5/20/03 The Debt Limit Road Map

Yesterday was the third trip around the debt limit track. This is the last time the Treasury has enough gas, they maintain, to pay bills. Of course, they said this on Feb. 20 and then just a couple of months later, and now yesterday. Let me make this clear. The facts are still the facts. The Treasury can rob Peter to pay Paul just so often. There are a limited number of loop-holes in the government trust funds and accounts. The government is out of money, and that makes for a dangerous and volatile economic landscape which is not a platform for a bull market in stocks and bonds. Listen to Brian Roseboro, assistant Treasury secretary for financial markets, who said yesterday "We have had to disrupt the Treasury bill market, which we do not like to do. We were able to justify the last $20 billion but we are at an end. We have exhausted every prudent and legal fiscal management thing we can use." The $20 billion will only last until May 28. No, Mr. Roseboro, there are a few prudent fiscal management things you could use- cut expenditures and start with the Snow man's salary. Reduce salaries in every government office by 5%. If that isn't sufficient, then layoff employees. I assure you there will be no difference in productivity.

According to Bloomberg data, S&P 500 companies had a 5.1% drop in sales per employee in 2002 while net income per worker plunged 73% and employment was lowered by 1.5%. How is it that the U.S. government reported productivity gains of 4.7% in 2002? The S&P 500 companies have audited financial statements. Who audits the government numbers?

Our U.S. Health Secretary said there are likely to be some SARS deaths in Europe and the U.S. later this year. He said "I don't think SARS is going to go away."

Matsushita temporarily closed its two plants in China after experiencing an outbreak of SARS.

My methods for looking at markets is a bit different. My thinking is a bit different. I know I know. Enough already. Any way, I look at the market leaders. For the Nasdaq I focus solely on Microsoft. They are the dominant player in technology for my money. For starters, they must be doing something right with $45+ billion in cash in the bank. They don't need to juggle the books to get there like our government does. They earned it. Microsoft's market cap is about $266 billion. Look at the stock at $24 and change. The Nasdaq bottomed in roughly mid October of last year. Microsoft was $22. Sure it rallied to $29 but it also dropped in March back to $22 and change. What I'm saying is simple. For about 11 months the stock with all the gyrations is still roughly the same. The leader has not been in a new Nasdaq bull market. On the N.Y. Stock Exchange my proxy is WalMart. Yes, it's my favorite company. It should be. It's got the best record on the Big Board. WalMart has a market cap of $230 billion. The stock is at $52 and change. In October it traded down to $48. It was $46 in March of this year. Roughly a year ago the stock was the same as it is now. The leader has not been in a bull market. Microsoft has 50,000 employees and the average salary is $77,000. They make a difference economically in this country. WalMart is our largest non-government employer with 1.4 million employees. They dominate the consumer landscape with sales which dwarf any other company in America. The point is simple. If the leaders aren't in a bull market, how can we be in a bull market? You may not share my viewpoint. That's ok. Maybe you run a hedge fund and think you're hot stuff. Actually, according to the HedgeFund.net-PerTrac Universes, hedge funds year to date gained an average of 3.40% while the S&P is up over 4% since the start of the year. These figures were taken from a universe of 2400 hedge funds.

For the very first time a head of the Fed appeared in a public service announcement. Greenspan was on radio and TV and pleaded with consumers to be careful with their finances. He said "Making informed financial decisions about what to do with your money will help build a more stable future for you and your family." Now listen to this. Fed Governor Gramlich said "Educated consumers know how to save for their goals, use credit wisely, and avoid getting in over their heads." Shouldn't Greenspan and Gramlich be preaching to the Congress and the Administration? Doesn't the Fed realize the government is way over its head in debt? It's ok to preach to the public but not to those employed by the public?

The drug industry won a court order in October 2000 blocking the Maine discount-drug program. The 1st U.S. Circuit Court of Appeal later upheld the Maine program. Yesterday the Supreme Court let Maine begin their Rx program. It's straightforward. There are 325,000 uninsured individuals in Maine. That state wants to provide the uninsured with the same discounts the insurance companies provide the insured, and that is about a 20-25% discount. I expect this program to become popular in all of our states. There isn't a law which sets income limits on those eligible to buy discounted drugs. The pharmaceutical industry will make a great many enemies should they fight this ruling in other states.

On Sunday it was reported that three U.S. troops were killed and four injured in Iraq. Yesterday it was reported that a Marine Corps transport helicopter crashed in central Iraq with at least four aboard, and there were no survivors indicated. Does this sound like the war is over? How many more of our soldiers need to be reported dead before Americans realize we no longer belong in this country? I would love to know the cause for which our soldiers are now dying? Liberation? WMD? Maybe to free Iraq of foreign debts? If that's it, please bring our soldiers home. We have big big debts to free at home.

Oregon has the highest unemployment rate in the country. Today ends a mail-in election. Portland voters are considering a temporary countywide income tax. It would mean a resident with $45,000 in taxable income would pay more than $440 a year in taxes. The slogan at tax campaign Portland headquarters reads "Sometimes even pigs must fly." Oregon has no state sales tax. The personal income tax generates 87% of the state general fund. The temporary tax is basically a school tax in order to prevent significant teacher layoffs.

5/19/03 The Facts Are The Facts

Often I am criticized for describing the facts as I see them. Actually, that is not true. I describe the facts as the facts are, and then and only then, do I entertain thoughts going forward. A perfect example is SARS. Maybe I have an advantage in that I have had a health care business for several years. However, the facts were presented for everyone to see. This was and is a virus similar to AIDS. Yes, there are differences, but the fundamental similarity made this virus lethal. There would be serious social and financial implications from this virus. There is no entity that can hide the truth forever- no government and no group of individuals- especially in this wired world. As such, one could project forward from the SARS facts. To date, the world has gotten off relatively easy. Yet, just when you get overconfident, the virus returns as it did yesterday in Singapore. It was the first case in 19 days. Taiwan was also doing ok for awhile, and then wham. Now there are 4 hospitals closed in Taiwan, another one 25 miles west of Taiwan, and there were five more deaths yesterday and 36 new cases. It is wise to keep a watchful eye out for the facts and often the bad news is not what we wish to see or hear. Overconfidence is an achilles heel for those possessing it.

Circumstances change and public opinion with them. The question is whether all situations are neutral and whether only our opinions make them otherwise. About 20 years ago many experts suggested American industry might be better served by mirroring the Japanese where companies were coining it and the Nikkei was flying higher and higher. Years later, how many nice words does one hear about the Japanese economy and the Nikkei? I am hardly an expert on Japan but I do recognize certain facts. Real estate in certain sections of Tokyo was being valued by the inch and that real estate was an important source of collateral. I found these circumstances difficult to fathom. Of course, I am often criticized for my emphasis on risk/reward and value. As I said just yesterday, my investing vision is highly limited and this I recognize. I wish I were smarter but I am not.

Why do I bring up Japan and recognizing facts? I was criticized for my views on Japan and I am criticized for my views on the United States and questioning the stability of our economic system. Please do not tell me this is heresy. I am projecting forward based on the facts as the facts are. We have a $9.5 trillion GDP. Our budget deficit will be at least $400 billion this year and even the CBO says it will be at least $300 billion next year. The trade account deficit will also be at least $400 billion. The expenditures for entitlement programs, such as, Medicare and Medicaid, exceed the combined number for the budget and trade account deficits. As such, the deficit as a percentage of our GDP is considerably higher than what is reported in the press or deemed in the acceptable historical range. In addition, we know that the facts state the U.S. imports more than we export. Therefore, a weak dollar can only create a net negative impact rather than one which is positive. Additionally, we do not live in a perfect world. If we have deflation, that doesn't mean all prices have to go down at once. The vast majority are. I paid $1.39 for regular unleaded gas yesterday at Arco. At the same time I know natural gas has been rising in price. Mortgage rates are at all-time lows while the affordability of a home based on income levels maybe at all-time lows in certain regions of the country. Health care costs keep rising and so do auto insurance rates as incentives offered on new cars keep increasing too. The facts reflect though, that net net, prices are coming down. That paints a deflationary picture. Interest rates on U.S. treasuries are at all-time lows. They are credit obligations. Moody's and Fitch rate corporate bonds and other country bonds every day. When was the last time anyone took a hard look to see whether the U.S. treasury bonds should have their credit rating changed? They look at N.Y.C. and the state of California. I say the facts, just the facts, reflect a weakened financial state for the U.S. and I believe that is one of the reasons the dollar keeps dropping to new lows against the euro, and if it weren't for Japan supporting the dollar, it too would be much lower against the yen. It's not just that the facts state that bonds are overpriced. It's much more serious than that. We have been able to roll over some of our debt (with the help of lower interest rates) but we can no longer reduce our debt. In fact, when the debt ceiling is increased by the Congress that refuses to reduce spending, our ability to rollover the debt will be lessened. The higher the debt the higher the risk. The higher the risk the higher the payment should be for that risk. Ten Cents A Shine may have been a bad bet at 15-1 but it was a lot worse at 6-1. It was a bad bet at any price- that's in hindsight. Japan, in hindsight, was a lousy bet too for the past 20 years. The facts are the U.S. dollar should state "hope springs eternal". Unfortunately, you can't take hope to the bank. I am not asking anyone to accept my thoughts. Aristotle, after all, said "it is the mark of an educated mind to be able to entertain a thought without accepting it."

