Saturday, April 23, 2005

Are Expectations Substantially Distorted?

4/23/05 Are Expectations Substantially Distorted?

Before I get to Fed Governor Donald Kohn’s remarks made yesterday, I would like to touch on a few matters. The order is of no significance.

Ryanair previously announced that it contracted to purchase 29 Boeing 737-800 planes for delivery between now and March 2006. We learned through a Ryanair proxy filing that the cost per plane is about $29 million versus the list price of between $61.5 million to $69.5 million on Boeing’s Web site. Once again, it is clear that Boeing will make the vast majority of its net income from its defense business rather than from the sale of commercial aircraft. I do not believe the company’s shareowners fully grasp the transformation in Boeing’s cash flow and the competitive pricing burdens weighing on its future.

Maytag may close its Hoover vacuum plant. Lear Corp. plans to close some plants this year and move production to other countries. The company has 280 facilities and employs 110,000 workers. Its best customers are GM and Ford.

China’s oil imports rose 23% in March. Not surprisingly, crude closed at $55.45 per barrel.

In June 2004, I suggested that Wal-Mart shareholders consider scaling back the size of their holdings. The stock was $10 higher than the present price. Now, the street seems to have lost its love for the company. I would now suggest the purchase of the shares. Day in and day out, Wal-Mart is the consumer’s best friend. Their everyday low pricing prolongs purchasing power.

The Goldman Sachs Commodity Index is up 22% year-to-date.

In this year’s first quarter, Bank of America’s deposits grew by $11.4 billion, while liabilities jumped by $103 billion.

The U.S. purchases about one-third of China’s annual exports. We had better maintain our appetite for their goods because exports now represent 35% of China’s GDP versus 20% back in 1999.

Thanks to financial companies, builders, and energy enterprises, first quarter earnings for the S&P 500 will rise at least 12%. That’s about 50% higher than envisioned back in December. One should ask about the sustainability of that pace as interest rates rise and inflation takes its toll. The stock market looks forward and not backwards. You’re only as good as your last trade. In other words, can the S&P 500 repeat the first quarter? Google might but will the Bank of America? Dell might but will P&G? Until the answer comes into clearer focus, increased volatility will become a more frequent reality.

Talking about Google, the company unveiled a beta map site program. The link is

I have stated on many occasions that Donald Kohn would be my choice to replace Alan Greenspan when the latter retires at the end of this year. Yesterday, Kohn spoke at the 15th Annual Hyman P. Minsky Conference at The Levy Economics Institute of Bard College located in Annandale-on-Hudson, NY. I would like to provide a few quotes from his remarks:

“We should not hesitate to raise interest rates to contain inflation pressures just because it might set off a retrenchment in housing prices. Nor should we hesitate to raise rates because higher rates mean higher debt-servicing burdens for the current account, the fiscal authority, or households.”

“To the extent that current spending behavior is built on realistic expectations- in particular, for future short-term interest rates, the exchange rate, rates of return on capital investments in the United States relative to those abroad, and housing price appreciation- the transition should be relatively orderly: Asset prices should adjust gradually to changing developments, as should the spending patterns of households and firms. But if current expectations are badly distorted, then the way forward may not be so smooth. Eventually, reality always asserts itself over wishful thinking, and such realignments are sometimes abrupt, as illustrated by the collapse of the high-tech bubble a few years ago. In such circumstances, asset prices can adjust sharply, and private spending may also respond quickly, making it difficult for monetary and fiscal policy actions to provide a timely enough counterweight to keep the economy continuously on track. Are expectations substantially distorted? Because we seldom have direct and reliable readings, it is hard to say…Complacency would be ill-advised.”

Friday, April 22, 2005


4/22/05 Yesterday

There is a reason for old adages. They occur and recur. Yesterday was a perfect example of the market accommodating the fewest number of people at any one time. There was something for everyone to cheer about and, at the same time, something for everyone that could create worry. The prior day’s trading was a huge disappointment for the bulls. Yesterday’s 206 point gain in the Dow, 48 point Nasdaq advance, and 22 point jump in the S&P 500 generated joy in Mudville. It created hope for the bulls and hopefully improved liquidity in the overall equity markets. It also offered an opportunity to sell some weak sisters on strength.

