Saturday, August 16, 2003

Posting For 8/17/03: The Miscellaneous Report

According to the SoyFoods Association of North America, the soy-food industry has grown 13% to $3.65 billion in sales in 2002. Soymilk sales have grown six times from $100 million in 1995 to about $600 million in 2002. Soy milk is lactose-free, lowers cholestrol, strengthens bones, but it has high levels of polyunsaturated fat and carbohydrates, and does not contain calcium and potassium. Nevertheless, production of soymilk surpassed 100 million gallons last year, and, I believe, will continue to gain in popularity.

Philip Morris' attorney, John Mulderig, said "the bottom line is a party shouldn't be forced into bankriuptcy and deprived of the right to appeal." This statement was made in response to friday's ruling the company had to post a $12 billion bond to secure the judgment while the decision is appealed. The present state law requires losers of lawsuits to post the amount of the judgment as well as enough to cover court costs and interest.

June air travel was only down 4% from 2002 but 15.5% below June 2000. Several airlines posted second quater profits only because of federal aid which no longer is available. Fall fare sales have arrived early this year. United and Delta threw in a free night at a hotel. The airlines are starting to catch the auto rebate bug.

Iowa, according to the census, is gaining more people from California than any other state. Immigration experts said this fact is tied to the availability of $10 an hour jobs in meatpacking plants, and these jobs have attracted large Hispanic populations to Iowa,and they have become the largest minority segment in the state.

One of the reasons the U.S. government gave for the strong GDP second quarter was agriculture. Yet, Deere during this quarter, had "planned lower production volumes in the agricultural equipment division." Turning to Deere, the stock is at its highest level in many years. Once again, investors looked at the headline. Looking further, "excluding the impact of changes in currency-exchange rates, overseas sales were down 3% for the quarter." In addition, another benefit to net income was a lower tax rate. Going forward, excluding the impact of currency and price, net equipment sales are "forecast to be slightly lower for the fourth quarter." The physical volume of agricultural equipment sales is expected to be down slightly as "production in the U.S. and Canada will be down 7% in the fourth quarter, as inventories are reduced in line with our asset management objectives." The stock is at $55 and has a Scouter rating of 9. The stock broke below $40 in April. At 24 times earnings, sales of $16 billion, a market cap of $13 billion, this, I believe, is a wonderful time to consider selling into strength. Deere is a cyclical company, and, as interest rates rise, their construction business will not be able to carry the day.
8/16/03 Wall Street Knows Best?

This year the Nasdaq is up 27%, the S&P 500 is up 13%, and the Dow is up 12%. This past week there was a rotation into cyclical stocks which rose over 3% during the past five trading days. International Paper, Caterpillar, and Alcoa all moved higher with International Paper the standout. Wall Street appears to have their own take on cyclical companies. The Street ignores what's happening with plant closings. Due to poor market conditions and efforts to cut costs, Weyerhaeuser announced on Friday they will shut down two plants in Oregon and lay off 200 workers. The company is down to having just 5000 employees in Oregon, which is a major lumber state, and the last time I checked, lumber goes into the making of paper. Wall Street has always jumped on cyclical stocks as an economy gets stronger. But, there is another side to the story. Cyclical stocks are the last group to move higher in a rising stock market. I call them the last gasp stocks. Eventually, I find, they will take your breath away.

There was a mixed picture as industrial production rose 0.5% in July mostly because utility output increased 3.9% due to warmer weather. On the other hand, the output of nondurable goods fell 0.4%. Looking at the numbers rationally, the facts are that in July 2003 manufacturing production is down 1.4% and business equipment 1.1% from year ago levels. If you think the economy is stronger, I suggest you need a reality check. As long as companies are shutting down plants and reducing employment, this economy is on a one way ticket to palookaville.

Friday, August 15, 2003

8/15/03 How’s This Picture?

We spend billions in an attempt to rebuild Iraq. Our troops risk their lives so that the Iraqi people will have a better life. About one American soldier is killed daily, and more are wounded. As a thanks for a job well done, the Pentagon wants to cut the pay of our 148,000 troops in Iraq. Unless action is taken very quickly, our fighting forces will lose a pay increase approved last April of $75 in “imminent danger pay” and $150 a month in “family separation allowances.” The Defense Department is in favor of the cuts, and says its budget beginning October 1 cannot provide for the higher payments. It will be up to Congress to maintain the increases as a part of its annual defense appropriations legislation. Is there something wrong with this picture?

California has provided the necessary votes for the recall measure to come to a vote. In doing my analysis, one point became clear. The measure is to recall Gray Davis. Should Davis resign prior to the recall and the LT Governor take over, then the latter would become governor and there would not be a recall.

