1/22/05 The Scorecard
A funny thing happened on the way to the January effect. For the first time in 23 years, the new year opened with three consecutive down weeks. Yesterday, the Dow broke below its December 2004 low to a level not seen since November 10. This decline has resulted in only 10% of the DJIA stocks trading above their 10-day moving average. The DJIA is below its 50-day moving average. The post-presidential election rally brought forth the year-end bonuses for most money managers. The investors are now left holding the bag, so to speak.
Despite M-3 falling $8.7 billion in the latest week, its annualized growth rate of 8.8% fosters the rising trend of inflationary forces. Over the past 52 weeks, real estate loans are up approximately 15%.
Why is it that the headlines hardly ever discuss a comparison between pre-tax profits and after-tax profits? Such a discussion might point to the tax benefits GE received. The tax rate on their financial services division is 3%. What should a fair-value P/E be for income gains generated by lower tax payments?
I remain puzzled by the following dichotomy. As I mentioned months ago, the Bureau of Economic Analysis, a government agency, reported that corporate profits were actually down $27.6 billion in the third quarter. Then how is it that Wall Street analysts report that profits are gaining at a double-digit rate?
Dietrich Bonhoeffer: “To understand reality is not the same as to know about outward events. It is to perceive the essential nature of things. The best-informed man is not necessarily the wisest. Indeed there is a danger that precisely in the multiplicity of his knowledge he will lose sight of what is essential. But on the other hand, knowledge of an apparently trivial detail quite often makes it possible to see into the depth of things. And so the wise man will seek to acquire the best possible knowledge about events, but always without becoming dependent upon this knowledge. To recognize the significant in the factual is wisdom.”
I know the Fed is not concerned with inflation, and that it’s under control. In fact, Richmond Fed president Lacker and Minneapolis Fed president Stern both remarked recently that inflation remains contained. The energy market has a mind of its own with crude at $48.53 per barrel and heating oil at $1.38 a gallon. I also noticed that zinc futures rose to a 7-year high.
The December semiconductor book-to-bill ratio declined below 1-to-1 for the fourth straight month. Orders declined for the third consecutive month.
There were several topics Bush did not cover in his inaugural speech. I thought I might provide this information from the Pentagon. On May 1, 2003 Bush declared an end to major combat operations. At that time, there were, on average, 17 monthly U.S. military fatalities. The average today is 82 per month. During this same period, the average number of U.S. soldiers wounded by hostile acts has risen from 142 per month to 808 per month. Since November 2003, attacks on U.S.-led coalition forces have risen from 735 a month to 2,300 per month.
Due to its preliminary survey of only about 300 households, I do not place much significance in the University of Michigan consumer sentiment index. Others believe it’s the holy grail. As such, I simply mention the index for the month of January decreased to 95.8 from 97.1 in December. I feel confident that this index presently overstates the level of consumer confidence.
China is now the world’s second biggest oil consumer. Their crude imports rose nearly 35% in 2004.
India’s Wipro Ltd. stated that its business process outsourcing services suffered in the fourth quarter from huge staff turnover. The company’s vice chairman, Vivek Paul, said on Friday the BPO business faced annualized attrition rates as high as 90%. The major problem exists at call centers. Paul stated “we are not counting on big price increases, so really it has to be volume-fed, that’s where we are pushing.”
Photoworks of Seattle has downsized from 750 employees in 2000 to 134, and yesterday they announced laying off an additional 66 people. The company is transforming itself from mail-order film processing, the market for which is declining about 30% a year, to an online provider of digital photo services. Prints of digital images will be outsourced to a company in Maryland.
If you have been reading my daily thoughts, you know I have been negative on GM for one year. In fact, I have been short during this entire time period. To be precise, I have been long Toyota and short GM. That has not changed. However, I don’t believe that GM is going out of business or that it will stop paying the interest on its debt. It’s popular to talk about the possibility of GM bonds being downgraded by S&P. Their bonds trade like GM is a pile of junk. Our 10-year U.S. treasury bonds trade like they are gold-backed. In fact, for my money, our U.S. treasury bonds are over-owned and over-rated. I would like you to consider going long the GM bonds due in 2013 and shorting the 10-year U.S. treasury bonds.
Friday, January 21, 2005
1/21/05 Liberty, Freedom, And The Spending Regime Ruler
Woodrow Wilson: “Liberty has never come from the government. Liberty has always come from the subjects of government. The history of liberty is the history of resistance. The history of liberty is a history of the limitation of governmental power, not the increase of it.”
Yesterday, the Conference Board stated the growth rate of the U.S. leading index slowed below its long-term trend ( a 1.5 percent annual rate) in the second half of 2004, but not to a rate that has historically been associated with a recession. Only four of the ten indicators that make up the leading index increased in December. By comparison, three of the seven components of the lagging indicators gained in December. The lagging index was unchanged in December after decreasing 0.3% in November.
FDR: “True independent freedom cannot exist without economic security and independence. People who are hungry and out of a job are the stuff of which dictatorships are made.”
The Philly Fed reported that indicators for general activity, new orders, and shipments fell from their readings in December. The index, reflecting the broadest measuring of manufacturing conditions, fell to 13.2 in January from 25.4 in December. Importantly, the new orders index fell 11 points and the shipments index fell 10 points. More than 66% of the firms reported higher prices for purchased inputs in January, up from 56 percent in the prior month. Thirty-one percent of firms reported prices for their own manufactured goods were higher this month, while 7 percent reported lower prices. The outlook for employment growth improved modestly. The percentage of firms expecting increases in capital spending in 2005 was slightly lower than the percentage at the beginning of 2004.
Charles Austin Beard: “You need only reflect that one of the best ways to get yourself a reputation as a dangerous citizen these days is to go about repeating the very phrases which our founding fathers used in the struggle for independence.”
Michael Niemira, chief economist at the International Council of Shopping Centers, predicted that sales at stores opened at least a year will rise 3% in 2005, a decline from the 3.8% pace in 2004. He went on to state that stores would have a difficult time posting solid sales gains in the first half over the year-ago period due to higher interest rates and the absence of tax refunds and heightened mortgage refinance activity. Lew Frankfort, chairman and CEO of Coach, remarked “the competition is getting broader and innovation and relevance really sells.” Do you see a lot of innovation and relevance in the retail landscape?
