Saturday, November 20, 2004

11/20/04 Notoriously Unstable

Willie Scott is a volcanologist at the U.S. Geological Survey Cascades Volcano Observatory. He remarked about Mount St. Helens that “this is a rather unpredictable volcano. It’s very important we monitor the situation closely…Lava domes are notoriously unstable. The larger the dome, the more likely chunks will break off.” The new lava dome and the uplifted area encompass 70 acres and stand 750 feet high. It is growing daily.

As of today, the nation’s outstanding public debt is $7.45 trillion. There are just under 295 million people living in the U.S. Each citizen’s share of this debt is $25,267.76. The national debt mounts daily and so does each citizen’s share. The total national debt has risen 30% in Bush’s first four years. In my view, the mounting debt should be monitored closely. At this size, it is notoriously unstable.

According to the International Herald Tribune, during the Bush presidency, 92% of the nearly $1 trillion increase in publicly held debt has been financed by foreign lenders. Greenspan stated yesterday “international investors will eventually adjust their accumulation of dollar assets or, alternatively, seek higher dollar returns to offset concentration risk, elevating the cost of financing the U.S. current account deficit and rendering it increasingly less tenable.” Less tenable makes the situation less predictable. Uncertainty is bad for the equity and debt markets. According to the IMF, dollars account for about 64% of all the assets in the vaults of foreign central banks and national treasuries.

Greenspan: “Rising interest rates have been advertised for so long and in so many places that any one who has not appropriately hedged his position by now, obviously, is desirous of losing money.” The other day I suggested the elimination of all debt positions. Rising interest rates can only cause debt instruments to lose value.

Traded goods account for 25% of our GDP. At its current rate of growth, the account deficit amounts to 6% of our GDP, and therefore, it approximates 25% of the traded goods produced. That is an unsustainable situation.

In my view, the declining dollar and the twin tower deficits will lead to much lower equity prices and much higher interest rates.

Yesterday, crude oil jumped up 5% to $48.44 a barrel. December heating oil rose 8.7% for the week to $1.48 a gallon. Gold rose to $447 an ounce, up $8.70 for the week. Finally, the dollar was last seen trading at a 4 ½ year low versus the yen and at a new all-time low versus the euro. The South Korean won had its biggest weekly advance in six years. One should note that about three weeks ago the Bank of Japan forecast that core prices will increase in the fiscal year beginning April 1 for the first time in eight years.

We should maintain a watchful eye for the rally in Asian currencies. A balance of power could be in the works with more countries having an increasing appetite for non-dollar assets. This could contribute to a 4% increase in the value of China’s yuan. It would not be surprising to see the yuan pegged to a basket of currencies rather than to just our dollar. In my view, the big story in 2005 will be the move by international investors and foreign lenders away from U.S. assets. It makes rational sense for them to increase the diversity of their holdings. The declining dollar has limited the upside potential for their equity positions, and the unsustainable debt levels have imposed greater risks in holding U.S. debt instruments and Greenspan reminded us that record low interest rates are not here to stay.

Stephen Roach, chief economist for Morgan Stanley: “The personal saving rate stood at just 0.2% of disposable personal income in September 2004—down from 7.7% as recently as 1992.”

Zhou Xiaochuan, China’s central bank chief, stated yesterday that China is “prepared to talk with other G-20 countries about long-term economic policy, including its exchange rate.”

Even though net capital inflows have exceeded the trade deficit by a comfortable margin, the current trend is unsettling. It was only 12 months ago that the U.S. was importing twice the capital as the size of the trade deficit. In August of this year, foreign investment in U.S. assets actually declined. There was a rebound in September, but the margin to cover the deficit was slight. As the decline in the dollar quickens, the opportunity to attract foreign investors and lenders declines. This is a risk that cannot be ignored. In light of this risk, I do not believe investors are being compensated adequately in the equity and debt markets.

Samsung accounts for more than a 10th of Korean exports.

House and Senate negotiators agreed on a $388 billion federal spending bill that will fund 13 government departments in 2005. Don’t be fooled. There were cuts but there was still plenty of pork, and not surprisingly, they voted to increase the pay of civilian government workers by 3.5%. If Bush had the backbone, he’d veto this spending bill. With our record deficits, spending must be reduced and not just cut. Meanwhile, Rep. Bill Young, R-Fla., chairman of the House Appropriations Committee, and a chief author of this “omnibus” spending bill, stated “this is a lean and clean package that adheres to the budgetary limits agreed to by the president and the Congress.” Young proves it’s so easy to spend the money of others. He goes to the head of the class. Meanwhile, the taxpayers take it on the chin. Some day the voters will elect adherents to thrift to Congress and the oval office.

Cingular told AT&T Wireless contract workers that, as of 12/31/04, they would be let go. Glenshaw Glass Co, is a venerable, 109-year-old maker of glass bottles. They have 300 workers and they are Shaler County, Pa’s largest private employer. The company will shut down their furnaces on Monday, All 300 will lose their jobs.


Friday, November 19, 2004

11/19/04 A Recession Has Returned

In 1990, the Congress enacted the Budget Enforcement Act (BEA) in an effort to rein in yearly deficits that the government had experienced since 1970. By 1998, the government had a surplus of $68 billion, the first surplus since 1969. The discretionary spending caps and the PAYGO (PAY-AS-YOU-GO) provisions were extended twice until, on October 1, 2002, the Republican-controlled Congress voted not to extend discretionary spending caps and PAYGO rules. The efforts of the Blue Dog Coalition, a group of 36 moderate to conservative Democrats in the Congress, have been in vain. The Blue Dogs have attempted to impose enforceable spending limits that would serve as fiscal guardrails to restrain Congress and the president from enacting legislation that would increase the federal debt. Late Thursday, the Congress voted to increase the debt limit by $800 billion to $8.18 trillion. In sum, that increase brought to $2.23 trillion the total debt limit increases Bush has required in his four years in office, more than all the debt the U.S. accumulated from 1776 through 1986. Bush commended the debt ceiling increase and stated “passage of this legislation was important to protect the full faith and credit of the U.S.” Unfortunately, Bush doesn’t get it. With the same deficit policies in place, there is no place to go but down. Since Bush entered the White House, the Fed’s trade-weighted major currency dollar index indicates that the dollar has declined about 20%. The next 20% decline won’t take 4 years to take place. Global Insight anticipates the trade deficit will be $700 billion in 2005, up from $600 billion in 2004, and this will require a $2 billion daily inflow of foreign capital to fund the budget and trade deficits. The problem is that foreigners already own 50% of all U.S. Treasuries outstanding, 12% of U.S. agency bonds, and 25% of corporates. Their walls are well-endowed with our paper.

