Saturday, September 06, 2003

9/06/03 80% Permanent

A study released this week by the Federal Reserve Bank of New York found that about 80% of the jobs lost since the 2001 recession were the result of structural changes by businesses aimed at permanently reducing their labor forces. During the 1990-91 recession, 57% of the job cuts reflected permanent structural changes. It is no wonder that more job seekers are discouraged. In the month of August the number of discouraged workers climbed to over 500,000 for the first time in this job downturn. More than 20% of those without a job have been out of work for six months or longer, and this is a 20-year high.

Richard Yamarone, Argus Research economist: “This is the productivity miracle at work- lost jobs and low inflation.”

Mark Zandi, chief economist at Economy.com: “If we don’t see some good job growth by Thanksgiving, then the spurt in economic activity that we are currently experiencing will fade."

Not since World War II has employment failed to grow for so long during a recovery. The national payroll has shrunk by almost 3 million jobs since March 2001. Most economists are surprised that the loss of jobs continues despite an extraordinary level of economic stimulus- low interest rates, tax cuts and rebates, a rise in government spending and not only military, and mortgage refinancings. In addition, the overall workweek sits at an all-time low while the manufacturing workweek is at a low for the current business cycle.

In its August monetary policy report to the Congress, the FOMC stated “but because of the considerable amount of economic slack prevailing and the economy’s ability to expand without putting upward pressure on prices, the Committee (FOMC) indicated that the small chance of an unwelcome decline in the inflation rate was likely to remain its predominant concern for the foreseeable future.” The Committee might consider how wrong they are in one area. They have continually misjudged the benefits from improved productivity. The fact is household incomes have not been lifted from increased productivity. Business capital spending has hardly improved from increased productivity. On the other hand, inflation remains tame overall. Obviously, there have been price spikes in gasoline, beef, and some other areas.

On Friday December gold rose 1.3% to close at $378.70 an ounce, its highest closing since early February. December silver rose 2.3% to close at $5.15. Palladium closed up 6.7% at $222 an aounce, a five-month high. Hard assets are in growing demand.

Bill Cheney, chief economist at John Hancock Financial Services: “Businesses across the board are figuring ways to do more with fewer people. We may be further than we thought from a truly sustainable economic recovery.”

Labor Secretary Elaine Chao expresses an empathetic viewpoint: “the manufacturing sector has been in a decline for the last 40 years. Having said that, we are very concerned . We are focusing a lot of attention on manufacturing.” That concern and attention and a buck will get you on the bus.

The lack of jobs is taking its toll on consumer confidence, and that was reflected in the latest University of Michigan survey where the drop in confidence was more than expected.

Larry Bartels, a professor of politics and public affairs at Princeton University, says real disposable income per capita (RDI) is the single best predictor of presidential elections. He said “it’s closer to everyday people’s ordinary experience. It’s a measure of what they actually have in their pockets, rather than an abstract economic indicator.” The Investors Business Daily points out that, four times since 1948, the party in the White House lost the popular vote when the RDI per capita grew less than 2%. In the June quarter which just ended, it rose just 1% from a year earlier and at an annualized 1.7% pace. Maybe it’s symbolic that the president is speaking to the nation on Sunday night from the White House and not the oval office.

White House spokeswoman Claire Buchan: “The president’s priorities are that government gets results for the people, and he is focused on protecting Americans, winning the war on terrorism, and ensuring economic security.” I think Ms Buchan needs to take a reality check. A report issued on Wednesday for the Joint Chiefs of Staff said planning for the rebuilding phase of the Iraq war was late in starting and not ready for activation when the war began March 19. Since the May 1 landing on the deck of the carrier USS Abraham Lincoln (the one announcing the end of major combat operations), 149 Americans have died in Iraq, exceeding the 138 who perished during major combat operations. Additionally, no WMD have been found. Osam bin Laden has not been captured. Saddam Hussein is still at large. Meanwhile, troop morale is at a low level and four times they have been given a date by which they would leave Iraq. Each time the date cam and went. The troops have been faced with reductions in pay but only yesterday Bush said “my attitude is, anytime we put our troops in harm’s way, they deserve the best pay, the best training and the best possible equipment.” He must think he’s still on the deck of the USS Abraham Lincoln. If Norman Schwartzkopf were running this operation, things would be a lot different for our troops.

Bush in his 2000 presidential nomination acceptance speech: “Big government is not the answer. The alternative…is to put conservative values and conservative ideas into the thick of the fight for justice and opportunity.” Since late 2000, 500,000 new defense-related jobs have been created, but this number only included 70,000 troops in uniform. That’s big government at its worst. The discretionary spending levels of the Bush years have been deplorable. Reduced spending must be considered curse words at 1600 Pennsylvania Avenue.

