7/11/03 False Pretenses
I am sure President Bush is a humanitarian. There is an earnest effort to provide AIDS relief for Botswana and to assist Liberians. The interest in those areas, however, pales in comparison to the focus on oil and natural gas. According to the World Market Research Center in London, Africa already supplies between 15% and 18% of the oil the U.S. imports, and that is projected to increase to 25% by 2015. Daniel Yergin, chairman of Cambridge Energy Research Associates, says “African oil is going to be of increasing importance to the world oil market, and topping the list are Nigeria and Angola.” Nigeria produces 2 million barrels of crude a day, and that’s a third of Africa’s total output. Of that, Nigeria exports 742,000 barrels a day to the U.S. or 8% of the total U.S crude oil imports of 9.2 million barrels a day. Angola accounts for 5.4% of U.S. oil imports. Nigeria also holds the world’s ninth largest storehouse of natural gas. According to the U.S. Geological Survey, there are 1.2 trillion barrels of proven oil reserves in the world. Of that, 77 billion are in Africa, about three times as much as in the U.S. In a recent analysis, James Burkhart of Cambridge Energy Research Associates stated “one out of every five barrels of growth in global oil production capacity to 2010 could come from West Africa.” The real purpose of the trip was quite transparent. The Johannesburg daily, the Mail & Guardian wrote about Bush’s trip that it “must be seen for what it is- hard-eyed self-service posing as a mercy mission…Bush’s primary concerns, as they were before the invasion of Iraq, are domestic security, the advancement of corporate America and the securing of strategic assets, mainly oil.” I have no problem with those concerns. Just say it up front. West Africans might be more appreciative and not have anti-Bush riots as they did in Pretoria earlier in the week.
The budget crisis is coming to a head in California. Sen. Tom Torlakson, D-Antioch, said Thursday “the reality is we’re heading toward insolvency. We are heading toward fiscal harm of a very significant nature.” The plan ,which will be signed, shall involve shifting taxes rather than imposing new ones. For example, there shall be a transfer of a half cent of the current sales tax from local government to a state fund dedicated to paying off a $10.7 billion loan over five years. To offset this loss, the state would shift to local governments property tax money that currently funds schools. To compensate the schools, money would come from the state general fund, and this plan would reduce the general fund during each of the next five years by $2.3 billion. Californians will need to adjust to musical tax chairs. Make no mistake. California is running out of funds. The state will quit paying contractors working on construction projects after July 20 due to the lack of funds in the state highway account.
If the Euronations talk down the euro, Japan sells the yen, and our Treasury department welcomes a weak dollar, who will be the long-term buyers of the respective currencies? German Chancellor Schroeder suggested the ECB should weaken its currency to help the region’s exports. Domestic demand remains weak. The European Commission said this week that Europe’s economy may fail to grow in the second and third quarters. The Bank of Japan sold significant amounts of yen in June after a record 4 trillion yen in May. Japan’s Ministry of Finance wants to limit yen appreciation in an effort to spur exports. The United States, unlike Germany and Japan, has a current account deficit and therefore has a need to attract about $2 billion a day to offset the deficit. As such, the U.S. is limited in its efforts to support a weak dollar policy. Nevertheless, our Treasury has suggested that our exports would be helped by a weaker dollar exhange rate vs the euro, pound, and yen. In sum, the Euronations, Japan, and the U.S. want to export themselves out of economic weakness. There is limited reality in this plan.
The landmark bilateral agreement between New Delhi and Beijing opens border trade through the northeastern state of Sikkim and its ancient trade pass at Nathula and China’s Tibet Autonomous Region. It is hoped that this agreement will lead to $10 billion in bilateral trade with India. Right now trade between the two countries is only $5 billion a year. The two governments also signed an agreement liberalizing issuing visas, and the latter would be six-month multiple entry visas with multiple stays of less than 90 days each to promote short-term travel.
In the headlines in the U.S. I read about a jobless recovery, a sluggish job market, and a spiritless economic start. Just like Bush’s trip to Africa is under false pretenses, so are the headlines about our economy misleading. The Labor Department said the number of unemployed workers who remained on the benefit rolls after filing an initial claim jumped by 87,000 to 3.82 million in the June 28 week, and this was the highest level since February 1983. This is not a sluggish job market. The job market sucks. There is no recovery. As for spiritless, it would be accurate to state we are still in a recession. There’s enough BS to fertilize all of the farmland in this country.
Penn Companies plans to close its manufacturing facility in Atlanta and will layoff 123 employees. They make and distribute embroidered emblems and their primary market is the uniform service and industrial laundry industries.
Since May 1, 77 of our soldiers have died in Iraq. Bush said there is a “security issue” in Iraq but vowed to “remain tough.” Gen. Tommy Franks told Congress “I anticipate we’ll be involved in Iraq in the future. Whether that means two years or four years, I don’t know.” We do know that this military campaign is costing at least one soldier’s life per day and $4 billion per month. If our cause is truly a just one, then we should have no trouble arranging for UN and NATO troops to join our efforts. If they balk, we should walk. A senior British official said Thursday it would be “extremely difficult” to find banned weapons whch justified the war. The British Broadcasting Corporation said on Thursday senior figures in London no longer believed banned missiles or chemical weapons would be found in Iraq. Rep. Ike Skelton, D-MO, the senior Democrat on the House Armed Services Committee, said “we cannot leave Iraq. This must be a success.” War and Wall Street have one thing definitely in common. Buy and hold strategies work in very few instances. To be truly successful, one must have an adroit exit strategy mapped out prior to entry. With respect to the latter, the U.S failed our troops miserably. Smart generals and smart investors know the first loss is the best loss. Americans recognize the joys of freedom and the responsibilities that come with freedom. Let’s keep it real. Iraq is not Nazi Germany.
Lastly, I get daily emails with respect to my bearish leanings. I take full responsibility. Readers don’t know me very well. I can be bullish on the Nikkei and bearish on the Nasdaq. I can be bearish on the U.S. dollar and bullish on the New Zealand Dollar. I always find good supportive evidence to be bearish in an area and bullish somewhere else. My timing is rarely on the mark, and probably never will be. Timing is an immense challenge. I will get the timing right on the money when it comes to risk arbitrage but not as it pertains to movements in the Dow or the Nasdaq, for example. In sum, I am never simply bullish or bearish.
Thursday, July 10, 2003
7/10/03 Twenty One Consecutive Weeks
Filings for unemployment benefits have exceeded 400,000 for 21 consecutive weeks. That’s the longest since a near 2 year period which ended in July 1992. The average number of jobless workers filing for initial state unemployment benefits over the past four weeks rose by 1,000 to 426,750 in the week ending July 5. The number filing in the most recent week increased 5,000 to 439,000, the most in five weeks.
William Cheney, chief economist at John Hancock Financial Services, “unless the labor market starts growing again soon, the odds of another recession will rise.”
The Bank of England cut its benchmark interest rate a quarter of a point to 3.5%. Interest rates were last lower in 1954. The bank said in a statement: “the global economy recovery has remained hesitant. Although the preconditions for recovery remain in place, the prospects for external demand for U.K. output is weaker than previously expected.” That is a sage observation, and one which, in my view, is an apt description of the current conditions for external demand for U.S. output. The U.K.’s GDP grew at its slowest pace in a decade in the first quarter, falling short of the bank’s forecasts. I believe the same thing will be stated for the second quarter. The bank will release new quarterly forecasts next month.
In the current CFO they discussed a subject which I had just touched on the other day in my blog. It is a matter which disturbs me greatly. CFO states: “the Administration may extend the current 2002 law that allows employers to use a slightly higher discount rate to value their pension liabilities-which shrinks the mandatory funding obligations. Or it may issue a proposal for long term funding changes, including use of a yield curve.” In 2002 companies faced pension shortfalls of $220 billion. They are obligations. Fund the obligations promptly. There is already enough unrest in the workplace.
Springs Industries will close plants and layoff 630 employees. DuPont Photomasks will cut 5% of the workforce or about 100 jobs.
WalMart said June same-store sales rose 2.7%; however, inventory levels remained higher than expected.
China has set a target for 7% annual economic growth for the current 10th Five-Year Plan (FYP, 2001-2005). China’s GDP growth rates for 2001 and 2002 were 7.3% and 8.1%, respectively, according to the National Bureau of Statistics.
The monthly Western Washington report from the NAPM showed the regional index falling to 49.8 in June from May’s 51.8. For the past three months this index has been around the 50 level. Importantly, only 9% of survey respondents currently expect to add employees while 60% expect employment levels to remain the same.
For the second straight month U.S. wholesale inventories decreased 0.3%. Wholesale sales for the month of May declined 0.5%, and this was an improvement from April’s drop of 2.5%. It should be noted that wholesale inventories account for 25% of business inventories while retail and factory stockpiles make up the rest.
It was reported that Moody’s delinquency index on credit card payments 30 days late rose to 5.20% in May from 4.86% a year earlier.. May’s charge-offs rose to 7.05% from 6.46% a year ago and from 7% in April. In addition, May bankruptcy filings were up 10% from year-ago levels.
The consumer group, FAMILIES USA, reported that the price of the 50 prescription drugs most commonly prescribed to senior citizens in the U.S. rose nearly 3.5 times faster than inflation in 2002. They said: “for seniors on fixed incomes with no drug coverage, increases at that level make it impossible to continue purchasing the medications they need…more and more are being forced to go without much-needed medication.”
In Europe, the May unemployment rate rose to 8.8%, and it remains higher than that of other major industrial economies. South Korea reported that its economy shrank into a recession as its economy continues to have difficulty. Hyundai’s Choi K. Seon said “we have a strong won, high labor cost, and the uncertainty of the U.S. economic rebound.”
J.P. Morgan airline analyst Jamie Baker said “we see little evidence to suggest that the overall demand for air travel is increasing.” Cost-cutting remains a major focus for the airlines, and this means lower wages and more layoffs.
Oracle’s Ellison in talking about PeopleSoft’s Conway: “at one point Craigey thought I was going to shoot his dog. I love animals. If Craigey and Bear (Conway’s dog) were standing next to each other and I had one bullet, trust me, it wouldn’t be for the dog.” Actually, he wouldn’t have one bullet left. Ellison already shot himself in the foot when he started his hostile offer. But there is good news on the way for Ellison. Kimberly-Clark is introducing a jumbo roll of toilet paper with a filled-in hole. He can be the first on his block to use it after PeopleSoft completes the acquisition of J.D. Edwards and after receiving bad news from the Justice department as well as the courts.
President Bush: “Look, there is no doubt in my mind that Saddam Hussein was a threat to world peace.” Iraq did not have a nuclear warhead and wasn’t buying uranium to make one. No one has found any WMD. Hussein may have been a threat to his own people. That doesn’t make him a threat to world peace.
Filings for unemployment benefits have exceeded 400,000 for 21 consecutive weeks. That’s the longest since a near 2 year period which ended in July 1992. The average number of jobless workers filing for initial state unemployment benefits over the past four weeks rose by 1,000 to 426,750 in the week ending July 5. The number filing in the most recent week increased 5,000 to 439,000, the most in five weeks.
William Cheney, chief economist at John Hancock Financial Services, “unless the labor market starts growing again soon, the odds of another recession will rise.”
The Bank of England cut its benchmark interest rate a quarter of a point to 3.5%. Interest rates were last lower in 1954. The bank said in a statement: “the global economy recovery has remained hesitant. Although the preconditions for recovery remain in place, the prospects for external demand for U.K. output is weaker than previously expected.” That is a sage observation, and one which, in my view, is an apt description of the current conditions for external demand for U.S. output. The U.K.’s GDP grew at its slowest pace in a decade in the first quarter, falling short of the bank’s forecasts. I believe the same thing will be stated for the second quarter. The bank will release new quarterly forecasts next month.
In the current CFO they discussed a subject which I had just touched on the other day in my blog. It is a matter which disturbs me greatly. CFO states: “the Administration may extend the current 2002 law that allows employers to use a slightly higher discount rate to value their pension liabilities-which shrinks the mandatory funding obligations. Or it may issue a proposal for long term funding changes, including use of a yield curve.” In 2002 companies faced pension shortfalls of $220 billion. They are obligations. Fund the obligations promptly. There is already enough unrest in the workplace.
Springs Industries will close plants and layoff 630 employees. DuPont Photomasks will cut 5% of the workforce or about 100 jobs.
WalMart said June same-store sales rose 2.7%; however, inventory levels remained higher than expected.
China has set a target for 7% annual economic growth for the current 10th Five-Year Plan (FYP, 2001-2005). China’s GDP growth rates for 2001 and 2002 were 7.3% and 8.1%, respectively, according to the National Bureau of Statistics.
The monthly Western Washington report from the NAPM showed the regional index falling to 49.8 in June from May’s 51.8. For the past three months this index has been around the 50 level. Importantly, only 9% of survey respondents currently expect to add employees while 60% expect employment levels to remain the same.
For the second straight month U.S. wholesale inventories decreased 0.3%. Wholesale sales for the month of May declined 0.5%, and this was an improvement from April’s drop of 2.5%. It should be noted that wholesale inventories account for 25% of business inventories while retail and factory stockpiles make up the rest.
It was reported that Moody’s delinquency index on credit card payments 30 days late rose to 5.20% in May from 4.86% a year earlier.. May’s charge-offs rose to 7.05% from 6.46% a year ago and from 7% in April. In addition, May bankruptcy filings were up 10% from year-ago levels.
The consumer group, FAMILIES USA, reported that the price of the 50 prescription drugs most commonly prescribed to senior citizens in the U.S. rose nearly 3.5 times faster than inflation in 2002. They said: “for seniors on fixed incomes with no drug coverage, increases at that level make it impossible to continue purchasing the medications they need…more and more are being forced to go without much-needed medication.”
In Europe, the May unemployment rate rose to 8.8%, and it remains higher than that of other major industrial economies. South Korea reported that its economy shrank into a recession as its economy continues to have difficulty. Hyundai’s Choi K. Seon said “we have a strong won, high labor cost, and the uncertainty of the U.S. economic rebound.”
J.P. Morgan airline analyst Jamie Baker said “we see little evidence to suggest that the overall demand for air travel is increasing.” Cost-cutting remains a major focus for the airlines, and this means lower wages and more layoffs.
