Microsoft’s (MSFT) stock has gone nowhere for over a decade, trading in the $40-$60 range through 1999 and early 2000, and only occasionally breaking $30 since. Currently trading around $26-$27 ($27.12 on September 16 market close), it’s threatening to pierce $30 again. Several factors support the argument that Microsoft’s stock can achieve sustained value above $30 in the coming year.

Some context can help here. CEO Steve Ballmer has headed the company since January 2000. Stepping into the founder’s shoes is never easy, and no one can blame Ballmer for failing to continue Microsoft’s meteoric growth from a start up to a multinational powerhouse – a company can only grow so big. But at some point blame for failure to generate value for shareholders is placed on the person at the helm, and that’s Ballmer. Consequently, grumbling about Ballmer has been on the rise, with highly respected fund manager David Einhorn saying it’s time for Ballmer to leave and that he’s a drag on the stock (see, e.g., here.).

Setting Microsoft’s anemic stock performance and the sky-high expectations for big tech companies aside, Microsoft’s financial performance since Ballmer took over hasn’t exactly been a disaster. Since 2002, earnings have only gone down twice, in 2004 and (not surprisingly) 2009, and in both 2005 and 2010 they rebounded above the level of the year preceding the declining year.

Full text of article carried exclusively on Seeking Alpha.

Over the summer, Romney remarked that New Jersey Governor Chris Christie would be on his short list for a Vice President,[ii] but this just obscures a real heavyweight prospect for the nomination:  Virginia Congressman and House Majority Leader Eric Cantor. Regional and other demographic considerations will make Cantor a formidable prospect to run with Romney:

The Southern Factor

For generations it was conventional wisdom in U.S. politics that between a presidential candidate and running mate, it was a good sell for one to be from the North and the other from the South.  Kennedy (Massachusetts)/Johnson (Texas), 1960; Johnson (Texas)/Humphrey (Minnesota), 1964; and Carter (Georgia)/Mondale (Minnesota), 1976, all won national elections using that template, with Nixon (California)/Agnew (Maryland), 1968, 1972, winning on a Western/mid-Atlantic variant.  The pattern has weakened as greater mobility has allowed individuals to garner more regional alliances over the course of their lives.  George H.W. Bush was raised in New England but built his business and early political career in Texas, while Barack Obama was born in Hawaii, pursued higher education in New York and Massachusetts, and built his career in Illinois.

Nevertheless, North-South coverage is still a strong political asset, and Cantor’s Southern background would complement the pedigree of a Northern Republican like Mitt Romney, who was Governor of Massachusetts, and whose father was Governor of Michigan.

Virginia

Obama won 53% of the vote to win Virginia, previously a Republican stronghold, in 2008,[iii] making the Old Dominion the swing state of the future. With 13 electoral votes in 2012, Virginia is a big prize, now just one electoral vote short of the 14 delegates New Jersey will bring to the table.[iv] Representing the Northwest Richmond area, and with strong pro-defense views that should be well received in the Virginia suburbs that are the home for much of the Washington, D.C. military/defense community, Cantor is a good bet to deliver Virginia.

Florida

But among the states, probably the biggest prize Cantor could deliver is Florida, the king of swing states.  With 29 electoral votes (gaining 2 in the 2010 census),[v] Florida is now tied with New York for the third largest state by electoral votes,[vi] and the largest state likely to be in play because California (55 electoral votes) and New York (29 votes) are firm Democratic strongholds, and Texas (38 votes) is entrenched in the Republican camp.  The winning presidential contender has taken Florida in 9 of the last 10 presidential elections, the exception being Bill Clinton in 1996.[vii]

Cantor’s key to Florida is his Jewish heritage.  A 2006 survey estimates the Jewish population of Florida at over 650,000, then 3.7% of the state.[viii] That is not to say that Cantor’s path to delivering Florida would be easy.  The Jewish electorate is overwhelmingly Democratic, with only 11-24% of Jewish voters supporting the Democratic candidate in every presidential contest since 1992.[ix]

But the numbers reveal that a good showing by Cantor could sway Florida.  In 2008, Barack Obama won Florida by only 204,577 votes, 2.5% of the votes cast,[x] even with opponent John McCain suffering from his ill-suited running mate Sarah Palin.  In a closer contest, George W. Bush won Florida by only 537 votes in the disputed 2000 election.[xi]

