Friday, July 25, 2003

7/25/03 Crosscurrents

Yesterday's market was an interesting one, and possibly important. Thirty year mortgage rates are bumping up to 6% and closed at 5.94%. This rapid rise in rates will have a huge dampening on the refi market. In yesterday's blog I discussed the mortgage market and the refi portion. A goodly portion of the consumer's spending in the last 12 months has been the direct result of the cash freed up from refinancing a home. With this cash taken out of consumer hands, spending habits will be impacted. I do not believe the current market reflects this and I don't believe earnings estimates have been adjusted downward either. It's always smart to stay ahead of the curve. You don't want to get run over by a bull reversing its course.

S&P downgraded California's debt to 'BBB". This is a notch higher than I had anticipated. The bonds were given a stable outlook. We'll have to see how long it stays that way.

It is anticipated that workers' comp insurance rates paid by California employers are probably headed for a 12% rate increase starting Jan. 1, 2004.

The Chrysler division of Daimler Chrysler posted an operating loss in the second quarter because of lower vehicle sales and the cost of incentives.

Robert McTeer, Fed Reserve Bank of Dallas President, said he was optimistic that an economic recovery will gather steam next year. He admitted that his optimism rests less on hard evidence than it does on "a hunch and a hope."

The VIX index or the CBOE Nasdaq Volatility Index is hovering around the low for the year or at the 20 level. This low volatility level is quite surprising given the large rise in equities since early March.

Gold is having another run, and closed at $362.30 per ounce.

Crude oil futures closed above $30.

Ten year treasuries rose in yield to 4.16% and that's close to the recent high posted in the early part of this week.

Think tank EraNova Institute said in a report not to count on yesterday's jobs for tomorrow's income. "Even the most high-tech jobs are being downsized rapidly. They'll never resize and some will disappear," said the author of the study. The basic problem is not, they say, that high-tech and service jobs are going overseas. That's only temporary. Third -world contractors will eventually lose out to all-electronic solutions. They suggest "we need to leapfrog the technology that's displacing us."

Thursday, July 24, 2003

7/24/03 Here Comes The Dreckorator

It won’t be long before California sees its debt obligations downgraded to junk bond status. That downgrade will cost the state almost $1 billion more in higher interest charges. That’s assuming someone wants to buy these bonds. Maybe they will serve as wallpaper to investors. The call can be heard: here comes the dreckorator.

The Wendover-Global Insight IT Spending Index fell 14% in the June quarter from the prior quarter and hit its lowest point since the index was published in 1999’s fourth quarter. According to the Precursor Group, businesses account for two-thirds of all tech spending and $340 billion was spent on technology in 2002 and that’s $50 billion less than the peak reached in 2000.

Juniper Networks CEO Kriens: “We’re encouraged about a recovery but not convinced.” I’m encouraged about the recovery in Juniper’s stock price but not convinced.

According to Stephen Roach, chief economist at Morgan Stanley, mortgage debt stands at 67% of GDP. The Mortgage Bankers Association of America reported yesterday that in the week ending July 18 mortgage apps in the U.S. decreased 5.8%. The refi share decreased to 68% from 70%. The MBAA forecasts mortgage apps to amount to $3.34 trillion dollars in 2003 or 30% of the GDP and that 68% will be refinancing existing mortgages.

Sen. Dick Durbin (D-ILL) “If you come to this floor of the Senate and stand before a microphone and are critical of this administration for their policy or use of intelligence be prepared for the worst.”

Today Rumsfeld and Co. will hold up pictures of Saddam’s two dead sons. Meanwhile, three more soldiers were killed in an Iraqi ambush. There is something wrong with this picture.

Today Bush visits Michigan for the ninth time since being elected President. He might consider spending as much time visiting soup kitchens and unemployment offices. Only then will he get in touch with Main Street. It must run in the family. His father didn’t get it either. The democrats don’t need to find a candidate to run against Bush. Their best candidate is Bush. He’s his own worst enemy.