California has a $38 billion budget deficit and yet the highest mean priced homes are in the Bay Area of San Francisco at $560,200 and in the June quarter price increases of 24% took place on and around Riverside and San Bernardino in Southern California and 21% for Los Angeles. At the same time, unemployment remains at a very high level in the SiliconValley. Is there anything wrong with this picture?

The Dow and the Nasdaq have had spectacular gains over the past 5 months. At the same time Charles Schwab continues to lay off people and close offices. They plan to fire another 250 workers and close 20 more branches. At the end of 2000 the company employed 26,300 and that I down to 16,000. Up to the latest announcement, Schwab had closed 31 branches. A Schwab spokesperson said “we are very cautious about the environment, so we are continuing to be vigilant on the expense front.”

The index of mortgage applications fell 16% and the refinancing index 20% in the latest week to the lowest levels in about one year. Joseph Abate, a senior economist at Lehman Bros, said “higher mortgage rates will not leave the economy unscathed. They will work through several channels to reduce significantly the stimulus they have provided to the economy since the recession began.

Thursday, August 14, 2003

8/14/03 England, Germany, France, Italy, and Spain

What do those countries all have in common? Their ten year government bonds yield less than our 10 year government bonds which now provide a return of 4.64 per cent. Does that concern anyone? Of course not. Those economies are doing poorly and ours is recovering in strong fashion. Right? Wrong. The media makes a big deal because our trade deficit dropped $2 billion to about $40 billion in the month. Get real. Some civilian aircraft got delivered. Boeing has laid off over 35,000 workers in the commercial aircraft division. They are phasing out the 767 due to no new orders. Their airliner business is punk. Meanwhile the real story continues. Imports from China hit their highest level in 8 months.

Then the media reported unemployment dropped. It didn't. It rose. Then producer prices were announced as rising 0.1 per cent for the month and this declined from 0.5 per cent in June. It should be noted that in July food prices fell for the first time in 10 months. Everyone laughs that the Fed is concerned with deflation. Consumer prices tomorrow will show almost no increase as well.

So what's going on? The Fed is scared. That's right. They are printing and printing money, and that should generate inflation. It hasn't. The government is spending and spending money like nobody's business, and yet, the private sector can't generate topline growth, and the person on main street has little confidence in the way the economy is being managed.

Imports from China continue to rise. Next month the Snowman will go to China and tell the Chinese officials to raise the value of their currency in relationship to the dollar. We may as well dicate to them. We do with every other country. It's too bad we can't run our own show. The other countries will get the last laugh when we slide into something more serious than a recession. They don't have long to wait.

Wednesday, August 13, 2003

8/13/03 Your Neighborhood

The Fed worries about prices not rising as certain segments of the economy show some improvement; however, prices in your neighborhood might be going up. That's the way the world works. There are many exceptions to generalizations, but it's still your hurt and your cash flow is diminishing. This is one more reason why the study of individual behavior and experience is worthwhile, and why it's important to listen to the stories of the people and not simply the politicians.

Everyone on Wall Street has their take on the economy and stock and bond prices. There are literally a million stories in the naked city. To be a successful investor you must sift through the fiction and get to the facts. For me, as a generalization, demand does not meet supply. Of course, that may not be the case with workers' comp or various types of insurance. I am talking a generalization, and therefore, businesses, as a whole, do not have pricing power that sticks. You can fly between the west coast and Ft. Lauderdale for $211. There are other markets where the competition and the pricing is less attractive. It's supply and demand. As long as companies continue to focus on cost cutting, employment levels will continue to decline. Reliant Energy, for example, just announced laying off 650 workers. The unemployment beat goes on. The unit labor cost will continue to decline. There are hundreds who line up for 2 job openings. The hours worked will continue to decline. Increased productivity creates less hours worked. You bust your cohones to hopefully stay in the same cash flow space. That doesn't do much for consumer optimism or confidence. You can read about how certain economic segments are doing a bit better. As a generalization, nothing much has changed- except for stock prices. It's up to the markets to walk the talk. Bring on the topline growth. Bring on higher prices and higher margins. If you can't do it, then the Fed has a right to worry. You have a right to worry. The market had better worry. It's time to put up or shut up. Give me your best shot. I'm ready to be surprised.

Tuesday, August 12, 2003

8/12/03 Optimism Is Wearing Off

Today is the Open Market Meeting for the Fed. I considered giving my thoughts about what they might say, and then I realized their statements are irrelevant. The market determines the level of interest rates. As for policy, the Fed is excellent at increasing the velocity of currency in circulation. That back-office function could be outsourced to India at a significant savings.