A clue to how Cantor could change the dynamics of the Florida presidential contest lies in the 1980, ’84 and ’88 elections, where the Republican candidate won 39% (Reagan), 31% (Reagan), and 35% (George H.W. Bush, running while Reagan’s Vice President) of the vote respectively.[xii] This better performance compared to later elections can be attributed to Reagan’s strong and sincere support of Israel.[xiii]

President Obama’s Israel policy has been controversial in the American Jewish community, especially since his public suggestion that Israel’s pre-1967 borders, with adjustments, should be the basis for peace negotiations.[xiv] With a strong Israel position and an articulate Jewish running mate, Romney could make sufficient inroads in Florida’s Jewish population to tilt the Sunshine State’s even scales.  This prospect is also suggested by Republican Bob Turner’s victory this week in the special election to represent New York’s 9^th congressional district, a heavily Democratic region covering parts of Queens and Brooklyn with a large Jewish population.[xv]

Conclusion

Like in my earlier post, my intention is not to endorse – and Rep. Cantor has long dismissed speculation that he would run for Vice President[xvi] and is not even a candidate for that office now – but to assess the possibility of an outcome.  Of course there are many preconditions for this scenario to become a reality, not the least of which include Romney winning the nomination and Cantor deciding that he wants the job.  But the prospect of a Romney/Cantor ticket shows the strength of the options Romney could have if he reaches the general election.  At the very least that should play to his advantage in securing the nomination, but could ultimately do more.

- TWT

[ii] See http://nation.foxnews.com/chris-christie/2011/07/27/romney-says-christie-his-vp-shortlist.

[iii] See http://www.270towin.com/states/Virginia.

[iv] See http://www.270towin.com/states/New_Jersey.  New Jersey has voted for the Democratic contender in every presidential election since 1992.

[v] See http://www.270towin.com/states/Florida.

[vi] See http://www.thegreenpapers.com/Census10/HouseAndElectors.phtml.

[vii] See link at note ii above.

[viii] See http://www.jewishvirtuallibrary.org/jsource/US-Israel/usjewpop.html.

[ix] See http://www.jewishvirtuallibrary.org/jsource/US-Israel/jewvote.html.

[x] See http://www.usatoday.com/news/politics/election2008/fl.htm.

[xi] See http://uselectionatlas.org/RESULTS/state.php?f=0&year=2000&fips=12.

[xii] See link at note ix above.

[xiii] See Mitchell Bard’s article at http://www.mitchellbard.com/articles/reagan.html, which cogently argues that Reagan projected true support of Israel’s role in the world despite occasional public rebukes.

[xiv] See e.g., http://www.nytimes.com/2011/05/20/world/middleeast/20speech.html?pagewanted=all, http://www.foxnews.com/politics/2011/05/22/ears-obama-israel-lobby-conference/, http://abcnews.go.com/Politics/obama-speech-backlash-call-reinstate-1967-mideast-borders/story?id=13639200.

[xv] See http://www.cnn.com/2011/POLITICS/09/14/new.york.special.election/index.html?hpt=hp_t1.

[xvi] See the post at http://blogs.jta.org/politics/article/2008/07/25/999430/cantor-for-veep and other sources for Cantor deflecting speculation that he would run with John McCain in 2008.

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I can remember writing the post and asking myself if I really believed that a U.S. downgrade could happen.  I wished that I didn’t, but I did, so I published the article.

As an American, I wish I hadn’t been right, but I was.  Now it’s time to assess what happened.

The rational was largely qualitative

While there was reportedly a last minute skirmish while administration officials tried to forestall the downgrade by pointing out a purported trillion dollar mathematical error,[i] a significant portion of Standard and Poor’s (S&P) stated rational was qualitative. In its announcement, S&P stated:

• More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011.
• Since then, we have changed our view of the difficulties in bridging the gulf between the political parties over fiscal policy, which makes us pessimistic about the capacity of Congress and the Administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government’s debt dynamics any time soon.[ii]

Fault lies all round

• Tea Party adherents stubbornly declared their platitude of not raising taxes at all, seemingly unaware of the consequences of their position (i.e. that higher interest rates from a credit downgrade would increase government costs anyway).
• Some established congressional Republicans stubbornly opposed defense cuts, recklessly avoiding the reality that higher interest rates for the government to borrow after a credit downgrade could sting national security by diluting the ability to finance future defense needs.
• Congressional Democrats were equally stubborn, and in fact more Democrats (95) voted against the House bill that raised the debt ceiling than Republicans (66).
• President Obama insisted on a long-term deal to avoid the debt-ceiling coming up again before the 2012 election.  While based on the theory that it would hurt the country to have these debt-ceiling debates during the pre-election “silly season,” historical precedent was not on the President’s side.  Ronald Reagan signed five bills increasing the debt ceiling in the 18 months before he was reelected in November 1984.[iii]

What’s the good news?

