Saturday, April 01, 2006

Deja Vu All Over Again

4/2/06 Deja Vu All Over Again

Venezuela Oil Minister Rafael Ramirez: "We said we don't want them (ExxonMobil) to be here. If we need them, we'll call them." ExxonMobil has no plans to pull out of Venezuela. Since Hugo Chavez took office in 1999, his government has passed legislation requiring a majority government stake in all oil production projects and increased taxes and royalties on oil companies. Last Thursday, the country's Congress approved guidelines to turn 32 privately run oil fields over to sate-controlled joint ventures. This will impact Royal Dutch Shell, Total, British Pete and others. In addition, there is a proposed increase in income tax rates from 34% to 50%, royalties from 16.65 to 33.3%, and their potential drilling acreage slashed by almost two-thirds. It is quite possible that the Western world is horrified by Venezuela's actions; however, if one has a good memory, things could be a good deal worse. In 1936-1937 Mexico expropriated all foreign oil properties-- almost all U.S. oil company properties. This is how Pemex came into being. Mexico is now a key trading partner of the U.S. Going back as far as 1850, Mexico never repaid hundreds of millions of dollars of debt nor interest on that debt nor accrued dividends on preferred stock ownership. Venezuela's recent actions pale by comparison.

Maciavelli: "Whoever wishes to foresee the future must consult the past; for human events ever resemble those of preceding times. This arises from the fact that they are produced by men who ever have been, and ever shall be, animated by the same passions, and thus they necessarily have the same results."

Doug Noland details the first quarter's broad based global equities market asset inflation. He observed
"throw in gold's 12.9% gain, silver's 28.6%, copper's 9.2%, lead's 13.5%, aluminum's 8.9%, nickel's 12.6%, zinc's 13.1%, crude oil's 9.2% and the ongoing rise in global real estate prices and you've got A Notable Quarter of Global Asset Inflation. Little wonder global bond markets are in retreat."

Rob Peebles: "It wasn’t that long ago that we were issuing warnings on Asian currencies. But now, according to a news story in Asian papers this week, the Asian Developing Bank has warned that countries in the region should be prepared to deal with a U.S. dollar crisis. “Our suggestion to Asian countries is: do not take this continuous financing of the U.S. current account deficit as given. If something happens, then East Asian economies have to be prepared,' Masahiro Kawai, a Development Bank official said."

A few hurdles to overcome for the Lucent/Alcatel deal: (1) how many directors for each company
(2) Lucent's three pension plans held a collective surplus of $2.69 billion as of the end of its 2005 fiscal year in September; however, its health care plan for retirees had a shortfall of almost twice that amount, or $5.12 billion (3) Alcatel SA had planned to sell its satellite activities to defense electronics company Thales SA, but those talks have stalled over demands by European Aeronautic Defense and Space Co. that its own Astrium satellite unit be included in the operation.

"Starting in 2007, we will be idling and selling off all of Ford's North American automobile manufacturing assets, with a commensurate reduction in salaried and non-salaried employees," Mr. Ford said. "This will dramatically boost our short-term liquidity, allowing Ford to focus on new directions, new customer-focused avenues of exploration that will effectively leverage Ford's powerful brand identity." With all the GM news, the market has forgotten about the changes at Ford. At $8, the rewards far outweigh any downside, in my view.

Wal-Mart Stores Inc. estimated that March same store sales rose 1.3 percent. Sales were held back by Easter falling later this year than last year.The company's estimate was at the low end of its earlier forecast of same-store sales growth of 1 percent to 3 percent.

GM CEO Rick Wagoner: "GM expects Delphi to honor its public commitments to avoid any disruption to GM operations."

Foreign oil companies operating in Ecuador will have to pay a 60 percent tax on "extraordinary profits," according a tax proposal passed this week by the Ecuadorian Congress.

Gerda Lerner: "We can learn from history how past generations thought and acted, how they responded to the demands of their time and how they solved their problems. We can learn by analogy, not by example, for our circumstances will always be different than theirs were. The main thing history can teach us is that human actions have consequences and that certain choices, once made, cannot be undone. They foreclose the possibility of making other choices and thus they determine future events."

Mike Burk: "The secondaries were overbought last week and are more overbought this week. The typical seasonal pattern suggests the blue chips will lead the move upward next week. On average the high for the 2nd year of the Presidential Cycle occurs in late April."

If the Lucent/Alcatel merger is announced, it will be interesting to see how the control of Lucent's Bell Labs, which does work for homeland security and the defense separtment, takes place.