Despite the fact that Mexico has lost 200,000 jobs to China, the Mexican government will not support the U.S. efforts to have the yuan float freely. Jose Francisco Gil Diaz, finance minister of Mexico, stated “I am not asking any country to do anything. Maybe what the Chinese are doing now is correct, maybe.”

Phillipine’s Finance Secretary Jose Camacho: “We support the position that each of the APEC economies should be given the respect for applying policies appropriate for its own economy. We should allow the Chinese to determine the timing.”



Friday, September 05, 2003

9/05/03 Slack In Labor And Product Markets

Robert Parry is the president of the Federal Reserve Bank of San Francisco. He said he expects 4- 4.5% growth in this year’s second half but also said there is so much “slack in labor and product markets” and said risks of disinflation would “remain a concern for some time.” Another Fed member, Ben Bernanke, also spoke yesterday and stated that “soft labor markets and excess capacity create a further downward risk to inflation.” It is clear that they are on the same page, and share the same concerns. I believe the bond and stock markets have underestimated the deep-seated nature of these concerns.

There was greater slack in the labor market yesterday. Del Monte will phase out 15% of their positions in San Francisco; PeopleSoft will cut up to 1000 jobs; Dow Chemical said they still have 1700 jobs to cut; and Marathon Oil will layoff 265 workers. The good news is that Boston Scientific, the stent manufacturer, will hire 1200 new workers.

Pension Benefit Guaranty Corp. said private employer pension plans are $400 billion underfunded.

Kraft expects 3rd quarter earnings of 45-47 cents compared with 50 cents in the same quarter a year ago. Analysts had been expecting 49 cents. To reverse the downturn, the company plans promotions and price reductions and intends to cut capital spending and inventories.

A Washington, Iowa promotional calendar plant has been in this southeast Iowa community for 100 years. In January, 200 employees will be without jobs as the Norwood Promotional Products plant closes. Production will be moved to Sleepy Eye, Minn. The plant’s calendars range from art, animals, and religious subjects to making the Playboy calendars.

Productivity in the second quarter rose at a 6.8% annual rate. Possibly more significant, the U.S. supposedly is in its 20th month of economic recovery without job creation. The Federal Reserve has said there is a typical three-month gap between recovery and job creation. Maybe we haven’t been recovering for 20 months or possibly this economy isn’t typical or possibly no one can explain what truly is taking place today. It’s a bit like where have the WPM gone? Have they disappeared forever? Have jobs disappeared forever? Has Osama bin Laden disappeared forever? Who’s on first?

The unemployment rate will be released shortly. All we need to know is that the economists were wrong again. Unemployment claims rose last week to 413,000, their highest level since the week ended July 12.
In the 1994-2002 period, continuing unemployment claims averaged 2.579 million. This year they have averaged 3.575 million, and now stand at 3.663 million. Last quarter hours worked fell at a 2.3% pace and unit labor costs fell at a revised 2.8% annual rate during this period. Industrial capacity utilization remains around 75%.

The stretch of Pennsylvania Avenue in Washington DC between 15th and 17th streets NW has been closed to traffic since 1995. A promise to reopen the avenue was included in the Republican platform on which George W. Bush ran for president. Yesterday the National Capital Planning Commission approved plans for redesigning the portion of Pennsylvania Avenue in front of the White House with “security improvements” but it shall remain closed to traffic. The 2004 Bush budget includes $15 million for construction of improvements. Commission Chairman John Cogbill stated “the plan allows us to breathe new life into America’s Main Street. If they think this is Main Street America, then this country is truly in serious trouble.

The U.S. economy lost 93,000 non-farm payroll jobs in August, and it was the seventh straight month for these job losses. It was the largest decrease in payrolls since March. Economists had been predicting a job gain of 19,000. For at least two weeks I have been describing the daily job cuts across America. There was no way the August number could have been on the plus side.

Thursday, September 04, 2003

9/04/05 Leveraging A Little Bit

On August 5 Cisco issued its first quarter 2004 revenue guidance. At that time the company expected revenues to be slightly up 2 to 4% from the prior year’s period, and that would equate to roughly $4.86 billion. Earnings per share before one-time items would approach 15 cents. The news was not greeted with enthusiasm, and the stock proceeded to drop about 10% over 2 days. Yesterday it hit a new high. The CEO said “August was a little bit above my expectations.” It should be noted that August is normally a slow month. He also said that investors should not get too excited because Cisco is still not seeing companies boost spending. In sum, the little bit above expectations announcement resulted in a market cap increase of $3.5 billion. That’s pretty good leverage when one realizes the August revenues might have been less than $100 million above the most recent forecasts.