5/18/03 There Was One Undervalued Entry And Too Many That Were Overvalued

Once again, the Preakness reminded me so much of the stock market. It was a schooling day for me, and I learned more than I have in a very long time. For that I can thank the horses and the betting public. I am limited by the scope of my investing intelligence. My focus is risk/reward and value. Often what saves me is my willingness to change on a dime as values and risks evolve. The early morning line on Ten Cents A Shine was 15-1. As I have said, I am not a handicapper. The duo of Lukas and Bailey plus a good workout changed that betting line despite the horse's last three races which produced consecutive eighth place finishes. By the time I started watching Breakfast at the Preakness, the morning line had been reduced to 6-1 and the horse went off at 7-1. This wasn't value. To begin with, the risk was high and now anyone investing $2 or more on this horse was not getting paid for that risk. This is not said in hindsight. When we first turned on the TV, I mentioned to my family how nuts 6-1 was. I decided to cut back on what would have been waggered at 15-1. The opposite was true with Funny Cide. At 9-5 there was value. I figured the horse might go off at 6-5 with Peace Rules the second choice. The odds made it a different wager. In the end, I left with a tiny loss even though Peace Rules finished out of the money and Ten Cents A Shine was still running.

Changing on a dime comes with experience but, more importantly, it comes when you leave your ego out of investing. Making money requires disciplined thinking. You can't get attached to a pre-conceived idea or get stubborn because you won't accept being wrong or conversely that circumstances, as you see them, will prove you correct. Either you're on the right horse or you're not. When they turned for home yesterday, the jockey on Peace Rules knew he was in trouble. He admitted it after the race. Funny Cide made it look easy. As it turned out, there was only one horse to beat and that was himself. The same can be said for investing. You are only competing with yourself. Only you can beat yourself. The market is never wrong. Only you can be wrong. A horse must finish in the money to make money. To come out ahead the investor does not have to be in the top three or four. As such, maybe we're lucky not to make a living as a four-legged animal!

On Wednesday Bill Gates has Microsoft's annual CEO Summit. Normally there are at least 100 CEOs who participate. It will be interesting to read about the various technology trends envisioned on the horizon.

The Congressional debate on tax reform requires much in the way of reconciliation. The Senate's version incorporates $72 billion in tax increases as well as $20-30 billion in financial aid to the states. A big problem is the CBO analysis which the Republican leadership had requested. The study showed that, the revenue generated by proposed tax cuts, would at most reduce the deficit by 15% over the next 10 years.

I would like to offer an apology. During the heat of battle, so to speak, I said I would never purchase another product made in France because of their government's attitude leading up to the Iraq war. I was wrong. That country is a sovereign nation and entitled to be run the way they so choose as long as it is not harmful to others. A difference of opinion is not harmful. It is unfortunate that our leaders have not reached the same conclusion. The Paris Air Show beginning June 15 is a big deal in France. Our Defense Department is cutting back on the number of people and aircraft we are sending to the Show. Rumsfeld said: "It's not as if people won't be going from the United States. It may be at a certain level." Only lower-ranking officals will be sent. Joel Johnson, a VP at the Aerospace Industries Association of America, said "A quasi-boycott of the Paris Air Show will undercut the U.S. industry and discourage current and future customers."

Yesterday Taiwan reported its biggest oe day rise in SARS cases- 34. There have been 35 people in Taiwan who have died from this disease. Globally, 610 have died and there have been about 7770 cases. In July Honda had scheduled the start of production of subcompact sedans in China. Production is being delayed by one to two months because of SARS. A local paper stated that the disease has made parts procurements in Guangdong province more difficult.

N.Y.C.'s Independent Budget Office (IBO) said that the deficits through 2007 will continue to escalate as the average annual rate of spending will be more than double the average annual rate of revenues. Their report states that the main culprits are growing debt service, rising pension costs, escalating fringe benefits., and Medicaid. Doug Turetsky, a spokeman for IBO, said "We don't see the city economy growing its way out of this problem." Similar words have recently been uttered in Japan and the euro countries. If the Fed, the Administration, and our Congress come to accept that notion, then maybe we have an opportunity to solve some of our problems. A willingness to change can often produce more desired results. You might not come out a winner but the loss can be quite modest, and therefore, it will not require a financial bailout.

5/17/03 Investing On A Muddy Track

I am not a handicapper. I eat at the risk arbitage railing. There are similarities, however, between horse racing and investing. I discussed some of these just prior to the running of the Kentucky Derby. Today we will see an off-track at the Preakness due to the rain. Therefore, we must assess a couple of known facts. First, since 1983 there have been 89 non-Kentucky Derby starters entered into the Preakness. Only Red Bullet, the 6-1 second choice, was the victor over that 20 year period. Today there are 10 horses running in the Preakness, and six did not run in the Derby. Not one can be considered a serious contender to win- none is a Red Bullet. Therefore, I will concentrate on the four horses that did run in the Kentucky Derby. Scrimshaw finished 11th in the Derby, and was beaten by 10 lengths. Gary Stevens is a great jockey but better than the horse. Peace Rules came in third in the Derby. I had picked him for second behind my Empire Maker pick. The horse has never been spectacular on a wet course. I'll pick him for third this time. Funny Cide does well on an off-track and won the Derby. I had picked him for third there. He is the favorite. The Preakness favorite has lost six of the past 10 years. In the Derby the favorite has lost 23 out of the past 24 years. (I did not put enough weight into that fact.)Funny Cide starts from Post 9. Through Wednesday, Pimlico post positions 8,9,and 10 were a combined 3 for 76 on the track. I will pick Funny Cide for second. That leaves only one Derby starter remaining, and that's Ten Cents A Shine at an early morning line of 15-1. The horse finished 8th in the Derby; however, thr horse has been training well the past week or so. His times have been his fastest to date, and Jerry Bailey is a great jockey and Lukas is a great trainer. I like the number 5 Post. I have not heard anyone to date mention this horse as having a chance. The reason is simple- the horse has not been a strong contender for four months. It's an off-track. When the stakes are high and the going a bit muddy, anything can happen.

As in horse racing, you can know a ton of facts and still be a poor investor. You have to know when to pull the buy and the sell lever. You can follow Buffett in stocks and Gross in bonds. They deserve to be the favorites in their respective fields. Their records have proven that over time. No one is perfect and that is true for Buffett and Gross. The same can be said for Baffert, Frankel, Lukas, Stevens, and Bailey at the Preakness. They are the proven winners- especially in the big money races. Every day in the market is a big stakes day. Today we will try to look at the whole field, the whole track, and come away with some clarity out of our field of vision. I am not suggesting to follow my lead. I am trying to set the table, and you can decide whether you want to nibble or gorge or walk-away. Either way, I don't present you with a check and I don't rely on tips for investing.

There are individuals who do get paid to write. Let's take Timothy Middleton who just wrote a piece for MSN Money entitled "Investors reap spoils of deflation war." I don't know Middleton and have never spoken or interacted with him. He writes "the Fed has an almost unlimited ability to impose its will on the financial sector-- it generates inflation... the Fed's checkbook is bottomless; if it wanted to buy every single Treasury bond in existence, it could. All the cash it spent doing so would quickly find its way into corporate coffers and worker pay envelopes." I will not characterize the words I uttered to myself after reading this. I will only suggest that the spoken and/or written word can be meant well but come out in a very different fashion and in so doing, contribute to a muddy investment track.

Over this past week, since May 6, the long treasury market has reacted strongly to the Fed's recent stated concern about deflation. We have witnessed a gigantic rally in the long end of the market as rates declined to record low levels. Yesterday Ferguson, the Vice Chair of the Fed, gave a business school commencement speech at Washington University in St. Louis. He said that the possibility of delation "remains quite remote...The United States has too many good things going for it to make a forecast for deflation credible." Actually, Ferguson, you placed the policy statement of May 6th in question and raised the overall credibilty of the Fed, and that is something I have been discussing for two years. As such, I might change Middleton's words a bit and suggest the Fed has an uncanny ability to muddy the financial landscape with a downpouring of disparate statements.

Let's examine some facts in no particular order. Consumer demand is at a decade low pace. There is little or no pricing power. Import prices continue to decline. Prices at both the wholesale and consumer level are falling. Even medical costs are rising at a slower rate. In the first quarter of 2002 they were up 5% and this year only 1.7%, and that's a big difference. We need to remember that the health care sector is 16% of our GDP and rising each year as our population ages. Unemployment claims have stayed above 400,000 for 13 straight weeks. Industrial production continues to drop. Factory utilization is down to a 20 year low. Our account/trade deficit continues to rise to record levels and so does our Federal budget deficit. This landscape does not preclude rallies but it does not make for bull markets. Rising free cash flow, increasing revenues and profit margins, market leadership- that's a recipe for success. That's why Dell makes their shareowners money and those are the reasons I suggested to climb on board that horse when the stock was flattened after 9/11 to the upper teens. One might consider scaling back and taking some money off the table- not all but some. Why not play with the house's money in the next race?

There's a lot of talk about currencies, and I have contributed to that noise over the past year. Our rising spending and decreasing revenues and widening account deficits combined with our GDP growth accounted for by productivity gains have made for a declining dollar. The Fed's printing press has been a contributing factor as well. If we are to have a wide view of the field, we should also note the economic weakness in Europe and Japan have negatively impacted our exports as well as the potential flow of capital into the U.S. The economy for the EU has not been stagnant- it is down. Germany, France, Italy, Holland- all weak. Japan's economy is still weak. Their GDP is not growing and deflation continues. Middleton might check his words. Record low interest rates do not necessarily make for bull markets. Japan has been in a devastatingly long bear market. Their No. 26 note yielded 0.17% yesterday. They can't give the money away!!!! Japan has had 23 months of falling wages. It's no wonder the Nikkei dropped 31% last year. Deflation can cripple markets, and the Fed is not bigger than the market or deflation. Don't be misled by the cautious optimism coming out of the G7 meeting. They mean well. Just like Ferguson, they are trying to provide assurance to a muddy investor track. It would be helpful for the horse and the jockey to be in sync.

Let's review the bidding tomorrow. I want to catch breakfast at the muddy track and view the 10 horse field during their warm ups. You never know. My horse may still be running when tomorrow comes around or it could surprise. That's what makes for horse racing- especially on an off-track.