Robert McHugh: "Since the Fed announced it would hide the M-3 number, Gold has risen $123.11 or 26.4 percent. Since the Fed has actually stopped reporting M-3 two weeks ago, Gold has risen $39, or 7.1 percent."

The board of General Motors is meeting this weekend to decide on the sale of a controlling stake in GMAC.

Benjamin Graham: "Most of the time common stocks are subject to irrational and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or gamble... to give way to hope, fear and greed."

Friday, March 31, 2006

Use Your Head

4/1/06 Use Your Head

This is not an April Fool's joke. Frequently, I have cautioned against making investment decisions based on media accounts of events. Such an example would be the recounting of Delphi and the UAW and the possible impact on GM.
The folks at GM and the UAW recall 1998. It was the first time the court took jurisdiction over a strike at GM since 1937. For those with a lousy memory, March 10, 2006 should not be too much of a stretch. That was the day a bankruptcy judge stated the court would delay ruling in Tower Automotive's request to reject the company's labor agreements. In sum, the judge pushed any decision out to an unspecified future date. That will be the precedent used in the Delphi matter. In the meantime, GM CEO stated
"GM will continue to work with Delphi, its unions and the court to achieve a consensual agreement that makes sense and is financially viable for all of the parties." This is precisely what the court wants to hear. This is a commercial matter that will NOT be decided by a bankruptcy court.
Thirdly, this labor dispute involves a great deal more than simply Delphi, the UAW, and GM. It impacts
American Axle, Lear, and hundreds of auto suppliers and then creates an additional domino effect on many other industries.
When making an investment decision, base that thinking on the facts. Do not get scared by the headlines.
There is no room for emotion. Think clearly and rationally. The risks will be minimized and the returns from your investments have a much better opportunity to mount.

The annual cost of insuring $10 million of GMAC debt for five years using credit default swaps fell 35 basis points, or $35,000, to 395 basis points, a seven-week low, according to Deutsche Bank prices. The price of GM shares does not reflect this improvement.

I found it interesting that Morgan Stanley opined that large oil companies are takeover candidates. This is precisely in line with an observation I made a short itme ago.

I also found it interesting that the ECB recently sold 57 tons of gold.

In the new pending silver ETF, each share will equal 10 ounces of silver.

In the San Francisco Bay Area, in the month of March it rained 25 out of 31 days, a record.

General Motors Corp., which is closing plants in the United States, says it will spend $600 million to $650 million US to build a small car assembly plant in Mexico, employing 1,800 to 2,300 workers. It is to open in 2008. The plant will be built in the central Mexican state of San Luis Potosi, GM spokesman Carlos Gelista said Thursday. He said the Mexican government is providing financial incentives for the project, with construction starting in May or June. This sounds like a rational plan to me.

Putting things in perspective, ethanol amounts to about 3% of the nation's gas supply in the form of a blended component that serves as an octane enhancer, a clean-air additive and a renewable fuel resource.

With all the bad news from the media, how do you think GM stock fared in the quarter ended March 31?
Would you be surprised to know it was up 9% ? That was equal to the gain for crude futures in the quarter. However, press coverage on GM and crude differed quite remarkably.

Rob Lee: "The bear case has recently received strong support from bond price developments. The chart is a technically alarming one for bond bulls (I have deliberately chosen a long term chart with quarterly data to eliminate short term noise). Firstly, the long term trend - as shown by the two year moving average - is strongly upwards. Secondly, yields have decisively broken up through very strong resistance between 4.40% and 4.60%. Thirdly, yields have also broken through the twelve-year downtrend obtained by joining the peak levels attained in 1994 and 1999. My reading of this chart is that US ten year bond yields are likely to move up to test the next major resistance at around 5.40% to 5.60%, as represented by the peaks in 2001 and the low of 1995. I stress this is a medium term expectation rather than a short term one." As an aside, I continue to believe that bond yields will rise significantly above the current 4.85%
level. On a long term basis, a yield on 10-year Treasury bonds of 9% would not prove a surprise to me.

General Motors Corp. said on Friday a federal court had approved a deal with the United Auto Workers that will allow the struggling automaker to save $1 billion a year in healthcare costs.