The BLS reported that median weekly earnings of the nation’s 100.9 million full-time wage and salary workers were $653 in the first quarter of 2005. This was 3% higher than a year earlier, compared with a gain of 3% in the CPI over the same period. In other words, wage gains were devoured by inflation. As for staffing growth, we should remember that Manpower reported employment gains of 4.1% in January, 3% in February, 0.5% in March, and saw no pick up in April. Such a trend denotes a hesitancy to hire, and that does not provide comfort to one’s confidence levels going forward.

The Conference Board reported that its Composite Index of Leading Economic Indicators declined 0.4% in March. Only two of the ten indicators that make up the leading index increased in March. The coincident index, an index of current economic activity, rose 0.2% in March after rising 0.1% in February and declining 0.5% in January. This index has been increasing at a 2.5% annual rate since April 2003. On the other hand, the Lagging Index declined 0.1% in March, following a 0.3% increase in February and a 1% increase in January. Overall, in this year’s first quarter, growth was described by the Conference Board’s chief economist as “choppy” and “moderate.” One might note that the 0.4% decline in the March LEI was the largest in 2 years.

Yesterday, equity buyers preferred to focus on the Philly Fed survey where current manufacturing conditions jumped from March’s 11.4 reading to April’s 25.3. March’s reading was the lowest in 20 months. The new orders index rose seven points, and the shipments index rose almost 15 points. Indicators for unfilled orders and delivery times changed little from March. The current inventory index rose nine points and is now positive for the first time in six months. The current employment index increased seven points to its highest reading in three months, and the current workweek index increased 18 points to its highest reading in 14 months. There was bad news however. The prices paid diffusion index rose 21 points, its highest reading in three months. Nearly 56% of firms reported higher prices for inputs this month, compared with 36% in March. Only 5% of the manufacturers reported decreases in their input prices. Higher prices for final manufactured goods were also widespread this month. Thirty-three percent of firms reported higher prices for their goods, and the prices received index increased 13 points to its highest reading in six months. In addition, the index for future activity fell slightly this month with the future new orders index falling by one point and the future shipments index declining about eight points. Overall, the Philly Fed index reflected a rebound in growth from a weak March accompanied by a sharp pickup in inflation. For me, that’s not a great recipe for economic success. The bulls maintain, however, that prices are going up because of continued purchasing pressures. I guess that means inflation is good for the economy. I know it’s not good for the people on Main Street and their purchasing power.

Crude is back up to $54.30 a barrel. ConocoPhillips’ refinery in Louisiana will be down for one more week.

Costco’s forecast for its third quarter earnings trailed forecasts.

Google’s earnings exceeded expectations by 20 cents per share and sales exceeded analyst forecasts by $62 million. The company is operating on all cylinders. So is the stock.

Qwest raised its cash and stock offer for MCI to $30 per share. Needy buyers often create desperate pricing.

Berkshire Hathaway has taken a significant ownership interest in BUD. The latter may be a household name but its beer sales have exhibited lackluster growth of late. In that respect, it’s akin to Coke.

China recorded a capital account surplus of 110.66 billion U.S. dollars last year, up 110 pct from the previous year, the State Administration of Foreign Exchange (SAFE) said in a statement on its website.

Eastman Kodak Company EK reported a first-quarter net loss of 50 cents per share, on a revenue decrease of 3%. The loss reflects charges for focused cost reductions, while the company's sales reflect a decline in traditional products and services of 18% and an increase in the digital portfolio of 23%.
Kodak's reported net loss for the quarter included a non-operational charge that reduced earnings, on a net basis, by 53 cents per share, reflecting focused cost reductions announced in January 2004. By removing the cost-reduction charge from the calculation of earnings, Kodak had operational earnings per share of 3 cents in the first quarter. The savings generated by the prior focused cost reduction activities were offset by lower sales of traditional products, rising raw material prices, and costs associated with NexPress Solutions, which Kodak acquired in May 2004.
The company also reiterated its per-share operational earnings guidance of $2.60 to $2.90 for all of 2005.

A chemical added to processed meat products is responsible for a 6700% increased risk in pancreatic cancer, says author and nutritionist Mike Adams. The conclusion is based in part on research conducted at the University of Hawaii that reveals a 67-fold increased risk of pancreatic cancer in people who consume large quantities of hot dogs, sausage and other processed meats, versus those who consume little or no processed meat. The study was led by Dr.Ute Nothlings and was announced at the annual gathering of the American
Association for Cancer Research.