5/16/03 PIMPS Not TIPS

Every third Friday of each month I have an early breakfast with George Orwell. It's quite amazing how much I learn from an individual who has not been on this earth for quite a period of time. George asked me whether I had enjoyed last night's total lunar eclipse. The last one had occurred on January 20, 2000. Unfortunately, I said, the weather was not too cooperative, and I could not see very much. He said that's the basic problem today on earth. The citizens don't see a helluva lot, and the so-called leaders have soggy observations. He told me how we were behind the times, and suggested that the euro was a little like the Linux operating system- not painful to install, cost effective, and slowly gaining acceptance as the currency of choice. Heck, he said, the U.K. might jump on board on June 9th, and suggested the U.S. should join the group before the dollar fades into a newly-colored bill- one printed in yellow as in a caution light.

George asked me whether I had read the recent piece by Pimco's Bill Gross. I said I thought it was cleverly written with many good points. George said TIPS are ok but that PIMPS are way cool. I told him I'd never heard of PIMPS. He said they were on the way to everyone's neighborhood and to watch for them. I asked what PIMPS stands for. He laughed and said not what I think. It stands, he said, for Pension Investment Management Plans for Schmucks. He said Wilshire Associates has told the pension investors that 79% of U.S. public pension plans are underfunded. So now everyone knows. The solution, he said, is sheer genius- to sell pension obligation bonds, and to use the proceeds to jack up the asset returns and eliminate the underfunding. How simple can you make it? I wondered out loud who would buy these pieces of junk. George said investors are experienced in buying junk. That's where the PIMPS come into play. The PIMPS buy the junk with the left hand while the right hand wipes out the underfunding. I thought for a moment, and said it just doesn't sit right with me. George said not to worry because the citizens don't see a helluva lot and the leaders are in a fog.

We had another cup of coffee, and while sipping, George asked if I had seen the latest report showing where the price for crude goods had dropped 1.3% ex food and energy. I had seen that. He asked whether I had noticed the job cuts at IBM, American Airlines, and HealthSouth. I had seen them too. He wondered what I thought of the April PPI having the biggest drop on record. I was not surprised. He asked, if I knew all this, then how is it that, supposedly the economy is in the early stages of recovery, and 10 year Treasury bonds only yield 3.5% and 30 year mortgages are at a record low of 5.45%? I told him I thought the economy was not in the early stages of recovery and that investors buying long treasuries at these historic low yields should be committed. George thought a moment. He told me I was not as stupid as the other guys upstairs were making me out to be.

I got George some more eggs. The man eats like there's no tomorrow. George laughed. He told me a story about this self-proclaimed financial expert who thinks the world is about to witness a new technology cycle. George said the only cycle coming this person's way will be his passing go and collecting the $200. George explained this happens every time there is a total lunar eclipse. It plays tricks with people's senses. George said the last killer technology was email and, with it, instant messaging. Even eCommerce didn't make money in 2002. George said businesses are not looking to spend money. In order to get them to part with the green, the ROI has to be out of sight on a near-term basis.

George became more serious and changed the subject. He said that the economist from the Dallas Fed, Lori Taylor, was on the money. George remarked Taylor's analysis of Texas' tax revenue crunch was timely for Texas and the nation. Taylor stated "although economic weakness caused the revenue collapse, we cannot grow fast enough in the next couple of years to make the shortfall go away." George should know a timely analysis. He is able to see into the future.

5/15/03 Federal Unemployment Benefits Reloaded? And Our Bond Market

As I have previously noted, a federal unemployment extension providing 13 weeks of benefits to those who have run thru their state aid expires at the end of May. The Senate will vote on an amendment by Sen. Kennedy that would enable all unemployed workers eligible for the next 6 months for 26 weeks of federal jobless aid. In order to pay for this amendment, it is proposed to exclude the income tax cut for the top income bracket. Kennedy said his amendment would "provide a lifeline to those hurt the most by the enormous economic downturn." Sen Grassley called the proposal "a job-killing amendment." This says something about the problems in our country where the Congress pits the rich against the poor. It also says something about this country's finances. Obviously, we do not have the needed cash flow to generate jobs as well as to help the jobless.

That brings me to the state of the bond market. Thirty year governments are yielding a record low of 4.59%. Ten year treasuries just touched a 45 year low. We know prices are coming down. Just look at the gas pump. Retail sales are difficult to generate, and, as WalMart just stated, even revenue can be disappointing for Mother's Day. Inventory levels are higher than normal at retail, and that's not just for autos. Even sales of building materials fell in April. Simply put, with more unemployment there is less consumer spending, and we know the consumer accounts for at least two-thirds of our GDP. So, with this backdrop, why am I negative on the bond market? That's a darn good question. My answer flies in the face of normalcy and can be criticized and will be. I feel that our recession (I can use that word because the President just did to describe our economy) and the present state of deflation or disinflation(take your politically correct pick) will turn into something a lot worse- the big D. Please do not compare our interest rate environment to that of Japan. The latter runs trade account surpluses and we wish our country had their free cash flow. I do not believe the rates of return we offer on government bonds is enough to continue to attract foreign buyers to the tune of $2 billion per day, and with continued economic problems, I do not believe we can be viewed as a safe haven. A prudent investor should look at the risk/reward for government bonds- both from a global market and cash flow basis. Any way you cut the cheese, we don't cut the mustard. We aren't living on borrowed time. We are living on borrowed funds we cannot repay. Our credit rating should be downgraded. To prove my point, I have often discussed the U.S. being at a crossroads. We have reached the limit on our $6.4 trillion debt ceiling. It was reached today. The Republicans want the ceiling raised by $984 billion, a toothfairy number. The Democrats will offer a $250 billion alternative that they say will cover government borrowing thru the end of this year. By the way, I do not believe it will cover the borrowing. We can't even fund ourselves month to month. This is a situation which entails great risk to the investor and should be accompanied by significantly higher interest rates.

For the first time in five years, the quarterly orders at Applied Materials came in at less than $1 billion.

A market research study shows investors' confidence levels are at the highest point in 12 months. There are 3.40 bulls for each bear. That sounds like the rally's legs will not be long-lived.

Venezuela underestimated the resolve of its oil workers. I believe France, Germany, and Austria are underestimating the resolve of striking union workers. Their banner speaks volumes: "So it isn't the street that governs?"

AC Nielsen reports that there are about 13,000 dollar stores nationwide and that it's the fastest growing retail segment. Some of the largest companies are Dollar General, Dollar Tree, Family Dollar, and Ninety Nine Cents Only. I know- 99 cents is not a dollar.

In November we can look forward to "The Matrix Revolutions." Is Hollywood sending a message?

Thirty four states have overspent their budgets for fiscal 2003, and 27 have deficits to close by July 1. Good luck.

Nineteen states are reducing prison budgets and one, Minnesota, like Virginia, is considering serving two meals per day on weekends. Says Minnesota State Rep. Marty Seifert, "we have to make sure the rapists and the murderers sacrifice like everyone else." On the other hand, Nevada Governor Guinn is against cutting the food budgets for prisons because, he says, the state pays more to feed the wild horses under state control than to feed its prisoners.

The U.S. and Germany have something in common. Germany is now suggesting the country might be in a recession.

Minority Whip Harry Reid, Nevada Democrat: "If 60 Senators do not agree to support Social Security over the dividend-tax cut, I feel very sorry for the remainder of this session as to what it's going to do to the American people."

For the first time in about 7 weeks June crude closed above $29 a barrel.

Yesterday was a sad day. We lost Dave DeBusschere to a heart attack at the age of 62. He was a great NBA Hall of Famer and an incredible competitor and contributor to the championship Knick years in the 1970s.

Taiwan now has 34 SARS deaths, 264 confirmed cases, and 400 patients holed up at two hospitals.

The falling dollar has begun to exert an export toll on Japan, Canada, Mexico, and the euro countries.

Governor Davis has projected California's budget deficit at $38 billion. I apologize for projecting it yesterday at $39 billion. Davis has truly perfected the art of politics as he plans to extend $10.7 billion of that deficit into future years via a bond sale. I wouldn't buy those bonds with your money. In addition, Davis has become a comedian and should be considered as a guest host for SNL. He has called for significant structural reform in order to avoid future financial problems "or the same problems we're wrestling with will revisit us." I'm sure he is talking about the structural reform of tying his salary to specific levels of job performance.

As I mentioned a couple of weeks ago, we can expect the West Nile virus to be visiting our neighborhods very shortly. Yesterday two Harvard experts(those from Harvard consider themselves experts) said the West Nile could have a much larger impact than SARS in 2003- particularly in the Plains, western states, and Alaska. Last year the West Nile killed 284 in North America and resulted in 4,156 illnesses. They said "it is entirely reasonable to expect that the North American impact of West Nile virus will be as significant in 2003 as it was in 2002." They did not mean to indicate the East and the South would avoid the virus.

5/14/03 Winning Ways

Last night I was reminded of several valuable lessons. The Lakers were playing uninspired basketball, and they were down by 25 points to the Suns. I turned off the TV. Very early this morning I watched the highlights. Had Robert Horry's shot gone in at the buzzer, the Lakers would have won and not lost by two points. As it pertains to the market, you can't count your winnings before you lock them in for good. As it pertains to your enemies, never give them the opportunity to return. The Suns learned that and we witnessed it in Riyadh. Lastly, there are times when being at your worst can really be the best of times because the path of least resistance is up. The reverse is true as well.

