6/14/03 The Proxy

Today we journey to the land of the proxy. Some take me to task for the examples I use. In every case, I have given further consideration to my position, and do not believe a change is warranted. Each month various polls provide us with indications of consumer sentiment. Because consumer spending powers about 70% of our nation's GDP, the sentiment of the consumer can be viewed as a proxy for the economy. Fifty three economists polled had predicted that there would be a rise in consumer sentiment in June. They were very wrong. The University of Michigan reading dropped from 92 to 87. More importantly perhaps, the expectations index which reflects sentiment on optimism going out one to five years, dropped dramatically from 91 to 84. I have always placed great weight in how the consumer feels. Maybe those plowing into the Dow and the Nasdaq will ignore the sentiment expressed on Main Street. Often Wall Street believes they have all the answers about the future. I heard from someone early Friday morning who was certain the answers were right there in a folio of information. I don't read analyst reports. I do listen to the consumer. There's an old ad campaign: "an educated consumer makes our best customer." Never underestimate the consumer.

Our international trade reflects the level of our exports. With the dollar having dropped this year against all major currencies, one might think that our exports would look more attractive since they'd be more affordable. The April trade deficit of $42 billion was the third largest on record. April had the largest month to month decline in oil prices in 12 years. Overall imports declined about 2% in April but exports also dropped approximately 2%. The problem is weak demand. Even though our exports look more attractive price-wise, the economic conditions in most developed countries are weak, such as, in the euro nations. In addition, China continues to export competitive products, and they still make our exports look pricey. Prices of imported goods fell 0.3% in May. U.S. May producer prices also declined 0.3%. It is anticipated that May consumer prices dropped as well.

Some years back, the saying was as GM goes so does the economy. That is less true today, but the auto industry is still important to our GDP. It is an industry which impacts many other businesses. GM has $200 billion in debt. That's larger than the GDP of most countries. Moody's Investors Service cut the rating on that debt to Baa1 from A3 and from General Motors Acceptance to A3 from A2. The rating service said "the negative outlook reflects Moody's concerns that the competitive environment in the U.S. could become even more intense, that the weakness in the U.S. economy could extend well into 2004 and that GM might fall short of achieving various operating and financial objectives." Moody's said that GM faces rising pension costs with 2.5 retirees for every active employee and unfunded pension liabilty of $19 billion. GM's May incentives averaged $3,916 per car and truck up from 2002's May incentives of $2,733. GM may not be the same proxy for the economy; however, their unfunded pension liabilities combined with their health care liabilities make them a proxy for those nationwide business problems. If a stockholder looks at GM's overall liabilities, and compares them with the equity portion of the balance sheet, it might be a cause of concern. Of course, other might call me a worry wort. Then again, they have all the answers.

A month does not go by that I do not write about WalMart. By now, you know that this is my favorite company. I have said so often that WalMart is the proxy for the consumer, and, in my view, the overall economy. We know they are the largest employer with 1.4 million employees. We know their sales amount to about 3% of our GDP. I have said in the past that WalMart is the biggest customer for giants like P&G and Clorox and Campbell Soup and Disney. Back in the Fall of 2002 I wrote how WalMart's sales were slowing. It is nine months later, and the sales are still slowing. There has not been one indication of a pick-up in this entire period. Economists maybe forecasting a better second half. WalMart has not confirmed that view. I'll stick with WalMart. No one entity knows more about the consumer than WalMart. Buck WalMart and you will be a loser.

Yesterday PeopleSoft filed a lawsuit against Oracle in Alameda County Superior Court. The complaint alleges that Oracle has engaged in unfair business practices, trade libel and tortious interference with PeopleSoft's customer relationships. "By making an offer with the acknowledged intent of eliminating PeopleSoft's business, Oracle seeks to disrupt PeopleSoft's efforts to complete new sales, thus, effectively damaging PeopleSoft's business even if Oracle never buys a single share of PeopleSoft stock," said PeopleSoft's CEO. The latter reaffirmed his company's plan to move forward on its merger with J.D. Edwards. The lawsuit seeks an injunction barring Oracle from proceeding with its tender offer. I am not a lawyer; however, as a risk arbitrageur, I have spent countless hours in courts listening to various arguments. I believe, at the very least, PeopleSoft will be granted a temporary restraining order against Oracle's tender. I do believe, in the short run, PeopleSoft's business will be harmed. More importantly, I believe this tender, which will prove unsuccessful, shall damage Ellison's reputation and Oracle's business on a long range basis. He has, in my view, made the worst business decision since forcing Ray Lane out of his company. Beginning Monday, Oracle's Henley and Phillips will be in Boston trying to sell large shareholders on their tender. Ellison doesn't get it. There are only two factors that matter right now: the hearing on the TRO and the price of the tender. The price is too low, and, in my view, the shareholders won't get the opportunity to tender. The courts will see to that, and their decision will be the correct one. As I said from day one, Ellison blew it out of the shoot. He is an example of how not to execute a company takeover.