Rep. Tom Reynolds, Republican from NY: “If you don’t vote to increase the debt limit, you put our country in harm’s way.”

Rep. Peter De Fazio, Democrat from Oregon: “We are borrowing $1 million a minute to run the government.”

As mentioned, the PAYGO provision expired in 2002. Yesterday, the Republican rules committee would not let this provision be attached to the debt limit increase vote. By raising the debt limit, the government is asking each citizen of our nation to borrow an additional $2,000. Each one of us is a part owner of the daily increasing $7.4 trillion government debt, and this excludes trillions of future liabilities for Medicare and Social Security.

So why do I say our economy is now in the early stages of a recession? I’m not an economist- thank goodness. You might think I am shooting from the hip. I should point out that I don’t walk with a swagger and have never touched a drink or drugs. I haven’t even smoked. That makes me kind of different. In addition, I think for myself and don’t invest other people’s money. If I’m wrong, it’s my money that dwindles. Our economy has significant imbalances. In my view, the tipping point has been reached. The Conference Board’s Index of Leading Economic Indicators fell 0.3% in October, the fifth straight monthly decline. Some say the index must decline for three straight months and at least 3.5% over 6 months. There aren’t any hard rules and/or definitions. There are different theories on the subject. The Conference Board’s chief economist, Ken Goldstein, stated the five consecutive monthly declines in the index are “ a clear signal that the economy is losing steam, and may start off 2005 with a relatively weak pace of economic activity.”

Yesterday, Mad Cow and soybean rust did not cause the Philly Fed Manufacturing Index to fall to 20.7 in November from 28.5 in October. They didn’t make for the decline in new orders and shipments. They were not behind the 0.7% October decline in building permits in the U.S. A lot of people have purchased houses with little or no money down. Real estate taxes have escalated as the median price of a home has risen. Employee pay raises have not offset the rise in real estate taxes. Unfortunately, lenders are seeing foreclosures of houses only a few years old. That, I am afraid, will become a more common every day story in 2005.

I referred to the tipping point. There is no magic formula. Since Bush arrived in the Oval Office, net real earnings have declined for the average worker. It is not surprising that the savings rate is at an historical low while the average American’s total indebtedness is at an all-time high. That has been accompanied by record discretionary government spending, record budget and trade deficits, the need to spend almost $1 billion a day on interest on the nation’s debt, and a requirement to attract $2 billion a day in foreign capital to keep the economic ship afloat. It is members of Congress like Tom Reynolds who have put our nation in harm’s way. Their votes have produced record sending and record deficits and undermine our democracy and freedoms. Snow and others will place the blame on other countries not growing fast enough to solve our problems. Snow is a mouthpiece who had an abysmal record running a railroad. He isn’t up to the task of helping to make tough policy choices.

As for jobs, the Labor Department stated yesterday that, in the last week of October, 47 states and territories reported an increase in new unemployment claims while only six reported a decrease. Be wary of the employment reports. As I mentioned a couple of weeks ago, the non- farm payroll report counts an individual as two employees should that person be working two jobs. That is double counting. With the increase in those working more than one job to 8 million, there is a great deal of double counting and there will be more so with the growing trend to part time work, or work that is less than 32 hours a week and does not include benefits.

The negative cash flow of the average American and the negative cash flow at the municipal, state, and federal level have combined to place our nation in an economic declining position. The story is not that of 2.5% GDP growth or 3% GDP growth. There is no meaning to growth without an ability to sustain our way of life. That is not taking place. Don’t take my word for it. Look around you. Take a real good look. I don’t mean on Madison Avenue or Fifth Avenue. Take a good look on Main Street. The country isn’t making it on Main Street. Our country is red and blue on Main Street and comprises 98% of our citizens.



Thursday, November 18, 2004

11/18/04 Two Very Different Forecasts

Intel’s CEO: “I am looking at much improved performance in the first half of 2005 than in 2004.” On the other hand, Applied Materials’ CEO stated the company “expects new orders to shrink by one-third in the first quarter because some of the orders were placed in this year’s fourth quarter.” One of the reasons for the rush to place orders by year-end is to take advance of the 50% tax break on capital investment, a tax break which will expire on Jan. 1, 2005 unless extended. This is a good illustration of the phenomenon taking place throughout industry this month and next. You are seeing a short-term spike in capital investment for tax reasons. The rush to spend will end just as the $100,000 tax credit to purchase a Hummer was sharply reduced to $25,000, and then GM couldn’t move the car off dealer lots through large incentives. You can’t operate an investment portfolio based on tax decisions alone, and the same can be stated for running a business.

Kmart has about 144,000 employees with about 2,000 at its Troy, MI headquarters. Sears employs 249,000 with 4,800 at its Hoffman Estates headquarters. Sears’ CEO stated there will be “head count” changes. Financial engineering will not create positive same-store sales gains. In my view, from a retailing perspective, Wal-Mart and Target will continue to eat Kmart’s and Sears’ breakfast, lunch, and dinner.