Just before turning in last night I had wanted to watch the news headlines. I meant to turn to that station but mistakenly punched the wrong number by one digit and CNBC came on. I watched for two minutes or so- just in time for the head of this hedge fund to say that, had you invested in a mutual fund over the past three years, you would have lost money, and during that same period, investing in the average hedge fund would have generated a return of 13%. I sat there with my mouth open. I had no idea performances had been this poor. Taken over a six year period, the mutual fund investor would have been even and the hedge fund investor would have been up 75%. I never think about someone else's returns. I have always told myself that my knowledge is highly limited. Over a span of 3+ decades I have not made too many yearly investment decisions. I can't day trade. I don't understand technical analysis and, for example, the cup-with-handle. I know about drinking coffee. I don't read analyst reports. I don't listen to recommendations on TV or the radio or the Internet or in newspapers. I do read releases on the PR Newswire and on the Business Wire. I do read footnotes to company reports as well as 10K and 10Q reports. Occasionally, I call a company with a question arising out of their releases. I visit stores. I speak to consumers in stores. I speak to clerks. I speak to store managers. I look at the pricing of inventory. I notice carts coming out of stores. I do not believe government numbers. They get revised. I do not notice the size of Greenspan's briefcase. Basically, I read and think. I wish I were a good deal smarter. My results over the past three years or over the past six years aren't too bad though. You might say the average mutual fund or the average hedge fund would have been delighted to change places. But, then again, they do know sector investing and momentum investing and IPO flipping and go to investor conferences and talk to analysts and CFOs and CEOs and payout big commission dollars and charge big management fees. They have it going on all right.

Let's review what we've been able to nail down: an overvalued market in May/June 2000; undervalued housing stocks in 1999; under-appreciated gold in 2001; an overvalued dollar in early 2002; a good buying opportunity a week after 9/11; a good buying opportunity in mid-Oct. 2002; turning bearish on the economy in early 2001 and bullish on bonds; and sprinkled in-between all that, we had some risk arbitrage opportunities as well as some hedging opportunities. Over all, we didn't do too much. It's a full-time effort to stay ahead of the curve. There are a great many train wrecks in the naked city.

I know from experience that you are only as good as your last trade or investment. Right now, I walk a very lonely road. I am extremely negative on the world economy, and that includes ours. I believe most securities are significantly overvalued in most markets. I believe our unwillingness to cut federal government expenditures should be viewed in a criminal light. Tens of millions of Americans are having their lives destroyed as Washington politicians invoke policies which endanger our democracy. The real war is fought every day on Main Street as folks try to make ends meet, put food on the table, care for their sick without health insurance, lose their pension benefits, and pound the pavements and the Internet looking for a job- any job. This is not a soap opera. This is the real deal. If the President wants to have a real landing, he should try landing on Main Street for one week and not on a fighter jet. To understand the people you need to feel their pain. To be a successful investor you need to walk away from losers. Cut your losses short.

As unemployment has risen, so have foreclosures, and this despite record low interest rates. There are 34 million primary mortgages in this country, and more than 400,000 households are in foreclosure. Tom DiMercurio heads up Fidelity National Asset Management Solutions, the "foreclosure king" for 18 of the nation's top mortage makers. Tom asked his clients whether foreclosures would slow down this year, and "all of them told me to add staff. They definitely felt things were going to get worse before they scratched the surface at getting better." The big home builders are doing great, and many of their stocks hit new all-time highs this week. With rising foreclosures, it might be wise to nail down profits. It's a lot easier to sell on the way up.

Our trade gap rose to $43.46 billion. Maybe the Snow man will realize we import more than we export and that a weak dollar is disastrous to the U.S. economy.

The outbreak of SARS in Taiwan is spreading to the city of Kaohsiung.

Inventories of unsold vehicles are at a record high, and are up 630,000 units from a year ago. I say park these suckers along with the jetliners in the Mojave.

Gray Davis' plan for California is to increase the sales tax, triple the vehicle license fees, cut community college benefits, etc. Who elected this guy?

Singapore may have had an outbreak of SARS at its Institute of Mental Health.

5/13/03 P-traps And The U.S. Dollar

Every U.S. plumbing fixture in the U.S. uses P-traps that are designed to hold water at all times. The water acts as a barrier and prevents, insects, foul smells, and bacteria from backing up through the drains. What does a P-trap have to do with the U.S. dollar? I will try to explain. Hopefully, the analogy will not appear too convoluted. Some years back, central bankers felt uncomfortable holding so much gold in their coffers. What happened was a rush to the exits, and you probably remember gold cascading down to $250 per ounce. It has ony been in the past couple of years that gold has begun to climb the steep hill back to respectability. It has recovered to about $350 per ounce. Interestingly, about the time gold found a solid floor, the U.S. dollar started to form what has become a ceiling. This phenomenon has very serious implications. The dollar for the longest period could hold water, so to speak, at all times- in the face of a recession and growing account deficits. Many central bankers thought the U.S. dollar was overvalued at the time but the "P-trap" kept them at bay. Slowly, ever so slowly at first, the "P-trap" gave way. It is important to focus on the U.S. dollar comprising about 77% of global central bank reserves. Those central bankers reached a formally deliberated decision to reduce dollar-denominated assets and U.S. dollar holdings. The impact from this decision started to be felt last year, and in the last few weeks, we have witnessed a run on the dollar. Unfortunately, the Snow man has a myopic view of the dollar's decline and its positive impact on our exports- particularly for certain manufacturers and farmers. I would recommend a much broader field of vision.

Obviously, I have not sat in on the central bankers' deliberations. However, it might be useful to speculate as to the formulation for their thinking. The following reasons are brought forth in a random manner. First, would be our record budget deficits which this year will exceed $400 billion and far exceed the accepted level as a percentage of GDP in the euro countries. Second, our record trade account deficits which also will exceed $400 billion. Third, our weak economy which has pushed interest rates down to record lows. The economy is so weak that, at present, all the growth is represented by productivity gains. Yesterday, our President described our economy in this manner: "The best way to deal with the recession is to have an economic growth plan that will cause economic vitality." A recession does not give central bankers much confidence in the dollar. Four, the low returns on government bonds, such as, 3.6% on a 10-year, coupled with rising deficits make them unattractive investments when compared with alternative investment vehicles. Five, the U.S. government has alienated many foreign countries with hostile trade practices. Six, the U.S. government has dictated economic policy to others while it has failed to keep its own house in proper order. There have been too many scandals and too much spending and too much consumption, and each has tarnished our reputation abroad. Seven, even though the U.S. economy still generates almost 30% of global output, the economic dependency of other countries on the U.S. has waned considerably. Our imports are vital to Japan, for example, but they are less attractive as the dollar depreciates vs the yen. The same holds true for the euro counties. Eight, in 1980 the U.S. was a net creditor to the world, and now we are a net debtor exceeding $1 trillion. If interest rates were to rise, making principal and interest payments would place a huge burden on the U.S. treasury. Nine, the rapid rise in U.S. foreign debt has primarily fueled domestic consumption rather than simply investment in U.S. assets. U.S. personal consumption is more than five times larger than gross private investment, and that ratio continues to grow. Ten, the wealth effect from rising real estate values is not sustainable, and the economic impact from a decline in such values will have a profound impact on our economy. Eleven, there is a lack of confidence in the U.S. as a preferred destination for investment. Our stability has come into question. Twelve, There is abroad a distrust of the Bush Administration's anti-terror policies and the unilateral decision making as it pertains to declaring war. Thirteen, productivity increases have surpassed the growth of aggregate demand in the economy. Fourteen, emergence of especially China as a price-reducing entity has created declining import prices and led to increasing unemployment. Many envision this trend to continue and therefore limit future growth in the U.S. Fifteen, the continuing low rate of household savings in the U.S. Sixteen, our monetary base has expanded at a 7% rate in the past year, and rather than creating inflation, it has destabilized the value of the dollar. Seventeen, there is increasing anti-Americanism overseas. This, combined with terrorist acts, such as, yesterday's explosions in Riyadh killing 10 Americans and wounding 40 others, creates a growing feeling that the U.S. may no longer be a safe haven. In sum, the "P-trap" has failed and overseas capital inflows are turning to outflows, and the dollar is being sold while the euro, the Swiss franc, and the yen are being purchased. Every day there is a reminder on why to sell dollars. Yesterday it was the disclosure that, in the first seven months of the present government fiscal year. tax revenues were $62 billion lower than the same period a year ago while government spending rose by $76 billion. In addition, a confused picture is projected to the outside world. Our President pushes for tax cuts while the latest Gallup poll illustrates that Americans continue to regard deficit reductions as a higher priority than cutting taxes.

Daniel Mitchell, an economist at the conservative Heritage Foundation: "Even though I like to think taxes are the most important things in the world, even I have to admit there are other factors: monetary policy, regulatory policy, trade policy, government spending- all these things matter. Everything has to be interconnected."

The SARS Taiwan chief said it may take 5 weeks to control the disease. In the meantime, 8 people died there yesterday and their Hoping Hospital president was fired.

The N.Y. Times reports a new study finds 60 million Americans are uninsured during a year. That means we have something in common with China. There, only 10% of peasants have health insurance. Yesterday China reported 12 more SARS deaths and 75 additional cases.

On April 30 Microsoft said it was developing a portable toilet with Internet access called an "I -Loo." We now know this was a hoax perpetrated by its British division.

Hartford Financial cuts 1500 jobs.

Today found the Bank of Japan again selling the yen as the Snow man dismissed the effectiveness of currency interventions.

Laurens Van der Post: "Human beings are perhaps never more frightening than when they are convinced beyond doubt that they are right."

5/12/03 Support Our National Debt

Salmonella has been known to cause illness for over 100 years. Those with impaired immune systems, the elderly, and infants are most prone to this illness; however, cross contamination can make everyone susceptible to salmonella infections. I am not a doctor but I am a pretty good cook and I know the importance of hand cleansing and keeping separate cutting boards in order to reduce the potential of cross contamination. In my view, we are confronting highly dangerous consequences from cross contamination. As I mentioned as recently as yesterday, Americans owe $6.1 trillion on home mortgages on top of almost $2 trillion in consumer debt. On top of that each American family owes another $70,000, and this represents each family's share of this country's $6.4 trillion debt. I wonder why the President doesn't go around the U.S. providing that information? What does it mean to exclude $500 of dividends from taxation when your property taxes are going up, your water rates are increasing, and the sales tax is rising? You go to the store more often than you receive a dividend. Sen. John Breaux of Louisiana said that "about 92% of the people in Louisiana would not be affected by the dividend tax repeal." The Bush proposal does not include one penny of direct aid for the states, and the states have accumulated budget deficits of about $78 billion. The current Senate bill does include $20 billion in aid for state and local governments, and some senators want half of that aid to go towards Medicaid. The current tax bill being negotiated also includes $72 billion in corporate tax increases and custom fees. Businesses create jobs and not the government. What good does it do to contaminate the reduction of the current 38.6% tax rate to 35% with corporate tax increases etc? Since the Congress won't reduce spending, maybe we can get the consumer to reduce spending. I suggest that, each January's mailing of tax information, include a bill for $70,000 for the share of the national debt. If we exempt $500 in dividends from taxation, maybe the government can recover those needed dollars by asking families to pay up to $500 in interest on their share of the national debt. After all, that reflects a miniscule interest rate and we could receive in exchange a bumper sticker which reads "Support Our National Debt."