Boeing’s second quarter deliveries of commercial airplanes decreased 34% to 74 planes and revenues fell 24% from the year ago levels. Operating margins dropped to 5.4% from last year’s 7.3%. Forecasts for 2004 were cut. Don’t worry. They’ll be cut again. Boeing’s management is a case study for mismanagement.

Sony’s quarterly profits plunged 98%. It reflects a growing reluctance on the part of the consumer to part unnecessarily with cash.

Kodak will eliminate as many as 6,000 jobs. That’s about 8% of their workforce. Sales have dropped for three straight years. Last year Kodak was the best performing stock in the Dow. This year it’s the worst performing Dow stock. The company has a negative operating cash flow and refuses to cut the dividend. This is just stupid decision making.

Fed Governor Bernanke: “Very low inflation and deflation pose qualitatively similar economic problems, though the magnitude of the associated costs can be expected to increase sharply as deflationary pressures intensify.”

Christopher Ranch is the nation’s largest grower of garlic. They are located in Gilroy, Ca. The company, for the first time, started to import garlic from China last week. Says Don Christopher, “we held off the Chinese for 12 years, but now it’s time to give up. We know there’s a market for California-grown garlic. But if you look at history, people always go for the least expensive price. There are no secrets to the garlic business- it’s all about price. I’m a realist. When we have our customers telling us, we want to buy Chinese garlic, it doesn’t give us a choice.”

On Wednesday, Congressional investigators designated the government –sponsored program that insures the pensions of 44 million private-sector workers as ‘high risk.” Steven Kandarian, the program’s executive director said “it would take about 12 years of premiums (insurance) to cover just the claims from 2002.” It was revealed that airlines have $26 billion in pension underfunding and automakers $60 billion in unfunded obligations.

Two months before 9/11 a Phoenix FBI agent specifically accused Osama bin Laden of using flight schools in Arizona and other parts of the U.S. to train “a cadre of individuals” to carry out aviation terrorism, according to a congressional report. Agent Kenneth Williams concluded “the individuals will be in a position in the future to conduct terror activity against civil aviation targets.” Williams’ eight-page memo and its warnings were ignored by FBI higher-ups until after 9/11.

Wednesday, July 23, 2003

7/23/03 Planting Seeds

In all markets there are opportunities. Dana Corp. maybe one of them. As I mentioned ten days ago, this company is the subject of a hostile tender offer by ArvinMeritor. There are some anti-trust issues here as both companies manufacture axles, driveshafts, and foundation brakes for the truck market. The overlap is not insurmountable. Yesterday Dana’s board rejected the $15 bid as inadequate, risky, speculative, and lacking strategic value. In other words, the board was pissed that the price was too low and their nose was out of joint because Arvin Meritor is smaller by some margin than Dana. At 15.28 the risks are not too great because the company will earn $1.15-1.20 even though their revenues are declining somewhat. The restructuring program they initiated is paying dividends. I continue to believe Goldman Sachs, Dana’s advisor, should be able to find a buyer in the 17-18 range. In addition, ArvinMeritor will pay more to get a friendly deal accomplished.

It’s been over a year since we discussed Amazon. The stock didn’t have a friend in the world except for its CEO. I thought its technology made it viable from a long -term basis, and felt Amazon was potentially the most interesting of the public Internet companies, and that included eBay. I still feel that way. My observations were that the company needed to bite the bullet and provide yearly free shipping and to concentrate more on international business. The stock has done pretty well in the interim. It’s increased in value almost four times, and that’s better than a kick in the ass, and I get plenty of them. I didn’t think Amazon’s stock would go up to these levels in such a short amount of time. They will generate sales of $5 billion this year, and operating income will be about $330 million. They’ll continue to generate cash and pay down debt. Jeff Bezos and his team should be given more credit. These folks know how to stick to their knitting.

Amgen is another company which continues to perform. Since mentioning the stock a year or so ago, it too has done well, and more than doubled in price. For the first time, revenues for the quarter exceeded $2 billion. If one wants to have long- term participation in biotech, this is, in my opinion, the horse to be riding. Forget the rest. This is the class of the field. I can say that with confidence after experience with them for 20 years.

