Saturday, January 18, 2003

1/18/03 WalMart and Microsoft

Back in August, WalMart first warned that their same-store sales were slowing down to the 4% level. They stayed there thru November and declined again in December. I wrote about the significance of WalMart's warning, and basically pointed out that, if the best retail company in the world was warning about slowing sales, then how about every other company and particularly their competitors. It wasn't long before we saw the retail carnage, but meanwhile, Wall Street had for the most part ignored WalMart's words. Then, after the close on Thursday, Microsoft's CFO warned of the difficult economic environment and lowered the sales and earnings projections for the company's 2003 fiscal year. Like WalMart, Microsoft is the leader in the industry. If they are slowing down, watch out. This time Wall Street did listen and Microsoft dropped close to $3 per share and the Nasdaq over 3%. The problem is still two-fold. With a slowing environment for Microsoft, the P/E ratios need to come down for the tech stocks, and the earnings projections for the Nasdaq 100 need to be reduced further for 2003. In other words, the result will be lower stock prices. Rallies should be viewed as selling opportunities. Hopefully, you have been listening and lightening up your least favorable positions.

Factory production fell 0.2% in December with usable capacity resting at 75.4%. The U.S. trade gap in November jumped to $40 billion. Most importantly, consumer sentiment in January fell to 83.7 from 86.7 in December. Industrial production in 2002 declined for the second consecutive year, and was the first back to back decline since 1974-1975.

Home Depot to miss earnings targets for 2003.

The American Legislative Council says state deficits for 2003 could reach $90 billion. That sounds low to me.

As people have lost their jobs in the private sector, local governments have hired 429,000, states 115,000, and the Federal government 42,000. Where are they getting the money to pay these people? From taxes you are paying. There is something very wrong with this picture. Only the voters can change it.

Thursday, January 16, 2003

1/17/03 Big Deficits Seen For "Foreseeable Future"

The President's budget director said that federal deficits are expected to balloon to the $200-300 billion range in the next two years, and spoke of shortfalls "for the foreseeable future" and declined to predict when surpluses might surface. In July it was estimated a surplus would appear in 2005.
Last summer the administration projected deficits of $109 billion in 2003 and $48 billion in 2004. As one can see, they really have no clue whatsoever and are just picking numbers out of an embarrassing place. When you include the trade deficit and the off-balance sheet items for social security and the like, the deficit becomes an unruly percentage of our $10 trillion economy. You will hear the administration say the deficit is only 2-3% of GDP. That's pure BS.

The chief economist for Morgan Stanley said the U.S. needs a sizeable short-term stimulus to prevent deflation.

Goldman Sachs said it believes this year's deficit will hit $300 billion and increase to $375 billion in 2004.

As long as we continue to run large deficits, the dollar will stay weak.

Federated Dep't Stores cut its 2003 forecast, shut 11 stores, and fired 1500 workers.

Microsoft guided consensus for their 2003 year to $1.90-1.93 from the prior $1.98.

Pfizer lost its Neurontin patent case.

The recent spate of layoffs is taking its toll. At 8am the wait to speak to ADP about a payroll matter was 1 1/4 hours. There were only 7 calls in front of me. Obviously there are only a couple of people manning the phones. Then a call to Costco's business center brought a 15 minute wait, and the central warehouse was out of Coca Cola, towels, and toilet paper. The order was given to a competitor. This is the new business look- poor service and low inventory. You can expect lower earnings to spring forth and disenchanted customers.

1/16/03 The Fed Sees a "Subdued and Sluggish" Economy

The latest Fed beige book states that there is no evidence that either consumer or corporate spending is picking up and that business expansion remains minimal. Companies remain cautious about hiring. Consumer confidence is at a yearlong low. These statements are quite different from the comment about the economy hitting a soft patch. The Fed is beginning to see one half of the story. They fail to touch on the possibility of a contracting economy or one marked with deflation. That will come in time. The Fed can be counted on for late arrivals to reality.

There are $2 trillion in taxable money fund assets with an average yield of 0.84%. This tells you how distrusting the public is of the stock market.

Germany's $2 trillion economy only expanded 0.2% in 2002, the slowest in 9 years. Unemployment is at a 4 1/2 year high. For the first time since a unified Germany, consumer spending declined.

The ECB will cut interest rates at their next meeting on Feb. 6th.

According to CIO Insight magazine, a survey of 300 CIOs revealed that tech spending will decline in 2003.

U.S. producer prices were flat in Dec. Prices excluding food and energy costs actually fell 0.3%.

