Knee-Jerk Reactions Shackle Business

March 10, 2006
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GRAND RAPIDS — The 1969 Cuyahoga River fire in Cincinnati was the rallying cry for the environmental movement, and the U.S. government responded by creating the Environmental Protection Agency. Through the years, Americans have demanded similar social compacts in reaction to social concerns of the day, and the government has reacted by instituting laws such as the Minimum Wage Act, the Occupational Safety and Health Act, the Americans with Disabilities Act and the Family Leave Act.

“The Cuyahoga River fire happened, (and) we had a knee-jerk reaction. We did things in society so it wouldn’t happen again, and it worked: We have clean air and clean water,” Randy Bateman, senior vice president and chief investment officer for Huntington Bancshares Inc., told a group of investors at a recent presentation in Grand Rapids. “But a byproduct of that — an equal and opposite reaction — was that we priced ourselves right out of the manufacturing industry.”

In 1969, just under 35 percent of the American work force was employed in manufacturing; by 2004 only 10 percent was employed in that sector.

In 2000, American business caught fire with the Enron debacle. Society demanded greater accountability, and the government reacted with the Sarbanes-Oxley Act. New York State Attorney General Elliot Spitzer began taking on corporate America with lawsuits and, subsequently, prison sentences for corporate executives, and new tort issues began surfacing.

“What concerns me again is the reaction,” Bateman remarked. “Sarbanes-Oxley law has a number of fairly significant and far-reaching provisions — some of which are extremely unfriendly toward business. That’s kind of a frightening scenario. Almost every week now, we’re seeing some corporate executive hauled off to prison.”

Sarbanes-Oxley requires that all financial statements be signed by the chief executive officer, who has to attest that they are not only accurate but complete, and the statements have to be completed within a short period of time, he pointed out.

“If that’s the case, a lot of corporate executives are going to think hard about whether they want to be CEO or whether they want to open their business somewhere else,” Bateman said.

“I don’t want it to be perceived that this is going to drive all business away,” he cautioned. “That won’t happen, but this is a situation where I can see some parallels with what we saw in 1969.”

In September 2002, for instance, Stanley Works, the largest U.S. manufacturer of hand tools, said it needed to move its legal residence to Bermuda “to stay competitive.” In June 2005, Burlington Coat Factory said it might seek a buyer, because its CEO wanted to cash out. In December 2005, Koch Industries Inc. purchased one of the nation’s oldest and largest public companies, Georgia-Pacific Corp., which has since become the nation’s largest privately held company. Georgia-Pacific’s president had said he couldn’t stand the “quarter-by-quarter scrutiny” of his earnings.

Acquisition and merger activity is taking place almost weekly on a global basis, but particularly in the United States. There are about 88 public companies represented in the group funds Bateman manages, and six of them were bought out last year, he noted. One has been purchased so far this year.

“This is a natural factor of the opportunities that are being perceived overseas and the restrictions that are attendant to being in business here,” he said. “I think this has extraordinarily good repercussions for shareholders and investors right now. Typically, these companies, when they either go private or they sell out or are taken over — we’re looking at 10 to 20 to 30 percent premiums. So as an investor it’s a good opportunity, but for citizens of this country, I think it’s probably bad news.”

Bateman said Huntington Financial Group’s long-term view is “pretty optimistic” in terms of the U.S. stock market. However, one of any number of factors could upset the market: an epidemic such as SARS, a terrorist attack, a housing market bust, tax increases, inflation and interest rates, a hedge fund or trading problem, or international turmoil.

“This economy and this market can weather a lot of things,” Bateman said. “I think it can weather a terrorist attack — unless the terrorist attack was a dirty bomb on New York City that would make the city uninhabitable for a period of time. That would be hard to recover from.”

Huntington Financial Group makes its decisions on stock picks by looking at the 10 major economic sectors: consumer discretion, consumer staples, energy, financial, health, industrials, materials, technology, telecom and utilities.

“In every case of the prudent investor, their reputations are important, so we want to have exposure to every one of these major economic sectors,” Bateman said.

Among Bateman’s top 2006 stock picks are: Mentor Corp. (NYSE: MNT); CARBO Ceramics Inc. (NYSE: CRR); Garmin Ltd. (NYSE: GRMN); and Elk Corp. (NYSE: ELK).    

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