Thursday, April 21, 2005

The World According To The Fed

4/21/05 The World According To The Fed

Roger Ferguson, Fed Vice Chairman: “In 1985, our foreign assets were about equal to our foreign liabilities, so that our net international investment position was roughly zero. By 1995, our investment position had deteriorated to negative 4 percent of GDP, and by 2004, we estimate this negative position to have reached about one-fourth of GDP. If current account deficits continue to boost the negative international investment position, eventually the cost of servicing that position, which so far has been quite modest, would rise to an unsustainable level. Obviously, the current account would have to adjust to ensure that excessive debt burdens are not maintained…My sense is that implications of current account adjustment for U.S. economic growth and inflation will most likely be benign.” All of a sudden, unsustainable equates with benign.

The latest Fed Beige Book: “Upward price pressures have strengthened.” What a benign statement! According to the latest BLS statistics, real average weekly earnings fell by 0.3% from February 2005 to March 2005. The 0.6% rise in the CPI was the culprit.

Jared Bernstein, senior economist at the Economic Policy Institute: “Real wages continue to deteriorate for many U.S. workers. This marks the 11th consecutive month wherein annual wage growth failed to outpace inflation.”

Charley Reese, columnist for King Features Syndicate: “The American people are being screwed, blued and tattooed by the politicians in Washington, and most don’t even know it. They are suffocated by the incessant amount of fertilizer poured on them by the overpaid, overperked, overpensioned politicians who have voted themselves into the top 5 percent of income. Public servants, my foot.”

The GM plant in Linden, NJ closed yesterday. Ford’s plant in Edison, NJ closed in late February. They were the last two auto assembly lines in NJ. Ford will cut production in the second quarter.

JDS Uniphase will close 2 U.S. manufacturing facilities, ship those operations to China, and cut more than 700 jobs. Guilford Mills is closing its Greensboro, NC plant and cutting 101 employees as well as cutting 130 from its workforce at its Fuquay-Varina plant in South Wake County. Qwest will layoff 144 workers in Seattle.

Motorola had a bright quarter and lifted its second quarter outlook. I continue to believe the company offers exceptional long-term potential. Nokia’s profit was up 18% and the company raised the mobile market outlook to 15% growth from 10% for all of 2005. On the other hand, Qualcomm lowered its forecast for sales and profit from operations for the entire year.

According to John S. Herold Inc, employment by the largest U.S.-based oil and natural gas producers declined 4.1% in 2004, the 20th annual decline in the past 23 years. This statistic differs sharply from the 50% rise in crude over the past 12 months.

U.S. crude oil supplies dropped for the first time in 10 weeks and gasoline inventory declined. June crude is trading around $53.50 a barrel. As a matter of interest, in 1967, one U.S. dollar purchased 4 gallons of gas.

Ebay’s profits rose 28% and quarterly sales topped $1 billion for the first time.

The CRB Index rose yesterday to the 307 level. Inflation remains alive and well.

UK retail sales fell 0.1% from the previous month.

IBM hit a high of about $135 in 2000. Since early February of this year, the stock has once again been in a downdraft. For the past two weeks, that decline has accelerated. Last night the stock closed at 72, back to the price set 3 years ago. Management has related the difficulty created by a longer sales cycle. Last night Cramer recommended switching from IBM to EMC. That’s a nonsensical thought. Going from a services/consulting company to a storage outfit is mad. I don’t know when IBM will be able to close deals on a quicker note. I do know they have plenty of room to cut costs. It’s one thing to run from IBM at 95. It’s quite different to be a seller at 72. As for EMC, it might make an excellent takeover target.

China’s CPI rose 2.8% in this year’s first quarter. However, upstream products were priced more than 10% higher in the quarter. A major problem could be the severe draught in some parts of south China and southwest China this spring. We will have to see what impact it will have on farmers and their summer harvest.

Macquarie Bank FX Research: “There is no inflation in the US if you don't drive a car or need to pay to deliver or receive goods, particularly if you don't eat or have holidays. And of course, everyone is naked, because what you spend on clothes isn't counted either.”

McDonald’s CEO reported that “in March, McDonald's U.S. business marked its 24th consecutive month of positive comparable sales - a feat not achieved in nearly 25 years. I am encouraged by the ongoing strength and resilience of our U.S. business. Revenues increased 6% during the quarter and strong comparable sales helped offset higher commodity costs.”

According to Bankrate, mortgage rates fell to the lowest point in two months, and have now dropped four weeks in a row. The average 30-year fixed rate mortgage dropped from 5.95 percent to 5.86 percent. The 30-year fixed rate mortgages in this week's survey had an average of 0.3 discount and origination points.