According to UBS Warburg, a net $418 million was taken out of U.S. stocks in the weak ended May 2. The outflow was the fourth in five weeks. In Europe, there has been a net inflow for six of the past seven weeks.

The U.S. and France seem to be on the same page- extending retirement age and reforming retirement benefits. Both have been front page news from time to time in each country. Air France's unions will strike nationwide tomorrow specifically boycotting over the aformentioned topics. The airline will cancel 65% of its flights. Americans are too passive. Have you seen strikes over extending retirement age under social security to 67 or people losing 50-67% of their pension plans when corporations reorganize?

SARS has negatively impacted China's April retail sales and lowered the rate of direct investment into that country.

There have been 8 new SARS deaths in Taiwan.

Palmiero hit his 500th home run.

Spot gold hit a two-month high of $350.75 per ounce. The Snow man makes it so easy for the gold bugs to make money. He says a weak dollar helps exports. Of course, he doesn't say it also acts as a tax on imports- just like higher gas prices at the pump. While MMM and J&J are making more money on exports, the American consumer is taking it in the pocketbook on imports. Meanwhile, the euro has soared to 1.16 vs the dollar. The world is laughing at the U.S. and the voters do absolutely nothing. Does anyone care that, after adjusting for modest inflation, the U.S. median wage for all income levels fell every quarter between March 2002 and March 2003? The upper-income levels, the ones who create jobs, were hardest hit. An accountant put it this way: "with so many people out of work and needing income of any form, employers are able to set wages back two or three years." When President Bush stumps in New Mexico today, I wonder if he will tell that to the workers.

During the first quarter Japan sold the yen for dollars on 17 days. With the dollar at 116+ vs the yen, the Japanese government is probably supporting the dollar again.

5/11/03 This Time Don't Blame Al-Qaeda

The number of patients at VA hospitals and clinics climbed in number by about two-thirds to 4.3 million over the past six years. During the same time funding for VA health care increased by about one-third to $22.2 billion. As one veteran remarked about Bush and the Congress, "they're going to rebuild Iraq, and they don't have the money to take care of us when we get sick and old? They're going to give those rich folks a tax cut, and they're not even going to help all those veterans who were promised help? I feel sorry for those young ones coming back from the Gulf, if they have to go through what we're going through. I feel a total disappointment." The veteran I quoted enlisted at age 17, volunteered for hazardous duty and saw action in the Philippines and Japan. In sum, there is a waiting list of veterans trying to get into the VA system as new patients. According to the VA, 119,248 former service members were waiting more than six months for an initial appointment at the end of March. Almost 60% of patient appointments were rescheduled, and this created a further wait of two months. It should be noted that service members returning home from combat zones get two years of free care from the VA when they leave the military under recently affirmed policies. We have had more than 250,000 U.S. troops in the Gulf region during the Iraq war. How long will those leaving the combat zone wait for an appointment? Maybe Rumsfeld and Meyers and Franks should wait in line for an appointment alongside our veterans. Maybe those in Congress should join the waiting line. It's time those in Washington got to the back of the line. Their spending policies created the line.

Florida's Broward County was a hot job market throughout the 1990s. In 2002 Tallahassee (the state government) reported that 4400 jobs were lost. Now Tallahassee reports that, in fact, maybe Broward gained 8100 jobs. At the same time the state said Miami-Dade County did not gain 18,500 new jobs in 2002 but rather only 7600. The reason for the changes was placed on supposedly more accurate research methods on behalf of the U.S. Department of Labor. The latter replaced its sampling method with a probability-based system. When was the last time the government was probably right? Certainly not about jobless numbers. Each month they are revised. Certainly not about the budget deficit. That too is revised upwards, and sometimes weekly. Certainly not about the GDP which is often revised downward. Certainly not about the trade imbalance which is revised upward. My solution is to revise the U.S. Department of Labor payroll downward. This department labors under constant revisions and projects the probability of numbers with uncanny lack of success.

Laker coach Phil Jackson underwent angioplasty for chest pains.

36,000 female members of the military are stationed somewhere outside the lower 48 states, and I wonder how many of those women are mothers. Happy Mother's Day.

A Chinese export may have found its way into Houston yesterday. A large motorized rat was one of 250 entries on display during that city's Art Car Parade. It did not win for lack of a surgical mask.

Taxpayers are spending $5 billion per year on airport screening safety. Under-cover agents regularly sneak mock bombs and weapons past the screeners. A screener at LA International Airport said "we are not getting familiar with the stuff I think we need to get familiar with, particularly explosives." It's no wonder I do not want my family flying.

David Resler, chief economist at Nomura Securities International in N.Y. said "what we're hearing on a uniform basis is a complaint from businesses that they have no pricing power. The demand for their goods and services is so weak that they don't dare attempt to raise prices." Demand is weak for airline seats but companies raised prices last week. No one could accuse most airline executives of having a nose for good business judgment.

Americans owe $6.1 trillion on home mortgages on top of almost $2 trillion in consumer debt.

Inflation in the first quarter of 2003 was about 1.3% on an annual basis, and that was smallest rise in 38 years.

On Wednesday Gray Davis releases his budget for California. He will announce that the state's deficit has risen to perhaps $39 billion. He will need to address a short term debt of $12.5 billion which is due next month. With about 700,000 Californians out of work, declining receipts from state income tax are not able to meet rising expenditures. California will run out of money. So will N.Y.C.-once again. Who will look after our veterans, cover day care for working mothers, teach our school children, provide prescription drugs to Medicare patients and health care to our 45 million uninsured Americans, and supply the food banks for the homeless? As the President stumps for tax cuts, the U.S. Treasury is down to its last dime, and will be out of money in about four days. When the lights go dim in DC, Congressional spenders will not be laughing. They won't be able to blame it on Al-Qaeda. The taxpayers can blame it on the voters. The problem is we are the voters.

With five new fatalities, the death toll in China rose to 235 with about 5000 cases proclaimed to date. The WHO says the SARS data is significantly flawed in Beijing. The spokesperson for the WHO said "the problem with the data is that there are holes in it."

5/10/03 The Snow Man, WER Part II, And Deflation

The Snow man (John Snow) said our economic recovery "is insufficient to create jobs for the people who need them." Since when is a jobless recovery a recovery? I can state without hesitation that, if a good percentage of the aforementioned people do not get a job because of the "wobbly" economy, then the Snow man will find himself out of a job come November, 2004. The Snow man went on to proclaim that "I don't think the U.S. has any risk of being in a significant deflationary period." Some consider him an expert on deflation. In mid-1997, CSX, the company the Snow man headed, traded around 63, and for the first three quarters of 2000, the stock sold at 20. Even today the stock is down 50% from mid-1997. The Snow man was CEO during this period, and during a six year span, CSX's 1995 profits of $1.1 billion on sales of $10.3 billion plunged to 2001's profits of $293 million on sales of $8.1 billion. He knows deflation! He helped write the book for the CSX shareowners.

With the money supply growing at an annual rate of 7.2% over the past 12 months, it is not surprising to see increased interest in gold and gold mining stocks. As more dollars get printed, the dollar begins to depreciate and people turn to the "hard currency" of gold. There is an additional point about the increased growth in the money supply. It must be puzzling to the Fed that prices are not rising and that GDP exhibits a lack of growth ex productivity. In fact, the Fed has experienced deflation worries during the same week the money supply grew at its fastest rate in about two decades. The stock market should give this some consideration. I can assure you of one thing. There will be a cap on export growth. Despite the dollar depreciating vs the euro, Swiss franc, the yen, the Canadian dollar, and other currencies the economies in the latter countries are weak and the demand side of the equation for foreign goods is limited. Earnings for our international companies can be assisted by the weak dollar, but not by a meaningful amount. Those extra earnings are negligible compared with the weakened state of our domestic economy. Look at WalMart. It's main growth at present is the international market; however, the bulk of their locations is still in the U.S.

Lara Rhame, U.S. economist at Brown Brothers Harriman: "Ever since the Bush Administration came into office, they've been giving their tacit acceptance of a weaker dollar."

Citigroup economist Joe Lo expects prices in Hong Kong to fall 2% this year. Deutsche Bank believes, if SARS lasts 9 months, it could result in prices falling 0.4% in China. The Asian Development Bank suggests Asian economies could suffer $28.4 billion in economic damage if SARS were to be present into the third quarter of this year. With only 7 weeks until the third quarter, it is highly unlikely SARS will be leaving China within that time period.

The Blue Chip Economic indicators newsletter said "the paring of consensus estimates of GDP growth over the remainder of this year reflects diminished expectations of growth in personal consumption expenditures, business inventories, capital spending, and industrial production." This was the fourth consecutive month their forecast has been cut.

I am having a difficult time undrstanding President Bush stating the Iraq War is over. If that were true, then how is it that two soldiers were shot and killed a few days ago and that yesterday three more soldiers were killed and one injured when an Army helicopter crashed? Rumsfeld says our troops will remain until Iraq is stabilized? Has Iraq ever been stabilized?

In spite of the fact that municipalities all over the U.S. are running large deficits, yields on municipal bonds declined to their lowest level since 1968.