William Poole, president of the St. Louis Fed: “Economic growth will be boosted to an important extent by continued strong business fixed investment. Growth of consumer spending should also remain healthy.”
U.K. December retail sales fell 1%, the largest drop in December since 1981.
According to research by The Boston Consulting Group, virtually all growth in our consumer-based economy will be in the premium, affordable luxury end or in the low-price end, as the traditional mass market hollows out. The “new luxury” phenomenon represented approximately $525 billion in sales in the U.S. in 2004, up from $450 billion in 2003, and will probably reach $1 trillion by 2010, according to their research. They explain this phenomenon by suggesting it is a result of the number of middle market consumers increasing, and trading up and trading down in order to acquire and enjoy new luxury goods that matter to them. As an example, a consumer might buy grocery staples at Wal-Mart and sports clothes at Target in order to afford an entry-level BMW or a spa vacation. Travel, expenditures on the home, cars, and dining were the leading new luxury categories in 2004.
In September, I reported that Microsoft had cut 93 electronic testers from the payroll. On Wednesday, another 62 were laid off. Cingular passed out 88 new layoff notices to former AT&T Wireless employees in the Puget Sound region. On January 3, 155 of those employees received termination notices. Avery Dennison will close a plant in Flowery Branch, GA and cut 174 jobs. Ingersoll-Rand is halting production at its Bryan, Ohio manufacturing plant and 214 employees will lose their jobs. American Pad and Paper is closing its Holyoke, Mass. Manufacturing plant, and 176 workers will lose their jobs. Jeffrey Hayden, Holyoke’s economic development director, stated “this is just another sign of the Northeast not being able to compete in terms of labor, taxes, utilities, transportation, and other costs.”
Housing construction accounts for almost 9% of our GDP. What impact will rising interest rates have on housing construction?
Alexander Fraser Tyler: “A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves money from the Public Treasury. From that moment on, the majority always votes for the candidate promising the most benefits from the Public Treasury with the result that a democracy always collapses over loose fiscal policy always followed by dictatorship. The average age of the world's greatest civilizations has been two hundred years. These nations have progressed through this sequence: From bondage to spiritual faith; from spiritual faith to great courage; from courage to abundance; from abundance to complacency; from complacency to apathy; from apathy to dependence; from dependence back again into bondage.”
Woodrow Wilson: “Liberty has never come from the government. Liberty has always come from the subjects of government. The history of liberty is the history of resistance. The history of liberty is a history of the limitation of governmental power, not the increase of it.”
Yesterday, the Conference Board stated the growth rate of the U.S. leading index slowed below its long-term trend ( a 1.5 percent annual rate) in the second half of 2004, but not to a rate that has historically been associated with a recession. Only four of the ten indicators that make up the leading index increased in December. By comparison, three of the seven components of the lagging indicators gained in December. The lagging index was unchanged in December after decreasing 0.3% in November.
FDR: “True independent freedom cannot exist without economic security and independence. People who are hungry and out of a job are the stuff of which dictatorships are made.”
The Philly Fed reported that indicators for general activity, new orders, and shipments fell from their readings in December. The index, reflecting the broadest measuring of manufacturing conditions, fell to 13.2 in January from 25.4 in December. Importantly, the new orders index fell 11 points and the shipments index fell 10 points. More than 66% of the firms reported higher prices for purchased inputs in January, up from 56 percent in the prior month. Thirty-one percent of firms reported prices for their own manufactured goods were higher this month, while 7 percent reported lower prices. The outlook for employment growth improved modestly. The percentage of firms expecting increases in capital spending in 2005 was slightly lower than the percentage at the beginning of 2004.
Charles Austin Beard: “You need only reflect that one of the best ways to get yourself a reputation as a dangerous citizen these days is to go about repeating the very phrases which our founding fathers used in the struggle for independence.”
Michael Niemira, chief economist at the International Council of Shopping Centers, predicted that sales at stores opened at least a year will rise 3% in 2005, a decline from the 3.8% pace in 2004. He went on to state that stores would have a difficult time posting solid sales gains in the first half over the year-ago period due to higher interest rates and the absence of tax refunds and heightened mortgage refinance activity. Lew Frankfort, chairman and CEO of Coach, remarked “the competition is getting broader and innovation and relevance really sells.” Do you see a lot of innovation and relevance in the retail landscape?
William Poole, president of the St. Louis Fed: “Economic growth will be boosted to an important extent by continued strong business fixed investment. Growth of consumer spending should also remain healthy.”
U.K. December retail sales fell 1%, the largest drop in December since 1981.
According to research by The Boston Consulting Group, virtually all growth in our consumer-based economy will be in the premium, affordable luxury end or in the low-price end, as the traditional mass market hollows out. The “new luxury” phenomenon represented approximately $525 billion in sales in the U.S. in 2004, up from $450 billion in 2003, and will probably reach $1 trillion by 2010, according to their research. They explain this phenomenon by suggesting it is a result of the number of middle market consumers increasing, and trading up and trading down in order to acquire and enjoy new luxury goods that matter to them. As an example, a consumer might buy grocery staples at Wal-Mart and sports clothes at Target in order to afford an entry-level BMW or a spa vacation. Travel, expenditures on the home, cars, and dining were the leading new luxury categories in 2004.
In September, I reported that Microsoft had cut 93 electronic testers from the payroll. On Wednesday, another 62 were laid off. Cingular passed out 88 new layoff notices to former AT&T Wireless employees in the Puget Sound region. On January 3, 155 of those employees received termination notices. Avery Dennison will close a plant in Flowery Branch, GA and cut 174 jobs. Ingersoll-Rand is halting production at its Bryan, Ohio manufacturing plant and 214 employees will lose their jobs. American Pad and Paper is closing its Holyoke, Mass. Manufacturing plant, and 176 workers will lose their jobs. Jeffrey Hayden, Holyoke’s economic development director, stated “this is just another sign of the Northeast not being able to compete in terms of labor, taxes, utilities, transportation, and other costs.”
