Saturday, January 31, 2004

1/31/04 A Day To Remember

The day started off poorly. Western Washington had strong winds and heavy rains. There were many crashes on the roadways and one early morning fatality. At 7am heavy winds threw a tractor trailer almost off of the Deception Pass Bridge, a very high span between Oak Harbor and Anacortes. The bridge was closed for six hours. In the afternoon, just north of McChord Air Force Base, there was a 55-vehicle pileup on southbound Interstate 5. In the Eastern portion of the country, thirty miles north of Syracuse, New York, almost six feet of snow had accumulated over a several day period. I’m not a wimp, but I decided indoors would be a better place.

I should have braved the weather outside. There was Bush stating “the economy is strong and getting stronger.” In the third quarter the economy grew at an 8.2% rate. In the fourth quarter the GDP growth rate was 4%, and weaker than the 4.8% pace anticipated by economists and other financial pundits. The main reason for the growth in the latest quarter was the acceleration in our exports. They rose 19% in the fourth quarter, and that was almost double the rate of the third quarter increase. In other words, the weaker dollar enhanced our ability to ship our products overseas. Rep. Pete Stark, D-California, remarked “people are saying, ‘show me the jobs.’” I can show you the loss of jobs. Ford announced the layoff of 1,000 workers at their Hazelwood plant near St. Louis. The company makes Ford Explorers, Mercury Mountaineers, and Lincoln Aviators there. Pharmaceutical services company AmerisourceBergen will close its Louisville distribution center as part of a consolidation. About 90 people will be out of their jobs. Washington Mutual will layoff Jacksonville employees as a result of organizational changes. Because of a “national downshift” in the home refinancing market, the company will layoff a total of 3,000 employees nationwide. Maybe there was something in the water in Jacksonville. Winn-Dixie Stores is headquartered there. The company is going through some very difficult times, and intends to make $100 million in annual cost cuts. The CEO stated “there will be headcount reductions involved, and the specific details of that plan are still being assembled as we speak.” Winn-Dixie had once claimed a New York Stock Exchange record by increasing its dividend every year for 54 years, before holding the dividend steady in 198. It then cut the dividend sharply in 2001, and yesterday omitted the dividend. The company will not say when it will resume dividends. The company ranks 149 on the Fortune 500 list. The Tulalip Tribes laid off 240 Tulalip Casino employees, mostly card dealers and food-service workers. The casino, located in Washington’s Snohomish County, cost $78 million and was opened in June 2003. About 1,400 employees remain in the casino’s workforce. Ishoni Networks, a start-up with offices in the Silicon Valley and Bangalore, India filed for bankruptcy. The company was formed in 1998, and they raised $65 million in three rounds of funding from Draper Fisher, Bessemer, Infinity, Credit Suisse First Boston, and others. In early 2002, Philips Electronics acquired a 51% stake in Ishoni for $25 million. At one time the company employed 150 engineers in Bangalore. Ishoni was building a single chip product that combined voice, data, and security services to help customer premises equipment (CPE) makers quickly build integrated access devices and broadband communication gateway products.