Alfred Adler: “It is very obvious that we are not influenced by “facts” but by our interpretation of the facts.”

Ian Campbell, UPI Chief Economist Correspondent, said “in 2004 low growth or outright recession is likely for the U.S. economy, and the global impact of that will be negative.”

RSA cut 1000 jobs. Gateway will shut a computer assembly plant in Hampton, VA with 450 employees, and cut an undisclosed number of employees at 2 facilities in South Dakota which employ 3,450 people.

The latest Federal Reserve “beige book” said “labor markets remain slack across the nation. It said, where there were gains in wages, they were modest. At the same time, increasing health care expenses created a rise in overall labor compensation costs.

G.M.’s August U.S. car sales were down 8%. They cited weaker sales to corporate and rental car customers. Ford’s August U.S. sales of cars and trucks fell 12%. The company is lowering production in the current quarter by 1.2% and in the fourth quarter by 6.4%.

Shortly after 9/11, Amazon’s stock traded at $8, and I mentioned that I thought it was a promising risk/reward at that level. I never thought it would rise to $47 in 2 years. Yesterday it traded at that price. Sales are expected to reach $5 billion this year on earnings per share of 55 cents. Next year earnings could increase 50%; however, at the present price level for the stock, the risk/reward no longer looks promising. With those having a long term holding appetite, Exult could prove rewarding. At $8 the stock is not being given away; however, 5 years ago they had no revenue and today its about $500 million. They’ve grown from 2 employees to about 2000, and have $100 million in cash, and should earn about 17 cents this year but next year could bring an increase in earnings of 100%. The market cap is $880 million; however, in several years, their revenues could approach $2.5 billion. They are the leaders in integrated human resources management, and that’s a growing field. Their customer base is loyal and pleased with the results to date.

China is the world’s sixth largest economy, and rising yearly to higher rankings. Each year 20 million people enter their labor market.

Gold is trading around $375 per ounce and nearing the yearly highs.

Wednesday, September 03, 2003

9/03/03 Employment, Presenteeism, And The Consumer

Yesterday morning a financial TV station announced that Challenger, Gray, and Christmas stated layoffs for August had amounted to 79,925, and this figure was down 6% from July’s numbers. Was the viewer to cheer after hearing these layoff numbers? Was this to be taken as good news? Get real. We know the consumer is 70% of the economy. If layoffs persist on a monthly basis, consumption will be effected negatively. If that happens, an economic recovery shall not become a sustainable reality. In the last week of August, U.S. chain store sales lost momentum as they only rose 0.1% in the week ended August 30. I have said on several occasions that the economic blip upward in June, July, and August would be coming due to the tax cut and the child credit, and then the improvement would peter out. The reason was and still is the loss of jobs and the impact on the consumer. If anyone can prove my thinking incorrect, I would be pleased to hear from you. To put this bluntly and respectfully, it is not possible to manipulate consumer sentiment with growing unemployment lines. The media and Washington DC can talk a good game, and so can analysts on Wall Street, but they don’t make out the paychecks for Americans. In addition, unemployment benefits are paid for by the taxpayers and not by promises of a better future.

Presenteeism is what happens when people are too afraid to call in sick. Jeffrey Pfeffer, professor at Stanford University’s Graduate School of Business, says “there is no evidence that excessive hours are necessary for competitive success. But somehow we’ve gotten in our minds that to succeed in this world is to work yourself to death.” In Japan they have a word to describe death from over work. It’s karoshi, and the Japanese government has reported 10,000 cases a year of managers, executives, and engineers who have died from overwork.

Job cut announcements have totaled about 800,000 so far this year. The media will tell you that’s good news because that number is down 15% from the first 8 months of 2002. Meanwhile, the ISM Employment Index fell in August. This is the 35th straight month below the 50 level that separates growth from expansion. Norbert Ore, head of the ISM manufacturing survey committee, said “we have to see significant growth in manufacturing before industries will rehire.” With factories closing, I don’t see much reason to look for rehiring. Additionally, Rick Cobb, executive VP of Challenger, Gray, and Christmas, states “there has yet to be any significant indication of a rebound in capital spending that would support the view that employers will begin hiring en masse.”

Once again, the petroleum industry unjustly struck the pocketbooks of consumers over the Labor Day weekend. There was such a BS shortage that gasoline and crude futures fell more than 6% yesterday to close at their lowest levels since July. October unleaded gasoline fell 8 cents to close below 85 cents a gallon in New York. October crude was down over $2 per barrel to $29.41. It’s time consumers banned together and struck the hearts of the petroleum industry. Every American who drives should commit to reducing weekly gas usage by 1 gallon per week. That means driving 20 miles less per week. That should be achievable. Let’s see how the petroleum industry likes being on the receiving end- like the tobacco industry.

