5/10/03 The Snow Man, WER Part II, And Deflation

The Snow man (John Snow) said our economic recovery "is insufficient to create jobs for the people who need them." Since when is a jobless recovery a recovery? I can state without hesitation that, if a good percentage of the aforementioned people do not get a job because of the "wobbly" economy, then the Snow man will find himself out of a job come November, 2004. The Snow man went on to proclaim that "I don't think the U.S. has any risk of being in a significant deflationary period." Some consider him an expert on deflation. In mid-1997, CSX, the company the Snow man headed, traded around 63, and for the first three quarters of 2000, the stock sold at 20. Even today the stock is down 50% from mid-1997. The Snow man was CEO during this period, and during a six year span, CSX's 1995 profits of $1.1 billion on sales of $10.3 billion plunged to 2001's profits of $293 million on sales of $8.1 billion. He knows deflation! He helped write the book for the CSX shareowners.

With the money supply growing at an annual rate of 7.2% over the past 12 months, it is not surprising to see increased interest in gold and gold mining stocks. As more dollars get printed, the dollar begins to depreciate and people turn to the "hard currency" of gold. There is an additional point about the increased growth in the money supply. It must be puzzling to the Fed that prices are not rising and that GDP exhibits a lack of growth ex productivity. In fact, the Fed has experienced deflation worries during the same week the money supply grew at its fastest rate in about two decades. The stock market should give this some consideration. I can assure you of one thing. There will be a cap on export growth. Despite the dollar depreciating vs the euro, Swiss franc, the yen, the Canadian dollar, and other currencies the economies in the latter countries are weak and the demand side of the equation for foreign goods is limited. Earnings for our international companies can be assisted by the weak dollar, but not by a meaningful amount. Those extra earnings are negligible compared with the weakened state of our domestic economy. Look at WalMart. It's main growth at present is the international market; however, the bulk of their locations is still in the U.S.

Lara Rhame, U.S. economist at Brown Brothers Harriman: "Ever since the Bush Administration came into office, they've been giving their tacit acceptance of a weaker dollar."

Citigroup economist Joe Lo expects prices in Hong Kong to fall 2% this year. Deutsche Bank believes, if SARS lasts 9 months, it could result in prices falling 0.4% in China. The Asian Development Bank suggests Asian economies could suffer $28.4 billion in economic damage if SARS were to be present into the third quarter of this year. With only 7 weeks until the third quarter, it is highly unlikely SARS will be leaving China within that time period.

The Blue Chip Economic indicators newsletter said "the paring of consensus estimates of GDP growth over the remainder of this year reflects diminished expectations of growth in personal consumption expenditures, business inventories, capital spending, and industrial production." This was the fourth consecutive month their forecast has been cut.

I am having a difficult time undrstanding President Bush stating the Iraq War is over. If that were true, then how is it that two soldiers were shot and killed a few days ago and that yesterday three more soldiers were killed and one injured when an Army helicopter crashed? Rumsfeld says our troops will remain until Iraq is stabilized? Has Iraq ever been stabilized?

In spite of the fact that municipalities all over the U.S. are running large deficits, yields on municipal bonds declined to their lowest level since 1968.

In an SEC filing Halliburton's Kellogg Brown and Root subsidiary admitted committing a mult-million bribe. This is the same subsidiary which was awarded the no-bid U.S. government oil contract in Iraq in March. The illicit payments were made in 2001 and 2002. No mention was made of when the payments were authorized. Halliburton said none of its senior officers was involved in the bribe. VP Cheney was Halliburton's CEO from 1995 until August 2000. Interstingly, the company said its code of business conduct and internal control procedures were "essential" to the way it ran its business. Clearly, lack of disclosure is part of the way Halliburton runs its business. Not too long ago the U.S. Army Corps of Engineers said Halliburton had been given a contract covering oil well fighting in Iraq. A week ago we learned the contract also included "operation of facilities and distribution of products." There's an odor emanating from Halliburton and its not just from burning oil wells.

In the 12 months ending this June, Microsoft boosted planned research spending 21% to $5.2 billion and the CEO says that figure will go "maybe up 10%, 12%, something like that" in the next fiscal year beginning July 1.

