7/20/2002
The Third Bubble and Smoke and Mirrors
Before reading this posting I can state that it will upset most readers. As such, in advance of this upset, I proclaim a strong belief in capitalism, the U.S.A., God, and motherhood as well as a strong liking for apple pie. In June 2000 I warned of the coming bursting of the bubble in the stock market. Just last month I warned of the bubble soon to burst in the housing market. Is it true bubbles run in threes? If so, I can describe the third bubble- the gov't bond market. When the stock market is declining, funds pour into the gov't bond market, the so called safe haven. There is only one reason to find this market comforting and that's what appears on the dollar bill: "In God We Trust." Interest on the debt and repayment of the debt are made in dollars. It stands to reason that the "best borrowers" pay the lowest interest rate. Two year gov't bonds are now trading near their all-time lowest rate of 2.31%. This is as ridiculous as the Nasdaq index trading at 5000. The Administration has just announced we can expect federal budget deficits for years to come. Those deficits accompany huge monthly account deficits. The latest, $37 billion, was just announced. To nullify these deficits we need to attract foreign capital and inflows amounting to $1.7 billion per day- even on Sundays, a normal day of rest. Monthly statistics show that it is increasingly difficult to attract this capital. Our rates are too low and confidence in our accounting systems etc. has waned. The first sign of trouble has been the dollar falling in value. With that fall money managers are moving more funds into the eurozone market. The Administration has tried to calm the nerves of the investing public as well as foreign investors. From this week's stock market I would say nerves appear at their wit's end. Foreign investors will be the next to jump ship. When that happens, rates will begin to rise on gov't and corporate bonds and with that increase mortgage rates will move higher. The bottomline is the gov't must raise increasing amounts of money to fund our growing deficits. Supply and demand rule the markets. The gov't bond market will suffer the consequences. Hopefully corporations will not be crowded out of the bond arena. I strongly suggest the Administration cut spending by at least 20% and immediately. In addition, it's time to clean house. We need smart businessmen manning the gov't checkbook. It's nothing personal- just a business decision. I'd like to see a Ross Perot become Secretary of Treasury and a non-consultant or economist become Fed chairman. Preferably a person with a long successful business career of creating yearly positive cash flow. We need doers and not talkers. We will not talk our way out of deficits. The government's only source of revenue is our tax dollars. It's not like the gov't makes the money. If they did, do you think they'd spend it irrationally? The irony is that Mr. Greenspan has been overseeing the gov't bond market's irrational exuberance with smoke and mirrors. The American people will be the ones to pay the consequences. Isn't that always the way?
Friday, July 19, 2002
7/19/2002
Flow of Funds
In recent blogs I have discussed gov't budget deficits. I would like to touch on an additional deficit, and that is the difference between this country's exports and its imports. Until about six months ago the dollar was very strong against the yen and the euro. That fact made it cheaper to pay for imports. As such, the U.S. has been running a recent annual deficit(importing more than exporting) of close to $450 billion. This figure takes into account our annual trade with all countries, such as, China and Japan. In sum, this $450 billion is considered a negative flow of funds. The funds leave this country to pay for the imports. In order to make up this deficit we must attract capital into the U.S. It requires an enormous inflow on a daily basis. Up to this point we have been pretty successful attracting foreign funds. The U.S. has been viewed as a safe haven. After 9/11 that viewpoint has changed somewhat. In order to make the U.S. a more attractive location for investment it has been necessary to reduce the value of the dollar and make our exports more affordable. In addition, inflows into our bond market have lessened for two reasons. One is the loss of confidence with the continuing corporate scandals. The other is that our bonds provide less income than they do elsewhere. Fixed income investors can achieve 1 1/4% higher interest in short term German gov't bonds than they can with short term U.S. gov't bonds. That's a wide differential, and one more reason I believe our interest rates will begin to move higher.
Flow of Funds
In recent blogs I have discussed gov't budget deficits. I would like to touch on an additional deficit, and that is the difference between this country's exports and its imports. Until about six months ago the dollar was very strong against the yen and the euro. That fact made it cheaper to pay for imports. As such, the U.S. has been running a recent annual deficit(importing more than exporting) of close to $450 billion. This figure takes into account our annual trade with all countries, such as, China and Japan. In sum, this $450 billion is considered a negative flow of funds. The funds leave this country to pay for the imports. In order to make up this deficit we must attract capital into the U.S. It requires an enormous inflow on a daily basis. Up to this point we have been pretty successful attracting foreign funds. The U.S. has been viewed as a safe haven. After 9/11 that viewpoint has changed somewhat. In order to make the U.S. a more attractive location for investment it has been necessary to reduce the value of the dollar and make our exports more affordable. In addition, inflows into our bond market have lessened for two reasons. One is the loss of confidence with the continuing corporate scandals. The other is that our bonds provide less income than they do elsewhere. Fixed income investors can achieve 1 1/4% higher interest in short term German gov't bonds than they can with short term U.S. gov't bonds. That's a wide differential, and one more reason I believe our interest rates will begin to move higher.