The other two major credit agencies – Moody’s (MCO) and Fitch (majority-owned by Fimalac SA (FMLCF)) – have been more forgiving, holding the U.S. at Triple-A.

What to watch for?

Good – Key players in the U.S. political leadership actually accepting responsibility for what happened.

Bad – Politicians blaming each other and Standard and Poor’s.

What to ask for if things don’t get better?

Elections structured to ensure against disadvantaging centrists.  I believe that the President is an exceptionally talented individual, with immense powers of intellect, persuasion, and consensus building.  He also responded effectively to save an economy in the depths of collapse when he took office.  But his inability to bring the players together to raise the debt ceiling in a responsible timeframe raises the question of whether anyone with a long-established partisan pedigree can bring these quarrelling sides together quickly enough for the U.S. to make the timely decisions expected of a leading economy in today’s world.

If you share my concern, see my post on California’s Proposition 14.

– Thoughtsworththinking.net

[ii] See “United States of America Long-Term Rating Lowered To ‘AA+’ Due To Political Risks, Rising Debt Burden; Outlook Negative,” Aug. 5, 2011, at http://www.standardandpoors.com/ratings/articles/en/us/?assetID=1245316529563

[iii] See Dave Manuel’s outstanding compilation in “US Debt Ceiling Was Raised 18 Times While Ronald Reagan Was in Office,” Jul. 27, 2011 at http://www.davemanuel.com/how-many-times-was-the-debt-ceiling-raised-under-ronald-reagan-110/.

My doctor, a respected orthopedic surgeon, had nothing more to offer other than to intensify the symptomatic treatment through periodic Cortisone shots and advise me to hope for future therapies to offer a better cure.

Back in March, after experiencing flashes of pain in both hands and one foot while driving to work, I decided to research alternative treatments more aggressively than I had in the past.  After various Internet searches, I learned of two ideas I had not previously considered.  The first was Vitamin C supplementation.  Various sources said Vitamin C could help arthritis, and I also noticed that the disease scurvy – which includes joint pain – results from Vitamin C deficiency.  The second was that levels of Collagen II – also known as Hyalauronic Acid – an important component of skin and bones, decline with age.  Various posts claimed taking Collagen II yielded favorable results in reducing arthritis pain.

I decided to try both supplements.  I started with the Vitamin C, which alone may have had a mild effect, though the period when I added Vitamin C before adding Collagen was probably too short to tell.  I ordered the Collagen II in the form of 100 mg Hyalauronic Acid capsules, which came a week or so later.  I usually take a supplement of each twice a day.

After a month I felt fewer instances of the shooting pain I had been experiencing.  Now about five months later, the improvement is significant, and any pain I still experience is mild in comparison.  When I perform tasks requiring fine motor movements, like changing my baby daughter’s diaper, I can still feel that the joints at the base of my thumb are still weak and not the joints they were ten years ago, but I don’t feel the deeper pain I previously experienced.

Of course I’m neither a doctor nor a scientist, and I would advise anyone with joint pain to consult their doctor before beginning a new course of treatment.  Moreover, just because some particular supplements help one person does not mean that someone else will enjoy the same benefit.  That being said, if I can address my arthritis by taking Vitamin C and Collagen II, it stands to reason that some other people will be able to experience the same improvement.

Good luck in addressing your arthritis and I hope you find the solution that works for you!

In its June 22, 2011 submission to the SEC, the MFA cited my April 2009 article Dr. Doom (Nouriel Roubini) Himself May Hold Key to Market Recovery, where I discussed the market’s 1982 rally after economist Henry Kaufman predicted that interest rates would fall.  The MFA cited my post to support by analogy the proposition that “There are many real-world examples where the behavior of a high profile investor is likely to have influenced the activity of other market participants.”  You can see this citation on page 7, footnote 20, of the MFA’s June 22 letter here.

To put this in perspective, other authorities cited in the MFA’s submission include academic papers published by the Yale School of Management and the Journal of Finance, and articles from The Economist and The Wall Street Journal.  Thoughtsworththinking.net is very pleased to have produced material suitable for inclusion in a government filing among authorities of this stature.

