Saturday, February 28, 2004

2/28/04 Our Saturday Field Trip

You will notice that we have an addition to today’s group. I invited Allan Greenspan to join us. After listening to his address yesterday at the Stanford Institute for Economic Policy Research, I thought a trip to Main Street would do him some good. His optimism was reflected in this statement. “I would say that we could get a pop in employment almost any time…job creation occurs when you no longer can dip into the system of potential productivity advances to substitute for labor…my own judgment is that at some point that is almost certainly going to happen, indeed it is conceivable it may be happening now.” We will be visiting Connecticut, Mississippi, Michigan, Wisconsin, Oregon, and Hawaii. When our field trip is completed, I am confident that Alan will have a different take on the employment landscape.

Watch your step getting off the plane. There’s Steve Finger. He runs Connecticut-based Sikorsky Aircraft. He does not look very happy. Steve tells us he wrote a letter to workers. The Pentagon’s cancellation of the Comanche helicopter program will affect more than 400 jobs at their Bridgeport plant and about 200 at their Stratford, Conn. facility. In addition, another 100 or so workers will lose their jobs in Florida and Alabama. The Army announced that it was dropping the $39 billion program after spending nearly $7 billion and 21 years in development. The money will be spent instead on additional Black Hawk helicopters. This loss is certainly a big blow to Sikorsky, its employees, and particularly, Bridgeport and Stratford.

We’re on our way to Jackson and Carthage, Mississippi. Tyson Foods operates chicken processing plants in those locations. The Jackson plant was built in 1961, and the Carthage facility in 1995. There’s Bill Lovette, the Tyson Group Vice President of Food Service. He tells us that the Jackson plant processes 850,000 birds weekly and Carthage does 1.45 million weekly. The two plants combined employ 2,700 workers. They plan on combining production at Carthage and reducing employment to 1,800. Bill observed “we are also faced with a compelling need to install newer, more automated processing equipment, and it simply makes more business sense to invest that capital in the more modern facility. In the long run, this decision will help us improve the return on invested capital for the chicken segment of our business.” It will be difficult for those 900 workers to find other jobs. This is a tough hiring environment.

We are on our way for a short visit with Jennifer Granholm, Michigan’s Governor. When she heard Alan would be on our field trip, she made herself available. She told us that, on April 27, the governors of Wisconsin and Pennsylvania will join her on a visit to Washington, DC in an effort to seek federal help in reversing the loss of manufacturing jobs. Governor Granholm informs us that manufacturing accounted for 23% of Michigan’s gross state product in 2001. Since January 2001, the state’s manufacturing employment has fallen by 15% or 127,000 jobs. This decline has ravaged Michigan’s economy. She does not mention a pop in employment.

I see Jim Doyle, Wisconsin’s Governor. I appreciate his making himself available this Saturday. We no sooner get off the plane and he mentions that this week has been a bad one for Wisconsin workers. It seems that Dean Foods is closing its Madison plant and cutting 89 workers. Believe it or not, Bayside Senior Housing in Bayside is closing and 64 employees will lose their jobs. Trek Bicycle in Waterloo is dropping 80 workers from its payroll. Briggs and Stratton will cut 44 workers from it facility in Milwaukee. To make matters even worse, Perry-Judd’s in Waterloo will close its plant and 650 workers will be affected. It was a bad week for Wisconsin’s Main Street and its workers.

The pilot informs us that sunny skies are expected in Oregon. Amy Vander Vliet, a regional economist for the Oregon Employment Department, is meeting us at the Portland airport. Amy is a straight shooter, and greets us with “I think we’re still seeing a trend of tentative growth. It’s going to be extremely difficult to find a job.” She informs us that January was not a good month for Oregon. The state lost 3,600 jobs and employment dropped to 1,564,800 and the jobless rate climbed to 7.7%. Since June 2003, only 10,000 jobs have been created. Amy informed us that Paul Allen’s (Microsoft co-founder) Oregon Arena Corp., which operates the Rose Garden Arena, home of the Portland Trail Blazers, filed for Chapter 11 bankruptcy on Friday. The company had been scheduled to make a $3.2 million interest payment on Monday. Amy provided an example of the tough hiring environment in Oregon. She mentioned that Leticia Estrada has been looking for a job in the accounting field for six months, and that her search has produced nothing but discouragement. There are meager postings at the Oregon employment office in Portland.