Thursday, March 30, 2006

The Rubber Band

3/31/06 The Rubber Band

Today ends the first quarter, and it has been a remarkable one. I thought we might try something a bit different. You take one end of the rubber band and I'll take an other. Now stretch it out tight and pull.
On your side of the rubber band: year-to-date growth in bank credit, M3, M2, and commercial paper amounting to $445 billion; 11 straight quarters of double digit corporate profits with the latest growing at 13.8% and representing 11.5% of GDP; slowing retail sales but still showing growth; slowing housing (existing home sales growing but new houses declining) with prices still ahead of last year at this time; core PCE 2.4%; a U.S. dollar index that has held most of its gains from 2005; rising stock prices for companies in the energy business; the Russell 2000 (up 13% in 2006) and the S&P Mid cap index at all time highs, and the Nasdaq at a 5-year high. I am pulling on my end of the rubber band with multi-year, multi-decade highs, and some all-time highs for gold, silver, copper, zinc, platinum, palladium, and roaring prices for many company stocks in the metals industry; crude at $67, unleaded gas at $1.99, and natural gas at $7.50; yields on Treasury bonds at 22 month highs, such as, the 10-year at 4.86%; rising medical and education costs; understated government statistics on inflation and GDP growth; and a Fed that appears ready to hike rates in May and possibly in June. In sum, there is a battle going on and yet the Vix reflects low volatility. Something has to give with the rubber band.

With the end of the quarter, there is increased likelihood of a settlement in the Delphi/UAW/GM labor negotiations. In addition, I expect a positive announcement on the 51% sale of GMAC. There have been talks for the last six months. The time has come to cement the deal. Of course, I am an optimist.

The Conference Board Help-Wanted Advertising Index rose one point in February. The Index now stands at 39. It was 41 one year ago. Says Ken Goldstein, labor economist at The Conference Board: "Business isincreasingly concerned about the impact of new hiring (in terms of wages, aswell as health and pension benefits) in relation to corporate pricing power.The good news on the inflation front is actually a negative for business. It elevates the concern about rising costs, not offset by rising prices. That keeps hiring plans on the slow burner, as reflected in print advertisingvolume as well as in the other forward indicators of labor market activity." There were 1,987,000 new online job ads posted in February, according to The Conference Board Help-Wanted OnLine Data Series. The February number represents a drop of 175,000 jobs (8.1 percent) from January, which was upsharply from December. January and February combined show that the averagenumber of new online job ads for the first two months of 2006 is in line with the monthly levels in the late summer of 2005. Adjusting the number of ads forthe size of the labor force, there were 1.33 online job ads per 100 persons inthe U.S. labor force in February and 1.44 in January 2006. This was similar toAugust 2005 (1.43) and July 2005 (1.32).

The Federal Reserve and other banking agencies proposed a new set of capital rules for big U.S. banks on Thursday. The requirements under the Basel II agreement would direct certain banks to hold higher levels of capital than others in an effort to enhance risk management. "Given the increasing complexity of the activities at our largest banks, and the related risks of those activities, I fully support efforts to develop a more appropriately risk-sensitive capital framework for those institutions," Fed Chairman Ben Bernanke said in a statement. The public comment period on the proposal is four months.

The acquisition of Hughes Supply at $46.50 per share in cash by Home Depot was completed.

By 2020, the combined forces of the United States, China and India will account for more than 50 percent of all new economic growth, with the U.S. supplying 16 percent of that, according to a report issued Thursday. Globalization of companies will increase, the report predicts, and there will be sizeable growth in global economic output despite only a 15 percent increase in the work force. The Economist Intelligence Unit (EIU surveyed 1,656 executives in over 100 countries. Other key findings of the study were:
China's economy -- measured at purchasing power parity exchange rates -- will be on par with the United States by 2020, and it will have the second largest consumer market and the largest tech sector. Asia's overall share of the global economy will rise to 43 percent from its current 35 percent.
India will contribute 30 percent -- or 142.4 million -- to the 471 million new workers entering the global work force. The United States will contribute 12. 5 million new workers, and the overwhelming majority of new jobs will be in the service industry.

Antonio Gramsci: "I'm a pessimist because of intelligence, but an optimist because of will."

Wednesday, March 29, 2006

The Trends

3/30/06 The Trends

Looking at interest rates moving higher, gold at $572+, crude at $66+,gasoline futures at a 6-month high, and the Nikkei breaking 17,000, you would be surprised to see the Nasdaq at 2001 levels-- but it is. The Vix indicates there has been declining volatility for several years; however, the Dow is down over 90 points on Tues. and up 60 points on Wed. and the Nasdaq is up 33 points after a decline of 11 the day before. That's volatile in my book. In addition, interest rates, although trending up for months, still jump around on an intraday basis. In sum, things are not as serene as they appear on the surface.