In an SEC filing Halliburton's Kellogg Brown and Root subsidiary admitted committing a mult-million bribe. This is the same subsidiary which was awarded the no-bid U.S. government oil contract in Iraq in March. The illicit payments were made in 2001 and 2002. No mention was made of when the payments were authorized. Halliburton said none of its senior officers was involved in the bribe. VP Cheney was Halliburton's CEO from 1995 until August 2000. Interstingly, the company said its code of business conduct and internal control procedures were "essential" to the way it ran its business. Clearly, lack of disclosure is part of the way Halliburton runs its business. Not too long ago the U.S. Army Corps of Engineers said Halliburton had been given a contract covering oil well fighting in Iraq. A week ago we learned the contract also included "operation of facilities and distribution of products." There's an odor emanating from Halliburton and its not just from burning oil wells.

In the 12 months ending this June, Microsoft boosted planned research spending 21% to $5.2 billion and the CEO says that figure will go "maybe up 10%, 12%, something like that" in the next fiscal year beginning July 1.

Germany's industrial production, which accounts for 25% of their $2 trillion GDP, fell 1.1% in March from the levels recorded in the prior month. That decline was twice what economists had anticipated. Germany's April business confidence fell to a 16 month low.

Credit Suisse First Boston said yesterday the spread of SARS would cap Asia's economic growth at 5.7% this year, down from the forecast of 6.6% prior to the SARS outbreak.

Lack of demand is hitting the pizza business. A chain has a 2 for 1 offer on any large pizza.

2002 and 2003 have been marked by business cost cutting. Yet, two very successful privately-owned companies, SAS of North Carolina and Tom's of Maine, have not changed their ways. Both are recognized as wonderful places to work. Each offers family-friendly work and assistance programs, such as, flexible work schedules, teleconferencing, generous medical and dental benefits, four weeks parenting leave, long-term care insurance, child care benefits, and assistance for child/elder care, and other work/family issues. Very often caring companies are our most successful companies.

5/9/03 Wobbly Economic Recovery (WER)

The Snow man (John Snow) said "I think the economy is in recovery...but it's something of a wobbly recovery." You cannot blame him for being a cheerleader. He's our Secretary of the Treasury. By the way, I don't understand that description. How can someone head a department which cannot exist? A Treasury I thought should have assets and not just indebtedness. Now back to the WER. If the average number of weekly first-time claims for state unemployment over the past four weeks hitting a new one year high is wobbly, then Snow is correct. If more than 3.6 million Americans collecting state benefits over the past four weeks is wobbly, then Snow is correct. If disappointing April retail sales would reflect wobbly, then Snow is correct. Looking forward, WalMart sees their May same-store sales up only 1-3%. That is the lowest forecast in almost three years. That is really wobbly. I think the dollar may be a bit more than wobbly. It's hardly standing against the euro at 1.15, a four year low for the dollar and wobbly against the yen at a 10 month low. In sum, it has now been 12 consecutive weeks that there have been more than 400,000 weekly first-time claims for state unemployment, and it's the first time this has occurred since 1992. In the past three months 525,000 workers have lost their jobs. Last week GM closed two factories and temporarily idled 4000 workers while Ford shut one plant and put 1820 employees out of work for the week. I trust Snow will find a more suitable description for our economy than wobbly. I suggest deflated.

The Washington Post reports that GOP Senators have endorsed 30 tax increases in order to save Bush's tax plan. How is it possible for such people to get elected in the first place? The electorate needs to come off Prozac or its generic brand.

President Bush: "Fiscal discipline was high on my agenda, and therefore, anybody that works for me will place a premium on fiscal discipline." The CBO in April estimated that this year's deficit will reach $408 billion. In the first six months of this year deficits were running about double the amount of the prior year. I think the Administration's definition of fiscal restraint is holding down budget deficits to 100% increases. Gold bugs love Bush. Deficits increase, the dollar gets crushed, and gold rises to $348 per ounce. It's hog heaven. Keep the pork pograms rolling!

John F. Kennedy: "The Federal budget can and should be made an instrument of prosperity and stability, not a deterrent to recovery."

FDR:"True individual 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."

I must apologize to the Fed. I said they only now, this week, saw the risk of deflation. The minutes of the March 18 Federal Open Market Committee meeting stated "members saw further disinflation in core prices as a distinct possibilty over the next several quarters." We waited seven weeks to read that proclamation.

California counties would lose $2.7 billion in state and federal health care dollars if Davis' proposed Medi-Cal reductions become law. Davis truly is a wobbly Governor.

In order to buy a medium-priced home in California the family income needs to be $82,470 a year. Only 28% of California households fit that description. There are a growing number of homes on the market. Prices will come down. It's supply and demand. Just like the price of gasoline at the pump. In California it was $2.10 and two months later $1.77.

Rafael Palmiero is just one homer shy of the 500 mark.

Between March and April German wholesale prices dropped 1.1%. That's wobbly too.

Manufacturing accounts for 20% of U.K.'s GDP. Their March factory production fell at the fastest pace in five months. That's wobbly too.

Goldman Sachs says their mid-April IT survey declined to -3% and "perhaps the most troubling, those expecting spending acceleration in the second half of the year virtually evaporated, pushing their expectations into 2004 or after 2004." Wait till the Nasdaq catches up with this survey. Then we'll see wobbly.

Against the pound, the euro hit a record level of 71.87 pence. The U.S. dollar is not reeling by its little lonesome. Misery loves company.

The WHO raised the SARS mortality rate to 14-15%. An additional concern are the millions of migrant workers who have left Beijing and Guangzhou and are feared to be spreading SARS to outlining provinces in China like Henan.

Investors think they might have several recipes for success. In actuality, I have found that, over time, most investors cannot match the various indexes, and that includes professionals who receive a management and/or advisory fee. There are some successful day traders, some successful chartists, and so forth. In my view, quality management, quality of earnings and cash flow, consistent growth, buying during major market dips, and patience offer the best combination for on-going success. If you look at the great companies, WalMart, Microsoft, Colgate, Starbucks, Dell, Berkshire Hathaway, etc., they are not, in my opinion, at favorable buying points. They are valued too high in relation to their present and near-term rate of growth. Wait for their prices to come into favorable view. The same can be said for the overall market.

5/8/03 Suicide And The Fed Printing Press

I have been thinking about these subjects for quite some time. They are serious matters. At the same time, I hope you will forgive my one opening remark which may border on humorous or not depending on what side of the market you reside. Towards the end of the third week of October last year I wrote how I believed the market decline, at least for the near term, had been overdone. I suggested exploring the risk/rewards in several situations- QQQ, C, JPM, MRK, MSFT, PFE, and a few others. Over the past month many pundits have turned bullish. Let me just say, for example, that QQQ is up about 50% from the aforementioned late October. I think a reason for this recent bullishness can be found in an astronomical event. Yesterday Mercury passed between Earth and the sun. This five hour transit occurs only a dozen times in a century. As far as Earth is concerned, this ride has been completed.

According to a Harris poll, 7% of U.S. adults say they have attempted to commit suicide and 21% of adults say they have thought seriously about committing suicide. Twenty five per cent of the population believes that "suicide is an acceptible solution in certain circumstances." It should be noted that this recent poll did not canvas children. Having, thank goodness, never considered suicide, I find these statistics of nightmare proportions. We are talking about 60 million Americans who have seriously thought about committing suicide. I am not a psychologist or a psychiatrist, and am not certain what I would suggest were I one. I would like to think that more can be done in addition to prescibed medications. Suicide is a serious problem facing this nation.

Another serious problem facing this nation is the Fed. The problem does have something to do with potential suicide. But first, I must relate what Woodrow Wilson had to say. In 1913 he signed the Federal Reserve Act. Some years later he wrote that "I am a most unhappy man. I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated Governments in the civilized world no longer a Government by free opinion, no longer a Government by conviction and the vote of the majority, but a Government by the opinion and duress of a small group of dominant men." Woodrow Wilson was not a Jew.(I am, as everyone knows, a Jew. I can make the following joke. We know this.) As such, he didn't feel guilty. Instead, he felt emotionally contorted by the decision he had made to sign the Federal Reserve Act. I understand and feel his pain. We have supposedly dominant men in an economic haze. Fortunately, we have the market to provide a buffer and keep us, hopefully, ahead of the curve. Coming to the realization that we face deflation in May, 2003 is a bit like turning bullish in April of this year. It's too late to come to those decisions. In the first instance the deflation spiral started at least 24 months ago and cannot be stopped unless China falls off the globe. In the second instance, uncommon and favorable risk/rewards are rarely found in today's market. Let me continue, please, while you all stop screaming. I am not being a know-it-all. Nothing would please me more for all parties to have their day in the sun. Mercury, however, left our space. It left us with a Fed no longer focusing on inflation but rather deflation. Therefore, they will turn to reflating the system and turning on the printing presses in addition to buying government bonds. If they do that, the dollar will commit suicide. Our dollars will be wallpaper. No wonder Woodrow Wilson felt as he did.

I love seeing capitalism at work. Jim Hensen's children repurchased the Muppets for $89 million. That's one-eigth the price the Muppets was sold for just three years ago. The Muppets could have been a dotcom stock.

When the U.S. was high and mighty (I know Rumsfeld and company think we still are), the EU never would have given an ultimatum to us. Now that our country is in a decline we have been given an autumn deadline to change disputed tax break laws which will end our trade differences. If nothing is done by autumn, then sanctions would be imposed on 1/1/04. These guys are right. International trade is not an even playing field. It never has been and never will be. The EU says their patience is not infinite. It sounds like the Administration with the Iraqi government. I wonder how our Administration will take to the ultimatum.

The global death toll from SARS passed 500 today after Shanghai reported its first death from the virus. The WHO extended their SARS travel warning to Inner Mongolia and Tianjin. I need to change my summer vacation plans to Outer Mongolia.

Costco's total comparable-store sales in April rose 6%. They continue to do just great.

Jean Rhys, "Good Morning, Midnight" :"Next week, or next month, or next year I will kill myself. But I might as well last out my month's rent, which has been paid up."