In discussing the economy I have a tremendous advantage. I am not an economist. I do not have an MBA. I do not have a doctorate degree. I had to work my way through college. I have not worked for anyone else since my early twenties. In other words, I don’t have to kiss anyone’s ass for a paycheck. Additionally, I don’t have to please anyone and buy their votes. Thanks God, I am not running for elected office. I can tell you that, in the last three months of 2003, the personal consumption expenditures price index (PCE), a measure of inflation, rose at a 0.6% annual pace, down from 1.8% in the third quarter. This is important. In fact, according to the Commerce Department, the core PCE had the smallest rise in 41 years. The Fed will tell you that they are no longer worried about lower rates of inflation or rates trending towards deflation. They are either stupid or not telling the truth or possibly both. I think it’s the last alternative. In fact, I don’t think they have a clue. So you are probably thinking what makes me so sure of myself. The answer is I can read and I can think for myself. I have been stating that consumer spending topped out in September. From October through December, consumer spending, which accounts for over two-thirds of our GDP, grew at a 2.6% annual rate, and that is a full percentage point below the average per quarterly pace in the past two decades and represents a 62% decline from the prior three months. If anyone believes this decline in consumer spending is an aberration, they will be proven wrong. Workers’ wages and benefits grew by 0.7% in the final quarter of 2003, the smallest quarterly increase in a year and weaker than the rise anticipated by economists. In the month that is ending today, about 375,000 people will use up their state unemployment benefits. Most states provide about 26 weeks of benefits. Congress has refused to approve another extension of federal unemployment benefits for people who exhaust their state aid. Another extension would cost the government under $1 billion a month from the unemployment insurance trust fund, which contains about $20 billion. Bush must be on Mars. Using data supplied by the Labor Department, the Center on Budget and Policy Priorities stated “in no other January-June period on record have so many unemployed workers exhausted their regular benefits without qualifying for additional weeks of unemployed assistance.” Nearly 2 million people are expected to exhaust their state unemployment benefits in the first half of the year without access to more government aid or a regular paycheck, according to the Center’s study. Kindly absorb the following very closely. The 375,000 people who lost their unemployment benefits this month will be dropped from the unemployment rolls. The Labor Department will release the employment numbers on Friday, Feb. 6. Without adding one job, the unemployment number automatically gets reduced by 375,000. When reading the Labor Department release, do not be a fool. Think clearly. On most days in January one or more plants were closed. On almost every day there were layoffs. In addition, watch carefully for “adjustments” made by the Labor Department. I have discussed them recently. Those “adjustments” could add another 100,000 or reduce the unemployment numbers by that amount. Countering all of this will be a reduced labor force. Politicians will state less workers are required because of increased productivity. That may be part of the answer. The other part is the last vestige of strength left in this economy is our export side of the equation. Our export growth topped out in December. Demand from the euro countries is weakening as their economies continue to soften, and China’s growth is beginning to taper off.

Missouri is called the Show Me state. Except in the case of Adlai Stevenson, Missouri has voted for the winning candidate in the presidential election in the last 100 years. George O’Connor, a political scientist at Southwest Missouri State University, stated “jobs is the issue that strikes right at the heart.” If this is the number one issue for Missouri voters, and that’s what the polls indicate, then the job loss years of the Bush presidency make him an endangered species.

California Attorney General Bill Lockyear will be filing a lawsuit in federal court on Monday against Safeway, Albertsons and Kroger. It states that those three supermarkets have engaged in an “unlawful combination and conspiracy” because of a mutual aid agreement the supermarkets crafted ahead of the strike, according to a copy of the complaint. Lockyear stated “the grocers’ agreement to share costs and revenue hurts consumers by discouraging competitive pricing.” About 70,000 supermarket workers in Southern California are affected by the labor battle that has taken place since October of last year.

Friday, January 30, 2004

1/30/04 Truth Or Consequences

Last night at a Greenwich, CT fundraiser Bush stated “we are bringing much needed spending discipline to Washington DC.” His new budget projects the Medicare overhaul he just signed will be one-third more costly than estimated, and this year’s federal deficit is projected at $520 billion. The CBO had estimated earlier in the week that the deficit would be $477 billion. The White House estimates the cost of creating prescription drug benefits and revamping the Medicare program at $534 billion for the decade that ends in 2013. That number will appear in the 2005 budget Bush proposes this coming Monday. Last night at the Greenwich dinner Bush stated “this economy in America is strong, and it is getting stronger.” Motorola employed 150,000 people in 2000. At the end of 2003 the company employed 88,000. That number will shrink again. They are closing a plant in Boynton Beach, Florida where cell phones are designed, and 375 workers will lose their jobs. At the Greenwich dinner last night Bush stated “people are more likely to find a job.” Masonite Corp. announced plans to close its Danville, Va. pressboard manufacturing plant, leaving 172 employees without jobs. The company blamed the decision on a steep drop in demand for its products. The plant paid hourly workers an average of $14 per hour. At last evening’s dinner Bush stated “we’ve got a record of accomplishment.” Over 40% of New Hampshire taxpayers will receive less than $100 from the President’s tax cut in 2004. In addition, 48,000 families in New Hampshire were excluded from receiving the child tax credit because it was decided they were not deserving of it. Last night at the dinner Bush stated “we’ve added over a quarter million new jobs.” He failed to mention that close to 3 million jobs have been lost during his stay in the White House, and over 300,000 people gave up looking for a job in the month of December, 2003. This is the same Bush who stated “we found the weapons of mass destruction.” Reality can often emerge from the looking glass.

Washington Mutual officials related that the company is consolidating much of its back office operations to eliminate redundancies in its corporate structure and to counter the slowdown in the mortgage market. They plan to cut 98 jobs in Cobb County, Georgia.