Thursday, July 18, 2002
Posting #2 7/18/2002
I would be terribly remiss without mentioning what Andrew Grove, Intel's Chairman, had to say yesterday. Mr. Grove, in his youth, fled Communist Hungary to this country. Yesterday he compared today's anti-business atmosphere to the Communist Hungary he remembers so vividly. With all humility I believe the problem goes even further. Investors are being criticized for their greed in the late 1990's. The gov't didn't have a problem taking the capital gains taxes from the investors. In fact, those tax revenues produced large gov't surpluses. Now, with stock prices declining, tax revenues have dropped significantly, and we are faced with a $160 billion budget deficit. So we are led to believe the stock market and the investor are the culprits. Were they also the saviors? How about the anti-individual sentiment. An ordinary person works 4 1/2 months each year for nothing- all the money goes to the IRS. On top of that Mr. Greenspan denounces capitalist greed. Is it anti-American to make money in the stock market? Is it anti-American to take the side of the multi-national corporation over the consumer? That's what happens when one accepts a weak dollar. The consumer pays more for imported goods and our exports become more attractive. The consumer represents 2/3 of this economy and overwhelms the significance of Coke or MMM. I agree with Mr. Grove about the anti-business sentiment; however, that anti sentiment is much more far-reaching. I suggest it's unwise to bite the hand that feeds you.
I would be terribly remiss without mentioning what Andrew Grove, Intel's Chairman, had to say yesterday. Mr. Grove, in his youth, fled Communist Hungary to this country. Yesterday he compared today's anti-business atmosphere to the Communist Hungary he remembers so vividly. With all humility I believe the problem goes even further. Investors are being criticized for their greed in the late 1990's. The gov't didn't have a problem taking the capital gains taxes from the investors. In fact, those tax revenues produced large gov't surpluses. Now, with stock prices declining, tax revenues have dropped significantly, and we are faced with a $160 billion budget deficit. So we are led to believe the stock market and the investor are the culprits. Were they also the saviors? How about the anti-individual sentiment. An ordinary person works 4 1/2 months each year for nothing- all the money goes to the IRS. On top of that Mr. Greenspan denounces capitalist greed. Is it anti-American to make money in the stock market? Is it anti-American to take the side of the multi-national corporation over the consumer? That's what happens when one accepts a weak dollar. The consumer pays more for imported goods and our exports become more attractive. The consumer represents 2/3 of this economy and overwhelms the significance of Coke or MMM. I agree with Mr. Grove about the anti-business sentiment; however, that anti sentiment is much more far-reaching. I suggest it's unwise to bite the hand that feeds you.
7/18/2002
Covert Operations
The Administration has given the go-ahead for the CIA to conduct covert operations in Iran. Maybe a coup will work. It hasn't in the past, and there isn't any reason to expect it will now. If a coup fails, then the alternative would be a large military effort.
There is tried and true, and then tried and failed. No individual or group can talk the stock market up. Profits and confidence are the movers and shakers. Both Mr. Greenspan and Glenn Hubbard, chairman of the White House economic council of advisors, seem to believe the main risk to the economic turnaround is the stock market. Isn't it possible that an influential covert group is attempting to talk up the stock market when it appears to be reeling? It's a little like CNBC. They took a poll of analysts asking where the Dow would be by the end of 2002. Five respondents said between 1120 and 1150. No publicity was given to those not sharing that viewpoint. A few days before Mr. Greenspan spoke a new consumer poll showed a sharp drop in consumer confidence. Mr. Greenspan acknowledged the poll but said there wasn't any evidence of the lack of confidence being translated into lower spending. Are we all considered morons? How could a poll taken five days ago instanteously be translated into lower spending? I suggest a little less covert and a bit more get real.
Covert Operations
The Administration has given the go-ahead for the CIA to conduct covert operations in Iran. Maybe a coup will work. It hasn't in the past, and there isn't any reason to expect it will now. If a coup fails, then the alternative would be a large military effort.
There is tried and true, and then tried and failed. No individual or group can talk the stock market up. Profits and confidence are the movers and shakers. Both Mr. Greenspan and Glenn Hubbard, chairman of the White House economic council of advisors, seem to believe the main risk to the economic turnaround is the stock market. Isn't it possible that an influential covert group is attempting to talk up the stock market when it appears to be reeling? It's a little like CNBC. They took a poll of analysts asking where the Dow would be by the end of 2002. Five respondents said between 1120 and 1150. No publicity was given to those not sharing that viewpoint. A few days before Mr. Greenspan spoke a new consumer poll showed a sharp drop in consumer confidence. Mr. Greenspan acknowledged the poll but said there wasn't any evidence of the lack of confidence being translated into lower spending. Are we all considered morons? How could a poll taken five days ago instanteously be translated into lower spending? I suggest a little less covert and a bit more get real.
