11/15/03 An Irresponsible Government Hand Job

It’s early Saturday morning. This is not the way to begin a day, but to turn away, would go against so many of my beliefs in right and wrong. The Republican-proposed energy bill is 1700 pages long. Senate Democrats won’t get a chance to see the full bill until today. Senate Energy Committee Chairman Pete Domenici, R-NM, remarked “we know that as soon as you start reading the language, we’re duck soup.” Billy Tauzin, R-La, is the House Energy and Commerce Committee Chairman, and stated “in short, this bill will put a stop to the job losses that make it difficult for this economy to continue to recover.” The Republicans are selling this as a job creation piece of legislation. That’s right. As Tauzin stated, “this is, in essence, a jobs bill.” He pulled out of his crawfish behind the notion that 1 million jobs would be created by this 1700-page fiasco. John McCain will vote against the bill. He claims “it leaves no lobbyist behind.”
The bill will protect producers of MTBE from lawsuits claiming the gasoline additive is defective. It has been blamed for polluting municipal water supplies from coast to coast. California, New York, and Connecticut have moved to ban the use of MTBE in their states by year end. The bill would phase out the use of this additive by 2015. The bill contains more than $20 billion worth of tax incentives. The Senate allowed for only $16 billion worth of energy tax cuts in its annual budget while Bush only wanted $8 billion. With subsidies, loan guarantees, and direct spending, the cost of this legislation exceeds $100 billion, and McCain described the bill as “an Iranian bazaar, not an energy bill.” The politicians who vote for this bill, as it is presently written, should not be re-elected. They should be out of a job instead of giving the American people a hand job.

According to the Census Bureau figures, budget deficits have not kept state and local governments from increasing their payrolls. There were more than 15.6 million full-time state and local employees in March 2002, more than 200,000 higher than the previous March. Total payroll in March 2002 was over $52.3 billion, up roughly 6%. In recent years, many states and municipalities have coped with tight budgets by slashing services and/or raising taxes. That’s the new American way—slash and raise while you increase the hiring of your own and give yourselves raises! How the voters who are taxpayers stand for this I will never ever understand.

Arnold assumes the governship. The news awaiting him is not rosy. Santa Clara County, the heart of the Silicon Valley, saw its unemployment rate increase to 7.6% in October. The unemployment rate for the entire state this past month was 6.6%. In October, there were an estimated 69,300 adults out of work and actively looking for a job in Santa Clara County and in Los Angeles County last month there were 327,000 jobless. The number of unemployed in the entire state of California amounts to 1,161,000, according to the latest EDD figures.

According to new Pentagon data, the number of U.S. casualties from Operation Iraqi Freedom (what a crock!)—troops killed, wounded, or evacuated due to injury or illness—has passed 9,200. A total of 400 service members have died since the war began on March 20. Steve Robinson, executive director of the National Gulf War Resource Center, stated “we are shocked at the dramatic increase in casualties.” The numbers do not include service members treated in theater or those whose illnesses, such as Post-Traumatic Stress Disorder, were not apparent until after they returned to the United States.

I have written several times on the battle within Congress and with Bush on the matter of overtime pay. As I have mentioned, earlier this fall, both the House and the Senate voted for the provision to block the proposed overtime rules from enactment. In July, the OMB’s Statement of Administration Policy indicated the threat to veto any legislation that blocks implementation of its overtime overhaul. Unfortunately, it appears that the House and the Senate will cave in to the Bush threatened veto. They are likely to eliminate a provision protecting overtime from proposed Labor Department changes. This would deny overtime pay to millions of workers. It would be a very sad day for the American worker to be stripped of hard-earned overtime pay. Any politician who votes against overtime pay should not be re-elected.

The recent record-setting pace of personal bankruptcies continued in the 12 months ending September 30. They jumped 7.8% to 1,625,813 from the year earlier period. Samuel Gerdano, executive director of the American Bankruptcy Institute, stated the bankruptcy filings “are being overwhelmingly driven by individuals with household debt. They do reflect the buildup of heavy consumer debt.” The tight job market and the high number of unemployed workers probably were additional contributors. While bankruptcies were setting records, so were home prices in the third quarter. Home prices in a third of the nation’s cities and towns jumped at least 10% during those three months. According to the National Association of Realtors, prices rose at least 10% from a year earlier in 41 of the 124 areas tracked, the highest number of markets showing double-digit increases since the group began tracking home prices per area in 1982.

Thanksgiving will not be a happy time for some in Baltimore, a city described as having a financially strapped school system. The CEO of the Baltimore school district stated between 800 and 1,000 school employees will lose their jobs by Thanksgiving. John Musso, CFO for Washington DC public schools, said officials are considering cutting hundreds of jobs in their troubled system.

Yesterday I saw something for the first time. Zhone Technologies of Oakland had hoped to go public for several years. The downturn in the telecom industry had prevented it from happening. The company took an interesting route and merged with a public company, Oceanport, New Jersey Trillium Inc. Upon completion of the merger, Zhone announced the firing of 125 people at Tellium. In San Jose, the news was not quite as bad as only 100 jobs were cut at Adobe Systems. This represents about 3% of their workforce.

