Saturday, June 21, 2003

6/21/03 1974 Revisited

I was a young man. I’m still a young man. It was November, 1974 and the cupboard was getting very bare. We were down to rice, oatmeal, and powdered milk. On a day of splurging I was able to spring for a big bag of Idaho potatoes. I was so damn sure. My friends thought I was nuts. My family hung tough. Then one day I came home a bit on the shaky side. I saw a man pass my office window at 120 Broadway in NYC’s Wall Street arena. He passed on his way to the pavement below. My office was on the 20th floor. I thought of Jesse Livermore committing suicide 40 plus years before. Bear markets can do that. We were in the midst of a beauty of a bear market in early November of 1974. It was the worst since the depression. I was so sure of myself. I didn’t know any better. I was buying great companies yielding 6 to 10 per cent, at 4 and 5 price earnings ratios, and many stocks selling for less than the cash per share. These were not dotcom companies. These were the real deal. They made money. I just kept buying and buying and buying. I knew the food would not last forever. I was sure I was right. I got lucky. God must have watched out for me. The Dow bottomed in early December at 574. I never looked back until about five weeks ago. As Yogi would say, it was déjà vu all over again.

I had been taking a look at the economy for days, for weeks, for months. Just like in 1974. The bond market, I thought, was selling at crazy low yields. Who in his right mind would loan money to the U.S. government at these low interest rates when the country was busted? No one in their right mind. I was sure of that. This time around I had a bit more than just the rice, oatmeal, and powdered milk. The yields kept getting lower. The market said I was wrong. Just like 1974. I kept asking myself should I buck the trend? Will I get carried out? This time around I hedged a bit. I couldn’t get carried out. Every time I hedged I got angry at myself. I did it any way even though I believed in myself. I was only competing within myself. I have nothing to prove to anyone else. Never did. God looked out for me again. The bond market has tanked over the last two weeks. From December, 1974 the market did not look back for some time. Will it be the same this time for the bond market? I wrote not long ago that it didn’t matter whether Greenspan lowered rates at the last Fed meeting or in June. It doesn’t matter whether the rates are lowered by a quarter or a half a point. In fact, as I have said for a year, the Fed is a non-event. They are a figment of their own imagination. Whatever they do they cannot reverse what has been done. They cannot reverse the budget and trade deficits, they can’t create jobs, they can’t make business owners invest in their businesses, they can’t make people save, they can’t stop increased government spending. They can stop making speeches. Their words are a crock. They aren’t worried about price deflation. They’re worried about asset deflation. They should worry about people on fixed incomes earning squat on money market funds, savings accounts, and treasury bills. The population is aging a lot faster than people buying homes with low interest mortgages. When interest rates are lowered this week, what impact will that have on money market funds? When long term interest rates rise, what will happen to the well-being of mortgage backed securities. The Fed has gotten themselves into a catch 22, and there’s no way out. The Snowman said this week “conditions for this recovery are looking better and better.” He also said unemployment would continue to rise for a bit longer. On Friday Bush said the latest tax cut is “going to put wind at our back as this economy recovers from what has been a very tough period of time.” He also said the economy is not growing fast enough to make much improvement in the unemployment situation.

We have a situation where the Fed is pouring money into the system. The government is spending money like never before. Deficits are rising to incredible levels. The CBO says we will have deficits thru at least 2010. Governments do not create economic growth. They produce nothing. They only spend. They consume tax receipts. They are the weapon of mass destruction. There is only one way for the government to help- shrink federal services, employees, and benefits. The solution is to outsource the government to China and India. The citizens must take away the federal checkbook and create a governor on federal spending. When the free lunches end, when the pork programs are extinguished, then the path to sanity will be restored. Until that time, I continue to believe there will be a very long and painful bear market in government bonds. I’m a young man. I’ll live thru this period. Others will jump to their death. It’s will be déjà vu all over again. But don’t worry. Everything will be just fine. Goldman Sachs told their clients “what’s important here is the shift in the Fed’s regime-to focus on keeping short-term rates low for a sustained period in order to prevent deflation.” What the hell has been going on with a dozen rate cuts and the thirteenth on its way? The focus has not changed one bit. The Fed has followed the bond market down step by step by step. They have followed and not led. The guy who ran Greenspan Townsend does not lead markets.

The Mortgage Bankers Association said on Friday that U.S. mortgages in foreclosure climbed to a record high in the first quarter of this year, and that home loans in the process of foreclosure climbed to 1.2% of all mortgages, a record high.

