Saturday, July 19, 2003

7/19/03 Keeping It Simple

This morning I have a good deal of computer problems and this is the reason for the late posting and the shoert posting. I shall discuss this subject more fully in the future.

The essence of today's thought is focusing on companies which have created a huge bond with their customers and this has created a fierce customer loyalty. The latter, in my mind, should be an important element in making an investment decison. Some of the companies on my great list have such a relationship with customers- WalMart, Starbucks, Krispy Kreme, and Dell. People want to know where the nearest WalMart is, where can I find a Starbucks and a Krispy Kreme, and when buying a computer there is customer loyalty to Dell while this is not found with HP or IBM. There are people who prefer Macs but we are talking about a 3% market share, and this is rather insignificant.

Before making a long term investment in a stock, please consider the factor of customer loyalty because it is through that loyalty that a business begins to build on repeat business and your loyal customer becomes your best form of advertising. Without the customer base a business has no long term viability and lives day to day. Please give this some thought, and then make a list of the companies which are good examples of having customer loyalty. Do you own any of these companies? How have the companies on your list done over the long term appreciation wise? You might be on to something you might not have considered in the past.

Friday, July 18, 2003

7/18/03 Greenspan's Recent Testimony

Today I would like to revisit some points which I believe, will have a bearing on the bond and equity markets.
1. with surpluses turning to deficits the issuance of 30 year treasuries will "presumably be revisited." This is important. Due to the deficits, it is necessary to fund these obligations with long-term bonds. The financing burden will be shifted to the 10 and 30 year bonds, and this will impact, in my view, the growing steepness of the yield curve. Bond pits have missed the simple fact that deficits are not jst at record levels. They are off the charts and will continue that way for a very long time. Therefore, long rates will come under pressure for years.

2. Greenspan firmly stated that the level of government deficits affect long-term rates. Obviously, mortgage rates will be impacted and have begun to rise.

3. Greenspan said that worsening deficits necessitate paying for any further tax cuts either by reductions in government spending, which has not happened, or increases in taxes in other areas, which has and is happening at state, municipal, and local levels.

4. Greenspan stated that he did not believe that tax cuts were the right way to provide short-term stimulus to the economy, and many feel these cuts have an impact only after the economy has begun to improve.

5. Greenspan said it was necessary to deal with the deficits otherwise it will be difficult to maintain the growth rates that will bring the unemployment rate down. We are not dealing with the deficits and interest rates shall increase, in my view, and unemployment shall remain at untenable levels.

6. Greenspan mentioned that 75 million baby boomers would begin rtiring at the beginning of the next decade. He said that the government's Social Security and Medicare benefit plans mean Congress has promised a level of spending "in excess of our capability to finance it...we are running into potentially serious troubles.

In sum, the spending boom has shaken the foundation of our economic well-being. There will be a price. It won't just impact the benefits to be received under Social Security and Medicare. We must pay at the register, and IOUs will outlive their welcome. You may not share my viewpoint. That is your choice. You had better have plenty of staying power in the marketplace. You'll need it.

Thursday, July 17, 2003

7/17/03 The Tech Rally

The Nasdaq has had a pretty dynamic rally from the bottom hit in October, 2002. Basically, the QQQ has rallied from 20 to 32. My pencil shows that to be a gain of 80%. I know the Nasdaq got creamed from the 5000 level but we need to take a rational look at the current situation. Where’s the sales growth? I’m not just going to pick on the weak sisters like Motorola or Lucent. Let’s look at one of the other big names, such as, Cisco. I didn’t pick that name because I’m short at 19. I advised selling this stock many ten spots above this level. It was trading in the nose bleed section. Cisco is showing little or no topline growth and sells at 30 times earnings. That’s no bargain by my standards. IBM reports earnings and shows improvement thru acquisitions and cost cutting. The CFO at Intel, and that stock is up about 100% from the bottom, said he doesn’t see signs of computer upgrading or increased spending for tech. Philips warned that low consume confidence would hit its consumer electronics unit, which happens to be the largest in Europe. Maybe tech will recover somewhat or maybe it will stay along the bottom. Few companies are coining it. Investors have placed their bets on a tech rebound in the second half of the year. I suggest choose another game in town. They will come up short, and disappointment will reign supreme. I will place my bet on that outcome.

