Decoding Obamaspeak

The time has come, the president says, for a serious debate.

So I guess all of the kidding around about health care is over.

Mr. Obama said Saturday that health care was “an issue of vital concern to every American.” He’s glad so many are engaged and said the debate should be honest. He sought to spend his weekly radio address “debunking some of the more outrageous myths” about health care.

Which interested me. I myself have been working on a similar project. Not debunking health-care “myths” but decoding Mr. Obama‘s health-care rhetoric.

The president is lauded as being remarkably articulate. He isn’t as folksy as his predecessor. He speaks actively, not in the passive-apologetic of the second Clinton era. Mr. Obama tends to use a thrifty, declarative present tense.

“History is clear,” Mr. Obama might intone. Listeners, who assume the president knows more history than they do -- and presume he always tells the truth about it -- tend to give him a free pass on whatever he says next. But what comes next is an inarguable historical conclusion but a highly debatable interpretation of it.

Sometimes Mr. Obama seeks to build a rhetorical consensus before his pronouncement. “I think we can all agree,” he’ll say, “that the time to act is now.” This puts two human tendencies into play: The desire to be in agreement and the necessity of responding to problems that need to be solved. Listeners nod -- yes, we must agree; yes, we must act -- before they think. Many, if asked about the issue, would never describe it as requiring imminent action.

Or Mr. Obama might begin a sentence with: "Those who seek to divide us say …" Instead of putting everyone in the same category, as he does with the first example, he now asks listeners to pick one. He doesn’t just want you to nod, he wants you to join him. Do you want to side with the dividers, bad, or the uniter, good? That’s easy: Unity is something we’re taught to value; division is not. Don't we all want to be on the side of unity and goodness?

Yes, we do! (Sound familiar?)

Each of those rhetorical devices prove this president a master of presenting his opinions as inarguable fact. And yet despite the presentation, what Mr. Obama says after these little verbal “tells” is usually far from factual. I don’t know who falls for this, but the Jedi mind trick doesn’t work on me. And the more I hear this oratorical gimcrackery, the more I train my ears to parse whatever comes next.

Here are a few other telling phrases the president used at his town-hall meeting in Grand Junction, Colo.

"This is a legitimate debate to have."
Classic Obama-speak, a present-tense declaration. This may work when Mr. Obama is on offense, but they’re far more telling when he’s playing D. When a defensive Mr. Obama says these things, he typically means the opposite. He doesn’t think this debate is legitimate, he thinks it’s disruptive. What’s more, he knows and anyone who watched them know they were anything but a legitimate debate. They were scripted events full of sympathetic audiences asking softball questions. There was no clash over any meaningful ideas.

When you’re forced to say something as inherently healthy as public debate is “legitimate,” you’re in trouble. Tiffany doesn’t have to advertise that it sells genuine diamonds.

"I just want to be clear what this debate is about."
This is another example of the president meaning the exact opposite of the words that just came out of his mouth. The last thing Mr. Obama wants to do is be clear as to what the debate is about. He might as well say, “Let me make sure I have sufficiently clouded the issue so that you think this is about health care and not about a takeover of 20% of the national economy.”

"There's been a lot of misinformation."
Misinformation is when the other side says something you don't want to hear, when the opposition brings up -- to borrow a phrase -- an inconvenient truth. Such as the fact that an overwhelming majority of Americans are completely satisfied with their health care. (And a growing percentage are growing ever more disillusioned with Obama’s policies.)

"I just want to be completely clear about this; I keep on saying this but somehow folks aren't listening."

So it turns out it’s pretty easy to wave to adoring crowds during a campaign. It’s a lot harder to persuade the opposition once you’re in office. The problem here is that this new president, when put on the defensive, shows he is completely out of touch with the mainstream. The folks can hear you just fine. It’s not that folks aren’t listening, it’s that they disagree. That is, after all, their right.

After all that -- and much, much more -- Mr. Obama seemed slipped up. No one reported it, of course, but he did utter one completely true sentence, one that could be taken at face value. It was this president’s favorite opportunity, the teachable moment. "If you just believe the government shouldn't be involved in health care, period, then you're right that you can't support the kind of reform that we're proposing."

Andy Obermueller lives in Austin.

Check the Fine Print on the Bailout: It Has Some Good News

No one ever gives anything away, not even the federal government.

If you think the $700 billion bailout amounts to a mere windfall for the idiotic risk-management practices of a few, consider: Banks must give the federal government common or preferred stock to participate in the rescue. No CEO wants to be the guy who took "free" money and further eroded shareholder value after an already lousy year, which issuing new shares or preferred would certainly do.

