Saturday, April 16, 2005

Taxes And A Small Cup Of Coffee

4/16/05 Taxes And A Small Cup Of Coffee

Federal agencies are not producing the transparent performance reports that are mandated by law and intended to describe the public benefits they provide to Americans, according to a study released today by scholars from the Mercatus Center at George Mason University.

“Especially on Tax Day, Americans deserve to know what they are getting when they spend $2 trillion on the federal government,” said Jerry Ellig, a Mercatus Center senior research fellow and study co-author. “But our study shows that many agencies are simply not living up to their mandatory reporting obligations.”

The Mercatus Center’s “6th Annual Performance Report Scorecard,” evaluates the performance and accountability reports produced by 24 Cabinet departments and other agencies covered under the Chief Financial Officers Act of 1990. “The annual performance reports are intended to identify how much public benefit federal agencies produce for citizens, and at what cost,” said Maurice McTigue, a Mercatus distinguished visiting scholar and study co-author. “Half the agencies we studied aren’t meeting reporting requirements similar to those we now demand of publicly traded companies, which means we have no idea whether or not our investments as taxpayers are going towards programs that work.”

For fiscal year 2004, the Departments of Labor, State, Transportation, and Veterans Affairs produced the highest rated reports, with the Department of Commerce seeing substantial improvement. “We saw some modest improvement this year, but the average scores in six out of 12 categories is still below acceptable levels,” said McTigue, a former New Zealand government minister. The Departments of Defense and Homeland Security, and the Office of Personnel Management had the lowest-ranked reports in FY 2004. Health and Human Services, representing 24 percent of federal spending, missed the reporting deadline and ranked last (24th) since the report could not be included in the study.

“Only 11 percent of the federal budget is covered by good reporting, and two-thirds is in agencies whose reporting is unsatisfactory,” said Ellig, a senior research fellow at Mercatus. “It’s disappointing that some of the agencies with the biggest budgets have consistently failed to produce transparent reports that assess the public benefits they produce and show how their leaders are using this information to improve performance in the future,” he added.

According to the 2005 Congressional Pig Book, Congress jammed 13,997 pork projects into the 13 appropriations bills for a total of $27.3 billion. Try and remember the pork as you bust your butts at work—day in and day out.

The University of Michigan Sentiment Index dropped to 88.7% in April from 92.6% in March. Current conditions declined to 103.9 from 108 and expectations to 79 from 82.8.

Foreigners purchased many more U.S. assets in February-- $84.5 billion—than I had envisioned. The drop was small from January’s $92.5 billion.

The U.S. administration is calling for China to move immediately to introduce a flexible currency. Unfortunately, a flexible currency will still leave a huge disparity in labor costs.

China’s exports have overtaken Japan’s. Not surprisingly, the People’s Bank of China stated the country’s forex reserves grew 49.9% year-on-year in the first quarter to $659.1 billion.

The Fed’s Empire State Manufacturing Index in April plummeted to 3.1 from a revised 20.2 in March. It was the lowest reading since April 2003.

U.S. March import prices rose 1.8%, the fastest increase in more than 2 years. Excluding petroleum, import prices rose 0.3%, while export prices rose 0.7%. Excluding agricultural goods, export prices rose 0.4%.

In March, factory output declined 0.1%. It was the first drop in six months.

Doug Noland: “But with air now flowing out of the speculative Bubble in Risk, financial dislocation dynamics are in play.”

Although the rise in housing prices in San Diego and Los Angeles has begun to slow a bit, the same cannot be said for the Bay Area around San Francisco. There, home prices rose to new highs in March as sales for that month were at their highest level in 16 years. The median price paid for a Bay Area home was $568,000, a new record, and up 3.5% for the month and up 19.8% from March 2004. Prices are going up at their fastest pace in four years.

Fed Board Governor Donald Kohn: “A measured pace of rate increases is our best guess for now…But that guess is conditional on our expectations that the economy will evolve roughly along the lines I have described…Market participants should understand the nature of the chances they are taking. Markets price best if they take account not only of the most likely outcome but also of the risks of alternative developments…Long-term rates probably will increase in a more normal pattern of responses than we have seen over the last year.”

