Saturday, December 25, 2004

12/25/04 Merry Christmas

It is a special time for family, togetherness, thanks, and prayer. There is delicious food and wonderful gifts that bring much joy. For most Americans, the daily stress and grind will be lessened this Christmas day. For others, the winter cold in Ohio, Michigan, Minnesota, Kentucky, and even south Texas have created added pressures on homeless shelters. For others, low-paying jobs, temporary work, plant closings, and layoffs have increased the growing demand at food pantries, food banks, and soup kitchens. A growing number of working Americans live in poverty. A growing number of American families live in poverty. Hopefully, through the generosity found in our communities, most Americans will not be hungry this Christmas day. However, reports have shown that many food banks are in “crisis mode.” Challenger Gray & Christmas stated the Ohio Food Bank has seen a 17 to 20% increase in the number of working poor seeking assistance this year. Even though Congressional pork spending is at record high levels, “donations and government funding are at all-time low levels” for food banks and community assistance centers. To make matters worse, especially during harsh winters, sickness rises. There will be increased pressures for local community medical assistance as only 41% of workers who earn less than $10 an hour have employer-provided insurance. Without employer coverage, how can the working poor afford the average monthly health insurance premium of $282 for an individual and/or $756 for a family? The Institute of Medicine is a branch of the National Academy of Sciences. The Institute estimated that providing health insurance to those without coverage would save between $65 billion and $130 billion a year because it would increase life expectancies and worker productivity and reduce healthcare costs. That certainly would make for merrier Christmases for years to come for all Americans.

For the last 12 decades, the Dow has risen about 80% of the time during the last five trading days of the year. That’s a happy thought.

The China Daily reported that “china is likely to experience a ‘catastrophic’ drought next year.” This could have a major negative impact on water supplies as well as grain production.

According to the Ministry of Communication, China’s cargo turnover of all sea and river ports increased 126% year-on-year in 2004.

According to the Comptroller of the Currency, total U.S. commercial bank derivative holdings grew at a 16% rate in this year’s third quarter. Do you think these bankers have a firm understanding of their derivative positions and their potential risk?

In the twelve months ended Dec. 11, wholesale prices only rose 6.73% in India due to lower food prices and a marginal fall in energy rates. It is estimated that, by the end of March 2005, the inflation rate will moderate further to 6.5%, and this would equate to the present yield on the country’s 7.38% 2015 bonds.

State-run Indian railways raised freight rates for most commodities 7.7% last month due to higher diesel and steel prices. The railways are India’s biggest consumer of steel and diesel.

The malls across our nation are closed today. The Internet never closes. When the meal is over and the dishes are done, shoppers will get to view marked-down items. The day can end with consumers gobbling up early bird specials.

Friday, December 24, 2004

12/24/04 Father And Son

On October 13, 1989, Senator Fritz Hollings spoke on the Senate floor and stated “of course, the most reprehensible fraud in this great jambalaya of frauds is the systematic and total ransacking of the Social Security trust fund in order to mask the true size of the deficit…the Treasury is siphoning off every dollar of the Social Security surplus to meet current operating expenses of the Government…the hard fact is that, in the next century, the Social Security system will find itself paying out vastly more in benefits than it is taking in through payroll taxes. And the American people will wake up to the reality that those IOUs in the trust fund vault are a 21st century version of Confederate banknotes.”

On January 24, 1990, Senator Daniel Moynihan spoke on the Senate floor and remarked “Mr. President… If there is a problem of dissimulation, I would suggest that it resides with the present practice of using Social Security trust funds as general revenues. My distinguished friend, the Republican Senator from Pennsylvania, Senator Heinz, has used a very direct word for this. He says it is called embezzlement.”

On November 5, 1990, Bush Sr. signed into law Section 13301 of the Budget Enforcement Act of 1990. It made it unlawful to include Social Security funds in budget calculations. Despite the signing of this law, Bush Sr. continued to use Social Security funds for budget purposes.

Bush Jr., in his first State of the Union Address, said “To make sure the retirement savings of America’s seniors are not diverted to any other program, my budget protects all $2.6 trillion of the Social Security surplus for Social Security, and for Social Security alone.” During his first term, Bush Jr. spent the entire $509 billion in surplus Social Security revenue generated. Each and very day almost $440 million is being embezzled from the Social Security trust fund.