Don Imus: “When you’re talking to someone, you better know which side of the chicken wire you’re on.”

General Motors is planning to sell $13 billion of bonds and will use most of the proceeds to reduce deficits in its world-wide pension plans which amounted to $25.4 billion at the end of 2002. Because of rising pension costs, Moody’s and Fitch Ratings just cut their ratings on GM’s long term debt.

Boeing previously announced a 35,000 ceiling for job cuts in their commercial airplanes division. Now the company says more layoff plans may be announced next month. The June quarter for Boeing will not be pretty. Fittingly, Boeing’s CEO, Phil Condit, was named the new head of the Business Council. That says a lot for that organization.

The landscape in the PeopleSoft/J.D.Edwards/Oracle fracas changed a bit on Friday. That was anticipated. The PeopleSoft board rejected the sweetened Oracle bid saying it “undervalues the company and is not in the best interest of PeopleSoft shareholders.” However , the PeopleSoft board “determined that future circumstances might make it advisable or necessary for the company to engage in discussions or negotiations with third parties regarding extraordinary transactions.” Needless to say, should a judge stop the Oracle tender, such circumstances would not be necessary. It is difficult to envision what company could serve as a white knight. I ruled out IBM, Microsoft, and SAP. I took a long look at Intuit. They could do it, but would they want to. I have no idea. PeopleSoft is quite aware that, if Oracle’s bid is successful, 5000 of the 8000 PeopleSoft employees will be fired. Oracle also changed their tune on Friday. They now state they “will continue to develop and improve PeopleSoft’s products for at least the next ten years-even longer, if customers require further support.We will have more than 4000 engineers supporting PeopleSoft customers all over the world, and they can stay on PeopleSoft applications or migrate to Oracle applications at their discretion. It’s entirely their choice." Let me make this clear. PeopleSoft doesn’t want to find a white knight or sell out. They said that to protect themselves legally with shareholders. Oracle wants to have PeopleSoft customers convert to Oracle E-Business Suite applications. They are not looking to enhance PeopleSoft’s existing product offerings. They said they would not shut down PeopleSoft products in order to look better in court before the judge hearing the motion for the TRO. As I have said so often, don’t believe what you read. Think for yourself.

Friday, June 20, 2003

6/20/03 "The Weather Is Too Hot"

Often I am critical of government agencies. When praise should be forthcoming, I provide it. In NYC we make jokes about the 120-year-old Brooklyn Bridge. They've been retold for years. So will the foiled plot to destroy the bridge. Iyman Faris pleaded guilty on May 1 to charges he was involved in a plot to cut the bridge's suspension cables with "gas cutters" and obtaining "torque tools" to derail trains in the Washington area. The plea document clearly indicates that he was an operative for Osama bin Laden's al Qaeda organization. Faris discontinued plans for the attack on the bridge because security was too tight and the suspension cables did not appear vulnerable. He sent a coded message stating "the weather is too hot."

Houston's unemployment rate increased from 6.3% to 6.7% in May, and was the largest one month jump in a decade. The Texas Workforce Commission said the area produced 15,000 fewer jobs, the 16th consecutive month of year-over-year losses. Bill Gilmer, senior economist with the Federal Reserve Bank in Houston is surprised that Houston's unemployment continues to mount as the U.S. drilling rig count improves, the ISM index improves, the dollar declines in value, consumer confidence is up, the stock market is up, and interest rates decline. However, employers are not hiring. What do employers think they know?

What do insiders know? Argus Research provided an 8 week ratio of selling to buying by corporate insiders. The ratio is approaching 4 shares sold for each share purchased. Wall Street climbs a wall of worry. The insiders aren't worried. They're cashing in. They've got the green. A bird in the hand.

In a few minutes GE will be starting its webcast with analysts. Yesterday the company released its May orders. Remember Mrs. Robinson and plastics? Plastics is not hacking it for GE. Actually, its hacking away at profits. The division is hurt by lower prices and higher material costs. A company the size of GE cannot pass along the cost increases. Maybe investors should think about that. Orders for plastics fell about 20% last month. First quarter profits from plastics were down 56%. In May orders for appliances declined 5%. That means Sears can't be knocking the cover off of the ball. GE's earnings for 2003 will slightly exceed $1.55 per share. At yesterday's close the p/e was a bit over 19, but the stock does yield 2.5%. From when GE was mentioned back in October, the stock has done ok. It's up about 36%. That's a ham sandwich. All joking aside, GE has a market cap of close to $300 billion. I consider this company one of the proxies for business in America. They're doing ok but nothing to write home about. The outlook for 2004 for them is ok but nothing to write home about.