According to independent, non-sponsored research conducted by Feedback Research, results indicated that this year’s online holiday shopping season kicked off stronger than last year. In addition, 52% indicated they will begin holiday gift buying more than 30 days before Christmas, up from 43% in 2004. Online shoppers are also planning to finish buying their gifts sooner than in-store shoppers. A total of 66% of respondents stated they will buy gifts online this year, up from 54% last year. Seventy-two percent replied that clothing was their holiday gift of choice, followed by both movies and toys, each with 60%.

In October, industrial output rose 0.7% with capacity utilization rising to 77.7%. Over the last 30 years, the average has been 81.1%.

P.J. O’Rourke: “Giving money and power to the government is like giving whiskey and car keys to teenage boys.”

According to the BLS, real average weekly earnings fell by 0.4% from September to October after seasonal adjustment. After deflation by the CPI, average weekly earnings decreased by 0.4% from October 2003 to October 2004.

John Maynard Keyes: “The best way to destroy the capitalist system is to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”

Crude stocks have risen more than 8% since late September. However, supplies of heating oil remain 16% below year-ago levels. Heating oil futures rose yesterday by 8.45 cents to $1.41 a gallon and crude rose by 73 cents to $46.84 a barrel.

Sam Rayburn: “When you get too big a majority, you’re immediately in trouble.”

Delphi Corp. is closing its Foley, Alabama plant and about 170 jobs will be lost.

Gold topped $445 per ounce. Silver rose to $7.66 per ounce. Copper settled at $1.40 a pound.

Consumer core prices are rising at a 2.4% annual rate, up from 1.3% in the first ten months of 2003.

Ronald Reagan: “Inflation is as violent as a mugger, as frightening as an armed robber, and as deadly as a hit man.”

There were many reasons given as well as many rumors provided for yesterday’s drop in interest rates for treasury bonds. For example, the ten-year yield declined from 4.21% to 4.14%. Considering the inflation report, that was quite a performance. I don’t deal in rumors- just the facts- like Joe Friday. As such, I don’t know why the rates declined like they did.

Senator Fritz Hollings of South Carolina is retiring from the Senate after a 38-year public service career. On Tuesday, he gave a farewell address to his fellow Senators. Here are some excerpts from this address: “We had five drunks or six drunks when I came here. There is nobody drunk in the United States Senate. We don’t have time to be drunk and, more than that, we have the women. We had one woman. Now we have 14, and you can’t shut them up…Take right now the issue that is going to confront us tomorrow afternoon or Thursday of raising the debt limit. We are spending $600 billion more than we are taking in, which is 6% of our GDP. In the European Union, if you exceed 3% of your GDP, you are not eligible to be in the European Union. Here we are telling the world what they ought to do in diplomacy, international affairs, defense affairs, and fiscal affairs, and we would not even be eligible to be in the European Union. We have, Mr. President, the economy on steroids. Add it up. Add up the deficit of 2001, 2002, 2003, and 2004-those four years- and you have $1.7 trillion that we have goosed into the economy with these tax cuts…We have to do something about that deficit…When Bush came in, he turned a $6 trillion projected surplus to a $5 trillion projected deficit, and now we have to increase the debt limit. Now the dollar is in a deep dive. Interest rates are going to have to go up. We are depending on financing our debt some $700 billion by the Japanese, $170 billion by the Chinese, and $67 billion by Korea. Can you imagine going with a tin cup to Korea, begging: Please finance my debt because I need another tax cut?…
We don’t have time for constituents, except for the givers. Somebody ought to tell the truth about that…Money is a cancer on the body politic.”

Google stated its revenue growth rate from the second to the third quarter of 2004 may not be sustainable into the fourth quarter.

Wednesday, November 17, 2004

11/17/04 Creating Shareholder Value

There are many ways to accomplish this endeavor. One is through merging. Kmart will Buy Sears, creating the third largest retailer with about 3,500 stores. The transaction is valued at $11 billion, and the new company will be called Sears Holdings even though each business will be operated separately under their respective brand names. Eddie Lampert, the largest shareholder in each company, will look to sell more stores and unleash underlying shareholder value. So far, he has done just that after Kmart came out of bankruptcy. This is a merger of two weak retailers.

Then there is the case of HP. They grew quarterly revenue 8% year-over-year. The problem is that their receivables increased $1.8 billion from the prior quarter to $10.2 billion and inventory ended the quarter at $7.1 billion, up $1 billion or 16+% year-over-year. In other words, the headlines read great with respect to sales and earnings but beneath the surface potential problems loom.

Then there is cost cutting in an effort to unlock shareholder value. GM plans to close its Baltimore assembly plant next year. The plant makes the Chevy Astro and the GMC Safari. There is practically no demand for these vehicles, and hasn’t been in well over a year. The shutdown will impact about 1,000 hourly and 100 salaried workers.

Bertrand Russell: “The fact that an opinion has been widely held is no evidence whatever that it is not utterly absurd.”

Marcel Proust: “The voyage of discovery is not in seeking new landscapes but in having new eyes.”

One of the problems with security analysts and market sages is that they look at the landscape with old eyes. Often, one hears the same stories about year-end rallies and rallies after presidential elections. Unfortunately, the landscape’s underpinnings change through the years. It requires new eyes. On Thursday night, the Senate will take up the vote for increasing the debt limit. Since Bush took office, the debt limit has been increased by more than $2 trillion to its present $7.4 trillion. Now, Republicans want to raise the debt limit for the third time in three years. This has never taken place in our nation’s history. Will this vote be accompanied by a vote on spending measures to control the budget deficit?

Nancy Pelosi: “We must return to fiscal responsibility, because no nation has ever been strong, free, and bankrupt.” If the Senate does not put forth any pay-as-you-go measures, I urge investors to sharply reduce their holdings in equities, and begin with those companies not central to your long-term objectives.

General Omar Bradley: “Our is a world of nuclear giants and ethical infants. If we continue to develop our technology without wisdom or prudence, our servant may prove to be our executioner.”

