Saturday, April 24, 2004

4/24/04 Saturday Thoughts

Bill Gates: “If you invent a breakthrough in artificial intelligence so machines can learn, that is worth 10 Microsofts.” One might note that Microsoft went public in 1986. Since then, its stock has risen more than 24,000%. Buying and holding the great ones- that is a reflection of non-artificial intelligence.

Stephen Levy, director of the Center for Continuing Study of the California Economy: “Venture capital funding has increased by more than 5% in recent months. We have hit bottom, and we’re bouncing back up, but it’s nothing to write home about yet. The new jobs have to come from new companies, and that has to come from venture capital.”

Actually, Stephen, the new jobs can come through other means. Let’s look at Sunland Inc. of Portales, NM. This company has been making peanut butter since 1988. Sunland needs to expand in order to meet demand. The U.S. Department of Agriculture Rural Development program awarded a $450,000 federal loan to Roosevelt County Electric Cooperative, and the Cooperative, which is eligible to apply to the USDA for zero interest loans for economic development projects, reloaned the money at a zero interest rate to Sunland Inc. Jerry Partin, the Cooperative’s manager, stated “we re-lend that money to the industries creating the jobs and providing the economic development.”

In its first quarter survey of 3,000 job seekers, Challenger, Gray & Christmas found that 63.5% of those who found jobs got them at businesses with fewer than 500 employees.

China’s President Hu Jintao: “There’s excessive growth in fixed-asset investment and blind investment in construction. If these problems are not addressed, they will have a negative impact on the economy. We are confident that the strengthening of controls will bring China’s economic growth to a more sustainable momentum.” Jintao is sounding more like Greenspan each day.

For the week ended April 10, the following increases in initial unemployment claims took place: in California 12,000; in Pennsylvania 4,000; in New York 4,000; in Wisconsin 3,300; and in Michigan 2,600. Those are key voting states. Overall, the number of unemployed workers receiving state benefits increased by 52,000 to 3.02 million in the week ending April 10. Wall Street anticipates the Labor Department to pull a rabbit out of the April hat indicating 150,000 on-farm payroll jobs were created. It’s amazing how low-paying temporary employment with little or no benefits can get the bond market all worked up. Greenspan, in my view, only stated one fact in the last week. He remarked that 85,000 workers exhaust their benefits each week. Most workers are only eligible for up to 26 weeks of benefits. When the benefits run out, that person is dropped from the unemployment rolls. They are not counted. If 320,000 to 340,000 were dropped from the employment rolls in March, then, despite a gain of 308,000 in non-farm payrolls, there was a net loss of jobs. Similar happenings took place in January and February and will occur in the month of April. If the bond market does not wake up quickly, they will help to compound a serious problem.

Attorney Joe Tacapino: “The presumption of innocence begins with the first retainer.”

More than 100 U.S. soldiers have been killed in Iraq in April, and over 510 since our March 20, 2003 invasion.

The discount airlines are continuing to put pressure on other airlines. There is a $99 each way fare from coast to coast, and in May, one can fly to London for $260.

According to a new Harris Poll, Bush’s job ratings are down to 48% positive, 51% negative, the worst ratings of his presidency and the first time his negative rating is greater than his positive rating. Going back to Lyndon Johnson, in the month of April prior to a November election, only George H.W. Bush, Carter, and Ford had lower ratings, and none won in November. As an aside, Cheney’s ratings are 36% positive and 52% negative.

Wijian Shan, manager of Newbridge Capital: “China is now buying dear and selling cheap.”

Guo Shuqing, head of China’s State Administration of Foreign Exchange: “We don’t think that a fixed system is good. We think that a floating system is good.”

Nandan Nilekani, Infosys CEO: “We’re demolishing the myth that the future of global IT cannot be in India…Our business innovation is forcing rivals to redesign the way they do things. So this is more than an offshore play. It’s a model play.”

Micahel Santoli: “History is rather clear, though, in its verdict that stocks are at a disadvantage as monetary conditions tighten.”

