Saturday, August 30, 2003

8/30/03 Monetary Policy Landscape Uncertainty

Alan Greenspan: "Uncertainty is the defining characteristic of the monetary poicy landscape."

Alan Greenspan: "Only a limited number of risks can be qantified with any confidence. And even those risks are generally unquantifiable...becuse we may not fully apprciate even the full range of possibilities, let alone each possibility's likelihood."

The above quotes came from a speech given by Alan Greenspan at the annual Kansas City Federal Reserve Bank meeting held in Jackson Hole, Wyoming. The taxpayers footthe bill to have this speech on risk management and to have the Fed's goal of price stability and the maximum sustainable economic growth reaffirmed. In other words, it's a time to enjoy nature over the Labor Day weekend in beautiful Jackson, where I lived for sevral years.

Warren Buffett: "Risk comes from not knowing what you're doing."

Without the $350 billion tax cut, July disposable income would have gained only 0.2%.

The Mexican peso is flirting with a record low, and stands at a little over 11 to the dollar.

Stephen Roach, chief economist at Morgan Stanley, said "as long as hiring and wage income generation remain deficient, once the policy stimulus fades, there will be little fundamental fuel for the world's only growth engine. I still see the U.S.primarily thru the lens of a post-bubble economy that has failed to purge the excesses of the late 1990s.

Accroding to new statistics released yesterday by Right Management Consultants of Philalphia, unmploye workers at almost all levels are needing nearly twice as long to find new jobs as they did two years ago.

Friday, August 29, 2003

8/29/03 Layoffs And Plant Closings Continue

On a day when the growth estimates for the second quarter were raised, several companies announced layoffs and plant closings. In fact, it was one of the busiest days in some weeks for such announcements. First out of the box was Oneida, the plate and dinnerware manufacturer, laying off 100 workers and mulling plant closings in Mexico, China, Italy, and possibly Buffalo. Then Chrysler said significant additional job cuts may be required unless the company can increase U.S. sales. They have closed 7 factories and cut 30,000 jobs since 2001, and it's thought a cut of another 12,000 jobs could be needed over a period of time. After Chrysler, Goodyear anounced cutting 500 jobs. Finally, Novellus said they may close facilities to improve profit margins and may announce job cuts. This company competes with Applied Materials, and the latter has been undergoing significant restructuring. It would appear that companies feel a continuing need to close factories and plants to improve their profitability and to remain competitive in the marketplace. I see no end to this trend, and it looms large for more job losses.

The Commerce Department said after-tax corporate profits were down 3.4% for the second quarter.

Albert Einstein: "The hardest thing in the world to understand is income tax."

Margaret Thatcher: "The usual socialist disease: they have run out of other people's money."

On August 2, 2002 30 year mortgage rates were 6.43%. Now they are 6.32%.

According to the CBO, Congress is set to vote on a Medicare package that could cut up to $16 billion of Medicare funding for cancer care over the next 10 years.

In July, there were inflows of $21 billion in stock funds and $8 billion in outflows for bond funds. The good news is that, in the latest week for August, there were inflows into both types of funds.

Ronald Reagan: "The three stages of government: if it works, tax it. If it still works, regulate it. If it stops working, subsidize it."


Thursday, August 28, 2003

8/28/03 Funding The Supply Of Debt

Mark Faber: "between 1997 and 2001 to generate one dollar of GDP growth, 4.8 dollars of new debt was created."

Yesterday $25 billion of 2 year treasuries brought a yield of 2.04% or more than 100 basis points above the Federal Funds rate. Foreign central banks purchased only 26% of the issue compared with 36% of the last 2 year sale. Next month we will witness more than $50 billion of 2 year, 5 year, and 10 year notes being auctioned. This on-going supply hopefully will be met with eager buyers. Unfortunately, I believe the appetite for our treasury notes is waning.

Why do I make this statement? The recipe for these treasury auctions is not too appealing. It is a mixture of the speed of our monetary printing presses; increasing debt loads from growing trade and currency account deficits; the rising rate of government spending; overcapacity; slack demand creating price reductions and greater buyer incentives; and the need for debts to be reduced- either through payments, defaults, or worse yet, hyperinflation.

Federal government spending doesn't create sustainable GDP growth. It creates a false impression that the economy is vibrant. That spending comes from a combination of tax receipts and printing money in the form of debt. In other words, the government consumes and does not produce. As increasing amounts of debt are required to generate GDP growth, our treasury notes take on a risky dimension. It is the latter which makes foreign buyers of our debt instruments wary of getting severe indigestion. I know such a suggestion will be met with horror and blasphemy. I've munched on that combo before and not been worse for wear.