Wal-Mart’s CFO stated current U.S. quarterly sales remain sluggish.

GM’s October sales in western Europe fell 9.5%.

Goldman Sachs suggests that 2005 will prove to be another year of modest tech spending.

According to Cendant, there are more than 89 million members of frequent flyer programs today, and $1.9 billion is spent annually as part of loyalty programs.

The Association of Flight Attendants represents more than 46,000 flight attendants at 26 airlines. The president of the AFA urged union leaders to authorize a nationwide strike and railed against U.S. airlines for slashing flight attendants’ pay and benefits.

The euro traded at a record high and gold hit a new 16-year high.

The index for crude materials rose 4.3% in October compared with a decline of 4.2% in September. U.S. October PPI intermediate prices rose 0.9% with core prices up 0.3% for the second consecutive month. The PPI is now up 4.4% in the past 12 months, with the core rate up 1.8% in the past year. The good news is that crude reached $55.67 on October 25, and it’s now trading around the $46 level. Longer-term inflation worries remain subdued as the difference between the 10-year Treasury bond and 10-year TIPS is about 2.5 percentage points, close to the 10-year average.

Money Foods is closing its three U.S. mushroom operations in Michigan, Indiana, and San Mateo County, CA. The farms have not made any money in the last four years. Several hundred workers will lose their jobs. Osram Sylvania will close its Waldoboro, Maine light bulb filament plant and 134 workers will lose jobs. Most of the production will be shifted to the Czech Republic, where labor costs are cheaper.



11/17/04 Creating Shareholder Value

There are many ways to accomplish this endeavor. One is through merging. Kmart will Buy Sears, creating the third largest retailer with about 3,500 stores. The transaction is valued at $11 billion, and the new company will be called Sears Holdings even though each business will be operated separately under their respective brand names. Eddie Lampert, the largest shareholder in each company, will look to sell more stores and unleash underlying shareholder value. So far, he has done just that after Kmart came out of bankruptcy. This is a merger of two weak retailers.

Then there is the case of HP. They grew quarterly revenue 8% year-over-year. The problem is that their receivables increased $1.8 billion from the prior quarter to $10.2 billion and inventory ended the quarter at $7.1 billion, up $1 billion or 16+% year-over-year. In other words, the headlines read great with respect to sales and earnings but beneath the surface potential problems loom.

Then there is cost cutting in an effort to unlock shareholder value. GM plans to close its Baltimore assembly plant next year. The plant makes the Chevy Astro and the GMC Safari. There is practically no demand for these vehicles, and hasn’t been in well over a year. The shutdown will impact about 1,000 hourly and 100 salaried workers.

Bertrand Russell: “The fact that an opinion has been widely held is no evidence whatever that it is not utterly absurd.”

Marcel Proust: “The voyage of discovery is not in seeking new landscapes but in having new eyes.”

One of the problems with security analysts and market sages is that they look at the landscape with old eyes. Often, one hears the same stories about year-end rallies and rallies after presidential elections. Unfortunately, the landscape’s underpinnings change through the years. It requires new eyes. On Thursday night, the Senate will take up the vote for increasing the debt limit. Since Bush took office, the debt limit has been increased by more than $2 trillion to its present $7.4 trillion. Now, Republicans want to raise the debt limit for the third time in three years. This has never taken place in our nation’s history. Will this vote be accompanied by a vote on spending measures to control the budget deficit?

Nancy Pelosi: “We must return to fiscal responsibility, because no nation has ever been strong, free, and bankrupt.” If the Senate does not put forth any pay-as-you-go measures, I urge investors to sharply reduce their holdings in equities, and begin with those companies not central to your long-term objectives.

General Omar Bradley: “Our is a world of nuclear giants and ethical infants. If we continue to develop our technology without wisdom or prudence, our servant may prove to be our executioner.”

Wal-Mart’s CFO stated current U.S. quarterly sales remain sluggish.

GM’s October sales in western Europe fell 9.5%.

Goldman Sachs suggests that 2005 will prove to be another year of modest tech spending.

According to Cendant, there are more than 89 million members of frequent flyer programs today, and $1.9 billion is spent annually as part of loyalty programs.

The Association of Flight Attendants represents more than 46,000 flight attendants at 26 airlines. The president of the AFA urged union leaders to authorize a nationwide strike and railed against U.S. airlines for slashing flight attendants’ pay and benefits.

The euro traded at a record high and gold hit a new 16-year high.

The index for crude materials rose 4.3% in October compared with a decline of 4.2% in September. U.S. October PPI intermediate prices rose 0.9% with core prices up 0.3% for the second consecutive month. The PPI is now up 4.4% in the past 12 months, with the core rate up 1.8% in the past year. The good news is that crude reached $55.67 on October 25, and it’s now trading around the $46 level. Longer-term inflation worries remain subdued as the difference between the 10-year Treasury bond and 10-year TIPS is about 2.5 percentage points, close to the 10-year average.

Money Foods is closing its three U.S. mushroom operations in Michigan, Indiana, and San Mateo County, CA. The farms have not made any money in the last four years. Several hundred workers will lose their jobs. Osram Sylvania will close its Waldoboro, Maine light bulb filament plant and 134 workers will lose jobs. Most of the production will be shifted to the Czech Republic, where labor costs are cheaper.



Tuesday, November 16, 2004

11/16/04 U.S. Small Business Owners’ Early Holiday Sales Forecast

According to the recent DollarDays survey, 48% of small business owners say their customers are more focused on price this year than they were last year, while 33% say their customers will be about as cost-conscious as last year. Only 13% expect their shoppers to be less frugal. Importantly, 13% say 2004 holiday sales to date are ahead of last year’s sales, while 27% sat sales are even and 26% say sales are behind. Sixteen percent say they will hire additional help for the busiest shopping season of the year, while 70% say they won’t. Twelve percent say they will begin marking down seasonal merchandise right after Thanksgiving, while 19% say their first markdowns will occur by Dec. 10. In sum, Marc Joseph, COO of DollarDays, stated “small business owners are clearly walking the line between being optimistic about their busiest income-generating season and being pragmatic.”

