Ken Fisher's comments on the credit crunch

Other than Walmart, take his stock recommendations with a grain of salt. Arcelor Mittal is very highly leveraged, even by steel industry standards and has grown so much in the past 2 years that the law of large numbers will apply. C's fate remains to be seen. Why speculate when you can invest in known quantities such as Wells Fargo and US Bancorp that have been unfairly dragged down by C's poor stewardship?


Financial Columnists
Portfolio Strategy | Crunch Mythology
Ken Fisher 03.24.08, 12:00 AM ET

If you believe the popular economic myths of the day, you think there's a credit squeeze--less total credit available. This is nonsense. There's indeed less credit available to poor risks, individual and corporate. But that just means there's more for the good borrowers. Blue-chip companies are flush with capital and borrowing power. This is bullish, both for the economy and for stocks, especially stocks of big companies.

Fact: The largest firms have much more credit access in all forms than they did 12 months ago. These are the very firms that can spend it the most and the fastest.

Fact: Total corporate borrowing--that is, total U.S. corporate debt issuance--was higher in 2007 than in 2006. In January 2008 U.S. corporate borrowing was $101 billion, up slightly from the same month a year ago. The majority of this debt was of investment grade, meaning that it was rated BBB or better; within this segment the borrowings were up 12% from a year ago. Some credit crunch!

If there were a squeeze, interest rates would be shooting up. They aren't. Over the past year the yield on investment grade corporate bonds has gone down. At the superprime end, debt rated AAA, the yield is down from 5.18% to 4.63%. Globally, there are only 14 corporate borrowers with that rating (among them ExxonMobil and Novartis). But there are more than 350 A-rated or higher. Recently rates are down, a little, on AA, A and BBB bonds, too.

A parallel myth is that corporations have stopped doing takeovers and stock buybacks. Tell that to Microsoft. It's just that we've changed from a lot of small deals to fewer bigger ones. By the fourth quarter "credit crunch" headlines were ubiquitous, yet fourth-quarter 2007 announced takeovers were $478 billion, the fourth-largest quarter ever. The volume was a $116 billion gain from the third quarter. Share repurchase announcements in January totaled $59 billion, up 16% from a year ago. That's a $700 billion annual rate. The prior four months were also up--collectively, by 63.5%, to $276 billion ($828 billion annualized).

Where do we get all these myths about crises and collapses? From pontificators. The sort of folks who frequent Davos.

Yahoo will cost Microsoft $40 billion or more if it goes through--essentially half cash. It will issue long-term debt for the first time in its existence. Surprise, it will be AAA rated. In one bite, IBM announces a $15 billion stock buyback. Some credit crunch. Think big.

As I detailed last month, the market has shifted, as it did in the mid-1990s, into a period where the biggest stocks do best. We're in the first full correction of the new leg of the bull market. The Asian debt contagion then is the American debt contagion today. This debt crisis is, like the last one, a false alarm. By midyear we will awaken to an ever shrinking supply of equity and a growing economy. The market will be led by big companies.

If you think we're moving toward recession, you might expect steel prices to weaken. So many expect this to happen that recession is already built into the prices of steel shares. Since I see no recession, I expect steel to do well. Hence I like Arcelor Mittal (79, MT), domiciled in Luxembourg but spread across the globe. It operates in 60 nations. Its 115 million tons of annual capacity give it 15% of the world total and three times as much as its largest competitor. Arcelor mines coal and iron, makes coke, has both integrated mills and minimills and has top-notch distribution. In an industry selling at two times annual revenue Arcelor is at just one times. It goes for ten times likely 2008 earnings and two times book value. A little price increase from here could go a long way for this $115 billion market-cap producer.

Still worried about a recession? Then buy Wal-Mart (51, WMT), which retails affordable consumer staples in good times and bad. The world's dominant retailer at a market multiple of earnings isn't a bad way to go when the biggest stocks are doing best. Market capitalization, $204 billion.

It's going to take years for the financial sector to recover from its excesses, just as it took years for energy to recover from the 1980 collapse and for technology to recover from 2000. Still, I like Citigroup (25, C). The stock costs less than half of what it did last year. The market value of $129 billion looks high against earnings of $3 billion. But those earnings reflect the subprime writeoffs. These writeoffs have simply nothing to do with the underlying business. Take them out of the equation and you find Citi going for four times operating earnings. I think this is a $40 stock by mid-2009.