Martin Hutchinson, UPI Business and Economics Editor, noted that yesterday John Chambers, Cisco’s CEO, cashed in $38 million worth of stock options, leaving him at yesterday’s closing price options worth $363 million, and that all of these options were received since 2001. It’s fair to say that the majority of Cisco shareholders have not profited from their share ownership since 2001. Hutchinson points out that, in total, Cisco's stock option plan has issued 321 million shares with a total value of $7 billion.

According to a recent analysis by the Tufts Center for the Study of Drug Development, the FDA’s fast program to speed new drugs to market has shaved the time required to develop a new drug and win approval for release. Their study found that clinical development time for fast track drugs approved between 1998 and 2003 was, on average, 2 to 2.5 years shorter than for non-fast track drugs.

Yesterday, In New Delhi, South Asia’s biggest annual trade fair opened with President A.P.J. Abdul Kalam saying India can double its economic growth to 10% “with the right type of management system.” He inaugurated the 23rd India International Trade Fair. Despite a steady rise in the rupee, Indian exports rose over 18% last year, and this year they are close to double-digit growth. Kalam noted “the aspirations of both developed and developing nations are the same. While the developed nations, which are just eight in number, strive to retain their place, the developing nations aspire to achieve the status of developed nations. Competitiveness connects the two.” He maintains the winner, according to the law of development, is the smarter of the two “based on the quality, cost competitiveness and just in time delivery.” According to data from the Indian Venture Capital Capital Association, India received $550 million in venture funding in 78 firms in 2002. This year, through September, similar funding has topped $500 million and is expected to reach about $700 million by the end of the year. I believe India shall prove to be an increasingly important country for successful venture capital funding.

Yesterday I touched on the art of thinking for oneself. I mentioned how one could arrive at the conclusion that U.S. retail sales for October would decline, and this after the surge in consumer spending in July and August. In fact, the Commerce Department revised the number for September downward to a larger decrease of 0.4%, and announced a decline of 0.3% for October. The latter was larger than economists had been predicting, but they were at a disadvantage. They were paying attention to the proclamations from their associates. We had a distinct advantage. We ignored what they said, and did our own thinking.

Jack Tierney: “This bull market has been created for the debtor class. Those who have saved and as Clinton would say “played by the rules” are getting screwed. The Greenspan/Bernanke axis has given us three choices: keep your cash in the money market and lose through inflation, spend it now before the greater inflation we’re planning eats it away faster, or invest it in bonds or equities…hundreds of thousands of Americans (perhaps millions) with several hundred thousand dollars put away, and upon which the interest would supplement their pensions and other savings, find themselves strapped. They have no choice but to put their savings at risk. And voila, a bull market is created. But if the hoped for returns don’t materialize or are less than needed, no problem. Take out a mortgage on that home you own free-and-clear… and refinance at will.”

11/14/04 Joining Minds

I am going to show you how simple it is to arrive at a rational conclusion. We will do this together. We know that the consumer, that’s you and me, account for 70% of our GDP. How do we anticipate what other consumer habits might be and how they are spending or not spending their money? The first thing we do is watch what companies who provide products to the consumer are doing. Today recent retail sales will be released. We know they will be down. How do we know? NOT from reading what Wall Street analysts write. The auto companies have said their sales for October were disappointing. As such, they just raised the incentives on their products. In other words, they are choking on inventories and will lower prices. Who knows the consumer the best? WalMart does. They said consumer demand dropped off dramatically in October when some unseasonably warm weather cut into the demand for fall clothing. As such, the company took write downs on overstocked clothing items in October. That is information the company released. It is available to everyone. It is important to filter out bogus information from companies. Carol Sanger is a spokesperson for Federated Department Stores (Macy’s etc). She stated “I think there’s a feeling of hopeful optimism that the fourth quarter may be better than anticipated based on trends we have seen in the third quarter.” The most encouraging sign, she says, has been a pickup in men’s and women’s apparel, the area where WalMart is taking price reductions. There is another way to check on Ms. Sanger. Yesterday, Levi Strauss cut its financial outlook for the year, citing tighter retail inventories and a worldwide trend toward lower prices for jeans and casual pants. Previously, the company had forecast flat sales, and, in the face of stagnant sales, said full-year net sales were expected to be down 6 to 7%. That is a big negative change. Maybe Ms. Sanger is mistakenly optimistic for the fourth quarter, but WalMart and Target are not, and their record for sales and profits make Federated look like a third rate outfit, which I believe they are. WalMart and Target are cautious for the holiday season, and both state that it will be fiercely competitive for the consumer dollar with heavy price-cutting in video games, digital cameras, and high-tech TVs. WalMart will carry digital TV sets in 1500 stores this holiday season. They will go head-to-head with Best Buy, and the latter has increased its big-ticket TV sales to nearly 30% of its total sales from about 20% a year ago. Consequently, if you were a Best Buy shareowner, you might be worried about reduced margins on plasma, flat-panel, and high-definition TVs.