Oracle’s Ellison in talking about PeopleSoft’s Conway: “at one point Craigey thought I was going to shoot his dog. I love animals. If Craigey and Bear (Conway’s dog) were standing next to each other and I had one bullet, trust me, it wouldn’t be for the dog.” Actually, he wouldn’t have one bullet left. Ellison already shot himself in the foot when he started his hostile offer. But there is good news on the way for Ellison. Kimberly-Clark is introducing a jumbo roll of toilet paper with a filled-in hole. He can be the first on his block to use it after PeopleSoft completes the acquisition of J.D. Edwards and after receiving bad news from the Justice department as well as the courts.
President Bush: “Look, there is no doubt in my mind that Saddam Hussein was a threat to world peace.” Iraq did not have a nuclear warhead and wasn’t buying uranium to make one. No one has found any WMD. Hussein may have been a threat to his own people. That doesn’t make him a threat to world peace.
Wednesday, July 09, 2003
7/09/03 Intelligence+Fraudulent Information=Refuse
As Al Pacino said in Scent of a Woman, “I’ve been around you know.” Yesterday, I received an email stating I like to argue. On the contrary, I do not like to argue. There are just so many hours in the day, and I don’t have the temperament or patience to sift through garbage. I don’t collect garbage, and I refuse to clean up after it. On Wall Street, to be successful, one must diligently mine thru the information released to the investing public. A good deal of information is worthless and some is fraudulent. We’re not trying to reinvent the wheel. We’re simply trying to make money the old-fashioned way- we earn it.
Risk arbitrage is one avenue for making a living. In the last few days several M&A deals have been announced. That has gotten the media all excited. They have a story which has been in moth balls. Don’t get too worked up. Most big acquisitions don’t work, and most of these announced deals are flawed from the start- just like Oracle’s bid for PeopleSoft, which will become a textbook example at Harvard Business School of how not to make a hostile merger offer. The best of the four deals just announced is Alcan’s offer for Pechiney. Alcan has been around the block before with this company. They want to buy Pechiney and will pay the necessary price to get Pechiney’s board of directors on board. Eventually, after much postering, the European government officials will approve the deal. It will be a bit like Nestle’s takeover of Dreyers in the U.S. There might be some scares along the way. If so, take advantage of the scares and I believe the rewards will come your way. Ignore reading the papers and listening to the media and ignore analysts. They haven’t a clue about risk arbitrage.
Next is EMC’s acquisition of Legato. It’s straightforward. There won’t be another bidder. You get 0.9 of a share of EMC for each Legato share, and that’s generous. The deal will close in the fourth quarter. Legato employs 1500 people, and maybe 150 shall be let go. The deal makes some sense for EMC as Legato’s software analyzes, backs up, and recovers data on computers.
Yellow Corp. is buying the larger Roadway Corp. At the outset I tell you I do not like trucking deals. I try to stay away from the Teamsters. Why do I need to go looking for trouble? Roadway deals with the retail customer and Yellow more to the manufacturing end. This deal involves and centers around lowering costs. These two companies have not grown their revenues for years. Their profit margins are an embarrassment.
Roadway has already told analysts that earnings would be disappointing. This deal will be done with part cash and part stock. You get $48 for the cash portion. The remainder you get 1.924 shares of Yellow common and there is a collar of plus or minus 15% from the $24.95 per Yellow share.
The last deal to be discussed is the smaller ArvinMeritor hostile $15 tender for Dana. Arvin has made prior overtures to no avail. Dana employs 60,000 people and has revenues of almost $10 billion. Arvin’s workforce is half the size and revenues are about 45% less. Arvin will pay more for Dana but the latter will sell to another party more to its liking. If successful, the combination of Arvin and Dana would have a highly leveraged balance sheet in an industry, auto parts, which offers limited growth potential. Full year earnings for Dana will approximate $1.15 per share. The industry is marked by poor ROI and suppliers like Dana are under pressure to provide cost reductions to customers. Dana has a respected name. Maybe another company will pay $19 for Dana. There is some upside but not much. The stock traded at $17+ yesterday. You might consider pulling the trigger on a Dana put- as a seller.
All of the above acquisitions involve consolidation and not growth. They involve layoffs and not hiring. They are a sign of the times and not an indication that business is about to turn the corner. I’ve been a buyer of companies. I did not lay off people. I expanded facilities I purchased. I didn’t consolidate. I aggressively expanded the presence in the marketplace. These acquisitions are not moneymakers for shareholders. They leave too many questions unanswered. For me it’s simple. The people making the buying decisions have trouble running their own show. Making the show larger just creates more opportunities for disappointment down the line.
Yesterday GM announced their cash rebates and interest-free loans would be extended through July 31. The company said customers had developed “incentive burnout,” a term that refers to customers taking incentives for granted and for the failure of those incentives to draw customers into the showroom. Significantly, GM’s inventories are about 21% above normal at the end of June.
Consumer debt in May increased by 5% or $7.3 billion to $1.76 trillion. That’s a pile of debt.
I would like to turn the attention to a very important area. The thinking about a weak dollar helping our exports is flawed. Yes, there will be some improvement but not a great deal. It took me some time to realize why that is. In 2002, for the first time since 1961, Japan imported more from China than the U.S. Taiwan and South Korea, along with other ASEAN countries, all reported 50% increases in their exports to China in 2002 while their exports to the U.S remained flat. The economies in Asia, which are seeing above average growth rates, are becoming less reliant on the U.S. market and focusing more on regional trade throughout Asia. It is highly important to note that, in 2001, 25% of the United States’ total exports went to the Pacific Rim. Their value amounted to $182 billion, and equated to the same percentage and same dollar value as our exports to Europe. In 2002 the percentages changed slightly to 26% and 24%, respectively. More than a third of our exports in 2002 went to Canada and Mexico. The U.S. share of world exports is roughly 12-13%. The economies in Europe are weak. Mexico is showing limited growth. The Pacific Rim nations are emphasizing regional transactions, and this is not a short-run situation. The growth potential for our exports is not expanding. Our horizon is shrinking. This is just one more reason why GDP estimates for the second half of 2003 and for next year are way too high.
A U.S. federal appeals court yesterday rejected Vice President Cheney’s request that it block a lawsuit seeking papers from his energy task force. U.S. District Court Sullivan said “carefully focused discovery will fully protect the vice president.” It will, hopefully, provide some transparency to the American people.
The new Pew Research Center poll shows increasing criticism for Bush’s handling of the economy and health care problems. His overall approval rating slipped to 60%. On April 9 it was 74%.
As Al Pacino said in Scent of a Woman, “I’ve been around you know.” Yesterday, I received an email stating I like to argue. On the contrary, I do not like to argue. There are just so many hours in the day, and I don’t have the temperament or patience to sift through garbage. I don’t collect garbage, and I refuse to clean up after it. On Wall Street, to be successful, one must diligently mine thru the information released to the investing public. A good deal of information is worthless and some is fraudulent. We’re not trying to reinvent the wheel. We’re simply trying to make money the old-fashioned way- we earn it.
Risk arbitrage is one avenue for making a living. In the last few days several M&A deals have been announced. That has gotten the media all excited. They have a story which has been in moth balls. Don’t get too worked up. Most big acquisitions don’t work, and most of these announced deals are flawed from the start- just like Oracle’s bid for PeopleSoft, which will become a textbook example at Harvard Business School of how not to make a hostile merger offer. The best of the four deals just announced is Alcan’s offer for Pechiney. Alcan has been around the block before with this company. They want to buy Pechiney and will pay the necessary price to get Pechiney’s board of directors on board. Eventually, after much postering, the European government officials will approve the deal. It will be a bit like Nestle’s takeover of Dreyers in the U.S. There might be some scares along the way. If so, take advantage of the scares and I believe the rewards will come your way. Ignore reading the papers and listening to the media and ignore analysts. They haven’t a clue about risk arbitrage.
Next is EMC’s acquisition of Legato. It’s straightforward. There won’t be another bidder. You get 0.9 of a share of EMC for each Legato share, and that’s generous. The deal will close in the fourth quarter. Legato employs 1500 people, and maybe 150 shall be let go. The deal makes some sense for EMC as Legato’s software analyzes, backs up, and recovers data on computers.
Yellow Corp. is buying the larger Roadway Corp. At the outset I tell you I do not like trucking deals. I try to stay away from the Teamsters. Why do I need to go looking for trouble? Roadway deals with the retail customer and Yellow more to the manufacturing end. This deal involves and centers around lowering costs. These two companies have not grown their revenues for years. Their profit margins are an embarrassment.
Roadway has already told analysts that earnings would be disappointing. This deal will be done with part cash and part stock. You get $48 for the cash portion. The remainder you get 1.924 shares of Yellow common and there is a collar of plus or minus 15% from the $24.95 per Yellow share.
The last deal to be discussed is the smaller ArvinMeritor hostile $15 tender for Dana. Arvin has made prior overtures to no avail. Dana employs 60,000 people and has revenues of almost $10 billion. Arvin’s workforce is half the size and revenues are about 45% less. Arvin will pay more for Dana but the latter will sell to another party more to its liking. If successful, the combination of Arvin and Dana would have a highly leveraged balance sheet in an industry, auto parts, which offers limited growth potential. Full year earnings for Dana will approximate $1.15 per share. The industry is marked by poor ROI and suppliers like Dana are under pressure to provide cost reductions to customers. Dana has a respected name. Maybe another company will pay $19 for Dana. There is some upside but not much. The stock traded at $17+ yesterday. You might consider pulling the trigger on a Dana put- as a seller.
All of the above acquisitions involve consolidation and not growth. They involve layoffs and not hiring. They are a sign of the times and not an indication that business is about to turn the corner. I’ve been a buyer of companies. I did not lay off people. I expanded facilities I purchased. I didn’t consolidate. I aggressively expanded the presence in the marketplace. These acquisitions are not moneymakers for shareholders. They leave too many questions unanswered. For me it’s simple. The people making the buying decisions have trouble running their own show. Making the show larger just creates more opportunities for disappointment down the line.
Yesterday GM announced their cash rebates and interest-free loans would be extended through July 31. The company said customers had developed “incentive burnout,” a term that refers to customers taking incentives for granted and for the failure of those incentives to draw customers into the showroom. Significantly, GM’s inventories are about 21% above normal at the end of June.
Consumer debt in May increased by 5% or $7.3 billion to $1.76 trillion. That’s a pile of debt.
I would like to turn the attention to a very important area. The thinking about a weak dollar helping our exports is flawed. Yes, there will be some improvement but not a great deal. It took me some time to realize why that is. In 2002, for the first time since 1961, Japan imported more from China than the U.S. Taiwan and South Korea, along with other ASEAN countries, all reported 50% increases in their exports to China in 2002 while their exports to the U.S remained flat. The economies in Asia, which are seeing above average growth rates, are becoming less reliant on the U.S. market and focusing more on regional trade throughout Asia. It is highly important to note that, in 2001, 25% of the United States’ total exports went to the Pacific Rim. Their value amounted to $182 billion, and equated to the same percentage and same dollar value as our exports to Europe. In 2002 the percentages changed slightly to 26% and 24%, respectively. More than a third of our exports in 2002 went to Canada and Mexico. The U.S. share of world exports is roughly 12-13%. The economies in Europe are weak. Mexico is showing limited growth. The Pacific Rim nations are emphasizing regional transactions, and this is not a short-run situation. The growth potential for our exports is not expanding. Our horizon is shrinking. This is just one more reason why GDP estimates for the second half of 2003 and for next year are way too high.
A U.S. federal appeals court yesterday rejected Vice President Cheney’s request that it block a lawsuit seeking papers from his energy task force. U.S. District Court Sullivan said “carefully focused discovery will fully protect the vice president.” It will, hopefully, provide some transparency to the American people.
The new Pew Research Center poll shows increasing criticism for Bush’s handling of the economy and health care problems. His overall approval rating slipped to 60%. On April 9 it was 74%.
Tuesday, July 08, 2003
7/08/03 Sun Valley
Wall Street started the week with a big fireworks display. By week’s end, my feeling is the big news will come out of Sun Valley, Idaho. This week is the Allen & Co. conference in Sun Valley. Most investors have never heard of Allen &Co. I have. It has been my pleasure to have a relationship with that firm going back 30 years. The company was started by Charlie Allen, and his nephew now runs the business. Charlie started as a runner in the 1920s and rose to become the most successful venture capitalist of his time. He helped start Syntex, which provided the birth control pill, and the precursor toWorldComm, among others. WorldComm had quite an uphill battle against the then all-powerful AT&T. This conference brings key businessmen together for one week, and that includes Bill Gates and Warren Buffett. From this conference has come various deals- Capitol Cities/ABC, Viacom and Blockbuster, Disney and the Fox Family Channel, and many others. This year a deal for Vivendi Universal could be finalized.
In the June 2003 volume of The Journal of Finance there is an important paper entitled “The Impact of Jumps in Volatility and Returns” by Eraker, Johannes, and Polson. Normally I don’t make reference to such studies for fear that my readers could get the idea I have the potential to be erudite. God forbid. These writers have been quite meticulous, and have left me with the feeling they know something about this subject matter. That is refreshing. Some of their findings: “Jumps in returns can generate large movements such as the crash of 1987, but the impact of a jump is transient. A jump in returns today has no impact on the future distribution of returns.” Another thought is “jumps in volatility fill the gap between jumps in returns and diffusive volatility by providing a rapidly moving but persistent factor that drives the conditional volatility of returns.” Importantly, they state, “jump risk, either in returns or in volatility, cannot typically be hedged away, and investors may demand a large premia to carry these risks.” Lastly, the writers point out the persistent effect of jumps in volatility on the distribution of returns; however, they state, “the presence of jumps in volatility does not eliminate the need for jumps in returns.” They provide formal evidence that jumps in volatility may remove the misspecification documented in models with diffusive stochastic volatility.
In 2002 our trade deficit with Japan was $70 billion. If Japan’s economy is to improve and GNP to expand by 1%, the major beneficiary will be the shipping industry as 90% of Japan’s cargo moves by ocean. During the past five years Japan’s big three ocean carriers- “K” Line, MOL, and NYK Line- reported increased sales and earnings. In a country slightly smaller than California, there are 127 million people. According to Bloomberg, 10 year U.S. treasury yields have tracked the Nikkei in the past year with a correlation of 0.77. Ten year U.S. treasuries are yielding about 3 ¾% and 10 year Japanese government bonds yield 1.17%. The latter were yielding 0.43% on June 11.
For months and months I have been describing the future fallout from state deficits. Yesterday you witnessed an example in realtime. Wendy’s lowered its projections for the second quarter and for the full year. New Ohio laws will make Wendy’s effective tax rate for the second quarter 39.5% and in the second half about 37%. Wendy’s is headquartered in Ohio, and that state has increased the rate at which it taxes franchise companies such as Wendy’s.