Germany's industrial production, which accounts for 25% of their $2 trillion GDP, fell 1.1% in March from the levels recorded in the prior month. That decline was twice what economists had anticipated. Germany's April business confidence fell to a 16 month low.

Credit Suisse First Boston said yesterday the spread of SARS would cap Asia's economic growth at 5.7% this year, down from the forecast of 6.6% prior to the SARS outbreak.

Lack of demand is hitting the pizza business. A chain has a 2 for 1 offer on any large pizza.

2002 and 2003 have been marked by business cost cutting. Yet, two very successful privately-owned companies, SAS of North Carolina and Tom's of Maine, have not changed their ways. Both are recognized as wonderful places to work. Each offers family-friendly work and assistance programs, such as, flexible work schedules, teleconferencing, generous medical and dental benefits, four weeks parenting leave, long-term care insurance, child care benefits, and assistance for child/elder care, and other work/family issues. Very often caring companies are our most successful companies.

5/9/03 Wobbly Economic Recovery (WER)

The Snow man (John Snow) said "I think the economy is in recovery...but it's something of a wobbly recovery." You cannot blame him for being a cheerleader. He's our Secretary of the Treasury. By the way, I don't understand that description. How can someone head a department which cannot exist? A Treasury I thought should have assets and not just indebtedness. Now back to the WER. If the average number of weekly first-time claims for state unemployment over the past four weeks hitting a new one year high is wobbly, then Snow is correct. If more than 3.6 million Americans collecting state benefits over the past four weeks is wobbly, then Snow is correct. If disappointing April retail sales would reflect wobbly, then Snow is correct. Looking forward, WalMart sees their May same-store sales up only 1-3%. That is the lowest forecast in almost three years. That is really wobbly. I think the dollar may be a bit more than wobbly. It's hardly standing against the euro at 1.15, a four year low for the dollar and wobbly against the yen at a 10 month low. In sum, it has now been 12 consecutive weeks that there have been more than 400,000 weekly first-time claims for state unemployment, and it's the first time this has occurred since 1992. In the past three months 525,000 workers have lost their jobs. Last week GM closed two factories and temporarily idled 4000 workers while Ford shut one plant and put 1820 employees out of work for the week. I trust Snow will find a more suitable description for our economy than wobbly. I suggest deflated.

The Washington Post reports that GOP Senators have endorsed 30 tax increases in order to save Bush's tax plan. How is it possible for such people to get elected in the first place? The electorate needs to come off Prozac or its generic brand.

President Bush: "Fiscal discipline was high on my agenda, and therefore, anybody that works for me will place a premium on fiscal discipline." The CBO in April estimated that this year's deficit will reach $408 billion. In the first six months of this year deficits were running about double the amount of the prior year. I think the Administration's definition of fiscal restraint is holding down budget deficits to 100% increases. Gold bugs love Bush. Deficits increase, the dollar gets crushed, and gold rises to $348 per ounce. It's hog heaven. Keep the pork pograms rolling!

John F. Kennedy: "The Federal budget can and should be made an instrument of prosperity and stability, not a deterrent to recovery."

FDR:"True individual freedom cannot exist without economic security and independence. People who are hungry and out of a job are the stuff of which dictatorships are made."

I must apologize to the Fed. I said they only now, this week, saw the risk of deflation. The minutes of the March 18 Federal Open Market Committee meeting stated "members saw further disinflation in core prices as a distinct possibilty over the next several quarters." We waited seven weeks to read that proclamation.

California counties would lose $2.7 billion in state and federal health care dollars if Davis' proposed Medi-Cal reductions become law. Davis truly is a wobbly Governor.

In order to buy a medium-priced home in California the family income needs to be $82,470 a year. Only 28% of California households fit that description. There are a growing number of homes on the market. Prices will come down. It's supply and demand. Just like the price of gasoline at the pump. In California it was $2.10 and two months later $1.77.

Rafael Palmiero is just one homer shy of the 500 mark.

Between March and April German wholesale prices dropped 1.1%. That's wobbly too.

Manufacturing accounts for 20% of U.K.'s GDP. Their March factory production fell at the fastest pace in five months. That's wobbly too.