Bear in mind also that the government is actually getting something for your money in this deal: Mortgage-backed securities. Just because these assets are too toxic to trade (right now) doesn't mean that they aren't performing. They are. These assets might not be saleable, but they're still earning money. That's because most homeowners are in fact paying back their loans. The feds will use this cash -- billions of dollars in interest payments -- to either buy more mortgage-backed securities or simply to recoup our investment.

The government's main asset in this deal isn't cash, it's time. It doesn't have to please or at least placate Wall Street like public banks do. Uncle Sam can afford to wait things out -- and I wouldn't be the least bit surprised if the secondary market for these assets reappears. Soon.

I also think you'll start to see ads in the Wall Street Journal in short order from banks advertising the fact that they are NOT participating in the bailout.

Watch List: National City

So it looks like we have a deal. Policy-makers, doing the job they're paid for, have created a compromise plan to bail out financial markets.

The rescue is too late to save Washington Mutual, which was seized late Thursday by federal regulators. That news sent its stock to the floor. It also did a number on Ohio-based National City.

NCC lost -25.7% Friday to close at $3.71. The shares have traded between $2 and $27.21 for the past 52 weeks. Shares are down -77.5% year to date. I think they're a buy. Here's why:

(1.) Banks make money by lending. That's also how they lose money. NCC's "classified" loans total $3.7 billion, or about 3.2% of NCC's total. These are credits more than 90 days past due.

Every bank has classified loans, even in the best of times. To cover these losses, bankers set aside cash in a reserve fund. NCC's loan-loss reserves, according to the latest data from the FDIC, total $3.4 billion.

Not every classified loan will go bad. In fact, the FDIC's Quarterly Banking Profile for the period ended June 30 says the net chargeoff rate for banks with more than $1 billion in assets was 1.32%. NCC's reserves are higher than that -- it can cover 3% of its loans, or 92.6% of its classified loans. So if every classified loan goes bad, NCC will need to come up with $316 million to cover them.

National City can do this very easily: The upside to having 3% of your portfolio classified is that 97% is not. Those loans are still earning interest. Consider: $112 billion at 8% earns $9 billion a year in cash. Even if the cost of funds behind those loans -- what it had to pay to borrow the money to lend it -- is 5%, or $5.6 billion, then NCC is still turning a gross lending profit of $3.4 billion, and that's before it earns a dime in fees.

(2.) National City has no option-adjustable mortgages on its books. These loans allow borrowers to pay less than their full monthly interest payment, and they've caused banks no small amount of consternation. Anyone worried that NCC is the next WaMu should write this down: WaMu's option-adjustable mortgages alone were larger than NCC's entire mortgage portfolio. WaMu made billions in loans and let borrowers pay no interest. Smart move? You be the judge.

(3.) NCC has a huge stake in Visa it could sell to raise cash -- in fact, it has very strong assets. And they're selling for very cheap -- NCC is trading for a fifth of its tangible book value. Its market cap is $2.9 billion. From a purely fundamental perspective, this bank strikes me as being worth more than that -- and that was true with or without a bailout.

Those are all good reasons to buy these shares. But this is a market where good reasons won't get always you very far. Nevertheless, NCC presents a potentially good short-term trade: Assuming a sub-$4 entry point, I like the idea of a laddered exit prices of $4.75, $5.50 and $6.25 covered by a trailing stop to contain downside. Granted, that's academic if the shares open at $8.25, and that's not out of the question as Wall Street responds to the bailout. With any luck, it won't be signed into law until Tuesday, and National City will drop back down to $2 in the interim. Hey, I hate to be a greedy bastard, but I do have an obligation to shareholders.

A rising tide lifts all boats, and the bailout is sure to bring back investors who sold off on Friday. We'll see…

The Case for Netflix, Part 1

Boss Hoover smelled trouble.

The automobile was on the rise, and Hoover he knew it was only a matter of time before his profitable Ohio saddle shop would go on the wane. His sickly tinker of a cousin, James Murray Spangler, had recently taken out a patent on a gizmo he'd invented to help him clean the department store where he worked. Hoover bought the rights to the machine in 1908 and went on to make the vacuum cleaner an essential household tool.

True story.

Hoover had the vision not only to foresee that his saddle shop would falter but also to exploit a new technology. When I think of Hoover, a similar episode comes to mind. In this case, a company that remade a failing industry, then lassoed a developing technology to enhance its strong competitive advantage and position itself to dominate its market.

That company: Netflix.

I'll soon begin a series about this company, which has proven adept at seeing the future and profiting from it. The video-rental company, which mails movies to customers on a subscription basis, foresaw the widespread adoption of the DVD and then revolutionized the way America rents movies, much like iTunes changed how people buy music (and how Amazon's Kindle will change how people buy books).