Housing construction accounts for almost 9% of our GDP. What impact will rising interest rates have on housing construction?
Alexander Fraser Tyler: “A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves money from the Public Treasury. From that moment on, the majority always votes for the candidate promising the most benefits from the Public Treasury with the result that a democracy always collapses over loose fiscal policy always followed by dictatorship. The average age of the world's greatest civilizations has been two hundred years. These nations have progressed through this sequence: From bondage to spiritual faith; from spiritual faith to great courage; from courage to abundance; from abundance to complacency; from complacency to apathy; from apathy to dependence; from dependence back again into bondage.”
Thursday, January 20, 2005
1/20/05 Know What You Own
Last night was a good lesson for Ebay shareholders. Analysts were disappointed that earnings fell a penny short of their estimates and that guidance for 2005 was one penny less than projected in October. This is a ten-year old company in which earnings are still growing 40% or more. You need to know what you own and have a time horizon for your investment. The company purchased PayPal and the latter’s revenue is growing better than 50%. At the same time, margins at PayPal are lower than the rest of Ebay’s businesses. As such, the margins were slightly lower than anticipated because PayPal is growing faster than expected. It is significant that Ebay raised its 2005 revenue projection from its previous forecast. Of all the companies doing business on the Internet, Ebay has the best model and the best future. It is a company with top-notch management. If you own this stock for the next 20 or 40 years, there will be other bumps in the road. However, as Meg Whitman stated, “Ebay’s long-term promise is extraordinary.” That statement can only be made about a handful of companies. For example, I’ve owned Medtronic for 39 ¼ years. I look forward to owning Ebay for at least that long.
The BLS reported that average weekly earnings rose by 3.3% seasonally adjusted, from December 2003 to December 2004. After deflation by the CPI-W, average weekly earnings decreased by 0.2%. That statistic represents a significant flaw in our economic recovery. When wages trail inflation, an economic recovery is but a mirage.
The Labor Department reported that initial jobless claims dropped by 48,000 during the week. The Labor Department also reported that the number of people continuing to collect state jobless benefits rose to 2.694 million from 2.647, a rise of 47,000. The Labor Department giveth and taketh away.
China has ordered a halt to construction work on 26 big power stations, including two at the Three Gorges Dam, on environmental grounds. China has also reported an abrupt slowdown in its auto sales. How will that impact GM?
When in doubt, turn to T-bills. The three-month rate is 2.360%, the highest in more than three years.
In a study by Hewitt Associates of nearly 200 large companies, 27% stated they will consider amending their defined benefit plan to exclude new employees from participation, and 20% will consider providing defined contribution plans only.
For all of 2004, consumer prices rose the most in four years. Prices were 3.3% higher than in 2003. Anthony Santomero, president of the Philly fed, stated “if signs of price pressure emerge on a consistent basis we will need to consider quickening the pace (of rate hikes).”
Over the past 12 months, Germany’s exports increased by 8.2%. From May to November, the dollar fell by 8.1% in trade-weighted terms, and yet, our exports declined by 2.3% in November.
Since Ebay announced plans to increase its fees starting Feb. 18, listings on Overstock.com increased 50%. For one month, from Feb 18 to March 18, Overstock will lower listing fees by the same percentage as the increase in Ebay’s listing fees.
The Bank of Japan stated that its economic growth next fiscal year will not meet its prediction of a 1.5% rise and that consumer prices may also not rise by the 0.1% it had projected for the year beginning April 1.
Over the next five years, Wal-Mart plans to open hundreds of stores in China in a joint venture with Beijing-based CITIC Pacific Co. Ltd. Wal-Mart will hold a 65% interest in the venture. Wal-Mart’s first store in China opened in 1996, and now they have more than 40 stores.
With the exception of Vermont, all states require balanced budgets. Many states have already utilized reserve funds as well as tobacco settlement money to fill previous budget gaps. Some states are projecting very large budget deficits for fiscal 2006 starting July1. They include California, Connecticut, Illinois, Indiana, Massachusetts, Michigan, Minnesota, New Jersey, New York, Ohio, Oklahoma, Oregon, Washington, and Wisconsin.
T-Mobile plans to cut up to 2,200 jobs in Europe by 2006. Deutsche Bank is planning to cut 4,000 to 6,000 jobs in its global investment banking division.
Amalgamated Sugar has sugar beet processing plants in Nampa, Paul, and Twin Falls, Idaho and one in Nyssa, Oregon. The company will sharply curtail operations in Nyssa and about 100 workers will lose their jobs. The reasons are excess domestic sugar production; the importation of sugar-containing food products; USDA marketing allotments limiting the amount of sugar companies can sell; and trade pressure from foreign producers. It should be noted that Amalgamated is probably the low-cost producer of sugar in the U.S.
Delta Airlines lost $780 million in the fourth quarter.
Boeing’s charges for ending the 717 production will be $385 million rather than the original projection of $340 million.
United Healthcare is raising their earnings estimates.
Jay Leno: “President Bush has been working on his inauguration, not the actual speech but the word inaugural.”
The weekly index compiled by the Economic Cycle Research Institute fell to 130.4 in the week to Jan. 7 from an upwardly revised 131.6 the previous week. The index’s annualized growth rate fell to a minus 0.5 percent from 0.8 percent the prior week. Anirvan Banerji, director of research of ECRI, stated “we are seeing the effect of the slowdown.”
Last night was a good lesson for Ebay shareholders. Analysts were disappointed that earnings fell a penny short of their estimates and that guidance for 2005 was one penny less than projected in October. This is a ten-year old company in which earnings are still growing 40% or more. You need to know what you own and have a time horizon for your investment. The company purchased PayPal and the latter’s revenue is growing better than 50%. At the same time, margins at PayPal are lower than the rest of Ebay’s businesses. As such, the margins were slightly lower than anticipated because PayPal is growing faster than expected. It is significant that Ebay raised its 2005 revenue projection from its previous forecast. Of all the companies doing business on the Internet, Ebay has the best model and the best future. It is a company with top-notch management. If you own this stock for the next 20 or 40 years, there will be other bumps in the road. However, as Meg Whitman stated, “Ebay’s long-term promise is extraordinary.” That statement can only be made about a handful of companies. For example, I’ve owned Medtronic for 39 ¼ years. I look forward to owning Ebay for at least that long.
