Saturday, August 23, 2003

8/23/03 Misleading Information Is Not Reassuring

Frequently, I receive angry emails criticizing my negative remarks about information released by the government. Let’s set the record straight. I am not negative. I state, without hesitation, that most often the information is purposely released incorrectly, and will be corrected at a later date when it will not make the headlines. Yesterday a finding was issued by the Environmental Protection Agency’s Office of the Inspector General. “When the EPA made a September 18 announcement (after the 9/11 attack) that the air was
‘safe’ to breathe, it did not have sufficient data and analyses to make such a blanket statement. Furthermore, the White House Council on Environmental Quality influenced…the information that EPA communicated to the public through its early press releases when it convinced EPA to add reassuring statements and delete cautionary ones.” A discovery of asbestos at higher than safe levels in dust samples from lower Manhattan was changed to state that “samples confirm previous reports that ambient air quality meets OSHA standards and consequently is not a cause for public concern. Yesterday Bush’s senior environmental advisor stated the actions were justified by national security. James Connaughton, chairman of the White House Council on Environmental Quality (I didn’t know such a Council existed until now), stated “We were trying to quickly get out the best information we could so that people didn’t overreact and also so people didn’t under-react.” Connaughton is a perfect example of why this country needs a massive layoff of government workers.

There is another problem brewing in Washington, DC. Starting when students return to classes on Sept. 2, public schools will offer alternatives to regular hamburgers. Initially, the offering will include veggie burgers. Then they hope to expand into fruit-based burgers like prune, cherry, and blueberry burgers. This is an effort to combat the obesity problem in schools. Between the rap music and prune burgers our school children will keep all UFOs at bay.

I have been thinking of the announcement Intel made yesterday. They basically said their chip shipments for notebook computers and for servers outweighed the softness for chips used in communication businesses, and the company increased their quarterly guidance for shipments and gross margins. At the same time, their CFO said it’s unclear whether the strength in the first part of the 3rd quarter will be sustainable. Knowing the latter, then why did the company make this announcement on August 22? It makes no sense. Intel had scheduled a mid-quarter update for September 4, and intends to keep to that schedule. With Labor Day coming up, there are only seven business days between August 22 and September 4. If the CFO is not sure about sustainability, then they should have taken the additional time until the 4th. Although not as large as Intel, I’ve run a large public company. It’s wise to be conservative.

U.S. drivers are utilizing 9.4 million barrels of gasoline a day in their cars. We have 149 refineries with a capacity to produce 8.8 million barrels a day. Imports make up the difference. Conservation might be in order. Refiners took heavy losses during 2002; however, at present, according to oil analyst Jacques Rousseau, refineries are enjoying margins of about $14 per barrel, compared to a more normal $5.

The Domino Sugar plant will shut down in Brooklyn, NY and 190 workers will be laid off. It marks the 15th sugar refinery closed in the United States in the past 23 years.

Cash-strapped companies are seeking alternatives to fulfill under-funded pension obligations. Northwest Airlines received approval to use stock from its privately held regional affiliate, Pinnacle Airlines Corp. The airline owes $223 million to its plans for 2002. Navistar International recently used company stock to supplement pension contributions. U.S. Steel is seeking approval to use 170,000 acres of timberland to cover pension shortfalls.

India has a population of 1.1 billion people. Yet, in 2002, U.S. exports to India only totaled $4.1 billion with imports from India amounting to $11.8 billion. By comparison, the U.S. exported more than $22 billion worth of goods to China in 2002. China has a population of 1.3 billion people.

Yesterday Bush made his first trip to the state of Washington since his election. It was a perfect example of how to alienate people on main street. The primary stop was a $2,000 plate luncheon attended by 850 people at Craig McCaw’s home in the Hunts Point section on Lake Washington in Bellevue. This is the richest enclave in the state with only 450 people living in this lakeside suburb of East Seattle. Prior to the lunch he toured a dam and made comments on the salmon run and the environment and met six local businessmen at Boeing field. The most important employer in the state, Microsoft, was not on the agenda nor was Dr. Leroy Hood, the leading human genome scientist in this country. You cannot isolate yourself from the common voter and expect to understand the problems in every day lives. Nor can you expect to win Washington in November 2004.


