Granite Group Advisors

Perhaps as early as today the Supreme Court will be ruling on the constitutionality of Obamacare.  This will no doubt create an enormous amount of political theatre. However, this morning we will look at this from an economic standpoint as to the effects of the decision. 

The following areas will be most negatively affected if the Supreme court rules against Obamacare.  Pharmaceuticals were set to get guaranteed additional earnings (in the billions) that will go away.  Insurance companies will no longer get 30 million people added to the rolls and will also lose out on all the additional income of premiums paid.  Hospitals that currently lose money on the uninsured will also lose out, as the mandate would have forced states to expand their coverage and pay these hospitals.   The biggest winners will be the unemployed and small business.  Small businesses may be more comfortable without the new regulations and start to hire again, which would be great for our economy in general.   These are the most important sectors to watch as the court decision comes into play.  They have the most to lose if the plan is stricken, and will experience major market gyrations based on the outcome.  Stay tuned as we will  know the answer this week.  

Over the weekend the Greeks had another election in an effort to form a new government.  This was a highly anticipated event, as the election had many consequences to global markets.  When all was said and done, the Greeks voted to stay in the Eurozone and the majority went to the New Democracy party.   However, the New Democracy party did not win the majority needed to form a new government and are now working to create a coalition government so that they can move forward.  Basically, nothing has changed from Friday, as Greece is still in waiting.  They need a majority coalition to continue to get money from the European Central Bank and make good on their promises of austerity.  Our take is that the European debt crisis will continue and there are still serious problems in Spain, Italy and others.  This will continue until the European leaders can restructure and learn how to do business together.

Over the weekend the news broke that the Eurozone Finance Ministers are planning to bail out Spain’s banks with a credit line offer of 125 billion dollars.  The markets immediately reacted positively, in the belief that this was a good move to help stabilize the Euro as well as the entire Euro zone.  From our perspective, this is a short term move and not a long term solution to the problem.  Spain needs critical structural changes that promote growth.  This is the only way to  will fix the problem and unfortunately this will take a lot of time.  The current transaction just kicks the can down the road and buys Spain some time.  Ultimately, all you have to do is look at Greece to see what bailouts mean — it does not change anything for the long term.  Greece will be right back where it was a few months ago.  The next European nation in line for help is Italy,  but again, we believe the Eurozone countries not only need to curb spending, but create an environment that promotes economic growth or we will be right back in this position again in the future.

Today the excitement is abound for one of the biggest tech IPO’s in history.  As Facebook begins trading today under the symbol FB the question is should you buy?

First let’s talk fundamentally about the stock offering and it’s price.  The ipo is offering the stock at 38 dollars a share with roughly 423 million shares outstanding which would make the market cap of FB roughly 104billion.  To compare that to other companies AAPL is over 500 billion in market cap and Exxon is over 380 billion  and Johnson and Johnson roughly 128 billion.

To put the stock in perspective Facebook earns roughly 1 billion dollars a year, so on open will be trading at 100x current earnings.  Exxon makes roughly 39 billion dollars a year and yet trades at roughly 10x earnings.  AAPL makes 38 billion dollars a year and yet trades at 13 times earnings.  When looking at it this way does this IPO even make any sense. While we may be wrong in the short-term the stock is overvalued dramatically and reminds us of the tech bubble that existed in the late 90’s.

To take a bet on the future of Facebook you will be betting that they will begin to truly multiply their earnings by roughly 30x just to trade at 30x earnings.  Currently the S&P trades at roughly 13x earnings so FB would have to multiply their earnings by 30x just to trade at 3 times the P/E of the S&P 500. What will happen no one knows yet, but the downside looks a little too uncomfortable for this advisor to take that chance.