Bond market participants do not appear to understand the risks they are taking. During this week, treasury yields dropped dramatically to multi-month lows. We might take a closer view of the gap between the 5-year treasury yield at 3.87% and GM’s 5 3/8 bond due in 2011 at a yield of just over 11%. That is not a misprint. Forget the rating on GM bonds. Do you think the company will default on this obligation in 6 years? If you do, then you had better take a closer look at your equity portfolio. I believe that GM can come back. I remember when only a short time back McDonald’s stock was selling at close to $12 a share, and no one wanted to take their child there to eat. I didn’t eat at McDonald’s. I munched on the stock. The meal has been real tasty. I’d rather own GM bonds yielding 11% than a 5-year Treasury any day of the week. Why? I prefer to invest in private enterprise rather than government employees. Government produces red ink. They generate pork. They create financial risk and instability. Record twin tower deficits eventually lead to chaos. I’ll take a Chevy Suburban for safety over that treasury bond. I’ve owned three in my lifetime. How many treasury bonds do you own? Not many I bet. On the other hand, China and Japan own them up the wazoo!!!!!!!

Bechtel is laying off 700 workers. The finger in the chili at the San Jose Wendy’s has led to layoffs in some Northern California locations. Monaco Coach will close its Bend, Oregon facility. Thor America is closing its Middleburg plant that produces Citation and Chateau recreational vehicles. About 140 employees will lose their jobs. Tower Automotive is closing its Bowling Green, KY, Belcamp, MD, and Corydon, IND plants, and 800 employees will lose their jobs. Oneida is closing its Buffalo distribution center, and 90 workers will be cut from the payroll.

There are many ways to judge the economy; however, not many can be helpful in real-time. My favorite is this one. Everyone has passed or been to a 7 Eleven store. Management can tell almost instantaneously when the economy is taking a turn for the better or for the worst. If the customer goes from ordering a large coffee to a small coffee, then you know the economy is at the very least slowing down. It is a very early warning signal. I’m seeing more small coffees being poured.

Friday, April 15, 2005

Oy Vey! Breaks And Brakes

4/15/05 Oy Vey! Breaks And Brakes

Chief Justice John Marshall: “The power to tax is the power to destroy.”

President Bush: “My view of China is, is that it’s a great nation growing like mad. And that’s one of the reasons why Americans are seeing over $2 gasoline, is because demand for energy in China is large, and supply around the world hasn’t kept up with the increase in demand.” The last time I checked the U.S. was the largest consumer of crude. By the way, crude is trading around $50.60 a barrel.

In the newest Harris poll of 1,010 U.S. adults, Bush’s job ratings fell to 44% positive, 56% negative, the worst numbers of his presidency.

The UAW will work with General Motors Corp. to reduce the automaker's $5.6-billion-plus health care tab -- but it must be done within the confines of the current 4-year contract. That's because the UAW doesn't intend to reopen that agreement, union officials said Thursday during and after an annual UAW-GM meeting. Rising health care costs have truly helped to put the brakes on GM’s earnings.

IBM’s quarterly results were substantially below expectations. The company might restructure, and blamed the weak sales growth on the inability to close deals. Give me a break! With about 370,000 employees, there must be a closer or two. This company has been living quarter-to-quarter on buying back stock for its treasury. I have received a good deal of criticism and snipes from those long IBM. At $80, the hot shots are nursing some ugly marks to the market.

Weak pricing sure put the brakes on Samsung’s quarterly results. They dropped 52%, and Sony Ericsson wasn’t pretty either as they were also hit with a backlog of inventory to go with the weak pricing.

Sun Micro disappointed with a small loss instead of a small profit, but GE came through with 38 cents versus 32 cents.

I’d like to wish a happy 50th anniversary to McDonald’s and to Salk’s polio vaccine as well as a happy 102nd to the Golden Rule Store. You might know it as JC Penney.

Yesterday, the Dow dropped to a 5-month low and it declined through its 200 day moving average.

Twenty-eight states and territories reported increased unemployment claims in the week that ended April 2, while 25 reported decreases.

Black and Decker is closing its last North Carolina plant. Production will be moved to Mexico and Tennessee. About 675 employees will be impacted. Northwest Airlines will layoff 600 mechanics. Therma-Wave will cut 8% of its workforce.