Watch what the winners are doing. When the government mailed out the child credit checks in July, WalMart made it known to the consumer that the company would cash those checks, and made it easy to spend the money in their stores. This holiday season WalMart is pushing their credit cards. Target has been very successful with their credit card program, and in the latest quarter the credit card dividion contributed $162 million to their pre-tax profits up from the year earlier $138 million. With the new WalMart credit card, there will be no payments for 90 days. You can buy for the holidays and pay later. That is an incentive plus their low every day prices. If merchandise is not moving, WalMart will take the necessary price reductions to clear out stock. They do not wait to have sales after Christmas. They will be having sales each day leading up to Christmas. They will pressure margins at other retailers. The story for this holiday season will be somewhat better sales this year but lower margins.

The number one concern on the consumer’s mind is the employment picture. The Labor Department stated yesterday that first-time claims for unemployment benefits rose 13,000 to 366,000 in the week ended Nov. 8 from a revised 353,000 in the prior week. The latest report showed a rise in the total number of unemployed workers who continued to draw benefits after filing an initial claim. That figure rose by 49,000 to 3.53 million in the week ended Nov.1, the latest week for which figures are available. WalMart’s CEO observed “we’re still seeing a cautious customer who is buying at opening price points and timing their expenditures around the receipt of their paycheck.” Simply put, less paychecks mean less buying, and those buying are purchasing, said their CEO, the lowest-priced items, a sign that household budgets remain strapped.

Consumers are not alone with budget concerns. Georgia’s Department of Community Health, which provides health benefits to state employees, states the benefits program is in financial trouble and will fall short on its budget by $110 million next year. In fact, they are expecting shortfalls in 2004 and 2005. Costs for the program are expected to increase by 12% in 2005, which would leave an estimated $325 million deficit for that year.

Research from ACNielsen shows that private-label brands ranging from soft drinks to paper products grew twice as fast in dollar sales as branded products from 1997 to 2002. The slow economy has prompted more people to purchase private-label products, such as, Sam’s Choice, WalMart’s own brand of soft drinks made by Cott Corp. At an average WalMart store, a 2-liter bottle of Sam’s Choice soda was selling for less than half the price charged for Coke and Pepsi products. The editor and publisher of Beverage Digest remarked that “in supermarkets, the overall carbonated soft drink industry is down, and private label is up strongly. It’s taking share from some brands.” Cott is the biggest maker of private-label soft drinks and the fourth –largest manufacturer overall in the U.S. market. So far this year, Cott stock has risen 50%, and yesterday made a new 52-week high.

The world communicates through Tellabs equipment more than two-thirds of telephone calls and Internet sessions in several countries, including the United States. Tellabs provides data switching and bandwidth management solutions to communication carriers. Elcoteq Network Corporation is the largest European electronics manufacturing services company, and they focus primarily on communications technology products. Tellabs today announced plans to outsource manufacturing of its international products to Elcoteq. Approximately 300 employees will be affected by the outsourcing and the R&D alignment.

According to a report in Indian daily, WalMart has formally shown interest in sourcing goods worth $7-10 billion from India in the next two years. The company has asked for a list of 20 Indian suppliers to source every category of products in which it is present. It has been suggested that textile quotas will be eliminated beginning on Jan. 1, 2005.This would mea that a U.S. retailer would step up sourcing from India. This is just one more reason why I am very enthusiastic about the long-term prospects for India. I view India as a much more favorable trading partner than I do China.

11/13/03 The Dollar Is The World’s Doormat

As the Dow approaches the 10,000 mark, gold $400, and the FTSE Eurotop 300 Index is only five points from this year’s highest point, only one currency, the Mexican peso, of the 16 most-traded currencies, has declined against our dollar this year. The dollar is at a 10 year low versus the Canadian dollar; it is at a 6 year low against the Australian and New Zealand dollars; the yen is near this year’s high versus the dollar; and the euro and the pound are not far away from this year’s top level versus the dollar. Tomorrow, Greenspan will discuss monetary policy at a forum. Our monetary policy is to maintain short term rates at a 1% level, a 45 year low, while rates are being raised in other parts of the world. In the meantime, China is posting a record trade surplus and Japan’s current account surplus is running more than a third greater than last year. There are flashing red lights. China’s consumer prices rose in October at their fastest pace in six years. Prices for food and housing have jumped dramatically. In September, China’s consumer prices rose 1.1%. In October, they escalated 1.8% from a year earlier. China’s economy is overheating. Much of the world this year has depended on their imports. For the first ten months of 2003, China’s imports increased 40% to about $334 billion, and only slightly below their exports of $348 billion. Mexico, on the other hand, depends on the United States for its exports. The U.S. buys 85% of Mexican exports, and this represents 25% of their country’s GDP. Industrial production has dropped for six consecutive months, and yesterday’s their peso had its biggest decline in two months against the dollar as it came to rest at 11.1220 versus the greenback. Mexico’s fortunes are too tied to the United States, and they are paying the price.