In the quarterly Business Roundtable survey for the next six months of 2003 only 14% of the CEOs surveyed expect their U.S. capital expenditures to rise during the second half of the year, and that’s down from 18% in April. Only 16% expect employment growth during this period. These CEOs expect GDP growth of 2.3%. These are the folks who are the leading CEOs in the U.S. Despite what you read and hear, these are the people who will greatly impact business spending and hiring, and the latter will impact consumer spending. Basically, growth is a no show across the board in this survey. I put more stock in this than the forecasts of the Fed. This survey is but one more indication that the overall equity market got way ahead of the GDP growth curve, which is modest at best. This country has a great deal of debt- $31 trillion to be precise. It far outweighs the ability to pay off that debt. I see rising credit defaults and rising bankruptcies. Other than that I see clear sailing.

At the end of 2002, according to the Federal Reserve Bank, the fair market value of the net derivative contracts held by large institutions was $27 billion, and the top ten banks by assets held in excess of 97% of the value of all those contracts.

Wednesday, July 16, 2003

7/16/03 The Turning Point

Alan Greenspan missed the turning point. It came exactly one month ago on June 16. That’s the day to remember. Interest rates fell on that day to 45 year lows. As we look into the future, I can’t see 45 years from now; however, I promise you interest rates won’t be at these levels again in most of our lifetimes. Greenspan talked about keeping rates low for a long time. He’s a follower. He can print money but he can’t make ensure that its worth something in the marketplace. Greenspan is talking about short term rates. After all, the economy is managed via adjustable rates on a daily basis rather than the prudent approach of locking in long term rates to fund multi-year liabilities and future deficits. Our Fed chairman is in a dream state, and believes the economy might grow at a 4.25% next year while rates remain low and inflation declines to the 1% level. This truly is irrational exuberance. I give this man a lot of credit. He has been a public servant for many many years, and put up with plenty of BS in DC. There’s no reason for him to make his swan song to the public one filled with the same BS. I’m sure he’s frustrated after all these years, but please don’t take it out on a gullible American public. They have a right to expect some respect.

Standard and Poor’s released a forecast for the remainder of the year and for next year. They expect the S&P 500 Index to close 2003 at 1,030 and believe there will be corporate earnings growth of 16% in 2003 and 14% for 2004. Hopefully they will be correct. I don’t put stock in forecasts by analysts or organizations.

A surprise did take place yesterday. The Bank of Canada lowered its overnight lending rate to 3%. They cited declining inflation expectations, the impact from SARS, and the fallout from the isolated case of Mad Cow disease. As a result of the cut in rates, the Canadian dollar fell vs the U.S. dollar.

Loral Space and Communications filed for Chapter 11. They hope to successfully reorganize. They haven’t had an annual profit in six years.

More bad news for Boeing. Since 1982 Boeing has built more than 1000 757s. They are running out of orders for this plane. Unless lightening strikes, the company could close the production line for this plane by next summer. The planes are made in Renton, just outside of Seattle. Washington’s current unemployment rate is 6.7%.

Yesterday the U.S. 3rd Infantry Division was told they would be staying in Iraq indefinitely despite previous plans to send them home in July and August. “We were told three times we would be going home in a couple of months. It is not a good time to announce this. We are demotivated,” said Sergeant Chris Grisham, a military intelligence officer. “It’s a big shock,” said Sergeant Josh Holt of Montgomery, Alabama.” “I am hoping that as long as I can get my mail and make some calls home, I can survive,” said Private Torrence Gilliam, from Spartanburg, Soth Carolina.

Could 9/11 have been anticipated? In 1987, in The Futurist, terrorism expert Brian Jenkins mentioned the possibility of aerial suicide attacks. In the same magazine in 1994 an article by forecaster Marvin Cetron specifically identified the World Trade Center as a choice terrorist target: “Targets such as the World Trade Center not only provide the requisite casualties but, because of their symbolic nature, provide more bang for the buck.” In reviewing the 1993 attack testimony revealed the Center’s towers could not withstand the crash of larger airliners. Cetron suggested that multiple targets might be selected for attack.

Futurist John Petersen, president of the Arlington Institute, discusses possible big surprises for the future: the secession of a western state from the U.S.; the collapse of the UN; the collapse of Mexico’s economy,
followed by a U.S. takeover of Mexico; and an attack by nuclear terrorists on the U.S.

According to Jon Spayde, bank-issued credit card debt has more than doubled since 1994. Eight times as many people are going bankrupt as during the Great Depression even though our population has only a little more than doubled since then. To put it in perspective, there were 1,539,111 “non-business” bankruptcy filings in 2002 alone or roughly equivalent to the population of Philadelphia.