Goldman Sachs says their mid-April IT survey declined to -3% and "perhaps the most troubling, those expecting spending acceleration in the second half of the year virtually evaporated, pushing their expectations into 2004 or after 2004." Wait till the Nasdaq catches up with this survey. Then we'll see wobbly.

Against the pound, the euro hit a record level of 71.87 pence. The U.S. dollar is not reeling by its little lonesome. Misery loves company.

The WHO raised the SARS mortality rate to 14-15%. An additional concern are the millions of migrant workers who have left Beijing and Guangzhou and are feared to be spreading SARS to outlining provinces in China like Henan.

Investors think they might have several recipes for success. In actuality, I have found that, over time, most investors cannot match the various indexes, and that includes professionals who receive a management and/or advisory fee. There are some successful day traders, some successful chartists, and so forth. In my view, quality management, quality of earnings and cash flow, consistent growth, buying during major market dips, and patience offer the best combination for on-going success. If you look at the great companies, WalMart, Microsoft, Colgate, Starbucks, Dell, Berkshire Hathaway, etc., they are not, in my opinion, at favorable buying points. They are valued too high in relation to their present and near-term rate of growth. Wait for their prices to come into favorable view. The same can be said for the overall market.

5/8/03 Suicide And The Fed Printing Press

I have been thinking about these subjects for quite some time. They are serious matters. At the same time, I hope you will forgive my one opening remark which may border on humorous or not depending on what side of the market you reside. Towards the end of the third week of October last year I wrote how I believed the market decline, at least for the near term, had been overdone. I suggested exploring the risk/rewards in several situations- QQQ, C, JPM, MRK, MSFT, PFE, and a few others. Over the past month many pundits have turned bullish. Let me just say, for example, that QQQ is up about 50% from the aforementioned late October. I think a reason for this recent bullishness can be found in an astronomical event. Yesterday Mercury passed between Earth and the sun. This five hour transit occurs only a dozen times in a century. As far as Earth is concerned, this ride has been completed.

According to a Harris poll, 7% of U.S. adults say they have attempted to commit suicide and 21% of adults say they have thought seriously about committing suicide. Twenty five per cent of the population believes that "suicide is an acceptible solution in certain circumstances." It should be noted that this recent poll did not canvas children. Having, thank goodness, never considered suicide, I find these statistics of nightmare proportions. We are talking about 60 million Americans who have seriously thought about committing suicide. I am not a psychologist or a psychiatrist, and am not certain what I would suggest were I one. I would like to think that more can be done in addition to prescibed medications. Suicide is a serious problem facing this nation.

Another serious problem facing this nation is the Fed. The problem does have something to do with potential suicide. But first, I must relate what Woodrow Wilson had to say. In 1913 he signed the Federal Reserve Act. Some years later he wrote that "I am a most unhappy man. I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated Governments in the civilized world no longer a Government by free opinion, no longer a Government by conviction and the vote of the majority, but a Government by the opinion and duress of a small group of dominant men." Woodrow Wilson was not a Jew.(I am, as everyone knows, a Jew. I can make the following joke. We know this.) As such, he didn't feel guilty. Instead, he felt emotionally contorted by the decision he had made to sign the Federal Reserve Act. I understand and feel his pain. We have supposedly dominant men in an economic haze. Fortunately, we have the market to provide a buffer and keep us, hopefully, ahead of the curve. Coming to the realization that we face deflation in May, 2003 is a bit like turning bullish in April of this year. It's too late to come to those decisions. In the first instance the deflation spiral started at least 24 months ago and cannot be stopped unless China falls off the globe. In the second instance, uncommon and favorable risk/rewards are rarely found in today's market. Let me continue, please, while you all stop screaming. I am not being a know-it-all. Nothing would please me more for all parties to have their day in the sun. Mercury, however, left our space. It left us with a Fed no longer focusing on inflation but rather deflation. Therefore, they will turn to reflating the system and turning on the printing presses in addition to buying government bonds. If they do that, the dollar will commit suicide. Our dollars will be wallpaper. No wonder Woodrow Wilson felt as he did.

I love seeing capitalism at work. Jim Hensen's children repurchased the Muppets for $89 million. That's one-eigth the price the Muppets was sold for just three years ago. The Muppets could have been a dotcom stock.