Friday, April 23, 2004

4/23/04 Some Ways to Improve Profit Margins

Outsourcing continues to play an increasingly significant role in financial services call center operations, such as, the Bank of America forming a subsidiary in India and shifting 1,000 jobs there. A U.S. call center employee earns approximately $20,000 annually, whereas an Indian counterpart could earn $2,500, according to a recent study by Cutting Edge Information. The latter firm also mentioned that “a customer service job there is more prestigious than in the United States.”

The shift to Indian call centers has moved across the ocean with 850 people losing their jobs at services form Experian. That credit checking and data collection firm is shutting its division that provides call center services for third parties. They blamed the loss of some of its biggest contracts to offshore companies. One of the lost clients is Marks & Spencer, which is ending its contract early, in June. The British retail company stated it plans to cut 1,000 jobs at its head office, some of which are likely to be transferred to India.

Curt Anderson, senior director of investor relations at Microsoft: “We’re going to hold our operating expenses flat, ’04 to ’05. That’s going to give us about 2 percentage points of operating margin improvement.” The company is making more use of its videoconferencing software and has cut employee travel by 20%. The company is negotiating better deals with vendors. This is Microsoft and not Wal-Mart. One of the reasons I believe overall inflation will remain muted over time is the effort by companies, such as Microsoft, to improve margins. This will be a yearly exercise, and there are many opportunities for most companies in this area. There was another significant event yesterday at Microsoft. The company makes its headquarters in Redmond, Wa. About 12 miles down the road, is the city of Issaquah. Microsoft has purchased a large tract of land there. It would serve as a new campus. Microsoft told the city of Issaquah that construction on its new campus would not start for at least another year. John Connors, the CFO, stated “we’ll start building out Issaquah when and if we need the space.” This reminds me a great deal of Cisco and their property just south of San Jose. Watch what decision makers do and not what they say. Microsoft has $57 billion in cash. They will husband that money. PC sales and business spending have improved but it’s a bit like unemployment. The trend is better but not great. It doesn’t warrant a new campus.

One more note, and this on Boeing. The company indicated that their quarterly numbers would be better than expected. Deliveries of commercial airplanes are only modestly above plan. This is a fact. The only variable could be a benefit from a defense contract with more revenue hitting this quarter. Until there is a complete overhaul of Boeing’s management, I wouldn’t go near it as an investor.

There is an article in today’s Wall Street Journal on companies regaining pricing power. In fact, the price increases that have been announced have been modest and certainly not widespread. The major activities in improving profit margins are the effort to enhance productivity and to improve margins at the expense of vendors, such as, the effort by Microsoft and others.

Yasheng Huang, associate professor at MIT’s Sloan School of Management: “Sooner or later, China’s micro-economic fragility- which has led to low efficiency and huge non-performing bank loans- will dent its growth. Massive investment booms have fueled economic growth but the booms are not sustainable in the long term.”

Thursday, April 22, 2004

4/22/04 Mass Layoffs

In the Jan- March 2004 quarter there were 4,289 mass layoff events and they created unemployment claims of 416,209. This compares with the corresponding quarter of the previous year of 4,885 events and 463,421 claims. This is further evidence of a gradual decline in unemployment; however, with the recession having ended 2 1/2 years prior, unemployment claims remain at stubbornly high levels, and this after three successive quarters of above average GDP growth created by massive fiscal stimulus (record low interest rates and rounds of tax cuts). Going forward, circumstances will change for the worse.

The flattening of the treasury yield curve negates the theory that the economic recovery will retain its strength.

The two year treasury is yielding the most since October 2002.

I would recommend going long the 30 year treasury and shorting the 10 year treasury. The three quarter point spread does not provide enough value premium for a bond three times in duration.

I recommend the continuation of avoiding the noise coming from the Fed chairman. His words are filled with air bubbles.