More than 130 million customers worldwide visit a WalMart store each week. Excluding autos, WalMart accounts for 9 cents out of every retail dollar spent in the U.S. They are the proxy for the consumer. I follow this company closer than any other public company. Why? It's the most important American company. They employ 1.4 million people. They are Main Street. WalMart's same store sales are ok. They're nothing to write home about.

The Justice Department will review the takeover issues surrounding the fracas at PSFT/JDEC/ORCL. More than 20% of PeopleSoft's 5000 customers are government agencies or universities.

Since June 10, the 10 year Treasury note yield has increased from 3.11% to 3.34%. 15 year mortgage yields have risen to 4.62%.

U.S. jobless claims have exceeded 400,000 for 18 straight weeks. The number of workers still collecting unemployment checks rose to a new 20 year high. The figures do not include some 850,000 workers receiving federal checks available to those who exhaust state benefits. One might note that the U.S. economy shrank by 325,000 non-agricltural jobs in April 2003 over April 2002, and the latter month didn't exactly knock the cover off the ball either.

I know that some of my readers have a thing for counting. Here's the count. Prior to May 1, the date the Iraq war was declared over, 138 Americans died in combat in Iraq. Since May 1, there have been 51 fatalities or 1 every day. Other than the families of those fallen soldiers, how many other Americans care? If anyone does care, I don't hear much noise.

Yesterday Krispy Kreme opened its first store outside North America. It's located in a suburb of Sydney, Australia. Over the next 5 years the company plans to open 30 additional stores throughout Australia and New Zealand. That might be a good reason for me to move there. I need to personally investigate my Krispy Kreme investment. It makes me smile when I read that the company makes almost 2.8 billion doughnuts a year.

Earlier in the month I had mentioned that GE was cutting 414 employees in Macon and Atlanta. Those cuts were directly related to the loss of business from Home Depot. You read correctly. Yesterday GE said they would be cutting an additional 62 employees in its Atlanta office. Georgia got another piece of bad news yesterday. Herman Miller, the furniture manufacturing company, will move its Canton, Georgia operations to its home-base in Michigan and cut about 500 jobs. Wilbur Ross is right on when he said "manufacturing has a peculiar problem, which is our trade deficit. Imports account for about 14% of the economy and contribute to the loss of manufacturing jobs." Our first quarter trade deficit was a record $136 billion. On an annualized basis, that's just shy of 6% of our GDP. The worst part is that deficit is a cancerous growth. It just keeps getting bigger.

On Wednesday the American Electronics Association reported that U.S. exports of high-tech goods fell by 26% from $223 billion in 2002 to $166 billion in 2002. During that same period U.S. electronic imports were down 19%. During this 2000-2002 period the Association said there was a 10% drop in U.S. tech employment. China became the United States' top supplier of high-tech goods, surpassing Japan and Mexico. During this time span imports from China increased by 32% or $8.4 billion.

I was especially interested in something Chang Mook Sohn, the state of Washington's chief economist said. Sohn is a very astute guy. He is increasingly concerned about the prospect of deflation in the state. Sohn said the sate of Washington is heavily reliant on sales taxes for revenues. The more prices fall, the less the state collects in sales taxes. That's a point I had not adequately considered. Sohn believes there is a one in four chance that deflation will take hold nationwide.