When the U.S. was high and mighty (I know Rumsfeld and company think we still are), the EU never would have given an ultimatum to us. Now that our country is in a decline we have been given an autumn deadline to change disputed tax break laws which will end our trade differences. If nothing is done by autumn, then sanctions would be imposed on 1/1/04. These guys are right. International trade is not an even playing field. It never has been and never will be. The EU says their patience is not infinite. It sounds like the Administration with the Iraqi government. I wonder how our Administration will take to the ultimatum.

The global death toll from SARS passed 500 today after Shanghai reported its first death from the virus. The WHO extended their SARS travel warning to Inner Mongolia and Tianjin. I need to change my summer vacation plans to Outer Mongolia.

Costco's total comparable-store sales in April rose 6%. They continue to do just great.

Jean Rhys, "Good Morning, Midnight" :"Next week, or next month, or next year I will kill myself. But I might as well last out my month's rent, which has been paid up."

I wonder whether our government will award Halliburton a contract to fight the cholera breakout in the Iraqi city of Basra. The company must be familiar with contamination and poor sanitation.

5/7/03 A Roadmap Diffusing Confusion

Yesterday I received an email from a professional investor who said he didn't share my bearishness. This individual is a new reader of this blog, and therefore, is unfamiliar with my style of investing. I attempt to stay with the trend but still look for what I believe are uncommon values with limited risk. I have stated time and time again that selling at the high and buying at the low are a matter of luck. Buying right and selling right are a matter of skill and discipline. Once again, I mention that I have been negative on the overall market for three years; however, about one week after 9/11 I mentioned that the short-term risks in the market were limited, and gave several reasons for that analysis. I suggested several stocks for the readers to analyze. I do not make specific recommendations for others. I suggest various alternatives. I went so far as to mention, over the past year and a half, even eBay, Amazon, Yahoo, Juniper, Cisco, Microsoft, and Sun Micro. Only the latter sells close to the price mentioned in the blog at that time. It should be noted that I feel more comfortable with suggesting looking at Merck under 40 because I understand their business a good deal better and, as such, can sit as an investor a lot longer. The point is one can be negative on the Dow and still like McDonald's under 13 or be negative on airline stocks and still like Southwest Airlines in the low double digits. I may think Lowe's is a great company but too rich, and that Home Depot is not as well run but still find value in the latter in the low 20s. I am never just bearish or just bullish. My mind arbitrages moving valuations and relationships. When the euro was originally released, I was negative at 1.18 and then it got crushed to the middle 80s. It was time to change. Nevertheless, there are basic trends. We have oversupply almost everywhere we look; we overspend almost everywhere the eye can see; we are overburdened by debts in almost all walks of life and in all halls of federal, state, and local governments; too many Americans go without healthcare and jobs; corporate cost-cutting does not necessarily lead to top-line growth; and not surprisingly, in this environment, there is much depression and much economic anxiety. The country is in a decline with decreasing cash flow and deflation imported from global competition.
I have said over and over again that the Fed could not deal with the aforementioned problems. The market will, and it shall take time and there will be much heartache in the interim. Our Washington leaders do not have a clue either. It's not just the Federal Reserve. Rep. Thomas said " a $550 billion tax cut will create 750,000 jobs. Secretary Snow said "it costs $80,000 to create one job." The Administration in recent days said the aforementioned tax cut would create 1.4 million jobs. Numbers are just that. These folks don't know. They do know they don't want to cut spending. Lastly, just to make the point, Mitch Daniels, the OMB chief, said he was retiring in 30 days. He took the job originally because of Bush's priorities:"fiscal restraint, a balanced budget, and paying down the debt."

Swiss Re Chief Eeconomist: "Inflation is not a problem and unemployment is rising-classic signals for a Fed cut..The likelihood of a double-dip recession, though down slightly is still high-about 25%. Europe is currently economically weaker than the U.S. and the appreciation of the euro is not helping its fragile recovery.Hence the ECB is likely to lower interest rates again."

Cisco's sales were down 4% from a year ago and operating cash flow declined 20%. It's tough to put a positive spin on that combo.

The tax package released by Senate Finance Committee Chairman Charles Grassley contains no federal Medicaid assistance to help states prevent health care cuts. It should be noted that only a few months ago by a vote of 80-19 a "Sense of the Senate" resolution was passed to provide $15 billlion for Medicaid to assist the states in avoiding cuts to health care.