Friday, August 22, 2003

8/22/03 Unemployment Without Benefits

While market indices continue to move higher and the unemployment headlines read brighter, a growing cancer is hitting the job market. Employees are being encouraged to take time off without pay. That means the employee is still an employee but cannot receive unemployment benefits. Why would an employee be willing to swallow such a pill? That employee can’t find another paying job. Cost cutting has become such an overwhelming problem that counties are getting into the act as well. The Chicago County Board of Commissioners last week agreed to encourage employees to take days off in the remaining months of the year without pay. The suggestion was for every employee to take five days off without pay. If volunteers did not come forward, then the commissioners would make the request a mandatory one. A staffing professional describes the situation in the Silicon Valley: “very few companies nowadays can afford to maintain the staffing levels of a year ago. Choosing to avoid the bad press and morale deflation that can accompany layoffs, the current trend is about making ripples, not waves. So, valley companies are getting wily, crafty, even creative-and employees, more or less, are putting up with it even if some of the moves are illegal. Still, it beats a pink slip.” Miles Locker, the attorney for the California state Labor Commissioner, says “ a forfeiture of accrued vacation is 100% illegal. You cannot take away vacation time that’s already accrued. It absolutely violates the California Labor Code. What we’re hearing is just widespread violations.” According to the 1997 decision made in Digiacinto v. Ameriko-Omserv Corp., an employer can change an employee’s vacation plan at any time, but they can’t take away vacation time an employee has already earned.

Nobel Prize winning economist Robert Solow: “When real GDP falls below potential, it is…because producers and sellers cannot find enough willing buyers at the prices they are charging.” A good example would be the recent price cutting in the PC market. The IBD/TIPP home computer purchase index fell nearly 17% to 18.6 in August. Last year, the index dropped only 3% between July and August. Roger Kay, an analyst with International Data Corp., said “since Dell sells directly, it would be the first to notice slumping demand.” This week they cut prices on desktop PCs and notebooks. It should be noted that the home computer purchase index has been an early indicator of sales. In the survey only 21% in August said they were “very likely” or “somewhat likely” to buy a new PC in the next six months and this is down from 26% in July.

The highest prices for gasoline at the pump appear to be just around the corner. Yesterday the futures price in New York rose by close to 10 cents, the biggest move since 1991. The wholesale price in California is already at a record. With almost 30 million motorists on the road for Labor Day weekend, there will be more than chump change being expended at the gas pumps. As gas prices absorb consumer dollars, less money will be available for retailers. That's life in the fast lane.

The Russell 2000 index, which tracks smaller capitalization stocks, recorded its tenth consecutive daily gain. For the year it’s up 29%. The S&P 500 index is up 14%. Small has been the place to be.

Two more U.S. soldiers were killed in Iraq, bringing the number of American combat deaths to 179, 32 more than were killed during the first Gulf War. The daily toll mounts with no end in sight. Winning is not achieved fighting an enemy hidden in shadows and rarely visible around corners or in alleys.

Boeing officially notified another 1,440 employees of October layoffs.

Microsoft has issued 33 security advisory bulletins this year. With an R&D budget exceeding $6 billion, you would think some progress would be accomplished in the security arena.

How can the economic war on recession be won with the current state of joblessness? Since Bush took his oath of office, there has been a loss of 3.25 million non-farm private jobs lost. That’s why old-timers are reminded of Herbert Hoover and the depression years.

I reread a statement Greenspan made some months back. He said 10 million mortgages were refinanced in 2002. He estimated the net dollar value of these refinancings at $1.75 trillion. With 6.4 million homes sold in 2002, he said another $350 billion in home equity was realized through capital gains from these sales. In total, he estimated that households realized $700 billion in built up equity from housing in 2002. We know that, since the end of May, refinancing of mortgages has dropped by 70%. If we review Greenspan’s above- mentioned account, quickly we realize the vast change in consumer liquidity over the past 60 days. There is no way that the tax cut and the child credit could have come close to offsetting this liquidity reduction. The net effect should be felt in lessened consumer spending in coming months. Maybe the PC survey was an early indicator.