Political pundits tend to compare the current fiscal clashes to the 1995-96 debate that ultimately shut down the federal government for several weeks.  Cost-cutting Republicans were blamed for the mess, ultimately unraveling the support then-House Speaker Newt Gingrich had garnished with his “Contract with America.”  A recent WSJ/NBC News poll found 43% of Americans blamed Republicans for the ’96 shutdown versus 32% for Democrats.  The same poll found a 3-4 point swing in Republicans favor for this year’s debt-ceiling debate, with most – 39% – still blaming Republicans, versus 35% for Democrats. ¹

But the poll may not capture the full picture of how voters may react in 2012.  Consider the following differences with 1995-96:

The Harm May be Permanent

While the ’95 shutdown was incredibly wasteful, it did not substantially affect the country’s standing with international stakeholders.  Were a U.S. credit downgrade to occur, the nation’s fiscal reputation – while still strong – would be weakened.  Interest rates for the U.S. to borrow would likely increase to some degree, further aggravating the country’s budget deficit.  Blows to international prestige tend to accrue to an incumbent President.

Inability to Avert a Downgrade May Be Seen as Reflecting Adversely on the President’s Leadership

In business, if a manager handles a rouge employee so that he doesn’t affect the unit’s performance, the manager will likely be viewed as doing their job.  But if the organization’s output suffers because of the loose cannon, the manager should be held accountable.  Superficially, the situations may not look the same – the manager has direct authority over the employee, while House Republicans have the aggregate independent authority of their elected members under the U.S. Constitution.

But in reality the situations may not be seen as that different.  A rouge employee may have strong alliances with the manager’s superiors or other stakeholders that make imposing discipline treacherous.  But a talented manager will find a way to finesse the situation so that the subordinate can be reeled in without threatening the manager’s own standing.

Using this everyday workplace comparison, if permanent harm results the President may be viewed as failing a leadership test.  Fair?  Maybe not.  Maybe this was a situation where no one allied with a political party could have herded their own alliance and the opposition into the same corral.  But fairness may not count.

A 2010 Opponent May Have Clean Hands

President Clinton’s eventual opponent in his 1996 re-election bid was then Senate Majority Leader Bob Dole (R-Kansas).  While Dole eventually pushed back against his own party’s right wing to end the shutdown in January ‘96, he had partnered with Gingrich all through the year on the platform that lead to the first partial shutdown in November ‘95.  Thus while Dole’s role may be viewed as constructive in the light of history, he was hardly perceived as lacking culpability when he ran in ‘96.

I’ve argued in an early analysis that Mitt Romney will most likely win the Republican nomination, and if this happens it is likely he will be viewed as having clean hands.  While Romney recently began to remark on the debt ceiling issue,² the fact that he is currently in private life will help him.

Conclusion

Stay tuned.  While a lot of water is yet to pass under the bridge on the debt-ceiling controversy, comparisons with the ’95-’96 shutdowns to gauge the political fallout may be less than perfect.

1. See Wall Street Journal, July 20, 2011, p. A6.
2. See “Mitt Romney Breaks Silence on Debt Ceiling,” July 14, 2011, abcnews.com, http://blogs.abcnews.com/thenote/2011/07/mitt-romney-breaks-silence-on-debt-ceiling-afghanistan-israel-iraq-troop-withdrawal-balanced-budget-amendment.html.

Gold miners

Gold has done well so far this year, beginning 2011 at $1424.20 an ounce and now topping $1600, an 11.65% rise.  Shares of two of the biggest players, Barrick Gold (ABX) and Newmont Mining (NEM), have respectively lost 10.4% and 7.23% of their value since their 2011 opening, while another big hitter – Goldcorp (GG) – has outperformed, gaining 18.68%.

This inconsistency indicates that value opportunities are peppered in the sector.  Moreover, factors I anticipate will keep the price firm in the second half of 2011, like negotiations in Washington for the 2013 federal budget and buying for the traditional end-of-year wedding season in India, have not even kicked in yet (see my February opinion here).  Concededly, gold miners may be more of a short to medium term opportunity as breakthroughs in the various regional sovereign debt issues and reduced gold demand after the wedding season may soften metal prices, so if gains materialize investors may want to consider taking profits.