In 2002 foreign investors made direct investments of $52 billion into China and this was followed by $13 billion in the first quarter. Manufacturing comprises 54% of China's GDP, services 28%, agriculture 14%, and construction 4%. JP Morgan says China's electronic-goods sales could fall up to 10% this quarter. Acer, Taiwan's biggest computer vendor, is delaying production of notebook computers in China because of the SARS virus. Access to raw materials and cheap labor continue to be China's main attraction.

SARS death toll: China 214, Hong Kong 193, and Singapore 27. In Beijing 17,000 are quarantined. UN health chief Brundtland said "we have not seen a peak in China yet."

Foreclosures jumped 8.2% in the Silicon Valley in the first quarter of 2003 compared with one year ago.

I have often stated that I think Barry Diller has a nose for making money. On Monday his company announced an agreement to purchase Lending Tree, a company I suggested to readers of this blog two weeks ago. At that time I mentioned you can buy good growth in an internet company without paying an outlandish price like you do with eBay at present levels. Obviously, Barry Diller shares that viewpoint. Fortunately, Lending Tree was then at $14.

Over the past month the networking index is up about 30%. That's more than I can say for their order flow.

15% of our GDP is comprised of imports. With the dollar falling prices will go up. Fortunately, the opposite is true with our exports. The trouble is we import more than we export. As such, our account deficit is a mere $400+ billion.

The Small Business Survival Committee said "from 1992-2000 per capita total U.S. state spending increased by 40% while inflation registered just 16.4%" That spending has now produced huge deficits and we have begun to see the impact with rising state layoffs in April. I expect that trend to continue for some time and to be accompanied by similar layoffs at the local government levels. I have mentioned several times about the job cuts in education.

A new survey by TrueCareers shows that 61% say their financial situation has worsened in 2003.

5/6/03 Buying Right Is A Stepping Stone To Making A Profit

I appreciate the difficulties in starting a company from scratch. I've done it. What eBay and Amazon have accomplished are truly fantastic. What price do you pay for fantastic? Should Ebay have a market capitlaization which exceeds that of General Motors or McDonald's or even Boeing? I can see Boeing. Kroger is a pretty good company. Should Amazon's market cap exceed Kroger's. I could continue with Yahoo and make comparisons. I wrote a piece like this in the Spring of 2000. I don't want to be repetitive. Let's not make the same mistakes from the late 1990s. There are enough losses on the books. Every time losses mount, market liquidity drops. To fuel investment we need liquidity.

Maybe being a libertarian, I am a bit more out-spoken than most. I was watching Sander Levin, a Democrat on the Ways and Means Committee. He said "I would target a tax cut to those who would spend the money." Anyone who votes for him should be committed. I think it is highly likely that a good proportion of the tax cuts will go towards reducing credit card debt. Credit card delinquencies are at a 13 year high. While I'm on the subject, auto delinquencies are on the rise and homes in foreclosure are at record highs.

I thought there was a significant point in the ISM non-manufacturing business survey. There was a drop in backlog orders, and that is a forward-looking indicator, and so is the stock market.

President Bush said yesterday "the best way to stimulate demand is to let people keep more of their money." I would hope everyone would agree with that statement. He is well-intentioned. These are special times. Millions of Americans really have negative net worths. Millions are out of a job. A the end of May millions will have their federal unemployment benefits expire. About 45% of unemployed workers are still without a near-term job prospect when those benefits run out. The extension of unemployment benefits lasted 29 months in the early 1990s. If they end on the 31st of this month, their extension would have been limited to 15 months. It is not surprising, therefore, that, in the most recent Newsweek poll, 62% of those surveyed said they'd vote on issues of jobs and the economy.

Do not liken the recent market fastbreak to the ones captained by Jason Kidd. The latter doesn't run out of gas. He can go the distance.

Rent-controlled N.Y.C. apartments will be hiked by a maximum 5.5% for a one-year lease and 8.5% for a two-year lease. Inflation is hitting N.Y.C. during a bleak economic period for the city. Homeowners across the nation are also getting hurt- by rising insurance rates and increased property taxes. The squeeze is on most everyone.