Claude Bernard: "Man can learn nothing unless he proceeds from the known to the unknown."

GM is looking to sell its 7.9% stake in Isuzu for $300 million+.

Google will sell about 5 million shares for approximately $2 billion.

Whirlpool Corp.'s planned $1.7 billion acquisition of Maytag Corp. is expected to close no later than April 3, the companies said after the closing bell on Wednesday, following the clearance of the merger by the Department of Justice's antitrust division. I did not believe Justice would approve this deal.

According to Ibbotson Associates, small caps have outperformed large caps by approximately 130% since 1999.

Henry To: "The NYSE 10-day differential of new highs vs. new lows has been on a declining trend ever since January 2004 - more than two years ago. Moreover, the number of new highs on the NYSE failed to break the 200 mark even in light of the most recent rally in both the NYSE Composite and the Dow Industrials. This is all the more ominous for the major market indices given that the NYSE had as many as 450 new highs in late January of this year, and as many as 600 new highs during the December 2003 to January 2004 period."

Gasoline futures rose to their highest price in almost six months after a government report showed the biggest decline in U.S. inventories since August. Supplies fell 2.4 percent to 216.2 million barrels last week, the largest drop since Aug. 12. ``This week is really the peak of the refinery outage season,'' said Andy Lipow, president of Houston consultant Lipow Oil Associates LLC. ``We have a fair amount of catalytic crackers that have been off stream for either scheduled or unscheduled maintenance.''

The Security Council urged Iran on Wednesday to suspend its uranium-enrichment activities and asked the director of the International Atomic Energy Agency to report back on Iran's compliance within 30 days.

According to the Financial Times, negotiators for Alcatel and Lucent were on Wednesday night confident they had narrowed most of their differences and could strike a deal to merge the two telecommunications equipment manufacturers within days. It is expected to value Lucent at $13.7 billion.

Albert Szent-Gyergyi: "Whatever a man does he must do first in his mind."

Tuesday, March 28, 2006

Consumer Optimism and Investor Optimism

3/29/06 Consumer Optimism And Investor Optimism

The Conference Board Consumer Confidence Index, which had declined in February, increased in March. The Index now stands at 107.2, up from 102.7 last month. The Present Situation Index rose to 133.3 from 130.3. The Expectations Index improved to 89.9 from 84.2 last month.The Consumer Confidence Survey is based on a representative sample of5,000 U.S. households. "This month's gain in Consumer Confidence has pushed the Index to a near four-year high (May 2002, 110.3)," stated Lynn Franco, Director of The Conference Board Consumer Research Center. "The improvement in consumers' assessment of present-day conditions is yet another sign that the economy gained steam in early 2006. Consumer expectations, while improved remain subdued and still suggest a cooling in activity in the latter half of this year."

Yesterday morning found many cross currents. While consumer confidence rose close to a 4-year high, crude gained strength and topped $66 a barrel. That strength spilled over into heating oil, gasoline, and natural gas and created inflation fears in the Treasury market where yields across the curve hovered around 4.75%. Yet, the Russell 2000 and the S&P Mid cap index both powered to all-time highs. The rally in the energy sector gave a boost to the Dow.

Whatever strength was evident in equities gave way after the FOMC meeting. It never ceases to amaze me how eternally optimistic investors and traders are. That optimism got flushed quickly as the Fed raised another one-quarter point and indicated they were not done raising rates. Treasury bond yields jumped even higher and the 30-year rose to 4.8o%, the 10-year to 4.78, and the 2-year to 4.79%. It won’t be long, in my view, until the 5% level is passed on the way up.

Most investors do not pay much notice to GMAC bonds; however, GMAC is present in around 65 percent of synthetic collateralized debt obligations (CDOs), according to Standard & Poor's, and underlies an estimated $1 trillion of default swaps. That’s not chump change.

Swiss Re's USchief economist Kurt Karl: "Though the yield curve is flat-to-inverted, economic growth remains solid and a recession is unlikely. Inaddition to an inverted yield curve, typically the economy slows rapidlybefore a recession. However, the latest economic indicators imply robustgrowth. However, high oil prices and modest wage gains will slow consumer spending this year, lowering US growth to close to 3.0%, compared to 3.5% lastyear. The unemployment rate continues to fall and manufacturing capacityutilization continues to rise, so the Fed will need to raise rates at leastone more time to 5.0%, most likely at the next FOMC meeting in May. Unlikelast year, this year will have a more coordinated global monetary policy. TheEuropean Central Bank is expected to raise its policy rate to 3.0%, the Bankof Japan will be tightening and the Chinese authorities are expected to allowthe renmimbi to appreciate. These measures, coupled with a slowdown in all-items inflation will represent a significant tightening of monetary policy, raising long term interest rates to slightly over 5.0% in the US."