Hazel Henderson, economist and futurist: “Personally, I believe that the U.S. dollar’s days as the world’s “defacto” reserve currency are numbered. Some 35% of world trade and other countries” currency reserves are now in euros. Many countries have diversified their currency reserves out of U.S. dollars.

I don’t know what the future holds. I just know it will hold many surprises, and many will not be welcome surprises. Few would have expected the rise in rates which have occurred in 10 year treasuries between June 16 and today. I certainly don’t believe the stock market’s current level in any way reflects the turning point in interest rates. Several years from now you will be able to look back and know the signs for another 9/11 were clearly in view. It will be self-created and not from a third world country terrorist group. The seeds of destruction are right under your nose.

Tuesday, July 15, 2003

7/15/03 Extreme Makeover

That’s ‘bull.’ I’m a calm person. My first reaction was I’m from NYC. You can’t shit a shitter. Were I from Intercourse, Pennsylvania I might have had a different thought. Yesterday was Ari Fleischer’s last day on the job. He said it best. “We don’t know if it’s true but nobody- but nobody- can say it was wrong. That is not known.” What does that have to do with the price of good intelligence or “an apple in Cincinnati and an orange in the State of the Union”? I have confidence in the American public. They’ll sort through the bull.

I’ll deal with the economic BS. Back in December, November, October, and September of 2002 I called the Administration’s budget forecasts one big crock. Then, over a period of months, they ramped up their deficit forecasts from $160 billion to $210 billion to $296 billion. This had nothing to do with an Iraq war. Yesterday the same people forecast a deficit of more than $410 billion in 2003.
These are dangerous people. It is not a question of being misleading. Statistically they knew what they were saying was an impossibility. At no time was the deficit going to be below $360 billion. Greenspan and the Fed knew that. I’m not the only one who can add. You have a triple whammy here. The government did not provide truthful budget forecasts, the Fed printed money in double digits, and government non-interest, non-defense spending was up 10% in 2002 and so far this year is up about 6%. Keep in mind that discretionary government spending is only authorized at the 4% level. This is big government at work. These are irresponsible spenders at work. The voters are responsible and the non-voters even more responsible. To exacerbate the situation the government is borrowing short and ignoring the ability to lock in long term financing at historically low rates. This is fiscally irresponsible and a lose-lose situation. I promise you that short term rates will not stay at these levels. The Fed knows that. The Administration turns a deaf ear. We need an extreme makeover and that’s no bull. Over the history of our nation we certainly didn’t have hundreds of thousands of our fighting men and woman die to produce these present shambles. As Martin Hutchinson said, “the truth is, taxpayer’s money is not in good hands.”

A report by California’s Chamber of Commerce discovered California’s tax burden has increased over the past decade to more than 24% above the national average. California’s corporate tax burden is almost 40% above the national average. Electricity costs in California are nearly double the national average. California’s overall business costs are 32% above the national average. In 2002, California lost 125,500 non-farm jobs. In the past 12 months, California has proposed or passed an additional 94 job-killing bills. There is a crisis in the state’s workers’ compensation insurance as premiums are now astronomical. San Francisco has had the greatest exodus of people in cities with a population in excess of 100,000. San Francisco now has more than 31,000 employees, and this is an increase of about 30% in eight years. This while the private sector lost 60,000 jobs. Pretty soon they’ll call San Francisco the land of the homeless by the bay.

H.L. Mencken: “The government consists of a gang of men exactly like you and me. They have no special talent for the business of government; they only have a talent for getting and holding office.”

Atlanta-based Mirant filed for Chapter 11 bankruptcy late yesterday. That made it the tenth largest
bankruptcy by assets in U.S. history, according to BankruptcyData.com.

Yesterday Mexico declared a state of emergency against the West Nile virus. It’s only a matter of time until it reaches our borders.

Delta Airlines recently told 1.050 flight attendant that they could be furloughed as soon as September 1.

John Lichtblau, chairman of the Petroleum Industry Research Foundation, said due to problems with oil pipelines and refineries, current commercial production in Iraq may be at only 500,000 barrels per day, which is used for domestic needs. Once again, government estimates are off by a wide margin. We have been told current production is estimated at 800,000 barrels per day. Before the war, 2.5 to 3 million barrels per day were produced. It will be interesting to see how Iraq’s reconstruction will be funded from oil revenues. That is the Bush plan. It sounds like another Administration economic forecast gone sour. How do you account for this on-going lack of intelligence? The FBI can’t assume the responsibility.