Warren Buffett expanded Berkshire Hathaway’s investments in oil and gas this week. Houston-based Seitel will be acquired through a bankruptcy reorganization plan. Seitel’s debt load was too burdensome. Actually, the company is operating profitably and they have a very large seismic library. They charge oil and gas companies for surveys made years ago, and this without sending out crews for more information. The surveys provide promising areas for drilling. In recent months, Berkshire has provided financing to CenterPoint Energy, purchased Kern River Gas Transmission, and bought Northern Natural Gas. In addition, they have made a significant investment in China’s oil and gas endeavors. Many years ago Loews Corp.made a big bet on the drilling rig business when it was flat on its back. They made a ton of money. Buffett is not buying at the bottom, but oil and gas has cash flow potential over the next several years.

According to Veronique de Rugy, a fiscal policy analyst at the Cato Institute, discretionary government spending in 2002 rose 12.3% and will rise 12.6% in 2003. With an inflation adjusted economy barely growing, this spending is irresponsible and undermines our liberties and is a WMD. I suggest the Administration get its purse strings together, and snap it shut tight.

Bank Of Canada Governor David Dodge said their economy is slowing faster than expected, and in all likelihood, interest rates will probably be cut on Sept. 3 when the bank meets again.

Siebel Systems will layoff 490 employees, eliminate certain facilities, and migrate certain business operations offshore. The company barely produced a profit for the latest quarter. Sun Microsystems saw revenues drop 13% in the quarter, and they too had disappointing earnings. In a poor business climate, corporations are reluctant to spend on the customer analytic applications offered by Siebel or the high-end servers produced by Sun.

In Hong Kong consumer spending is anticipated to drop almost 3% this year. They have had 55 consecutive months of deflation and six years of declining property values. Japan is not the only country with deflation problems.

Lastly, I would like to revisit the reason for the Iraq war. We have not been fighting for our liberties for 227 years so that an Administration could exert pressure in order to produce the right evidence to validate the war. Everyone in the Administration is responsible. No one is excused. The American people did not vote for this behavior. We have checks and balances in this country. They can be found at the exits. The first loss is the best loss but it won’t bring our dead soldiers back to life. It will prevent this fiasco from ever happening again.

Tuesday, July 22, 2003

7/22/03 Soul Searching And Investing

Only you know why you invested in a stock. You pulled the trigger. No one else. It's important that you be honest with yourself. It will impact your results as well as your relationships with others. Accept the fact that we all make mistakes. We are not perfect. We're working on making changes and honing our skills- as investors in stocks and bonds and as investors in life's experiences. It's ok to lose money as long as we learn from that experience and don't repeat the same mistake. It's easy to acknowledge your mistake in the stock market and divorce your holding. It's a matter of facing reality and accepting responsibility for the mistake. In investing there are no WMD. It's only you and your mind. In Iraq there are no WMD. It's only the Administration and their willingness to tell the truth. Don't look at yourself in the mirror and face a face that failed to tell the truth. That's a one-way ticket to loserville.

Often I have written about the 44-45 million Americans who do not have health insurance. Now we have another calamity brewing, and that's with the Pension Guaranty Corporation, a government vehicle for 44 million Americans with pensions. This entity is running out of money. No surprise. The government is busted. People with pensions have reasons to worry. These individuals thought their retirement years would have some financial stability. It is a looming problem. Unfortunately, people are realizing they can't rely on the government and its leaders long after the horse is out of the barn.

IBM will be grilled for their conference call discussion yesterday. The subject matter was the company's growing need to move white collar jobs overseas. They'll be calling the company Big Overseas instead of Big Blue.

Nationwide 80% of all businesses are family businesses and they total 13 million in number. According to labor statistics, about 70% of family businesses fail to transfer from the first to the second generation, and, of those remaining, less than 50% transfer from the second to the third generations.

