 there have been only two negative third years of any President's term. They were both long ago: in 1931, in the midst of the 1929--32 crash, and in 1939, as we entered World War II. Both very weird and unusual times.
All other third years were double-digit positive, except single-digit positives in 1947 and 1987. The average return in third years is 20%. In fact, there have been only five negative S&P 500 years in the back half of presidential terms. Market risk is highest in the front half of Presidents' terms, which is historically when most attempts at redistributive legislation have occurred. Once the midterms are over, it gets better. It will be no different in 2007. If the S&P 500 is up, the world market will be, too. Good times are close at hand. The time to buy is now, before the perception of political risk fades.
Germany's SGL Carbon (6, SGG) has fallen 33% since May and has yet to recover as it supplies primarily the hard-hit steel and semiconductor industries with carbon and graphite products, which include electrodes, laboratory components and furnace linings. If the economy doesn't roll over, SGL Carbon is too strong not to bounce back. It sells at 80% of sales and 15 times 2007 earnings.
The Chinese stock market fell in 2003, 2004 and 2005. China Netcom Group (36, CN ) didn't suffer that fate and in fact was in public hands only for the third of those years. Still, in that backdrop you can buy it at only one times revenue, seven times trailing earnings and three times cash flow (in the sense of net income plus depreciation).
With $10 billion in revenue and 120 million voice customers and 13 million broadband customers in ten northern provinces, it is one of China's biggest telecom firms and will move up smartly when the Chinese market recovers.
Switzerland's Adecco (nyse: ADO - news - people ) (15, ADO) is one of the world's biggest temporary-staffing firms. It has 4 million workers on call in 6,600 offices in 70 countries. It is the number one or two player in most of the largest markets. The company is an economic hedge, because the more firms fear a slowdown, the more they shift to temp workers. Adecco sells at half of annual revenue and 17 times 2006 earnings.
First Horizon National (nyse: FHN - news - people ) (39, FHN ) is the biggest Tennessee bank and limps along in 40 other states, with its prime strength in the South. The stock, which was $47 two years ago, has been hit recently by sagging mortgage spreads and the settlement of a class lawsuit tied to loan fees. At 12 times decreased 2007 earnings and 8 times what a reasonable management could earn, it is eminently affordable. Don't be put off by the board's feeble attempt at a poison pill. While you wait for a takeover bid, you get a 4.6% dividend yield.
Britain's Tomkins (18, TKS) is worth more dead than alive. Break apart the divisions selling building products, consumer products, fluid control systems and auto equipment and you get $40 a share. P/E, 11; yield, 4.5%.
Kenneth L. Fisher is a Woodside, Calif.-based money manager. Visit his homepage at www.forbes.com/fisher.
1 of 1
Article Controls
E-mail | Print | Comments | Request Reprints | E-Mail Newsletters | My Yahoo! | RSS
Related Sections
Home > Columnists > Kenneth L. Fisher
News Headlines | More From Forbes.com | Special Reports
Subscriptions >
Free Trial Issue of Forbes Forbes Gift Subscription
Subscribe To Newsletters Subscriber Customer Service
Buy Audio Version of Forbes
E-Mail Alerts
Companies
First Horizon National
Adecco
Enter E-Mail Address:
FAQ Privacy Policy
Free Trial Issue
Gift Subscriptions
Magazine Archives
Looking for a Forbes magazine article?
Search here.
Trading Center
Brought to you by the sponsors below
Marketplace (Sponsored Links)
Capital One Small Business Solutions
Capital One Small Business Solutions Capital One thinks BIG about your small business - Cards, Loans, Credit
www.capitalone.com/smallbusiness
Find Consulting Jobs
Access Pre-Qualified Projects from Top Businesses. Register Now!
www.eWorkMarkets.com
Are you or your spouse age 50 or over?
You deserve great auto insurance. You've earned it. You expect it! Now you can get it. The AARP Auto Insurance Program from The Hartford offers g...
aarp.thehartford.com
Smart Investment: Costa Rica Real Estate
Introducing Costa Esterillos, a private gated community located on the Central Pacific Coast of Costa Rica. Pre-development pricing is now being offe...
www.CostaLandSales.com
Score 750 with Manhattan GMAT
GMAT Exclusive focus and real teachers with 99th% scores. Offering 9-session prep classes, 2-week GMAT prep program, 1-day workshops, and free previe...
www.manhattangmat.com
ForbesAutos.com
Find the Hybrid that's Right for You in The World's Largest
Luxury Showroom
CEO Book Club more >
Weiss Vs. Wall Street
Gary Weiss
A Q&A with Wall Street muckraker Gary Weiss.
READ REVIEW BUY THIS BOOK
Laissez Faire In The Studio
Dunstan Prial
At Columbia Records, John Hammond made some of the greatest discoveries in American music.
READ REVIEW BUY THIS BOOK
Search Books
Advanced Search | New & Notable
Click Here
Forbes Magazine - Get a Free Trial Iss
# posted by robertts12 @ 8:04 AM 