Prime Minister Koizumi visited the Yasukuni Shrine which honors Japan's war dead. There he said "I will visit the shrine to remind me about the priceless significance of peace. The visit will make me more determined to never go to war." Maybe some of our leaders should have joined Koizumi on his Shrine visit.

There are increasing attacks in the Southern no fly zone. On Monday allied planes struck 5 sites in S. Iraq.

Airbus lowered their estimate on airplane deliveries. As I have mentioned so often. Why buy new? Pick one up at firesale prices in the Mojave airplane parking lot.

DuPont warned that 4th quarter earnings would fall short of expectations. Apple reported a loss. ADP disappointed. Best Buy cut 700 jobs. The good news- Rand McNally will come out of bankruptcy with a new owner.

Wednesday, January 15, 2003

1/15/03 Management Is The Difference

KMart and WalMart started their businesses at the same time. Yesterday Kmart, fighting to survive, announced the closing of 336 stores and laying off 37,000 workers. WalMart recently announced an aggressive store opening schedule and plans to hire another 800,000 workers over the next 5 years. The companies are in the same business. The main difference is management. It's a winning lesson. When investing, go with the proven talent. Ignore the media hype. Stick with the results.

Georgia Pacific warns its 4th quarter earnings will be disappointing. They have been hurt by "competitive market conditions and higher manufacturing costs." They failed to mention their overladen debt structure.

The analysts raved last night about Intel's 4th quarter. Get real. The stock sells at $18 with a 2003 EPS possibility of 60 cents or 30 times earnings. This is an excellent company, no longer run by Andy Grove, in a cyclical industry and there is no way their historical or present performance comes close to a 30% growth rate. Capital spending will drop about $1 billion this year to $3.7 billion, and this reflects uncertain market conditions going forward.

In December the Pew Global Attitudes opinion survey found increasingly negative views of the U.S. in over two-thirds of the 27 countries it surveyed. Given our recent troop movements, I believe that survey would be even more negative if taken today. We need to proceed cautiously and not just with a few friends. The world is a small place. It's vital to be right. It's more important to be right at the opportune time. We should take note that Germany wants a UN vote before there is a war in Iraq.

John S. Herold Inc. reports 2002 worldwide upstream M&A deal value plunged 44% to $46 billion.

Grocery distributor Fleming Cos. cut its 4th quarter profit estimate and blamed the growing dominance of WalMart. The latter does its own distributing.

The EU paints a bleak economic picture and stated that "the reaction to the slowdown in economic growth is characterized by policy inertia and backtracking."

AllFirst Financial eliminates 1132 jobs.

The dollar falls to 118.00 yen, the Euro up to 1.06 vs the dollar, and the dollar at 1.38 Swiss francs. The dollar is in a bear market.

Talking about bear markets, on occasion opportunities arise for trading rallies. I discussed that possibility 10 days after 9/11 and then again in mid-October of last year. Trading rallies do not change the basic trend. That is a given. In my view the high point for January will turn out to be the high point for 2003. I have no idea when the bear market will end. I just make the trend my friend and act accordingly. Those that fight the trend lose their capital.

December retail sales rose an expected meager 1.2% but were flat when excluding auto sales. I expect a continuation into January and beyond.

There was a new anthrax scare at the Fed's incoming mail center.

Mel Karmazin is in talks to become AOL Time Warner CEO. That would be a plus.

Tuesday, January 14, 2003

1/14/03 Payroll Taxes vs Income Taxes

The stimulus package has a cornerstone of weakness- it fails to address that most Americans pay more in payroll taxes than they do in income taxes. This is simply a basic fact. FICA taxes are cut off at $87,000, and therefore, one making more than $87,000 does not have to pay on the rest. When you combine this with a sales tax, you find that rich and poor pay alike. The problem in both examples is simple- whether its FICA or a sales tax, the payments represent a much larger percentage of income for the poor and middle class. This disparity needs to be addressed and corrected. If economists are concerned about slowing consumer spending, then further analysis is required. Keep in mind that I am a capitalist, a libertarian, and against forced taxation. At the same time my head is not in the sand with respect to reality..

In the Silicon Valley it is estimated that more than 45 million feet of commercial real estate sits empty or roughly one-sixth the size of the Valley. Another 20 million feet sit empty in Manhattan.

According to Merrill Lynch, other post-employment benefits(OPEBs)- moslly retiree medical care- for the S&P 500 are underfunded by $317 billion. That does not include the pension shortfalls. For examply, GM has an OPEB liability of $52 billion. In many cases, the liabilities in these two areas dwarf the market capitalizations for an individual company. This is just one more reason that stocks, in general, are significantly overvalued in my view.