Treasury Department General Counsel David Aufhauser is resigning from his post on Sept. 30 due to the fact that the “campaign against the financing of terror…has defined a significant amount” of his job. Washington DC is a revolving door for employees. There appears to be growing discontent.

DHL announced they would be cutting 2,870 jobs or 6% of the workforce.

You have to hand it to Chrysler. They are on their toes and super promotional. They beat GM to the punch and announced “aggressive” new consumer incentives on most of its 2004 model year vehicles. Despite offering cash rebates of up to $4,500, the Big Three automakers have lost 1.5 percentage points of the U.S. market share since the beginning of 2003. In the second quarter Chrysler lost $1.1 billion due to the high cost of incentives. I guess they feel they’re on a roll, and need to keep those cars coming off the factory floor so that they can be sold at a loss. Maybe they’ll make it up in the volume. GM will announce their incentive program today. Of course, the industry will make a big media splash of record car sales in August. All they need to do now is make a profit on the sales. It’s no big deal if your name is Toyota.

Tuesday, September 02, 2003

9/02/03 I’m Lovin It

That’s the new worldwide McDonald’s ad campaign which begins this week. I’m not so sure the employees in Bellevue, WA are lovin it. Their store was located at a prime site, and was in existence for about 2 decades. Without any publicity, the store closed over this weekend. Located in Bellevue is Burger King, Wendy’s, and the rest of the usual suspects. Arby’s is across the street from McDonald’s. Maybe the competition got too heated from those roast beef sandwiches.

You gotta love Bush’s recipe for fixing our manufacturing base and the loss of jobs in this area. The government does not manufacture anything- except for the items produced in various prisons by inmates. Come to think of it, that’s low cost labor that should be able to compete with China. Many inmates get paid 20 cents or less per hour for working. Of course, they get free food, housing, clothing, and healthcare. Back to Bush. He named a “czar” to address the loss of manufacturing jobs. He did accomplish something. He created a job. At the same time, he was consistent with his economic policy of increased discretionary spending and generating unneeded overhead in Washington.

The Snowman is over in China jawboning the Chinese government to overhaul its currency system with its yuan fixed at 8.3 to the U.S. dollar. Whose fault is it that the U.S. has a $103 billion trade deficit with China? Are we going to blame it on the exchange rate? Maybe, if our budget deficit were reduced by cutting government spending, our dollar would have a greater purchasing value. Winners accept responsibility and losers blame others. There seem to be plenty of blaming others in Washington DC. Presently, the yuan will not be revalued. It is thought that doing so would exacerbate the problems evident at many of their local banks. China will continue to purchase our treasury notes. Looking at the situation rationally, China is taking the money from the trade surplus generated with the U.S. and investing most of that money in our government bonds. The money is remaining, for the most part, in this country.

Government statistics talk about the recovery. Wall Street buys the talk. If the recovery were for real, then why did the economy lose 44,000 jobs in August? I am tired of jobs being described as a lagging indicator. If jobs were being added, lagging indicator would not be utilized in the description. The stock market, on the other hand, is considered a leading indicator. Why? The sarcastic answer is so few money managers beat the averages and indexes over time. In other words, a bunch of also-rans are the leading indicator. They should get czar jobs in Washington DC.

Monday, September 01, 2003

9/1/03 The Truth On Labor Day

Worker productivity rises off the charts, and yet, jobs are outsourced to lower labor cost countries. Workers accept pay and benefit cuts only to see a factory shut down. At some point the landscape for workers and management/owners must find a happy medium. There is less and less loyalty within the workplace, and clearly less satisfaction during difficult economic times amidst heightened stress. It may be Labor Day, but today there is much less to celebrate. It’s one thing to have a job, and another thing to keep the job. Millions of Americans have learned that all too well. The U.S. needs to regain some of its sheen. That is not something that can be blamed on 9/11.

A study by researchers at the University of Illinois said, at the current rate, a full recovery in the technology sector is unlikely to come before 2012. The current industry’s job growth is estimated at approximately 1%, and this is down from the double-digit increases in the late 1990s.