While everyone is enjoying eggnog and being merry, I thought the aforementioned would be a jolly reminder of what it means to get stuffed in real-time. So, while you’re opening your loot during this holiday, know you and your neighbor are being looted by someone you and millions of others invited back into that big white house for another four years.

Just because the cost of money is cheap, doesn’t mean stocks and bonds are cheap.

From November 2003 to November 2004, the M3 money supply rose at a 5.4% rate; however, between August 2004 and November 2004, the rate of growth slowed to 1.6%. Between November 2003 and November 2004, the monetary base of depository institutions, adjusted for changes in reserve requirements and seasonally adjusted, rose each and every month. However, from December 1 through December 22, 2004, the monetary base has declined below the prior month’s level. I mention this changing flow of funds pattern as a very real red flag. Changes are in the wind, and those changes can bring some unwelcome surprises in the coming year.

The euro rallied to a new high of 135.40 versus the dollar.

Almost 2 million people are employed in department stores this day before Christmas. Stars of this holiday shopping season have been gift cards, the iPod, plasma-screen TVs, Delphi XM Satellite MyFi, and cashmere sweaters.

COX-2 selective inhibitors are associated with an increased incidence of serious adverse events as compared to non-selective NSAIDS (non-steroidal anti-inflammatory drugs).

The Commerce Department reported that November new home sales declined 12% to the lowest level since July. It was the largest drop in more than a decade. November inventory of new homes for sale represented a 4.5 month supply. It was the largest inventory since 1979. The median price of a new home sold in November declined 8.2% to $206,300. It means that new home prices have dropped 0.4% since November 2003. However, residential real estate represents 29% of the value of total household assets while the household financial obligation ratio exceeds 18%, both near record levels.

The housing market in California is a different story with 2004 being a record year for home prices. The annual median price of a home rose 22% to more than $450,000. The median number of days required to sell a home has been only 29 days, the third lowest on record. Even though more than 200,000 permits were issued in 2004, the total fell short of household growth estimated at between 220,000 and 250,000 this year. The state’s Housing Affordability Index has fallen to about 19% this year.

Sales and earnings at American Greetings are below expectations due to lower revenue at the retail level and from the seasonal gift-wrap business.

Real disposable income rose 0.2% in November and the savings rate rose 0.3% in the month. At the same time, consumer spending rose 0.2% in November. Over the past year, real spending has risen 3.4% while real disposable income has increased by 2.2%. In 2004, we spent more than we earned.

Kurt Wulff: “2004 was the year in which the world production of light oil peaked… Just by replaying the old oil cycle, starting in 1976, we could have a three-to-fivefold gain in the oil price in the next five to 13 years.”


Thursday, December 23, 2004

12/23/04 The End Game

How do you know it’s the end game? In basketball, it’s the last 2 minutes that count. In elections, such as the Governor’s race in the state of Washington, it’s the third recount, the hand recount, that counts--- even if the difference is only 10 votes out of 10 million ballots cast. In the bond and stock markets, there is no end game. The music doesn’t stop unless you can’t meet a margin call. Sometimes the direction of the game takes on a life of its own. Since August 2004, the Dow Transports have risen over 800 points or about 28% without a correction. What does that signify? It means that price points are moving up almost daily with strong investor buying power and the willingness to pay a premium for designer labels, so to speak. At some point, promotions come into play. Then the scramble for bargains takes place. It’s like the old free-for-all days at Loehmann’s. Be careful not to get trampled. Shoppers hunting for bargains can get aggressive and vicious. The problem now is that there are few bargains and prices continue to escalate--- not just for equities but also in real estate, for example, in San Francisco. Multiple bids turn into a feeding frenzy. It’s not for the faint of heart.

Can you explain to me how the GDP rose 4% in the third quarter while corporate profits declined by 4.2%?

According to Redbook, chain store sales have fallen for three straight weeks. There is another side to the end game. Walmart.com introduced gift cards during the 2002 holiday season. The company expects its sales of online gift cards to triple this season from last year.

The end game is still alive. According to the International Council of Shopping Centers and UBS, one in five consumers plan to shop on December 26. That’s a Sunday. I thought it was a day of rest.

VeriSign stated that this year’s average online transaction increased 10% to $140.

For many, when a plant closes, it is the end game. Hopefully, that will not be the case for all the employees at the Shaw Industries wool plant in Dallas. It is closing.

