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Tuesday Value Overview

August 02, 2011 | About:
Tuesday came in down big again as investors fear we’re on the edge of a recession. Consumer spending is down, personal income is still weak and the labor market shows no signs of turning around. The debt ceiling debate may be over for now, but we’ve seen no relief rally like many of us expected. Unfortunately we’re back to other concerns. One industry that may be on the upswing is auto and I highlight some thoughts on Ford (F) and General Motors (GM) sales. I’ve also got an article about Russell Glass and his activist efforts towards DST Systems (DST). Finally, John Hussman has some prescient thoughts on the economy. One cure for investors may be his Exxon (XOM) holdings.

I've followed Ford closely over the last year or so and recently bought into the stock. The primary idea is that U.S. auto sales are way below normal and anything beyond the current sales and any overseas sales are not being taken into account in the the stock price. You can read my thoughts from a few weeks ago at, Ford: Simple but Not Easy. Yesterday Edmunds came out with an article demonstrating how the miserable first-half GDP hasn't really negatively affected auto sales. They still project 12.9 million in sales this year, which is inline to Ford and GM's estimates. Edmunds also believes there are 2.5 million units of deferred demand that should be released in the second half of the year. These are cars that would have been bought but for the first half supply disruptions. If the second half GDP is as bad as the first half, it's certainly possible some of these sales won't come to fruition. Nevertheless, this should be taken as good news for the automakers considering we're now on year four of under-normalized sales. The irony is that the automakers are trading at valuation levels that suggest a peak, but the underlying sales actually are showing a rise from a trough.

Dealbook profiled activist investor Russell Glass from RDG Capital and he reminded me of Bill Ackman in his style. He doesn't loudly agitate like Carl Icahn, who was once his boss; he quietly convinces the company that the change he suggests is in their best interest. Sometimes it's the facts themselves that do the convincing, and sometimes a little leverage from others helps it along. The corporate subject here is DST Systems, in which Glass and others would like the company to pursue a sale. David Dreman, Pioneer Investments, and RS Investment Management also have significant stakes.

John Hussman, who has been vocal on the macro level, gives out his four warning signs that a recession is coming: widening credit spreads, falling stocks (i.e., S&P 500 falling below where it was six months earlier), ISM below 50 or moderate ISM and weak employment growth, and moderate or flat yield curve. Right now, we're close to having all four satisfied, but not quite there. What does this mean for the stock market? Well, that depends on whether the market has already factored it in or not. Perhaps the high flyers will come back, but there is a wide range of cash-rich value stocks out there right now that appear significantly undervalued. For example, Hussman recently ramped up his Exxon holdings.

Disclosure: Long F, XOM

About the author:

Steven Kiel
Steven Kiel is the president and chief investment officer for Arquitos Capital Management, a Virginia-based investment management firm. He is a graduate of George Mason School of Law and a captain in the Army Reserves. He manages two spoke funds, The Freedom Fund, a value-oriented portfolio, and The Hayek Fund, a portfolio dedicated to free market principles. He can be contacted at steven.kiel@arquitos.com or through the firm's website at www.arquitos.com.

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