Wednesday, April 21, 2004

4/21/04 Ass Backwards

Some things never change. Wall Street hangs on Greenspan's words as if he has something new to say. His words reflect what has taken place. He is not a futurist. He is an historian. The fact that the Chinese have created huge moves and, in some cases, shortages in several commodities is old news. This is true in oil, steel, aluminum, soybeans, etc. We have discussed this time and time again. The fact that Greenspan hinted at rising rates- so what. The market has moved rates dramatically over the past month. That's how the 10 year treasuries got to yielding about 4.5%. Maybe they go to 5.5% in the next 6 months. I don't know. I do know these rates are a gift. The government does not have a balance sheet to warrant borrowing at these rates and the same can be said for most companies. These rates do truly reflect non-reality borrowing.

Take Ford Motor Credit. Their first quarter interest rates declined by almost $200 million dollars compared with the prior year. They earned $1.1 billion pre-tax in the first quarter, compared with $727 million in the previous year. Basically, the entire quarterly improvement was from lower rates, higher used vehicle prices, and improved credit loss performance. When you have $4,300 in incentives on a vehicle, loss experiences will tend to decline. More importantly, their total financing revenue declined from $4.3 billion to $3.778 billion and their depreciation on operating leases declined from $2.1 billion to $1.3 billion. This is not a cheery picture.

Yesterday was another example of analysts not coming close to quarterly results for a company. In many cases, without company guidance, analysts are worthless. Motorola was the latest example. Rather than focusing on their earning 18 cents per share on $8.5 billion in revenue, a greater plus was the licensing agreement with RIMM that ties some Motorola handsets with the RIMM blackberry. New management seems to be working at Motorola as did the new management at McDonald's. Our best wishes are extended to Jim's family.

Foreign correspondent Philip Smucker's new book is A Qaeda's Great Escape. He tells the story of how poor planning and a rush to war allowed Bin Laden to slip away, regroup, and return to the front lines of the war on terror. With a myriad of interviews, he details how Bin Laden slipped away.

Tuesday, April 20, 2004

4/20/04 The Most Prized Possession Is Integrity

Yesterday, Democrat Nelson of Nebraska, senior member on the Armed Services Committee, stated "it costs $100,000 to train and deploy one servicemember in Iraq. Half of the troops in Iraq are for support purposes only. Therefore, when we say we have 135,000 troops serving there, only half are combat troops...we could not possibly get another 20,000 troops over in Iraq for at least 90 days. That's why we extended the tour of duty for some personnel." He has heard from many families that the extended tour of duty to one year or more is presenting a severe economic and emotional hardship on those back home. In his opinion, our troops around the world require "better balancing." In my view, the administration has not been been truthful to our troops. Too many times, they have been told they are returning home only to be told the plans have been cancelled. If it happens once or twice, that is difficult at best. It has been a great deal more than that. Nelson admitted that was the case. It should be mentioned a Republican from Texas was present when Nelson was making these remarks. He never corrected Nelson- not once.The most endangered species are leaders of nations. Lack of integrity increases the endangerment.

Monday, April 19, 2004

4/19/04 Shopping on Main Street

Over the past week, three purchases were made at three different well-known retail establishments. On the cover of the box, the lamp was stated to operate on a three-way basis. It was one-way. The bath accessory was to stand from the floor to the ceiling. It couldn’t. It was missing a screw. The vacuum cleaner’s handle was difficult to push. It was missing two screws and became detached. All three items were returned. All were made in foreign lands. When items were made in America, I rarely had this experience. This is the price for lowering our manufacturing costs? I prefer the old times.

Sunday, April 18, 2004

4/18/04 Voxel and the Orb

We live in a society marked by the shift to an aging population. In order to effectuate successful transformation, we must re-invent ourselves, so to speak. Some of the change can be found in the emerging fields of biotechnology and nanotechnology. Today we shall explore voxel images and the Orb.