We have a long flight to O’ahu and there is some time to discuss Alan’s remarks made yesterday on the Chinese yuan. He stated “the one thing I’m reasonably sure of, however, is that if the value of the Chinese currency does rise, which I think is a fairly reasonable expectation… it is not going to shut down exports from China to the United States, which will then be replaced by U.S. production.” Guo Shuqing, head of China’s State Administration of Foreign Exchange, stated “ the inflation rate is rising and the asset bubble is starting to get worrying.” In January his country’s foreign currency reserves increased by $13 billion to $416 billion. Guo observed “the ways to reduce the balance of payments surplus include increasing imports, expanding capital outflows, reducing capital inflows and enhancing the elasticity of the exchange rate.” In sum, the effort will be to enhance the demand for the U.S. dollar and reduce demand for the yuan. That doesn’t mean the peg will be changed today. The wider band will be effectuated some months from now.

Here we are. Marcus Gillespie, the owner and president of Sunrise Construction, is over there. He builds home frames for Shuler Homes Hawaii and others. Marcus informs us that he has 160 union carpenters but is laying off another 20 workers today. He stated “we’ve already laid off 10, and we’re expecting to probably let go another 30 to 40 guys next Friday.” Ron Taketa, financial secretary and business representative for the Hawaii Carpenters Union, the largest of the Islands’ trade unions, is with Marcus. Ron and Marcus tell us about the 22-day-old concrete strike that began on Feb. 6. The issues focus on sick leave and employee contributions to healthcare plans. By the end of next week there won’t be any concrete. Bruce Coppa, president of Pacific Resource Partnership, joins us. He stated “this strike is having a lot of repercussions across the community. At the end of this week, you’re going to start to see some real telltale signs. Morale is an issue, and people’s mortgages and car payments are in jeopardy.” As the strike drags on, the number of layoffs will only increase.

It’s been a busy day. I know that today’s field trip is of no interest to investors on Wall Street. It’s business as usual there. The Investment Company Institute reported yesterday that stock mutual funds received $43.7 billion in new cash last month, and this pushed total fund industry assets to a record $7.5 trillion. The previous record was $7.47 trillion in August 2000. In addition, hybrid funds that own stocks and bonds took in $5.5 billion in January. It must be wonderful to shut out the noise from the millions of unemployed, under employed, and discouraged workers on Main Street. For individuals like Alan Greenspan it has been out of sight and out of mind. Maybe today’s field trip expanded Alan’s vision.

Peter Thiel: “Everyone is asking when the Fed will have to start raising rates. But the real question is: When does the Fed throw in the towel and cut rates all the way to zero? They have one more point to go.”

Friday, February 27, 2004

2/27/04 Employee Healthcare Benefits

United Food and Commercial Workers International: “If the supermarket giants—profitable, growing Fortune 50 mega-corporations—can launch an attack on health care benefits, then every employer is sure to follow….in one year, over 2 million lost health insurance. That’s over 6,000 workers a day…no worker should ever again be forced to choose between a paycheck and health care benefits. No worker should ever be forced into the streets for five months to protect health care for their families.” The 70,000 UFCW members will vote on the proposed agreement with Ralph’s, Vons, Albertson’s, Kroger, and Safeway tomorrow and Sunday. The strike is estimated to have cost the companies $1 billion in lost sales. About 900 stores were affected. The major beneficiaries have been Costco, Whole Foods, and Wal-Mart. Before anyone gets too excited about the ratification of this agreement, another problem is looming in the coming months, and it’s much bigger. There are upcoming negotiations from Sacramento to Washington, DC with respect to United Food and Commercial Worker union contracts affecting 250,000 employees. These contracts expire in coming months. Similar issues are at stake—proposed deep cuts to healthcare benefits and a proposed two-tier wage system that would pay new hires less. Ron Lind, spokesman for the coalition of eight unions, stated “we are willing to engage in health care cost containment. But it is one thing to make changes with a scalpel. It’s another to use a chainsaw.” The fireworks have not ended.