Investor Intelligence sentiment data indicates no bear market since 1964 has ended without at least 55% of newsletter writers turning bearish at or near the bottom. Over the past three years such bearishness has not exceeded 45%.
Yesterday A June survey by Goldman Sachs showed that 2003 IT spending outlaws are likely to remain little changed from a year earlier. That survey did not help BMC Software, as they said earnings and revenues would miss second quarter estimates. They blamed the disappointment on delays in purchasing decisions by larger customers. We have heard that refrain from others. Goldman Sachs expects IT spending to increase by 3.5% in 2004. That was a major reason for tech stocks to do better yesterday. In my view, a pick-up of 3.5% would make the Nasdaq overvalued by a significant amount. Today EMC announced buying Legato for .9 share of EMC. Consolidation will continue as growth prospects are limited, in my view.
Madness is in the works over this FT article on Microsoft possibly paying out a dividend of $10 billion. Can everybody be this stupid? It’s not going to happen. Listen to John Connors, Microsoft’s CFO: “But the most important thing that shareholders really have to understand is we’ve got to get our legal situation resolved and things behind us in terms of what those situations could have on our product development strategy, our licensing strategy, and our distribution strategy.” The company will continue to buyback shares and raise the dividend which is now a “starter dividend.” The increase will not knock your socks off.
According to Bloomberg, WalMart and Target account for 48% of the billions in products the 50 largest retailers sold in the U.S. last year. As such, it is wise to focus mainly on those two companies when assessing the retail industry and the consumer. Until they say differently, retail sales can be expected to grow at a very modest level.
The White House acknowledged that Bush (isn’t he the White House?) was incorrect in his State of the Union address to say that Iraq recently sought significant quantities of uranium. The blame was placed on incorrect intelligence. In my view, a smart leader takes full responsibilities for mistakes, and doesn’t place blame on others.
In the June 24 Ha’aretz there is a Bush quote related by Palestinian Prime Minister Mahmoud Abbas: God told me to strike al Qaida and I struck them, and then he instructed me to strike at Saddam, which I did, and now I am determined to solve the problem in the Middle East. If you can help me I will act, and if not, the elections will come and I will have to focus on them. I trust Bush has not received instructions from Above to change the pension rules and the contributions to those pensions. I trust this is his own doing. Let me indicate how strongly I feel on this subject. In Deleon Springs, Fla. a motorist drove home about a mile with the legless body of a pedestrian in his front windshield before calling authorities that he hit the man with his car. Investigators believe the legs were severed by the impact with the car. The driver didn’t stop to report the accident because he didn’t have a cell phone. Let me make this absolutely clear. There are strict pension laws in this nation. I have pointed out that corporations are severely in arrears in their pension contributions. They must make up those arrearages which are in the hundreds of billions of dollars. Bush wants to make it possible for corporations to alleviate this problem by reducing contributions. This will cut the legs out from those in the pension plans, and endanger their well-being. I know they have phones in the White House. Hopefully, Bush will make the calls necessary to take his idea off the table. That way it won’t be dead on arrival.
Wall Street started the week with a big fireworks display. By week’s end, my feeling is the big news will come out of Sun Valley, Idaho. This week is the Allen & Co. conference in Sun Valley. Most investors have never heard of Allen &Co. I have. It has been my pleasure to have a relationship with that firm going back 30 years. The company was started by Charlie Allen, and his nephew now runs the business. Charlie started as a runner in the 1920s and rose to become the most successful venture capitalist of his time. He helped start Syntex, which provided the birth control pill, and the precursor toWorldComm, among others. WorldComm had quite an uphill battle against the then all-powerful AT&T. This conference brings key businessmen together for one week, and that includes Bill Gates and Warren Buffett. From this conference has come various deals- Capitol Cities/ABC, Viacom and Blockbuster, Disney and the Fox Family Channel, and many others. This year a deal for Vivendi Universal could be finalized.
In the June 2003 volume of The Journal of Finance there is an important paper entitled “The Impact of Jumps in Volatility and Returns” by Eraker, Johannes, and Polson. Normally I don’t make reference to such studies for fear that my readers could get the idea I have the potential to be erudite. God forbid. These writers have been quite meticulous, and have left me with the feeling they know something about this subject matter. That is refreshing. Some of their findings: “Jumps in returns can generate large movements such as the crash of 1987, but the impact of a jump is transient. A jump in returns today has no impact on the future distribution of returns.” Another thought is “jumps in volatility fill the gap between jumps in returns and diffusive volatility by providing a rapidly moving but persistent factor that drives the conditional volatility of returns.” Importantly, they state, “jump risk, either in returns or in volatility, cannot typically be hedged away, and investors may demand a large premia to carry these risks.” Lastly, the writers point out the persistent effect of jumps in volatility on the distribution of returns; however, they state, “the presence of jumps in volatility does not eliminate the need for jumps in returns.” They provide formal evidence that jumps in volatility may remove the misspecification documented in models with diffusive stochastic volatility.
In 2002 our trade deficit with Japan was $70 billion. If Japan’s economy is to improve and GNP to expand by 1%, the major beneficiary will be the shipping industry as 90% of Japan’s cargo moves by ocean. During the past five years Japan’s big three ocean carriers- “K” Line, MOL, and NYK Line- reported increased sales and earnings. In a country slightly smaller than California, there are 127 million people. According to Bloomberg, 10 year U.S. treasury yields have tracked the Nikkei in the past year with a correlation of 0.77. Ten year U.S. treasuries are yielding about 3 ¾% and 10 year Japanese government bonds yield 1.17%. The latter were yielding 0.43% on June 11.
For months and months I have been describing the future fallout from state deficits. Yesterday you witnessed an example in realtime. Wendy’s lowered its projections for the second quarter and for the full year. New Ohio laws will make Wendy’s effective tax rate for the second quarter 39.5% and in the second half about 37%. Wendy’s is headquartered in Ohio, and that state has increased the rate at which it taxes franchise companies such as Wendy’s.
Investor Intelligence sentiment data indicates no bear market since 1964 has ended without at least 55% of newsletter writers turning bearish at or near the bottom. Over the past three years such bearishness has not exceeded 45%.
Yesterday A June survey by Goldman Sachs showed that 2003 IT spending outlaws are likely to remain little changed from a year earlier. That survey did not help BMC Software, as they said earnings and revenues would miss second quarter estimates. They blamed the disappointment on delays in purchasing decisions by larger customers. We have heard that refrain from others. Goldman Sachs expects IT spending to increase by 3.5% in 2004. That was a major reason for tech stocks to do better yesterday. In my view, a pick-up of 3.5% would make the Nasdaq overvalued by a significant amount. Today EMC announced buying Legato for .9 share of EMC. Consolidation will continue as growth prospects are limited, in my view.
Madness is in the works over this FT article on Microsoft possibly paying out a dividend of $10 billion. Can everybody be this stupid? It’s not going to happen. Listen to John Connors, Microsoft’s CFO: “But the most important thing that shareholders really have to understand is we’ve got to get our legal situation resolved and things behind us in terms of what those situations could have on our product development strategy, our licensing strategy, and our distribution strategy.” The company will continue to buyback shares and raise the dividend which is now a “starter dividend.” The increase will not knock your socks off.
According to Bloomberg, WalMart and Target account for 48% of the billions in products the 50 largest retailers sold in the U.S. last year. As such, it is wise to focus mainly on those two companies when assessing the retail industry and the consumer. Until they say differently, retail sales can be expected to grow at a very modest level.
The White House acknowledged that Bush (isn’t he the White House?) was incorrect in his State of the Union address to say that Iraq recently sought significant quantities of uranium. The blame was placed on incorrect intelligence. In my view, a smart leader takes full responsibilities for mistakes, and doesn’t place blame on others.
In the June 24 Ha’aretz there is a Bush quote related by Palestinian Prime Minister Mahmoud Abbas: God told me to strike al Qaida and I struck them, and then he instructed me to strike at Saddam, which I did, and now I am determined to solve the problem in the Middle East. If you can help me I will act, and if not, the elections will come and I will have to focus on them. I trust Bush has not received instructions from Above to change the pension rules and the contributions to those pensions. I trust this is his own doing. Let me indicate how strongly I feel on this subject. In Deleon Springs, Fla. a motorist drove home about a mile with the legless body of a pedestrian in his front windshield before calling authorities that he hit the man with his car. Investigators believe the legs were severed by the impact with the car. The driver didn’t stop to report the accident because he didn’t have a cell phone. Let me make this absolutely clear. There are strict pension laws in this nation. I have pointed out that corporations are severely in arrears in their pension contributions. They must make up those arrearages which are in the hundreds of billions of dollars. Bush wants to make it possible for corporations to alleviate this problem by reducing contributions. This will cut the legs out from those in the pension plans, and endanger their well-being. I know they have phones in the White House. Hopefully, Bush will make the calls necessary to take his idea off the table. That way it won’t be dead on arrival.
Monday, July 07, 2003
7/7/03 A Programmed Cyborg Meets Its Terminator: Productivity
I thought I might use a catchy heading to get your attention. I know Wall Street as a whole is ignoring this no-spin blog. Let me set the table in neat fashion. The average workweek of 33.7 hours is the lowest level since the government began keeping records in 1964. The number of part-time workers is 4.6 million, and that's up from 3.3 million only three years ago. No one can get an exact handle on the number of people who have stopped their job search. These are folks who have given up after 21 months of trying to find a job. Maybe the number is 3 million, as the Labor Department suggests. From my research I would estimate a more accurate number to be about five million. When you total those who are unemployed, those who are part-timers, and those who no longer are looking for a job, you arrive at a total of about 16 million people. That is approximately 6% of this nation's population, and that includes children and youngsters not yet eligible for the workforce, retirees, infirmed, etc. Erica Groshen, an economist with the Federal Reserve Bank of N.Y., says jobs are scarce and work hours limited because of increased productivity. In other words, advances in computers, telecommunications, and the internet have helped to make job cuts permanent and enabled service-sector jobs to be accomplished overseas. That may tell part of the story. Another part is the absence of top-line growth in industry. It should be noted that June was the 35th consecutive month of job losses in the manufacturing area. I do not believe for one second that an economic recovery will take place while this job picture is present. We should remember that, according to Thomson Financial, earnings increases for the third and fourth quarters of last year fell short of analysts' average midyear estimates by at least 60%. Analysts estimate that profit for companies in the S&P 500 will increase 12.8% this quarter and 21.4% next quarter. Last year analysts forecast that earnings would increase 16.6% in the third quarter and 28.5% in the fourth quarter. The actual numbers were 6.8% and 9.7%. Now you know why I don't read any reports by analysts. By the way, this wasn't a one-time mental error. Two years ago the estimate was for a profit decline of 6.2% and 5.3% in the third and fourth quarters. Actual earnings dropped 22% in both quarters.
Operation Sidewinder began a week ago. We have seen more of our soldiers wounded and killed in Iraq than before this offensive took place. We might rethink our plan of attack in this region.
The Nikkei closed at its highest level since August 27, 2002, and it was the 28th consecutive day where over 1 billion shares traded. The last time that happened was in February, 1989, the height of Japan's market bubble. Ten year Japanese government bond yields rose to 1.08%.
VF to acquire Nautica for $17 per share in cash., a 28% premium over the closing price on July 3. The dissident shareholders pushed and got a nice ROI.
At age 46 Martina Navratilova won her 20th Wimbleton title. This one was in mixed doubles with Leander Paes of India.
Finding Nemo will soon become the top grossing animated film of all time.
Yesterday's elections in Mexico were devastating to Vincente Fox, and the results were much worse than anticipated. The National Action Party lost 44 seats, the Party of the Democratic Revolution gained 37 seats, and the PRI added 20 seats. Lopez Obrador, with a popularity of over 80%, will become the prime mover in Mexico's political arena.
Alcan Inc. made a hostile offer for Pechiney SA. They made an offer of 123 euros and three Alcan shares for five Pechiney shares. That works out to about 41 euros per share. If successful, this would make Alcan the world's largest aluminum company. They are currently number two behind Alcoa. Alcan is being advised by Morgan Stanley and Lazard LLC, a good combination for a hostile offer. Last week Pechiney rose almost 9% in price. In August 1999 Alcan agreed to buy Pechiney and the aluminum and packaging units of Algroup. European regulators objected to the deal. Since then, Alcoa and Norsk have made large acquisitions. Thus, Alcan will have a better regulatory reception this time. I believe the deal will be completed but at a higher price.
I thought I might use a catchy heading to get your attention. I know Wall Street as a whole is ignoring this no-spin blog. Let me set the table in neat fashion. The average workweek of 33.7 hours is the lowest level since the government began keeping records in 1964. The number of part-time workers is 4.6 million, and that's up from 3.3 million only three years ago. No one can get an exact handle on the number of people who have stopped their job search. These are folks who have given up after 21 months of trying to find a job. Maybe the number is 3 million, as the Labor Department suggests. From my research I would estimate a more accurate number to be about five million. When you total those who are unemployed, those who are part-timers, and those who no longer are looking for a job, you arrive at a total of about 16 million people. That is approximately 6% of this nation's population, and that includes children and youngsters not yet eligible for the workforce, retirees, infirmed, etc. Erica Groshen, an economist with the Federal Reserve Bank of N.Y., says jobs are scarce and work hours limited because of increased productivity. In other words, advances in computers, telecommunications, and the internet have helped to make job cuts permanent and enabled service-sector jobs to be accomplished overseas. That may tell part of the story. Another part is the absence of top-line growth in industry. It should be noted that June was the 35th consecutive month of job losses in the manufacturing area. I do not believe for one second that an economic recovery will take place while this job picture is present. We should remember that, according to Thomson Financial, earnings increases for the third and fourth quarters of last year fell short of analysts' average midyear estimates by at least 60%. Analysts estimate that profit for companies in the S&P 500 will increase 12.8% this quarter and 21.4% next quarter. Last year analysts forecast that earnings would increase 16.6% in the third quarter and 28.5% in the fourth quarter. The actual numbers were 6.8% and 9.7%. Now you know why I don't read any reports by analysts. By the way, this wasn't a one-time mental error. Two years ago the estimate was for a profit decline of 6.2% and 5.3% in the third and fourth quarters. Actual earnings dropped 22% in both quarters.
Operation Sidewinder began a week ago. We have seen more of our soldiers wounded and killed in Iraq than before this offensive took place. We might rethink our plan of attack in this region.