Canada’s largest steel company, Stelco Inc., filed for bankruptcy yesterday and stated layoffs can be expected. They have a high cost structure and a dwindling cash position. They have 8,400 active workers at their two main steelmaking divisions, and may have to cut 1,500 workers from the payroll. In addition, they have 12,200 retirees and have a $1.3 billion pension obligation deficit.

The U.S. Citizenship and Immigration Services (USCIS) has announced that this year’s cap of 65,000 H1-B guest-worker visas is nearly two-thirds filled within the first quarter of the fiscal year, which began on October 1, 2003. Some 43,500 visas have either been approved or are ‘pending in the queue for adjudication.’ This means that U.S. embassies and consulates around the globe will not be able to issue H1-B visas after February or March, by which time the full quota would have been reached, until the new fiscal year 2005 begins in October 2004.

Yesterday Sears, Roebuck and Co. forecast weaker-than expected profit for 2004. At the same time, the company forecast 2004 same-store sales to show an increase in the low-single digits. Clearly, lowered profit projections and higher sales estimates do not jibe. When the year is over, I suspect the sales numbers will prove disappointing. Take away the significant stock repurchase plan, and an investor has little reason to smile. Even though the stock has dropped 12 points or so from its recent high, it is still double the price where I believed it represented a good risk reward. The company’s CEO reminded analysts yesterday that the company still must pay pension benefits to 115,000 retirees. That is a big hunk of change. Having sold its credit card operation to Citigroup in November, Sears will be totally dependent on customers walking into their stores and making purchases on a repeated basis. They have their work cut out for them. Wal-Mart has about 138 million customers walking through their stores each week. I would not want to be in Sears’ shoes nor would I want to be a stockholder at this price level.

The latest monthly report from the Conference Board showed an index measuring help-wanted advertising in U.S. newspapers fell slightly to 38 in December from 39 in November. In addition, the Federal Reserve Bank of Chicago stated its National Activity index declined in December, and the main reasons were a lack of hiring and slow manufacturing activity. The index in December dropped to +0.13 from November’s 0.68.

The Labor Department reported that the Employment Cost Index, which reflects what employers pay in wages, salaries, and benefits, rose 0.7% in the last quarter of 2003. It was the smallest cost increase in benefits and wages in a year and was less than expected. The bulk of the increase was tied to healthcare costs. Even though cost pressures for employees are modest, employers remain cautious about adding permanent staff members to their workforce. Meanwhile, the number of Americans collecting state unemployment benefits rose by 11,000 to 3.13 million in the week ending January 17.




Thursday, January 29, 2004

1/29/04 Be Patient

Lao Tzu: “Trying to understand is like straining through muddy water. Be still and allow the mud to settle.”

Michael Prell, former chief of research at the Federal Reserve: “Chairman Greenspan does not make changes until he thinks there is good reason to do so.”

David Kay: “Reality turned out different from expectations.”

Let’s be patient. Let’s be still. Let’s look for a good reason for the Fed changing their statement on rates from “considerable period” to “be patient.” Is this simply a nuance? Is this nothing more than an attempt to improve on communications with the investing public? Does the difference in wording represent a change? The bond and stock markets believe it is a change. That fact does not impress me. Financial pundits, analysts, economists, and the like are wrong more than they are right. The financial futures now indicate a possibility that interest rates will increase from May onward, and specifically, that the rise will probably take place around August or September. Prior to yesterday’s Fed meeting, many believed rates would not be raised for a considerable period of time. However, the change to being patient has made the pundits less patient. They have gotten antsy. I suggest they drink some warm milk and get some rest. Maybe they should simply be still. We need to look for a reason that the Fed changed their wording. What hasn’t changed? The Fed committee continues to believe in an accommodative stance, that productivity is robust, that output is brisk, that hiring is subdued, that core consumer prices are muted, that inflation is expected to remain low, and that resource use is slack. Thus, “the committee believes it can be patient in removing its policy accommodation.” Be still. Don’t muddy the water. After a considerable period of time, the mud will settle. It could be worse. Hopefully, you have your health. Have some apple pie. The carbs won’t kill you. In sum, the reason for the change was simple. The Fed wanted to gain some breathing room. They were uncomfortable with an open-ended forecast on keeping interest rates unchanged. Let's get real. Interest rates are presently artificially low. The financial risks warrant much higher rates. In sum, I am boring myself writing about this Fed meeting. I could care less what they say or do. I’m going to be still and think about something positive.