While lowering its earnings forecast for 2004, Schering-Plough also announced reducing the quarterly dividend to 5.5 cents from 17 cents, eliminating bonuses, and through voluntary retirement, cutting staff by roughly 1,000 or more.

Thursday, August 21, 2003

8/21/03 Focus On The Truth

J. Dennis Delafield, manager of the Delafield Fund: “The first principle of winning is not to lose. I never worry about what we don’t make. I worry about what we might lose.”

Mark Husson. Merrill Lynch retail analyst: “Wal-Mart’s impact has been like the Black Death. The plague comes to your village, and everyone gets sick, but not everyone dies.” In 1994, Wal-Mart had 2% of the Dallas market for grocery sales, and today the share has risen to 16%. Trent Crowe, one of the company’s district managers, said “I’ve been all over, and this is as competitive market as there is. No one’s giving us anything.” Can you imagine what Kroger, Albertson, Safeway, Tom Thumb are mumbling?

You don’t need an economist to read the tea leaves. The answers are right under your nose. Just look. Focus on jobs, business capital spending, revenues, and inventory levels. Don’t drain your brain with the rest of the gibberish. It’s basic. Are businesses hiring? On balance the net result is no. Are businesses spending on capital projects? A survey of chief executives by the Business Roundtable last month indicated that 74% expected capital spending to remain at the present dismal levels over the next six months. In April the survey the same question resulted in an answer of 55%. As Cynthia Latta, an economist at Global Insight said, “we are seeing a lot of empty manufacturing facilities as companies close them down because they simply can’t compete with cheap imported goods. We don’t see any early end to that trend.” Is there topline growth or revenue pick up? If there were, inventory levels would be higher. The Institute of Supply Managers’ inventory index stands at a lowly 45.9. Economists are looking at an inventory build up to enhance GDP growth. They will have a long wait for that to happen. Technology advances enhance inventory management, and thus, there is a limited requirement to keep growing inventories on hand. No company is more advanced in this area than Wal-Mart. They wrote the book and keep writing new chapters. This company stays lean and runs all out. As Mark Husson said, they are like the Black Death. As a stockholder, you couldn’t ask for more. As a competitor, they are worse than your worst nightmare. The West Nile virus looks inviting next to Wal-Mart. The bottom line on the truth is simple. Forget the headlines. Look at how companies are being run. Corporate America for the most part is in survival mode. It’s not just Eastman Kodak or Hewlett Packard. It’s everywhere along main street.

Presco Steel Inc. in Gainsville is shutting down after 28 years in business. They are a steel making and steel erecting company, and will cut 87 jobs when the plant closes in October. They are the leading fabricator of regional malls. Assistant plant manager Doug Wimpy said “we’ve got too much overhead here, so they’re closing us down. But, we’re the best, most modern of the plants, so they’re taking all of our modern equipment and sending it to our sister companies. Most of the equipment is going to a sister company of ours down in Stone Mountain.” There are thousands of such stories in the naked city.

According to a report from the Federation for American Immigration Reform using U.S. Census Bureau data, Georgia taxpayers spend $231 million a year to educate illegal alien children. According to the report, U.S. taxpayers spend $7.4 billion a year to educate illegal alien children- enough money to put a computer on the desk of every junior high school student in America.

According to a study in the New England Journal of Medicine, administrative expenses consume almost $300 billion of health-care spending in the U.S., or 31% of the total. Costs for staff dedicated to billing and coordination between doctors and insurers add up to more than $1,000 per person each year.

North American-based manufacturers of semiconductor equipment posted $763 million in orders in July and a book-to-bill ratio of 0.97, according to the trade association SEMI. This means that $97 worth of new orders was received for every $100 of product billed for the month. The bookings were 35% below the orders posted for July 2002.

Through July, there have been four straight months of money inflows into stocks. In July, $21 billion flowed into stocks but this represented the first month since 2001 for a withdrawal of funds from the bond market. A total of $8.8 billion was withdrawn.

This morning the euro traded below $1.10, and it was the lowest level since April 29. With weakness in Germany and France, the euro region economy is on the brink of a recession. As such, money is being withdrawn from the euro and switched into the U.S dollar. Our economy is viewed as one with improving growth prospects. The dollar’s 200 day moving average is at $1.095. This a spot where the euro could get some buying support.