Hot money’s only loyalty is to going where the action can produce profits. The Nasdaq is still down 60% from the high of five years ago. At the earliest whiff of a top, the hot money will leave the housing market. Just as profits from the dotcom era generated enormous GDP growth, so have escalating real estate prices. There had better be a third leg to the stool. Otherwise, our economy will hit the dirt with a thud. Bear markets produce torture but don’t take any prisoners.

This weekend the G-7 gather in Washington. China will not be present; however, in less than 6 weeks, central bankers from Japan, China, and South Korea will get together at their first international conference. You can bet currency re-valuation will be on the table for discussion.

Japan, China, Taiwan, Korea, India, Hong Kong, Singapore and Malaysia combined hold approximately $2.4 trillion in forex reserves.

In the first quarter of 2001, I suggested one consider the purchase of Newmont Mining shares at $16. Since then, the stock has reached $50 on a few occasions and now rests around $40. Should market weakness continue, adding to holdings around $36 might prove advantageous.

Yesterday, the Dollar Index rose above its 200-day moving average against an index of 6 currencies. Today will be a good test for the dollar. A report will show the net amount of U.S. financial assets purchased by foreigners in February. In January, there was a leap up to $91.5 billion. A drop of $30 billion in February would not be surprising.

Wednesday, April 13, 2005

Fear Factor

4/14/05 Fear Factor

That Harley roar you heard was really a revved agonizing scream. The Hog shareowners lost $3 billion in market value in yesterday's trading session. It was only a few weeks ago that I mentioned the market cap for Harley-Davidson exceeded that of GM. No more. Here's another one for you. The market cap for Daimler Chrysler is $44 billion. GM's is $16 billion, Ford's is $18.3 billion, and Harley's $14.2 billion. You might consider buying GM, Ford, and Harley and shorting DaimlerChrysler and we'll take a look see in a month or so. By the way, GM's market share in Europe in the first quarter rose to 9.8% from 9.4% in the year earlier period. That's the good news. The bad news is the company still loses money in Europe.

Arthur Schopenauer: "We forget three fourths of ourselves to be like other people." Let's give it a whirl and stop doing that.

As the Fed worries more about inflation, crude dipped to $50.22 a barrel. The Fed is a great contrarian indicator.

March retail sales, excluding auto and gas sales, fell 0.1%, the first decline in a year. Aren't you glad the Fed sees the economy getting stronger? The Fed is a great contarian indicator.

The government reported the 9th straight weekly rise (3.6 million barrels) in crude oil inventories and a buildup of gasoline stocks (800,000 barrels).

San Diego has yet to publish audited financial statements for 2003 and 2004. S&P has yanked the city's credit rating. Insolvency? Maybe San Diego should be delisted as a city.

ATMs are being installed at many Wal-Mart and Walgreen's locations.

Up to a quarter of the cement used by our construction industry in recent years has been imported, such as, from South Korea and Greece. I wonder if the mob buys direct and cuts out the middleman.

Germany and Russia signed a deal to build a natural gas pipeline under the Baltic Sea and deliver fuel from Western Siberia to Germany. It would bypass Poland.

Advanced Micro Devices will report a loss in the quarter but also announced that its flash memory unit would be spun off.

Apple continues to knock the cover off the ball as it earned $290 million or 34 cents per share on sales of $3.24 billion in the March quarter. Jobs makes it look easy. The great ones have a way of doing just that.

CME, the largest U.S. futures exchange and the largest regulated marketplace for foreign exchange, set a new volume record in its CME Euro FX futures yesterday of 211,929 contracts, representing a notional value of $34.3 billion.

Alberto SantaLuca: "For all of 2004, disposable personal income, which was approximately $8.7 trillion, exceeded expenditures by less than $100 billion." (We should not forget the one-time $32 billion Microsoft dividend.)..."With little evidence that job growth, income growth, and spending growth are accelerating out of their current levels, the current evidence favors stagnation or recession. This could happen within the next 4 to 6 quarters."