Since June 2002, Norway’s central bank has cut interest rates nine times. They have gone from 7% to 2%, a record low. It’s possible the interest rates could be cut again. Their currency is near an all-time low against the euro. Inflation was down to 0.4% in December. I am not an expert on Norway but I do know they are rich in oil and in telecommunications (Nokia). Their currency is called the krone. I think I might investigate the potential in Norway. It’s a beautiful country. The fjords are here to stay.

Despite the big snowfall in Omaha, not much of that moisture found its way to western Nebraska. That region has received less than an inch of moisture since October 1. Long-term forecasts don’t provide clear precipitation trends for the Midwest. Al Dutcher, the University of Nebraska climatologist, stated “it took us several years to get into a drought, and it will take several years to undo these problems… water supplies will be limited.” The Harlan County Reservoir, near Alma, Nebraska, is 36% full. Dutcher observed “you’re looking at 26,000 acres of farmland without water if Harlan shuts down. That means yield losses could potentially total 4 million bushels if corn isn’t irrigated and dryland crops fail.”

U.S. orders for durable goods were unchanged in December. Excluding transportation equipment, the orders dropped 0.7%, and were expected to increase 2.5%. Sales of new single-family homes dropped 5.1% in December. The inventory of unsold homes on the market rose in December to 374,000, the highest level since June 1989. At the present sales pace, that represented a 4.2 months’ supply, the largest in February. Yesterday’s Fed meeting will only exacerbate the inventory of unsold homes. Mortgage rates are moving higher.

McKinsey Global Institute estimates that, of every $1 that is “offshored,” the company gains 58 cents in net cost reduction “even as they gain a better (or identical) level of service.” Since 2000, India’s business process outsourcing sector has grown by 60% but it only employs 250,000 people. India’s has a population of 1.05 billion people.

I have never hidden my dislike for Boeing’s top management. Under the revised labor law changes, an individual who receives military training is classified as a “learned expert” and could lose access to overtime pay. Cheryl Russell, Boeing’s director of federal affairs, wrote “Boeing observes that many of its most skilled technical workers received a significant portion of their knowledge and training outside the university classroom, typically in a branch of the military service, where through a combination of classroom training and field experience they become ‘learned experts’ on very sophisticated aerospace products or services.” With learned professionals being exempt from overtime pay, Boeing will have the legal right to take away overtime pay from all employees with prior military experience. I truly feel for these employees. Of course, each week there are fewer employees at Boeing. That’s the good news.

Yesterday, bankrupt toy retailer KB Toys stated they would close at least 375 stores, and beginning today will conduct store-closing inventory sales. By February 11, KB will choose 19 to 115 more stores for closing, and ultimately will operate 750 stores, a reduction of at least 30%. About an equal percentage of workers will lose their jobs or about 3,500 of its present 12,000 employees. Hexcel Corp. reported yesterday that it would close its Livermore, California manufacturing facility that employs 105. The plant manufactures prepeg and adhesive products for commercial aerospace, defense, and industrial markets.

Rusty Williams was the founder of Cor Therapeutics, the company purchased by Millenium Pharmaceuticals for $1.8 billion in 2002. Thereafter, he founded Five Prime Therapeutics. Located in South San Francisco, its drug-screening system looks very promising. The company’s CEO stated the system can create new drug leads “on a scale and in a time frame that’s unprecedented.” That wording seems definitive, and the good news is I won’t need to be patient.


Wednesday, January 28, 2004

1/28/04 A Familiar Refrain

I apologize for commenting on today’s Fed meeting. For the last two days I have received way too many emails asking for my opinion on the outcome of today’s Fed meeting. So many times I have written that the Fed is a follower and not a trend setter. To be polite, I shall expound on that statement. First, I think it is pompous as hell for Greenspan to remark that “there is, for the moment, little evidence of stress in funding U.S. current account deficits.” The man is in a responsible position. How about the difficulty in funding the budget deficit? The deficits are about equal in size and total close to $1 trillion. Sung Won Sohn, chief economist of Wells Fargo Bank, observed the U.S. economy now borrows $1.5 billion a day from foreign investors, and that this level could reach $3 billion a day in the near future. That sounds like a stressful situation to me. The Fed sets monetary policy. They have tried to maintain low interest rates, they have tried pumping liquidity into the economy, and they may have even prayed in order to jump start the U.S. economy. Only a sharply lower dollar has spurred economic activity, and that has been export activity. In the U.S. we still have too many goods chasing too few buyers and too much unused plant capacity. Productivity has improved, foreign profits have improved, but workers are employed for fewer weekly hours and their pay barely keeps pace with an inflation rate of 1.1%. In other words, domestically we have a very stressful situation. I could care less whether the Fed’s “policy accommodation can be maintained for a considerable period.” Their policy has helped the housing, construction, remodeling, and mortgage industries and it has created cheap debt for corporations and the government. Otherwise, it has not change the domestic demand side of the equation.