The Nikkei closed at its highest level since August 27, 2002, and it was the 28th consecutive day where over 1 billion shares traded. The last time that happened was in February, 1989, the height of Japan's market bubble. Ten year Japanese government bond yields rose to 1.08%.
VF to acquire Nautica for $17 per share in cash., a 28% premium over the closing price on July 3. The dissident shareholders pushed and got a nice ROI.
At age 46 Martina Navratilova won her 20th Wimbleton title. This one was in mixed doubles with Leander Paes of India.
Finding Nemo will soon become the top grossing animated film of all time.
Yesterday's elections in Mexico were devastating to Vincente Fox, and the results were much worse than anticipated. The National Action Party lost 44 seats, the Party of the Democratic Revolution gained 37 seats, and the PRI added 20 seats. Lopez Obrador, with a popularity of over 80%, will become the prime mover in Mexico's political arena.
Alcan Inc. made a hostile offer for Pechiney SA. They made an offer of 123 euros and three Alcan shares for five Pechiney shares. That works out to about 41 euros per share. If successful, this would make Alcan the world's largest aluminum company. They are currently number two behind Alcoa. Alcan is being advised by Morgan Stanley and Lazard LLC, a good combination for a hostile offer. Last week Pechiney rose almost 9% in price. In August 1999 Alcan agreed to buy Pechiney and the aluminum and packaging units of Algroup. European regulators objected to the deal. Since then, Alcoa and Norsk have made large acquisitions. Thus, Alcan will have a better regulatory reception this time. I believe the deal will be completed but at a higher price.
Sunday, July 06, 2003
7/06/03 Decompression
When one goes diving without scuba gear, it can get a bit scary in the depths of the ocean. Should your upward return to the water’s surface be too fast, the nitrogen in your blood, compressed by the depths of the ocean, would not have time to decompress. Instead, it can expand like soda bubbles when a bottle is first opened. The result can be a brain embolism, a cardiopulmonary embolism, and a heart attack. The laws of physics are different on Wall Street. There you have the Fed, economists, and analysts of all kinds willing to provide navigational forecasts which, unfortunately, have often led to wealth embolisms.
Forty nine of fifty four economists recently surveyed by the Wall Street Journal expect the Dow to finish above 9000 this year. Even though these economists expect annualized growth of 3.5% in this year’s third quarter, 3.8% in the fourth quarter, and 3.8% in the first half of 2004, growth is not expected to be strong enough to create many new jobs. In fact, the unemployment rate, they say, is expected to remain unchanged through the end of this year and to only decline slightly by June 2004. Why do economists feel comfortable with a growth rate of 3.5%? Since 1930, that’s been the average GNP growth rate. Therefore, the average has produced a comfort level for the future. I prefer to be guided by the facts and not by the average. Additionally, forecasts are often clothed in errors of omission. For example, I can state the Nasdaq has just risen 25% in price since mid-March. That is true. Let’s take another view. The Wilshire 5000 Total Market Index tracks more than 5700 U.S.-based companies. It ended the week at 9,462, and this represents a rise of 1.6% from the prior year’s level. This too is true but gives a different picture. Over this period of time the Wilshire does not provide the same decompression dangers as the Nasdaq poses from the recent three month spurt. We are talking about the same market but different time references.
Decompression can happen in various venues. We had the tax act of 1986. It killed many tax deduction loopholes. One impacted the Arabian horse industry. Prior to the enactment of this tax act a top Arabian might have sold for $250,000. After the passage of the new tax act that same horse sold for $6,000. I know. I made such a purchase at that time. Over the past few years the Fed has made a concerted effort to bring down interest rates and this has produced record low mortgage rates. The latter have spurred the rise in home prices. Real estate in Carmel, CA has always been pricey- especially along the beach. A 2000 square foot home with two bedrooms might have fetched about $2.75 million at that location ten years ago. With no improvements, that same house was listed not too long ago at $16 million. The price has since been reduced. Inflation in this country is about 2%, and that’s only because of health care costs, and the price of natural gas, jet fuel, and gasoline. There is no economic justification for the house in Carmel to have that price tag. Supply and demand is not different from past circumstances. There was little economic justification for the price of Arabian horses either in the early 1980s- only as a tax shelter. Mortgage rates, according to the head of the MBA, have seen their lows. As they begin to rise, and they have in the last two weeks, then prices will decline.
The sole justification for present stock prices is the higher forecast for GNP growth. At the present time we are in a recession. The entity, which has described this economic situation, has not deemed current conditions favorable enough to warrant a change in this description. If the optimistic economists fail to envision better employment conditions, it is difficult to see where business will be expanding and business spending accelerating. Consumers will accept rebates and concessions and almost free money. When the cost of money begins to rise, and it has begun, the consumer will become a more fragile commodity. Short and long term interest rates are not sustainable at these levels. The same can appropriately be said about current stock prices. They reflect profit levels which will not be met, and that is not different from the condition which has existed since the recession began.
More than 25 million people rely on the Colorado River. The Imperial Irrigation District in southern California holds the rights to more water than any single user on the river, more than the states of Arizona, Nevada, Wyoming, and New Mexico. Nevada has exhausted its legal allocation of the river, and is searching for alternatives. Tim Barnett, a researcher at Scripps Institution of Oceanography, says warming temperatures will shorten the snow-melting season in the West’s high country and will reduce runoff by 17% to one-third on the Colorado River and other systems, leaving them unable to meet demands for the foreseeable future. The Fed can print money. They can’t produce water. Economists can produce forecasts for GNP growth. They can’t produce water to maintain the current growth patterns in Nevada, Phoenix, and other parts of the West. President Bush can cut taxes but he can’t restore water to overtaxed rivers. The laws of nature outlive the experts and the politicians.
I do have a bit of good news on this Sunday. Last night no one won the Powerball jackpot. That means on Wednesday the payoff rises to $240 million. There will be about 75 million tickets sold, maybe more, for that jackpot. A winner is anticipated. It could be you. What do you think the chances are that a Fed member, an economist, a stock analyst, or a politician will correctly match all six numbers in the drawing?
When one goes diving without scuba gear, it can get a bit scary in the depths of the ocean. Should your upward return to the water’s surface be too fast, the nitrogen in your blood, compressed by the depths of the ocean, would not have time to decompress. Instead, it can expand like soda bubbles when a bottle is first opened. The result can be a brain embolism, a cardiopulmonary embolism, and a heart attack. The laws of physics are different on Wall Street. There you have the Fed, economists, and analysts of all kinds willing to provide navigational forecasts which, unfortunately, have often led to wealth embolisms.
Forty nine of fifty four economists recently surveyed by the Wall Street Journal expect the Dow to finish above 9000 this year. Even though these economists expect annualized growth of 3.5% in this year’s third quarter, 3.8% in the fourth quarter, and 3.8% in the first half of 2004, growth is not expected to be strong enough to create many new jobs. In fact, the unemployment rate, they say, is expected to remain unchanged through the end of this year and to only decline slightly by June 2004. Why do economists feel comfortable with a growth rate of 3.5%? Since 1930, that’s been the average GNP growth rate. Therefore, the average has produced a comfort level for the future. I prefer to be guided by the facts and not by the average. Additionally, forecasts are often clothed in errors of omission. For example, I can state the Nasdaq has just risen 25% in price since mid-March. That is true. Let’s take another view. The Wilshire 5000 Total Market Index tracks more than 5700 U.S.-based companies. It ended the week at 9,462, and this represents a rise of 1.6% from the prior year’s level. This too is true but gives a different picture. Over this period of time the Wilshire does not provide the same decompression dangers as the Nasdaq poses from the recent three month spurt. We are talking about the same market but different time references.
Decompression can happen in various venues. We had the tax act of 1986. It killed many tax deduction loopholes. One impacted the Arabian horse industry. Prior to the enactment of this tax act a top Arabian might have sold for $250,000. After the passage of the new tax act that same horse sold for $6,000. I know. I made such a purchase at that time. Over the past few years the Fed has made a concerted effort to bring down interest rates and this has produced record low mortgage rates. The latter have spurred the rise in home prices. Real estate in Carmel, CA has always been pricey- especially along the beach. A 2000 square foot home with two bedrooms might have fetched about $2.75 million at that location ten years ago. With no improvements, that same house was listed not too long ago at $16 million. The price has since been reduced. Inflation in this country is about 2%, and that’s only because of health care costs, and the price of natural gas, jet fuel, and gasoline. There is no economic justification for the house in Carmel to have that price tag. Supply and demand is not different from past circumstances. There was little economic justification for the price of Arabian horses either in the early 1980s- only as a tax shelter. Mortgage rates, according to the head of the MBA, have seen their lows. As they begin to rise, and they have in the last two weeks, then prices will decline.
The sole justification for present stock prices is the higher forecast for GNP growth. At the present time we are in a recession. The entity, which has described this economic situation, has not deemed current conditions favorable enough to warrant a change in this description. If the optimistic economists fail to envision better employment conditions, it is difficult to see where business will be expanding and business spending accelerating. Consumers will accept rebates and concessions and almost free money. When the cost of money begins to rise, and it has begun, the consumer will become a more fragile commodity. Short and long term interest rates are not sustainable at these levels. The same can appropriately be said about current stock prices. They reflect profit levels which will not be met, and that is not different from the condition which has existed since the recession began.
More than 25 million people rely on the Colorado River. The Imperial Irrigation District in southern California holds the rights to more water than any single user on the river, more than the states of Arizona, Nevada, Wyoming, and New Mexico. Nevada has exhausted its legal allocation of the river, and is searching for alternatives. Tim Barnett, a researcher at Scripps Institution of Oceanography, says warming temperatures will shorten the snow-melting season in the West’s high country and will reduce runoff by 17% to one-third on the Colorado River and other systems, leaving them unable to meet demands for the foreseeable future. The Fed can print money. They can’t produce water. Economists can produce forecasts for GNP growth. They can’t produce water to maintain the current growth patterns in Nevada, Phoenix, and other parts of the West. President Bush can cut taxes but he can’t restore water to overtaxed rivers. The laws of nature outlive the experts and the politicians.
I do have a bit of good news on this Sunday. Last night no one won the Powerball jackpot. That means on Wednesday the payoff rises to $240 million. There will be about 75 million tickets sold, maybe more, for that jackpot. A winner is anticipated. It could be you. What do you think the chances are that a Fed member, an economist, a stock analyst, or a politician will correctly match all six numbers in the drawing?
Saturday, July 05, 2003
7/05/03 The New Order Is The Fireworks Display
Niccolo Machiavelli: "There is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things."
Yesterday Americans watched their local fireworks display from their favorite vantage point. The President was weighing sending troops to Liberia. Unfortunately, our nation was focused in the wrong direction. The real pyrotechnics are taking place on the Indonesian island of Bali. You won't find shooting rockets and sparklers. It's the annual gathering of officials from the EU, China, Japan, and eight other Asian countries. The discussion centers on the macro-economic policy between these nations. The headlines will consist of the concerted fight against poverty and removing obstacles to trade. The real item is the yuan. That's the fireworks. That's the new order of things. Japanese Finance Minister Masajuro Shiokawa said "I have no plans to bring up the issue of revaluation directly." Naturally. It will be discussed indirectly over a ceremonial tea gathering. The fact is there are several Asian countries concerned with the impact of the falling dollar on their local currencies. If I were in their shoes, I'd be concerned as well. Kim Jin-Pyo, South Korea's minister of finance and economy, said "the European countries seem to be of the view that since the U.S. has a huge trade deficit and many countries in East Asia and in particular China has a large share of that, there should be or there could be a cautious correction of that imbalance." One European delegate mentioned the need for an appreciation of the yuan during the Bali meeting. Several economists have noted that a rise in currencies in Asia would cut the U.S. current account deficit, and that a stronger yuan would have a greater impact on the U.S. deficit than the euro's rise against the dollar. Since 1994, China's central bank has kept the yuan fixed at 8.28 to the U.S. dollar. The yuan is allowed to fluctuate only a fraction of 1%. China's state newspaper, the 21st Century Business Herald, reported on June 30 that China's central bank has had to buy huge amounts of dollars every day to stabilize the yuan. The chances of that continuing for much longer, in my view, are slim. It is more likely that the Chinese government will increase the trading range from 1% to at least 3%, and test the waters, so to speak.
The U.S. government believes the current yuan peg rate against the dollar provided China with an unfair export advantage. China has accumulated about $350 billion in foreign reserves. My belief is China's success has been built on low manufacturing costs thru low labor and material costs and not the yuan peg rate to the dollar. The fireworks from China are in the beginning stages. The display won't be pretty. It will be the real deal- the real shock and awe.
A big deal has been made of the recent change in the tax treatment of dividends. At the time of its announcement, I mentioned I thought the impact would be a minor plus. In June, 96 companies boosted their dividends up from 87 in June 2002. Approximately 95% of companies declaring dividends in June made no change in their payouts, and thus continued the same payout rate as in the prior quarter. The last time I looked dividends were paid out of earnings and not out of changes in tax policy.
WalMart now employs more than 300,000 people outside the United States, and that's more than any company in the private sector employs in the United States. The company plans to open about 130 new stores overseas this year. The U.S. economy accounts for 37% of the world's GDP. "That leaves 63% for our growth strategy," John Menzer, head of WalMart's international operations, said at the company's recent annual meeting.
Jerry Springer was, at one time, the mayor of Cincinnati. He is contemplating a run for the U.S. Senate in Ohio. He would be challenging Republican George Voinovich. Should he run, the unemployment rolls would increase. He currently employs 60 people on his show.
Niccolo Machiavelli: "There is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things."
Yesterday Americans watched their local fireworks display from their favorite vantage point. The President was weighing sending troops to Liberia. Unfortunately, our nation was focused in the wrong direction. The real pyrotechnics are taking place on the Indonesian island of Bali. You won't find shooting rockets and sparklers. It's the annual gathering of officials from the EU, China, Japan, and eight other Asian countries. The discussion centers on the macro-economic policy between these nations. The headlines will consist of the concerted fight against poverty and removing obstacles to trade. The real item is the yuan. That's the fireworks. That's the new order of things. Japanese Finance Minister Masajuro Shiokawa said "I have no plans to bring up the issue of revaluation directly." Naturally. It will be discussed indirectly over a ceremonial tea gathering. The fact is there are several Asian countries concerned with the impact of the falling dollar on their local currencies. If I were in their shoes, I'd be concerned as well. Kim Jin-Pyo, South Korea's minister of finance and economy, said "the European countries seem to be of the view that since the U.S. has a huge trade deficit and many countries in East Asia and in particular China has a large share of that, there should be or there could be a cautious correction of that imbalance." One European delegate mentioned the need for an appreciation of the yuan during the Bali meeting. Several economists have noted that a rise in currencies in Asia would cut the U.S. current account deficit, and that a stronger yuan would have a greater impact on the U.S. deficit than the euro's rise against the dollar. Since 1994, China's central bank has kept the yuan fixed at 8.28 to the U.S. dollar. The yuan is allowed to fluctuate only a fraction of 1%. China's state newspaper, the 21st Century Business Herald, reported on June 30 that China's central bank has had to buy huge amounts of dollars every day to stabilize the yuan. The chances of that continuing for much longer, in my view, are slim. It is more likely that the Chinese government will increase the trading range from 1% to at least 3%, and test the waters, so to speak.