GM stated “there is no issue” over the company’s ability to repay $300 billion in debt.

In the largest one-week decline since December 2001, first-time claims for state unemployment benefits plunged by 36,000. One should keep in mind that there were seasonal adjustments with the early Easter holiday. I continue to report on the growing number of daily plant closings and employee layoffs.

Wednesday, April 20, 2005

The Great Divide

4/20/05 The Great Divide

Housing has been bolstering our economy for at least the past 3 years. Housing starts plummeted 17.6% in March, the largest decline since Jan. 1991. Building permits fell 4%, single family permits fell 5.4%, apartment starts fell 31.6%. In the week ended April 15, mortgage applications declined 1.6%.

For the second quarter, Ford expects to break even or lose 15 cents a share. Meanwhile, GM had the worst quarterly loss in 13 years. The real disappointment was the slim 8.4% increase in first quarter China sales. That is not discounting the problems in North America and the anticipated $5.6 billion in health care costs in 2005.

It was reported that U.S. core PPI only rose by 0.1% in March. The overall PPI is up 4.9% in the past 12 months, and that’s not tame. The real clunker in March was the fact that intermediate energy goods increased 3.7%, and that crude energy goods prices increased 5.5% in the month. Today, we find crude trading at $52.75 a barrel and heating oil at $1.50 a gallon. The crude/gold ratio stands at about 8.24 to 1. Dennis Gartman told his readers he expects the ratio to climb to 15 to 1.

Speaking of Dennis Gartman, he expressed in his Gartman Letter today that “we are out of the dollar, and we suspect that we shall remain out of the dollar for some very long while into the future.”

The March SEMI book-to-bill orders were down 26% in March from one year ago. However, that did not prevent Intel from having a net income increase of 255 and a revenue increase of 17% in the first quarter. In addition, the company boosted its forecast for 2005 gross margins. Intel is experiencing “good growth in emerging markets” and the laptop market.

Yahoo reported that its latest quarterly revenue topped $1 billion for the first time. The company’s net more than doubled with internet advertising bolstering results.

U.S. Air and America West are in advanced merger talks.

Fitch lowered its rating on Berkshire Hathaway’s bonds from stable to negative.

According to the National Conference of State Legislatures, 26 states face fiscal budget gaps.

PricewaterhouseCoopers' 'Trendsetter Barometer' interviewed CEOs of
360 privately held product and service companies identified in the media
as being among the fastest growing U.S. businesses over the last five years.
The surveyed companies range in size from approximately $5 million to
$150 million in revenue/sales. Driven by the need to offload complex regulatory compliance and free up capital, fast-growth CEOs have turned to
outsourcing of human resource functions -- and achieved high satisfaction for
both quality and savings.

"The housing bubble has been created more by the business press than reality," said Sam Zell, chairman of Equity Office Properties Trust and Equity Group Investments LLC. "You can't have a crash without oversupply."

U.S. March CPI increased 0.6%, with the core rate jumping 0.4%, the biggest increase since August 2002. Naturally, Fed members believe inflation is not a problem.

Starwood Executive Chairman Barry Sternlicht: “You can sell anything you can get your hands on in Las Vegas, but nobody knows what it costs to build there because contractors are stretched so thin. It’s wacko out there but it’s fun, as long as you get a chair when the music stops.” When they raid the whorehouse, they take all the girls!

Tuesday, April 19, 2005

Credit Derivatives, Risk, And Sentiment

4/19/05 Credit Derivatives, Risk, And Sentiment

According to a recent survey by ISDA, the credit derivatives market was worth $8.4 trillion at the end of 2004, 123% higher than the year before and about 45 times bigger than in 1997. One area of concern is collateralized debt obligations which are complex pools of credit risk bundled frequently into highly leveraged packages. The Fed recently stated it was concerned that up to 1 in 10 investors who buy CDOs may not fully understand the risks. In all likelihood, the credit derivatives market will exceed the size of our country’s GDP in 2005. If there a hiccup in CDOs should occur, the consequences could be profound. Such risk, in my view, is clearly not built into today’s equity and credit markets. It should be noted a growing number of deals remain unconfirmed between counterparties months after their agreement by traders. Not surprisingly, volatility as measured by the VIX index is on the rise.

Gary Shilling: “Markets remain illogical longer than you or I can remain solvent.”

Mark Twain once said that a cat that sits on a hot stove will never sit on a hot stove again, nor on a cold one either, because they all look alike. Is there any correlation between a hot stove or a cold stove and the appearance of market risk in today’s investing environment?