Marc Joseph’s comments could also characterize the situation at Wal-Mart, the ultimate proxy for the nation’s average paycheck-to-paycheck consumer. The company’s CEO is optimistic heading into the holiday shopping season; however, the results just reported for the third quarter were not pleasing. The Wal-Mart stores unit “had a poor quarter” with same-store sales rising only 1.3%. Sam’s Club comp sales growth was somewhat better at 4%, but compared to the results at Costco, they too were disappointing. The International division continues as the star performer with comp sales for the quarter rising 18%. In sum, overall corporate sales were below forecasts and net income benefited from a work opportunity tax credit, which acts as an incentive to hire certain workers, such as, former welfare recipients. One might also note that, as lower margin grocery sales grow as a percentage of sales, it can be expected that profit margins will be tested. International operations will need to carry a larger share of the growth story.

Justice Brandeis: “We can have democracy in this country, or we can have great wealth concentrated in the hands of a few, but we can’t have both.”

Office Depot is cutting 819 workers. Detroit Public Schools announced it will have to cut 4,000 jobs and close as many as 40 of the district’s 255 schools due to the latest projected budget crisis. Putnam is cutting 100 jobs.

The UK is experiencing a soft patch in its housing sector.

The Pension Benefit Guaranty Corp. lost $12.1 billion in fiscal 2004, boosting its year-end deficit to $23.3 billion, the federal agency stated yesterday. Most of the loss came from $14.7 billion in terminated pension plans. In addition, the agency calculated $96 billion in unfunded vested benefits in other plans as “reasonably possible” at risk of default, up from $82 billion a year earlier. I wonder how long this growing financial cancer can be swept under the rug?

December crude closed yesterday at $46.87 a barrel, a two-month low.

Justice Brandeis: “Experience teaches us to be most on our guard to protect liberty when the government purposes are beneficent.” When those in elected office choose power for the few over the well-being of the majority, then it’s time to watch the burning fuse on the exposed time-bomb.

Many are adept at spouting statistics. One must be wary of those that tell half the story. For example, according to Taxprof, the tax burden in the U.S. is the second lowest of the 30 most advanced nations in OECD. As a percentage of GDP, the OECD stated it is 25.4% in the U.S., and that only Mexico at 19.5% is lower. Under Carter, the percentage was 18.4% and under Reagan it was 18.2%. Even that only tells part of the story. There is a growing gap between tax revenues and expenditures, and that’s why we have record budget deficits. In addition, we should take one further look at the OECD data. Finland is the 4th highest taxed country on the OECD list but the World Economic Forum ranks Finland as the most competitive global economy. Sweden is the highest taxed country and yet it is the third most competitive after the U.S. Statistics can play games with the full story.

Gold hit $440 per ounce.

IDC stated that PC sales growth will slow to 10.5% in 2005 “based on the economic assumption that the current boom is fairly weak as far as booms go and is going to be relatively short.” The last recession was a short one so why can’t this “boom” be relatively short?

Laurence Kotlikoff, professor of economics at Boston University, stated that Medicare and Social Security represent unfunded future liabilities of $43 trillion. He asks “how are we going to pay these bills? The government will have to print more money and you’d want to sell your bonds.” I would also add, as I have done so for two years, you should maintain the smallest holding possible in U.S. dollars. They represent an accident waiting to happen.

U.S. retail chains' same-store sales fell 0.4% in the week ended Nov. 13 compared to the prior week.
11/16/04 U.S. Small Business Owners’ Early Holiday Sales Forecast

According to the recent DollarDays survey, 48% of small business owners say their customers are more focused on price this year than they were last year, while 33% say their customers will be about as cost-conscious as last year. Only 13% expect their shoppers to be less frugal. Importantly, 13% say 2004 holiday sales to date are ahead of last year’s sales, while 27% sat sales are even and 26% say sales are behind. Sixteen percent say they will hire additional help for the busiest shopping season of the year, while 70% say they won’t. Twelve percent say they will begin marking down seasonal merchandise right after Thanksgiving, while 19% say their first markdowns will occur by Dec. 10. In sum, Marc Joseph, COO of DollarDays, stated “small business owners are clearly walking the line between being optimistic about their busiest income-generating season and being pragmatic.”

Marc Joseph’s comments could also characterize the situation at Wal-Mart, the ultimate proxy for the nation’s average paycheck-to-paycheck consumer. The company’s CEO is optimistic heading into the holiday shopping season; however, the results just reported for the third quarter were not pleasing. The Wal-Mart stores unit “had a poor quarter” with same-store sales rising only 1.3%. Sam’s Club comp sales growth was somewhat better at 4%, but compared to the results at Costco, they too were disappointing. The International division continues as the star performer with comp sales for the quarter rising 18%. In sum, overall corporate sales were below forecasts and net income benefited from a work opportunity tax credit, which acts as an incentive to hire certain workers, such as, former welfare recipients. One might also note that, as lower margin grocery sales grow as a percentage of sales, it can be expected that profit margins will be tested. International operations will need to carry a larger share of the growth story.

Justice Brandeis: “We can have democracy in this country, or we can have great wealth concentrated in the hands of a few, but we can’t have both.”

Office Depot is cutting 819 workers. Detroit Public Schools announced it will have to cut 4,000 jobs and close as many as 40 of the district’s 255 schools due to the latest projected budget crisis. Putnam is cutting 100 jobs.

The UK is experiencing a soft patch in its housing sector.