The BLS reported that average weekly earnings rose by 3.3% seasonally adjusted, from December 2003 to December 2004. After deflation by the CPI-W, average weekly earnings decreased by 0.2%. That statistic represents a significant flaw in our economic recovery. When wages trail inflation, an economic recovery is but a mirage.
The Labor Department reported that initial jobless claims dropped by 48,000 during the week. The Labor Department also reported that the number of people continuing to collect state jobless benefits rose to 2.694 million from 2.647, a rise of 47,000. The Labor Department giveth and taketh away.
China has ordered a halt to construction work on 26 big power stations, including two at the Three Gorges Dam, on environmental grounds. China has also reported an abrupt slowdown in its auto sales. How will that impact GM?
When in doubt, turn to T-bills. The three-month rate is 2.360%, the highest in more than three years.
In a study by Hewitt Associates of nearly 200 large companies, 27% stated they will consider amending their defined benefit plan to exclude new employees from participation, and 20% will consider providing defined contribution plans only.
For all of 2004, consumer prices rose the most in four years. Prices were 3.3% higher than in 2003. Anthony Santomero, president of the Philly fed, stated “if signs of price pressure emerge on a consistent basis we will need to consider quickening the pace (of rate hikes).”
Over the past 12 months, Germany’s exports increased by 8.2%. From May to November, the dollar fell by 8.1% in trade-weighted terms, and yet, our exports declined by 2.3% in November.
Since Ebay announced plans to increase its fees starting Feb. 18, listings on Overstock.com increased 50%. For one month, from Feb 18 to March 18, Overstock will lower listing fees by the same percentage as the increase in Ebay’s listing fees.
The Bank of Japan stated that its economic growth next fiscal year will not meet its prediction of a 1.5% rise and that consumer prices may also not rise by the 0.1% it had projected for the year beginning April 1.
Over the next five years, Wal-Mart plans to open hundreds of stores in China in a joint venture with Beijing-based CITIC Pacific Co. Ltd. Wal-Mart will hold a 65% interest in the venture. Wal-Mart’s first store in China opened in 1996, and now they have more than 40 stores.
With the exception of Vermont, all states require balanced budgets. Many states have already utilized reserve funds as well as tobacco settlement money to fill previous budget gaps. Some states are projecting very large budget deficits for fiscal 2006 starting July1. They include California, Connecticut, Illinois, Indiana, Massachusetts, Michigan, Minnesota, New Jersey, New York, Ohio, Oklahoma, Oregon, Washington, and Wisconsin.
T-Mobile plans to cut up to 2,200 jobs in Europe by 2006. Deutsche Bank is planning to cut 4,000 to 6,000 jobs in its global investment banking division.
Amalgamated Sugar has sugar beet processing plants in Nampa, Paul, and Twin Falls, Idaho and one in Nyssa, Oregon. The company will sharply curtail operations in Nyssa and about 100 workers will lose their jobs. The reasons are excess domestic sugar production; the importation of sugar-containing food products; USDA marketing allotments limiting the amount of sugar companies can sell; and trade pressure from foreign producers. It should be noted that Amalgamated is probably the low-cost producer of sugar in the U.S.
Delta Airlines lost $780 million in the fourth quarter.
Boeing’s charges for ending the 717 production will be $385 million rather than the original projection of $340 million.
United Healthcare is raising their earnings estimates.
Jay Leno: “President Bush has been working on his inauguration, not the actual speech but the word inaugural.”
The weekly index compiled by the Economic Cycle Research Institute fell to 130.4 in the week to Jan. 7 from an upwardly revised 131.6 the previous week. The index’s annualized growth rate fell to a minus 0.5 percent from 0.8 percent the prior week. Anirvan Banerji, director of research of ECRI, stated “we are seeing the effect of the slowdown.”
Wednesday, January 19, 2005
1/19/05 IBM And Ryland
Several months ago, I suggested a strategy of purchasing one share of eBay, Yahoo, and Google and shorting one share of IBM. The market capitalization of the combined three companies were equal to the market capitalization of IBM. My theory was IBM ‘s growth was limited in compared with the high growth profile of the other three. Yesterday, IBM reported earnings for the quarter and for the full year. Revenues in the fourth quarter rose 3%, adjusting for currency. Fourth-quarter income from continuing operations was $3.1 billion. What did they do with the money? They repurchased $2.9 billion worth of stock during the fourth quarter. For the whole year, the earnings from continuing operations totaled $8.4 billion, and of that amount, $7.3 billion was utilized to repurchase stock. For the full year, revenues grew 4%, adjusting for currency. The company ended the year with $10.5 billion in cash; however, debt was just below $23 billion. This is a non-innovative company. Fifty percent of their revenues are derived from services. It’s only a matter of time until the software and consulting companies in India take market share from IBM. For my money, at 19 times fully diluted earnings, IBM represents little value. On the other hand, eBay, Yahoo, and Google represent, in my mind, the best growth opportunities in the world of the Internet. Statistically, on a P/E basis, they are hardly cheap. As I have stated in the past, the strategy I have outlined may not be for everyone.
It was a pleasure to read the report from Ryland Group. They are one of the nation’s largest homebuilders and a leading mortgage-finance company. Currently, they operate in 27 markets across the country. They announced record results for its fourth quarter, including the highest fourth-quarter consolidated net earnings, revenues, new orders, closings, backlog, and earnings per share in its history. In addition, they increased earnings guidance for 2005, with earnings per share expected to exceed $7.25. The stock closed at a new all-time high of $61.50. I have consistently underestimated the resiliency of the homebuilding market. If I had to choose between making an investment in IBM or in Ryland, I would choose the latter. The P/E is modest, and leaves room for a slowdown in housing.