According to the latest AAI I statistics, 42% of investor sentiment was bearish, 42% was neutral, and 17% was bullish. The bullish camp was the smallest in 13 years. Meanwhile, Market Vane’s bullish consensus increased last week to 64% from 63%. Obviously, statistics can have a large variance, and that’s why it’s necessary to do your homework.

The ARMS Index was developed by Richard Arms 38 years ago. It is a volume-based breath indicator with analysis of advancing/declining issues in relationship to their corresponding volume. If the ratio is 1, then there is a balance, above 1 more volume in declining issues, and below 1 more volume in advancing issues. As of the market close on Friday, the 10-day moving average was 1.195, and that was a fairly neutral reading in spite of the sharp decline in the market indices last week.

We are smack in the middle of earnings season for this year’s first quarter. It is well to remember that corporate profits are approaching $1.1 trillion or 9% of GDP. The 25-year average is about 7%. Consequently, it is wise to lower our expectations for earnings going forward.

In January, MMM predicted sales growth of 5 to 7%. For the first quarter, sales rose 1.8%. Profits in health care rose 18%, and this division carried the day for the remainder of the company.

Buick’s sales were down 22% in this year’s first quarter and Pontiac’s sales were down 17%. Which brand will be “fired?”

The March Spherion Employment Report showed that 53% of 3,200 employed adults surveyed in Ohio feel there are fewer jobs available, up 10 percentage points from February. In addition, the percentage of Ohio workers who believe the economy is getting weaker or staying the same was 76%, an increase of 7 percentage points from February. Where is Pastor Parsley now? Breaking bread with Karl Rove and Tom DeLay?

Kerr-McGee announced it is commencing a modified “Dutch Auction” tender offer for up to $4 billion of its common stock. The offer will expire on May 18 unless extended. Shareholders will have the opportunity to tender some or all of their shares at a price not less than $85 per share or more than $92 per share. If the tender is fully subscribed, $4 billion of common stock will be repurchased, representing 27% to 29% of the outstanding shares as of March 31, 2005.

According to the Photo Marketing Association International, sales of digital cameras are expected to increase by 13% in 2005 to where 52% of households would own a digital camera by the end of 2005.

The German investor confidence index declined for the first time in 6 months in April.

According to Bloomberg, China’s economy probably grew by 9% in this year’s first quarter, the slowest growth in 2 years. India’s economy increased to as much as 8% in the fiscal year ended March 2005.

In February 2005, industrial production in the eurozone was down 0.5% compared to the prior month.

Britain’s CPI rose 1.9% in March over last year, the highest in almost 7 years.

Sunroc will close its Harrington, DE plant. And 124 workers will be cut from the payroll.

Lucent Technologies, Inc. (LU) said second-quarter net income rose to $282 million, or 6 cents a share, from $88 million, or 2 cents a share, in the year-earlier quarter. The earnings released today included 2 cents in tax benefit. The results were in line with the forecast of analysts polled by Thomson First Call. Revenue for the period climbed 6% to $2.34 billion. Compared with the year-ago quarter, revenues in the United
States increased 10 percent and revenues outside the United States increased 1
percent. Importantly, Lucent posted its highest quarterly revenues for wireless since 2002. Looking ahead, management said it sees 2005 revenue growth in the mid-single digits. Jeong Kim, the former chief executive and founder of Yurie Systems, which Lucent acquired in 1998, will rejoin Lucent as president of Bell Labs. He will succeed Bill O'Shea, who is retiring after 33 years of service to the company. Kim left Lucent in 2001. His return is a big boost for Bell Labs.

From the Financial Times: “A few months ago Ian Sideris, a partner at Simmons & Simmons law firm, was completing a contract for a collateralised debt obligation when he asked a delicate question: who was the investor buying this CDO, a complex instrument that allows investors to buy pools of debt? The answer took him aback.

Rather than a hedge fund or bank, as Mr Simkins had expected, the client was an Australian charity. "We need to realise that the universe of investors for this type of product has widened in the last year," he says. "But then you also have to wonder about the capacity of some of these new investors to understand the economics [of what they are buying]."

