BG07052009
SMOKE ‘EM
A little smoke never really harmed anyone – right?
By Neil George
Long time readers of mine know that I indeed love smoke. In fact one of my favorite financial-focused films was an HBO-made film released in 1993 adapted from the even better book of the same title – Barbarians At The Gate.
With a spattering of stars including Senator Fred Thompson and James Garner – the film is about the biggest leveraged buyouts (LBO) of that time – that of RJR Nabisco by the private equity guys over at KKR with a little help from their friends.
James Garner portrays F. Ross Johnson – then head of RJR Nabisco and in the scene where Henry Kravis (one of the K’s in KKR) is pitching the LBO idea – Garner is lighting up a good after dinner cigar and with a whiff and puff of smoke – he exclaims that he loves smoke.
As I write this – I’m enjoying a nice cigar supplied by my favorite importer and distributor – Jon’s Pipe Shop (www.jonspipeshop.com). The cigar is from the Philippines under one of his labels – Humberto Mendoza and is a delightful mild cigar for the morning – with just a bit of sweetness to go along with my bottomless cup of Joe.
Now I know that my days of enjoying cigars with my morning coffee are becoming just as numbered as being able to enjoy my collection of newspapers being delivered. So, if anything – I’m making sure that I can savor this moment as I type out my daily missive.
Smoke of course can have some positive benefits – and not just the creative process of reading, thinking and writing – but also to perhaps provide a nice filter on what we want to see.
Such of course is going to be the case as this afternoon’s Federal Reserve’s Stress Test results are released.
While the current head of the US Treasury assures us in his Op-Ed bit in this morning’s New York Times (www.nytimes.com/2009/05/07/opinion/07geithner.html?hp) that the Stress Test was and is credible – as I’ve noted before – it really doesn’t matter and shouldn’t matter what the Fed and/or the Treasury might say about the financials of the 19 banks surveyed.
Instead, it should be how each of us as part of the market views the banks. The other day – I went through how I look at banks – cutting through the smoke and mirrors of government pitchmen from the West Wing and next door at the US Treasury Building on Pennsylvania Avenue – to look at whether a bank is good enough to buy its stock – and even more so good enough to lend it money in the form of a mini-bond or preferred stock.
My example was Regions Financial (NYSE: RF) – which looks like from the bits of stuff leaked out ahead of the official test results won’t be asked to raise more capital.
I on the other hand am concerned about the debt rolloevers in the next 2 years – in which billions more of capital (either stock or bond) will have to be raised.
But instead, it seems that a little smoke out there in the market might allow traders and investors to perhaps see the banks in a little more beguiling light enough to want to buy – or at least not short them in the market.
Meanwhile – smoke can maybe do a bit more for your portfolio during the current mess of the economy and markets.
Periodically I look at tobacco companies. These have always been the stalwarts of the market – pitched as defensive stocks – kind of consumer staples with a bit of a kicker.
That kicker of course is the higher dividend yield that the makers of cancer sticks tend to pay out.
The downside to this market segment comes in two parts. The first of course is the never-ending series of lawsuits by over-eager consumers of their products that all of a sudden wake up to the idea that just maybe smoking is bad for them.
So, they want to blame somebody for their own back health decisions and there’s of course always a lawyer readily available to step in and provide them with a bit of help in getting what they see as rightful justice and perhaps a few billion dollars to make it all ok.
The second part of the downside to tobacco is that consumers of cancer sticks in primary markets are reducing their buying and smoking. Whether because they’re thinking more healthy – or whether the incessant taxes are getting to them – or whether they’re just getting tired of the ever more zealous nanny governments telling them that they can’t smoke in more and more spots – cancer stick consumers are slipping and sliding in number.
But this doesn’t mean that the market can’t still provide ample cashflows for businesses that understand that they aren’t in a growth market – but rather a cash-cow one.
So, if they can cut down on costs and keep delivering the products more efficiently – cash can and does keep coming. And unlike way too many companies supposedly making more socially-accepted products – tobacco companies tend to be some of the best stocks that pay you to own them.
And there are still plenty of markets around the world that are still heavy consumers of cigarettes. Russia of course has 70 percent of its male adult population that fires up each and every day. And in China with even greater numbers – the slightly smaller percentage of only 60 percent lighting up is still one hell of a cash pile in the making.
So, like I keep doing – I’ve made my notes in my Reports Notebook with a lot of the bits and pieces of market data on the right hand column of the Notebook and on the left side – I’ve begun to note some of the major usual suspects in this market to take a further look at and stress test them out.
But with some today – including British American Tobacco (London: BATS) reporting higher revenues for the last quarter gaining more than 7 percent – and the overall global industry group generating gains so far this year just shy of 17 percent – and an average dividend yield from these stocks that pay you running well over if not multiples of that of the S&P 500 – look for some new picks from me in the coming days.
And a guy that new how to operated in some of the highest powered smoke filled rooms of Hollywood – died at 79 years.
For decades – if you were looking to put together a project to make a picture in Los Angeles or become a producer along the great white way in Manhattan you needed some talent to make it happen.
And to get that talent – you needed to get to and through of the greats of agents – Sam Cohn.
Neil George is editor By George.
The above is only opinion and does not represent and/or offer to buy or sell any security and/or any financial advice. The opinions contained may not be suitable for all investors who should consult their own financial adviser before making any investment or other decisions. I may own some of these same securities noted in accounts under my control or for my benefit.
Errors/Omissions: I always welcome being called on facts, figures and commentary from readers and look forward to your feedback. I can be reached by email at njgeorge@att.net or njgeorgejr@gmail.com or at 01-314-616-3325.