Is the end game approaching for Medicare? Comptroller General Walker stated “the Medicare problem is about seven times greater than the Social Security problem. It is much bigger, it is much more immediate, and it is going to be much more difficult to effectively address.” John Palmer, one of the six trustees of Social Security and Medicare finances, stated “costs are going to soar, and that is going to put tremendous pressure on federal revenues.” According to the GAO, unfunded Medicare liabilities amount to about $28 trillion.

The Medicare Part B premium for visits to doctors’ offices will rise by 17% or $11.60 in 2005. The typical monthly COLA for Social Security is $25 in 2005.

Air Europa, Spain’s third-largest airline, is currently an all-Boeing operator with 737 and 767 aircraft. The airline ordered 10 A350 planes from Airbus. In addition, Decan Air, India’s low-cost airline, ordered 30 A320s from Airbus and Kingfisher Airline ordered 10 A320s. Meanwhile, JAL ordered 30 Boeing 7E7s. Boeing now has 112 firm orders for the 7E7. The company predicted it would have firm orders for 200 by the end of 2004. Time is getting short for that to occur.

Our economic expansion has been slowing while interest rates have remained at near record-low levels. What happens when rates rise?

Bush’s approval rating stands at 49%. Now I know why he is the Man of the Year. He is the first President in the history of the U.S. to be re-elected with an approval rating under 50% and to also have that approval rating remain under 50% a month after the election. He made history.

Blockbuster cut the price for online rentals to $14.99 per month? Is this the end game?

Excluding transportation, durable goods orders fell 0.8% in November after falling 1.3% in October.

Wednesday, December 22, 2004

12/22/04 Let The Good Times Roll

When there are 29 out of 30 Dow stocks up in a day, and that was the case yesterday, you know the flow of funds is decidedly moving into equities. Over the past several weeks, many companies have announced buybacks of their own stock. Microsoft paid out that $32 billion dividend. Companies have over $1 trillion in cash on their balance sheets. Merger activity has moved to the front pages. It's no wonder there is a big seasonal rally. Yet, I remain convinced that the right course of action, at leats for me, is to sell into the strength. As previously stated, I have also eliminated all Treasury bond holdings.

With all that cash you would think companies would be increasing wages and salaries and hiring more permanent workers. As with this holiday's retail sales, permanent hiring is lackluster. Meanwhile, workers are content to work at least 16 hours a week at Safeway as a courtesy clerk and receive $8.39 an hour. Why? By working 16 hours a week, they receive full medical and dental coverage and that provides peace of mind. That's a trade off for working at $8.39 per hour and, for many, being over-qualified.

Bilateral trade between China and India surpassed the $10 billion mark for the first time. Growth in the first 10 months was an impressive 82.5%.

For many months I have written about the weakness in the UK housing market. There is talk that the Bank of England will soon lower interest rates.


Tuesday, December 21, 2004

12/21/04 Precarious Looting

Bush on Social Security: “It’s now in a precarious position. And the question is whether or not our society has got the will to adjust from a defined benefit plan to a defined contribution plan.”

Economist Allen W. Smith, Ph.D. is author of the “Looting of Social Security: How the Government is Draining America’s Retirement Account.” According to Smith, “most of the participants in the debate argue that, when benefit payments begin to exceed payroll tax revenue in 2018, Social Security can just start redeeming that hoard of government ‘bonds’ that are in the trust fund to supplement the inadequate tax revenue, and that it will last until 2042.” He says people who make this argument are wrong. Simply stated, he says, “every penny of the Social Security surplus has been ‘borrowed’ and used to fund other things… since the money was spent, and not invested in paying down the public debt by buying marketable Treasury bonds as the supporters of the 1983 Social Security legislation intended, the trust fund holds only non-marketable ‘special issue’ IOUs that are simply accounting entries that keep track of how much the government owes to Social Security. These IOUs are not real assets because they have no cash value. So, unless the government begins repaying its debt to Social Security now, when Social Security begins to run deficits in 2018, it will be necessary to raise taxes, borrow massive additional amounts from the public, or cut benefits. This is what the privatization smoke screen is intended to keep the public from seeing…The solution to the short-term Social Security imbalance would be for the government to immediately stop looting Social Security and begin repaying the $1.5 trillion that it has already looted from the fund.”

H. Stanley Judd: “The ultimate security is your understanding of reality.”

Dwight Eisenhower: “We will bankrupt ourselves in the vain search for absolute security.”