Sandra Pianalto, president of the Cleveland Fed, indicated in a speech yesterday that the inflation process has “clearly shifted away from disinflation” and expressed it would be “prudent” to continue to hike short-term interest rates. One might take her viewpoint with a grain of salt. In November, she remarked “recent energy price increases don’t seem to be affecting long-term inflation expectations.”
CONTECH is the only nationwide provider of corrugated metal and plastic pipe, detention/retention systems, geogrid and geotextile materials, erosion control products, concrete arch systems, and retaining wall systems and bridge structures. Effective February 1, they will raise prices as much as 10%.
Fed governor Susan Bies: “I believe that, with inflation expected to moderate, the Federal Reserve can continue to remove its policy of accommodation at a measured pace, consistent with its commitment to maintain price stability as a necessary condition for maximum sustainable growth.”
Total capital flows totaled $81 billion in November. That helped partially offset the monthly $60 billion trade deficit and the average monthly budget deficit exceeding $34 billion.
B.H. Liddell Hart: “A complacent satisfaction with present knowledge is the chief bar to the pursuit of knowledge.”
According to a national survey by Nationwide, 80% of respondents are not losing sleep over their finances, and 59% believe they have a plan and are saving enough to meet retirement goals. The savings rate has declined to 0.1%, one of the lowest rates recorded since tracking began in 1959. Less than half of workers are covered by any type of pension plan. Of those eligible, 25% don’t participate.
Following the acquisition of Robert Mondavi Corp., Constellation Brands confirmed yesterday that 210 Mondavi workers have been laid off post-merger. The cuts include administrative, sales, production, and other workers.
Eric Hoffer: “You can discover what your enemy fears most by observing the means he uses to frighten you.”
We are near decade-low volatility readings for equities. Why is there so little fear in owning equities, 10-year Treasury bonds, and/or junk bonds? Do you think there will be double-digit gains in corporate profits in 2005, a decline in the recent rise in inflation, a decline in the twin tower deficits, a lessening in demand for petroleum products, and/or the disappearance of al-Qaeda and other terrorist cells? Do you think there will be a renewed appetite to acquire dollar-denominated assets?
The CBO recently reported their “Future-Year Defense Plan” will cost substantially more than the amounts cited by the administration in budget projections.
Beginning October 1, 2004, the national debt is increasing an average of $2.12 billion per day. Each citizen’s share is approaching $25,800.
In January, the Empire State Manufacturing index fell to 20.1 from 27.1 in December, while the employment index declined to 12.7 from 15.7.
Pfizer’s Lipitor is the pharmaceutical industry’s first $10 billion product.
Eric Meurice, president and CEO, of Dutch chip equipment maker ASML: “There is clearly no visibility at the moment on where the semiconductor industry is going to go.”
During the economic recovery that began in November 2001, we have witnessed the worst employment growth since 1932 coupled with, adjusting for inflation, no income growth, and this despite multiple rounds of Fed and government stimuli. Clearly, record unsustainable low savings, record high unsustainable twin tower deficits, and record high unsustainable household and national debt levels will not provide a foundation for a self-sustaining economic recovery. Forced expenditure adjustments will lead to restrained consumer credit growth leading to a declining economic expansion and, ultimately, to currency depreciation and a curtailment of purchasing power. More flexible exchange rates will not solve the mounting current account problem. The importance of our dollar as a reserve currency will continue to decline. However, the price for economic stability can only be realized through reduced consumer and government expenditures. In the long term, this change will be most welcome. In the short term, it will produce a shock for our equity and debt markets. It is unavoidable.
If you think inflation is moderate, check out the prices for hot-rolled coil steel, wood products, copper, aluminum, cement, plastics, chemicals, corrugated boxes, refrigerators, dishwashers, and washing machines. Inflation will hurt the buyers of 10-year Treasury bonds. If you don’t believe me, check their yields in six months, and then let me know how much money you’ve lost marked-to-the-market.
The CFSB-Tremont hedge fund index rose 9.64% in 2004, down from a rise of 15.44% in 2003. Some believe that performance warrants a pat on the back. Some are willing to accept mediocrity.
Several months ago, I suggested a strategy of purchasing one share of eBay, Yahoo, and Google and shorting one share of IBM. The market capitalization of the combined three companies were equal to the market capitalization of IBM. My theory was IBM ‘s growth was limited in compared with the high growth profile of the other three. Yesterday, IBM reported earnings for the quarter and for the full year. Revenues in the fourth quarter rose 3%, adjusting for currency. Fourth-quarter income from continuing operations was $3.1 billion. What did they do with the money? They repurchased $2.9 billion worth of stock during the fourth quarter. For the whole year, the earnings from continuing operations totaled $8.4 billion, and of that amount, $7.3 billion was utilized to repurchase stock. For the full year, revenues grew 4%, adjusting for currency. The company ended the year with $10.5 billion in cash; however, debt was just below $23 billion. This is a non-innovative company. Fifty percent of their revenues are derived from services. It’s only a matter of time until the software and consulting companies in India take market share from IBM. For my money, at 19 times fully diluted earnings, IBM represents little value. On the other hand, eBay, Yahoo, and Google represent, in my mind, the best growth opportunities in the world of the Internet. Statistically, on a P/E basis, they are hardly cheap. As I have stated in the past, the strategy I have outlined may not be for everyone.
It was a pleasure to read the report from Ryland Group. They are one of the nation’s largest homebuilders and a leading mortgage-finance company. Currently, they operate in 27 markets across the country. They announced record results for its fourth quarter, including the highest fourth-quarter consolidated net earnings, revenues, new orders, closings, backlog, and earnings per share in its history. In addition, they increased earnings guidance for 2005, with earnings per share expected to exceed $7.25. The stock closed at a new all-time high of $61.50. I have consistently underestimated the resiliency of the homebuilding market. If I had to choose between making an investment in IBM or in Ryland, I would choose the latter. The P/E is modest, and leaves room for a slowdown in housing.
