A PayDirt idea: USA, Inc.
In today's issue, we're looking at the company called the United States of America (NYSE ticker: DJIA). This investment idea belongs to the "wounded elephant" category, both quintessentially and symbolically, as the elephant is wounded indeed, so much so that it can't even stand up to the donkey in the November election. So you have fine assets such as millions of square miles of land, decaying but still good infrastructure, impressive scientific potential, and the undervalued military-industrial complex still carried on the books at cost. In addition you've got intangibles such as exellent printing presses that are capable of churning out record quantities of greenish paper in an unprecentedly short amount of time. The liabilities side of the balance sheet does not look pretty. There is some 5 trln of public debt, plus another 4 trln of intergovernmental debt. Add to this a further 53 trl dollars of unfunded promices, and you get the idea. Four years of mismanaged expansion have resulted in stagnating revenues and deteriorating profit margins. And the cash flow statement is a disaster. Budget shortfall has recently exceeded 400 bln, a result of ill-timed tax cuts for billionnaires and a failed joint venture to explore Iraki oil, which brings in losses that approach 200 bln a year.
My turnaround thesis hinges on the new CEO who is likely to undertake several important steps to streamline this ship, on the improved competetiveness resulting from the debacle, and on the unlocking of the value of assets and intangibles. First, I expect the new management to fully utilize its most valuable asset - the printing press in a painful but necessary effort to devalue the 5 trl dollars of public debt. I also expect it to reform its underfunded pension program, winning concessions from retirees through the process known as underreporting inflation. The plan of action has been drawn by the Bureau of Labor Statistics as early as the 1990s, but the half-hearted efforts of the old management lacked commitment and resulted in only modest savings. In addition, inflation remained too low over the past decade, making it harder to eke out a substantial profit by underreporting it. This is all about to change, however, as the new CFO Bernanke is launching an ambitious new program to bring the rate of inflation to double digits. I expect the inflationary tax on creditors to reduce the public debt to a more manageable 3 trl in real terms, and strike some 30 trl of unfunded promices off the balance sheet. A decision to exit the Iraki market should provide a near-term catalyst, resulting in 200 bln of savings. Another (admittedly less likely) possibility of repealing tax cuts promised by the old management could save a comparable amount, effectively reducing the budget shortfall to zero. Devalation of the dolar should provide an additional tailwind. Recent statistics suggests that the weaker dollar is already resulting in an improved balance of trade - a trend that should pick up in the next several years. In a separate development, the housing sector, which is responsible for the lion's share of the company's revenue, is back on track after the CFO Bernanke offered price guarantees for mortgage-backed paper, putting the floor under the market. Yet another potential catalyst is the advance in solar technologies, which should gradually deflate the oil bubble by the end of the next decade. Also, rumors from the corporate headquarters indicate that several plans of a health care reform are being drawn. If successful, such a reform could trim the corporate deadwood, adding up to 7% of GDP to the bottom line. With the combination of increasing revenues, higher profit margins, and inflation, I can easily see DJIA reaching 40,000-50,000 over next 10 years.
Bottom line: This company won't double overnight, but if the investment thesis plays out, it should offer a steady return on investment with a minimal risk. This solid, reliable, and ultimately too-big-to-fail enterprise should provide a nice balance to any international portfolio.