Saturday, October 11, 2003

10/11/03 A Preemptive Strike On BS

Yesterday the California State Employment Development Department released unemployment data for September. It is a good primer on how government figures work. Santa Clara County’s unemployment rate of 8% in August fell to 7.5% in September. I can hear the cheers on Wall Street. The traders read the headlines. Let’s read the nitty gritty. The number of unemployed county residents dropped by 6,400 to 67,800 in September, but the number of employed residents fell as well. Why did people move out of the county? Simple. The number of jobs in the county in September, 864,800, was the lowest of any month since February 1996. Overall, the state of California lost 16,600 jobs from August to September. Many of the job losses came in professional and business services, leisure and hospitality, and manufacturing.

Yesterday the CBO said tax receipts, especially corporate receipts, came in stronger than expected this fall. They might have mentioned that, for all of fiscal 2003, corporate tax receipts fell by 11.1%, and amounted to only 1.2% of our GDP. Let’s look closer. Overall federal government tax receipts amounted to $1.78 trillion in fiscal year 2003, and this was $70 billion less than in 2002. As a percentage of the economy, the federal tax receipts fell to 16.6%, the lowest level since 1959. The headlines fail to tell you that little tidbit. The problem is simple. Our receipts continue to drop and our spending continues to rise. You don’t need to have an MBA to know that spells trouble.

The headlines read that oil prices continue to climb. They have recently. That’s a party that will have a not-too-pretty ending for OPEC. Their stranglehold on the market is over. OVER. Russia will stuff it up their you know what. Russia’s Energy Minister Igor Yusufov said in Moscow that OPEC’s price target was too high. He stated “we don’t want to go over $25 a barrel because it hurts consumers, while OPEC believes that $28 a barrel- even $30 a barrel- is acceptable.” In other words, Russia will pull a chinese on the oil market. Russia is the largest crude supplier outside OPEC. World oil output increased by 300,000 barrels a day last month to just over 80 million barrels. Of that increase, Russia, Norway, and Kazakhstan added 135,000 barrels a day last month. Non-OPEC production has risen by 2.2 million barrels a day since September 2002. No one doubts that Iraq has large oil reserves. Russia, however, has the resolve and production to make oil prices fall, and to keep them at non-inflationary levels. In that respect, they have a commonality with China’s efforts in the manufacturing arena.

Today is a gathering of 57 countries of the Organization of the Islamic Conference. Top priority is “the eviction of foreign forces from Iraq, allowing the United Nations to administer Iraqi affairs as a prelude to restoration of Iraq’s independence, and to the rebuilding of what has been destroyed over the past 20 years, all in accordance with a clear and short timetable.”

The dollar hit a 9-year low versus the Canadian dollar and a 3-year low versus the yen. Imports in August exceeded exports by $39.2 billion. Given the weakness in the dollar, that number is extraordinarily high.

Joseph Abate, a senior economist at Lehman Brothers, stated “without some degree of pricing power and signs of stronger economic growth, both profits and labor market recoveries will remain softer than normal.” Some might question that statement. In fact, the GDP might grow almost 6% in the third quarter. That growth is a bit like the unemployment discussion earlier in this writing. One needs to go below the headlines. If expenses drop, then profits may rise faster than anticipated. In the case of the government, the deficit is lessened because spending on welfare payments, health care for the needy, and unemployment benefits were lower than forecast. That does not mean there was an improvement. Overall, spending rose and receipts dropped. In the case of corporations, cost cutting increased but revenues did not keep pace. Companies knock inflation on its heels. Auto makers spent an average of $4,123 on discounts and incentives in September, according to CNW Marketing Research.

Jeff Immelt took over the helm at GE from Jack Welch in September 2001. Since that time, GE has made 120 acquisitions worth about $50 billion. Immelt may be a great manager. I don’t believe any manager can successfully oversee the integration of 120 businesses in two years.

KoSa is a polyester fiber producer with a regional headquarters in Charlotte. They will discontinue production at its Shelby plant and lay off 150 employees. Cavalier Specialty Yarn will lay off 120 workers over the next three to six weeks. The company filed for bankruptcy protection last month.