Netflix took everything that was wrong with conventional movie rental and leveraged it to its advantage. It countered the inconvenience of a round trip to the video store with
free home delivery and return. It didn't just eliminate late fees, it gave customers total pricing control. It built a vast library of movie titles that no brick-and-mortar competitor could match, and then it developed a proprietary system for suggesting movies for its customers. You don't need a membership card. You don't need cash. You don't even get a bill -- payment is automated.

Have you ever met a brand ambassador? Someone so sold on a product that you can't get him to shut up about it? Some people feel this way about their iPhones or BlackBerries. The zeal of the Netflix user comes close.

And, in that vein, the only figure I could find that was higher than Netflix's customer satisfaction rate was the performance of its stock. The company incorporated in 1997 and sold shares to the public in May 2002 for $7.72. They now trade for $32, a gain of +314.5%.

Hoover saw the writing on the wall about the advent of the automobile, and he realized the potential of his janitor cousin's contraption. Netflix, similarly, foresaw the adoption of the DVD and had the vision to change the way people could rent movies. And it is doing it again. Netlfix knows video-on-demand is next. And the company has begun to position itself as a market leader of this new technology. As competitors like Blockbuster are scrambling to catch Netflix in rental by mail, Netflix is partnering with manufacturers to build set-top boxes that will allow downloads on demand. Netflix's real revolution -- and real financial performance -- hasn't even started yet.

I'll lay out my case for this longterm play over the next few days. Stay tuned.

Closing MER

I sold all my MER shares for $27.05 about an hour into the trading day.

I bought this stake on the premise that the firm was undervalued on Aug. 1. I still think it is, but that just means Bank of America got a good deal, not that a better offer is possible.

I paid $26.85. As Merrill began to slide last week it dipped my "floor" price, and I doubled down at $19.43. Over the weekend, when everyone -- including me -- expected, BAC to make a run for Lehman, it instead bought Merrill for $29 a share in an all-stock deal worth $50 billion.

BAC subsequently took a little hit, so MER's shares didn't rise to the merger price, as is typical in cash deals. The stock has since seen extreme volatility.

I may well have sold too early, but trying to buy every bottom and sell every top is a fool's errand. Sometimes brass means having the presence of mind to walk away with a profit.

And I did, ahem, make +16.9% in 49 days, and that ain't bad.

The Successful Investor

Last night I ate at a barbecue joint. I'm fond of this place. They don't have plates and you sit at metal folding chairs around long tables that both remind me of the parish hall of the church I attended as a kid. It's a family place where families eat. I held the door open for the woman behind me. Wouldn't have seemed right if I hadn't. That kind of place.

I typically eat with an exceedingly literate and well-informed companion -- The Wall Street Journal. The paper's news was exceedingly grim. I pushed it aside and sat back to think about the day. Friends had called and emailed to ask what I thought, what they should do. Some I told to do nothing. Some I told to start buying. The right thing to do in this market is what you feel most comfortable doing.

Come to think of it, that's the right thing to do in every market.

We're hearing a lot about the business of risk these days. It's been around for centuries, but now it's on page one. We hear the people on the news try to say "credit default swaps" and "delevering" as though they've been saying them for years. They haven't been, of course, and they're clearly not comfortable with the terms.

But you don't have to understand these terms to be a successful investor.

You do have to understand what the term successful investor means.

It doesn't have anything at all to do with beating the Street, earning X return or timing the market. It's wholly unconnected from your account balance. Being a successful investor means you can sleep at night. It means you've put your money into securities that you understand and have confidence in -- and that's the sort of advice I try to give. And when the financial waters roil and the Journal prints articles vaguely suggesting an imminent financial apocalypse, what do you do?

Well, I went to eat barbecue and watched a little baseball on TV.

Treasury Secretary Hank Paulson and Fed Chair Ben Bernanke, among others, aren't getting a lot of sleep or time off these days. Nor are their counterparts in Japan, England and the rest of the Group of Eight. That's as it should be. Together, those men and nations have the tools to stave off a meltdown -- not a crisis, but a meltdown -- and the smart move is to sit still and give winds and tides time to change.

That's my take, and this: A weekend off is going to do a lot of good.

In the meantime, I'm doubling down on CIT.

"It Was Funny the First Time" Dept.

Citigroup downgraded embattled Lehman Brothers today, from "buy" to "hold."

As with its recent move to remove its "buy" rating from failed Fannie Mae and Freddie Mac, Citi's Lehman downgrade not the most prescient call. After all, Lehman shares have lost -92.5% for the year. Was this is first time it thought, "Yunno, this might be a good stock for our customers to get out of."

Upgrading Lehman from "buy" to "strong buy" actually would make a lot more sense. Heaven knows I'm tempted to grab some of this storied company at this insultingly cheap price.