Over the past three months the Nikkei has risen 30%. Most everyone’s attention has been on the Nasdaq, the Dow, and the S&P 500. When the Nikkei surge reaches the headlines, then all will notice and pile in. That’s what happened with the euro at the $1.18 level. When the sheep pile aboard, even the ark runs the risk of capsizing.

Wednesday, August 20, 2003

8/20/03 Stocks And Dividends

There are several examples where companies are paying out dividends but the company is not earning that dividend. It is important, once again, for the investor to focus on cash flow (net income + depreciation) as well as free cash flow- the cash flow remaining after capital expenditures and other necessary items, for example, R&D, are expended. A relevant case study might be RJR, the cigarette company which manufactures Camel, Winston, Salem, Doral, Vantage, and others. Aside from the on-going litigation awards and expenses, RJR’s profits and sales are down sharply from year ago levels because of increased competition from discount cigarette brands. RJR is not the only company facing these hurdles, but the company is lowering its forecasts for the remainder of the year and is expected to announce layoffs in September. At present they employ about 8,000. The stock is down about 50% from its $60 high. The question one might ask is where would the stock trade if the dividend were lowered significantly from the present $3.80 to possibly $1.80 per share? If the company were to earn only $2.40 per share, a dividend of $1.80 would still be a healthy chunk of income. It’s fair to say that many analysts expect the dividend to be cut, but is the stock fully discounting the cut? That’s hard to say. Hypothetically, if the dividend were reduced to $1.80 and the stock dropped to $25, then the yield would still approximate 7% and that’s a good deal higher than is afforded in most other stocks. The average stock yield is about 1.5%. It’s good to keep an eye on companies like RJR. Often they represent opportunities after the dividend is cut. A necessary reduction can be a sign reflecting reality on the part of the board of directors, and too often, directors fight reality.

Yesterday Carly Fiorina reflected on the disappointing results provided by Hewlett Packard. In addition, the revenue numbers issued by Intuit were also disappointing. The stock of Intuit sells at a fancy P/E, and therefore, the marketplace will not be too forgiving.

I read where the price of gasoline had risen almost 30 cents a gallon in ten days in the Seattle area. That’s an eye-opener.

Chuck Phillips of Oracle: “We were already getting PeopleSoft customers switching over, and that’s one of the reasons PeopleSoft sought out J.D. Edwards-they were getting squeezed.” They certainly weren’t getting squeezed by Oracle. The latter sought out PeopleSoft and wanted to merge Oracle’s application business with PeopleSoft. You have to forgive Phillips. He’s knew at his job.

Mortgage applications peaked the last week in May. For the week ended August 15, refinancing applications are down 70% from the peak and overall mortgage applications down 60% from that high water mark.

The economy of California and that of France are roughly the same size. For the second quarter, France’s GDP shrank 0.3%. Economists had been predicting no change in the rate. French exports declined 0.6% in the quarter.

Residential construction accounts for 5% of the value of goods and services produced in the U.S., and low mortgage rates have helped fuel housing starts to their highest level in 17 years. As mortgage rates rise and mortgage applications decline, it is only natural that housing starts will begin to decline. How much they decline we will have to wait and see. Clearly, housing starts have helped to provide an underpinning to the U.S. economy.

Microsoft said its latest versions of its Office programs will be made available on Oct. 21, and this is later than expected. Microsoft took an extra three months to test Office with users.

Boeing issued 60-day layoff warning notices to 255 workers. The cuts are separate from Boeings plans to cut up to 10,000 jobs this year- mostly from the commercial aircraft division.

Tuesday, August 19, 2003

8/19/03 Pop Up Ads

There’s a columnist for Forbes Magazine who is a money manager. He uses pop up ads to attract new investors to his firm. I’ve always held the belief that one’s investment record negates the need for ads. After reading his latest article, I can see why he utilizes pop up ads. Rather than placing a title of “today’s bearish analysts can’t be trusted,” maybe he should consider the thought that everyone is entitled to an opinion and maybe others run rings around his performance record. Another columnist relies on a 68% increase in Deere’s earnings as a reason to be bullish. I outlined what the facts are for Deere. The management is lowering its forecasts going forward, and the strength in the construction business was tied to lower mortgage and interest rates. July and August will, in all probability, be the last strong months for new home starts and construction in general. In fact, I look for layoffs to take place within the mortgage industry and the construction business.