John Challenger, CEO of Challenger, Gray, and Christmas, talking about the fear factor in the workplace: “They’re working harder because there are fewer people around them than there used to be, and they know there are more people on the job market. So they’re holding on to their jobs for dear life, to a degree. They’re protecting against the risk of losing their jobs and becoming one of the statistics of the more than 2 million people who have been out of work for 27 weeks or longer.”


Friday, October 10, 2003

10/10/03 You Can Handle The Truth

The Labor Department reported yesterday that first-time jobless claims fell by 23,000 during the week that ended Saturday. Why did they fall by 23,000? Because the prior week’s number was raised to a revised 405,000. In other words, the jobless number rose in the prior week. This week’s number shall also, in my opinion, be revised upward. By that time, Wall Street and the media will have forgotten the revisions. Meanwhile, the number of people continuing to collect state unemployment insurance remains in excess of 3,640,000 people. Taxpayers deserve better from the Labor Department. They deserve accurate and not weekly revised upward numbers. This is politely called fudging the facts. The forecast for jobs is not bright. The Business Council stated 63% of its member organizations would maintain current hiring levels next year, and that jobs for manufacturing would remain difficult to obtain. Overall, only 14% said they would step up hiring. A few companies, such as, GE and Union Pacific, have begun selective hiring. In sum, layoffs in technology and manufacturing have slowed, but they continue. The average weekly claims since the beginning of July have amounted to 403,400. In the first half of the year they were 419,270. A good part of the problem was outlined by Jeff Immelt, GE’s CEO. He said excess capacity remains in the economy. Immelt’s statement is reinforced by the Conference Board’s most recent survey of business leaders. Since January, almost three times as many CEOs have scaled back capital spending plans as those willing to expand those plans. In other words, CEOs are even reluctant to spend stockholder money. We must also remember that those same CEOs surveyed are selling stock in increasing proportions to their purchases in a ratio of 36:1.

Telefonica SA is the largest telephone company in Latin America. They plan to cut a fourth of its workforce in the region, or 6300 jobs. France Telecom SA plans to eliminate 13,000 jobs this year, and Portugal Telecom SGPS SA is cutting 1500 workers from the payroll.

Yesterday President Bush addressed the NEW Hampshire Air National Guard, Army National Guard, Reservists and their families at Pease Air National Guard Base in Portsmouth, NH. Bush has carefully crafted new rhetoric to justify the Iraq war. He stated “the regime of Saddam Hussein possessed and used weapons of mass destruction.” He didn’t say was in possession of WPM at the time of our invasion. He can no longer make that statement, and it was the latter which caused our country to go to war. Please note that, since the major combat was declared over on May 1, 94 U.S. soldiers have been killed in action in Iraq. Why did we invade Iraq? Bush said “I acted because I was not about to leave the security of the American people in the hands of a madman.” Where was the problem of security when he didn’t have WMD. I’m told the President likes to do what’s right. If that’s so, then he should apologize to the families of the military who have lost their love ones; apologize to the service members and their families who have been injured and wounded in Iraq; and apologize to the American people for “misspeaking,” as the Vice President describes such actions. Rather than being forthright, Bush pushes on despite any evidence of WMD. Rather, he clings to “our investigators have found evidence of a clandestine network of biological laboratories. They found advanced design work on prohibited longer-range missiles.” In other words, all of the above + $1 will get you on the bus. It means zilch.

The government is not finished with its tricks. Joshua Bolten is the Director of the OMB. The government’s fiscal year ended September 30, 2003 and the OMB last projected a budget deficit of $455 billion. The actual number will be released toward the end of October. Bolten said “my expectation is that we will go below $400 billion as a result of both slower expenditures than were anticipated in July… and some modest good news in revenue collections.” In other words, expenditures were held up until the new fiscal year which began October 1, and the release of the coming year’s deficit number can be delayed until after the presidential election in November 2004. The government will attempt to place an improving face on the budget deficit picture and state there is a dedication for exercising fiscal restraint. This is a dangerous situation. Figures are manipulated. The country’s fiscal well being is at risk. Citizens stand idly by as we invade a country based on misinformation. Our fighting forces are dying every day. Our service members are wounded and injured daily. When will the nation face reality? Recall your brain power and common sense, and your guts.