The Conference Board’s Help-wanted Advertising Index rose one percentage point in January to 38; however, the Index stood at 41 one year ago. The job market is tight. Yesterday, the new $200 million Hard Rock Hotel & Casino in Hollywood, Florida began a three-day job fair. The Seminoles are hoping to find 1,800 employees in time for a late-April opening. Some applicants waited in line for five hours. The lines snaked around the parking lot. About 2,500 people showed up early in the morning for these jobs. One applicant stated “I would work right now just for the benefits. Health insurance is out of control.”

The Bureau of Labor Statistics was created 120 years ago. Its first commissioner, Carroll Wright, stated “the incumbent has soon realized the sacredness of his office and he has learned to tell a statistical lie is the most harmful thing a man can do.” We sure could use Wright’s appreciation for right and wrong today. We have an Administration grounded in statistical “revisions.” I said that so nicely. It’s still early.

Yesterday Morningstar Foods announced that it will cease operations at its plant in Madison, Wisconsin. The closure will affect approximately 100 employees.

According to a new study by Bain & Co. and released yesterday, nearly 40% of companies in California are planning to move jobs out of state. All of the senior executives interviewed see the business climate in California unfavorably. These companies employ nearly 500,000 workers in California. Dick Kovacevich, chairman and CEO of Wells Fargo, stated “business as usual is not working in California. The state must…improve the competitiveness and keep high-value jobs in the state. If nothing changes, things are likely to get worse.” I guess we can expect a lot of homes to go up for sale. The tight housing market should change dramatically as businesses move jobs out of California.

GE and Honda formed an alliance to enter the microjet market. Building jet engines for small, low-cost jet aircraft makes a good deal of sense. With lower operating costs and more flexibility in landing at smaller airports, there should be a growing demand for such aircraft.

The Sept. 11 Commission is scheduled to finish work on May 27, but its members are seeking at least a two-month extension. They have cited repeated delays because of disputes with the Bush administration over access to witnesses and documents. House Speaker Dennis Hastert, R-Ill, remains opposed to providing the extension and does not intend to bring any legislation to the floor. Maybe House members should consider growing a set of cojones and standing up to the Speaker. Hastert will end up looking like another Aristede because a compromise shall be reached and a new July 26 deadline set.

In the week ended Feb. 21, the number of people applying for unemployment benefits for the first time rose 6,000 to 350,000. The four-week average rose 2,750 to 354,750, the fourth consecutive increase and the highest level since December of last year. Bob Mellman, J.P. Morgan economist, stated “I think hiring is slow, but all signs are that hiring is coming.” Howard Stern could probably have an appropriate comment on “coming.” Maybe Mellman should have stood on that five-hour line in Florida hoping to get a job at the new casino. The applicants came, the line moved slowly, and the pace of hiring didn’t set the world on fire. As an alternative, Mellman could stand on the picket lines the next time the UFCW workers go on strike. Better yet, Mellman can join the BLS and revise the employment numbers. One better, J.P. Morgan could consider replacing him with someone who reports on the facts. As a reminder, this is a no bullshit zone.

Lastly, we can look forward to today’s revisions on the fourth quarter GDP growth. It will be lowered. The trade gap was worse than expected, construction was worse than expected, inventories were worse than expected, etc. etc. But, economists will be excited about the prospects for growth in 2004. It won’t be slow. It will come quickly. Where is Carroll Wright?

Thursday, February 26, 2004

2/26/04 Mass Layoffs, Rollbacks, Growth Warnings

Starbucks Chairman Howard Schultz: “The current high level of revenue performance is not sustainable.”

Microsoft CFO John Connors: “We won’t have the growth we’ve had in the past years in revenue and profit, but we should be able to deliver a decent year in terms of growth.”