Monday, April 18, 2005

Global Melting

4/18/05 Global Melting

Nouriel Roubini: “The trouble is that, using protectionist language to bully China to revalue its currency is a dangrerous and reckless game to play. Given the current volatile times and sharply falling US equity markets, protectionist rattle-sabering to move the dollar down may lead to a financial crash. One should only remember that one of the immediate trigger of the 1987 stock market crash was investors' anxiety about U.S. trade and fiscal deficits and U.S. criticism of West Germany and Japan economic policies and currency values. On the weekend before the 1987 stock market crash, Treasury Secretary Baker made a statement in a television interview that the dollar should slip further, publicly criticizing the German government. The US advocacy of a stronger German Mark and Japanese Yen then triggered a sudden exit of foreign investors from US financial markets and the stock market crash of Black Monday as it led to expectations of capital losses on US dollar assets. Thus, bullying of China into unilaterally revaluing is not only bad economic policy: it may also lead to a financial crash.”

Benchmark indices declined in all of the 16 Western European markets that were open.

Japan’s stocks plunge 3.8% to a 4-month low. It was the biggest drop in 11 months.

European shares stand at a 2 ½-month low.

Germany’s Dax Index declined 2.5%.

The Euro Stoxx 50 fell 2.2%.

Oil dipped below $50 a barrel to $49.96.

Philips Electronics NV’s first quarter tumbled close to 80%.

Brad Setser predicts the U.S. current account deficit may worsen this year to the $850 to $900 billion range.

Paul Volcker: “Home ownership has become a vehicle for borrowing.”

John Hussman stated “this is the first time since early 2003 that the Fund (Hussman Strategic Growth Fund) has been fully hedged by fully offsetting the value of our stock holdings with short sales in the S&P 100 and the Russell 2000…This is not a market that’s likely to be accommodating to anybody who is reckless about risk here.”

IMF managing director Rodrigo De Rato observed “if policies do not adapt, do not change to react to these imbalances, we run the risk of an abrupt correction of the markets… when confidence for different reasons could evaporate or could be reduced.”

Alcan will likely close a number of its aluminum smelting plants in Europe due to soaring costs.

Hyundai targets 1 million vehicle sales in China by 2010.

Adobe reached an agreement to buy Macromedia for $3.4 billion in an all-stock deal.

When negative sentiment reaches abnormal heights, as is the case this morning, it is not unusual to experience a sharp rally. As I have stated for the past five months, I would utilize rallies to reduce positions in equities where the price does not currently reflect the risk potential for revenue and earnings disappointment. In other words, it is hoped that, as an investor, you truly know the prospects for the companies in which you have an ownership interest. It is not sufficient to read analyst reports. Independent research is required.

Nationwide, the number of mortgages for investment property has jumped 43 percent over the last three years to 8.65 percent of all mortgages in 2004, according to San Francisco research firm LoanPerformance. In San Diego County, mortgages for investment property have soared 95 percent to 12.48 percent of all mortgages over the same time period, said LoanPerformance.

Sunday, April 17, 2005


4/17/05 Gaps

"Labor is prior to, and independent of, capital. Capital is only the fruit of labor, and could never have existed if labor had not first existed. Labor is the superior of capital, and deserves much the higher consideration." Lincoln's First Annual Message to Congress, December 3, 1861.

Sol Palha: “History has shown us that good plays always have a pain/aggravation and then frustration stage before finally exploding up. Gold, natural gas, oil, silver, nanotech, biotech etc. all went through similar stages.”

According to a study by Torto Wheaton Research in Boston, the cost of renting an apartment in the Washington DC area in 2004 was just 59% of the cost of buying a home. That’s down from 82% in 2001 and presently the widest gap since 1989. I feel confident a similar study of the San Francisco Bay Area would show even more disconcerting results. In sum, there are times when it is more prudent to rent than to buy.

In the equity markets there frequently are gaps between value and perceived growth. To take advantage of this gap requires, at the very least, much study and patience. It means waiting for the appropriate risk/reward. After making such a choice, there usually will be an additional waiting period accompanied by pain/aggravation and frustration. Self-doubt might arise. You need to know what you are buying, and be comfortable with that knowledge. The waiting period could last for two years. Can you handle that frustration? The payoff time gap must be considered. So must your personality. Are you cut out for this endeavor? I savor the challenge.

If you own Merck at $45 and the stock gaps down to $25 because of Vioxx concerns, what do you do? Do you sell on the news? Do you average down because Merck is not a one trick pony? Merck is back to $35. What do you do? If you can’t handle gaps, don’t invest. There will be others like Merck.

Some businesses go out of style because of new technology. Universal Music’s record-processing plant in Gloversville, NY will close and 112 union workers will lose their jobs. There isn’t much call for vinyl records these days.