Tuesday, July 16, 2002
Posting for 7/17/2002
Interest Rates: It was fun while it lasted!
IThe Bond Market Association's Economic Advisory Committee recently predicted large federal budget deficits well into the decade with some believing annual deficits could approach $200 billion. In fact, they mentioned that deficits can raise interest rates and discourage investment. Over the next five quarters the committee is forecasting an increase in both short and long term interest rates. I agree with this scenario. I also believe that Wall Street is convinced the Fed will hold the line on interest rates and assist in an economic turnaround. Thus, the market may not be factoring higher interest rates into future business conditions. The market anticipates future events, and therefore, a smart investor must also anticipate- at least 9 months in advance. Looking at WalMart's recent stock performance one can witness a future anticipated decline in consumer spending. The same is true with Home Depot and Lowe's in home renovation and do-it-yourselfers. These are the market leaders in their respective fields. Higher interest rates mean higher mortgage rates, and the latter will lead to less home building, less home buying, and reduced demand will bring forth lower home prices. So, in sum, we should be looking for weaker economic conditions, weak consumer spending, higher unemployment, higher interest rates, reduced real estate prices, a weaker dollar, and a global deflationary trend. That's my mid-year economic viewpoint.
Interest Rates: It was fun while it lasted!
IThe Bond Market Association's Economic Advisory Committee recently predicted large federal budget deficits well into the decade with some believing annual deficits could approach $200 billion. In fact, they mentioned that deficits can raise interest rates and discourage investment. Over the next five quarters the committee is forecasting an increase in both short and long term interest rates. I agree with this scenario. I also believe that Wall Street is convinced the Fed will hold the line on interest rates and assist in an economic turnaround. Thus, the market may not be factoring higher interest rates into future business conditions. The market anticipates future events, and therefore, a smart investor must also anticipate- at least 9 months in advance. Looking at WalMart's recent stock performance one can witness a future anticipated decline in consumer spending. The same is true with Home Depot and Lowe's in home renovation and do-it-yourselfers. These are the market leaders in their respective fields. Higher interest rates mean higher mortgage rates, and the latter will lead to less home building, less home buying, and reduced demand will bring forth lower home prices. So, in sum, we should be looking for weaker economic conditions, weak consumer spending, higher unemployment, higher interest rates, reduced real estate prices, a weaker dollar, and a global deflationary trend. That's my mid-year economic viewpoint.
7/16/2002
Pfizer to buy Pharmacia
They will issue 1.4 shares for each Pharmacia. At last night's Pfizer 28 3/4 close the worth would be a bit over 40 per share and Pharmacia closed at a point discount to that level. The rationale for the merger is: close to a dozen drugs with annual revenue exceeding $1 billion are protected by patents between 2010 and 2015; Pfizer's core and global pharmaceuticals business will be expanded; and there will be inroads into endocrinology, oncology, and opthalmology. The anticipated net income yearly growth rate will be 14% and achieve earnings of $1.84 in 2002 and $2.12 in 2004. With that growth rate my view it is unlikely the P/E for Pfizer would drop below 14 or a bit over $25 per share, a drop of some 10%. Pharmacia shares would drop in line with those of Pfizer's. This merger will place pressure on other companies, such as, Novartis, Glaxo, and Merck to make acquisitions. Two possible candidates could be Schering Plough, selling at 21 1/2 with a 16P/E and yielding 3% or Bristol Myers Squibb at 23 with a P/E of about 10 and yielding 4.9%. Should the dividends in each be safe the yield would cushion any price decline from these levels. Each company has problems but some bright spots like Schering's new drug Zedia which fights cholestrol.
Pfizer to buy Pharmacia
They will issue 1.4 shares for each Pharmacia. At last night's Pfizer 28 3/4 close the worth would be a bit over 40 per share and Pharmacia closed at a point discount to that level. The rationale for the merger is: close to a dozen drugs with annual revenue exceeding $1 billion are protected by patents between 2010 and 2015; Pfizer's core and global pharmaceuticals business will be expanded; and there will be inroads into endocrinology, oncology, and opthalmology. The anticipated net income yearly growth rate will be 14% and achieve earnings of $1.84 in 2002 and $2.12 in 2004. With that growth rate my view it is unlikely the P/E for Pfizer would drop below 14 or a bit over $25 per share, a drop of some 10%. Pharmacia shares would drop in line with those of Pfizer's. This merger will place pressure on other companies, such as, Novartis, Glaxo, and Merck to make acquisitions. Two possible candidates could be Schering Plough, selling at 21 1/2 with a 16P/E and yielding 3% or Bristol Myers Squibb at 23 with a P/E of about 10 and yielding 4.9%. Should the dividends in each be safe the yield would cushion any price decline from these levels. Each company has problems but some bright spots like Schering's new drug Zedia which fights cholestrol.