Before closing, I should touch on the job and inflation fronts. Bankrupt denim maker Cone Mills will close two North Carolina plants and lay off 625 workers. Fluor Fernald produced uranium products for the U.S. weapons program. They released 90 salaried and wage employees in construction, engineering, and project support positions, as well as laborers and porters. About 1.252 remain at this plant located 18 miles northwest of Cincinnati. It is expected that additional workforce reductions shall be forthcoming. Cygnus will reduce its workforce by 60%. Vector will close its Timberlake cigarette manufacturing facility and 150 workers will lose their jobs. There are a couple of bright spots. Houston’s new 1,200 room Hilton Americas-Houston will open on December 4, and the hotel is looking to fill about 1,000 jobs. Their job fair runs through Saturday, and the hotel expects between 6,000 and 8,000 applicants. The hotel estimates about 60% of the applicants are unemployed. Others were making $60,000 to $80,000 a year but now they just need jobs. Karen Gastile is a 41 year-old mother of a college senior and a 5-year old. She has been working temporarily as a $6 an-hour home health care worker. She had been working steadily since the 1980s in a customer service job for an insurance company but was laid off two years ago. She said of the new Houston hotel that “I hope and pray I’ll walk away with a job today…to sum up, since Bush, it’s been hell.” There is another tidbit of good news. It’s for China. Toyota will start producing car engines in China in 2005 for export to other Asian countries.

Crude oil futures closed around $31 per barrel and November natural gas closed at $5.50 per million BTUs. U.S. heating oil stocks are 8.6 million barrels below the five-year average. European supplies, including heating oil, have fallen to a 4.2% deficit versus last year. The one good news in the oil market was Nigeria’s labor unions canceled a strike that had been called to protest an increase in the retail cost of fuel.

Thursday, October 09, 2003

10/09/03 Employed Seasoned Women

Between 2000 and now, every sector in the work force has less employment but one. Three years ago, 50.3% of women between 55 and 64 were working full or part time. As of last month, according to the Bureau of Labor Statistics, that had risen to 54.1%. Jared Bernstein, an economist and co-director of research for the Economic Policy Institute, stated women of this age category “work in health services, real estate, and teaching.” He said that health services and real estate have been bright spots in the economy. They may be bright spots; however , according to the Institute for Women’s Policy Research, the median annual income of a woman between 50 and 61 is just under $29,000, about two-thirds of what it is for a similarly aged man.

A week from today the annual cost-of-living adjustment will be announced for the 47 million Americans receiving Social Security benefits. The average monthly check this year is $895. A 2% increase would mean $10 extra to anyone receiving a Social Security check for $500. A 2% increase would be the third-lowest boost in 15 years. According to the Social Security Administration, about 20% of all Social Security recipients have no other income.

Most investors have knowledge of a short sale in the equity market. How many know a short sale in real estate? You will be reading more about that. It’s coming to your neighborhood. To avoid foreclosure or bankruptcy, a growing number are turning to short sales, and that involves selling a home for less than what is owed. According to Loan Performance in San Francisco, the number of delinquent mortgages rose 50% between June 2000 and July 2003. A short sale stays on one’s credit report for 7 years, and is described as a late mortgage payment. A foreclosure remains for 10 years. In addition, one must pay taxes on the difference between the value of the home and the mortgage balance because the IRS considers the difference as taxable income.

Companies have a high expectation for the productivity of physical capital. As such, over the past 11 years the inventory to sales ratio has dropped from 1.56 to August’s 1.20. It is a reflection of the growing trend to just-in-time inventory at the retail level.

Musicland Group operates Sam Goody and Suncoast Motion Picture Co. They plan to close 150 stores and layoff 900 employees.

Bush will visit Japan a week from tomorrow. He will defend the Administration’s record on Iraq and the U.S economy as well as focusing on global trade and exchange rates. For the first time in three years, the dollar slid below the 109 yen level, and certainly doesn’t reflect a strong dollar policy. The latter is a bad joke.

The WHO is bracing for another SARS outbreak this winter. Dr. Lee Jong-Wook, stated “our working assumption is that SARS will come back…in the coming winter, if SARS is mixed with the common cold and flu this will cause a lot of problems.”