The key to resolving Social Security, as well as for most problems, is rational decision making rooted in common sense judgments and choices. Invading Iraq was one of choice. There was significant evidence in the winter of 2001 to suggest that, at the very least, doubt surrounded the existence of WMD. I expressed this view quite frequently at that time. Now, Bush is making another precarious judgment. Solving the problems of Social Security is not about society’s will. It is about the federal government’s will--- the will of the Administration and the Congress--- to sharply reduce spending and to begin the repayment of the $1.5 trillion looted from the fund. Approving federal budgets does not equate to right-doing, so to speak. It does not create a good housekeeping stamp of approval and a pat on the head. It is wrong to loot, and people who loot are convicted and sent to prison--- unless they reside at 1600 Pennsylvania Avenue. The government has made no provision to repay the $1.5 trillion that was looted. No federal budget should be approved without repayment provisions.

For the first time in six months, the Conference Board stated the U.S. index of leading economic indicators rose. It was up by 0.2%. In November, six of the ten indicators that make up the index increased. The main improvements were rising stock prices and real money supply. At the same time, the growth rate of the leading index has slowed below its long-term trend.

According to the Holiday eSpending Report, online shoppers in the U.S. spent $16.7 billion during the first six weeks of the holiday season, rising 28% from the prior year. The fastest growing categories year-over-year were music, video/DVD, jewelry, books, and toys/Video games (hardware and software). By comparison, ShopperTrak reported that retail sales on Saturday and Sunday fell 3.3% from the final pre-Christmas weekend a year ago. In the week that ended December 18, sales dropped 5.9% compared with the same week a year ago. Describing this shopping season, Michael Niemira, chief economist at the International Council of Shopping Centers, stated “it’s slow; it’s very uneven; and, at times, it’s worrisome.” Kurt Barnard of Barnard’s Retail Consulting Group stated “so far the season has been a considerable disappointment for most retailers.” One reason, Barnard opined, was “it’s just the same old, same old, same old.” He could just as easily been describing the rhetoric coming out of Washington DC. There is a big difference. Spending by the Administration and the Congress is far from lackluster or slow. It is, however, quite disappointing and extremely worrisome.

Dana Corp. is closing its Stateville, NC plant. It will result in 300 lost jobs. The facility supplies equipment to makers of industrial equipment, such as, graders, loaders, and tractors.


Monday, December 20, 2004

12/20/04 Winter Has Arrived

The winter solstice maybe tomorrow, but don't tell that to Washington DC. It's 10 degrees F, and with the winds blowing 20 to 30 miles per hour, it feels like 10 below. With temperatures like that across many sections of the country, it doesn't take long to use up a lot of heating oil, natural gas, and propane. Combine that with bin Laden's call to attack Saudi oil supplies, and you have some strong bidding for crude. The 10 cent drop in the price of gas at the pump was a welcome relief, but it appears to be short-lived. Santa arrived on Wall Street and that's more than enough to line the pockets of many investors and speculators. Unfortunately, all good things come to an end--- just like warm weather.

According to WebSideStory, Microsoft has started to lose browser market share for the first time in four years. Internet Explorer's share in the U.S. has dropped from 96% in early 2003 to 92% as of Dec. 3. Firefox and Opera have over 10 million users, and Firefox was officially on the market less than 2 months ago. As I mentioned about three months ago, Firefox will make a dent in the browser market, and that dent will get bigger in time.

According to an AP poll, one-half of Americans say they worry about the money they owe---even more so with the holiday purchases, and three-fourths in the poll stated they have credit cards. More than half expect their debt will cause them problems over the next five years. They shouldn't worry. Greenspan is not worried about consumer debt levels, and he is all-knowing. He is Carnac the non-magnificent. As for Federal spending, the Snowman stated it will be reduced in 2006. He seems to have by-passed 2005. Maybe the stock market has taken 2005 for granted too. Years ending in 5 are often clear sailing. It always stays warm too.


Sunday, December 19, 2004

12/19/04 A State Of Mind

The holiday season is one of faith, compassion, giving, and joy. It is a state of mind that, unfortunately, is seasonal, and has a partial resemblance to the yearly Claus rally on Wall Street. All good things come to an end---- even the two-day economic conference in DC., which reminds us that this season is often mindless and comprised of senseless dribble.

Harry and David of Medford, Oregon had quite a surprise this holiday shopping season. They received more online orders than they did from their catalog. Could this spell trouble for the catalog business in years to come?

I hope everyone has a wonderful holiday, and one filled with peace of mind and a quality of life cherished and sought by all.