The Pension Benefit Guaranty Corp. lost $12.1 billion in fiscal 2004, boosting its year-end deficit to $23.3 billion, the federal agency stated yesterday. Most of the loss came from $14.7 billion in terminated pension plans. In addition, the agency calculated $96 billion in unfunded vested benefits in other plans as “reasonably possible” at risk of default, up from $82 billion a year earlier. I wonder how long this growing financial cancer can be swept under the rug?

December crude closed yesterday at $46.87 a barrel, a two-month low.

Justice Brandeis: “Experience teaches us to be most on our guard to protect liberty when the government purposes are beneficent.” When those in elected office choose power for the few over the well-being of the majority, then it’s time to watch the burning fuse on the exposed time-bomb.

Many are adept at spouting statistics. One must be wary of those that tell half the story. For example, according to Taxprof, the tax burden in the U.S. is the second lowest of the 30 most advanced nations in OECD. As a percentage of GDP, the OECD stated it is 25.4% in the U.S., and that only Mexico at 19.5% is lower. Under Carter, the percentage was 18.4% and under Reagan it was 18.2%. Even that only tells part of the story. There is a growing gap between tax revenues and expenditures, and that’s why we have record budget deficits. In addition, we should take one further look at the OECD data. Finland is the 4th highest taxed country on the OECD list but the World Economic Forum ranks Finland as the most competitive global economy. Sweden is the highest taxed country and yet it is the third most competitive after the U.S. Statistics can play games with the full story.

Gold hit $440 per ounce.

IDC stated that PC sales growth will slow to 10.5% in 2005 “based on the economic assumption that the current boom is fairly weak as far as booms go and is going to be relatively short.” The last recession was a short one so why can’t this “boom” be relatively short?

Laurence Kotlikoff, professor of economics at Boston University, stated that Medicare and Social Security represent unfunded future liabilities of $43 trillion. He asks “how are we going to pay these bills? The government will have to print more money and you’d want to sell your bonds.” I would also add, as I have done so for two years, you should maintain the smallest holding possible in U.S. dollars. They represent an accident waiting to happen.

U.S. retail chains' same-store sales fell 0.4% in the week ended Nov. 13 compared to the prior week.
11/16/04 U.S. Small Business Owners’ Early Holiday Sales Forecast

According to the recent DollarDays survey, 48% of small business owners say their customers are more focused on price this year than they were last year, while 33% say their customers will be about as cost-conscious as last year. Only 13% expect their shoppers to be less frugal. Importantly, 13% say 2004 holiday sales to date are ahead of last year’s sales, while 27% sat sales are even and 26% say sales are behind. Sixteen percent say they will hire additional help for the busiest shopping season of the year, while 70% say they won’t. Twelve percent say they will begin marking down seasonal merchandise right after Thanksgiving, while 19% say their first markdowns will occur by Dec. 10. In sum, Marc Joseph, COO of DollarDays, stated “small business owners are clearly walking the line between being optimistic about their busiest income-generating season and being pragmatic.”

Marc Joseph’s comments could also characterize the situation at Wal-Mart, the ultimate proxy for the nation’s average paycheck-to-paycheck consumer. The company’s CEO is optimistic heading into the holiday shopping season; however, the results just reported for the third quarter were not pleasing. The Wal-Mart stores unit “had a poor quarter” with same-store sales rising only 1.3%. Sam’s Club comp sales growth was somewhat better at 4%, but compared to the results at Costco, they too were disappointing. The International division continues as the star performer with comp sales for the quarter rising 18%. In sum, overall corporate sales were below forecasts and net income benefited from a work opportunity tax credit, which acts as an incentive to hire certain workers, such as, former welfare recipients. One might also note that, as lower margin grocery sales grow as a percentage of sales, it can be expected that profit margins will be tested. International operations will need to carry a larger share of the growth story.

Justice Brandeis: “We can have democracy in this country, or we can have great wealth concentrated in the hands of a few, but we can’t have both.”

Office Depot is cutting 819 workers. Detroit Public Schools announced it will have to cut 4,000 jobs and close as many as 40 of the district’s 255 schools due to the latest projected budget crisis. Putnam is cutting 100 jobs.

The UK is experiencing a soft patch in its housing sector.

The Pension Benefit Guaranty Corp. lost $12.1 billion in fiscal 2004, boosting its year-end deficit to $23.3 billion, the federal agency stated yesterday. Most of the loss came from $14.7 billion in terminated pension plans. In addition, the agency calculated $96 billion in unfunded vested benefits in other plans as “reasonably possible” at risk of default, up from $82 billion a year earlier. I wonder how long this growing financial cancer can be swept under the rug?

December crude closed yesterday at $46.87 a barrel, a two-month low.

Justice Brandeis: “Experience teaches us to be most on our guard to protect liberty when the government purposes are beneficent.” When those in elected office choose power for the few over the well-being of the majority, then it’s time to watch the burning fuse on the exposed time-bomb.

Many are adept at spouting statistics. One must be wary of those that tell half the story. For example, according to Taxprof, the tax burden in the U.S. is the second lowest of the 30 most advanced nations in OECD. As a percentage of GDP, the OECD stated it is 25.4% in the U.S., and that only Mexico at 19.5% is lower. Under Carter, the percentage was 18.4% and under Reagan it was 18.2%. Even that only tells part of the story. There is a growing gap between tax revenues and expenditures, and that’s why we have record budget deficits. In addition, we should take one further look at the OECD data. Finland is the 4th highest taxed country on the OECD list but the World Economic Forum ranks Finland as the most competitive global economy. Sweden is the highest taxed country and yet it is the third most competitive after the U.S. Statistics can play games with the full story.

Gold hit $440 per ounce.

IDC stated that PC sales growth will slow to 10.5% in 2005 “based on the economic assumption that the current boom is fairly weak as far as booms go and is going to be relatively short.” The last recession was a short one so why can’t this “boom” be relatively short?