When Greenspan discusses monetary policy, he might touch on federal discretionary spending, which expanded by 12.5% in the fiscal year that ended September 30. According to preliminary spending figures from congressional budget panels, the government spending levels have grown by 27% over the past two years. If Bush tells the American people the reason for the increase is to fight terrorism, he is telling half the story. In 2003 military spending did increase 17%; however, nonmilitary discretionary spending rose an unacceptable 8.7% to $418.6 billion. Rudolph Penner, a Republican and former CBO director, remarked “the most interesting thing is Bush has not vetoed anything, let alone a spending program. One wonders how serious the White House is about holding the line.” It should be noted that Homeland Security is just one element in nonmilitary discretionary spending. In my opinion, the Bush administration is the least fiscally conservative administration in this nation’s history. The plummeting value of the dollar is a reflection of my viewpoint.

A recent study by Global Insights of Waltham, Mass. Analyzes job losses between 2001-2003 and expected job gains in 2004-2005. The average wage of jobs lost from 2001 to 2003 was $43,629. The average wage of anticipated new jobs created during the 2004 to 2005 period is forecast to be $35,855, or a wage gap of 18%. Yesterday it was reported that Gene Logic, which sells subscriptions to its gene databases, would cut 50 jobs from the company’s database development and production department. Weyerhaeuser will close its Longview fine paper mill and eliminate 119 jobs. In 2001 they had closed another paper-making plant in the same city.

According to META Group, Inc., an average of 41% of new development activity is now outsourced, and this is up from the 35.9% jump in the prior year. According to the study, more and more companies realize the strategic and financial advantages to using offshore resources for both programming and business processes. Dr. Howard Rubin, META’s executive vice president, stated “going offshore and using the economics of offshore outsourcing have been the only competitive options left for larger companies with all the IT budget decreases of 2000, 2001, 2002, and even 2003…there is no doubt that 2003 has been a terrible year for IT workers. Staff cutbacks and the unavailability of new positions have sent many IT professionals looking for new career options.” Forrester Research said, despite an improving economic picture, 2004 IT budgets remain conservative, and that CIOs expect, on average, a modest 1.7% budget increase from 2003. Their November survey polled more than 800 technology decision-makers at North American firms.

Many months ago, I mentioned that Applied Materials looked like an interesting value. The stock was trading at $12. I never expected it to rise to $26. Yesterday, they reported their first profitable quarter in a year. Their new CEO stated “the fourth-quarter results indicate what we believe is a turning point for the semiconductor equipment industry. We are seeing an improving environment that cuts across most segments and geographies.” To be a successful investor the idea is to do your own homework and research individual companies. Applied Materials’ results are being driven by wireless products and flat-panel displays, and both could be seen coming down the demand lane a year earlier. It should be noted that their order backlog at the end of this past quarter is down slightly from the end of the prior quarter. In their next quarter revenues, said their CFO, are expected to only grow 5 to 8%. That, to me, does not warrant a market capitalization of ten times sales.

In the past year I have often touched on rising home values and rising property taxes. In Maricopa County, Arizona there has been a recent 7 to 8% increase in the value of existing homes. Arizona property owners paid $334 million more or an increase of 7.6% in property taxes this year compared with 2002. This shatters the one-year growth record set in 2000. Kevin McCarthy, president of the Arizona Tax Research Foundation, stated “most economists will tell you the growth we have seen should broaden the tax base and lower the tax rate. In this instance, in most jurisdictions, rates are not being reduced commensurate with growth and values.” Tony D’Alessio is a retired engineer and lives in Pinal County. He remarked “our sleazy politicians claim they have not increased taxes. They are correct. They have relied on the county assessor to do the dirty work for them. It’s really sickening. Is anyone deceived by this party line.”

Yesterday a suicide attack in southern Iraq killed 27 people (and the final toll may be larger). The bombing killed 18 Italians. About2300 Italian troops are stationed here in Iraq. The U.S. military said another American soldier had been killed, and another wounded. Guerrillas have now killed 156 U.S. troops since Bush declared major combat in Iraq over on May 1. A recent CIA report wars that Iraqis are losing faith in U.S.-led occupation forces, and this has led directly to increased support for the resistance. Paul Bremer’s description of the situation was “I think the situation with the Iraqi public is, frankly, not easy to quantify.” John McCain expressed “time is not on our side.” The CIA report warns that appointed Iraqi leaders do not appear to be up to the job of governing or working toward holding elections. Maybe we should consider exporting our hanging “chads” to them.

11/12/03 The Pulse Of America

Right Management Consultants publishes their Right Career Confidence Index. In the latest survey, one out of four American workers continues to believe they could lose their job in the coming year, and nearly 85% say it would be difficult for a laid-off employee to find new work. These fears are borne out in several trends. In the late 1990s one might be ashamed to say they had just found a great bargain in a thrift store. The situation is quite different today. People are proud to show off their newest purchase for $2. According to the National Association of Resale & Thrift Shops, “resale is one of the fastest growing segments of the retail industry.” The association estimates more than 15,000 resale shops are operating around the country.
Dorothy George is the vice president of business development for Goodwill Industries of Lower South Carolina. She remarks that “people are paying attention and seeing they can find good deals at Goodwill stores. Attitudes are changing. It’s trendy to shop at Goodwill, especially among college-age people. About 60% of our donors are also our shoppers. People drop something off and then go shopping.” Kathleen Kelly has a consignment shop specializing in furniture and home furnishings. Her shop in the Savannah area has been open for a year. She says the business success is “phenomenal. It’s more of an acceptable thing. Look at the economy-people are counting their pennies.” The National Retail Federation survey of the college crowd confirms what Dorothy George said. Twenty three per cent plan to shop at resale or thrift shops. With the growth in “goodwill” shopping and increased purchases at the dollar stores, there is little question less money is available for merchandise at department stores.