Sandra Pianalto, president of the Cleveland Fed, indicated in a speech yesterday that the inflation process has “clearly shifted away from disinflation” and expressed it would be “prudent” to continue to hike short-term interest rates. One might take her viewpoint with a grain of salt. In November, she remarked “recent energy price increases don’t seem to be affecting long-term inflation expectations.”
CONTECH is the only nationwide provider of corrugated metal and plastic pipe, detention/retention systems, geogrid and geotextile materials, erosion control products, concrete arch systems, and retaining wall systems and bridge structures. Effective February 1, they will raise prices as much as 10%.
Fed governor Susan Bies: “I believe that, with inflation expected to moderate, the Federal Reserve can continue to remove its policy of accommodation at a measured pace, consistent with its commitment to maintain price stability as a necessary condition for maximum sustainable growth.”
Total capital flows totaled $81 billion in November. That helped partially offset the monthly $60 billion trade deficit and the average monthly budget deficit exceeding $34 billion.
B.H. Liddell Hart: “A complacent satisfaction with present knowledge is the chief bar to the pursuit of knowledge.”
According to a national survey by Nationwide, 80% of respondents are not losing sleep over their finances, and 59% believe they have a plan and are saving enough to meet retirement goals. The savings rate has declined to 0.1%, one of the lowest rates recorded since tracking began in 1959. Less than half of workers are covered by any type of pension plan. Of those eligible, 25% don’t participate.
Following the acquisition of Robert Mondavi Corp., Constellation Brands confirmed yesterday that 210 Mondavi workers have been laid off post-merger. The cuts include administrative, sales, production, and other workers.
Eric Hoffer: “You can discover what your enemy fears most by observing the means he uses to frighten you.”
We are near decade-low volatility readings for equities. Why is there so little fear in owning equities, 10-year Treasury bonds, and/or junk bonds? Do you think there will be double-digit gains in corporate profits in 2005, a decline in the recent rise in inflation, a decline in the twin tower deficits, a lessening in demand for petroleum products, and/or the disappearance of al-Qaeda and other terrorist cells? Do you think there will be a renewed appetite to acquire dollar-denominated assets?
The CBO recently reported their “Future-Year Defense Plan” will cost substantially more than the amounts cited by the administration in budget projections.
Beginning October 1, 2004, the national debt is increasing an average of $2.12 billion per day. Each citizen’s share is approaching $25,800.
In January, the Empire State Manufacturing index fell to 20.1 from 27.1 in December, while the employment index declined to 12.7 from 15.7.
Pfizer’s Lipitor is the pharmaceutical industry’s first $10 billion product.
Eric Meurice, president and CEO, of Dutch chip equipment maker ASML: “There is clearly no visibility at the moment on where the semiconductor industry is going to go.”
During the economic recovery that began in November 2001, we have witnessed the worst employment growth since 1932 coupled with, adjusting for inflation, no income growth, and this despite multiple rounds of Fed and government stimuli. Clearly, record unsustainable low savings, record high unsustainable twin tower deficits, and record high unsustainable household and national debt levels will not provide a foundation for a self-sustaining economic recovery. Forced expenditure adjustments will lead to restrained consumer credit growth leading to a declining economic expansion and, ultimately, to currency depreciation and a curtailment of purchasing power. More flexible exchange rates will not solve the mounting current account problem. The importance of our dollar as a reserve currency will continue to decline. However, the price for economic stability can only be realized through reduced consumer and government expenditures. In the long term, this change will be most welcome. In the short term, it will produce a shock for our equity and debt markets. It is unavoidable.
If you think inflation is moderate, check out the prices for hot-rolled coil steel, wood products, copper, aluminum, cement, plastics, chemicals, corrugated boxes, refrigerators, dishwashers, and washing machines. Inflation will hurt the buyers of 10-year Treasury bonds. If you don’t believe me, check their yields in six months, and then let me know how much money you’ve lost marked-to-the-market.
The CFSB-Tremont hedge fund index rose 9.64% in 2004, down from a rise of 15.44% in 2003. Some believe that performance warrants a pat on the back. Some are willing to accept mediocrity.
Tuesday, January 18, 2005
1/18/05 What’s Changed?
We’re close to four months into the 2004-2005 government fiscal year that began on October 1. The American public was told the budget deficit would decline. It hasn’t. We were told the weak dollar would help our exports. The trade gap has widened to record levels. The Fed members have told the financial community that inflation is not a problem. The CPI inflation rate is trending towards 4%. Any small wage gains have been smoked out by inflation. Workers are behind the eight ball. All is not glum. Coach and Nordstrom’s are turning in terrific gains resulting from the top 1% of households accounting for 20% of all incomes and one-third of all net worth. Businesses are struggling to pass along their increased costs. Prices for intermediate goods, excluding food and energy, rose 8.3% in 2004 and crude goods zoomed 20% higher. As for crude oil, it’s returned to a 7-week high of $49.26 a barrel. It seems that winter does bring forth cold weather, and the latter, combined with 2004’s rising oil demand of 3.3%, makes for more costly energy products. Meanwhile, the dollar is trading near a five-year low against the yen. As long as there is on-going worry that the U.S. economy won’t have enough foreign investment to offset the current account deficit and the budget shortfall, the dollar will have difficulty sustaining a rally. Do not be caught up in the day-to-day currency fluctuations. Maintain a minimum exposure to dollar holdings.
Cullen Hightower: “Money was invented so we could know exactly how much we owe.”
The National Retail Federation reported that retail sales grew 6.7% in 2004. They project a gain of 3.5% in 2005. Their chief economist, Rosalind Wells, stated “this year, consumers will be under increased financial pressure due to higher energy costs and slow wage growth. Additionally, past stimuli provided by tax cuts and very low interest rates will no longer be there to boost consumer spending…Modest income growth will put a financial strain on consumers.”