Thursday, June 19, 2003

6/19/03 Migration Is For The Birds

Completing a tender offer is more than just about the money offered to shareholders. It always was, and always will be. Larry Ellison is a smart guy. From the outset he should have appreciated this fact. He didn't. He should have also realized the potential impact from an investor suit against Oracle. Late Friday A Delaware judge refused to dismiss a shareholder suit against Oracle. Chancery Court Vice Chancellor Leo Shrine found that Oracle's special litigation committee looking into insider trading was "fraught" with conflicts. Specifically, he wrote, "material considerations other than the best interests of Oracle could have influenced the committee's inquiry and judgments." Ellison has been questioning PeopleSoft's responsiveness to shareholder rights. I think he would be best served to watch his own back. The Chancellor criticized Oracle for having two Stanford professors prepare the 1,110 page report. Shrine wrote "by any measure this was a social atmosphere painted in too much vivid Stanford Cardinal red for the committee members to have reasonably ignored." At the time of the report Ellison was considering a $170 million gift to the Stanford scholarship program and donating his $100 million home to Stanford after his death. It should be noted that this special committee was formed in 2002 to investigate the stock sales of board members, and that included Ellison's $700 million sale of Oracle stock shortly before Oracle warned of a third quarter earnings shortfall. Now let's migrate to migration. At the time of the original $16 tender, Ellison said Oracle would support the PeopleSoft products, discontinue further development of PeopleSoft's products, stop actively selling PeopleSoft products, and encourage PeopleSoft customers to switch to Oracle products. Basically, that meant Oracle would be phasing out PeopleSoft's products. I knew that would be a nail in the coffin of the tender offer. Yesterday, after raising the tender price to $19.50, Ellison said Oracle would provide a way to have PeopleSoft's customers gradually migrate to Oracle's products. Ellison says he understands CRM. I don't believe that. He wants to dictate the marketplace to the customer. Understandably, the state of Conn. sued to block the tender and other states will follow suit(no pun intended). Let's take a look at another customer's view of migration. Santa Clara University has invested five years installing PeopleSoft's software and training people to use it. The university's CIO, Ronald Danielsen, is concerned. Shortly, his students will have a web-based PeopleSoft application which will effectuate ordering transcripts, paying tuition bills, and other university matters. He says "if Oracle were to succeed in the takeover and phase out PeopleSoft software, we would have to go through another implementation of another administrative software suite. That makes me really uncomfortable." ChartOne is a medical chart technology company located in San Jose. They use PeopleSoft's products. Their CFO George Abatjoglou said "I think it's a terrible deal the way Larry Ellison is laying it out there. When you buy a technology company, you buy it for its customers and technology. If Larry Ellison is going to throw away the technology, then you're down to the customers. And I don't think he'll be able to keep them." Ellison should have thought of that prior to his making a tender offer. He may captain his own plane and his own racing boat, but he doesn't captain customers. Winning managers listen to their customers. He might try listening for a change. He'll get that opportunity in court, and won't like the message. Chancellor Shrine was just the beginning. Lastly, I read the filing that PeopleSoft made with the SEC. It states that the revised merger agreement with J.D. Edwards will boost its operating earnings by 50% next year. Specifically, PeopleSoft expects its non-GAAP earnings to be between 84 and 92 cents per share. As such, the stock is presently selling at a completed merger p/e of about 20 times 2004 anticipated results. That should provide some needed downside protection should the Oracle tender be blocked or fail.

A good deal of economic data will be released today. We'll probably see an increase in the leading economic indicators as stock prices have moved higher and the money supply has increased. The Philly Fed factory index will show improvement as did N.Y.'s the other day. The May budget deficit will be another whopper. Finally, weekly unemployment claims should continue to signal a weak job market. Talking about unemployment, EDS is cutting 2700 jobs; Thomson SA is cutting 1,200 jobs in the U.S.; British American Tobacco will cut more than 1000 jobs in Britain and Canada; and Spanish telecom Telefonica will cut 4500 jobs or 10% of its workforce, and plans to cut another 4500 jobs in 2004 and 2005.

According to International Strategy and Investment(ISI), only twice since 1953 has the S&P gained more than 20% in the first three months after reaching a low. Both times, it returned less than 7% in the next three months and even less during the next 18 months. Since March 11 the S&P 500 has gained 26%. ISI is forecasting a 4% rise in the S&P 500 from its present level to year end.

Nielsen Media Research anticipates that China's present $10 billion advertising market is set for double digit growth annually in the next 10 years and should exceed Japan's market by 2010, and this would make China the second largest advertising arena. Hosting the 2008 Olympics should aid the boom.

Airbus won an order from Korean Air to buy five A380s worth $1.4 billion, and brought orders for the company's super jumbojet to 129.

Yesterday Larry Doby, a baseball Hall of Famer, passed away. Soon after Jackie Robinson joined the Dodgers, Larry became the first black baseball player in the American League. He was a gifted and fine individual.

Tom Campbell, a former Congressman and now Dean of the Haas School of Business at the University of California-Berkeley, said the Silicon Valley will not lead the nation out of a recession, and remarked "we are in some ways the victim of our own success." He was referring to the flexibility and productivity developed by the IT industry having created a situation where companies seeing a growth in revenues are not necessarily hiring more people. He said the current jobless recovery "is unlike any recovery we've experienced before." Campbell went on to say that "consumption as the driving force of the economy is over."