According to the Craft Yarn Council, since 1998, there has been a 400% increase in the number of women under 35 years old who knit. An estimated 4 million new people pick up knitting needles each year. The Council states that the percentage of women under age 45 who know how to knit and crochet has doubled in the past six years. Debbie Stoller is author of Stitch ‘N Bitch: The Knitter’s Handbook, and believes women knit to free themselves from the “global corporate culture where all clothing is made the same.” It may be more than that. Stephanie Winland is the 25-year-old managing editor of Cast On, the official publication of the Ohio-based Knitting Guild Association. Stephanie states that “knitting is something that Gen Xers and Gen Yers are paying attention to. There are cool, trendy yarns, fibers, and patterns now, so people are getting excited about it.” There is one additional plus to knitting. Says Ilien Hechtman, a Miami knitter, “you can knit instead of eat. Knitting should go right along with the Weight Watchers plan.”

Talking about Florida, The Fort Lauderdale Police Department will cut 42 jobs in an effort to slash $6.3 million and to help make up a $15 million city budget shortfall. The layoffs amount to 8% of its police force. In the last week of October, Standard & Poor’s said it would continue to monitor the city’s financial status. They pronounced its outlook on Fort Lauderdale’s general obligation debt as “negative.” The Georgia Department of Labor announced another plant closing. Lithonia Lighting will shut its Decatur facility and cut 231 jobs.

According to the China Post newspaper, Sun Microsystems is moving forward with a $50 million research and development center in Taiwan. The facility will develop Linux software and Java-based 3G mobile communications technology. In the meantime, Sun has slashed its prices by 30% on one of its key products, the Sun Blade 2000 workstation.

Texas continues to lead the nation in the rate of uninsured, with one in four residents lacking health insurance. This situation was not created overnight. It existed when George Bush was Governor of Texas. His problems with health care have not been resolved. They have been expanded to Medicare. The GOP in the Senate indicate they will not produce a Medicare bill prior to the Thanksgiving holiday. Will they finalize a bill by year-end?

A U.S. soldier was killed Tuesday evening by an improvised explosive device. The death brought to at least 154 the number of U.S. soldiers killed in action since the Bush Administration declared major combat over on May 1.

According to a recent survey by MACResearch, the holiday shopping season has begun for 30% of shoppers; another 16% will begin shortly before Thanksgiving; and 20%will begin the day after Thanksgiving. The balance of the respondents said they would shop the same time as always. I am not certain what that indicates. Shoppers plan to spend $528 on gifts this season, and the average gift list consists of 10.5 people. I guess the .5 is for the unborn. By comparison, 28% plan to spend more on gifts than last year, with 50% spending the same amount. Almost 70% reported to be either value shoppers or careful planners, with the most important influence in purchase decisions cited as “sales.”

Trade with Australia generates $6.6 billion in surplus for the United States. Australian trade and investment employs more than 350,000 Americans. The Australian state of Victoria is a promising site for American companies doing business in the Asia Pacific region. Recently, IBM decided to locate a 300 person software support center there.

11/11/12 Veterans Day

Dwight Eisenhower in 1953: “Every gun that is made, every warship launched, every rocket fired signifies in the final sense, a theft from those who hunger and are not fed, those who are cold and are not clothed. This world in arms is not spending money alone. It is spending the sweat of its laborers, the genius of its scientists, the hopes of its children. This is not a way of life at all in any true sense. Under the clouds of war, it is humanity hanging on a cross of iron.”

George Washington: “Occupants of public offices love power and are prone to abuse it.”

George Washington: “Government is not reason. It is not eloquence. It is a force like fire; a dangerous servant and a terrible master. Never for a moment should it be left to irresponsible action.”

Brenda Behnken makes her home in Tempe, Arizona. Her son Paul was sent to Iraq two months after he left Afghanistan. Mrs. Behnken said “I know real fear. It lives in your mind and soul every single minute of every single hour of every single day. It never goes away. Paul has returned home. She states “my son taught me that I don’t have just the five children that I love. I have five million children. Every serviceman and woman who serves my country is my son’s brothers and sisters. He told me so. I have cried and grieved the loss of every soldier. My heart breaks for their families. I will never, never forget their sacrifices. Neither will my children or grandchildren.” Marking the 20th anniversary of the National Endowment for Democracy, President Bush stated “freedom is worth fighting for, dying for, standing for- and the advance of freedom leads to peace.” In an August 2001 speech to the VFW and the American Legion, he emphasized “my administration understands American’s obligations not only to those who wear the uniform today, but to those who wore the uniform in the past: to our veterans.” Speaking to the troops in a medical center in January 2003, he remarked that “America should and must provide the best care for anybody who is willing to put their life in harm’s way.” Unfortunately, as we remember our veterans, we also remember the 200,000 veterans waiting six months or more for their first appointment at a VA facility. We remember veterans being asked to pay an annual health care enrollment fee of $250, doubled prescription costs, and increased co-payments. We remember denying access to veterans who do not have service-related disabilities and with incomes as low as $21,050. We remember that the VA anticipates that 55% of veterans who already participate in the VA health care plan, numbering 1.25 million, may be unable to continue participation due to the enrollment fee. We remember that Congress sought to include $1.3 billion in veteran’s health care and extending benefits for reservists who have been activated in the $87 billion emergency funding bill. In a letter from White House Budget Director Joshua Bolten, the Administration “strongly opposed” the provisions. Should you see pictures of your president participating in remembrances for our veterans, please remember how that individual keeps his commitments to our veterans and how that commitment differs from the every day remembrances expressed by Brenda Behnken.