The U.S. government believes the current yuan peg rate against the dollar provided China with an unfair export advantage. China has accumulated about $350 billion in foreign reserves. My belief is China's success has been built on low manufacturing costs thru low labor and material costs and not the yuan peg rate to the dollar. The fireworks from China are in the beginning stages. The display won't be pretty. It will be the real deal- the real shock and awe.
A big deal has been made of the recent change in the tax treatment of dividends. At the time of its announcement, I mentioned I thought the impact would be a minor plus. In June, 96 companies boosted their dividends up from 87 in June 2002. Approximately 95% of companies declaring dividends in June made no change in their payouts, and thus continued the same payout rate as in the prior quarter. The last time I looked dividends were paid out of earnings and not out of changes in tax policy.
WalMart now employs more than 300,000 people outside the United States, and that's more than any company in the private sector employs in the United States. The company plans to open about 130 new stores overseas this year. The U.S. economy accounts for 37% of the world's GDP. "That leaves 63% for our growth strategy," John Menzer, head of WalMart's international operations, said at the company's recent annual meeting.
Jerry Springer was, at one time, the mayor of Cincinnati. He is contemplating a run for the U.S. Senate in Ohio. He would be challenging Republican George Voinovich. Should he run, the unemployment rolls would increase. He currently employs 60 people on his show.
Friday, July 04, 2003
7/04/03 Polishing The Headstone At The Cemetery
There are many constants in my life. One is being asked why I care so deeply about others and the welfare of this nation. Most would state a single individual cannot have an impact, and believing otherwise is a futile effort. I don't share that view and never have and I never will. I feel the toll of those who have died to preserve my liberties. I don't watch fireworks. I look at the headstones in cemeteries and watch the loving and grieving faces of those left behind. They polish the headstone and hopefully there is some resulting comfort.
Today is Independence Day. I ask myself how can there be independence when there are at least 10 million Americans out of work and looking for work. That excludes the three million Americans who have given up trying to find a job. There are two million Americans who have been unemployed for 27 weeks or more. The average jobless duration is now 20 weeks. That is a 20 year high. The economy has lost almost one million jobs in the last 90 days. About 3.8 million Americans are collecting unemployment benefits, and that is a 20 year high. Those with jobs have an average work week of 33.7 hours and in the factory at 40.2 hours. It's tough to make ends meet with those limited hours. Overtime hours are down to 4 hours per week. An index of help-wanted advertising in major newspapers last month was at its lowest level in 41 years, and the most recent Manpower survey indicates hiring plans for the third quarter are at the lowest level in 12 years. It's tough to be independent under these conditions. How independent can one be when health insurance cannot be afforded? There are almost 45 million Americans who are in this situation. On this fourth of July I am reminded by the words of Teddy Roosevelt: "A man who is good enough to shed his blood for his country is good enough to be given a square deal afterward. More than that no man is entitled to, and less than that no man shall have." I know our veterans are not being provided a square deal when it comes to healthcare.
To achieve a competitive advantage in this information age it is necessary to have the skill in utilizing the information and then its application in sifting thru baloney to get to the prime cuts and the tidbits of knowledge capital found in the marrow bones. I am happy to report a success story in this endeavor. Adam Monk has achieved such success as head of the Chicago Sun-Times Monkey Business stock selection. Adam is a 31 year old cebus monkey from Brazil, and he recorded a gain of 19% in the five stocks he selected for the Chicago Sun Times early in 2003. The paper reports that Adam is working on a new line of monkey mutual funds. He made his stock picks by stabbing a pen at the Chicago Sun Times stock tables. Hopefully, this accomplishment will provide a meal for a lifetime for one of my email cohorts. There are many avenues available for the successful investor. Richard Chu, an SG Cown technology analyst states " tech investing is like jumping out of a window and hoping that someone will catch you." Hope springs eternal.
It is appropriate that I mention the new exhibit In Philadelphia. There is not a new replica of the Liberty Bell. It is a permanent exhibit on the money and banking system at the Philadelphia Federal Reserve and it is called "Money in Motion." What caught my eye was not Greenspan at the ribbon-cutting ceremony but rather the 25 foot tower of shredded money which depicts the $100 million destroyed in an average week at the Philadelphia Federal Reserve. I feel certain that the loss in the value of the dollar over the past year comfortably exceeds that weekly $100 million destruction. Maybe they should construct a waterfall depicting the demise in the value of the dollar. It's tough for a country to run massive budget and trade deficits and retain its independence. I think Thomas Jefferson would second that thought.
The other day I mentioned placing some money in China's yuan. Yesterday Goldman Sachs' Fred Hu said China's currency is undervalued by as much as 15% and thought the Chinese government might allow the yuan to appreciate before the end of the year. Whether it's in 2003 or 2004 this upward revaluation will take place. China is on its way to becoming the superpower of the 21st century. We had a big part in that. We run a $100 billion plus trade account deficit with China. We are handing them the reigns of power, and with that, our independence.
This week it was reported by Cushman & Wakefield that office vacancies in San Francisco's business distict climbed to 21% and that office rents dropped to an average of $27.72 per sq ft compared with $32.64 a year ago. That marked the 10th consecutive quarter that prices have fallen in San Francisco. Citywide there are 17 million sq ft of office space sitting empty. It reminds me of all the unused jets sitting in the Mojave.
There was an interesting study done by Runzheimer International and the Association of Corporate Travel Executives. It indicated that 40% of North American organizations have smaller travel budgets this year and that another 34% have travel budgets flat with a year ago. Importantly, 59% are making increased use of teleconferencing, Web conferencing, and video conferencing. The senior editor said she thought teleconferencing would come to be regarded as a permanent tool for doing business. I agree. The loss of business travel and its premium ticket prices could prove the long term demise of many airlines.
Siebel Sysyems cautioned that customers continue to delay making buying decisions. As a result, Siebel will have additional layoffs. Baxter International announced cutting 2500 jobs the other day. In addition to these cutbacks, I have noticed a slowdown in another area. There are less buyers to be found for 10 year U.S. treasuries, which slipped in price for the third consecutive week, the longest slide since November. Interestingly, Japan had a similar experience. The yield on 10 year Japanese treasuries have risen to their highest level since September 1999, and have more than doubled in yield since June 11.
There are many constants in my life. One is being asked why I care so deeply about others and the welfare of this nation. Most would state a single individual cannot have an impact, and believing otherwise is a futile effort. I don't share that view and never have and I never will. I feel the toll of those who have died to preserve my liberties. I don't watch fireworks. I look at the headstones in cemeteries and watch the loving and grieving faces of those left behind. They polish the headstone and hopefully there is some resulting comfort.
Today is Independence Day. I ask myself how can there be independence when there are at least 10 million Americans out of work and looking for work. That excludes the three million Americans who have given up trying to find a job. There are two million Americans who have been unemployed for 27 weeks or more. The average jobless duration is now 20 weeks. That is a 20 year high. The economy has lost almost one million jobs in the last 90 days. About 3.8 million Americans are collecting unemployment benefits, and that is a 20 year high. Those with jobs have an average work week of 33.7 hours and in the factory at 40.2 hours. It's tough to make ends meet with those limited hours. Overtime hours are down to 4 hours per week. An index of help-wanted advertising in major newspapers last month was at its lowest level in 41 years, and the most recent Manpower survey indicates hiring plans for the third quarter are at the lowest level in 12 years. It's tough to be independent under these conditions. How independent can one be when health insurance cannot be afforded? There are almost 45 million Americans who are in this situation. On this fourth of July I am reminded by the words of Teddy Roosevelt: "A man who is good enough to shed his blood for his country is good enough to be given a square deal afterward. More than that no man is entitled to, and less than that no man shall have." I know our veterans are not being provided a square deal when it comes to healthcare.
To achieve a competitive advantage in this information age it is necessary to have the skill in utilizing the information and then its application in sifting thru baloney to get to the prime cuts and the tidbits of knowledge capital found in the marrow bones. I am happy to report a success story in this endeavor. Adam Monk has achieved such success as head of the Chicago Sun-Times Monkey Business stock selection. Adam is a 31 year old cebus monkey from Brazil, and he recorded a gain of 19% in the five stocks he selected for the Chicago Sun Times early in 2003. The paper reports that Adam is working on a new line of monkey mutual funds. He made his stock picks by stabbing a pen at the Chicago Sun Times stock tables. Hopefully, this accomplishment will provide a meal for a lifetime for one of my email cohorts. There are many avenues available for the successful investor. Richard Chu, an SG Cown technology analyst states " tech investing is like jumping out of a window and hoping that someone will catch you." Hope springs eternal.
It is appropriate that I mention the new exhibit In Philadelphia. There is not a new replica of the Liberty Bell. It is a permanent exhibit on the money and banking system at the Philadelphia Federal Reserve and it is called "Money in Motion." What caught my eye was not Greenspan at the ribbon-cutting ceremony but rather the 25 foot tower of shredded money which depicts the $100 million destroyed in an average week at the Philadelphia Federal Reserve. I feel certain that the loss in the value of the dollar over the past year comfortably exceeds that weekly $100 million destruction. Maybe they should construct a waterfall depicting the demise in the value of the dollar. It's tough for a country to run massive budget and trade deficits and retain its independence. I think Thomas Jefferson would second that thought.
The other day I mentioned placing some money in China's yuan. Yesterday Goldman Sachs' Fred Hu said China's currency is undervalued by as much as 15% and thought the Chinese government might allow the yuan to appreciate before the end of the year. Whether it's in 2003 or 2004 this upward revaluation will take place. China is on its way to becoming the superpower of the 21st century. We had a big part in that. We run a $100 billion plus trade account deficit with China. We are handing them the reigns of power, and with that, our independence.
This week it was reported by Cushman & Wakefield that office vacancies in San Francisco's business distict climbed to 21% and that office rents dropped to an average of $27.72 per sq ft compared with $32.64 a year ago. That marked the 10th consecutive quarter that prices have fallen in San Francisco. Citywide there are 17 million sq ft of office space sitting empty. It reminds me of all the unused jets sitting in the Mojave.
There was an interesting study done by Runzheimer International and the Association of Corporate Travel Executives. It indicated that 40% of North American organizations have smaller travel budgets this year and that another 34% have travel budgets flat with a year ago. Importantly, 59% are making increased use of teleconferencing, Web conferencing, and video conferencing. The senior editor said she thought teleconferencing would come to be regarded as a permanent tool for doing business. I agree. The loss of business travel and its premium ticket prices could prove the long term demise of many airlines.
Siebel Sysyems cautioned that customers continue to delay making buying decisions. As a result, Siebel will have additional layoffs. Baxter International announced cutting 2500 jobs the other day. In addition to these cutbacks, I have noticed a slowdown in another area. There are less buyers to be found for 10 year U.S. treasuries, which slipped in price for the third consecutive week, the longest slide since November. Interestingly, Japan had a similar experience. The yield on 10 year Japanese treasuries have risen to their highest level since September 1999, and have more than doubled in yield since June 11.
Thursday, July 03, 2003
7/04/03 A Recap And A Peek Forward
To my original blog readers I apologize in advance, and appreciate your patience. Over the past three or four months there have been a great many new readers of this blog. Several times each day I have received requests to recap the suggestions provided over the past three years. So here goes. In May/June 2000 I turned completely negative and suggested that all securities be fully hedged or sold. I suggested the purchase of gold and Newmont Mining. About ten days after 9/11, I suggested going long to take advantage of what I believed would be a short-term rally. About one month later I recommended that those positions be sold or hedged. I did not return to a bullish stance until mid-October 2002 and recommended positions then taken to be sold or hedged prior to the new year. Other than the suggestion to buy McDonald's at 12 1/2, being negative on the takeover of Hershey's, being optimistic on the takeover of Dreyer's after a big drop from an FTC scare, and the recent selling of the J.D. Edwards $10 strike price puts, I have missed the big move in the upside since mid-March. Over the past two years I have also suggested taking positions in Pfizer, Merck, JP Morgan, Citigroup, Starbucks, Dell, Microsoft, Krispy Kreme, WalMart, Colgate, and Home Depot. All the suggestions were made at price levels significantly lower than the present. This year we eliminated our gold position at $370 per ounce and repurchased a few months later at $323 per ounce. Over the past 1 1/2 years I have been negative on the U.S. dollar and optimistic on the New Zealand ollar. That continues. About 7 weeks ago I turned highly negative on long term treasury bonds. That continues. Some weeks back I turned positive on the Nikkei about 20% below its current level. Yesterday the Nikkei had its highest volume since 1989. At one point the average almost touched 9900 before closing just above 9600. I think this is a good point to take some profits. I have been on the mark about the economy for the past 2 1/2 years and did predict the recession then and I believe we are still in a recession.
In 1998 and 1999 I turned very bullish on housing stocks and believed that the vast majority of one's portfolio should be weighted in this sector. Stocks were selling at 4 and 5 times forward looking earnings. I sold them for big gains. This year those stocks made new all time highs. The industry sold almost one million single family homes last year and a new record is expected for 2003. Mortgage rates went considerably lower than I had expected. Who would have thought there would be 1.7 million housing starts in 2002 and then again in 2003? The home improvement trend is alive and well, and that's why I had suggested adding to the Home Depot core position around $23. I am concerned for the housing sector though. Yesterday the president of the Mortgage Bankers Association said that mortgage rates had seen their lows. Troubling is the view expressed by Joe Carson, chief economist at Alliance Capita. He stated " the ratio of the market value of real estate to disposable income is at an all time high. Mortgage debt is now growing at two times the rate of growth in personal income and more than two times the rise in the value of real estate- faster than at any other period in U.S. history. This is the first cycle in history in which an increase in personal income is needed to pay for assets that have been purchased and not for assets to be purchased in the future."