Laurence Kotlikoff, professor of economics at Boston University, stated that Medicare and Social Security represent unfunded future liabilities of $43 trillion. He asks “how are we going to pay these bills? The government will have to print more money and you’d want to sell your bonds.” I would also add, as I have done so for two years, you should maintain the smallest holding possible in U.S. dollars. They represent an accident waiting to happen.

U.S. retail chains' same-store sales fell 0.4% in the week ended Nov. 13 compared to the prior week.
11/16/04 U.S. Small Business Owners’ Early Holiday Sales Forecast

According to the recent DollarDays survey, 48% of small business owners say their customers are more focused on price this year than they were last year, while 33% say their customers will be about as cost-conscious as last year. Only 13% expect their shoppers to be less frugal. Importantly, 13% say 2004 holiday sales to date are ahead of last year’s sales, while 27% sat sales are even and 26% say sales are behind. Sixteen percent say they will hire additional help for the busiest shopping season of the year, while 70% say they won’t. Twelve percent say they will begin marking down seasonal merchandise right after Thanksgiving, while 19% say their first markdowns will occur by Dec. 10. In sum, Marc Joseph, COO of DollarDays, stated “small business owners are clearly walking the line between being optimistic about their busiest income-generating season and being pragmatic.”

Marc Joseph’s comments could also characterize the situation at Wal-Mart, the ultimate proxy for the nation’s average paycheck-to-paycheck consumer. The company’s CEO is optimistic heading into the holiday shopping season; however, the results just reported for the third quarter were not pleasing. The Wal-Mart stores unit “had a poor quarter” with same-store sales rising only 1.3%. Sam’s Club comp sales growth was somewhat better at 4%, but compared to the results at Costco, they too were disappointing. The International division continues as the star performer with comp sales for the quarter rising 18%. In sum, overall corporate sales were below forecasts and net income benefited from a work opportunity tax credit, which acts as an incentive to hire certain workers, such as, former welfare recipients. One might also note that, as lower margin grocery sales grow as a percentage of sales, it can be expected that profit margins will be tested. International operations will need to carry a larger share of the growth story.

Justice Brandeis: “We can have democracy in this country, or we can have great wealth concentrated in the hands of a few, but we can’t have both.”

Office Depot is cutting 819 workers. Detroit Public Schools announced it will have to cut 4,000 jobs and close as many as 40 of the district’s 255 schools due to the latest projected budget crisis. Putnam is cutting 100 jobs.

The UK is experiencing a soft patch in its housing sector.

The Pension Benefit Guaranty Corp. lost $12.1 billion in fiscal 2004, boosting its year-end deficit to $23.3 billion, the federal agency stated yesterday. Most of the loss came from $14.7 billion in terminated pension plans. In addition, the agency calculated $96 billion in unfunded vested benefits in other plans as “reasonably possible” at risk of default, up from $82 billion a year earlier. I wonder how long this growing financial cancer can be swept under the rug?

December crude closed yesterday at $46.87 a barrel, a two-month low.

Justice Brandeis: “Experience teaches us to be most on our guard to protect liberty when the government purposes are beneficent.” When those in elected office choose power for the few over the well-being of the majority, then it’s time to watch the burning fuse on the exposed time-bomb.

Many are adept at spouting statistics. One must be wary of those that tell half the story. For example, according to Taxprof, the tax burden in the U.S. is the second lowest of the 30 most advanced nations in OECD. As a percentage of GDP, the OECD stated it is 25.4% in the U.S., and that only Mexico at 19.5% is lower. Under Carter, the percentage was 18.4% and under Reagan it was 18.2%. Even that only tells part of the story. There is a growing gap between tax revenues and expenditures, and that’s why we have record budget deficits. In addition, we should take one further look at the OECD data. Finland is the 4th highest taxed country on the OECD list but the World Economic Forum ranks Finland as the most competitive global economy. Sweden is the highest taxed country and yet it is the third most competitive after the U.S. Statistics can play games with the full story.

Gold hit $440 per ounce.

IDC stated that PC sales growth will slow to 10.5% in 2005 “based on the economic assumption that the current boom is fairly weak as far as booms go and is going to be relatively short.” The last recession was a short one so why can’t this “boom” be relatively short?

Laurence Kotlikoff, professor of economics at Boston University, stated that Medicare and Social Security represent unfunded future liabilities of $43 trillion. He asks “how are we going to pay these bills? The government will have to print more money and you’d want to sell your bonds.” I would also add, as I have done so for two years, you should maintain the smallest holding possible in U.S. dollars. They represent an accident waiting to happen.

U.S. retail chains' same-store sales fell 0.4% in the week ended Nov. 13 compared to the prior week.

Monday, November 15, 2004

11/15/04 It’s The Season To Hire Seasonal Workers

According to Manpower, 38% of national employers in the retail and wholesale trade sectors plan to boost staffing levels during this shopping season. The sector includes merchandise department stores, restaurants, grocery stores, and wholesale dealers and distributors, among others. According to the Illinois Retail Merchants Association, those seasonal hiring plans aren’t necessarily motivated by an anticipated hike in sales. The association states “it has to do with competition.” It’s often part of the effort to keep lines short because “they don’t want to lose sales. Competition is so tight.” Sears is a good example. They expect flat sales in the fourth quarter, but will still hire holiday workers because “it’s tied to customer service.” Limited Brands has 3,835 stores and will add 80,000 seasonal workers. Target will hire between 50,000 and 80,000 seasonal workers. UPS reports they will hire roughly 70,000 loaders, sorters, and drivers for the holidays. Marshall Field’s is hiring 7,000 for the holidays, and that’s slightly more than last year. Interestingly, the National Retail Federation projects holiday spending will rise 4.5% this year to $219.9 billion. Hiring rose 3.9% last year, but they are projecting head counts will be flat this time overall.

Ogden Nash: “The most exciting happiness is the happiness generated by forces beyond your control.”

After cutting incentives 16% in October, Gm ended the month with a larger than expected inventory of cars and trucks.