OGTIA, the official guide to Internet architecture and a non-profit organization, has unveiled a beta version of its OgtiaKeyMaker invented by Roger Marx Dray (http://rogermarxdray.com). It promises to reorganize the sale of goods throughout the Internet. A user can enter data in one place, their own page, and the entire Internet will know what the person wants to buy or sell. This negates the need for users to enter the data several times in several web sites. Users, in a few minutes, can control the content and the access of their own data. The same system is being developed for resumes. Dray maintains OgtiaKeyMaker will reorganize the Web so search engines will become 100,000 times more efficient. He stated that the new Interactive Way will soon make today’s Google, Yahoo, and Accoona interfaces completely obsolete. Additionally, eBay is no longer the only game in town. The new search engine is being developed at http://way7.com. The beta version of OgtiaKeyMaker is available at 206.51.234.135/keymaker.
MMM’s 4th quarter worldwide sales rose 7.9% compared to the 4th quarter of 2003. In the latest quarter, currency effects increased sales by 4%.
Alexander Herzen: “There is nothing in the world more stubborn than a corpse. You can hit it, you can knock it to pieces, but you cannot convince it.”
We’re close to four months into the 2004-2005 government fiscal year that began on October 1. The American public was told the budget deficit would decline. It hasn’t. We were told the weak dollar would help our exports. The trade gap has widened to record levels. The Fed members have told the financial community that inflation is not a problem. The CPI inflation rate is trending towards 4%. Any small wage gains have been smoked out by inflation. Workers are behind the eight ball. All is not glum. Coach and Nordstrom’s are turning in terrific gains resulting from the top 1% of households accounting for 20% of all incomes and one-third of all net worth. Businesses are struggling to pass along their increased costs. Prices for intermediate goods, excluding food and energy, rose 8.3% in 2004 and crude goods zoomed 20% higher. As for crude oil, it’s returned to a 7-week high of $49.26 a barrel. It seems that winter does bring forth cold weather, and the latter, combined with 2004’s rising oil demand of 3.3%, makes for more costly energy products. Meanwhile, the dollar is trading near a five-year low against the yen. As long as there is on-going worry that the U.S. economy won’t have enough foreign investment to offset the current account deficit and the budget shortfall, the dollar will have difficulty sustaining a rally. Do not be caught up in the day-to-day currency fluctuations. Maintain a minimum exposure to dollar holdings.
Cullen Hightower: “Money was invented so we could know exactly how much we owe.”
The National Retail Federation reported that retail sales grew 6.7% in 2004. They project a gain of 3.5% in 2005. Their chief economist, Rosalind Wells, stated “this year, consumers will be under increased financial pressure due to higher energy costs and slow wage growth. Additionally, past stimuli provided by tax cuts and very low interest rates will no longer be there to boost consumer spending…Modest income growth will put a financial strain on consumers.”
OGTIA, the official guide to Internet architecture and a non-profit organization, has unveiled a beta version of its OgtiaKeyMaker invented by Roger Marx Dray (http://rogermarxdray.com). It promises to reorganize the sale of goods throughout the Internet. A user can enter data in one place, their own page, and the entire Internet will know what the person wants to buy or sell. This negates the need for users to enter the data several times in several web sites. Users, in a few minutes, can control the content and the access of their own data. The same system is being developed for resumes. Dray maintains OgtiaKeyMaker will reorganize the Web so search engines will become 100,000 times more efficient. He stated that the new Interactive Way will soon make today’s Google, Yahoo, and Accoona interfaces completely obsolete. Additionally, eBay is no longer the only game in town. The new search engine is being developed at http://way7.com. The beta version of OgtiaKeyMaker is available at 206.51.234.135/keymaker.
MMM’s 4th quarter worldwide sales rose 7.9% compared to the 4th quarter of 2003. In the latest quarter, currency effects increased sales by 4%.
Alexander Herzen: “There is nothing in the world more stubborn than a corpse. You can hit it, you can knock it to pieces, but you cannot convince it.”
Monday, January 17, 2005
1/17/05 Are You Hiding?
Bush stated he has been unable to locate bin Laden “because he’s hiding.” Was Hussein in Times Square when he was located? Bush maintains that “we had an accountability moment, and that’s called the 2004 elections.” You can understand that point of view. The corpse from the movie “Bernie’s Weekend” could have done better than Kerry. Actually, maybe the Democrats should have run a pig against Bush. Winston Churchill had it right when he observed “I like pigs. Dogs look up to us. Cats look down on us. Pigs treat us as equals.” The electorate could have related to a pig as akin to the common man in the red and blue states.
I gave some additional thought to a pig running for the highest office in the land. Maybe the analogy to the common man is not so far-fetched. As George Carlin quipped, “if a pig loses its voice, is it disgruntled.” Are you in hiding or have you lost your voice?
Pulitizer Prize-winning reporter Seymour Hersh broke the story about Abu Ghraib prisoner torture in Iraq. Hersh now reports that the U.S. has been “conducting secret reconnaissance missions inside Iran at least since last summer” in an effort to identify target information for suspected nuclear, chemical, and missile sites. A former high-level intelligence official remarked “this is a war against terrorism, and Iraq is just one campaign. The Bush administration is looking at this as a huge war zone. Next, we’re going to have the Iranian campaign.”
In the fall of 2002 I wrote about the growing possibility of the U.S. invading Iraq. I also mentioned that several key insiders in the Pentagon privately discussed Iran as the primary axis of evil target. Hersh reported that Bush has already “signed a series of top-secret findings and executive orders authorizing secret commando groups and other Special Forces units to conduct covert operations against suspected terrorist targets in as many as 10 nations in the Middle east and South Asia.”
I have had a recurring dream. The dream is that the American people will come out of hiding. A collective voice will be heard and it will not be disgruntled.
Bush stated he has been unable to locate bin Laden “because he’s hiding.” Was Hussein in Times Square when he was located? Bush maintains that “we had an accountability moment, and that’s called the 2004 elections.” You can understand that point of view. The corpse from the movie “Bernie’s Weekend” could have done better than Kerry. Actually, maybe the Democrats should have run a pig against Bush. Winston Churchill had it right when he observed “I like pigs. Dogs look up to us. Cats look down on us. Pigs treat us as equals.” The electorate could have related to a pig as akin to the common man in the red and blue states.