Currently, I suggest hedging or selling all equity positions with the exception of the J.D. Edwards puts. I suggest continuing to hold New Zealand dollars and to nibble on China's yuan. Stay long gold. Avoid treasury bonds. Do not place your funds in U.S. money market funds where the average taxable yield has fallen to a record low 0.58 per cent. Any new thoughts will be provided, as always, in the next blog. Pundits say that we are at a turning point in the economy. The question is whether it's for the better.
John Graham, a professor at Duke's Fuqua School of Business, directs a quarterly nationwide survey of CFOs. The latest survey indicates that 20% of the CFOs say the depreciated U.S. dollar is increasing sales, but only 3 per cent say it will lead to increased capital spending or additional hiring. Among firms with foreign sales that make up at least one-fourth of their total sales, 51% say the depreciated dollar will lead to increased sales; however, even among these companies, only one in ten says the depreciated dollar wlll increase capital spending or hiring. In sum, if capital spending is on hold, if hiring is on hold, if higher mortgage rates are in the making, and if consumer cash flow fails to rise, then the current economic forecasts are mere folly and, with them, the current stock market upsurge built on a foundation of sawdust.
To my original blog readers I apologize in advance, and appreciate your patience. Over the past three or four months there have been a great many new readers of this blog. Several times each day I have received requests to recap the suggestions provided over the past three years. So here goes. In May/June 2000 I turned completely negative and suggested that all securities be fully hedged or sold. I suggested the purchase of gold and Newmont Mining. About ten days after 9/11, I suggested going long to take advantage of what I believed would be a short-term rally. About one month later I recommended that those positions be sold or hedged. I did not return to a bullish stance until mid-October 2002 and recommended positions then taken to be sold or hedged prior to the new year. Other than the suggestion to buy McDonald's at 12 1/2, being negative on the takeover of Hershey's, being optimistic on the takeover of Dreyer's after a big drop from an FTC scare, and the recent selling of the J.D. Edwards $10 strike price puts, I have missed the big move in the upside since mid-March. Over the past two years I have also suggested taking positions in Pfizer, Merck, JP Morgan, Citigroup, Starbucks, Dell, Microsoft, Krispy Kreme, WalMart, Colgate, and Home Depot. All the suggestions were made at price levels significantly lower than the present. This year we eliminated our gold position at $370 per ounce and repurchased a few months later at $323 per ounce. Over the past 1 1/2 years I have been negative on the U.S. dollar and optimistic on the New Zealand ollar. That continues. About 7 weeks ago I turned highly negative on long term treasury bonds. That continues. Some weeks back I turned positive on the Nikkei about 20% below its current level. Yesterday the Nikkei had its highest volume since 1989. At one point the average almost touched 9900 before closing just above 9600. I think this is a good point to take some profits. I have been on the mark about the economy for the past 2 1/2 years and did predict the recession then and I believe we are still in a recession.
In 1998 and 1999 I turned very bullish on housing stocks and believed that the vast majority of one's portfolio should be weighted in this sector. Stocks were selling at 4 and 5 times forward looking earnings. I sold them for big gains. This year those stocks made new all time highs. The industry sold almost one million single family homes last year and a new record is expected for 2003. Mortgage rates went considerably lower than I had expected. Who would have thought there would be 1.7 million housing starts in 2002 and then again in 2003? The home improvement trend is alive and well, and that's why I had suggested adding to the Home Depot core position around $23. I am concerned for the housing sector though. Yesterday the president of the Mortgage Bankers Association said that mortgage rates had seen their lows. Troubling is the view expressed by Joe Carson, chief economist at Alliance Capita. He stated " the ratio of the market value of real estate to disposable income is at an all time high. Mortgage debt is now growing at two times the rate of growth in personal income and more than two times the rise in the value of real estate- faster than at any other period in U.S. history. This is the first cycle in history in which an increase in personal income is needed to pay for assets that have been purchased and not for assets to be purchased in the future."
Currently, I suggest hedging or selling all equity positions with the exception of the J.D. Edwards puts. I suggest continuing to hold New Zealand dollars and to nibble on China's yuan. Stay long gold. Avoid treasury bonds. Do not place your funds in U.S. money market funds where the average taxable yield has fallen to a record low 0.58 per cent. Any new thoughts will be provided, as always, in the next blog. Pundits say that we are at a turning point in the economy. The question is whether it's for the better.
John Graham, a professor at Duke's Fuqua School of Business, directs a quarterly nationwide survey of CFOs. The latest survey indicates that 20% of the CFOs say the depreciated U.S. dollar is increasing sales, but only 3 per cent say it will lead to increased capital spending or additional hiring. Among firms with foreign sales that make up at least one-fourth of their total sales, 51% say the depreciated dollar will lead to increased sales; however, even among these companies, only one in ten says the depreciated dollar wlll increase capital spending or hiring. In sum, if capital spending is on hold, if hiring is on hold, if higher mortgage rates are in the making, and if consumer cash flow fails to rise, then the current economic forecasts are mere folly and, with them, the current stock market upsurge built on a foundation of sawdust.
Wednesday, July 02, 2003
7/2/03 Scrounging For Scraps
Depending on your point of view. most pieces of information will provide some meat on the bone for a bull or a bear, as the case may be. Yesterday was no exception. The ISM June national factory gauge did rise to 49.8 from 49.4 in May; however, a number below 50 indicates a contraction in activity. The big three auto companies had an overall rise in June sales inentives. For GM the incentives were $4000 per vehicle, for Ford $3700, and for Chrysler $3500. U.S. auto sales did rise, however, 1 1/2% at GM, 6% at Chrysler, and Ford's were unchanged. However, the rise in sales were deemed disappointing given the level of incentives. By comparison, Nissan's June sales rose 22% and their incentives remained at $1500 per vehicle. It reminds me of a statement by Thomas Edison: "Results! Why, man, I have gotten a lot of results. I know several thousand things that won't work." U.S. construction spending fell an unexpected 1.7% in May. However, state and local governments cut spending by 1.5%. Therefore, the results weren't really too bad.
We should take a closer look at the ISM report. New orders were up slightly. The new backlog of orders picked up for exports. That's good. The new backlog of orders for supplier deliveries fell, and that's not a good sign. One real negative did stand out. There was a very steep decline in inventories. It might indicate a concern about the projected pick-up in the economy or it might indicate a concern about the possibility of falling prices. Either alternative doesn't bring a smile to my face. We can look at the aforementioned in a few ways. Jim Miller said "the road to success is always under construction." Maybe the pace of construction slowed in June. On the other hand, maybe Winnie had it right. Winston Churchill declared "most men occasionally stumble over the truth, but most of them pick themselves up and hurry off as if nothing happened yesterday." Maybe that's what happened with investors in yesterday's market. Alternatively, maybe we should shrug off the news. As Albert Einstein said, "we should take care not to make intellect our god; it has, of course, powerful muscles, but no personality." Actually, I think this market has plenty of personality. It's stubborn and often with muscles between the ears.
Personally, I wish I could stop thinking so much. It would make this market run much easier to grasp. I can't do that though. I appreciate the words of Confucius: "He who learns but does not think, is lost! He who thinks but does not learn is in great danger." I'm not looking for danger. I appreciated the limited danger in the Nikkei several weeks ago. The 20% rise has been a nice scrap.
Later this week the information on June payrolls will be released. The payrolls are expected to be flat and the unemployment rate to rise to 6.2%. In June I know U.S. employers cut 60,000 jobs. That was the fewest in 31 months, but the job cuts do continue. A year ago that number was 95,000. So there is some good news but not good enough. GNP growth is forecast to be 3.2% in the third quarter and 3.5% in the fourth quarter. From October 1, 2002 thru June 30, 2003 that growth number was about 1.4%. Going forward GNP is not going to miraculously increase by well over 100% in three months. It is not happening. You may take issue with that statement. That's ok. I walk the road Robert Frost described: "Two roads diverged in the woods, and I-- I took the one less traveled by. And that has made all the difference." You must take your own road. It's your money. Just remember the facts. Yesterday American Airlines furloughed 3100 flight attendants and Storage Networks cut 35% of its staff. That's the reality of the workplace.
The American Association of Individual Investors survey indicates 71% are bullish and 8% are bearish. 59% of investment advisors are bullish and 18% are bearish. The biggest bears of all are the insiders who continue with their selling at about four shares sold for each share purchased.
Investors might take note of Microsoft's decision to cut about 800 support staff workers in Texas and North Carolina and to add workers at the company's new campus in India. Many other tech companies have made similar moves. Microsoft employs 50,000 workers. They are looking to save money on services and having them fulfilled in India. Today Merrill Lynch raised their earnings estimate for Microsoft by five cents a share due to cost-cutting measures but not because of revenue growth.
General George Patton said " success is how high you bounce when you hit bottom." Looking in the rear view mirror, I know we hit a bottom in 1974, in 1982, and in 1987. Did we hit bottom in October 2002? Is the latest 15% S&P 500 Index run the final bounce for some time or the start of a bigger bounce? In the market success is limiting your risk and maximizing your reward. Success does not come to pigs- only to bulls or bears or sometimes both. Enjoy the scraps. Avoid getting stuffed. It's bad for the digestive system. That reminds me of something Elayne Boosler said: "When women are depressed they either eat or go shopping. Men invade another country." As Henny Youngman might say, then don't get depressed. It doesn't pay.
Before closing for the morning, I have a few final thoughts. The Maryland Pharmacy Discount Program for seniors just went into effect, and is for participants with annual incomes of up to $15,715 for an individual or $21,210 for a couple. Prescriptions are available at 65% of the state Medicaid program or a savings of about 50% off the retail price. The state is putting up $8 million which is matched by the federal government, and this will pay for the 35% of the cost that is not absorbed by the patient. We should monitor this program. It sounds promising.
Tobacco farmers are planting the smallest crop since 1874, the year Ulysses S. Grant was president. American manufacturers are buying less U.S. tobacco because, as an economist for the Agriculture Department says, they can get cheaper leaf from Zimbabwe, Brazil, and other countries. It's not just China that exports lower prices.
The U.S. has 361 ports with 5000 coastal facilities and some 10,000 ships. About 95% of international cargo to the U.S. arrives by ship. Many believe the maritime industry is our most vulnerable portion of homeland security.
California has the lowest credit rating among U.S. states. They did not pass a budget for the fiscal year which began yesterday. As such, the state was forced to freeze payments ranging from those to nursing homes to community colleges. More than $500 million in aid to schools was cut off. During Davis' first four years in office, state spending rose 33% while tax receipts rose 22%. The problem is pretty simple. The solution is not pleasant. What do you do with 37 million outstretched palms?
Depending on your point of view. most pieces of information will provide some meat on the bone for a bull or a bear, as the case may be. Yesterday was no exception. The ISM June national factory gauge did rise to 49.8 from 49.4 in May; however, a number below 50 indicates a contraction in activity. The big three auto companies had an overall rise in June sales inentives. For GM the incentives were $4000 per vehicle, for Ford $3700, and for Chrysler $3500. U.S. auto sales did rise, however, 1 1/2% at GM, 6% at Chrysler, and Ford's were unchanged. However, the rise in sales were deemed disappointing given the level of incentives. By comparison, Nissan's June sales rose 22% and their incentives remained at $1500 per vehicle. It reminds me of a statement by Thomas Edison: "Results! Why, man, I have gotten a lot of results. I know several thousand things that won't work." U.S. construction spending fell an unexpected 1.7% in May. However, state and local governments cut spending by 1.5%. Therefore, the results weren't really too bad.
We should take a closer look at the ISM report. New orders were up slightly. The new backlog of orders picked up for exports. That's good. The new backlog of orders for supplier deliveries fell, and that's not a good sign. One real negative did stand out. There was a very steep decline in inventories. It might indicate a concern about the projected pick-up in the economy or it might indicate a concern about the possibility of falling prices. Either alternative doesn't bring a smile to my face. We can look at the aforementioned in a few ways. Jim Miller said "the road to success is always under construction." Maybe the pace of construction slowed in June. On the other hand, maybe Winnie had it right. Winston Churchill declared "most men occasionally stumble over the truth, but most of them pick themselves up and hurry off as if nothing happened yesterday." Maybe that's what happened with investors in yesterday's market. Alternatively, maybe we should shrug off the news. As Albert Einstein said, "we should take care not to make intellect our god; it has, of course, powerful muscles, but no personality." Actually, I think this market has plenty of personality. It's stubborn and often with muscles between the ears.
Personally, I wish I could stop thinking so much. It would make this market run much easier to grasp. I can't do that though. I appreciate the words of Confucius: "He who learns but does not think, is lost! He who thinks but does not learn is in great danger." I'm not looking for danger. I appreciated the limited danger in the Nikkei several weeks ago. The 20% rise has been a nice scrap.
Later this week the information on June payrolls will be released. The payrolls are expected to be flat and the unemployment rate to rise to 6.2%. In June I know U.S. employers cut 60,000 jobs. That was the fewest in 31 months, but the job cuts do continue. A year ago that number was 95,000. So there is some good news but not good enough. GNP growth is forecast to be 3.2% in the third quarter and 3.5% in the fourth quarter. From October 1, 2002 thru June 30, 2003 that growth number was about 1.4%. Going forward GNP is not going to miraculously increase by well over 100% in three months. It is not happening. You may take issue with that statement. That's ok. I walk the road Robert Frost described: "Two roads diverged in the woods, and I-- I took the one less traveled by. And that has made all the difference." You must take your own road. It's your money. Just remember the facts. Yesterday American Airlines furloughed 3100 flight attendants and Storage Networks cut 35% of its staff. That's the reality of the workplace.
The American Association of Individual Investors survey indicates 71% are bullish and 8% are bearish. 59% of investment advisors are bullish and 18% are bearish. The biggest bears of all are the insiders who continue with their selling at about four shares sold for each share purchased.
Investors might take note of Microsoft's decision to cut about 800 support staff workers in Texas and North Carolina and to add workers at the company's new campus in India. Many other tech companies have made similar moves. Microsoft employs 50,000 workers. They are looking to save money on services and having them fulfilled in India. Today Merrill Lynch raised their earnings estimate for Microsoft by five cents a share due to cost-cutting measures but not because of revenue growth.