Duke Energy cut its 2002 earnings forecast citing a sluggish U.S. economy. More importantly, the company now anticipates a range of earnings for 2003 of $1.35-$1.60 down from $1.84. In October the company had predicted 2003 earnings would be little changed from 2002.

The parent of FAO Schwartz filed for Chapter 11 bankruptcy protection.

Since October 2001, the U.S. has spent $850 million on humanitarian relief operations in Afghanistan.

Spending on prescription drugs for children thru age 19 increased 28% last year. Children account for only 5% of total drug spending in the U.S. but it's growing.

WalMart is considering a cash bid for Safeway,Plc, the British supermarket chain.

Abbott Labs is delaying raises for 6 months for 34,000 U.S. employees.

Pessimism continues to grow concerning joblessness and a potential war. The backdrop for business is fragile, and the stock market's recent strength is nothing but chasing fool's gold. There isn't one person I know or know of that can honestly tell me the names of three stocks that are dirt cheap. When I view the floor of the NYSE and the Nasdaq, I see a lot of dirt.

Monday, January 13, 2003

1/13/03 Case Finally Closed

Steve Case resigned from AOL Time Warner. Since the merger, the market value for the stockholders has dropped $100 billion. That's more than the GDP for most countries.

Leonard Pitts Jr, The Miami Herald:" Extraordinary times require extraordinary measures, yes. We are all desperate to feel safe again, yes. But that's precisely why we the people need to be more vigilant and more skeptical of our government. We must pay close attention as corners are cut and rights abridged in our names.

Not from lack of patriotism or need to be blindly adversarial. Rather, because the citizenry of a democratic nation is the most important check on the potential excesses of government. And because it's in a time of emergency that excess is most likely.

Do we care? From all appearances, we do not.

Sadly enough, we seem to have made our choice. We choose expedience."

Glaxo said it would stop shipping drugs to Canadian pharmacies and wholesalers that are shipping the drugs to the U.S.

Should you want a fun ride, you might try out the Nissan minivan with the optional zebra-striped leather seats designed by Joan Rivers for the People's Choice Awards.

OPEC to increase oil production quotas by 6.5%.

The 49er offense was shut down by Tampa's machine. The last time SF looked so peaked was during the Enron electricity fiasco.

The real estate bubble has found its way to Kuwait along the Iraqi border. Everyone wants a birdseye view of the troop movements. It's the most activity since Peter O'Toole crossed the sands.

Bill Richardson says Pyongyang is preparing to negotiate. The problem is he speaks a rare dialect.

Four warships left this weekend from Virginia Beach for the Gulf. I just hope they don't have a break-out of the virus hitting the cruise ships.

Californians should consider moving to New Mexico. Psychologists in that state are now allowed to prescribe drugs.

It is anticipated that employee health plan costs will increase by at least 15% in 2003, the biggest jump in a decade. You can expect to pay an ever-increasing share of the premiums, and higher fees for drugs, doctor visits, and hospitalizations. Consider it a tax hike like higher gasoline and heating oil prices. So go figure. What does it take to really stimulate the economy?

During the Super Bowl there will be 61 30-second ad spots, and each will sell for $2 million. That sounds like a good business venture.

Sunday, January 12, 2003

1/12/03 Pension Fund Managers Are Panicked

The corporate pension fund shortfalls are rising. For example, Ford's has risen to $14.5 billion. Rather than decrease their risk exposure, the managers feel pressured to make a 9% return, and believe they must increase their equity positions at the expense of bonds. The problem is not the markets. It's the managers themselves and those entrusted to oversee the pension fund assets. Most are inept and not qualified to manage a portfolio through a bear market- especially when it's OPM.

The U.S. now has 150,000 troops in the Gulf. Another 225,000 and we'll have as many folks as are in Wyoming.

According to a national Knight Ridder poll, Americans are overwhelmingly against a unilateral war in Iraq.

In 2002 a total of 10 million people received unemployment benefits. Unemployment among women has increased as much as it has for men. In recessions this is usually not the case.

Merrill Lynch says the budget deficit may increase to $300 million. I mentioned this a week ago.

Foreigners are shifting from dollar deposit accounts to Euro deposits.

IC equipment vendors are offering discounts up to 40%.

To reiterate, eliminating taxes on dividends will not stimulate the economy in 2003. The assistance comes with the filing of tax returns in April, 2004.

Economists are concerned that continuing job losses will stall the recovery. I'm concerned for economists. We don't have a recovery.

Economists are concerned that the poor holiday season reflects a spending hiatus for the consumer. I'm concerned for economists. They have missed the change in trend. Spending is out and savings is in.