The United Food and Commercial Workers Union has called for a strike vote today. The results will be released tomorrow morning. The union represents 70,000 grocery workers at Albertsons, Ralphs, and Vons markets in Southern California. The three unionized chains control 75% of the Southern California market. WalMart, however, is making inroads with their supercenters. The three chains are pushing the union to accept insurance premiums, higher deductibles and co-pays for doctor visits, and a lower pay scale for new employees. Paul Clark, professor of labor studies and industrial relations at Penn State University observed “it’s going to get worse as WalMart opens stores in every conceivable market. This is a problem that’s not going to go away.”

Sean Egan is managing director of Eagan-Jones Ratings Co. in Philadelphia. He remarked that Ford has $25 billion in unfunded pension and health-care liabilities and that Ford has “very skimpy equity: $8 billion of shareholder equity versus $311 billion of assets. That really is a sliver.” He went on to state that “the industry is beleagured by inventory overhang. The time it takes to turn inventory over-basically sell a vehicle- industrywide has increased from 60 days in July 2002 to 78 days in July 2003." I continue to mention the auto industry. It faces significant problems- too little equity, unfunded pensions, rising health care liabilites, and too much inventory, and that inventory is taking longer and longer to sell. It is not accident waiting to happen. It has already happened at Chrysler and Ford, and GM will need to be very adept to avoid a mishap.

Wednesday, October 08, 2003

10/08/03 Part Time Employment

Over the past week I have received many requests to more fully discuss the part time employment situation in our country. This subject came to the forefront after the Department of Labor had mentioned the primary cause for the rise of 57,000 jobs was the increase of 33,000 part time workers. Many times I have mentioned the growing problem of the inability to find full time, permanent employment. There are 5 million temporary workers in the U.S. It is a part of the workforce that continues to grow each year. Companies do not want to pay benefits as they do with permanent employees. In addition, until there is a growth in the revenue stream for companies, there will be a reluctance to hire full time workers. That is understandable. There is one more point to mention. The number of workers who have been unemployed for 27 weeks or longer has reached a 20- year high, and many welcome the opportunity to work even if it’s part time.

Yesterday, Cooper Tire announced an agreement with Hangzhou Zhongce Rubber Company of Hangzhou, China to supply Cooper with 250,000-350,000 radial medium truck tires annually. This will replace the production at the company’s Albany, Georgia plant where 1,500 workers are employed. HP also announced additional cuts of 1,200 workers and UC Berkeley announced laying off 200.

Consumer credit has now reached the $2 trillion mark. That requires a concerted effort to spend.

Japan spent $40 billion buying U.S. dollars in September. It was money down the drain as the dollar broke below the 110 yen level.

Osama bin Laden is at large. Saddam Hussein is at large. President Bush expressed doubt the Justice Department will ever find the administration official who disclosed the identity of the CIA operative. 320 U.S. service members have died in Iraq since March 20. Maybe the voters have an answer for this ineptness. California voters finally stood up and were counted.

According to the Pew Hispanic Center, more than half of the 759,000 Hispanics who entered the workforce between 2000 and 2003 were unable to find jobs, even though overall Hispanic employment increased by 379,000 to about 15 million. The unemployment rate for Hispanics in August was 7.8%.

For years, Costco has been on my list of favorite companies. Unfortunately, WalMart’s Sam’s Club has Costco in their pricing line of fire. The price war is taking its toll. In August, Costco warned they would not meet its quarterly earnings forecast of 54 to 56 cents. Today they reported a quarterly drop to 51 cents. WalMart is chugging on all cylinders. They can afford a price war. Costco cannot. WalMart smells blood. They will keep up the pressure on Costco’s margins. Hopefully, Costco’s small but growing international business will help to offset the pricing situation.

Yesterday, ten Southeast Asian nations signed an accord establishing a Europe-like economic community by 2020. In addition, it calls for a regional security community to combat terrorism and other transnational crimes. The accord sets deadlines for lowering tariffs and travel restrictions in the region where trade totals $720 billion a year. The Southeast Asian countries hope, by coming together, they will better counter the economic power of China and India.

