Here are a few more thoughts on the economy. Wouldn't mind seeing
the trade deficit widen a bit here. That would at least suggest
countries like Japan are having some success at an export-led
recovery. If the U.S had a trade surplus now, the $ would shoot
through the roof.
I think an important aspect that I often overlook is the budget
which is now posting surpluses after more than 15 years of
deficits. What this does is effectively reduce the government's
borrowing costs and the amount of new Treasury bonds: another
reason why interest rates are tumbling. This is not a fad but
a significant structural shift which the US economy should
continue to benefit from in the long term (just like the budget
deficit had turned into a structural problem for more than 15
years, prompting higher bond yields and interest rates.)
I too get several credit card offers every week. But like the
Dutch, who have the highest-rated banks in the world, I turn
them down. I have not seen any stats. on personal debt levels
but personal income is on the rise with the unemployment rate
at a historic low. What would it take to crack consumer
confidence? 1) a severe corp. earnings slowdown prompting
layoffs, 2)a Fed. that is tightening monetary policy, 3)signs
of runaway inflation. 4)a severe rise in credit delinquencies.
While we have seen a moderation in GDP early this year and a
slowdown in corp. profit, I don't see 2,3 or 4 happening.
The earnings slowdown has already been played out for 2 quarters.
So this year's earnings slowdown should make comps. easier for
next year. My sense is that this is an orderly earnings adjustment
we are going through. It's not a Fed. induced interest rate hike
which I would be concerned about.
Why don't I expect a severe corp. earnings adjustment? Because
monetary policy isn't that restrictive and the supply of money
based on M2 is abundant in the economy. And personal income is
up while unemployment payrolls are down.
Ironically, EIDOS had performed poorly during the previous
years' economic expansion (FY1993,1994,1996 and 1997) and
only this past FY year posted $1.09 EPS. Sony has doubled
its sales of the Playstation during this slow season while
its other operations have dragged. My point is that we may
actually see an earnings pick up in some sectors and a slow
down in others. I think the interactive sector falls in the
first category as the base of game hardware is bigger this
year than last year and the trend in the case of the Play-
station it's actually on the rise this slow season. EIDOS &
the other companies in the industry will stand to benefit
from this hopefully.
--EIDOS is not involved in any litigation. There may have been a
settlement over Myth or the charges may have been dropped early
this year. As far as a poison pill provision, it's a good idea.
If management thinks this company is worth more than $22 a share
(since they did not sell any of their 10% stake in the company
last Spring), I would not be surprised if some take-over sharks
are sniffing. According to one sell-side analyst who's firm has
no banking relationship with EIDOS, ERTS could buy the company
at $28 a share and it would still be accretive. I don't know what
kind of math he's using but if after FYQ1 EIDOS posts trailing
earnings of $1.36, an acquisition at $28/share would give it a
P/E of 20: still below the industry average.
Bleeker |