Warren Buffett: “Our country’s ‘net worth’ is now being transferred abroad at an alarming rate.”

Stephen Roach, Morgan Stanley chief economist: “the engine of the global economy, the U.S., is running not on gas but on fumes, on little more than tax cuts and borrowing.”

Kraft confirmed the company is planning to eliminate 6,000 positions at all levels of the organization. In addition, they expect to exit or close up to 20 of its production facilities worldwide. The 20 is not a misprint. IBM continues to state they will be hiring. Funny, but I only read about the firing. Yesterday they stated 300 jobs would be trimmed from its computer systems division. The layoffs will impact the division’s development and finance groups and primarily will take place in San Jose, California. An IBM spokesperson stated the cuts are part of an ongoing effort to reevaluate the company’s skill mix. Do you understand that statement? By comparison, we might take a look at Infosys, the Indian consulting company. Last year they added 10,000 jobs, and they received 960,000 applications for those openings.

Iowa Governor Tom Vilsack warned of the potential for massive layoffs of teachers and staff at Iowa’s public schools if lawmakers can’t find a way to boost state aid. He stated that 3,900 teachers and staff members could lose their jobs. In Alameda County, which is on the Oakland side of the Bay Bridge, 95 social services workers will lose their jobs under a budget-balancing plan approved yesterday. Those losing their jobs are clerks, social workers, and employment counselors. The layoffs will take place by February 13.

There are so many roadside bombs and explosions in Iraq that keeping track of the casualties is difficult. Since the U.S.-led invasion of Iraq in March, at least 517 American soldiers have been killed.

The dollar has been slipping against the yen and stands below 106. We know that the Japanese have spent billions buying U.S. dollars. It has slowed the dollar decline versus the yen but it is not a long- term solution. Even though the yen has become more expensive, Japan’s exports rose almost 10% in the fourth quarter, a drop from the prior quarter’s 21.4% rise but still a strong performance.

I have stood aside and not written about the bird flu; however, it is now in 10 Asian countries and killed at least 8 people. This matter needs to be monitored closely. We can remember back to 1918 when million died from this type of influenza strain. The WHO warned about the bird virus combining with a human flu virus which could mutate into a new strain and prove devastating to the human population. In that case, there would not be immunity built up or an available vaccine.

Dr. Arun Netravali, President (Emeritus) of Bell Laboratories, Lucent Technologies Inc, is setting up a $250 million venture capital fund to invest in U.S.-based start-up companies in telecom and technology areas, which would be outsourcing to India. The fund would take minority stakes in these companies.

February 13 is the cutoff date for companies to submit bids to buy AT&T Wireless. A number of potential buyers have been mentioned, including NTT DoCoMo, Cingular Wireless, Nextel Communications, and Vodafone.

Tuesday, January 27, 2004

1/27/04 Eventually

I was re-reading some of my notes from mid-October 2002. At that time, it appeared great value could be found in every sector of the equity market. It was an unusually attractive risk/reward buying opportunity. Yesterday the Dow traded at a 31-month high and venture funding escalated to an 18-month high. I never thought such a transformation could take place in such a short time. If someone had suggested in October 2002 that, within 15 months, we would initiate a war; face a budget deficit of $500 billion and a trade deficit of $500 deficit; that the dollar would plummet against all major currencies; that the Fed funds rate would decline to 1% and remain there; that inflation would decline to about 1%; that unemployment would worsen over the next 15 months; that productivity would rise over 5%; and that GDP in the September 2003 quarter would rise 8%, would you think that person was ready for a mental institution? Someone might suggest steroids had destroyed mental faculties. The business of prognosis is a crap shoot. There are ways to minimize the crap shoot, but eventually the future is still up for grabs. There are too many variables. If I ever give a prognosis going beyond today, please remind me that I am a schmuck to do so.