Using several government surveys, BillSaver.com assembled a financial profile of the typical American. In 2002, median income dropped for the second consecutive year in the United States, decreasing 1.1% to $42,409. More than 41% of all households now make less than $34,999. The median household debt now stands at $38,800, and that does not include home mortgages. “The average person has over 38% more debt than they have in their retirement account,” said the founder of BillSaver.com. The average American household only saves about 7% of its income.

Ajit Gupta, CEO and co-founder of Santa Clara-based Speedera Networks, remarked “in business, there are only two levers: the cost side and the revenue side. Since the economy is not improving, you redirect your cost.” Kaiser Permanente has shifted about 200 information technology jobs to Indian companies, paying between $25 and $30 an hour instead of $80 to $100 an hour in the United States. Whirlpool Corp. is shifting some production to Mexico in order to lower costs. CSX is the biggest railroad in the eastern United States. Yesterday they announced a cost-cutting campaign focused on improving operating income. CSX now employs about 34,000 people, and will cut as many as 1,000 non-union jobs from the payroll. Motorola will lay off an additional 2400 by the end of the first quarter.

In 1962 Kennedy attempted to impose price controls on steel. In March 2002 Bush imposed steel tariffs. The WTO appeals panel ruled yesterday that U.S. tariffs on imported steel are illegal, and that the duties of up to 30% introduced by Bush breached trade rules. The EU said it will impose retaliatory sanctions of up to $2.2 billion by introducing 100% duties on some U.S. imports, effectively pricing those goods out of the EU market. Originally, Bush’s decision to levy steel tariffs was warmly received by the rust-belt states of Pennsylvania, Ohio, and West Virginia, important re-election battlegrounds.

Fred Hu, managing director of Goldman Sachs (Asia), states that China is “still the most profitable automobile market in the world.” GM and Ford are finding a very different experience in the United States. After a sales decline in October, they recently boosted incentive allowances. In the latest quarter, Toyota sold more cars than Ford, and that includes sales of Volvo, Jaquar, Land Rover, and Aston Martin. Toyota might end 2003 as the number two auto maker in the United States.

According to London-based research firm Datamonitor, more than 25% of Fortune 500 companies are shifting back office operations to India. This firm states that currently one out of every 24 call center agents serving U.S. customers is outsourced to a “near outsourcing center” in Canada and Mexico or an “offshore center” in India or the Philippines. It predicts that, by 2008, one in 15 agents will be outsourced to a foreign market. According to Datamonitor, labor costs in outsourcing destinations are 15 to 25% lower than those in the United States, and that agent turnover rates are 10 times less.

Statistics reveal that the economy in India grew 4.3% in the year ended March 2003. If it had not been for the worst drought in three decades, growth would have been higher. Estimates are for their growth to slightly exceed 7% in this fiscal year. Yet, their fiscal deficit will be about 5.8% of their GDP. Government expenditures continue to increase.

John Hussman of the Hussman Fund group points out that Fabrizio Galimberti noted in the Economist that “foreign outsourcing has the effect of artificially raising productivity figures because subtracting imports from GDP does not adequately correct for their impact on final output, yet foreign labor is not counted, so measured output per worker increases.”

The U.S. Commerce Department recently reported that new orders for computers fell 3.2% in September from the level in August. Computer shipments also fell by 1.3%. On a month-to month basis, semiconductor shipments dropped 8.2%.

As I mentioned the other day, there is a growing shortage of nurses in the United States. Positions are being filled by nurses from the Philippines. Next month nurses will begin to arrive from India. Two years ago India began offering exams for nurses to work in the United States. St. Bernadine Medical Center in San Bernadino, CA is experiencing an acute nursing shortage and has not been able to fill the void. Laurie Eberst, senior vice president of clinical services and chief nursing executive, states “we have no alternative but to go outside the U.S.”

11/10/03 Follow The Sun

I know something about running a business with factories as well as running a business without factories. I found my greatest success was running both businesses around the clock. Cost per unit were reduced in the factory. In the non-factory business, there are significant advantages in timing, execution, and delivery. I have experienced both over the past 23 years. Oracle Corp. of Redwood Shores formed their subsidiary in India in 1993. They had some engineers working there on a project by project basis. In 1996 the subsidiary received its first product to deliver on its own, and the result was successful. From there, in 1999, Oracle adopted the follow the sun business model. Projects begun in Redwoord Shores would be handed off via telecommunications to the technical staff in India. When the staff in California was asleep, the engineers in India would be working on the project, and vice versa. Oracle has locations in Hyderabad and Bangalore, and they are building a new seven-acre campus in Hyderabad. When completed, Oracle will have about 4,000 employees in India. Oracle is hiring about 4 engineers each work day. It’s not just about cost savings. Engineering costs do run less than half of that in the United States. That’s important; however, it’s also vital to be closer to your customers, and Oracle does 60% of its business outside the U.S. India is the company’s fifth-largest market in Asia, with more than 6,000 customers. This is the hi-tech workplace of today and tomorrow.