According to numbers by the Tax Foundation and Citizens For Tax Justice, Bush's tax cuts in 2001 and 2003 have removed about 4 million taxpayers from the income tax rolls, and about 40 million families will have no income tax liability in 2003. That's great. There's just one small problem. The Congress will increase discretionary spending by 4% in the current fiscal year. I guess the Fed will just keep printing money and the Congress will just keep increasing the debt limit and everyone will be happy forever in la la land. If America wants to lose its freedoms, this is the way to go. Please hold the gloom and doom theory. That's total crap. But there is hope. It brings a smile to my face. Within 5 years, 30% of the government's 1.6 million full-time employees will be eligible to retire and another 20% could seek early retirement. If we can hold out another 5 years, we can lop off 800,000 government workers! It gets better. Sixty five per cent of the Senior Executive Service will be eligible for retirement in 2004. Don't you just love this? There really is hope. Now I know why the S&P 500 rallied so sharply. The Street recognized future government payroll savings. It was never about the tax cuts. It was never about the benefits for those receiving dividends. It was pending government downsizing. Some believe the market will continue to climb a wall of worry. In this case it will be the worry of a government brain drain. Don't lose any sleep. Please.



Wednesday, June 18, 2003

6/18/03 Pfizer

It was many months ago that I recommended Pfizer and Merck for your consideration. Pfizer was 25 and Merck was at 40. In the interim, the latter has outperformed Pfizer by a large margin. These are two companies which can produce highly profitable results over the long term. At its present price, Pfizer's current p/e is somewhat above its current growth rate. The CFO has projected 2004 earnings per share of $2.13. The company's 20 new products in the pipeline could create an opportunity for much stronger future growth. This is a company which should benefit its shareholders. The healthcare field continues to be my favorite area of investment for the long term. Currently, this industry comprises over 15% of our GDP. With the aging of our population, Pfizer should be a major beneficiary of this trend. I have never been a fan of investment diversification. I don't believe there are a host of great companies around the globe. I have found that the greatest long term investment success is to stay with the great ones. When the opportunity presents itself, add to those holdings. Over the years, this simple formula has proven to be a welcome tonic. There are many avenues for making money in the stock market. There are many more avenues for losing money. Make it easy on yourself. Don't knock yourself out betting on the next Secretariat, so to speak. The results might add you to the list of the depressed in this country. The list is long enough.

UBS is cutting 3% of their global investment banking workforce, or 500 employees. The reduction will be evenly spread in Asia, Europe, and the Americas. This company has 16,000 folks in their investment banking department. I feel confident that there is plenty of room for more cuts- let's say at least a few thousand for starters.

Quite frequently I make reference to the parking lot in the Mojave. I'm talking airline jets. We need to bring our cameras. The parking lot is growing. There are now 2,186 planes parked. By the time I finish this blog, there could be more. Only a masochist would invest in the airline industry on a long term basis. I've been negative on this industry for a very long time. Some wise guy will tell me how much these stocks have risen over the past three months. How have they performed over the past three years? Would you rather own Boeing or Pfizer? If you say Boeing, I'll send the paramedics right over.

Almost every week I discuss the importance of ROI. In the July issue of Business 2.0, they have a worthwile article on this subject and opine that "it's not enough that companies are in the black. They ought to return more of their cost of capital." More investors should pay attention to this subject matter. In their table of companies they cite HP, Amazon, AMD, Motorola, Dell, Microsoft, and Merck. Only three companies on that list produce results where the return on capital exceeds the cost of capital. To be expected, they are the great ones- Microsoft, Dell, and Merck. In this same Business 2.0 issue, there is an article on Leroy Hood, MD, Ph.D, director of the Institute for Systems Biology, and the inventor of the automated DNA sequencer. The article is entitled "Beyond the Genome." I recommend that, all investors interested in the healthcare field, make this must reading.

According to a report from Harvard University's Joint Center for Housing Studies, if layoffs continue to increase, some neighborhoods could be facing declines in house prices as the result of a glut of homes put up for sale. I have thought this for well over a year, and have been right on rising unemployment and wrong on house prices. Maybe Harvard's timing will be better than mine. The report does say, however, that the fundamentals for housing are still strong as the number of immigrant and minority households grow and provide a big source for housing demand. The report closes by focusing on affordability of housing as a problem, a subject I have mentioned frequently. Up to now, the latter has had no impact whatsoever on the upward movement of house prices. Lower mortgage rates have proven a tremendous salvo.