CBO Director Douglas Holtz-Eakin stated “if you look forward, sustained large deficits in the face of fully operating economy will have economic consequences.” Is he suggesting we should look backwards? The CBO’s annual budget report indicated the government’s $4 trillion debt could more than double if Bush succeeds in making his tax cut proposals permanent. They are set to expire by 2011. The CBO estimates the 2005 will rise to $477 billion from this year’s $375 billion level. I think it is safe to state the budget deficit will be much higher than $477 billion. It should be noted the CBO’s first budget deficit for 2004 was $185 billion. Clearly, the differential was not solely the Iraq war. As Sen. Kent Conrad of North Dakota remarked, “the president wants to go to Mars, and he’s got deficits going to the moon.” If Bush is insists on efforts to go to Mars, I recommend Greenspan for the first flight. Yesterday he told an economic conference in London that he was confident that “eventually” jobs lost during the recession could be replaced. It is possible that he got confused and was stating that he could be replaced. I think Yogi Berra would have a better handle on our economic picture, and Yogi could describe it better.

Over the first three years of the Bush Administration, non-defense discretionary spending increased 27%. When people voted for Bush, were they voting for spending, spending, spending or fiscal conservatism? If Congress is not concerned about the deficit and the state of spending, are the voters? One might take note that federal revenues as a percentage of GDP have fallen to their lowest level since 1950. That is a good thing. Unfortunately, when you combine low federal revenues with record government spending, you have a recipe for fiscal instability.

There are reports in the media that the EU might find Microsoft in violation of antitrust laws. The EU has conducted a three-year investigation. Microsoft and the EU have been in settlement talks. It has been suggested that the EU would require Microsoft to “unbundle” its Windows Media Player software. The company maintains the media player software is an essential piece of Windows. The EU was busy launching reprimands against the U.S. government too. Their complaints centered on zeroing or failing to account for certain amounts of dumped product that eventually will be sold at or above the domestic price. The EU stated “the U.S. zeroing practice is having a significant adverse economic impact on EU exporters in various sectors, including steel, chemicals, and pasta.”

Several times I have written about the tax break for the purchase of a Hummer. It gets better. A federal court decision and the IRS’s recent extended interpretation of company private aircraft use have led to the allowance for business owners and employees to make extensive personal use of company aircraft while the company continues to fully deduct the costs of owning and operating the plane. This interpretation would provide a windfall to Subchapter S corporations and other “pass-through entities.” The case was decided at the U.S. Court of Appeals for the 8th Circuit. In essence, Subchapter S corporations can take full deduction of the plane’s expenses even though the aircraft use might be 95% personal. The value of the travel must be included as income to the shareholder or employee who flew.

Chick-fil-A, Inc. has more than 1,125 restaurants in 37 states and Washington, D.C. This Atlanta-based company just completed its 36th consecutive year of sales gains and reported system-wide revenues of over $1.5 billion. They are credited with introducing the chicken nugget concept. In 2004, they plan on opening 90 restaurants, including, on January 29, their first free-standing restaurant in Southern California. In addition, they will continue their western expansion into Phoenix this year. In the future, you can expect to see one of their restaurants in your neighborhood.

Plaid Clothing makes tailored men’s clothing and sportswear. They are owned by a division of Hartmarx. Two years ago they closed a plant in Somerset, Kentucky. Yesterday they announced the closing of their plant in Erlanger, Kentucky, and they are laying off 70 workers. Raleigh-based PharmaNetics is continuing to lay off workers, and they are reducing its workforce to 38 employees. In November they cut 47 employees and this time 17. On the other hand, Charlotte-based SPX Corp. is developing a state-of-the-art manufacturing facility in Tianjin, China to make cooling products for the energy industry. They plan on employing more than 200 at this location. This new operation is an excellent illustration of the economic realities within the United States and outside our borders. Eventually, there are new jobs. Greenspan failed to mention their location.

Robert McTeer, President of the Federal Reserve Bank of Dallas: “Instead of counting jobs, we should make every job count…we will occasionally hit a soft spot when we have a mismatch of supply and demand in the labor market. But that is temporary. Don’t become a Luddite and destroy the machinery, or become a protectionist and try to grow bananas in New York City.”




Monday, January 26, 2004

1/26/04 Changes Are In The Air

Thursday night the Senate passed a bill banning U.S. companies from outsourcing government contracts overseas. The bill was part of an $820 billion spending bill leftover from last year. It awaits Bush’s signature. Assuming Bush approves the bill, and he hasn’t vetoed any proposed legislation since arriving in office, it would become the first federal law prohibiting companies from performing contracted government work outside the U.S. On Saturday, Confederation of Indian Industry president Anand Mahindra stated “this is particularly unfortunate, since studies on the BPO (business process outsourcing) sector have shown that the company that outsources gains much more than the company to which it is outsourcing…. In this particular case, since the Senate ban is on U.S. government contracts, the ultimate loser is the U.S. taxpayer, who will now pay more for government services.”