Tuesday, October 07, 2003

10/07/03 Keeping It Real

The earnings season has arrived. The expectation is for a 16% quarterly rise in profits. We must focus on the top line and not just the bottom line which reflects cost cutting, including closed plants and employee layoffs. We should notice whether a business is growing, and the nature of that growth. For example, Pepsi reported higher profits mainly due to Frito Lay's snack foods. That's great but they have substantial investments in other areas, particularly soft drinks. When you think of Pepsi, you think of the drink and not snack foods. Today Alcoa reports. Last year's quarter stunk because aluminum prices were 59 cents a pound. This quarter the price is 65 cents and should produce a profit gain of about 4 to 5 cents a share over last year's 26 cents. There is still a world wide oversupply of aluminum, and the aircraft and auto markets have not been great recently for Alcoa. The report should not be startling.

The U.S. dollar is trying to hold 110 vs the yen and 1.18 vs. the euro. However, the Mexican peso fell to a record low of 11.28 against the dollar.

The 2004 campaign message was released last week by Howard Dean. He stated "by this time in his presidency, President Clinton had created over 7.5 million private-sector jobs. In contrast, President Bush has lost over 3.2 million jobs in his 33 months in office."

According to the Natinal Commission on Teaching and America's Future, almost one third of teachers leave the field within the first three years and half before their fifth year.

Goodyear will close its Huntsville, Alabama tire plant. About 1,100 jobs will be impacted.

Rolls-Royce is forecasting 2003 business jet deliveries of about 500 units, down 25% from 2002. Deliveries for 2004 are expected to be at the same level, followed by a slow recovery in 2005.

The Business Travel Coalition said travel spending is expected to fall 7% in 2003. Next year 7 in 10 North American companies surveyed will spend the same or less on business travel next year. About two-thirds of respondents expect to buy more tickets from low fare carriers next year.

This is important. In the third quarter, corporate insiders sold 36 shares of stock for every one share they purchased. This is the worst ratio in ten years. I believe this is so one-sided, that, at the very least, it would be prudent to reduce equity holdings.

Still Governor on Sunday, Davis signed a mandatory health insurance law for California. For companies with 200 or more employees, those firms must provide health insurance for the employees and their families by 2006. With companies having between 50 and 199 employees, health insurance needs to be provided for the workers only by 2007. Companies with 50 or less employees are not affected.

Monday, October 06, 2003

10/06/03 Resilient Oil Prices

Oil prices held above $30 per barrel as Nigeria's main trade union called for a general strike to begin Thursday. The first phase of the strike is expected to last two weeks. Nigeria is the world's seventh largest oil exporter. In additon, two hurricanes and one tropical storm have kept two oil shipping ports shut down in Mexico.

The U.S. Department of Labor and Forrester Research expect 587,000 jobs to be exported overseas in 2005. Recently, Oracle said it was moving 2000 developer jobs from the U.S. to India and HP stated they would be closing a Florida service operation and sending its 1200 jobs to India. With 51 million people on the do-not-call list, telemarketers will need to lower labor costs as they endeavor to absorb their recent financial hit. Labor and rent costs are lower in other countries. The average telephone sales employee is paid $10,000 annually in India compared with $40,000 in the U.S.

In the midst of the hottest housing market in Phoenix history, a record number of people are losing homes to foreclosure. The foreclosure rate is outpacing record increases in home sales and prices, and so far this year, according to the MBA, home foreclosures have climbed an additional 10%.

Gail Thompkins-Bischel's husband serves as a National Guardsman, and those servicemen were told those serving in Iraq would have their stints "in theatre" doubled from 6 months to a year. Her husband was to return home on Nov. 15 in time for Thanksgiving. She says "they pulled the rug out from under us." Major Gen. Paul Monroe, commander of the California National Guard, said "they've been handed a bitter pill, and I can't coat it with enough sugar."

The Chicago Mercantile Exchange will offer futures contracts on the U.S. consumer price index not adjusted for seasonal fluctuations.

Sunday, October 05, 2003

10/05.03 Yom Kippur

This is the most solemn day of the year for the Jews. Yom Kippur is the last day that God keeps open the Book of Life. It means there is a list for those to live and for those to die. By repenting during Yom Kippur, a Jew starts the new year with a clean slate. It is the day of atonement and intertwined is forgiveness with repentance.

I will not make this a traditional blog but rather will simply point out a couple of things I found interesting.
The Toyota Center, a $235 million downtown arena, opens tomorrow in Houston, and it will be the home to the Rockets, Comets, and Aeros.

Costco is increasing the amount employees are required to contribute to their health insurance plan. The mandatory contribution is being raised to about 8.5% from about 4.5%.