U.S. Auto Manufacturers

Ford’s (F) shares have lost 23% of their value since the beginning of the year (from $17.02 to $13.09) while the S&P 500 has risen 4.62%.  Meanwhile, GM’s (GM) stock is currently languishing at $29.76, below what the shares sold for in GM’s initial public offering (IPO) last November.

Both companies are affected by fears of a “double-dip” U.S. recession crimping U.S. consumer demand, though other factors weighing on the shares vary.  Ford has been experiencing some setbacks in conjunction with their improved quality effort that may be a temporary by-product of adding ambitious new electronic features.  Profit taking following the company’s meteoric recovery may also be holding the stock back for now.  Meanwhile, GM has been experiencing excess truck inventories that scare investors because they remind people of the bloated dealer stocks that drove the company to bankruptcy.  But the new GM’s place in the industry is already qualitatively different than the GM that went under, with the new Chevy Cruze apparently outselling imports (see my recent opinion on GM, here).  GM is a longer term prospect than Ford because it will take GM a few years to revamp its truck line for a more value/green conscious customer base that prefers high-mileage vehicles.  And Ford – which never declared bankruptcy – got a head start in its turnaround.  But both companies offer the prospect of sustained value.

Conclusion

Some gold mining stocks offer the chance to buy into the red-hot precious metals sector with less risk than physical gold or assets directly linked to it that have already appreciated to record levels.  There are some risks that gold will soften by 2012.  But because gold is a hedge against the kind of risks that abound today, especially diminishing confidence in major paper currencies, it’s reasonable to own some percentage of gold related assets.  Investors should be prepared to keep their eyes peeled for prices too high to be sustained and trim holdings.

U.S. auto manufacturers offer a value opportunity for a long-term investment.  This sector is arguably more suited for investors who want to buy and hold without checking their portfolios too often in the hope that the auto companies will succeed in building value over several years.

Disclaimer:  The information provided in this post does not constitute professional investment advice, and should only be used in consonance with all available information, including the opinion of a professional adviser, to make an investment decision.

Disclosure:  The author is long Barrick Gold (ABX) and Ford (F) as of the original publication of this post. The author does not hold a securities position in Newmont Mining (NEM), Goldcorp (GG), or General Motors (GM).   This disclosure includes holdings of immediate family members.

While the debt limit has been raised numerous times in the past, and sometimes the issue has been contentious, bond interest and principal have always been paid on time. If the debt limit is raised again and a default avoided, the Aaa rating would likely be confirmed. However, the outlook assigned at that time to the government bond rating would very likely be changed to negative at the conclusion of the review unless substantial and credible agreement is achieved on a budget that includes long-term deficit reduction.

Potential implications of Moody’s announcement are:

• While — again — a downgrade in the U.S. credit outlook is not imminent, it is this author’s opinion that it is now not more likely that the U.S. will avoid an outlook downgrade than experience one.
• While the prospect of real fiscal damage to the nation will motivate congressional Republicans to make a deal to raise the debt limit before default, political posturing for the 2012 elections will prompt them to keep up the policy pressure, with a downgrade in credit outlook potentially playing to their advantage so long as the triple-A credit rating is preserved.
• A downgrade in outlook will begin a chain of events where key parties will prepare to manage risks associated with a real U.S. credit downgrade, potentially increasing the prospect of one barring a spending reduction breakthrough.
• Decreased confidence in the U.S. partisan political sector to timely resolve serious U.S. financial issues.
• Increased likelihood that gold prices will at remain firm in the second half of 2011 due to risks associated with potentially declining United States creditworthiness in consonance with my published February opinion.

Potential investment implications of a downgrade in U.S. credit outlook are:

• Not necessarily by itself sinking U.S. stocks into a correction-level decline, as a weakening dollar may prompt buying from abroad.
• Favorable to the gold mining shares, which have lagged behind gold’s historic price rises,² due to increased confidence that the metal will maintain its value in the coming months and sustain profits.

Disclaimer: The information provided in this post does not constitute professional investment advice, and should only be used in consonance with all available information, including the opinion of a professional adviser, to make an investment decision.

1. See “Moody’s Places US Aaa Government Bond Rating and Related Ratings on Review for Possible Downgrade,” July 13, 2011 at http://www.moodys.com/research/Moodys-Places-US-Aaa-Government-Bond-Rating-and-Related-Ratings?lang=en&cy=global&docid=PR_221800.
2. See C. Cui & L. Pleven, “Miners Hit Back In Gold ETF Fight,” Wall Street Journal, June 13, 2011, pp. C1 & C2.