The American Stock Exchange is preparing to introduce the first U.S. exchange-traded fund tracking crude-oil prices next week. One might consider reducing positions in the energy sector.
They have had a very strong run, and it would be difficult to find any analyst looking to cut back in Schlumberger, Transocean, Diamond Offshore etc. Running with the crowd can get a little stampedish.

Developments

3/28/06 Developments

Silver for May delivery rose as much as 10.5 cents, or 1 percent, to $10.89 an ounce on the Comex division of the New York Mercantile Exchange. It traded for $10.84 in London. After a six-year rally, prices are up 22 percent since Dec. 31.

According to a union bulletin, Delphi Corp. is offering factory workers a one-time payment of $50,000 to accept a 35 percent cut in pay by late 2007 under a new proposal the company sent Monday to its unions. The plan calls for wage reductions to be phased in rather than immediate drastic cuts, as two previous proposals demanded, and would rely on financial support from General Motors Corp., which spun off Delphi in 1999. Under the offer, production workers making $28 per hour would see their pay fall to $22 per hour July 3 and then drop again to $16.50 per hour in September 2007.

David Yu: "Prior to May 2004, the year-over-year change of total net foreign purchase of U.S. Treasuries had seldom fallen below zero. After that, it has been staying mostly in the negative territory. If this trend continues and the downward spiral accelerates, the dire consequence of decreasing foreign financing for America's increasing deficits would be a catastrophe for the U.S. economy."

With the national debt now exceeding $8.31 trillion, each American family share is just shy of $90,000. This exploding debt is more dangerous in the short and long term than any concern about illegal immigration.

Menzie D. Chinn: "A cautionary note regarding America's current path is provided by Britain's loss of military and political primacy in the twentieth century; that development followed a shift from creditor to debtor status. Similarly, a prolonged decline in the dollar's value and increasing indebtedness will erode America's dominance in political and security spheres."

GM said its March spending is down $1,523 to an average of $2,702 per vehicle. By comparison, DaimlerChrysler AG’s Chrysler Group is spending $4,133 per vehicle, while Ford Motor Co. is spending $3,583, according to the Power Information Network, a division of J.D. Power and Associates. The industry average for incentives is $2,257 per vehicle this month. Even though GM's market share declined by one percentage point to 24% in this year's first quarter, the fact remains the company has been able to increase its operating margins on a per-vehicle basis. The pricing strategy will pave the way for GM to break even much sooner in its U.S. operations. Meanwhile, Europe will show a profit and China and India's operations are going just great.

Mazda shares recently traded at a 7-year high. The company is on tap to have record sales and earnings for the second straight year. Investors often forget that Ford owns one-third of Mazda. Ford has few friends among analysts. They'll come on voard when the stock sells above $10.

Homebuilder Lennar reaffirmed its 2006 earnings goal of $9.25 a share on the strength of an order backlog that exceeds $7 billion. The company was able to achieve a 4% increase in new orders in the first quarter.

Sunday, March 26, 2006

Consider

3/27/06 Consider

India's Minister of State for External Affairs Anand Sharma: "India's crude oil self-sufficiency declined from 63 percent in 1989-90 to 30 percent in 2000-01. The situation is only likely to get worse in the future" Domestic production, he said, is likely to rise from 26 million metric tons to 52 million metric tons in 2011-12 and to 80 million metric tons in 2024-25. "But India's demand for oil is expected to increase from 122 million tonnes to 196 million tonnes in 2011-12, and 364 million tonnes in 2024-25. By 2024-25, crude oil self-sufficiency would be a mere 15 percent." Between India's and China's long-term thirst for oil, what are the chances of the price of crude coming down significantly?

Thank goodness inflation is under control and not a concern. Retail gas prices across the country climbed an average of nearly 15 cents in the past two weeks, according to a survey released Sunday. The weighted average price for all three grades increased to $2.52 a gallon by Friday, according to Trilby Lundberg, who publishes the semimonthly Lundberg Survey of 7,000 gas stations in the country. Gas prices are 40 cents higher than they were a year ago. Since we have millions of cars in the U.S. and no one drives them, then the increase in gas prices at the pump should present no problem for those on Main Street.