Monday, July 15, 2002
7/15/2002
Mr. Greenspan
Tomorrow the Fed chairman provides his semi-annual testimony to Congress. The world will be watching; however, it is doubtful that the financial markets will be hanging on his every word. How much more can the Fed lower interest rates? In recent weeks the dollar has fallen rapidly against the yen and the euro. That fact prevents the Fed from printing too many dollars in an attempt to increase liquidity in the market place. Mr. Greenspan will touch on the corporate and accounting scandals and explain their negative impact on business investment and consumer spending. (When a corporation buys a PC it's an investment. When Mr. and Mrs. Smith purchase the same item, it is spending. Maybe the difference has to do with depreciation, an interesting accounting item.) Sentiment indicates the growing reluctance on the part of business to spend and hire. This alone will impact the economy in the future. Mr. Greenspan will attempt to soothe the nerves of consumers, investors, corporate leaders, and the nations responsible for buying our debt. So, the bottom line is for him to reject irrational gloom and project an economy which has recovered slowly in this year's second quarter, and to provide an emotional pathway for calm leading to economic resiliency. That is a difficult chore. I wish him well in his Greenspan speak.
Mr. Greenspan
Tomorrow the Fed chairman provides his semi-annual testimony to Congress. The world will be watching; however, it is doubtful that the financial markets will be hanging on his every word. How much more can the Fed lower interest rates? In recent weeks the dollar has fallen rapidly against the yen and the euro. That fact prevents the Fed from printing too many dollars in an attempt to increase liquidity in the market place. Mr. Greenspan will touch on the corporate and accounting scandals and explain their negative impact on business investment and consumer spending. (When a corporation buys a PC it's an investment. When Mr. and Mrs. Smith purchase the same item, it is spending. Maybe the difference has to do with depreciation, an interesting accounting item.) Sentiment indicates the growing reluctance on the part of business to spend and hire. This alone will impact the economy in the future. Mr. Greenspan will attempt to soothe the nerves of consumers, investors, corporate leaders, and the nations responsible for buying our debt. So, the bottom line is for him to reject irrational gloom and project an economy which has recovered slowly in this year's second quarter, and to provide an emotional pathway for calm leading to economic resiliency. That is a difficult chore. I wish him well in his Greenspan speak.
Sunday, July 14, 2002
7/14/2002
The D Word
Sunday is suppose to be a day of rest. As such, I apologize in advance for this posting which may prove unsettling for many. Over the past year I have had a growing sense that there was a chance our economy could take a turn into a depression. A year ago I thought there was a 10% chance and that feeling has recently grown to 30%. Normally I would only discuss this subject with family; however, yesterday I read the most recent Barron's and in it was an interview with Seth Glickenhaus, a successful investor for well over 50 years. Like me, he thinks for himself and is a contrarian. Barron's asked him whether he thinks a depression could be coming. Seth's reply was: "not only could be, it will be." His opinion was based on many facts. Interestingly, based on history, he stated that the stock market would need to consolidate for 16 years. I remember the period from 1966 to 1982, and that's just what the market did as it moved back and forth and back and forth. In every market there will be opportunities to make money. One has to be patient and assess the risk/reward ratio until it is clearly in your favor. This market is unforgiving. There is very little room for error. Invest when the time is right for you and not when a pundit proclaims the time is now. It's your money. The pundit has an axe to grind. Don't let your hard earned savings get pulverized.
The D Word
Sunday is suppose to be a day of rest. As such, I apologize in advance for this posting which may prove unsettling for many. Over the past year I have had a growing sense that there was a chance our economy could take a turn into a depression. A year ago I thought there was a 10% chance and that feeling has recently grown to 30%. Normally I would only discuss this subject with family; however, yesterday I read the most recent Barron's and in it was an interview with Seth Glickenhaus, a successful investor for well over 50 years. Like me, he thinks for himself and is a contrarian. Barron's asked him whether he thinks a depression could be coming. Seth's reply was: "not only could be, it will be." His opinion was based on many facts. Interestingly, based on history, he stated that the stock market would need to consolidate for 16 years. I remember the period from 1966 to 1982, and that's just what the market did as it moved back and forth and back and forth. In every market there will be opportunities to make money. One has to be patient and assess the risk/reward ratio until it is clearly in your favor. This market is unforgiving. There is very little room for error. Invest when the time is right for you and not when a pundit proclaims the time is now. It's your money. The pundit has an axe to grind. Don't let your hard earned savings get pulverized.
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