The May book-to-bill ratio for semiconductor equipment fell for the third consecutive month, and stood at 0.89. Excess capacity and weak demand make for tough competition.

The Australian dollar rose to its highest level in almost four years. The interest rate gap is pretty darn wide, and about to get wider. Our overnight Fed rates stand at 1.25% vs Australia's 4.75%. You have to love the differential and park your U.S. dollars in Australian dollars.

Instead of whining about the amended PSFT/JDEC merger agreement, Oracle's Ellison would do well to focus on a money making area. The real future for Oracle's database prowess is in the field of bioinformatics. Ellison should concentrate on that. He won't find SAP in that arena- only IBM and a handful of other upstarts.

Moody's cut the ratings on the long term debt of R.J. Reynolds to junk status, and warned that the credit status of the $1.8 billion worth of debt could be cut even more. Moody's said "the downgrade reflects RJR's uncompetitive operating cost structure; Moody's expectation of significant volume drops in the U.S. tobacco market; increased competition from small manufacturers; and the difficult litigation environment that RJR Tobacco faces over the medium term." As I have previously noted, several states have sold bonds secured by their anticipated tobacco litigation revenue stream. They had better hope RJR and others can continue to fund their bonds. I wouldn't want to be a holder of those bonds.

The Snowman said "unemployment is unaceptably high at 6.1% (in May) but it could well rise to 6.2 or 6.3 per cent before the higher growth rates begin to bring it down." He said "the current account deficit is something to be monitored for sure but nothing to be alarmed about." He really deserves to be a guest host on Saturday Night Live. When other finance ministers raise our current account deficit as a worry, he says "I suggest to them how much less do you want to sell to us." The man is a regular riot.

According to a U.S. Institute of Medicine study, the medical expenses for the 41 million uninsured Americans cost the taxpayers as much as $130 billion a year. The study suggests that, if the uninsured had equal access, the cost of their care would probably be reduced by 50% to $65 billion.

New home sales continue at a pace which exceeds 1 million units on an annual basis. Over the past nine months, eight of those months have exceeded the million unit rate.

Even though U.S. industrial production rose a smidgen in May, the factory utilization rate continues at a two decade low. Some say the worst is over for our factories. Tell that to China. Tell that to India and their growing outsourcing industry. However, there are CEOs ready to fight. Said Carly Fiorina of HP, "we are not going to let our compeitive position erode because of others ability to price beneath us." You tell them, Carly. While you're at it, explain to your stockholders why the total cost of HP capital is 11.9% and the return on capital is 2.9%. Talk is cheap and the cost of HP capital appears way too dear.

Tuesday, June 17, 2003

6/17/03 Credibility Of Intelligence

Yesterday the latest information on the N.Y. State manufacturing index was off the charts. It was much stronger than expected. That's great news. In my view, it's exaggerated great news. The real news was at the Paris Air Show. That's the real deal. Why? Because Boeing is our largest exporter. That's the one company which will have the greatest impact on our ability to improve on this nation's trade account deficit, which lately has been running an uncool $40 billion or so a month. Yesterday Airbus received an order for 41 planes worth $12.5 billion from Emirates Air. Boeing, on the other hand, received only 4 new plane orders from the same airline- all leased planes. The Emirates order from Airbus includes 21 doubledecker A380s, a plane that seats 500 to 650 passengers. By comparison, Boeing's 747 seats 420. Boeing has maintained that there wasn't a market for a superjumbo jet. This week will bring more bad news for Boeing from the Paris Air Show. Qatar Airways will place an order for 30 Airbus A330s and A340s. Boeing was counting on that Qatar order. So was our trade account deficit. Boeing thought they had the inside track because the U.S. had recently made Qatar its new Middle East air operations center. Boeing will be introducing a new jetliner in 2008. On Sunday the company named the plane the Dreamliner. Between now and 2008 I wonder how pleasant the dreams will be for Boeing. Of course, there's always the freight business.

The skies are unfriendly for others and not just for Boeing. Summer is the peak airline travel time to Europe. I know the airline stocks have been rallying like crazy. What a run! I like to look at the real time data and not what's on a wish list. Yesterday Virgin Airways announced a package that is available between July 1 and August 31, the prime travel period. Between JFK in NY and London you get round-trip airfare, 6 nights of hotel accomodations, daily Continental breakfast, hotel taxes and service charges all included in a package for $499. That price makes for strong competition, and eases the pain from a weak dollar.It increases the pain for the U.S airlines with routes to Europe.