I have felt for years that the companies who provide the best place for employees to work very often represent the greatest shareholder opportunities. For a long time Coke was an admired employer. Things have changed. They have a facility in Sylmar, CA. Rick Bronson is a 12 year route driver for Coke. Based on a second hand report, Bronson was fired for drinking a Pepsi. The company maintains that, by so doing, Bronson slandered the Coke product. At this same facility, Arrowhead brand spring water is dispensed for all employees. Arrowhead competes directly with Dasani, Coke's brand of spring water. The fact is Bronson, as a Teamster, is an organizer of Coke merchandisers. Teamsters Local 848 has filed unfair labor practice charges against Coke. I think they'll win. Shareholders, on the other hand, come out losers when companies treat their employees in this fashion. If I owned Coke stock, I'd sell it.

Coke is not alone in their mishandling of employees. Take Imperial Sugar. Please! That company shut their sugar refinery and packaging and distribution operations in Sugar Land, Texas. A total of 455 employees were terminated. This was not a new operation. It had been in business for 150 years or so- this is not a misprint. The employees were members of the International Association of Machinists and Aerospace Workers Local 517. Most of the employees were with the companies for years and years. Imperial Sugar maintains the employees are not eligible for severance. Lupe De La Cruz, who followed his grandfather and father into the plant, says he and his wife are owed about $50,000 in severance pay. The company maintains that severance pay only is applicable if the job losses were caused by technological improvements. Over the past dozen years Imperial Sugar has proven to be an embarrassment for the founding family's offspring and a terrible jolt to the stockholders and employees. They took a viable, debt free, money making business and filed for Chapter 11 with over $600 million in debt. It's a sad story. I know it well. My shareholders and employees fared a good deal better. We sold out to Imperial in 1988. Had I still been running this company, employees would have been treated a good deal differently. The team produced respectable cash flow with no debt on the books.

Roger Clemens sets an example for professional athletes. He works and practices hard, and competes with continuous desire. Yesterday he won his 300th game and recorded his 4000th strikeout. He is 40 years old, and became only the 19th pitcher to win 300 games and only the third to strikeout 4000.

This country has had to confront a good many difficulties over the past couple of years. Now we have Mormon crickets marching across the West. They hatch in the spring and feed through the summer. Experts say this year's infestation in Nevada, Utah, and Idaho could be the worst in decades.

6/13/03 SEC Filings

There is a real benefit in reading filings with the SEC. That is especially true when the documents involve mergers and acquisitions. They can be a roadmap to the truth. In yesterday's regulatory filing, it was pointed out that PeopleSoft's CEO had approached Oracle's Ellison last year about buying the latter's business software application business. Ellison confirmed that saying "last year Conway would have been running the company." Maybe to many this is not an important point. To me it is highly important. When Oracle started the Oracle tender for PeopeSoft, Ellison mentioned that they had been talking and could not arrive at a satisfactory price and so they began the tender. I pointed out what the facts really were. Ellison should have done the same. The filing made yesterday places the question of trust on the table. This matter will not be lost on PeopleSoft employees, JD Edwards employees, and possibly customers thinking about purchasing software from Oracle. SAP, the leader in this field, took advantage of this battle. Yesterday SAP ran a newspaper ad:"A few words of comfort for customers of PeopleSoft and J.D. Edwards. Just when you need it most. If the ground under your feet is feeling a bit unsteady these days, it's with good reason: the proposed acquisitions of PeopleSoft and J.D. Edwards could leave you questioning the future of your IT investments." The ad is certainly fair. If Oracle is successful in its bid, Oracle would drop the PeopleSoft product line, and the future acquisition of J.D. Edwards would be doubtful. Ellison has figured that PeopleSoft shareholders will be happy to take a low cash price because the immediate outlook for the latter company is not upbeat. (Oracle's competing division reported flat quarterly sales yesterday.) In the short term SAP will probably increase its market share, and that would include Oracle and not just PeopleSoft. They are a better company and customers prefer their products. I don't believe PeopleSoft will be purchased on the cheap, and I am not convinced the company will be acquired. I am convinced that one should question Ellison's motives as well as his words. I would prefer to read Oracle's regulatory filings. In the meantime, PeopleSoft's CEO said, they are "working closely with customers who are empathetic, sympathetic, surprised, incensed, and in some cases 'outraged' by the bid." By potentially eliminating product choice for customers, Ellison has placed the well-being of Oracle before its customers. That is a losing strategy.