Wal-Mart’s new strategy: “Rollbacks- to save you even more.” Before you enter a Wal-Mart store, you will notice that sign all over the windows. When you enter the store and see the aisles, you will see signs for rollbacks all over the store. An item that sold for $12 might now be $7. Wal-Mart is on a roll. They have their corporate heel on the windpipe of their competitors. We’re entering a new round of competition. Consumers will pay lower prices than ever before at Wal-Mart. Suppliers will receive lower prices for their products; however, as Wal-Mart grows, their volume will grow as a supplier and their profit margins will improve as their factory throughput increases and their efficiency is enhanced. Many of the less efficient will fall by the wayside. That will be true of suppliers and competitors. The rollback strategy will help in placing a lid on the CPI. Soon, Wal-Mart will account for 10% of retail sales in the U.S. (excluding auto parts and supplies).

In January, U.S. sales of previously owned houses fell 5.2% to an annual pace of approximately 6 million homes. However, in California, the median price of an existing home increased 20.7% and sales increased 5.3% compared to the same period a year ago. In January, in California there was only a two months supply of houses for sale.

According to a study by the Keystone Group of Los Angeles, over 261,000 manufacturing jobs and $98 billion in gross sales of California-manufactured products disappeared in the three-year period between 1999 and 2002. Manufacturing jobs in California pay almost 50% more than the average of all jobs in the state. The study indicated that manufacturing jobs have a pronounced “multiplier effect” in that they create jobs in other sectors of the economy, at a rate at least twice that of the trickle-down from the retail industry. I mention this study in light of the January mass layoff numbers released yesterday by the U.S. Department of Labor’s Bureau of Labor Statistics. In January 2004 there were 2,428 mass layoffs by U.S. employers (each action must involve the layoff of at least 50 people from a single establishment). The number of workers involved totaled 239,454 compared with the year ago period of 2,315 mass layoffs affecting 225,430 people. This is but one more indication that hiring improvement, when it does take place, has been limited in scope.

Tomorrow there will be a mass layoff at Maytag’s washer and dryer manufacturing plant in Newton, Iowa. A total of 170 production workers will be affected. Management stated that the layoffs are coincidental to the Samsung agreement announced Tuesday. Maytag and Samsung reached an agreement to build a new line of high-efficiency, front-load laundry products in South Korea under the Maytag and Amana brand names. Maytag maintains tomorrow’s layoffs are not a result of the agreement with Samsung. The company will close its refrigerator factory in Galesburg, Illinois later this year and move some of that production to Mexico. Already about 400 Maytag employees have lost their jobs in cuts over the past year. Maytag’s contract with the UAW expires in June and with the International Association of Machinists Local 1526 in September.

Some time today there should be an agreement reached between the unions covering the 70,000 supermarket workers and their Southern California employers. The strike has been going on for about 5 months.

Richwood Meat Co. of Merced, California is recalling 90,000 pounds of beef distributed to military bases in Asia and retail stores in western states because of fears the meat could be contaminated with a deadly bacteria. A Japanese laboratory found E.coli bacteria on some of the meat. When a foreign country finds your product contaminated, it’s a lousy reflection on the safety inspections in our country. However, this is nothing new. Business is usual under our USDA.

Alan Greenspan: “Progress in creating jobs has been limited.”

Alan Greenspan: “The degree of uncertainty about whether future resources will be adequate to meet our current statutory obligations o the coming generations of retirees is daunting.”

According to Reis Inc. of New York, the apartment vacancy rate of 6.9% is the highest in 15 years.

Wednesday, February 25, 2004

2/25/04 Consumer Confidence And Jobs

Edward Gramlich: U.S. Federal Reserve Governor talking about the February’s drop in U.S. consumer confidence: “This is a modest drop. There’s always some volatility. It’s a fluctuation and confidence has come back from last year.”