Manpower, the staffing firm, released information from their recent poll of 16,000 companies. It found that 65% of U.S. firms plan to keep their workforce the same in the third quarter. Only 20% plan to add new workers while 9% plan to eiminate positions. Adjusting for seasonal factors, however, only 6% of employers plan to add workers. That's the weakest forecast for hiring in 12 years. Jeff Joerres, Manpower's CEO, said "we are continuing to see companies struggling with predicting future demand for their products and services and being very careful about hiring people. It's a difficult time for job seekers, and so much of that is related to the cautious hiring by companies. Since the war has been concluded, we haven't seen any indications that would give us the sense that the war was a big muffler. Companies are playing a bit of a wait and see game. They want to wait and see if demand picks up before they commit to hiring." In sum, lack of business confidence has undercut the willingness to hire. It has also undercut the willingness to increase business investment. Both are needed for a recovery. The retail index made a new high for the year. WalMart has not changed its expectations for same store sales growth. Wall Street seems to have all the answers for intelligence. I'll put my money on WalMart. They know more about the consumer than any other entity in this country.

According to a new poll conducted by ComPsych Corporation, American workers are sacrificing vacation and family time due to the dire job situation. They found that 56% of employees are postponing vacation time until the work situation improves, and 44% of employees are taking limited vacation time this year. That should certainly have an impact on travel-related industries. They won't be able to blame it only on SARS. Dr. Richard Chaifetz, chairman and CEO of ComPsych, said "enormous workloads, as well as the feeling of job insecurity, are prompting employees to stay close to the office." The poll was conducted from May 30 to June 6.

Ford hopes to break even on its auto operations this year. I'm certain the employees join them in that hope. Ford's pension obligations exceed assets by about $16 billion worldwide.

Monday, June 16, 2003

6/16/03 There's Little To Cheer About On Main Street

Over the years there have been 31 attempts at recalling a California governor. It won't be long before the 32nd comes into view. This time the outcome may produce a different ending. To cover the $38 billion California budget deficit Davis will propose higher fees of $8 billion and a temporary sales tax increase of $2.3 billion. Education will be cut by $1.5 billion. It's also possible that some schools would need to be closed down.

In Iowa there are 950 cities, and each is attempting to weather the $60 million state budget cut beginning July1. There will be layoffs of city workers, police, and firefighters. There could be increased parking and garbage fees, salary freezes, and park closures.

The cost for a Harvard MBA is almost $100,000. At the University of Miami it is $30,000. The salary differential with an MBA degree is estimated by the Graduate Management Admissions Council to be $23,000. Jeffrey Pfeffer, a Stanford University management professor, says "there's an enormous number of MBAs being produced, so their value has gone down." In other words, the ROI on an MBA degree is declining.

PeopleSoft's CEO Conway described Oracle's bid to Bloomberg News this way: "It's like me asking if I could buy your dog so I can go back and shoot it."

Oracle's Ellison: "Most companies spend too much on IT and get very little in return." Should Oracle be successful in its PeopleSoft bid, then Ellison won't be disappointed with Oracle's multi-billion expenditure when the PeopleSoft software engineers walk out the door and don't return. Oracle will get little in return.

Since March 11 the Dow has gained 21%, the Nasdaq 28%, and the S&P 23%. Bullish sentiment now approaches 60%. I wonder how many investors grasp the facts. How many of those same investors believe U.S. forces have found WMD in Iraq? According to a recent poll, one in three Americans think the military has found Iraq's WMD. Heck. If the HULK has returned, so can the bulls. Animation is a wonderful form of entertainment. An industry has flourished from it. Long live cognitive dissonance.

Talking about WMD, Bush is now certain that Iraq had a "weapons program." A program is not the same as finding the WMD. It isn't even a subtle difference. Prior to the conflict with Iraq, 41% of Americans said in a Gallup poll that only conclusive evidence of the weapons' existence would justify the war. Now 56% of Americans say the war was justified whether WMD are found or not. Patience might possibly be warranted but clearly accountability is. I feel the same way about the current thinking behind the bull move in the market. Each quarter economists say profits will improve, investment spending will rise, and unemployment will drop. This has been going on since January 2001. In the interim there have been tax cuts. There have been 12 interest rate cuts. Maybe Wall Street believes the American public no longer cares about improved economic conditions. After all, it's refi time, baby. That's the new casino. Forget the hot IPOs. Get me a lower mortage rate. I say where's the cedibility? Show me the green! Put up or shut up! That's not asking too much.