Australian retail sales dropped in the first quarter.

Motorola closed its Beijing office after an employee contracted SARS. Twenty seven workers had been in close contact with that employee. For the next week 1000 employees will toil from their homes. Motorola's China business amounted to $5.7 billion in 2002, and the company is one of the three largest foreign investors in China.

The Transportation Security Administration plans to cut 103 screener jobs at Ronald Reagan Washington National Airport.

Spiegel will lay off 635.workers.

UC Berkeley will not be accepting students from China, Hong Kong, Taiwan, and Singapore for summer classes.

3Com Corp. will move its headquarters from the Silicon VALLEY TO mARLBOROUGH, mass. where their networking division is located.

With the implied yield on the July Fed funds contract at 1.10%, does it matter whether there is an interest rate reduction at today's Fed meeting or on June 25th? If business investment were about to pick up and economic growth were on the verge of spurting, interest rates would adjust upward and the price of gold would not be moving higher. The geopolitical risk is no longer in the air. Oil has declined sharply in price. Inflation is not an immediate concern. In recent weeks, as the markets surged higher, gold moved from a recent low of $320 per ounce to $342 per ounce. That may be a long way from the year's high of about $380, but it's a respectable rally.

Over the past several days villagers in Xiandie and Zhejiang have violently protested against quarantining suspected SARS cases. It was only a matter of time until the virus hit the countryside where 70% of China's 1.3 billion people live. Their death toll has risen to 206, and there are about 4300 announced cases.

April air travel is down 60% in Hong Kong, 40% in Singapore and Seoul, and slightly less in Bangkok and Kuala Lumpur. April tourist arrivals are down 20% in Australia, and the drop is expected to worsen. In Australia there are 550,000 workers in the tourism sector, and the country expects to lose close to $1 billion in revenues from the visitor drop.

With the dollar trading at 1.1341 per euro, it is now down about 8% on the year vs the euro and about 20% in the past 12 months. The trend speaks for itself.

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5/5/03 Insiders: Will They Contain The Bulls?

After the Iraq war ended, the bulls ambushed the bears. While their fighting continues, the insiders have gone on a buyer's strike and, in fact, have been selling. According to the Washington Service, U.S. executives and directors purchased only $90.8 million of their companies' shares in April, and this was the smallest amount since April 1995. In my view, insiders may not walk on water but they have a better view of their company's prospects than an analyst or any other independent investor. If it had been only a few insiders standing on the sidelines, then I would have placed less importance on the data. However, clearly that was not the case. This is a warning sign. At the very least one should be circling the investment track with a yellow flag. In addition, for the eight weeks ended April 30, Vickers Weekly Insiders Report said there were 1.84 sales for each one share purchased.

The Trustees for Social Security stated that the true liabilities of Social Security are $7 trillion larger than reported. Benefit payments, they stated, will exceed tax revenues by 2018. The 75-year deficit represents about 2% of payroll. I feel comfortable in saying that Social Security will be insolvent closer to 2010 than to 2020. It should be noted that the obligations of the U.S. Treasury amount to about $6.5 trillion, and of that figure, about $1.4 trillion is said to be in the Social Security Trust fund. I hope this gives a warm fuzzy feeling to the bulls. When the market crashes, and I feel confident it will, you'll be left with nothing to keep you warm.

Cathay Pacific will cut its dividend by 50% due to the impact SARS has had on air travel. SARS has killed 184 people in Hong Kong, and 1629 have been infected with the virus.

Yesterday Paul Silas was fired as head coach of the New Orleans Hornets. In 5 years he had set the franchise record for most wins. On Friday night his team was eliminated in the first round of the playoffs by the Philadelphia 76ers. In each of the past four years the Hornets made it to the playoffs but never past the second round. Silas earned a yearly salary of $1.5 million. The players wanted the coach to return. I can comfortably state that Paul Silas performed a great deal better as coach than at least 75% of mutual fund managers over the past three+ years. The lack of performance warrants their firing.