Economic Signposts

4/13/05 Economic Signposts

In February, the U.S. trade deficit reached a monthly record of $61 billion with imports rising 1.6% and exports essentially flat. The only real improvement was the trade gap with China that dipped to $13.9 billion from $15.3 billion in the prior month. However, in the first two months of 2005, our trade deficit with the Eurozone widened from $10.6 billion a year ago to $12.6 billion this year. To add a bit of financing requirements to the fire, our federal budget deficit for March amounted to $71.2 billion and $294.7 billion for the six months through March 31. The efforts to reduce the federal deficit have not been successful. There's just too much pork in the Congress.

The stock market had a sharp reversal for the better in the latter part of yesterday's trading. Notes from the FOMC meeting got traders inspired as they realized that the Fed would not be raising rates by 50 basis points at the next meeting. On the other hand, the notes revealed a concern that inflation could be intensifying as growth appeared to be stronger than anticipated. The Fed must be eyeballing a different set of numbers than I am. An industry report stated that worldwide sales of chip equipment declined for the first time in 19 months in February. The IEA lowered its forecast for global oil demand for the first time this year. Crude dropped to a 6-week low of $51.20 a barrel. It is down 12% from its recent high; however, crude is still 38% higher than one year ago. In addition, Harley-Davidson cut its earnings growth and shipment forecast for 2005. BMC software warned that earnings and revenues would be disappointing for the quarter and the company plans to cut 825 to 875 employees or 12% of its payroll. Foundry Networks warned of a sharp revenue shortfall for the quarter.

Challenger, Gray & Christmas stated high tech job cuts were 59,537 in the first quarter of 2005, the highest since the fourth quarter of 2003.

Foreign direct investment in China rose 9.5% in this year's first quarter. For all of 2004, it amounted to $60.6 billion, and a similar figure is anticipated for 2005.

Luxembourg Prime Minister Jean-Claude Juncker: "Appreciation of some Asian currencies is more than highly desirable."

Yesterday, the beta site for Nouriel Roubini's daily economic monitor became effective. The link is I highly recommend it.

According to the Council On State Taxation, businesses paid over $47 billion in state and local taxes in 2004, or 43% of all state and local taxes, nearly 10% higher than in the prior year.

The AARP stated that wholesale prices for name-brand drugs jumped an avergae of 7.1% in 2004, the largest increase in 5 years.

In the week ended April 8, mortgage applications increased 6.1% and refinancing applications increased 5.6%.

Tuesday, April 12, 2005

Trade Deficit

4/12/05 Trade Deficit

In November 2004, the U.S. had its largest monthly trade deficit. It amounted to $59.4 billion. Our latest monthly deficit will be released this morning. It will be a whopper. The clues have been provided. In the first two months of 2005, China's exports to the U.S. rose almost 37%, while in the same period, our exports to China fell by 9.7%. In March, China had a $5.7 billion trade surplus, up from $4.4 billion in February, and its exports rose 33% for the month. We also know that Japan's February trade surplus was larger than expected. Meanwhile, India posted record exports of $80 billion in 2004-2005, a growth rate of 24%. This year projections are for exports of $90 billion. Additionally, Izal Ali, the chief economist for the Manila bank, stated the collective GDP of countries in Asia will rise from 6.4% to 6.9% this year. If pressures from Asian exports were not enough, the U.S trade deficit has ballooned even more so because of energy imports. The mounting trade deficit makes for a weaker dollar and some increased buying interest for gold.

ADB India predicts India will become the third largest economy with a share of 14.3% of the global economy by 2015, and thus overtake Japan in just 10 years. By 2025, it is projected that India's GDP will be 60% of the size of the U.S. economy. By 2035, economist Arvind Virmini believes the Indian economy will be larger than that of Western Europe and only slightly smaller than the U.S. economy.

Over the weekend, the latest shutdown of the Ford Ranger plant in St. Paul came with little warning for the plant's 1,800 workers. MetLife will cut 600 jobs.

Pepsi Bottling's quarterly net fell for the first time in 2 years.