I wonder whether our government will award Halliburton a contract to fight the cholera breakout in the Iraqi city of Basra. The company must be familiar with contamination and poor sanitation.

5/7/03 A Roadmap Diffusing Confusion

Yesterday I received an email from a professional investor who said he didn't share my bearishness. This individual is a new reader of this blog, and therefore, is unfamiliar with my style of investing. I attempt to stay with the trend but still look for what I believe are uncommon values with limited risk. I have stated time and time again that selling at the high and buying at the low are a matter of luck. Buying right and selling right are a matter of skill and discipline. Once again, I mention that I have been negative on the overall market for three years; however, about one week after 9/11 I mentioned that the short-term risks in the market were limited, and gave several reasons for that analysis. I suggested several stocks for the readers to analyze. I do not make specific recommendations for others. I suggest various alternatives. I went so far as to mention, over the past year and a half, even eBay, Amazon, Yahoo, Juniper, Cisco, Microsoft, and Sun Micro. Only the latter sells close to the price mentioned in the blog at that time. It should be noted that I feel more comfortable with suggesting looking at Merck under 40 because I understand their business a good deal better and, as such, can sit as an investor a lot longer. The point is one can be negative on the Dow and still like McDonald's under 13 or be negative on airline stocks and still like Southwest Airlines in the low double digits. I may think Lowe's is a great company but too rich, and that Home Depot is not as well run but still find value in the latter in the low 20s. I am never just bearish or just bullish. My mind arbitrages moving valuations and relationships. When the euro was originally released, I was negative at 1.18 and then it got crushed to the middle 80s. It was time to change. Nevertheless, there are basic trends. We have oversupply almost everywhere we look; we overspend almost everywhere the eye can see; we are overburdened by debts in almost all walks of life and in all halls of federal, state, and local governments; too many Americans go without healthcare and jobs; corporate cost-cutting does not necessarily lead to top-line growth; and not surprisingly, in this environment, there is much depression and much economic anxiety. The country is in a decline with decreasing cash flow and deflation imported from global competition.
I have said over and over again that the Fed could not deal with the aforementioned problems. The market will, and it shall take time and there will be much heartache in the interim. Our Washington leaders do not have a clue either. It's not just the Federal Reserve. Rep. Thomas said " a $550 billion tax cut will create 750,000 jobs. Secretary Snow said "it costs $80,000 to create one job." The Administration in recent days said the aforementioned tax cut would create 1.4 million jobs. Numbers are just that. These folks don't know. They do know they don't want to cut spending. Lastly, just to make the point, Mitch Daniels, the OMB chief, said he was retiring in 30 days. He took the job originally because of Bush's priorities:"fiscal restraint, a balanced budget, and paying down the debt."

Swiss Re Chief Eeconomist: "Inflation is not a problem and unemployment is rising-classic signals for a Fed cut..The likelihood of a double-dip recession, though down slightly is still high-about 25%. Europe is currently economically weaker than the U.S. and the appreciation of the euro is not helping its fragile recovery.Hence the ECB is likely to lower interest rates again."

Cisco's sales were down 4% from a year ago and operating cash flow declined 20%. It's tough to put a positive spin on that combo.

The tax package released by Senate Finance Committee Chairman Charles Grassley contains no federal Medicaid assistance to help states prevent health care cuts. It should be noted that only a few months ago by a vote of 80-19 a "Sense of the Senate" resolution was passed to provide $15 billlion for Medicaid to assist the states in avoiding cuts to health care.

In 2002 foreign investors made direct investments of $52 billion into China and this was followed by $13 billion in the first quarter. Manufacturing comprises 54% of China's GDP, services 28%, agriculture 14%, and construction 4%. JP Morgan says China's electronic-goods sales could fall up to 10% this quarter. Acer, Taiwan's biggest computer vendor, is delaying production of notebook computers in China because of the SARS virus. Access to raw materials and cheap labor continue to be China's main attraction.

SARS death toll: China 214, Hong Kong 193, and Singapore 27. In Beijing 17,000 are quarantined. UN health chief Brundtland said "we have not seen a peak in China yet."

Foreclosures jumped 8.2% in the Silicon Valley in the first quarter of 2003 compared with one year ago.

I have often stated that I think Barry Diller has a nose for making money. On Monday his company announced an agreement to purchase Lending Tree, a company I suggested to readers of this blog two weeks ago. At that time I mentioned you can buy good growth in an internet company without paying an outlandish price like you do with eBay at present levels. Obviously, Barry Diller shares that viewpoint. Fortunately, Lending Tree was then at $14.

Over the past month the networking index is up about 30%. That's more than I can say for their order flow.

15% of our GDP is comprised of imports. With the dollar falling prices will go up. Fortunately, the opposite is true with our exports. The trouble is we import more than we export. As such, our account deficit is a mere $400+ billion.

The Small Business Survival Committee said "from 1992-2000 per capita total U.S. state spending increased by 40% while inflation registered just 16.4%" That spending has now produced huge deficits and we have begun to see the impact with rising state layoffs in April. I expect that trend to continue for some time and to be accompanied by similar layoffs at the local government levels. I have mentioned several times about the job cuts in education.

A new survey by TrueCareers shows that 61% say their financial situation has worsened in 2003.

5/6/03 Buying Right Is A Stepping Stone To Making A Profit

I appreciate the difficulties in starting a company from scratch. I've done it. What eBay and Amazon have accomplished are truly fantastic. What price do you pay for fantastic? Should Ebay have a market capitlaization which exceeds that of General Motors or McDonald's or even Boeing? I can see Boeing. Kroger is a pretty good company. Should Amazon's market cap exceed Kroger's. I could continue with Yahoo and make comparisons. I wrote a piece like this in the Spring of 2000. I don't want to be repetitive. Let's not make the same mistakes from the late 1990s. There are enough losses on the books. Every time losses mount, market liquidity drops. To fuel investment we need liquidity.

Maybe being a libertarian, I am a bit more out-spoken than most. I was watching Sander Levin, a Democrat on the Ways and Means Committee. He said "I would target a tax cut to those who would spend the money." Anyone who votes for him should be committed. I think it is highly likely that a good proportion of the tax cuts will go towards reducing credit card debt. Credit card delinquencies are at a 13 year high. While I'm on the subject, auto delinquencies are on the rise and homes in foreclosure are at record highs.

I thought there was a significant point in the ISM non-manufacturing business survey. There was a drop in backlog orders, and that is a forward-looking indicator, and so is the stock market.

President Bush said yesterday "the best way to stimulate demand is to let people keep more of their money." I would hope everyone would agree with that statement. He is well-intentioned. These are special times. Millions of Americans really have negative net worths. Millions are out of a job. A the end of May millions will have their federal unemployment benefits expire. About 45% of unemployed workers are still without a near-term job prospect when those benefits run out. The extension of unemployment benefits lasted 29 months in the early 1990s. If they end on the 31st of this month, their extension would have been limited to 15 months. It is not surprising, therefore, that, in the most recent Newsweek poll, 62% of those surveyed said they'd vote on issues of jobs and the economy.

Do not liken the recent market fastbreak to the ones captained by Jason Kidd. The latter doesn't run out of gas. He can go the distance.

Rent-controlled N.Y.C. apartments will be hiked by a maximum 5.5% for a one-year lease and 8.5% for a two-year lease. Inflation is hitting N.Y.C. during a bleak economic period for the city. Homeowners across the nation are also getting hurt- by rising insurance rates and increased property taxes. The squeeze is on most everyone.

Australian retail sales dropped in the first quarter.

Motorola closed its Beijing office after an employee contracted SARS. Twenty seven workers had been in close contact with that employee. For the next week 1000 employees will toil from their homes. Motorola's China business amounted to $5.7 billion in 2002, and the company is one of the three largest foreign investors in China.

The Transportation Security Administration plans to cut 103 screener jobs at Ronald Reagan Washington National Airport.

Spiegel will lay off 635.workers.

UC Berkeley will not be accepting students from China, Hong Kong, Taiwan, and Singapore for summer classes.

3Com Corp. will move its headquarters from the Silicon VALLEY TO mARLBOROUGH, mass. where their networking division is located.

With the implied yield on the July Fed funds contract at 1.10%, does it matter whether there is an interest rate reduction at today's Fed meeting or on June 25th? If business investment were about to pick up and economic growth were on the verge of spurting, interest rates would adjust upward and the price of gold would not be moving higher. The geopolitical risk is no longer in the air. Oil has declined sharply in price. Inflation is not an immediate concern. In recent weeks, as the markets surged higher, gold moved from a recent low of $320 per ounce to $342 per ounce. That may be a long way from the year's high of about $380, but it's a respectable rally.

Over the past several days villagers in Xiandie and Zhejiang have violently protested against quarantining suspected SARS cases. It was only a matter of time until the virus hit the countryside where 70% of China's 1.3 billion people live. Their death toll has risen to 206, and there are about 4300 announced cases.

April air travel is down 60% in Hong Kong, 40% in Singapore and Seoul, and slightly less in Bangkok and Kuala Lumpur. April tourist arrivals are down 20% in Australia, and the drop is expected to worsen. In Australia there are 550,000 workers in the tourism sector, and the country expects to lose close to $1 billion in revenues from the visitor drop.

With the dollar trading at 1.1341 per euro, it is now down about 8% on the year vs the euro and about 20% in the past 12 months. The trend speaks for itself.

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5/5/03 Insiders: Will They Contain The Bulls?

After the Iraq war ended, the bulls ambushed the bears. While their fighting continues, the insiders have gone on a buyer's strike and, in fact, have been selling. According to the Washington Service, U.S. executives and directors purchased only $90.8 million of their companies' shares in April, and this was the smallest amount since April 1995. In my view, insiders may not walk on water but they have a better view of their company's prospects than an analyst or any other independent investor. If it had been only a few insiders standing on the sidelines, then I would have placed less importance on the data. However, clearly that was not the case. This is a warning sign. At the very least one should be circling the investment track with a yellow flag. In addition, for the eight weeks ended April 30, Vickers Weekly Insiders Report said there were 1.84 sales for each one share purchased.