As I mentioned the other day, the U.S. economy is expected to expand 2.4% this year, according to the latest Blue Chip Economic Indicators survey. At the same time, second quarter profits for the S&P 500 are expected to rise by 6.9%, revised from 5.2% in early July. Analysts seem to be much more optimistic than those participating in the Blue Chip survey.

According to the latest Zogby Poll, the president's appoval rating has dropped from a high of 82% right after 9/11 to 53% last week. His disapproval ratings have risen from a low of 17% after 9/11 to last week's 46%. G.W. Bush said 1992 "was the most painful year in our family's history." The operative word is "was." If GW were a stock, the profit would have been locked in months ago- soon after the trend changed.

Monday, July 21, 2003

7/21/03 Searching For Value

I am an observer of human behavior. It provides an on-going crash course on what impacts future business results. You can laugh all you want. It works every time. Don't be fooled by how busy the parking lot is at a store. Watch what people are buying and how much they are spending. There are many small businesses doing their shopping at Costco. On the other hand, many individuals shop there. I stop and talk with a variety of shoppers. It doesn't surprise me that Costco's domestic same store sales are showing very small growth while foreign results are often in double digits. For the most part the shoppers here are consistently buying just what they need and nothing more. This is quite different from a couple of years ago when the carts were filled to the top. I do the same thing at WalMart, and the results are almost identical. Then I take myself to the Nordstrom Rack. I will be one of the few men in the store. I have no fear. I have prior experience at Loehmann's in the N.Y. area which was more dangerous than the running of the bulls in Spain. Female shoppers can be oblivious to the welfare of others when a true bargain is in their midst. At the Nordstrom Rack I'm out of harm's way. It's civilized. I can leave my boxing gloves at home. The results are the same. No extra buying. It's a focus on the outfits required in the near term, and invariably, price is an overriding factor in making a decision to buy.

How is it then that much less time is spent looking for values on Wall Street? The buyers are willing to buy on the recommendations of analysts? The buyers do very little checking of the merch. Maybe before buying a stock they should come from shopping at Costco, WalMart, or the Nordstrom Rack. Maybe there would be less "returns." I strongly suggest that buyers of equities pay much closer attention to the price tags on the "goods." I have a feeling you will find a good part of the merchandise is last season's merch priced as the new "fall line". It pays to have a keen eye. Feel the goods in your hand. Will it last? Are you getting value? You might save yourself a lot of angst.

Sunday, July 20, 2003

7/20/03 The Mop Up

As investors, we can learn a great deal about this war with Iraq. On May 1 the main fighting had ended, the President said. We were entering the mop up stage. The fact is we were quite unprepared for what followed, and that is the guerilla war which confronts our troops on a daily basis and our dead mount each day and now surpasses the human loss of the war fought a dozen years ago. It is wrong to gloat in war and wrong to gloat as an investor. It is unprofessional on both fronts. After the first month of the war Rumsfeld stuck out his chest and patted himself and others on the back for a job well done. The job hadn't been completed. Not by a long shot. Never ever let a profit turn into a loss. It is unforgivable and stupidity of the highest order.

I have mentioned that prior to investing one must have an exit strategy, a strategy which will be effective in all markets. Our exit strategy in Iraq must have been designed by amateurs. These are people who are out of their element, and thus the dead keep mounting. Do you want your head to roll as an investor? Suppose you bought a stock for the wrong reason? Suppose you bought a stock for the right reason but the market did not agree with your reason? Suppose you bought on someone else's advice? Is it your money or the advisor's? What are you going to do? Take whopping losses and get killed? That's what happens to amateurs and followers. You had better have plenty of discipline. You had better have had plenty of diligence as it relates to your exit strategy. I've seen people jump from above the 20th floor in 1974. That's a permanent exit strategy. I would hope you have something else in mind. So what's it going to be? Think before you mop up. Buy smart. Don't buy tips. Think for yourself and assume responsibility for your decisions. Keep a journal on why you buy and sell and where you went right and where you went wrong. You only go around once. Make it pleasurable and profitable.