A columnist for another financial organization wrote “as with the end of the 1990s bull market, anyone who says he called the bond bust of 2003 deserves skeptical scrutiny. I must be deserving of double skeptical scrutiny. As hard as I try, I am unable to bat a perfect 1000. I’m far from that. I picked up the Nikkei at the bottom at 7600 but preferred it to the Nasdaq. It was a great pick but the rise in the Nasdaq offset my gains. I’ve made wonderful calls in HD, MCD, AMZN, and many others- all near their lows- but eliminated the positions way too early. No one is clairvoyant. That’s what’s wonderful about the markets. They keep you humble. You are bound to make mistakes, and the prices are a daily reminder of those mistakes. The scorecard is loud and clear. No one needs pop up ads.

Cupertino’s Advanced Forecasting cautions that the worldwide semiconductor industry has not changed its fundamentals and it sees the possibility of a repeat of the boom-and-bust cycle. It should be noted that “Advanced Forecasting predicted in early 1999 that the growth rate of the underlying demand for Ics would slow significantly in the summer of 2000…. Instead of slowing down, the momentum continued, leading to inflated targets, overbookings, overcapacity, and inventories, causing the longest and deepest recession in semiconductor industry,” said Advanced’s Rosa Luis. Maybe the industry is learning. On Monday IBM said it cut 600 jobs in its chip-making division, which lost money in the second quarter due to weak technology demand and a slow start at its new plant. IBM also said it would require about 3000 executive and support employees to take one unpaid week of leave during the current quarter. IBM spokesman Scott Sykes said “these moves are designed to make us more competitive and improve our profitability.” If the economy were strong, I doubt whether these actions would have been taken. The market seems to ignore the on-going layoffs. I guess they only count to those families impacted. Maybe the columnist for Bloomberg is correct when he says “The U.S. economy’s naysayers just don’t know history.” I guess I deserve skeptical scrutiny. Pal, I know history and I’m not reading tea leaves!

Monday, August 18, 2003

8/18/03 Kansas City Royals

The Royals are a team with a payroll of $41 miilion. By comparison, the Yankees payroll is $180 million. For the first time since 1993, the Royals won a home series with the Yankees. It is Tony Pena's first year as a big-league manager. With Pena, with 43 games left, the Royals have already won more games and sold more tickets than all of last year. As DH Mike Sweeney says, "Tony Pena is the manager of the year and we're playing Tony Pena baseball. He tells us 'Go out and have fun, boys. Don't get nervous, don't feel pressure, just have fun.'" Quoting Confucius, Pena says "if you love what you're doing, you don't have to work for the rest of your life." I couldn't agree more. That's exactly how I feel. There is another key to the success the Royals are enjoying. They continue their winning ways because their .306 average with runners in scoring position is the best in the majors. In other words, when it counts they deliver. One can carry that thought over to investing. You don't need to swing for the fences. If you do, there will be far too many strikeouts produced which translate into losses. You need to get on base, and then bring that runner home by hitting your pitch. For example, it is much more difficult to time a turnaround situation than to find a good buying opportunity in WalMart or Microsoft. They are the leaders in their field and have demonstrated winning ways for 25 years. You too can have fun and bring the runner in scoring position across home plate. Have a plan when you go up to the investing plate. Prepare and have fun. Winning creates passion and passion creates winning.

The Federal Bureau of Labor Statistics show 4.7 million people who want to work full time have settled for part-time jobs, nearly a 50% increase from three years ago. More than 1 in 5 jobless workers or 2 million people have been out of work longer than half a year.

A growing number of immigrants are moving back to their home countries of Pakistan, India, China, Singapore, and VietNam- countries with job and economic opportunities. China is expanding at 8% a year and India last year grew at 4.3%.

Beginning with the last quarter of 2001 and for the next three quarters thereafter, the GDP expanded by 3.3%. However, during the 3rd quarter of 2002, the average nonfarm employment was 1.5 million less jobs than the previous year's comparable quarter. The rear view mirror and its experience, therefore, doesn't present a pretty employment picture for this period leading up to the next presidential election.