Silicon Graphics cuts 600 workers.

Craig Conway, PeopleSoft CEO: "The Oracle saga has flatlined. I don't think it has a heartbeat. I don't think it has a breath."

The U.S. Energy Department said yesterday it is probably underestimating the amount of fule utilities are storing for the winter because of its mathematical model methods.

Tuesday, August 26, 2003

8/27/03 The Very First Time

Microsoft has been in business for close to 30 years. Each year the company has made a practice of giving each employee a raise. The company employees close to 60,000 people. Today Microsoft sent a letter to every employee. For the very first time the company is giving a raise to no one. They stated that it was the management’s belief that employees were already receiving higher comparative salaries than that found at other companies. When I say times are different, many folks scoff at me. They just don’t get it. When they lose their shirts and their pants, they might see the light.

The talk around Sun Microsystems is that another round of layoffs is around the corner. We’ll just have to wait and see.

The CBO forecast a federal budget deficit of $480 billion in 2004. Given the fact that they have raise their deficit forecasts for 2003 seven times, I feel confident we can look for more of the same in coming months. The CBO forecasts unemployment at 6.2% for 2003 and 2004.

According to Tuesday’s ABC and Money Magazine survey, the consumer comfort index fell to a negative 17 in the latest week from a negative 16 in the prior week. That indicates a good deal of skepticism with respect to the anticipated economic recovery.

PeopleSoft is once again offering a money back guarantee on its products and those of newly acquired J.D. Edwards, and has promise five times the value of the software license fees in the event PeopleSoft is acquired and Oracle discontinues support for the product.
8/26/03 Mexico’s Problem Is China

With a drop in export orders, manufacturing companies in Mexico continue to layoff workers. Unemployment is at its highest level in more than 5 years. The problem is China and its cheaper labor costs. The U.S is Mexico’s largest export market and buys 85% of Mexico’s exports; however, thru the first six months of 2003, Chinese exports to the U.S. have grown 25% and are equal at this time to Mexico’s exports to the U.S. During this period, Mexico has experienced a 4.2% decline in non-oil exports.
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A month ago Cadence Design announced a layoff of 500 workers or 10% of its workforce. Their CEO said they will move more engineering jobs to India and China where he said “we can get three to five equivalent engineers for what we pay here.”

Siebel Systems said business software is under pricing pressure and their CEO said there’s “almost desperate pricing “ among its competitors.

The U.S. has been occupying Iraq for 117 days. More soldiers have been killed in this period than when there was heavy combat. The Administration has asked for patience. It’s hard to be patient with a daily average of 25 guerilla attacks on our troops. This is Bush’s Viet Nam and our troops are paying the price for an inept exit strategy.

Although less than 5% of Australian companies’ overseas assets are in Asia, some 60% of Australia’s international trade is with its Asian economic partners. Only 10% of Australia’s foreign trade is with the U.S.

Monday, August 25, 2003

8/25/03 President Bush

The markets might consider paying some attention to the August 21-22 poll taken by Newsweek. It is the first time a plurality has opposed a second term for Bush. 49% of registered voters polled would not like to see Bush re-elected, compared with 44% who said they would. The poll indicates increasing concerns about the economy and the continued violence in Iraq where our troops are killed and wounded daily. Wall Street, for the most part, depends on analyst upgrades/downgrades and CEO predictions, and pays very little attention to the every day person on Main Street. In fact, Wall Street looks down on those every day people. They are viewed as having limited investing intelligence. That’s why such a small percentage of mutual fund managers match, much less beat, the averages over time. If there is one major mistake the people on Main Street continue to make, it’s giving their hard-earned money to mutual fund managers, and then paying a fee for under-performance. Don’t worry. This mistake won’t last forever.

The Newsweek poll augurs poorly for the U.S. stock market. Disenchantment with Bush can only lead to lower consumer confidence and the latter to lower consumption levels. If the consumer is 70% of the economy, then the so-called jobless recovery will not last long, and that’s exactly what I have been saying. Money flow will no longer pour into stocks, and that’s what has been taking place over the last 120 days. You need to stay ahead of the curve and anticipate that change. Get the stretchers ready. A great many money managers will be carried out.