In a recent IBD/TIPP survey there were some interesting findings. While 73% of Republicans are optimistic regarding the economy, only 42% of Democrats share that view. They didn’t ask a Libertarian. Slightly less than those 65 and over are optimistic. Overall confidence in the six-month economic outlook declined from June’s 57 to the present 54.7, and represents the first such decline since the postwar market rally in April. Most importantly, the survey shows “about one-fifth say that an immediate family member lost a job in the past 12 months. Over one-fourth fear they may lose a breadwinner in the next 12 months. Further, three-fourths say that it is difficult to get a god job where they live.” This is not the stuff which makes for an economic recovery, and without an economic recovery this market rally will do a 180 degree about face. Most investors are not prepared for this scenario.

Prior to a market drop, it is always wise to make a list of companies which may prove rewarding over the long term. One such company could be Paychex, a 32 year old payroll and benefits outsourcing business which has grown from its founder and CEO, Thomas Golisano, to a 7500 employee corporation with sales approximating $1 billion. The company has never had a layoff. In tough economic times their annual profits still exceed a growth rate of 20%. They have 475,000 clients with 100+ offices in 36 states and DC, and reflecting the strength of the company is its ability to retain old clients and attract new ones. Should interest rates begin to rise, Paychex will benefit as the earnings generation from the float shall increase. This is a company with a history of strong cash flow.

Monday, July 14, 2003

7/14/03 The Open Sea Of Thought

Francois Gautier: “Many live in the ivory tower called reality; they never venture on the open sea of thought.”

The disease is back on Wall Street. Stocks are moving on analyst upgrades and downgrades. Of course, it is rare to see an outright sell recommendation. That might be considered independent thought. The vast majority of investors are sheep. It’s commonly referred to as the herd mentality. I prefer momentum masturbation. Vast commissions are paid to analysts to get the early call, to be the first to learn of the upgrade or the downgrade. It’s a little like the allotment of hot IPOs. The big commission dollars get a larger allocation of a hot issue. In this instance, you receive the first analyst call. Such allotments and such first calls give a jumpstart to a money manager’s returns. That doesn’t make that money manager a more proficient manager of money. It means he has a greater ability to shoot fish in a barrel. Everyone has their own style of investing. Over the long term I believe thinking for yourself brings forth less mistakes. The good news is the mistakes will be your own. The better news is you will be your own man. That is a meal for a lifetime.

Total U.S. debt is estimated at $31 trillion. Our annual GDP is $9.6 trillion. I wonder how Moody’s and Fitch’s would rate a company with that ratio. On its “currency” I am certain it would not read “In God We Trust.” It might say “Buyer Beware.”

Jeff Immelt, GE’s CEO: “What remains is excess capacity, and I think that’s just going to take time.” I certainly agree with that statement. It might serve investors well to focus on the revenue growth in the second quarter reports for public companies. That growth is estimated at 3%. Any increase above 3% would result from cost cutting. I again ask. What is the proper p/e for cost cutting? For a couple of years I asked this question of Oracle shareholders. Eventually, there were diminishing returns from expense reduction, and profits began to slide. Top line growth did not materialize.

Sandra Anderson has trained what is reputed to be the world’s best-trained human remains sniffing dog, Eagle. She has worked on 1000 cases across the U.S. in her 17 years as a handler. She was arrested for planting evidence at 3 scenes in Michigan. Burt Turvey, author of “Criminal Profiling,” said “every one of her cases needs to be reviewed. All of them. It will potentially unseat so many convictions.” When credibility comes into question, the whole ball of wax can unravel. It can happen in Michigan. It can happen in Washington, DC.

The annual income for people 65 and older is $29,487, according to the demographic research firm of Environmental Systems Research Institute. When you take that income, and figure the return on a CD or a money market fund, you realize seniors have a serious cash flow problem. The average one-year CD purchased last week yields 1.59%, and that’s according to Bankrate.com.

Continental Air deferred delivery of 36 Boeing 737s it had on order until 2008. The estimated cost is $2.5 billion. If Continental had confidence in their business outlook, such action would not have been taken. I suggest the consideration of all airline positions being eliminated except for Southwest Air and Jet Blue, and with those I suggest a hedged position. I have never liked the airline business. Even Warren Buffett had an experience which was not worthy of memory.