General George Patton said " success is how high you bounce when you hit bottom." Looking in the rear view mirror, I know we hit a bottom in 1974, in 1982, and in 1987. Did we hit bottom in October 2002? Is the latest 15% S&P 500 Index run the final bounce for some time or the start of a bigger bounce? In the market success is limiting your risk and maximizing your reward. Success does not come to pigs- only to bulls or bears or sometimes both. Enjoy the scraps. Avoid getting stuffed. It's bad for the digestive system. That reminds me of something Elayne Boosler said: "When women are depressed they either eat or go shopping. Men invade another country." As Henny Youngman might say, then don't get depressed. It doesn't pay.
Before closing for the morning, I have a few final thoughts. The Maryland Pharmacy Discount Program for seniors just went into effect, and is for participants with annual incomes of up to $15,715 for an individual or $21,210 for a couple. Prescriptions are available at 65% of the state Medicaid program or a savings of about 50% off the retail price. The state is putting up $8 million which is matched by the federal government, and this will pay for the 35% of the cost that is not absorbed by the patient. We should monitor this program. It sounds promising.
Tobacco farmers are planting the smallest crop since 1874, the year Ulysses S. Grant was president. American manufacturers are buying less U.S. tobacco because, as an economist for the Agriculture Department says, they can get cheaper leaf from Zimbabwe, Brazil, and other countries. It's not just China that exports lower prices.
The U.S. has 361 ports with 5000 coastal facilities and some 10,000 ships. About 95% of international cargo to the U.S. arrives by ship. Many believe the maritime industry is our most vulnerable portion of homeland security.
California has the lowest credit rating among U.S. states. They did not pass a budget for the fiscal year which began yesterday. As such, the state was forced to freeze payments ranging from those to nursing homes to community colleges. More than $500 million in aid to schools was cut off. During Davis' first four years in office, state spending rose 33% while tax receipts rose 22%. The problem is pretty simple. The solution is not pleasant. What do you do with 37 million outstretched palms?
Tuesday, July 01, 2003
7/1/03 It Feels Great To Get On Base
Since Doubleday invented the game of baseball, there have been few great pure home run hitters: the Bambino, Hank Aaron, Jimmy Foxx, Barry Bonds, and some other select names. The point is the number is truly a dot on the list of names who have played this game over the past 100 years or so. For the rest, the object has been to get on base. The same is true in the field of investing. There have been very few consistent investors who keep hitting the ball out of the park, as it were. For the rest, it is accumulating nickles and dimes and on rare occasions quarters. The average annual gain for investors over the past 100 years has been about 9%. In the second quarter that just ended yesterday the S&P 500 Index had a gain of about 15%. It was the best showing in almost five years. The stock market's job is to anticipate the future and react accordingly. As such, the thought is by the end of 2003 business will be better, and stock prices thus moved higher. Now, maybe there will be a home run hitter out there. I'm not one of them. The historical percentages would suggest your taking some money off the table and save it for another day. We could have another barnburner in the second half. It would be smarter to be conservative. Wait for your pitch. Don't swing at a fork ball. The extent of the drop can really fool you.
The first of July generally brings stock market gains. It is a lot easier to sell into strength. Today the ISM will be forecast and many suspect it grew for the first time since February. That might touch everyone's fancy. Don't be fooled. Manufacturing and factory growth are going nowhere fast. As Ed Yardeni points out, "imports account for almost one quarter of goods transactions in the U.S. up from 14% in the late 1980s." Because of the growth in imports our trade account deficit for 2003 will be about $550 billion and China accounts for over $100 billion of that figure. China also helps to set the prices from goods manufactured in our factories, and this has resulted in little or no pricing power in the U.S. Fitch points out that over the 2000-2002 period exports from China to the U.S. grew at an average annual rate of 12%. When you combine the latter with an outsourced service industry to India and other countries, you have a recipe for increased unemployment with higher productivity from the remaining workforce. Companies, states, counties, and other municipalities will continue to cut the number of workers and will hire on a highly selective and infrequent basis. Yesterday Waste Management announced more job cuts and let 300 workers go in Houston.
There has been much good news in the housing industry. Mortgage rates have dropped to record lows, the pace of refinancing is at record highs, and prices are strong. There are pockets of weakness. The San Francisco data shows a price decline as of mid-May of 3.8%. In Santa Clara county the resale median price is down 2.2% for the first four months of 2003. The president of Foreclosures.com said "when price appreciation plateaus, people who have been using their homes as ATM machines can't do that any more. As job loss persists and markets flatten out, we'll see more defaults later this year. People will simply be unable to afford the homes they own."
No one knows when prices will plateau in the stock market. It's just a guess. I say why guess. It's much better to place historical data on your side. As Bernard Baruch said you can't get hurt taking a profit. Rather than watching for clues from the news, which really is old news, think for yourself. Be confident enough to pull the trigger. If you decide you've made a mistake in selling, there is always the opportunity to buy once again. This time, however, you would be playing with some of the house's money. That gives ou a leg up. It feels great to get on base.
Since Doubleday invented the game of baseball, there have been few great pure home run hitters: the Bambino, Hank Aaron, Jimmy Foxx, Barry Bonds, and some other select names. The point is the number is truly a dot on the list of names who have played this game over the past 100 years or so. For the rest, the object has been to get on base. The same is true in the field of investing. There have been very few consistent investors who keep hitting the ball out of the park, as it were. For the rest, it is accumulating nickles and dimes and on rare occasions quarters. The average annual gain for investors over the past 100 years has been about 9%. In the second quarter that just ended yesterday the S&P 500 Index had a gain of about 15%. It was the best showing in almost five years. The stock market's job is to anticipate the future and react accordingly. As such, the thought is by the end of 2003 business will be better, and stock prices thus moved higher. Now, maybe there will be a home run hitter out there. I'm not one of them. The historical percentages would suggest your taking some money off the table and save it for another day. We could have another barnburner in the second half. It would be smarter to be conservative. Wait for your pitch. Don't swing at a fork ball. The extent of the drop can really fool you.
The first of July generally brings stock market gains. It is a lot easier to sell into strength. Today the ISM will be forecast and many suspect it grew for the first time since February. That might touch everyone's fancy. Don't be fooled. Manufacturing and factory growth are going nowhere fast. As Ed Yardeni points out, "imports account for almost one quarter of goods transactions in the U.S. up from 14% in the late 1980s." Because of the growth in imports our trade account deficit for 2003 will be about $550 billion and China accounts for over $100 billion of that figure. China also helps to set the prices from goods manufactured in our factories, and this has resulted in little or no pricing power in the U.S. Fitch points out that over the 2000-2002 period exports from China to the U.S. grew at an average annual rate of 12%. When you combine the latter with an outsourced service industry to India and other countries, you have a recipe for increased unemployment with higher productivity from the remaining workforce. Companies, states, counties, and other municipalities will continue to cut the number of workers and will hire on a highly selective and infrequent basis. Yesterday Waste Management announced more job cuts and let 300 workers go in Houston.
There has been much good news in the housing industry. Mortgage rates have dropped to record lows, the pace of refinancing is at record highs, and prices are strong. There are pockets of weakness. The San Francisco data shows a price decline as of mid-May of 3.8%. In Santa Clara county the resale median price is down 2.2% for the first four months of 2003. The president of Foreclosures.com said "when price appreciation plateaus, people who have been using their homes as ATM machines can't do that any more. As job loss persists and markets flatten out, we'll see more defaults later this year. People will simply be unable to afford the homes they own."
No one knows when prices will plateau in the stock market. It's just a guess. I say why guess. It's much better to place historical data on your side. As Bernard Baruch said you can't get hurt taking a profit. Rather than watching for clues from the news, which really is old news, think for yourself. Be confident enough to pull the trigger. If you decide you've made a mistake in selling, there is always the opportunity to buy once again. This time, however, you would be playing with some of the house's money. That gives ou a leg up. It feels great to get on base.
Monday, June 30, 2003
6/30/03 It's A War Out There
Starting July 1 the EU will start to collect a VAT on various products or auctions run online by U.S. companies and other non-EU countries. Amazon will charge the VAT on sales of downloadable software and e-books as well as the commissions collected for online auctions. eBay plans to assume the VAT on behalf of consumers in France and Italy. In Germany and the U.S. the company will increase fees to reflect the tax. eBay expects the costs to be "substantial."
Jeremy Grantham points out that timber has provided a higher return than the S&P Index, including dividends, for nearly 100 years. That I did not know. It will be interesting to see how the relative returns might be between water and the S&P Index over the next 25 years or so.
I received an email from a few folks saying how happy they are with their larger paychecks as a result of the tax cuts but, at the same time, complained how other increased local and state taxes and fees are eating into their new-found wealth, as it were. New state budgets take effect tomorrow. Let's look at Georgia. They raised taxes on a pack of cigarettes by 25 cents. They cut hundreds of millions of dollars from state programs. Health insurance costs will increase for hundreds of thousands of state employees and retirees and teachers; hundreds of state jobs will be eliminated or left unfilled; some school programs like driver's ed will be eliminated; many areas of the state will have higher property tax bills being mailed out and the latter for services being cut by the state; doctors will get less from the state for treating poor people; and fees for corporate filings with the state are going up by two-thirds. In sum, state and local taxes are rising, fees are rising, services are being cut, and the quality of life is on the decline. That's a stiff price to pay for government waste, mismanagement, and poor planning. That goes for all levels of government. There have been other Bush tax cuts. The latest will not promote economic growth. Businesses will not increase spending. Consumers will have less to spend after they pay for the added expenses at the state and local levels. Companies will not be hiring more people. In fact. more state and municipal workers will be axed from the payrolls. Wall Street will get it. The Nasdaq won't be at 1600 and the Dow won't be at 9000. Short term rates won't be at 1%. Wall Street is mid-way into a 12 round fight. They lost the first two rounds and have won the last four. Lennox Lewis was behind on three score cards and won by a TKO on cuts. The next six months won't involve a TKO. The fight won't be stopped on cuts. When the selling begets selling, the buyers will wait for the sellers to be clamped into the corner of the ring. It won't be pretty. Fools have rushed in and invested more money in the Fed's reflation game. This isn't a game. It's the real deal. The Fed's motives are blatant and irresponsible. Unfortunately, greed often listens to losers and losses follow. Better to think for yourself.
Starting July 1 the EU will start to collect a VAT on various products or auctions run online by U.S. companies and other non-EU countries. Amazon will charge the VAT on sales of downloadable software and e-books as well as the commissions collected for online auctions. eBay plans to assume the VAT on behalf of consumers in France and Italy. In Germany and the U.S. the company will increase fees to reflect the tax. eBay expects the costs to be "substantial."
Jeremy Grantham points out that timber has provided a higher return than the S&P Index, including dividends, for nearly 100 years. That I did not know. It will be interesting to see how the relative returns might be between water and the S&P Index over the next 25 years or so.
I received an email from a few folks saying how happy they are with their larger paychecks as a result of the tax cuts but, at the same time, complained how other increased local and state taxes and fees are eating into their new-found wealth, as it were. New state budgets take effect tomorrow. Let's look at Georgia. They raised taxes on a pack of cigarettes by 25 cents. They cut hundreds of millions of dollars from state programs. Health insurance costs will increase for hundreds of thousands of state employees and retirees and teachers; hundreds of state jobs will be eliminated or left unfilled; some school programs like driver's ed will be eliminated; many areas of the state will have higher property tax bills being mailed out and the latter for services being cut by the state; doctors will get less from the state for treating poor people; and fees for corporate filings with the state are going up by two-thirds. In sum, state and local taxes are rising, fees are rising, services are being cut, and the quality of life is on the decline. That's a stiff price to pay for government waste, mismanagement, and poor planning. That goes for all levels of government. There have been other Bush tax cuts. The latest will not promote economic growth. Businesses will not increase spending. Consumers will have less to spend after they pay for the added expenses at the state and local levels. Companies will not be hiring more people. In fact. more state and municipal workers will be axed from the payrolls. Wall Street will get it. The Nasdaq won't be at 1600 and the Dow won't be at 9000. Short term rates won't be at 1%. Wall Street is mid-way into a 12 round fight. They lost the first two rounds and have won the last four. Lennox Lewis was behind on three score cards and won by a TKO on cuts. The next six months won't involve a TKO. The fight won't be stopped on cuts. When the selling begets selling, the buyers will wait for the sellers to be clamped into the corner of the ring. It won't be pretty. Fools have rushed in and invested more money in the Fed's reflation game. This isn't a game. It's the real deal. The Fed's motives are blatant and irresponsible. Unfortunately, greed often listens to losers and losses follow. Better to think for yourself.
Sunday, June 29, 2003
6/29/03 Jean Banchet
Thirty years ago Jean and Doris Banchet opened their restaurant, Le Francais, in Wheeling, Illinois. Some considered it the best restaurant in the country- not unlike today's praise for The French Laundry in Yountville, CA. Jean Banchet retired a couple of years ago, and the new owner just couldn't make it in today's economy. Whether it's over time or since yesterday, things evolve and change. To be a successful investor one must change with the times in order to effectively counter the risks. Make no mistake. Risk is in the balance.
Once again, central bankers from around the globe had another get together this weekend. The group is in agreement that there will be a slow and sluggish recovery in the world economy. I was particularly interested in a comment made by Bank of Canada Governor David Dodge. He said "the mood is guarded optimism but with guarded kind of underlined." What surprised me was his frankness. Can you see Greenspan walking out of a Fed meeting and avoiding non understandable gibberish? I didn't read where Greenspan disagreed with the group's economic assessment. Do you believe that the current levels in the Dow, S&P, and Nasdaq reflect a vision of a slow and sluggish recovery? I don't. The forecasts are for growth of 3.5% in this second half. That's hardly slow and sluggish. When the markets reflect the latter, the price levels will be much lower and not similar to the close on Friday.
I was reading an interview with Bill Miller of T. Rowe Price. He has outperformed the S&P for well over a decade. His portfolio is now down to 2% in technology stocks. For someone who once had 15 times that percentage this is quite a change. He believes technology is not the place to invest. I give him credit for changing with the times. I should mention he thinks we're in a bull market.
As I have said so often in the last six weeks or so, I believe the government bond market is a ponzi game with rates at these levels. There is no question in my mind that the best way to make money is to be negative on the bond market. I was quite pleased to see 10 year treasuries have their biggest two week decline since October. I'll even smile more when the long bond yields at least 7%. I'm patient. The market will get it right. The risks shall be balanced and produce yields quite different from today. When that happens, much will have taken place in this country. You don't have to purchase a ticket on the Cyclone to get a roller coaster ride. You might be able to watch crickets migrate to Wall Street. It won't be a Stephen King movie.