Sanofi is making a $61 billion hostile offer for Aventis, a company formed from the merger of France’s Rhone Poulenc and Germany’s Hoechst. Sanofi has about half the revenue but almost the same market capitalization as Aventis. Patent risks are a large factor in this deal. Sanofi’s second most profitable drug, Plavix, a blood thinner, is under patent attack from Dr. Reddy, the Indian generic drug manufacturer. Aventis’ second most profitable drug, Lovenox, a thrombosis medication, is under patent attack by two other generic drug manufacturers. Aventis has hired Goldman Sachs, Morgan Stanley, and Rothschild to develop a defensive strategy.

Tomorrow, Kraft will discuss a restructuring. Philip Morris, its parent company, spun off 16% of Kraft in 2001. It is anticipated that about 6,500 jobs, or about 10% of its North American workforce, will be cut.

In the first update of the Reader’s Digest Family Index, the Gallup Organization polled 1000 people and found that 31% of Americans put off medical treatment because it was too expensive. Of that group, 57% stated the medical problem was very or somewhat serious. These results mean that, in the past year, 18% of all U.S. families experienced a serious health problem they could not afford to treat. According to a 2003 U.S. Census Bureau report, almost 44 million people have no health insurance. Fewer employers are offering health coverage. According to the Commonwealth Fund, a health care research foundation, the number of workers at corporations with more than 500 employees who lack health coverage has increased by 50% over the past 16 years. According to Mercer Human Resource Consulting, in 2003, on average, employees paid 58% of the premium for family coverage in PPO plans, up from 53% the year before, and 57% of premiums for HMO plans, compared with 50% in 2002. The medium out-of-pocket maximum for PPO care within the network climbed to $2,000 from $1,500, according to Mercer’s survey. A third of employers required a co-payment of $20 or more for HMO office visits, up from only 22% the year before.

One week from today, the White House prepares to unveil its 2005 budget plan. The administration has claimed it will freeze federal spending on all non-defense and non-homeland security budget items. When the year is over, it is safe to say such a freeze will not take place. It has nothing to do with the fact that it’s a re-election year. Bush excels at spending taxpayer money. Coming from Texas, he probably learned a great deal about LBJ’s presidential spending prowess. The CBO will provide a budget outlook. A deficit of at least $500 billion, up from the year before $380 billion, will be presented to the American people. I have made the following statement over and over. I will repeat it again. This gigantic budget deficit is undermining the economic fabric of the U.S. and the freedom we currently enjoy. It is more than simply irresponsible. That adjective is too kind and too mild. It is a WMD. Do not stand by and permit our country to be taken over. Our fate is in the hands of foreign nations. Foreign countries control the ownership of our U.S. treasury debt. If one controls the debt, one controls the present and future. We must regain control of our destiny. Failure to do so is not an option. Our freedom depends on it.

Sunday, January 25, 2004

1/25/04 Seasonal Adjustments

Microsoft stated it is in discussions with the Indian government to share its source code. The company’s Asia Pacific CTO, Peter Moore, told reporters “we have a program for making our source code available to governments around the world so that they can ensure the technology supports the national security interests of the country and we are in open discussions with the Indian government as well… we will compete freely in the market with open source software with the value of our technology.” Microsoft is currently on a recruitment drive in India for its e-governance initiatives, stated Moore. Hiring will be at senior, middle, and entry levels, and domain knowledge in government departments will be an advantage.

Georgia posted the nation’s second largest increase in jobless claims due to large-scale layoffs, according to a Bureau of Labor Statistics report. In 2003, mass layoffs produced 7,121 more claims in Georgia than those caused in 2002 by such large-scale layoffs. Only the state of New York, which had 8,005 more claims from laid-off workers than in 2002, had a larger increase than experienced in Georgia. Mass layoffs are those which involve 50 or more workers. Georgia sustained 402 mass layoffs in 2003, and this compares with 310 in 2002.