Gramlich is correct in stating that confidence has come back from last year. Last February 25 was less than a month before we invaded Iraq. At that time consumer confidence had plummeted to 64, a drop of almost 15 points from the prior month. It was the lowest reading since October 1993. A year later the index has risen to 87. Although there was a drop of 9 points from the previous month, over the past year considerable improvement in the overall consumer confidence index has taken place.
Can a Fed Governor be half correct? The answer is yes in the case of Gramlich. Both he and Wall Street missed the most important point. In order to have a proper assessment of consumer confidence, today it is necessary to step back in time to one year ago. The answer can be found in confidence concerning jobs. This is very important. Despite the improvement in the overall index from 64 to 87 over the past 12 months, the percentage who saw jobs as hard to get had actually increased from roughly 31 percent to 32 percent, a ten year high. The proportion who saw jobs as plentiful remained the same at just over 11 percent. There was a pickup in those who thought more jobs would become available. It rose from the meager base of about 13 percent to 18 percent. Interestingly, 18 percent also expect fewer jobs to become available today. Only 16 percent of those surveyed anticipate an increase in their incomes. In other words, Gramlich missed the crux of yesterday’s report. That should come as no surprise. He is a government worker.

Lynn Franco, Director of the Conference Board’s Consumer Research Center: “Consumers remain disheartened with current economic conditions, and at the core of their disenchantment is the labor market. While the current expansion has generated jobs over the past several months, the pace of creation remains too tepid to generate a sustainable turnaround in consumers’ confidence. And with consumers anticipating economic conditions to remain about the same in the months ahead, their short-term outlook turned less optimistic.”

With the report on mass layoffs due today, there is little reason to expect consumers will feel more buoyant in their level of confidence. It is important to be keenly aware of the crosscurrents in the consumer landscape. Wal-Mart and Target may be more optimistic and refund checks and lower tax payments will provide boosts to the pockets of consumers. At the same time, appliance makers are finding it more difficult, for example, to sell their products. It’s a mixed bag.

In 2002, the West Nile virus infected 4,156 people in the U.S. and 284 subsequently died. In 2003, 9,000 contracted the virus and 230 died. Only Alaska, Hawaii, Oregon, and Washington State reported no human cases last year. More than 1,000 blood donors have tested positive for the virus in the United States.

Yesterday the EU decided to ban imports of chicks and eggs from the U.S. for one month after the discovery of bird flu in Texas. Hundreds of U.S. exporters will face $200 million in EU tariffs unless the U.S ends an export-tax credit by Monday.

This morning the Tata group, comprising 91 companies and India’s second-biggest business conglomerate, announced that Jeffrey Sage, a global automotive solutions executive with IBM in Detroit, will join Tata Motors, India’s biggest vehicle maker.

On Sunday, the British newspaper, The Sunday Express, reported that Osama bin Laden had been found and was surrounded by U.S. special forces. The Washington Times reported on Monday that a top-secret U.S. commando team, Task Force 121, the one that had helped capture Hussein, was heading for Afghanistan. Yesterday CNN reported that Pakistan reportedly moved between 8,000 and 10,000 soldiers into the area, and that Pakistan forces had arrested 20 people so far in this operation. All we do know is that the hunt for bin Laden continues. The rest is speculation.

Tuesday, February 24, 2004

2/24/04 In Good Shape

Some pretty savvy bond managers bought 10-year Treasury Inflation Protection Securities (TIPS) two years ago. During this time period the yield on TIPS has dropped from 3.5% to about 1.8%. How could smart people be so wrong? TIPS are linked to the CPI, and the latter has been gaining at a rate approximating 1.8%. Therefore, the threat of inflation has been low and that is bad news for the performance of TIPS. There are exceptions, but it is fair to state that supply continues to overwhelm demand. Until that phenomenon changes, inflation should remain muted. Rather, one might consider the alternative. If demand does not pick up during an economic recovery, when will it?