The continuing claims of people collecting unemployment benefits in the last week of May increased to 3.8 million, the highest in 20 years. For the month of May retail sales rose 0.1%. Gasoline prices at the pump have just begun to rise again. It will be interesting to see whether consumer buying habits are impacted. At the same time one should note that import prices fell in May for the second consecutive month.

I thought it might be interesting to take a look at the heartland. Yesterday the Commerce National Bank of Columbus, Ohio released information on the local and state labor markets. It states that "the duration of the present jobless recovery is the worst for both the overall state and for the Columbus metropolitan area since jobs have been collected. In the case of Columbus, this means the longest bout of job losses during a period of economic growth since 1964, while the losses for Ohio are the poorest since 1939." In making economic forecasts as well as prognostications for the Dow, it can be helpful to break down the analysis state by state and company by company, as the case may be. That is not a monumental task. I have done this analysis. In my view, the economic forecasts for the second half are significantly too high, and I feel the same way about estimates for the companies in the Dow. For example, in the state of Washington, the Office of Forecast Council now expects 2003 to be the third year in a row of lower employment, and salaries are anticipated to fall 0.3% this year. Back in February, an increase in employment had been expected.

The average 30 year fixed rate mortgage fell to a new record low of 5.2%. Freddie Mac forecasts record mortgage originations this year of $3.3 trillion. In a $9.6 trillion GDP, that is an astounding number.

Additional layoffs were recently announced at 3Com, Safeway, and Dan River.

6/12/03 Does The Market Know Best?

I never believed father knew best. I'm a father of seven. Mother didn't know best either. Together we did a pretty good job. What does that have to do with the market knowing best? In my view, no one indicator of the future knows best. Each indicator can have its moments of brilliance. The market is a forward looking indicator. We've had a gigantic rally in almost all market segments for well over two months. As an overall assessment, it is fair to say that the economy is providing, at best, mixed signals. With the jobless rate at a 9 year high and consumer spending depressed, it is not surprising that yesterday Fed Vice Chairman Ferguson described the near-term outlook for the economy as "still somewhat clouded." The latest Fed beige book reflected an economy which had expanded at a "subpar" rate in April and May with continued downward pressure on wages and prices. Manufacturing remains mixed and certain service areas are upticking. The lower dollar has helped exports out of San Francisco while SARS has hurt international tourism in San Francisco. The picture is mixed; however, the stock and bond markets reflect clear sailing. I wouldn't want to take a sailing cruise right now. There have been too many confirmed reports of illnesses on these boats. Who needs to take that risk? I don't feel like spending the money anyway.

In some sections of the country agricultural production is impaired by unusually wet weather. In other areas crop conditions are so dry, as in parts of Texas, that planting is delayed. Farming is a tough business.

Moody's downgraded Oracle's outlook to negative. Marc Benioff, a former Oracle executive and CEO of Salesforce.com, a company where Ellison has an interest, said a takeover of PeopleSoft "would mean Larry has decided Oracle can't innovate on its own any more and needs to buy customers...Larry is testing his student to see how well he has learned from the master." I figure the student will teach the master a lesson or two.

Growth prospects are being scaled down in euroland. The ECB said the eurozone economy will grow as little as 0.4% this year and 1.1% next year. The euro region's economy didn't grow at all in the first quarter, and the EU said the economy may not grow at all in the second and third quarters. Investment budgets are not increasing. With the strength of the euro, exports are on the decline in some countries, such as, France.

Two years ago a techie friend suggested I take a look at Form Factor in Livermore, Ca, a town down the road apiece from where PeopleSoft is located. At the time this wafer test manufacturer was making a little money and sales were pretty modest. A lot has changed over the past two years. The market for their cards, which test 32 chips at a time, has exploded. They earned $10 million on sales of $79 million in 2002. Today they are going public. It will be the first high tech deal of the year. The size of the deal was increased from 5 million to 6 million shares and the price range upped from $9-11 to $11-13. Some of the proceeds will be used to expand their Livermore facility.

Anything can happen in this world. A PeopleSoft employee won $3.8 million in the lottery. She had been carrying the April 2 winning ticket in her purse, and had not checked it until Tuesday of this week.

6/11/04 The Financial Report Of The United States Government

Once again, the government failed to get a clean audit. There are 24 reporting agencies, and the Department of Defense, the SBA, and the U.S. Agency for International Development failed to receive clean audit opinions. Some might consider this harsh, but I don't believe any government agency should be funded until they do receive a clean bill of health, as it were.