There is an interesting study by Ben Jacobsen, an associate professor of finance at Erasmus University in Rotterdam, and two of his students, Gerben Driesprong and Benjamin Maat. They have studied the relationship between oil prices and the U.S. market for stocks from October 1973 to April2003. They found “changes in oil prices strongly predict future stock market returns.” The study is available at http://papers.ssrn.com/sol3/papers.cfm?abstract-id=460500. They constructed a hypothetical portfolio that shifted entirely into short-term Treasury bills whenever oil prices rose during the previous month by more than 5%. When prices rose less than 5%, the portfolio was kept in stocks. During the period studied, after transaction costs, their portfolio gained 11.5% versus a buy and hold performance of plus 10.4% a year on average; however, their portfolio was 30% less risky than buying and holding, as measured by the volatility of its returns. It should be noted that, although successful, they found the stock market moved in the direction suggested by the model only 52% of the time. They began the study in 1973 because oil did not trade freely before that year.

Blue Cross Blue Shield of Massachusetts (BCBSMA) uses more than 90% of every premium dollar topay doctors, hospitals, and prescription drug bills. The company has been successful in managing costs while enhancing the quality of care its members receive. The company is expected to earn a two per cent targeted operating profit margin in 2003. They are reducing premium increases in 2004 and expects to reduce the margin from two per cent down to one per cent by the end of next year. They are New England’s largest health plan and serve 2.5 million members.

In the latest Newsweek poll, 50% would not re-elect Bush, and 48% disapprove of his handling of the economy. This poll was taken after the good news was released on jobs and productivity. Fifty six per cent are worried about their ability to have enough savings for retirement and fifty three per cent are concerned about being able to pay medical and health care costs.

On Sunday evening south of Baghdad, a U.S. soldier was killed in a rocket-propelled grenade attack. The latest death brought to 151 the number of American soldiers killed in hostile action since President Bush declared major combat in Iraq over on May 1.

Bankruptcy attorneySteven Jurista stated that “solicitations for credit cards are absolutely out of control.” He asserts that consumers are already carrying debts of $10,000 at 20% per year. There is a good side. About 40% of Americans pay their credit card debts in full every month, he said. Alan Franklin, president of American Credit Alliance, warns against hoe-equity loans because “you never know when you are going to lose your job or get a very expensive illness. If you borrow, say $20,000, and start missing payments, lenders can take your house, even if it has $100,000 in equity.”

Meta Group analyst Jack Gold: “Everyone falls off a cliff at some point if they don’t see the cliff coming.” That includes economists and their theories. N. Gregory Mankiw is the chairman of the President’s economic council. Mankiw has written several analyses on the natural rate, NAIRU, monetary policy, and productivity. NAIRU is not another spelling for a Nehru jacket. In economist speak it stands for “non-accelerating inflation rate of unemployment.” These guys think up phrases to make themselves appear more erudite. Of course, no one understands a word they are saying. NAIRU is the unemployment rate consistent with maintaining stable inflation. The theory is that inflation will tend to rise if the unemployment rate falls below the natural rate, and conversely, when unemployment rises above the natural rate, inflation tends to fall. Since 1961, the average long-run employment rate is approximately 6%, or the level it is today. Since 1961. wehave never experienced short-term interest rates at 1% combined with productivity gains of 8% with an unemployment rate of 6% and a core inflation rate less than 2%. The composition of the labor force is changing with more service workers employed at wages at $10 per hour and under, and less skilled workers employed at $40,000 per year and higher. For example, we have discussed the highly skilled engineers being hired daily by Oracle in India with no job growth in the U.S. In fact, the U.S. payrolls have been lessened at that company. In addition, there are longer periods of uemployment and wage demands have lessened. This has contributed to lower core wage inflation. In addition, workers have concerns for their jobs. As we have seen in the auto industry, strikes have eventually led to plant closures. There may not be a direct connection, but worker dissatisfaction creates a less productive employee, and costs escalate for the employer. Mankiw has promoted the hypothesis that the decline in the NAIRU is attributable to the acceleration in productivity growth. I think we are discovering many other factors are contributing to changes in the NAIRU, and thus, refinements in monetary policy should be forthcoming.