Sunday, June 15, 2003

6/15/03 Don't Mess With Success

I was watching Tiger Woods. My first thought was how unhappy he looked. He appeared uncomfortable. Then I realized the difference. He had changed his appearance. His hair was a different color, and just as importantly, he wasn't wearing his normal colored shirt and pants. He had on a lime green shirt and blue pants. You can't win looking like that. An outfit like that isn't even suitable for a prairie dog or a Mormon beetle. Tiger had gone and changed his winning formula. He messed with success. It's done in business too. Coke is the most recognized brand name world wide. Some years back a genius recommended changing the Coke formula. Naturally, sales tanked. When teams are on a winning streak, they will repeat their same daily routines for fear of interrupting their winning ways. On Wall Street there are a few lessons of the investing road people have learned over the years to ensure winning ways. For example, don't buy auto stocks at low P/Es. They may look cheap then, but actually they are at the top of the auto cycle. Another example is to wait until stocks in general offer a decent yield. An individual might say today's 1.7% yield looks good compared with the Fed funds rate of 1.25% and the less than 1% yield on money market funds. By comparison, that's true; however, these historic low yields are not maintainable. That we know. Hence, it's better to wait for yields on stocks to improve. Don't mess with prior successes. Place risk at a disadvantage to reward. New hairstyles come and go. In vogue styles for clothing come and go. There's nothing wrong with the new. The question one must ask-- is the new worth the risk of messing with success? Is it an improvement? Just trying something new won't hack it in the market. It's tough enough to make money without changing what has worked over time.

On Friday there was a photo op at the State Department with Colin Powell and Mexican Foreign Affairs Secretary Luis Ernesto Derbez. The occasion was giving the stamp of approval to the identification cards the government of Mexico has issued to both legal and illegal aliens. The idea is for our government and our police departments to officially recognize these cards. It will be interesting to see the spin placed on authorizing amnesty for illegal aliens.

In the last presidential election Bush lost the state of Illinois badly. In today's paper, the Chicago Tribune released the results of their latest poll. When asked if they would vote next year for Bush or for an unnamed Democratic candidate for president, 38% sided with Bush, 36% for the unnamed Democrat, and 26% were undecided. Additionally, 42% said Bush should get another term and 42% said he shouldn't. Since becoming president, Bush has visited Illinois nine times.

So far this year Airbus has announced 156 plane orders to 36 for Boeing. At the Paris Air Show, the Airbus CEO said "our market share is considerably better than we'd forecast." For this year as a whole, Airbus will deliver 300 planes and Boeing 280.

On Friday BellSouth said it would eliminate 595 jobs in nine states. The company describes those targeted workers as "surplused employees". A total of 1,077 jobs were described surplus in the first quarter. Last year BellSouth eliminated 11,500 union and nonunion jobs. Over the past two years the company's operating revenue has declined 14% while net income has dropped 66%. If the company can describe an employee as "surplus", maybe the customer should recognize BellSouth's product offerings as "surplus" too.

Not everyone has heard of the "Wrigley Three". These are three men who were charged with murdering a young couple near the Cubs' ballpark in 1997. The three spent five years in Cook County jail awaiting trial for murder. Last month they got their 15 minutes in court. That's how long it took for the judge to rule the state's key witness was "worthless". The three were sent free. There are 95 other inmates who have been held at least 4 years in that same jail, and most have never had their day in court. I appreciate the goal of reducing crime. I also appreciate that a defendant is innocent until proven guilty and clearly has the right to equal justice under the law, and that goes for the entire legal system. This is an instance where one does not have to worry about messing with success. The legal system is filled with far too many "Wrigley Threes".

The recent stock market rise reflects the cheering for lower overall tax rates, lower capital gains taxes, and lower taxes on dividend income. There is a small fly in the ointment. It is called the alternative minimum tax(AMT). As tax rates decline, there is a greater chance for the taxpayer to be hit in the checkbook by the AMT, which requires the taxpayer to add back into taxable income such deductions as state and local taxes(including property) and then subtracting the AMT exemption amount. The latter is phased out at $58,000 for married couples and surviving spouses and at $40,250 for singles. There is one more gnat with which to contend. Most state and local governments have serious budget problems. As such, they may continue to fully tax dividends and capital gains at the state and local level. They have the perfect right to do so even though the federal government has lowered the rates at the federal level. In sum, there will be plenty of opportunity to reconsider the benefits of the recent so-called tax reduction package. Before plunging ahead, it's wise to learn the rules of the road.