There are approximately 6 million small employers and they employ about half of all workers and create most of the new jobs. According to a survey conducted by the National Federation of Independent Business trade group, despite the recent tax cut which raised to $100,000 from $25,000 the amount small businesses could write off annually on capital goods spending, only 26% of small companies plan to buy computers and other big-ticket items in the near future. This is down from 30% before Bush signed the latest tax cut bill. Wall Street seems to have an endless appetite for buying technology stocks. As I said, Wall Street has little respect outside their own small community.

Today in Taipei Intel’s CEO Craig Barrett told reporters that “it is too early to say we have seen the emergence of a total turnaround” in the semiconductor industry. The small business owners could have told you that. I wonder how long it’s going to take for Intel to trade up to $29 again. I wouldn’t hold my breath.

According to Harvard’s Joint Center for Housing Studies, $214 billion was spent on home improvement in 2001, up from $190 billion in 1999. Households spending $20,000 or more accounted for 48.3% of the home improvement market in 2001 compared with 33.3% in 1995. Nesting has grown in importance, but I believe, as money becomes scarcer for the average family, that less money will begin to be spent on home improvement. Rather than large ticket items, such as, Viking ranges and Sub Zero refrigerators, less expensive alternatives will be sought.

I want to close with a personal remark. I get lots of email criticizing my negativity. I do not walk on water and never will. That may come as a disappointment to my Mother, but she died some time ago. However, I am a good swimmer. I have no trouble negotiating the deepest end of the pool or the waves in the ocean. I make plenty of mistakes. Few can state, though, they missed the tech debacle beginning in 2000. Few missed the disaster of October 1987 but caught the upswing in 1982 and 1974. Yes, I have missed, for the most part, the bull move beginning in early March. On the other hand, I will also miss riding out on a stretcher, and that is coming soon to your neighborhood.

Sunday, August 24, 2003

8/24/03 Thought Is Free

Bertrand Russell: “Men fear thought as they fear nothing else on earth, more than ruin, more even than death. Thought is subversive and revolutionary, destructive and terrible, thought is merciless to privilege, established institutions, and comfortable habit. Thought looks into the pit of hell and is not afraid. Thought is great and swift and free, the light of the world, and the chief glory of man.”

The shroud of debt: this year’s budget deficit of almost $500 billion; this year’s trade account deficit of almost $500 billion; unfunded Medicare liabilities exceeding $35 trillion; unfunded Social Security liabilities exceeding $7 trillion; and the treasury printing presses running low on WD 40.

In the 12 months ending in July 2003, the core PPI was up 1.5%, a 37-year low. Federal Reserve Governor Ben Bernanke said “even if the economy recovers smartly for the rest of the year and next, the ongoing slack in the economy may still lead to continuing disinflation.” It’s an interesting thought- that the economy could recover smartly and yet there not be enough demand to swallow the slack and raise prices. If there’s not enough demand, surely there won’t be a need to hire additional workers. If there’s slack, it’s hard to imagine how the nation’s and the consumers’ debt levels will be reduced.

From 1960 to 1980, only 204,000 businesses failed in the U.S. From 1981-2001, more than 1 million U.S. companies have failed. Seton Hall University’s Stillman School of Business recently surveyed 1,900 executives. In the findings, 77% predicted an increase in business failures over the next five years. More than 80% said banks would tighten credit markets which will lead to increased business failures, and 76% said foreign competition would also contribute to more businesses failing.

Michael Fox, executive director of the Conn. chapter of the Gasoline and Automotive Service Dealers of America, said on Friday “I literally came to work and gas across the street was $1.83. I went to the bank, it was $1.90. I went to lunch it was $1.99.”

According to the U.S. Dept of Energy, Mexico ranks as the world’s fourth-largest oil producer. The U.S. imports almost 1.5 million barrels of oil per day from Mexico, our friendly trading partner that nationalized U.S. oil interests in 1936 and renamed the properties Pemex. Some sane people call that stealing. Some politicians call it the price of doing business. I’ll let you decide.

Nigel Calder: “The aim isn’t to degrade mind to matter, but to upgrade the properties of matter to account for mind, and to tell how from the dust and water of the earth, natural forces conjured a mental system capable of asking why it exists.”

St. Augustine: “People travel to wonder at the height of mountains, at the huge waves of the sea, at the long courses of rivers, at the vast compass of the ocean, at the circular motion of the stars; and they pass by themselves without wondering.”