On Friday the Commerce Department said factory orders had risen 2.2% in March. Most of the increase was the 1.9% rise in computer and electronic orders. Maybe the increase was Homeland Security getting their house in order. Frankly, the reason doesn't matter to me. What is important is Dell's COO stating that he doesn't see a pick-up in demand in his industry. I would rather trust Dell than data released from a government agency. Understating the Social Security liabilities by $7 trillion makes me a bit uneasy.

Yesterday I wrote about Compuware's new Detroit HQ building. Today is the MTA's $430 million HQ building at 2 Broadway in N.Y.C. Only a government agency could come in at about $300 million(that's not a misprint) over budget. N.Y.C. governance is a disgrace. The citizens should fire everyone connected with 2 Broadway.

The Kentucky Derby took its toll, and not just on the betting public. Buddy Gil has bone chips. Ten Most Wanted has a virus. Bobby Frankel is still trying to figure out the condition of Empire Maker. It maybe mental. Jerry Bailey said his horse didn't handle the track well. "Ever run on the beach where the water has run on it and its packed tight and then go three feet over and its nice and loose?" he said. "It's a lot harder to go through that." It may be harder, but Funny Cide ran on the same beach.

Rumsfeld said he "never believed we'd just stumble over weapons of mass destruction." He might have said the Administration stumbled on their words by stating they knew where they were located prior to the war starting. I had hoped Rumsfeld was too smart a guy to avoid being forthright. After the war had begun, Richard Meyers stood in front of the cameras bragging that he and his crew had a very very good idea as to where the weapons were located, and that finding them was not a problem. We know this. Rumsfeld talks to Meyers and Meyers talks to Rumsfeld. Often they could be found standing next to one another.

The biggest crowd over the weekend was not at the Kentucky Derby. It took place in Madrid where 1 million Spaniards came out to see Pope John Paul II canonize two priests and three nuns. In his quarter-century papacy the Pope has proclaimed 469 Saints. The Pope is a lucky man. I have yet to know a Saint. There's still hope. The Pope is considerably older than I am.

I have just learned of a new exciting experience. Dr. Klaus Stohr, the WHO's chief SARS scientist, said discovery that the virus can survive in feces at room temperature for as long as four days was "the most exciting, or perhaps disturbing, finding." Personally, I am considerably more excited by the finding that diarrhea provides a more favorable environment for the virus. Now I am closer to discovering what moves markets- diarrhea of the mouth.

At the Berkshire Hathaway annual meeting, Warren Buffett said of the proposed Bush tax proposals "the idea that it creates all kinds of jobs and everything else, that's what sort of turns me off. That's like a manager saying we're going to grow our earnings 20% per year. They don't have the faintest idea, in my view, of how many jobs this is going to create. How could they? Economics is not that precise."

According to a 396 page report from the Institute of Medicine, every hour 1500 people world-wide die of an old or new infectious disease, and more than half of those are children younger than five years old. Howard Markel, a professor of infectious diseases at the University of Michigan, is author of the forthcoming book "When Germs Travel."
Markel suggests "we don't conquer germs. We wrestle them to a draw." That sounds like an easier task than mutual fund managers have been having trying to fight the market to a draw.

5/4/03 Competing Perspectives

A funny thing happened on the way to the finish line at Churchill Downs. The wrong horse won. It should not have happened. No New York-bred had ever won the Kentucky Derby. The last gelding won in 1929. I know what you're thinking about 1929. Funny Cide had finished second to Empire Maker in the Wood Memorial and third to Peace Rules in the Louisiana Derby, his last two starts. His trainer is a steeplechase trainer and it was his first Derby. It was the first Derby win for the jockey. The horse sold as a yearling for $22,000 and then to the Sackatoga Stable, which is owned by six friends, for $75,000. There are all of three horses in this Stable. Funny Cide has mediocre breeding, and was only brought to Churchill Downs a few days prior to the race. He hardly had time to get to know the track. The Talmud says the burden is equal to the horse's strength, but there were stronger horses in the field. Tesio says "a horse gallops with his lungs, perseveres with his heart, and wins with his character." Maybe the Talmud was referring to inner strength. There is no question that Funny Cide had the inner strength yesterday to win by 1 3/4 lengths. He may not have been the best horse in the field but he was yesterday. Stranger things have happened on Derby Day. I watched Native Dancer lose to Dark Star in the Derby. Native Dancer won 21 out of 22 races. It should be noted that all 16 horses in yesterday's Derby came from the Native Dancer line. The morals of the story from yesterday's Derby are three-fold. First, character counts for plenty- even in horse racing. The crowd of 148,530 could confirm that.Two, don't be parked a little bit too wide on the first turn. It requires making up that little ground, and the latter can be the difference. To win you must be positioned properly. Three, there may come a time when even the best comes in second. It hurts. It hurts plenty but you can't let it spoil the next race.