The Trustees for Social Security stated that the true liabilities of Social Security are $7 trillion larger than reported. Benefit payments, they stated, will exceed tax revenues by 2018. The 75-year deficit represents about 2% of payroll. I feel comfortable in saying that Social Security will be insolvent closer to 2010 than to 2020. It should be noted that the obligations of the U.S. Treasury amount to about $6.5 trillion, and of that figure, about $1.4 trillion is said to be in the Social Security Trust fund. I hope this gives a warm fuzzy feeling to the bulls. When the market crashes, and I feel confident it will, you'll be left with nothing to keep you warm.

Cathay Pacific will cut its dividend by 50% due to the impact SARS has had on air travel. SARS has killed 184 people in Hong Kong, and 1629 have been infected with the virus.

Yesterday Paul Silas was fired as head coach of the New Orleans Hornets. In 5 years he had set the franchise record for most wins. On Friday night his team was eliminated in the first round of the playoffs by the Philadelphia 76ers. In each of the past four years the Hornets made it to the playoffs but never past the second round. Silas earned a yearly salary of $1.5 million. The players wanted the coach to return. I can comfortably state that Paul Silas performed a great deal better as coach than at least 75% of mutual fund managers over the past three+ years. The lack of performance warrants their firing.

On Friday the Commerce Department said factory orders had risen 2.2% in March. Most of the increase was the 1.9% rise in computer and electronic orders. Maybe the increase was Homeland Security getting their house in order. Frankly, the reason doesn't matter to me. What is important is Dell's COO stating that he doesn't see a pick-up in demand in his industry. I would rather trust Dell than data released from a government agency. Understating the Social Security liabilities by $7 trillion makes me a bit uneasy.

Yesterday I wrote about Compuware's new Detroit HQ building. Today is the MTA's $430 million HQ building at 2 Broadway in N.Y.C. Only a government agency could come in at about $300 million(that's not a misprint) over budget. N.Y.C. governance is a disgrace. The citizens should fire everyone connected with 2 Broadway.

The Kentucky Derby took its toll, and not just on the betting public. Buddy Gil has bone chips. Ten Most Wanted has a virus. Bobby Frankel is still trying to figure out the condition of Empire Maker. It maybe mental. Jerry Bailey said his horse didn't handle the track well. "Ever run on the beach where the water has run on it and its packed tight and then go three feet over and its nice and loose?" he said. "It's a lot harder to go through that." It may be harder, but Funny Cide ran on the same beach.

Rumsfeld said he "never believed we'd just stumble over weapons of mass destruction." He might have said the Administration stumbled on their words by stating they knew where they were located prior to the war starting. I had hoped Rumsfeld was too smart a guy to avoid being forthright. After the war had begun, Richard Meyers stood in front of the cameras bragging that he and his crew had a very very good idea as to where the weapons were located, and that finding them was not a problem. We know this. Rumsfeld talks to Meyers and Meyers talks to Rumsfeld. Often they could be found standing next to one another.

The biggest crowd over the weekend was not at the Kentucky Derby. It took place in Madrid where 1 million Spaniards came out to see Pope John Paul II canonize two priests and three nuns. In his quarter-century papacy the Pope has proclaimed 469 Saints. The Pope is a lucky man. I have yet to know a Saint. There's still hope. The Pope is considerably older than I am.

I have just learned of a new exciting experience. Dr. Klaus Stohr, the WHO's chief SARS scientist, said discovery that the virus can survive in feces at room temperature for as long as four days was "the most exciting, or perhaps disturbing, finding." Personally, I am considerably more excited by the finding that diarrhea provides a more favorable environment for the virus. Now I am closer to discovering what moves markets- diarrhea of the mouth.

At the Berkshire Hathaway annual meeting, Warren Buffett said of the proposed Bush tax proposals "the idea that it creates all kinds of jobs and everything else, that's what sort of turns me off. That's like a manager saying we're going to grow our earnings 20% per year. They don't have the faintest idea, in my view, of how many jobs this is going to create. How could they? Economics is not that precise."

According to a 396 page report from the Institute of Medicine, every hour 1500 people world-wide die of an old or new infectious disease, and more than half of those are children younger than five years old. Howard Markel, a professor of infectious diseases at the University of Michigan, is author of the forthcoming book "When Germs Travel."
Markel suggests "we don't conquer germs. We wrestle them to a draw." That sounds like an easier task than mutual fund managers have been having trying to fight the market to a draw.

5/4/03 Competing Perspectives

A funny thing happened on the way to the finish line at Churchill Downs. The wrong horse won. It should not have happened. No New York-bred had ever won the Kentucky Derby. The last gelding won in 1929. I know what you're thinking about 1929. Funny Cide had finished second to Empire Maker in the Wood Memorial and third to Peace Rules in the Louisiana Derby, his last two starts. His trainer is a steeplechase trainer and it was his first Derby. It was the first Derby win for the jockey. The horse sold as a yearling for $22,000 and then to the Sackatoga Stable, which is owned by six friends, for $75,000. There are all of three horses in this Stable. Funny Cide has mediocre breeding, and was only brought to Churchill Downs a few days prior to the race. He hardly had time to get to know the track. The Talmud says the burden is equal to the horse's strength, but there were stronger horses in the field. Tesio says "a horse gallops with his lungs, perseveres with his heart, and wins with his character." Maybe the Talmud was referring to inner strength. There is no question that Funny Cide had the inner strength yesterday to win by 1 3/4 lengths. He may not have been the best horse in the field but he was yesterday. Stranger things have happened on Derby Day. I watched Native Dancer lose to Dark Star in the Derby. Native Dancer won 21 out of 22 races. It should be noted that all 16 horses in yesterday's Derby came from the Native Dancer line. The morals of the story from yesterday's Derby are three-fold. First, character counts for plenty- even in horse racing. The crowd of 148,530 could confirm that.Two, don't be parked a little bit too wide on the first turn. It requires making up that little ground, and the latter can be the difference. To win you must be positioned properly. Three, there may come a time when even the best comes in second. It hurts. It hurts plenty but you can't let it spoil the next race.

So what does all the above have to do with the stock market? Plenty. There are no sure things. Something can go wrong. It does not pay to get over-confident. The trainer of Empire Maker really thought he had the race run prior to the running of the race. He had the best horse. He had the best jockey. He should have won. I thought he would too. I picked Funny Cide to come in third. I have often said that management is the difference when it comes to making smart investments in the market. The guys who continually have delivered winning results stick to their knitting, have inner strength, and character that does not skip a beat- Warren Buffett, Andy Grove, Bill Gates, Michael Dell, just to name a few. It's no accident that Berkshire Hathaway, Intel, Microsoft, and Dell have been huge winners over the years. Their founders
are first-class individuals who are smart, determined, and have a nose for money as well as finishing in the money, and they are realistic about the economic returns to expect. Yesterday was Berkshire Hathaway's annual meeting. Warren Buffett said "investors in U.S. stocks should expect a return of about 6% to 7% a year, and people who are looking for double those gains are dreaming."

In China the government attempted to appear confident that the worst of SARS was over. In Hong Kong the Director of Health, Margaret Chan, was more realistic and said SARS "is like a moving target so we have to be very careful...there is a chance that the number of deaths will continue to rise." We are much more likely to believe the descriptions of SARS coming from Hong Kong, Singapore, and Taiwan rather than China. The latter are a bit like the managements who constantly revise their company's earnings estimates downward but in China's case it's revising the suspected SARS cases and deaths upward. The similarity is the lack of character. It's best to avoid both.

Due to SARS, the Women's World Soccer cup will no longer be played this year in China. Schools in Beijing will stay closed for another two weeks, and this impacts a million children. Taiwan imposed a mandatory 14 day quarantine on all travelers from China, Hong Kong, Singapore, Macau, and Toronto. Taiwan has 204 reported SARS cases and eight people have died. In Singapore where there have been 25 SARS deaths, 3154 people are now quarantined. Lastly, scientists find SARS can live on objects for hours or even days.

Even though ABC sponsored last night's debate in S.C. among the 9 Democratic candidates, the network opted to air the movie, Gladiator, instead. No Democrat has carried S.C. in a presidential race since Jimmy Carter in 1976. In a month's time Hillary Clinton's book called Living History will be released. It has a first printing of one million copies. I have a feeling it will get more coverage than last night's debate.

It's official today. The N.Y.C. subway ride is now $2, and the 50 cent hike is the first increase in 7 years. At the same time, the sales tax was increased, there will be a surcharge on those earning $150,000 and over, and 3000 pink slips were handed out to city workers. N.Y. State can be ashamed as well. They have a $90.8 billion budget plan but the legislature approved a $93 billion budget. That is not a misprint. That would leave a $13 billion budget gap over the next two years. Maybe they can catch up to California's deficit.

Finally, we come to the ultimate perspective on non-reality. Maybe you have heard of the company called Compuware. Consider what the odds of this company being a winner were they a racehorse. In 2000 they earned $1.02 per share; in 2001 44 cents; in 2002 42 cents; and 2003 is estimated at 30 cents per share. They would probably be placed in a claiming race at a low valuation. The market cap is $1.7 billion and sales for the latest twelve months are about $1.5 billion. At the beginning of 2000 the stock sold at $40 and it's now about $4.50. Compuware is in the process of moving into a new Detroit headquarters building which cost $350 million. It has a 14 story glass atrium with a water sculpture under the glass skylight and it sends water into 15 upside-down glass pyramids. The 4400 workers will occupy 12 floors which will comprise one million square feet. The top floor, not surprisingly, is the executive level with an outside balcony which extends around the building. It's too bad that $350 million was not delivered to the stockholders as a return of capital. It might have helped to offset the 90% decline in the price of the stock over the past three years.