Greenspan: “Overall, the household sector seems to be in good shape…over the past two years, significant increases in the value of real-estate assets have, for some households, mitigated stock market losses and supported consumption.” Why should I worry? Greenspan explained that U.S. households own more than $14 trillion in real estate assets, and that’s almost twice the amount they own in mutual funds and directly hold in stocks. As such, even though consumer debt hit a record $2 trillion in December, and even though a record 1.6 million people filed for personal bankruptcy in fiscal year 2003, I do not need to worry because Greenspan proclaimed that “bankruptcy rates are not a reliable measure of the overall health of the household sector because they do not tend to forecast general economic conditions.” We had better root hard for home prices to keep rising. That appears to be our safety net. If the bankruptcy rates were declining, I have a feeling Greenspan would state they do indeed reflect the overall health of the household sector. Put simply, I think his statement is bullshit. If individuals file for bankruptcy, what happens to their debts? Not all the money owed is to large credit card companies that simply write it off as a bad debt. There are plenty of small businesses that are hurt, and that hurt ripples through communities. Bankruptcy filings are not a sign of fun and games. They reflect real hurt. You cannot have 45 million people without health insurance and millions of Americans either out of work, without a full-time job, or too discouraged to find a job and state the household sector is in good shape. If Greenspan believes those words, he should retire immediately before he ends his career on a worse than down note.

According to a recent survey by Habif, Arogeti, and Wynne, 20% of Georgia manufacturers have lost sales in excess of $1 million to offshore competitors in the past five years. Sixty-two percent of Georgia’s most profitable manufacturers reported losing sales to offshore competitors in the last five years. Manufacturers that sell more products outside the U.S. experience higher profit rates. Just 5.7% of Georgia manufacturers have moved activities overseas in the past five years, but 30% of publicly owned Georgia companies are “somewhat likely” or “very likely” to do so in the next five years.

The Commerce Department reported that e-commerce sales rose by almost 30% in the last quarter of 2003 compared with the previous three-month period. They now represent close to 2% of total retail sales.

Clariant, the Swiss chemical company, will cut 4,000 jobs over the next two years.

Yamanouchi Pharmaceutical and Fujisawa Pharmaceutical are merging and will become Japan’s largest pharmaceutical company. We can look forward to more global combinations in the healthcare industry.

Gonzales County is one of Texas’ top poultry-producing counties with more than 85 million birds with a value of $100 million, according to Agriculture Department data. On Monday the avian influenza virus discovered last week in Gonzales County was reclassified by the USDA as a highly potent strain based on DNA testing. The CDC has no evidence of any human health implications. Nevertheless, the Philippines and South Korea promptly banned imports of chicken and other poultry products from Texas. It is not the same strain that killed 22 people in Asia. However, it is the first time since 1983-84 that high-pathogenic avian flu has been found in the U.S. Philip Tiereno, director of microbiology at the New York University Medical Center, stated the real fear is that, in the process of jumping between chickens and humans, there could be an exchange of genetic matter or mutation, and this could make this strain more deadly.

Foreigners own 42% of the $3.6 trillion of U.S. treasury securities outstanding. If we do not reduce our deficits and cut government expenditures, waste, and pork programs, the majority of our nation’s outstanding indebtedness will be owned by non-Americans. This is a WMD soon to explode in our neighborhoods.






Monday, February 23, 2004

2/23/04 The American Way

If Ralph Nader can garner 1.5 million signatures, then it is his right to run for the presidency. In the last election he received 2.7% of the votes cast. He did not lose the election for Gore and the Democrats. Gore lost the election. He stunk the house out. It should have been a slam dunk. All he needed to do was to hammer away on the economic gains of the Clinton years. Gore was an inept campaigner and deserved to lose. I agree with a statement Nader made on Meet The Press. He stated that, if Bush cannot trust the American people with the truth, then the American people should not trust Bush with the presidency. That statement alone, in my opinion, makes his run for the White House an effort worth appreciating. Nader is out-spoken and bright. He is tough and, at the same time, understanding of the underdog’s plight. The race is better for Nader being in it. If anyone is afraid of him, it should be Bush. Nader will hone in on his weaknesses and exploit them for all of America to see. Maybe the various factions that support Bush will open their eyes. When you’re surrounded by hand guns and rifles in one’s home, I know one can be a bit preoccupied and oblivious to the truth. Nader couldn’t break the preoccupation of those in 2000. Maybe he’ll have better luck in 2004.