So what does all the above have to do with the stock market? Plenty. There are no sure things. Something can go wrong. It does not pay to get over-confident. The trainer of Empire Maker really thought he had the race run prior to the running of the race. He had the best horse. He had the best jockey. He should have won. I thought he would too. I picked Funny Cide to come in third. I have often said that management is the difference when it comes to making smart investments in the market. The guys who continually have delivered winning results stick to their knitting, have inner strength, and character that does not skip a beat- Warren Buffett, Andy Grove, Bill Gates, Michael Dell, just to name a few. It's no accident that Berkshire Hathaway, Intel, Microsoft, and Dell have been huge winners over the years. Their founders
are first-class individuals who are smart, determined, and have a nose for money as well as finishing in the money, and they are realistic about the economic returns to expect. Yesterday was Berkshire Hathaway's annual meeting. Warren Buffett said "investors in U.S. stocks should expect a return of about 6% to 7% a year, and people who are looking for double those gains are dreaming."

In China the government attempted to appear confident that the worst of SARS was over. In Hong Kong the Director of Health, Margaret Chan, was more realistic and said SARS "is like a moving target so we have to be very careful...there is a chance that the number of deaths will continue to rise." We are much more likely to believe the descriptions of SARS coming from Hong Kong, Singapore, and Taiwan rather than China. The latter are a bit like the managements who constantly revise their company's earnings estimates downward but in China's case it's revising the suspected SARS cases and deaths upward. The similarity is the lack of character. It's best to avoid both.

Due to SARS, the Women's World Soccer cup will no longer be played this year in China. Schools in Beijing will stay closed for another two weeks, and this impacts a million children. Taiwan imposed a mandatory 14 day quarantine on all travelers from China, Hong Kong, Singapore, Macau, and Toronto. Taiwan has 204 reported SARS cases and eight people have died. In Singapore where there have been 25 SARS deaths, 3154 people are now quarantined. Lastly, scientists find SARS can live on objects for hours or even days.

Even though ABC sponsored last night's debate in S.C. among the 9 Democratic candidates, the network opted to air the movie, Gladiator, instead. No Democrat has carried S.C. in a presidential race since Jimmy Carter in 1976. In a month's time Hillary Clinton's book called Living History will be released. It has a first printing of one million copies. I have a feeling it will get more coverage than last night's debate.

It's official today. The N.Y.C. subway ride is now $2, and the 50 cent hike is the first increase in 7 years. At the same time, the sales tax was increased, there will be a surcharge on those earning $150,000 and over, and 3000 pink slips were handed out to city workers. N.Y. State can be ashamed as well. They have a $90.8 billion budget plan but the legislature approved a $93 billion budget. That is not a misprint. That would leave a $13 billion budget gap over the next two years. Maybe they can catch up to California's deficit.

Finally, we come to the ultimate perspective on non-reality. Maybe you have heard of the company called Compuware. Consider what the odds of this company being a winner were they a racehorse. In 2000 they earned $1.02 per share; in 2001 44 cents; in 2002 42 cents; and 2003 is estimated at 30 cents per share. They would probably be placed in a claiming race at a low valuation. The market cap is $1.7 billion and sales for the latest twelve months are about $1.5 billion. At the beginning of 2000 the stock sold at $40 and it's now about $4.50. Compuware is in the process of moving into a new Detroit headquarters building which cost $350 million. It has a 14 story glass atrium with a water sculpture under the glass skylight and it sends water into 15 upside-down glass pyramids. The 4400 workers will occupy 12 floors which will comprise one million square feet. The top floor, not surprisingly, is the executive level with an outside balcony which extends around the building. It's too bad that $350 million was not delivered to the stockholders as a return of capital. It might have helped to offset the 90% decline in the price of the stock over the past three years.