Ohio’s state unemployment rate rose to 6% in December, up from 5.7% in November. According to Tom Hayes, director of the Ohio Department of Job and Family Services, “the unemployment rate increased in December largely because there were more holiday job seekers than available jobs. There were fewer people employed in the leisure and hospitality industry.” The number of unemployed workers in Ohio was 351,000 in December, up from 344,000 in November. The number of unemployed increased by 28,000 over the year from 323,000. The unemployment rate in November 2002 was 5.6%.

The Iowa caucuses are over. Unfortunately, there are thousands of Iowans whose jobless pay is set to end. Congress first approved extended federal benefits in March 2002, and these benefits were extended twice before expiring on December 21, 2003. During those extensions, the federal government paid out $141 million to more than 60,000 residents of Iowa. According to Iowa Workforce Development, the average weekly benefit was $239. The unemployment rate in Iowa rose 0.2% in December. Between January and June, 20,000 to 32,000 Iowans will have their state unemployment benefits run out.

Only twice since 1952 has the S&P 500 Index fallen in an election year. In 2000, it dropped 10% with George Bush. In 1960, it declined 3% with John F. Kennedy.

In 1929, Boeing bought Stearman Aircraft, a maker of biplanes, located in Wichita, Kansas. There, the company makes fuselages for Boeing’s 737 and 757 jets, engine casings for the 747,757, 767, and 777, and the nose and cockpit section of every Boeing jet, except the 717 made in California. The Wichita plant employs 12,400 workers. Boeing is in the largest employer in Wichita. A total of 42,000 ancillary jobs are dependent on Boeing in Wichita. Direct and indirect employment accounts for 15% of Wichita jobs and 17% of earnings in the city. Boeing wants to exit the business of making plane parts. The Wichita plant will be closed. In Toronto, Boeing manufactures the wings for the 717. When the 717 program ends, the Toronto plant will be closed. In Long Beach, building of commercial jets will end with the 717 program. The C-17 military will remain at that location. Boeing will sell its facility in Tulsa. That employs 1600 workers. It will sell a small plant in Melbourne, Arkansas. It employs 100 people.

Leonard Pitts Jr., syndicated columnist for the Miami Herald: “Under his (Bush) presidency, we find our soldiers engaged in open-ended conflict begun under misleading – if not false- circumstances, our moral capital diminished, our budget deficit skyrocketing, our civil liberties undermined.”

Over the last 48 hours, nine of our soldiers have been killed in Iraq. Since the start of the Iraq war, a total of 513 U.S. soldiers have been killed.

On February 6, the Labor Department will issue its employment report for January. I would like to take some time to explore the meaning of seasonal adjustments and to re-visit the employment report for January 2003. The employment report is the key to income, and this in turn, is the key to consumption. For the month of January 2003, in a revised report, the Labor Department stated that non-farm payrolls added 185,000 jobs. At the same time, please note that the average workweek in January 2003 was 34.3 hours. Therefore, between January 2003 and December 2003 the hours worked in an average week declined. Why were 185,000 jobs added in January 2003? You need to follow me here. It’s early on Sunday morning. This is important. The increase rose mainly because of a quirk in seasonal adjustment, which is supposed to compensate for the recurring pattern to get a picture of the underlying trend of retailers hiring just before Christmas and laying off afterwards. I can only explain this gibberish through this example. In December 2002 retailers didn’t hire as it was the fourth weakest Christmas season in retail employment since 1939. Therefore, in January 2003, they didn’t lay off as many workers as usual. The seasonal impact, before adjustment, was that, during this holiday season , one million retail jobs were lost. After the holiday, it was determined that the service sector had added 143,000 jobs, mostly retail. In addition, the Labor Department explained “a one-month change in weighting procedures makes data for January 2003 strictly comparable with data for both prior and subsequent months.” The January 2003 report had many inconsistencies. There was a rise in the number of people unemployed for a greater period of time. The unemployment rate fell to 5.7% because of a reduction in the labor force. Average hourly wages remained unchanged, and it was the first time (up to that point) since April 1993 that average hourly wages did not rise. Additionally, in that month of January, households had their biggest fall in consumer credit in 30 years. When we view the report on February 6, it will be important to focus on the seasonal adjustments. This past holiday season was modestly better than what was experienced in the prior year period. In December 2002, about 100,000 retail jobs were lost. In December 2003, the number was sharply reduced. Most of the jobs added in January 2004 were healthcare, education, construction, and some service related jobs. The seasonal adjustment factor will be less in January 2004 than in the prior January. The Labor Department tracks 347 industries. They have a big staff. Each month they make revisions. For me, life is not a do over.