This is an appropriate time to explore how some companies offer opportunities for growth and responsibility and maintain a winning team. A good example is a privately owned company with locations in California, Nevada, and Arizona. Most of their management personnel rise through the ranks and are promoted from hourly worker levels. Store managers, on average, have been with the company for over 13 years and make about $100,000 per year. Customer loyalty is at the highest level, and repeat business is the norm. A husband and wife team started the company in 1948, and family members have been at the helm since then. The menu has never changed. They were the first drive-thru hamburger stand in California. Their motto remains the same: “Give customers the freshest, highest quality foods you can buy and provide them with friendly service in a sparkling clean environment.” The potatoes are cut fresh on site for the french fries. The shakes have real ice cream. There are only double double burgers, cheeseburgers, and hamburgers. Those are the five items on the menu. The meat is fresh, the lettuce is fresh, and the tomatoes are ripe. Everything is cooked to order, and yet it is fast food. This is the Krispy Kreme of the hamburger business. It is the Starbucks of the hamburger business. There aren’t any franchised locations. The customers are dealing with the owners or staff trained by the owners. This is where children and grown-ups come to eat time and time again. Their sales are up 10% this year at the same time Burger King and McDonald’s and Wendy’s are struggling. Winners find a way to win even when the times get tougher. Maybe some day In-N-Out Burger will go public. That will be a real meal.

It’s the end of the summer and it’s been a long summer. There’s been too little sleep and too much on my plate. I take responsibility for this, and somehow I wish that at times I could be more than one person. It may seem that I am not everything I am cranked out to be. For that I apologize. I would never want to create disappointment. Unfortunately, sometimes the demands on my time may create difficulties for others. There are no excuses. I will try to do better.

Sunday, August 31, 2003

8/31/03 Our Breathing Is Labored

Do you like getting stabbed in the back? Do you like making your children’s world more fiscally burdensome than yours? Do you like being made to look stupid? It’s pay back time. It’s time for accountability. Look in the mirror. What do you see? If you said, an apathetic American, you are correct. I’m no different. I may have a big mouth and one vote, but I have not gotten out in the political trenches to change things either. Many Americans are happy with their tax cut and child credit check. How do you think the government is paying for the budget deficits? And the CBO says the deficits will rise at least in the near future. These deficits must be funded through additional revenues, and the latter spell increased taxes ranging from a minimum of $4000 to $7000 per household depending on the size of the deficit. There is only one alternative to increased taxation to offset these deficits and that’s to make large spending cuts. I know some of you think I’m being too rough. Actually, I need to be tougher. Bush and the Congress are the WPM. This year non-defense discretionary spending will be about 4% of the GDP. That is more than unacceptable. That is indefensible and irresponsible. Elect no official without a pledge to cut spending by at least 15%. Mandatory spending will exceed 11% of GDP this year. If we can work on a cure for cancer, we certainly can find a cure for pork, welfare, waste, and abuse spending. If we do not cut government spending drastically, our breathing will no longer be labored. The fresh air will cease to exist. Freedom will be lost.

Ford is gloating that August will be their best month this year for car sales. They have little to show for their efforts except the $4000 in incentives on each vehicle. The Big Three share of the auto market has fallen from 60% from 70% over the last five years. Asian auto makers now have over a 32% share up from 25 % only five years ago. All Japanese auto plants in North America are non-union and their labor costs amount to $7,000 per vehicle as compared with the U.S. auto makers’ labor costs of $7,500 per vehicle.

The GM labor contract with the UAW expires on September 14. The company is proposing to freeze hourly wages through 2007, plus paying three bonuses worth $1,066 assuming no overtime pay. GM would double the $3-5 workers pay now for each drug prescription. Workers would continue not paying part of the monthly health insurance premium. The UAW is in a poor bargaining position. Their membership has declined from 1.5 million to 639,000 over the past 25 years. The auto companies maintain they must hold down wages, benefits, and positions to stay competitive. The fact is simple. A growing number of consumers prefer Japanese vehicles. The trend is not friendly for the U.S. auto worker. Overall, labor unions currently represent only 9% of private-sector workers.

Challenger, Gray, & Christmas state that 4.1 million jobs have been cut since January 2001. The Bureau of Labor Statistics reports that 2.6 million fewer people are employed now than in January 2001. These facts explain why Bush is being compared to Hoover on job losses. Even if analysts are correct and 12,000 new jobs outside the agricultural sector were added to U.S. payrolls in August, it still would be only a pimple on an elephant’s ass. Come November 2004, jobs will become a big factor in the election.

Walker Information, a research firm in Minneapolis, said by 2012 more people shall be leaving than entering the workforce. They note that, the hiring and training of replacements, costs up to 1.5 times the position’s annual salary.

Jonathan Golub, VP and U.S. equity strategist with JP Morgan Fleming Asset Management: “What’s leading the market are companies that have no earnings and no dividends…there is a meaningful disparity between the well established companies and the rest.”