The Congressional Budget Office projected the Pentagon’s antiterrorism effort in Iraq and Afghanistan may reach $59 billion next year. Taxpayers for Common Sense (paying taxes makes no sense) suggests that postwar costs over the next decade may be as high as $465 billion. The American Academy of Arts and Sciences (they represent the movie industry) project the costs at $615 billion. I think the latter figure includes props and renting elephants for certain scenes.

Alliant Energy of Iowa is paying 30-40% more for natural gas this summer than it did last year. The company intends to offer a “worry proof” bill which lets consumers lock in a price for natural gas before a heating season starts. Another energy company in Iowa, MidAmerican Energy, will, starting in October, compute its budget-billing charges based on energy consumption over a two-year period, and this might smooth out the spikes in energy consumption resulting from a mild winter. Natural gas is Iowa’s main heating fuel.

Arizona has no gasoline refineries and all of its supply must be imported from other states. There is a “west line” coming from California refineries and an “east line” extending from El Paso to Phoenix. There was a temporary shutdown of the east pipeline that supplies 30% of the Valley’s gasoline. It caused shortages at many stations and, since Friday, prices have risen as much as 40 cents per gallon.

In the new IBP/TIPP poll, the Economic Optimism Index fell 1.4 points to 54.8 in August. Importantly, the Federal Policies component fell 3.6 points to 49.1. That’s the lowest reading since the poll began in February 2001. The poll indicates that the summertime tax rebates for families with children may have helped to keep optimism high, but now “the boost we got from May’s tax cut is wearing off.” Jobs continue to be a big concern. 27% of those surveyed say a family member has lost a job in the past 12 months. One-fifth say they fear a family member will lose a job in the next 12 months. 73% say it’s hard to find a job in their area. 35% say it is very hard to find a job.

A new report from Multimedia Research Group, Inc. and Fuji-Keizai USA provides a comprehensive market analysis for the biochip industry. This includes a forecast for DNA chips, DNA chip equipment, DNA chip making and processing services, and DNA chip software and services. They project the total biochip market size to grow from $1.1 billion in 2002 to $2.7 billion in 2007 with a compound annual growth rate of 19.5%. Biochips are being used to accelerate the research processes and help increase productivity to shorten the current 10-15 year drug development cycle.

Monday, August 11, 2003

8/12/03 A Special Blog: How The West Was Won

The California recall will go down as one of the great moments in American history. It’s not about Grey Davis. This story is about the power of the people, and they’re speaking up for their rights. This is a prime example for why so many Americans have died in wars over the past 227 years. People like Diane Feinstein and others have spoken out against the recall and mentioned the fiscal cost to California. As voters go to the polls in October, their votes will extinguish the words of the naysayers. As for the politicians who are afraid of the independence of the American people, vote them out of office. A politician serves at the request of the voters, and power is not in the hands of the politician but with the voter. The Constitution made certain of that.

It’s about time the voters turn their attention to Washington, DC. Since Bush became President, non-defense discretionary spending has jumped close to 30%. It is irrational and irresponsible to increase government spending in this fashion when receipts are dwindling due to a recessionary economy. If Bush won’t control spending, then the voters must. Ross Perot would never have compiled a spending record like Bush has. This President cannot buy your vote. Davis couldn’t, and Bush can’t. The California voters have shown they have the smarts to cut their losses short. Now it’s time for the voters across this great land to do the same. Elect a fiscally responsible individual, and one who can effectuate meaningful nation building. The world is getting smaller, and the job market is getting more competitive. Americans are the most talented workers on the face of the earth. They need the opportunities to show their worth.

Rising mortgage interest bills shall mean larger tax deductions for taxpayers, and this shall increase the nation’s budget deficit even more.

The Indian rupee has been depreciating over the last 40 years. Not this year. On a year-over-year basis it has appreciated about 5% against the U.S. dollar, 7% against the yen, and 4% against the pound. Against the euro it has declined 5%. The rupee is a mirror of India’s vibrant economy and bulging forex reserves.

India’s population is growing by 20 million every year. India faces a crisis with respect to the inadequate availability of water – especially in rural India where groundwater levels have plunged dramatically.
8/11/03 Another Employment Hurdle

Gartner, Inc. says one out of ten technology jobs in the U.S. will move overseas by the end of 2004. That fails to address another subject. The State Department issued 28,098 L-1 visas from Oct 2002 to March 2003, and this represented a 7% increase from the same period a year earlier. Each L-1 visa lets a worker enter the U.S. multiple times for up to 7 years, and facilitates a company transferring workers from overseas offices to the U.S. Importantly, it also permits companies to continue paying workers their home country wages.