Jeremy Grantham: "Growth stocks are merely badly overpriced--down from legendary levels--but value stocks, which were only a tiny bit overpriced, are now at least as badly overpriced as growth stocks. Small caps are now worse than large caps; emerging and international are now almost as bad; bonds that were brilliant are now badly overpriced. The only opportunity we see is high-quality stocks vs. junk [stocks]. My definition of quality is a high and stable return and low debt. If you have a low and volatile return and high debt, you are at the junky end."

According to the WSJ, GM is working to rectify accounting mistakes and could file its annual report with the SEC in days. Separately, the company is continuing talks over the possible sale of a stake in GMAC.

"Delphi has thrown a new proposal on the table. That's a good thing," Clyde Sims, a UAW bargaining chairman at a Delphi ball-bearing plant in Sandusky, Ohio, told Bloomberg. "It's got to be better than the last offer." In the previous offer Delphi demanded that the remaining workers accept wages of $12.50 an hour. The new offer is expected to approximate $16 an hour. According to Delphi, in 2005, it paid workers $76 an hour including benefits, double what its competitors pay and $11 an hour more than its workers received in 2004. No wonder Delphi had to file for bankruptcy protection.

Rep. Ron Paul: "Year after year our federal government spends beyond its revenues, prints new money to pay its debts, and borrows hundreds of billions abroad in the form of Treasury obligations that someday must be paid. With too many dollars and debt instruments in circulation, and no political will in Washington to cut spending, we've created a monster. Our perceived prosperity depends on keeping the great debt and credit engine pumping, but the only way to attract new lenders to fuel the engine is higher interest rates. At some point one of two things must happen: either the party in Washington ends, or the supremacy of the dollar as the world's reserve currency ends. It's a sobering thought, but a choice must be made."

GM originally classified some cash flows from mortgage loans at ResCap, GMAC's residential mortgage unit, as operating cash flows. It will restate them as cash flows from investments. GM has said the reclassification will not affect its income statement or balance sheet.

Pockets

3/26/06 Pockets

Whether it is in the equity market or even the housing market, there will be pockets of strength and pockets of weakness. For example, over the last several years the small caps have been up, up, and away while the large caps have languished. In housing, California, Arizona, Nevada, and Florida have been on a runaway train while Ohio and Michigan are stuck in the mud. Last week, the existing home sales report was above expectations while the new homes report stunk the house out. On Friday, the Russell 2000 and the S&P Mid cap made new all-time highs--just like copper and zinc. Silver roared ahead to a 23-year high and gold is knocking on the door of a multi-decade high. Meanwhile, the Nasdaq at 2300 is still 2700 points from an all-time high.

Predicting the direction of an entire market is impossible for me. I defer to others who do a better job week after week. Mike Burk is one of those. He observes the Russell 2000 has been up 83% of the time during the last 5 trading days of March in the 2nd year of the Presidential cycle while the Nasdaq has been up 60% of the time and the S&P 500 up only 37% of the time. Interestingly the average return for all three indices has been negative indicating the gains during the up years have been modest while the losses in down years have been substantial." That makes next week a tough one to call. For me, it is more rewarding to stick to individual stocks.

I find it interesting that the volatility in the equity market is modest at best, and it has been that way for some time. This reflects the belief, in my view, that the risks are not significant and that the potential gains are limited. As such, investors would have been better off just investing in the Russell 2000 index over the last three or four years. Will that continue to be the case? I do not believe so, but I have no way of backing up that statement. Simply put, the growth for small companies has outpaced the growth of larger ones and that is reflected in the dichotomy of p/e ratios. On the other hand, if the economy slows down or even turns down, then the investors might turn to the tried and true names like J&J and P&G. One must remember that higher interest rates generally mean lower profit margins and lower p/e ratios.

Wal-Mart is looking to tackle the estimated $50 billion natural-products industry.
The company will stock more than 400 organic products at its Supercenters and Neighborhood Markets beginning in a few weeks. New items will be added to all categories of food from dry goods to produce, but the number of items sold at each store will vary. George Baby, the line of organic cotton infant clothes, will follow in June. This is just the first step for Wal-Mart in this arena. Whole Foods and Wild Oats might not see Wal-Mart as a serious threat. They will find that Wal-Mart will drive prices down, and then down, and then down again. Profit margins will decline. Meanwhile, Wal-Mart will attract new customers.