Carl English, Consumers Energy CEO, testified before the House committee on energy and commerce. He said "natural gas consumers enjoyed stable prices from the mid-1980s to 2000, with prices that actually fell when adjusted for inflation. Today, however, the balance between supply and demand has become extremely tight, creating a tightrope effect...unless significant actions are taken on the supply side, gas markets will remain tumultuous, and the 64 million homes and businesses in our country usng natural gas will suffer the consequences...current prices may represent a new, and regular, level of natural gas prices for the foreseeable future." According to Energy Secretary Spencer Abraham, natural gas storage levels are at their lowest levels in almost three decades and 42% below their five year average.

Peter Rose, Expeditors International CEO: "An economist, after all, has been defined as someone who would marry Cindy Crawford for her money."

Of the major retailers, only WalMart and Target provide weekly sales figures. I guess Sears, JC Penney, Federated, and others didn't like the numbers their companies were reporting.

The CBO now estimates the federal budget deficit will be above $400 billion. Many weeks ago I said it would be at least $460 billion. Nicholas Johnson, a state and fiscal policy analyst at the Center on Budget and Policy Priorities, said "when people look at their reduction in federal taxes their positive feelings about those cuts will be tempered by the recognition that they'll have to pay greater state taxes, greater local taxes and greater fees of various sorts." At least 31 states have raised or are considering raising taxes and fees this year in order to eliminate deficits of over $80 billion. Yet, according to the latest IBD/TIPP poll, 50% of the American public express confidence in the federal government's economic policies and, on the handling of the economy, 38% give an A or B rating to Bush. I thought it would be closer to 1%.

Timing has never been my strong point. It was 30 years ago that I became bullish on the potential for Mexico as a business partner for the U.S. Now Mexico is our second biggest trading partner with $232 billion annually flowing both ways across the border. Mexican immigrants send about $12 billion annually back to their homeland, and this amount equates to the direct foreign investment in Mexico.

Texas Instruments is the world's biggest maker of semiconductors for cellular phones. Yesterday they warned that current quarter sales and earnings would be lower than expected because of SARS which they stated has created slow-moving cell phone chip inventories in Asia.

Intel's COO Paul Ortellini said "we can access incredible talent for software engineering in India. To get these skills, we may not be able to hire and train people quickly in the United States." Intel is investing $100 million in India and expanding staff there and creating a new software development center in Bangalore.

6/10/03 Pieces To The Puzzle

The National Association of Manufacturers is releasing a study today. In it "the result suggests that economies with no economic growth in manufacturing would experience economic growth of less than 1.5 per cent a year." The study represents growth rates in 40 countries. The NAM represents 14,000 U.S. manufacturers. They are warning a further decline in this manufacturing sector might halve U.S. economic growth as well as reduce the standards of living here.

The senior economist at Lehman Bros, Joseph Abate, studied rising pension liabilities and their impact on investment and hiring. The study indicates that over the past four years pension funds of the S&P Index 500 companies have seen the value of their shares drop 25%, and this drop has raised their obligations by $289 billion. In addition, declining interest rates have worked to decrease the returns as well. As such, Abate writes, "firms no longer are able to rely on appreciating stock prices to bail them out of their pension obligations and have been forced to divert profits, reducing capital expenditures and cutting labor costs." Over the past two years I have frequently written on this subject.

The CDC reported yesterday that the West Nile Virus has resurfaced in two dozen states. No human cases have been reported this year.

Nokia blamed weaker than expected sales in handsets in the second quarter on economic weakness in Europe and the U.S., the impact of the weaker dollar, and SARS.

UBS Warburg upgraded SAP today. This firm said SAP would benefit if PSFT's product line were to be replaced by Oracle's-- assuming a successful takeover by Oracle. They cite the superiority of SAP's products over Oracle's. The latter is pretty well accepted by those in the industry. SAP's 36% market share indicates that customers would much prefer their use to that of Oracle's. This is just one more reason to question the viability of Oracle's bid. Rick Allen, the CFO for JD Edwards, said "to the extent that victory is fear, uncertainty and doubt in the marketplace, Oracle has done that. It will all be sorted out in the coming weeks."