In June, unemployment in the euro zone countries amounted to 8.9%. There are 12.5 million people out of work. “If nothing is changed the OECD predicts the unemployment rate will average 8.25 per cent over the period 2003 to 2008,” said Laurence Boone, euro area economist at the Paris-based Organization for Economic Co-operation and Development. In Germany there are over 4 million unemployed workers, and that’s Europe’s largest economy. In the euro zone, taxes and contributions amount to over 40% of gross wages. A.T. Kearney’s study indicates that European banks will move 10,000 back office jobs abroad to low-cost countries by 2008.

Lakshman Achuthan of New York-based Economic Cycle Research Institute says “China’s the manufacturer and India’s the back office, that seems to be the way it’s shaping up. Industrial jobs are being lost to low cost producers in Asia. And those jobs are unlikely to return when the recovery begins.”

The Bank of Japan sold a record $76 billion yen from January through July.

According to the United States Department of Agriculture, nearly 13 million American children are at risk for hunger today. A recent survey conducted by the Alliance to End Hunger found that more than 43% of respondents said there were hungry people in their own communities who do not have enough to eat, and one quarter of the respondents were personally worried that they or someone in their family could go hungry and not have enough to eat in the future. More than 65% of voters say hunger is ‘an important election issue.’

Foot Locker is Nike’s largest customer. Due to a dispute on shoe prices and selection, Foot Locker is cutting back on Nike orders, and this will impact Nike’s results for the rest of the year. Nike has also said demand for golf products may remain weak due to the slow U.S. economy. In fiscal 2003 Nike earned $2.44 per share on revenues of about $10 billion. Analysts anticipate earnings of $3.16 per share for fiscal 2004. Those estimates, in my view, need to be reduced to $2.75 or lower. At $52.81and a market cap of $14 billion, the stock appears, at best, fully priced. Additionally, with the trend towards Americans weighing more, Nike is behind the times with their shoe styles. Few models are designed for wide feet. New Balance, on the other hand, provides a much larger array of widths.

Sunday, August 10, 2003

8/10/03 Vacation Time

Would you be surprised to learn that Americans work almost a month longer than the Japanese and three months more than Germans? That news is brought to you by a Gallup study. Are you surprised to learn that increasing joblessness has created more stress in the workplace which has led to more absenteeism, employee turnover, depression, and violent behavior? To make matters worse, a poll conducted by Harris Interactive showed that 51% of Americans did not think they would take a summer vacation and an additional 7% had delayed plans. More families are squeezing weekend escapes into their busy lives, and thus, downsizing vacations just as employers are downsizing the workplace. There is medical evidence that an annual vacation can cut the risk of heart attack by 30% in men and 50% in women. Job security fears and monetary considerations are preventing longer vacations. People are increasingly afraid to leave the office for even a couple of workdays. With fewer people traveling, and shorter trips the growing norm, the tourism industry is being transformed. Tourist businesses will need to become accustomed to relying on strong weekends and weak weekdays.

This coming Thursday, August 14, marks the 68th birthday for Social Security. As I have said several times, many low- and middle-income workers pay more in social security taxes than they do in income taxes. These are the folks who can afford taxation the least. If one were to have an effective tax cut, it would begin with social security taxes. Unfortunately, politicians are afraid to implement changes in a social system on the road to ruination. In my opinion, as a generalization, the most inept individuals run for office. They couldn’t find similar job security in the private sector.

The Center for the Study of Rural America is based at the Federal Reserve Bank of Kansas City. According to their study, from 1991 to 1998, rural communities gained about 155,000 factory jobs. Last year, 45% of the jobs lost in manufacturing was in rural communities. Between 1998 and the end of 2002, rural towns have lost 13.4% of their manufacturing employment or 572,000 jobs. Workers in rural areas often have far fewer employment alternatives than their city counterparts. Billy Ray Hall, president of the North Carolina Rural Economic Development Center in Raleigh, N.C., says “what happens in warp speed is the workers fall out of the bottom of the economy.” Unfortunately, most economists don’t spend time on rural main street. I do. I smell the hopelessness and despair in the air. These communities will need to re-invent themselves. That’s easier said than done, and, at best, takes time to accomplish. By next week there could be more than 572,000 stories in rural America. Bush might consider leaving Crawford, Texas and start listening. He’s on a month’s vacation. That’s a lot more than anyone in the private sector can say.

At present, WalMart’s stores provide payroll cash checking as well as money orders and transfers. About 20% of the company’s customers don’t have a bank account. WalMart hopes to be able to initiate minimal banking services including the handling of debit transactions, and thus reduce the company’s costs. This will require governmental approval. Last year they were blocked from purchasing Franklin Bank of California.

Last week Bill Gates sold 5 million shares of Microsoft. He still owns 1 billion shares. That’s with a “b”.