Prior to 9/11, former Senator Warren Rudman had warned of a terrorist attack on the U.S. He heads up a task force under the auspices of the Council on Foreign Relations. Last week that task force issued a report which stated “although in some respects the American public is now better prepared to address aspects of the terrorist threat than it was two years ago, the U.S. remains dangerously ill-prepared to handle a catastrophic attack on American soil.”

Sunday, July 13, 2003

7/13/03 I Pray The Country Has Not Been Betrayed

A Newsweek poll conducted July 10 and July 11 found Bush’s overall approval rating at 55%, compared with 61% in a May 29-30 survey. Like his father before him, he has lost touch with the man on the street. When individuals can’t find work, they cast their vote from the bread lines.

That’s what I wrote before I read this morning’s Washington Post. I know they are described as a left-wing newspaper. At the same time they uncovered the Watergate story. That took guts to keep at that subject matter. I admire that type of dedication and courage. I could care less about someone’s political preferences. Yesterday, I saw where Bush gave his support to George Tenet. Before he did that, I had told my family that George Tenet is a good man and way too careful and way too smart for a blunder like the uranium buy. I didn’t buy that story. My instincts told me otherwise. I waited for the other shoe to drop. It did. The Washington Post writes “CIA Director George J. Tenet successfully intervened with White House officials to have a reference to Iraq seeking uranium from Niger removed from a presidential speech last October, three months before a less specific reference to the same intelligence appeared in the State of the Union address, according to senior administration officials. Tenet argued personally to White House officials, including deputy national security adviser Stephen Hadley, that the allegation should not be used because it came from only a single source, according to one senior official. Another senior official with knowledge of the intelligence said the CIA had doubts about the accuracy of the documents underlying the allegation, which months later turned out to be forged.” The article is a long one and goes on to say that “seeking uranium from Niger” was never in drafts of the State of the Union address. Despite what Bush says, this is not a “flap”. Clinton was impeached. Nixon stepped down in disgrace. This country does not need another bombshell. The question is not whether Bush supports Tenet. Bush is responsible for his words spoken to the American people. The question is whether the American people believe Bush. Prior to the Washington Post article, Newsweek said 55% of the public gave Bush a favorable overall rating, and, as of this morning, I believe that rating would be in serious jeopardy.

We might learn something from Japan’s Takenaka and Shiokawa. Economics and Financial Services Minister Heizo Takenaka told a local television program “there are some bright spots for the future, such as more capital investment. But in the midst of these bright signs the economy as a whole is flat. While stocks have gone up in the past ten weeks, it doesn’t mean that GDP has.” Japanese Finance Minister Masajuro Shiokawa said the fundamental weakness of the economy had not changed despite some bright spots. Exports remain flat, and an improvement in corporate profits and investment remain slow.

On Friday Boeing Commercial Airplanes hands out its next round of 60-day layoff notices. About a month ago I mentioned further layoffs were coming. To the best of my knowledge, Lucent did not mention about further internal consolidation, and layoffs which are resulting in July, August, and September. Maybe the company felt the layoffs were not of a material nature. Only those fired would consider the action material.

Since Memorial Day, the Dow is up about 500 points. By Labor Day I predict the picture will be quite different. Why? How many people are not laboring? In addition, Bush will be laboring under a cloud, and Wall Street doesn’t like clouds.

ASEAN was established in 1967. The original members were Indonesia, Malaysia, the Philippines, Singapore, and Thailand. Currently, added to that group are Vietnam, Laos, Cambodia, Myanmar, and Brunei. ASEAN is only ten years younger than the EEC. In 1992 AFTA(ASEAN Free Trade Agreement) was introduced and it’s intent was to lower the tariff and non-tariff barriers among member countries, and thereby have closer economic integration. In recent years there has been a discussion of pegging ASEAN currencies to the Japanese yen, and such action may provide greater currency resiliency and it would help to stabilize exchange rates. Presently, the ASEAN countries have a population in excess of 500 million people, a combined GDP of about three-quarters of $1 trillion, and trade volume of approximately the same amount. At present the exchange rates of the ASEAN currencies against the U.S. dollar has a correlation coefficient of a bit more than 0.7 except for Myanmar’s Kyat. In the past year the drop in the value of the dollar has had a negative impact on the ASEAN group. If that decline continues, ASEAN will take a much closer look at the yen as a replacement. It will be one more instance of the loss of U.S. global economic influence.