It’s the American dream to afford to own a home. Is an interest-only mortgage an example of owning a home? You don’t pay the principal. You don’t build up equity. As long as home prices continue to escalate, no one gets hurt. There is nothing to prevent individuals from making principal payments in addition to the interest-only payments. Today’s most popular product is the 5/1 ARM, which fixes the interest rate for the first five years and then converts to a one-year adjustable rate. In the third quarter of 2003, the Mortgage Bankers Association stated that ARMs ended up in foreclosure at a 0.55% rate versus fixed-rate mortgages at a 0.27% rate. Fannie Mae reported that ARMs are about 40% of the dollar volume of today’s mortgage market. With interest rates at 40-year lows, it is difficult to understand why more home buyers don’t lock in fixed rates at present levels. The answer may be that adjustable rate mortgages are lower than fixed rates and that the average borrower keeps a mortgage five to seven years. Tom Smith, senior product manager at Fannie Mae, stated “the biggest appeal is the increase in purchasing power the consumer has by being qualified at only the interest payments on the loan.” Doug Duncan, chief economist of the Mortgage Bankers Association, stated “they don’t intend to build up equity in that property but to free up cash to solve other issues they may have financially. Then they move in three or four years anyway.” There is one additional advantage. With lower payments than if the homeowner were actually paying off the mortgage loan, the individual can still take the tax deductions for that interest. Everyone comes out a winner. Of course, interest rates need to stay low and home prices need to rise in value. It’s been a picnic for the last several years. If that formula for success should change, as with derivatives discussed yesterday, there could be a heap of trouble. American ingenuity is always at work. We can extend this winning formula to interest-only home-equity loans. It doesn’t get much better than that. Of course, with no equity, there cannot be true ownership. Am I the only one bothered by that concept?

There are 161,000 people in New York City’s securities industry. The New York State comptroller’s office stated that those in the industry received an average bonus of $66,800 in 2003. I hope investors believe they got their money’s worth in service and advice. Rising equity prices can mask inefficiencies, and that I am stating gently.

The British Medical Journal study reported that a major downsizing (cutting the workforce by more than 18%) helped to create an increase of 18% in the sickness rate of employees following the downsizing. It’s a lose-lose situation. Either you lose your job through downsizing or you stand an increased risk of sickness. It’s better to work in NY in the securities industry and receive a bonus of $66,800. There’s less chance to be downsized and less risk to get sick. Without a conscience and without a sense of wrongdoing, each day has blue skies. Just as interest-only mortgages and interest-only home equity loans are the rage, so is program trading, a mechanism that comprises over 50% of each day’s trading volume. The inherent worth and cash flow of a business take a weak second place to trading indices and scalping 1/64s of a point. Is this the mark of investing and building capital for over 50% of Americans who are owners of stocks? I don’t believe so. Those are folks left behind. This new game was not meant for them.

EBay has reported that about 430,000 individuals and small businesses make their livings off this portal, nearly three times the number in late 2002. Today the company will begin offering small business credit lines up to $50,000 and financing options for industrial and high-tech equipment that costs more than $2,000 in addition to shipping and tracking services.

The tax preparation business is changing. In 2002, only about 1,000 U.S. taxpayers had their income tax returns prepared by accountants in India. This number rose to 20,000 in 2003; however, this year the number is anticipated to jump to between 150,000 and 200,000 returns. The average accountant in India makes one tenth of the salary made by those in the U.S. India graduates about 50,000 accountants per year. They can comfortably handle 5 million U.S. returns or more.