6/9/03 Monkey Business

Just as an aside, the saying goes that things happen in threes. The server for this blog went down Saturday and Sunday mornings. Hopefully, the week will begin on a better foot. The title of the blog reflects my N.Y.C. humor, and that requires an acquired taste and some patience at times for the distasteful. Federal and state health officials are investigating the "monkeypox" virus in Wisconsin, Indiana, and Illinois. About 30 people were stricken with this small-pox like disease. It is spread by rodents and monkeys. The prairie dog is thought to be the root of this outbreak. It can be passed from animal to animal and from animal to human. In Africa it has been spread from human to human. The good news is that the mortality rate is significantly less than what is experienced with smallpox. I hope and pray that this disease does not spread like SARS. We have had enough loss of life in 2003, and secondarily, business cannot afford another jolt in the ear. The Pacific Asia Travel Association said job losses in China, Hong Kong, Singapore, and Vietnam could be as high as seven million in tourist related lines of work. This association said "the impact of SARS on our region has been greater than September 11, the Bali bombs, and the Iraq war." The Bush Administration does not want to play host to more job losses. They already are approaching 3 million. He is beginning to feel the Herbert Hoover disemployment(I figure economists say disinflation so I'll say disemployment) syndrome. I'll call it HHDS for short. God knows. No one wants to lose an election over a hanging prairie dog. It's bad enough to win an election over a hanging chad. I am optimistic. I just don't believe the 'monkeypox" will kill almost 800 people and infect more than 8400 as is the case with SARS.

I do believe we need to keep a watchful eye out for Pie. I am not talking blueberry or apple. Pie is an 18 month old bantam hen located at a farm near Cape Town, South Africa. She has been sitting on a pile of garlic for 24 hours a day, 7 days a week, for more than 2 months. She refuses to move. Nobody knows why she is sitting there. I think I have the answer. She is guarding the garlic with her life. The WPM have been disguised in the form of garlic cloves. Who would have thought? This is the ultimate switch.

Due to the SARS breakout in Asia, Motorola cut its second quarter sales and earnings estimates. This company is a master at cutting estimates. I really think they should be rewarded for this ability. How about a clean sweep of the top officers and the board room?

In a few hours UK's Chancellor Gordon Brown is expected to provide reasons why it is not the right time for Great Britain to join the euro currency zone. The pound has fallen 8% vs the euro this year, and Simon Wren-Lewis, an Exeter University professor, wrote the Chancellor that the pound would need to fall at least another 5% in order for the UK to adopt the euro. Meanwhile, Poland, in a weekend referendum, voted overwhelmingly in favor of joining the EU.

Over the next five years Warren Buffett has projected that the cost of capital created by the float at Berkshire Hathaway will be negative. Does that mean we will have deflation or disinflation or disemployment or possibly any possible combination of the three over the next five years?

According to the U.S. Food and Drug Administration, as many as 40% of all U.S. residents who travel to Mexico return with purchased pharmaceuticals that cost significantly less than their counterparts in the U.S. And I thought visitors from the states were returning with the Mexican two step.

We are fast approaching second quarter earnings season. At some point, investors will realize that companies manage their forecasts so the surprise hopefully will be on the upside. Microsoft has been doing that forever. We are bombarded by news that a company beat the street or didn't beat the street. Honest guidance would be helpful, but more importantly, I'd like to hear more about free cash flow, inventory turnover, the number of days receivables are outstanding, and the reserve for bad debts and other areas of future charge offs. Just like the news in this country is frequently managed, so are the earnings of public companies. There are many who believed that the beloved General Electric did it for years, and wrapped it in Sigma whatever. I'm not interested in "confessions". I'm not a priest. I have no expectations. Just give it to me straight up- in a shot glass. My Mother would have liked it that way.

6/8/03 The Federal Budget

I had written a very long blog this morning, but the blogger server went down and I lost the entire blog prior to posting. I will try and make up some of the subject matter lost but not this evening.
I wrote I thought a pretty good blog today on the rubber
>match with Funny Cide, Ellison, and the budget. I
>really need to quote from today's Seattle Times business section. Kent
>Smetters, an expert on Social Security and Medicare(unfortunately also a
>professor at the Wharton School which might place doubt on his data),
>Jagadeesh Gokhale, a senior economist for the Federal Reserve Bank of
>Cleveland(I have previously quoted him), and Laurence Kotlikoff, a Boston
>University economist, were asked by Paul O'Neill to write a report on the
>true, long-term obligations of the U.S. government and the information was
>to be included in the new budget presented to Bush and the Congress. It was
>purposely omitted. It stated that the new accounting shows the United Staes
>is broke- NOT MY WORDS THIS TIME. It states we are in the hole by $43
>trillion- that's over and above the government debt held by the public($3.8
>trillion). The $43 trillion is the present value of the Medicare and Social
>Security obligations and certain other government programs. The American
>Enterprise Institute will be issuing a pamphlet containing these numbers and
>it will be co-authored by Smetters.