I gave some additional thought to a pig running for the highest office in the land. Maybe the analogy to the common man is not so far-fetched. As George Carlin quipped, “if a pig loses its voice, is it disgruntled.” Are you in hiding or have you lost your voice?
Pulitizer Prize-winning reporter Seymour Hersh broke the story about Abu Ghraib prisoner torture in Iraq. Hersh now reports that the U.S. has been “conducting secret reconnaissance missions inside Iran at least since last summer” in an effort to identify target information for suspected nuclear, chemical, and missile sites. A former high-level intelligence official remarked “this is a war against terrorism, and Iraq is just one campaign. The Bush administration is looking at this as a huge war zone. Next, we’re going to have the Iranian campaign.”
In the fall of 2002 I wrote about the growing possibility of the U.S. invading Iraq. I also mentioned that several key insiders in the Pentagon privately discussed Iran as the primary axis of evil target. Hersh reported that Bush has already “signed a series of top-secret findings and executive orders authorizing secret commando groups and other Special Forces units to conduct covert operations against suspected terrorist targets in as many as 10 nations in the Middle east and South Asia.”
I have had a recurring dream. The dream is that the American people will come out of hiding. A collective voice will be heard and it will not be disgruntled.
Sunday, January 16, 2005
1/16/05 Risky Complacency
On Friday, the headlines were the 5,000 employees dropped from Oracle’s payroll. There is another world of technology out there. It exists in India, and not in Redwood Shores, the home of Oracle. Each quarter the top four Indian IT outsourcing companies are hiring 5,000 new employees in India. Customer demand is growing at an annual rate of 30%. Nandan Nilekani, CEO of Infosys, stated “we need a deep reservoir of talent as well as an alternative low-cost center like India as we continue to grow… and only China can match up.” China has 2,000 universities, and over 10 million enrolled university students. With the exception of HCL, the major Indian IT outsourcing firms already have development centers in China. According to Rao Talasila, General Manager of iGate in China, “the biggest challenge is finding the right human talent to power our growth needs. We have often had to turn away projects because we couldn’t find the proper talent. The recruitment supply chain for IT professionals in China is still in its infancy.” Can you imagine Oracle turning down business because they couldn’t attract the right talent?
Berkeley economist Alan Auerbach estimates that, over the next 25 years, Social Security payments will grow to 6.4% of GDP from today’s 4.3%. During that time period, Medicare and Medicaid will grow from today’s 3.8% of GDP to 8.3%. He points out that Social security as a percentage of GDP will level off after 2030 but Medicare and Medicaid will continue to mushroom in size.
The general consensus for 2005 is an economy growing at 3%; short term rates rising faster than long term rates; demand for oil remaining steady with prices staying above $40 per barrel; inflation rising at 3%; the dollar modestly weaker; profit gains of 6%; stock market gains of 6 to 8%; modest capital spending; and a tapped out consumer. We can couple the aforementioned with global producers exceeding global consumption. The mix makes for a risky complacent formula. The consensus is comfortable and leaves little room for surprises leading to increased volatility. I believe a big surprise in 2005 will be a spike in volatility with few portfolios prepared for the surprise.
Timothy F. Geithner, president of the Federal Reserve Bank of New York: “It is important that the United States work to build more confidence that it will act on the fiscal front to achieve a better balance between our commitments and our resources…An improved fiscal position can help reduce the risk of adverse outcomes--- those that might come in the form of a decline in the willingness of foreigners to acquire claims on the United States on the present scale.” He went on to state that “the probability of these shocks may be low, but it is higher than it has been, and higher than we should be comfortable with.”
Meade F. Griffin, former Texas Supreme Court Justice: “Live every day so that you can look all men in their eyes and tell them to go to hell.”
On Friday, the headlines were the 5,000 employees dropped from Oracle’s payroll. There is another world of technology out there. It exists in India, and not in Redwood Shores, the home of Oracle. Each quarter the top four Indian IT outsourcing companies are hiring 5,000 new employees in India. Customer demand is growing at an annual rate of 30%. Nandan Nilekani, CEO of Infosys, stated “we need a deep reservoir of talent as well as an alternative low-cost center like India as we continue to grow… and only China can match up.” China has 2,000 universities, and over 10 million enrolled university students. With the exception of HCL, the major Indian IT outsourcing firms already have development centers in China. According to Rao Talasila, General Manager of iGate in China, “the biggest challenge is finding the right human talent to power our growth needs. We have often had to turn away projects because we couldn’t find the proper talent. The recruitment supply chain for IT professionals in China is still in its infancy.” Can you imagine Oracle turning down business because they couldn’t attract the right talent?
Berkeley economist Alan Auerbach estimates that, over the next 25 years, Social Security payments will grow to 6.4% of GDP from today’s 4.3%. During that time period, Medicare and Medicaid will grow from today’s 3.8% of GDP to 8.3%. He points out that Social security as a percentage of GDP will level off after 2030 but Medicare and Medicaid will continue to mushroom in size.
The general consensus for 2005 is an economy growing at 3%; short term rates rising faster than long term rates; demand for oil remaining steady with prices staying above $40 per barrel; inflation rising at 3%; the dollar modestly weaker; profit gains of 6%; stock market gains of 6 to 8%; modest capital spending; and a tapped out consumer. We can couple the aforementioned with global producers exceeding global consumption. The mix makes for a risky complacent formula. The consensus is comfortable and leaves little room for surprises leading to increased volatility. I believe a big surprise in 2005 will be a spike in volatility with few portfolios prepared for the surprise.
Timothy F. Geithner, president of the Federal Reserve Bank of New York: “It is important that the United States work to build more confidence that it will act on the fiscal front to achieve a better balance between our commitments and our resources…An improved fiscal position can help reduce the risk of adverse outcomes--- those that might come in the form of a decline in the willingness of foreigners to acquire claims on the United States on the present scale.” He went on to state that “the probability of these shocks may be low, but it is higher than it has been, and higher than we should be comfortable with.”
Meade F. Griffin, former Texas Supreme Court Justice: “Live every day so that you can look all men in their eyes and tell them to go to hell.”
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