Simply described, voxel images are 3-D images. They are most often found in x-rays, CAT scans, MRIs, and even computer games. Karthik Ramani, a Purdue University professor has created a 3-D search engine. It’s interface is to be licensed by Imaginestics LLC, where Ramani is chief scientist. He believes his 3-D search engine “is the beginning of the information age.” As objects, not just words, are accessible through computers, Ramani believes productivity can be further enhanced. Princeton University professor Thomas Funkhouser and his colleagues have put a 3-D search engine on the Web. By using a computer mouse, the user can sketch an object, add a description in text, and then search for similar designed models in databases. Caterpillar’s senior engineering specialist, Rick Jeffs, believes Ramani’s search engine could simplify his company’s inventory. Designers could sketch a required part, and then view what fits the bill in inventory. Jeffs stated “this would really just add to the efficiency.” The idea of Google soon going public is on the minds of many investors. Google’s search engine is in 2-D, as it were. Ramani’s work adds vision to a Google search.

David Rose is president of Ambient Devices, creator of the Orb. Author Seth Godin stated “when you think about the magic of the Orb, it’s a thermometer for the rest of your life.” Rose observes “it’s based on our brain’s natural ability to process many streams of information in parallel. Our perceptual system is great at multiprocessing hundreds of peripheral cues every second. We do it without even trying. Today’s computer interfaces completely ignore this.” The late Mark Weiser, former chief technologist at Xerox’s PARC, stated “ubiquitous computing is roughly the opposite of virtual reality. Where virtual reality puts people inside a computer-generated world, ubiquitous computing forces the computer to live out here in the world with people.” Rose believes “once people are aware how easy and delightful it is to have these information devices in their lives, it will become second nature.” The original Orb cost $300. The price is now $150, and dropping. About 20,000 have been sold to date. The Orb is described as a “calm computing device” and it can provide information “to increase my peace of mind” and it is “dedicated to information people care about.” It can provide physical form to information, and the latter is delivered through a nationwide wireless network. An example of the Orb, an object the size of an over-sized egg, is serving as an indicator of the DJIA. If the Dow is up, the Orb shines green. If it’s down, it glows red. If it’s roughly unchanged, it’s yellow. It can be programmed to tell you about job openings, whether someone is online, track e-bay auctions, and on and on and on. It has endless uses. It can provide relief from information overload and make it easy to process basic visual information.

Senator John Edwards of North Carolina: “You know it must be an amazing thing to live a life where, when you’re asked multiple times whether you’ve questioned anything you’ve done, whether you’ve made any mistakes…you can’t think of a single thing. Well I have a suggestion for the president. If he’s struggling with the question, give me a call. I’ll give him an answer.”

When we analyze Wal-Mart, we see the world’s largest retailer, America’s largest corporation and its third largest revenue-generating entity behind the Center for Medicare and Medicaid Services and the Department of Defense, and the largest private-sector employer in the U.S. They have the largest private trucking fleet in the nation. They are the number one retailer in the U.S. of clothing, toys, groceries, home furnishings, home textiles, housewares, tableware, DVDs, vacuum cleaners, TVs, video game consoles, and many more items. I think we might consider one more description. Wal-Mart’s current level of annual revenues exceeds the GDP of all but two dozen of the world’s countries. For example, their revenues exceed Switzerland’s gross domestic product. The company has recently announced the purchase of stores in Brazil. They will open about 280 stores in this fiscal year. They are on the hunt for strategic international acquisitions. In a few years, Wal-Mart can be within the size of the top dozen countries’ GDP. Bob Zaragoza is a frequent Wal-Mart shopper in Colorado. He stated “people have to look out for themselves. And prices at Wal-Mart are cheaper than most anywhere else.” Those cheap prices may not reduce the price of gasoline, but most everything else will be. Wal-Mart’s growth will place a lid on inflation. Their purchasing power will continue to import lower prices from outside our borders.

Over the past three years, Illinois Tool Works has shrunk its U.S. payroll from about 36,000 to 28,000. Their vice president of investor relations, John Brooklier, stated “why would you be hiring people right now? If you still have a ways to go before manufacturing capacity is filled, where are the jobs going to come from?”

This is a big week for the reporting of first quarter earnings. I wonder how much of the increase will be attributable to currency adjustments, such as, with IBM? How much will be attributable to cost-cutting, such as, with J&J? How much will be attributable to lower interest rates, such as, with Southwest Airlines? How many will have high profit margins due to lower tax rates? It’s a good thing to compare apples with apples.