11/9/03 Home For The Holidays

Contributions to major charitable organizations fell last year for the first time in 12 years, according to The Chronicle of Philanthropy’s annual survey of the nation’s 400 largest nonprofit organizations. Donations dropped 1.2% last year to $47 billion. During the previous five years, donations increased an average of 12% each year. There is a rising demand for services, declining donations from individual donors, diminished endowments for foundation donors, and reduced grants from strapped federal and state governments. In his Saturday radio address, President Bush mentioned that this year’s stock market rally had added $2 trillion to the nation’s wealth; however, he did not state that charities anticipate heavier than usual demand for services between now and the end of this year. The organizations that provide meals to the needy are expecting they will need more food this Thanksgiving and Christmas. Providers are serving more people in the nationwide soup kitchens on a daily basis. Patrick M. Rooney, research director at the Center on Philanthropy at Indiana University, stated “giving falls…as personal incomes and corporate profits plunge.” How can that be after profits from continuing operations at the S&P 500 companies expanded at a rate of nearly 22% in the most recent quarter? The answer is right under the nose of every investor. The boards of public companies and their CEOs don’t feel good about those profits. It’s nice to show operating improvement; however, for the vast majority, it comes via cost cutting and eliminating employees and shutting plants. For every eBay, there are 100s that are not increasing revenues. Just as the economic recovery is a quite different from the past, so is the holiday season for the disadvantaged. This year, in addition to the unemployed seeking help, a record number of minimum-wage workers cannot afford to buy presents and still afford food and rent. In addition, there are a rising number of grandparents requesting gifts for grandchildren who live with them as well as more victims of domestic violence who are seeking aid. As Peggy Vick, the Salvation Army’s director of family services notes, “all these families find themselves in a crunch of some kind. They are all just trying to hold everything together and provide something for the children at Christmas.”

With Veterans’ Day approaching, Democrats charged that Republican-passed tax cuts and spending priorities have undermined the nation’s ability to provide health care and benefits to those who served in uniform. Rep. Chet Edwards in the Democrats’ weekly radio address stated “I have great concern that trillion dollar tax cuts to some of America’s wealthiest families have cut into our promise to support a decent quality of life for our military families and quality health care for our veterans. What message does it send to our veterans when the Administration says American taxpayers can afford to build new hospitals in Iraq, but we cannot afford to keep open veterans hospitals here at home?” He said 60,000 veterans were waiting six months or more for an appointment at a VA hospital. Edwards remarked “that is unacceptable. Democrats have proposed increasing funding for VA hospitals, expanding health access to health care for the National Guard and Reserves, and improving the health care injured veterans receive when they return from Iraq. Democrats are working hard to end the unjust disabled veterans tax for all veterans, and not just a few. The current Republican plan has been called ‘unacceptable’ by the American Legion, and we agree.”

I feel confident that not too many readers have heard the name Tan Kong Cheok, a 28 year old Singaporean. He started working for his father 16 years ago. At that time he packed boxes for his father, who runs Fullmark, a Singaporean ink refill-kit maker. For two and one-half years Tan worked on a product that would change the nature of the computer-ink business. Tan achieved what no one else has been able to accomplish. His product was launched in September at Singapore’s Comex show. He expected to sell 200 units. He ran out of product in the first three or four hours, says Jeremy Wagstaff. In the first two weeks he sold 5,000 units. The system is fool-proof. One places an old, empty cartridge in one side of Tan’s Inke machine, place an Inke tank on the other side, press a button, and a few minutes later the cartridge is full of ink. The manufacturer can be found at www.inke.com.sg and the average user should save more than $300 over 3 years. The product is guaranteed for 30 refills, but it should provide a much longer life as Tan has managed to recycle the same cartridge 30 times in some cases. The Inke machine costs between $45 and $60 and comes with three ink-tanks or the equivalent of three new black cartridges. It is available in Singapore, and early next year will be available worldwide. Now it’s available only for Hp printers, but Tan soon promises them for Epson, Lexmark, and Canon printers. The HP profit margins and cash flow will be hurt by Tan’s invention.

Clint Willis points out that there have been 10 bull markets since 1950, and they have delivered average gains of 133% over average periods of 50 months. Since 1950, there have been 10 bear markets that have created losses of 27% over 13 months. As he points out, “even the smartest investors can’t consistently predict what the stock market will do next.”

India’s National Association of Software and Service Companies (Nasscom) is an umbrella grouping of 850 companies. Nasscom estimates that job outsourcing to India saved U.S. companies $10-$11 billion in 2001 and was accompanied by a $3 billion increase in American exports to India that year. The exact number of jobs that have moved to India is not known. The Communications Workers of America estimates that 400,000 white-collar jobs have already been lost, particularly to India. They project another 3 million will migrate offshore by 2012, and that many shall go to India. On the other hand, Nasscom statistics estimate that India had 171,500 “business process” jobs by March 2003, up from 106,000 a year earlier. That number, Nasscom predicts, will grow annually by about 45% over the next five years to nearly 1 million by 2008. John Chen, Sybase CEO, argues that “when we spend $1 in India and China, 65 cents comes back” I the form of orders for hi-tech equipment.

Construction has provided a boost to the nation’s economy in 2003. Since February, the industry has added 147,000 jobs. According to the Labor Department, “construction was little changed in October.” Mortgage banking and mortgage refinancing has provided quite a lift to consumers’ cash flow as well as to business activity as a whole. According to the Labor Department, in October, “in the financial sector, employment in credit intermediation, which includes mortgage banking, fell by 10,000, reflecting the decline in mortgage refinancing activity.”