Sunday, February 22, 2004

2/22/04 Double Taxation And Worse

Charles Munger, Warren Buffett’s partner: “We tried to sell Gen Re’s derivatives operation and couldn’t, so we started liquidating it. We had to take big markdowns. I would confidently predict that most of the derivative books of (this country’s) major banks cannot be liquidated for anything like what they’re carried on the books at. When the denouement will happen and how severe it will be, I don’t know. But I fear the consequences could be fearsome. I think there are major problems, worse than in the energy field, and look at the destruction there.” Let’s suppose Munger is partially correct. There are estimated to be $41 trillion of derivatives floating through the atmosphere of the financial world. The value of all the stocks owned in the public domain are but a small fraction of that number. The value of the U.S. debt is $7 trillion. Our GDP is approximately $10 trillion. Derivatives overwhelm all of the aforementioned. Munger is one of the smartest guys managing money. If you doubt that statement, look at the yearly returns for Wesco Financial, the company he runs. Berkshire Hathaway owns 80% of Wesco Financial. Derivatives never sleep. No matter what happens around the globe, derivatives are alive and well. They go tick tick tick 24 hours a day.

Bill Ford, Ford Motor’s CEO: “If U.S. manufacturers have the health care burden, and if you don’t elsewhere, it starts to look more attractive to put your dollars elsewhere. That’s a real drag on the economy in terms of job creation.”

Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc.: “There is a huge reluctance on the part of business to hire unless they absolutely, absolutely have to. The cost of hiring someone can also be an expensive proposition, especially in health care.”

Firing is starting to stabilize and diminish; however, it takes some time for net employment to show marked improvement. For example, Bay Area and East Bay tech employment in December 2003 was only slightly below the total for December 2002. The Bay Area’s nearly 303,000 jobs at the end of 2003 were down 6% from the year before level. In the East Bay it was down 3.1% over the 12 months. Nevertheless, the 303,000 figure was 34% below the employment height of 462,000 jobs reached in December 2000, and it is the lowest level in nearly eight years. In talking with CEOs and hiring professionals, the bottom line is that it’s easier to get a contract job than a full-time job. Bay Area employers increasingly rely on contract workers as a way of cutting benefit costs, particularly health benefits. The main engine to getting hired is the ability to add revenue or cut costs. Secondarily is the need to fill a technical void, such as, computer security systems or web service skills.

Douglas Conant, Campbell Soup CEO: “Our customers are really slugging it out for retail space, and as long as Wal-Mart and some of the other customers are putting pressure on our customer base, it’s going to be a challenging environment for all manufacturers.” Wal-Mart’s Supercenters can buy and sell goods cheaper than their competitors. Their dedication to buying “right” is saving billions of dollars for American consumers. When you see the price of diapers or peanut butter or some other item lower at Wal-Mart, you can thank them with your repeat business. They are making ends meet a bit easier for our nation’s citizens. At the same time, they are squeezing the profit margins at many American companies. Those companies are forced to become more efficient, a lost art for many overpaid CEOs.

We have a growing WMD in our society. Bush may be searching for bin Laden but he has not set his sights on the American worker who receives social security. Supposedly, Bush has cut the taxes for Americans. For some he has. On the other hand, older workers have been screwed badly. Let’s look at this forgotten landscape. It’s bad enough to grow old. Our society is aging. Those on fixed incomes have been screwed by Alan Greenspan and the Fed. Greenspan is 76 and he has a job that pays a good income. He is not dependent on interest earned on money market accounts or on various types of government bonds. If he earns one-half percent or one percent or two percent on his savings, so what. There’s plenty of a difference for millions of older people, such as, those born around 1937. They can no longer afford to retire. The fixed income returns are too meager. If you get social security, your ability to bring in additional money from a job are limited. There is a ceiling. Let’s say that limit is $12,000. That means you can only earn $250 per week. Taxes will be taken out of that $250.Those taxes include allowances for social security taxes you will never live to see and get back. But if you earn more than $250 per week, for example, then you are taxed on a certain amount of the social security income presently received by you, an amount the government arbitrarily views as too much to receive should you still be working. This is your money. You have earned it. You have paid taxes on it. Who gives the government the right to limit your earning capacity? So when you see Bush proudly proclaim how he has helped American families and lowered their taxes, remember those still working and receiving social security. There are millions of Americans who are doubled taxed and screwed.