Monday, April 11, 2005


4/11/05 Insights

From an email received this weekend:
"Can you imagine working for a company that has a little more than 500 employees and has the following statistics:

>* 29 have been accused of spousal abuse


>* 7 have been arrested for fraud


>* 19 have been accused of writing bad checks


>117 have directly or indirectly bankrupted at least 2 businesses


>* 3 have done time for assault


>* 71 cannot get a credit card due to bad credit


>* 14 have been arrested on drug-related charges


>* 8 have been arrested for shoplifting


>* 21 are currently defendants in lawsuits


>* 84 have been arrested for drunk driving in the last year


>Can you guess which organization this is?


>Give up yet?


>It's the 535 members of the United States Congress. The same group of


>idiots that crank out hundreds of new laws each year designed to keep


>the rest of us in line."

I read an interesting article over this weekend in the Cleveland Plain Dealer. It described one individual's experience in buying a Dell laptop through the company's website on Jan. 7. I learned that "Dell spokeswoman Jennifer Davis said the company has separate operations that sell computers through its Web site. The 'home and home office' store caters to home users of computers. The 'small business' store sells products designed for use in businesses from 1 to 200 employees." The configuration of the laptops is only slightly different, such as, the size of the computer's memory; however, the prices can have a large variance. The two subdivisions are separate entities within Dell. As such, a customer doesn't receive the small-business price through the home office store or vice versa. In addition, you cannot get a credit for one store through the other.

According to the California Association of Realtors, in 2004, one in six purchasers surveyed said they were buying a home for investment or tax purposes.

Crude oil has dipped to $52.88 per barrel.

In 2004, the CPI rose 2.7% and wages 2.5%. Janemarie Mulvey, chief economist with the Employment Policy Foundation, remarked "healthcare has eroded the wage base."

Since 1885, in every 5th year of each decade, stock prices have risen.

Ingram Micro's outsourcing plan has impacted 550 jobs.

Over the weekend, I read a most worthwhile blog. The link is

Sunday, April 10, 2005


4/10/05 Fairness

In response to Verizon's recent announcement that the company had privately purchased Carlos Slim's 13.7% ownership interest in MCI, Bill Miller of Legg Mason wrote the following letter to the CEO of MCI:
Dear Mr. Capellas, I trust that pursuant to the announcement by Verizon that it has agreed to purchase the shares of MCI held by Carlos Slim, the Board of MCI will insist that all shareholders of MCI be treated equally, and that, at a minimum, any agreement for MCI to be purchased by Verizon have the same present value as that received by Mr. Slim. As I indicated in my letter to the Board last week, events had madeVerizon's $23.50 offer moot; this subsequent development confirms that. There can be no reason for the Board to support an offer to MCI owners that is substantially inferior to what Verizon has just agreed to pay for a non-control block of stock. Shareholders would be outraged if the Board did less than insist that the identical terms be made available to all other owners. That, of course, implies a higher value than the $25.72 cash price Mr. Slim will receive, since he will have the use of that cash shortly, while other MCI owners would have to wait until closing if Verizon offered the same price, including the same effective call option on Verizon's stock. Our rough calculation of the present value of what Verizon agreed to pay Mr. Slim, including the call, is in excessof $27.00. For the Board to continue to insist that the prior offer of $23.50 is sufficient and fair would be unconscionable. If presented with any offer from Verizon that is less than the present value of what they are paying Mr. Slim, we will vote against it. I expect the Board will do its duty on behalf of all owners of MCI. Sincerely, Bill Miller Chief Executive Officer Legg Mason Capital Management

Jeffrey F. Kupfer, executive director of the President's bipartisan tax panel, stated "our mandate is to be revenue-neutral, and we are interpreting that with respect to the president's policy baseline, which does not include a permanent fix to the A.M.T. (Alternative Minimum Tax)." About 3 million Americans will be hit by the AMT in 2005 and an estimated 18 million in 2006. Leonard Burman, a senior fellow at the Urban Institute, stated "the AMT is a high tax increase built into law." I doubt whether anyone would disagree with that opinion.

Warren Buffett: "The CEO who misleads others in publicmay eventually mislead himself in private."

Yesterday, I mentioned the new Shanghai home ownership law. The new law should materially impact the demand for various building materials, such as, lumber, concrete, copper, steel, glass, and paint, and, naturally, appliances, lighting fixtures, and other home requirements. We have already witnessed the effects of last year's auto financing restrictions on vehicle sales in China.