GM, Ford, and Chrysler are paying bonuses of $500 to $1,500 to U.S. buyers who finance through captive lenders.

Tower Semiconductor will cut 170 jobs, or 12% of its employees.

Sun Microsystems is introducing its next-generation operating system, the n0-cost Solaris 10. There will be a charge for support and service programs. Sun also promises to make the underlying code of Solaris available under an open-source license.

State media reports a coal shortage for this heating season for 200 million city dwellers in China.

Akimbo introduced the first Internet-to-TV-On Demand service. Kleiner Perkins, Sprout, and Draper Fisher Jurvetson are lead investors in Akimbo. This is a company that could go places.

Milton Berle: “Anytime a person goes into a delicatessen and orders a pastrami on white bread, somewhere a Jew dies.”

Crude fell 53 cents to an eight-week low to $46.59 a barrel.

Federal Judge A. Wallace Tashima: “The war on terrorism threatens to destroy the very values of a democratic society governed by the rule of law.”

Lockheed Martin refiled protests seeking to revoke Boeing’s contracts valued at more than $6 billion, part of the biggest Pentagon procurement scandal in more than a decade.

Last week, Korea’s central bank reduced its lending rate between banks by a quarter point to 3.25%. The decline is an effort to combat a slowing economy. How come their central bank is on the money and our Fed doesn’t get it right?


Sunday, November 14, 2004

11/14/04 Bulls In An “Unstable” Shop

There have been many claims that humans use only 10% of their brains. Up until now, I had serious questions about such claims; however, recently, I have had a more open mind. In the face of the dollar being down for seven straight weeks, the euro making a new all-time high, gold reaching 16-year highs, and the Fed raising interest rates for the fourth time this year, the S&P Index had its best 3-week rally in 2 years. Yesterday, Federal Reserve Governor Edward Gramlich, who was appointed to the Fed in 1997 by Clinton, gave a speech at the Gerald R. Ford School of Public Policy in Ann Arbor, Michigan. His comments are worth noting- both for bulls and for bears. In particular, he observed that “our low national savings rate and our high public deficits have in effect translated into national borrowing. If we were any other country in international history, it would have long ago been stopped.” He called the world situation “unstable.”

In the third quarter the private savings rate fell to a record low o.4%. The U.S. Treasury budget deficit weighed in at a record $412 billion for fiscal 2004. The trade deficit for the first nine months placed us on a path towards a yearly deficit of at least $600 billion. Third quarter worker productivity rose at a modest 1.9%, the slowest growth rate in 2 years. Meanwhile, unit labor costs rose at a 1.6% rate, the largest rise since the second quarter of 2001. In the past, Gramlich has noted that “because productivity growth is an important component of earnings growth, stock market valuations depend on the outlook for productivity.” The trend for productivity growth has been steadily dropping for several quarters. Gramlich has observed that “productivity alone determines the long-run path of income per capita, or living standards.” One should note that, in spite of increased productivity gains over the last three years, the average worker’s wages, adjusted for inflation, declined over that same period. As productivity gains continue to evaporate, one can expect further declines in the standard of living for the average American. This backdrop adds to the “unstable” situation described by Gramlich.

As Gamlich sees it, the solution is to cut the federal deficit. He mentioned that “the budget enforcement acts that we had in the late ‘90s proved to be successful.” In my view, there will be a severe dollar correction long before Bush vetoes a spending bill. The buck stops with foreign countries. The same countries that subsidize more than two out of every three dollars of the savings in this world also subsidize our nation’s growing habit to consume. That is an unstable situation, and unsustainable. If fiscal austerity is to find itself to our shores, it will be forced on us by other nations.

This week we will be reading some displeasing news. It will be reported that the PPI was sharply higher in October. The Index of Leading Economic Indicators will be down for October. The CPI will not be as tame as originally projected. The Congress will return to a Federal debt ceiling that is at the max. How many fiscally responsible senators and representatives will tie an increase in the debt ceiling to spending curbs and/or a pay-as-you-go budget?

George Roche: “You can like the company without liking the stock.”

Rick Sherlund: “We just don’t have a Next Big Thing stimulating demand.”

Michael Kelly, Techtel CEO: “Buyers are buying IT only when needed and when benefit is proven and the benefit is related to current important business objectives…Investment spending is being made to keep capacity across the board as close as possible to actual demand.”

One can also see the sparse inventory levels maintained by corporations. Inventory as a percentage of sales has been declining for some time. It reflects uneasiness on the part of CEOs and CFOs about near and intermediate term demand. It also reflects doubt on their pricing power ability. In light of the trend of decreasing worker productivity, one can expect profit margins to decline. Corporations can no longer depend on over-leveraged consumers to bail them out. Wage growth is not on the horizon to bail out consumers. All of the aforementioned does not comprise a wall of worry. It is more than that. It represents a pile of trouble, and that unstable pile is getting bigger every day.

Charlie Maxwell: “We are running out of the ability to produce 2% more barrels each year to meet world demand that increases about 2% annually.”

You can borrow money but you can’t borrow time. There are times when time is not your friend. This is one of those times.

Arnie Berman of CreditSights: “You need a pervasive sense that there is a next obvious thing to do, and that if you don’t do it, you will get left behind. Right now, there is nothing like that. Companies are doing ‘keep the lights on’ spending, and I don’t see that changing anytime soon.”

John Plender of the Financial Times: “GM’s equity is a slender $28 billion wedge that supports hundreds of billions of dollars in debt, healthcare liabilities and pension obligations. It is more of a social insurance for employees and retirees than an exemplar of shareholder capialism.”

Americans continue to import more food than they export.

A new study has been completed by four business scholol professors. The study analyzed 438,00 stock recommendations issued on more than 12,000 companies by 463 investment banks and brokerage frms between January 1996 and June 2003. The best analyst recommendations were those that went against the grain of the securities firms issuing them.