I have a plan. Rather than the Fed monetize more federal debt, I suggest we change the role of President Bush. He is a fantastic fund raiser. On Friday he had lunch and dinner in Burlingame and Los Angeles and raised $5 million. My idea is to for him to have fundraisers across the country- breakfast, lunch, and dinner- for 48 weeks of the year, and that accounts for a month's vacation. I feel certain he can raise at least $5 billion over that time, and that can go to reduce the national debt. It doesn't get better than that. It's a great return on his annualized salary. We can call it the ROI Tour.
Tomorrow the Justice Department will ask for a second request for more information from Oracle on its PeopleSoft bid. This hostile tender has been hurtful to PeopleSoft's potential business. LA County is putting on hold its talks with PeopleSoft for a $100 million software project. The County's CIO said "things were progressing nicely, then out of the blue Mr. Ellison decides to take a shot at PeopleSoft. We made a decision given the uncertainty to suspend negotiations." There are many other potential customers like LA County who have arrived at the same conclusion. Business is tough enough in the software industry. Privately, I have not heard from one top technology executive who is rooting for Ellison to succeed.
Fitch Ratings estimates the current global credit derivatives market at $2 trillion, and that market they predict, will rise to $4.8 trillion by next year. J.P Morgan, Citigroup, UBS Warburg, Bank of America, and Deutsche Bank are the major players. Greenspan says of credit default swaps "banks appear to have effectively used such instruments to shift a significant portion of the risk from their corporate loan portfolio to other organizations...concentration of market making has the potential to create concentration of credit risks." In my view, the derivatives market has been abused by greed. The banks seek out more and more fee-based income. Risks have not been spread. Risks have been concentrated. I have little faith in bankers to assess risk- much less concentrate it. Regulation is not the answer. Just some rational commonsense would be helpful. Unfortuately, I wouldn't hold my breath. The derivatives market will produce, in my view, a great many suicides. It's not too late to change with the times.
Thirty years ago Jean and Doris Banchet opened their restaurant, Le Francais, in Wheeling, Illinois. Some considered it the best restaurant in the country- not unlike today's praise for The French Laundry in Yountville, CA. Jean Banchet retired a couple of years ago, and the new owner just couldn't make it in today's economy. Whether it's over time or since yesterday, things evolve and change. To be a successful investor one must change with the times in order to effectively counter the risks. Make no mistake. Risk is in the balance.
Once again, central bankers from around the globe had another get together this weekend. The group is in agreement that there will be a slow and sluggish recovery in the world economy. I was particularly interested in a comment made by Bank of Canada Governor David Dodge. He said "the mood is guarded optimism but with guarded kind of underlined." What surprised me was his frankness. Can you see Greenspan walking out of a Fed meeting and avoiding non understandable gibberish? I didn't read where Greenspan disagreed with the group's economic assessment. Do you believe that the current levels in the Dow, S&P, and Nasdaq reflect a vision of a slow and sluggish recovery? I don't. The forecasts are for growth of 3.5% in this second half. That's hardly slow and sluggish. When the markets reflect the latter, the price levels will be much lower and not similar to the close on Friday.
I was reading an interview with Bill Miller of T. Rowe Price. He has outperformed the S&P for well over a decade. His portfolio is now down to 2% in technology stocks. For someone who once had 15 times that percentage this is quite a change. He believes technology is not the place to invest. I give him credit for changing with the times. I should mention he thinks we're in a bull market.
As I have said so often in the last six weeks or so, I believe the government bond market is a ponzi game with rates at these levels. There is no question in my mind that the best way to make money is to be negative on the bond market. I was quite pleased to see 10 year treasuries have their biggest two week decline since October. I'll even smile more when the long bond yields at least 7%. I'm patient. The market will get it right. The risks shall be balanced and produce yields quite different from today. When that happens, much will have taken place in this country. You don't have to purchase a ticket on the Cyclone to get a roller coaster ride. You might be able to watch crickets migrate to Wall Street. It won't be a Stephen King movie.
I have a plan. Rather than the Fed monetize more federal debt, I suggest we change the role of President Bush. He is a fantastic fund raiser. On Friday he had lunch and dinner in Burlingame and Los Angeles and raised $5 million. My idea is to for him to have fundraisers across the country- breakfast, lunch, and dinner- for 48 weeks of the year, and that accounts for a month's vacation. I feel certain he can raise at least $5 billion over that time, and that can go to reduce the national debt. It doesn't get better than that. It's a great return on his annualized salary. We can call it the ROI Tour.
Tomorrow the Justice Department will ask for a second request for more information from Oracle on its PeopleSoft bid. This hostile tender has been hurtful to PeopleSoft's potential business. LA County is putting on hold its talks with PeopleSoft for a $100 million software project. The County's CIO said "things were progressing nicely, then out of the blue Mr. Ellison decides to take a shot at PeopleSoft. We made a decision given the uncertainty to suspend negotiations." There are many other potential customers like LA County who have arrived at the same conclusion. Business is tough enough in the software industry. Privately, I have not heard from one top technology executive who is rooting for Ellison to succeed.
Fitch Ratings estimates the current global credit derivatives market at $2 trillion, and that market they predict, will rise to $4.8 trillion by next year. J.P Morgan, Citigroup, UBS Warburg, Bank of America, and Deutsche Bank are the major players. Greenspan says of credit default swaps "banks appear to have effectively used such instruments to shift a significant portion of the risk from their corporate loan portfolio to other organizations...concentration of market making has the potential to create concentration of credit risks." In my view, the derivatives market has been abused by greed. The banks seek out more and more fee-based income. Risks have not been spread. Risks have been concentrated. I have little faith in bankers to assess risk- much less concentrate it. Regulation is not the answer. Just some rational commonsense would be helpful. Unfortuately, I wouldn't hold my breath. The derivatives market will produce, in my view, a great many suicides. It's not too late to change with the times.
Saturday, June 28, 2003
6/27/03 This Picture Needs Cropping
Yesterday was my day for listening to the radio. I was fidding on the dial and heard a familiar voice. Here was a successful money manager. He had made good money for investors for probably 15 straight years and left his profession for "show business." He said he was buying Dow Chemical fr the yield- about 5%. He said he knew they weren't doing well but could cover the dividend and that one "should forget about the fundamentals... the market is in a sweet spot...I turned bullish with the Dow at 7700 and it's going to 9500." Who am I to argue with a guy who has been right and bullish? He made money up until 2000. I don't know his record after that. This is not the point. I don't care how smart one is. You never forget the fundamentals. Never. When A-Rod gets into the batter's box, do you think he goes over in his mind the pitcher's tendencies, what pitches to look for in this situation, where to hit the ball, where the defense is playing him etc? He doesn't walk to the plate and ignore what he's studied and what is required of specific preparation in a given situation. This commentator said that paying dividends is a sign of the strength of the company. It's only recently that Mcrosoft started payng a dividend. They have almost $50 billion in cash. Some of the companies with the largest cash reserves don't pay dividends. Take Berkshire Hathaway. In fact, the companies which have proven to be the best investments for me over time don't pay a dividend. They reinvest the money in their growth. This guy may be a smart money manager but he doesn't talk smart. I promise you this. If he forgets fundamentals, his market results will turn to red. Be careful what you read. Be careful of what people say. That goes for everyone. I am not excluded.
My next radio program concerned politics. The topic was the war in Iraq, a subject where my opinion has been voiced so many times. He wondered whether the public would care come the next election if at least one of our soldiers died every day for the next year or so in Iraq. Never once did he mention the loss for the families or the soldiers being wounded. They were just a numbers game in a political exercise. He said that a general had admitted that the Administration had underestimated the difficulties to be confronted after May 1. You didn't need the general to tell you that. Then came the bomb. The talk show host said that the killing of our troops in Iraq would not stop until Saddam Hussein was captured. He might have mentioned the terror alerts and Osama bin Laden. He actually believes this crap and gets paid for delivering his message from the mount. If this is an example of talk radio, then maybe this medium has hit its peak.
I read the Nike release early yesterday. I keep hammering on the point to watch the leaders. If they slow down, watch out for the rest of that industry. Nike is clearly the leader in its field, and a great marketing company. They said they were reducing their growth forecasts for the next six months. The stock got hit badly, but it could have been worse. Nike is providing a signal that the consumer is not out there hitting home runs. They're trying to get on base with a walk, and then possibly steal second or even seconds, as the situation may be. If economists are depending on an upsurge in consumer spending in the second half, Nike is telling you it's not going to happen. If the consumer keeps his bat on his shoulder and rarely swings at a pitch, business owners keep a tight rein on their wallets, and managers don't have the burning desire to hire, then what do you have? What we have had for nine months or more. You may want to crop this picture. That's your right. I prefer to crop the picture painted by the financial commentator and the political talk show host. I know what they said flies in the face of rationality and good common sense. Hell, in this heat wave, maybe we should just jump in the waves and forget all the picture taking. But we cannot do that. Kodak needs some help. Otherwise they will be kicked out of the Dow and then what kind of picture remains? Just Pfizer.
Yesterday was my day for listening to the radio. I was fidding on the dial and heard a familiar voice. Here was a successful money manager. He had made good money for investors for probably 15 straight years and left his profession for "show business." He said he was buying Dow Chemical fr the yield- about 5%. He said he knew they weren't doing well but could cover the dividend and that one "should forget about the fundamentals... the market is in a sweet spot...I turned bullish with the Dow at 7700 and it's going to 9500." Who am I to argue with a guy who has been right and bullish? He made money up until 2000. I don't know his record after that. This is not the point. I don't care how smart one is. You never forget the fundamentals. Never. When A-Rod gets into the batter's box, do you think he goes over in his mind the pitcher's tendencies, what pitches to look for in this situation, where to hit the ball, where the defense is playing him etc? He doesn't walk to the plate and ignore what he's studied and what is required of specific preparation in a given situation. This commentator said that paying dividends is a sign of the strength of the company. It's only recently that Mcrosoft started payng a dividend. They have almost $50 billion in cash. Some of the companies with the largest cash reserves don't pay dividends. Take Berkshire Hathaway. In fact, the companies which have proven to be the best investments for me over time don't pay a dividend. They reinvest the money in their growth. This guy may be a smart money manager but he doesn't talk smart. I promise you this. If he forgets fundamentals, his market results will turn to red. Be careful what you read. Be careful of what people say. That goes for everyone. I am not excluded.
My next radio program concerned politics. The topic was the war in Iraq, a subject where my opinion has been voiced so many times. He wondered whether the public would care come the next election if at least one of our soldiers died every day for the next year or so in Iraq. Never once did he mention the loss for the families or the soldiers being wounded. They were just a numbers game in a political exercise. He said that a general had admitted that the Administration had underestimated the difficulties to be confronted after May 1. You didn't need the general to tell you that. Then came the bomb. The talk show host said that the killing of our troops in Iraq would not stop until Saddam Hussein was captured. He might have mentioned the terror alerts and Osama bin Laden. He actually believes this crap and gets paid for delivering his message from the mount. If this is an example of talk radio, then maybe this medium has hit its peak.
I read the Nike release early yesterday. I keep hammering on the point to watch the leaders. If they slow down, watch out for the rest of that industry. Nike is clearly the leader in its field, and a great marketing company. They said they were reducing their growth forecasts for the next six months. The stock got hit badly, but it could have been worse. Nike is providing a signal that the consumer is not out there hitting home runs. They're trying to get on base with a walk, and then possibly steal second or even seconds, as the situation may be. If economists are depending on an upsurge in consumer spending in the second half, Nike is telling you it's not going to happen. If the consumer keeps his bat on his shoulder and rarely swings at a pitch, business owners keep a tight rein on their wallets, and managers don't have the burning desire to hire, then what do you have? What we have had for nine months or more. You may want to crop this picture. That's your right. I prefer to crop the picture painted by the financial commentator and the political talk show host. I know what they said flies in the face of rationality and good common sense. Hell, in this heat wave, maybe we should just jump in the waves and forget all the picture taking. But we cannot do that. Kodak needs some help. Otherwise they will be kicked out of the Dow and then what kind of picture remains? Just Pfizer.
Thursday, June 26, 2003
For Friday 6/27/03 The Best Of The Best
Recently, my son had the good fortune to have dinner with Dr. Leroy E. Hood, president and director of the Institute for Systems Biology in Seattle. Last year Dr. Hood received the 2002 Kyoto Prize for Advanced Technology. This prize is modeled after Sweden's Nobel Prize. Dr. Hood was honored for his original contribution in the mapping of the human genome and for his successful pioneer work in the automated instrumentation for DNA sequencing. Dr. Hood has been a founder of 9 successful companies. The best known is Amgen. His focus going forward is his concentration in the field of preventative medicine. This area holds much interest for me as well, and I too will meet with Dr. Hood to discuss this work. I consider Dr. Hood the world's leader in furthering the healthful well-being of mankind.
While on the subject of healthcare, I would like to emphasize my strong belief that Pfizer should be included in the Dow Jones Industrial Average. The reason is not because I have an interest in the company or believe it is an appropriate core holding for the long term. It's not because it is close to having the largest market capitalization of any public company. The main reason is that Pfizer is the leading ethical pharmaceutical company in the world. Healthcare makes up over 16% of the U.S. GDP and this percentage continues to grow. Next year Pfizer's sales will approach $55 billion. Pfizer has some heavy duty drugs in the pipeline- for malaria; small pox; epilepsy; neuropathic pain; anti-anxiety medication; a drug to raise the levels of HDL; and a drug to assist smokers in their efforts to stop the addiction. The company is spending over $7 billion on R&D this year. Pfizer should be listed in the Dow.
A month ago the Commerce Department had estimated that the first quarter U.S. GDP had risen at a 1.9% pace. In fact, that number was revised downward to 1.4%, and that matched the low growth rate of the fourth quarter in 2002. This is a 26% revision, and, in my view, unacceptable. It doesn't take almost three months to get a number correct. Time and time again I have written about government numbers. Only a fool would believe them. I continue to question whether they are released honestly in the first place or simply a tool to manipulate forecasts for future quarters. If the revisions were rare it would be one thing. They are the norm. The government also revised upward the unemployment numbers for the prior week. In essence, why should anyone believe the latest number of 404,000 idled workers.? They are certain to be revised- it happens weekly. Other than WalMart, Home Depot, Krispy Kreme, Starbucks, and companies like them, the only company I have seen hiring is Wells Fargo. I have seen plenty of job cuts. Second quarter GDP numbers will not be much different than those produced in the last two quarters. Companies continue to keep workers and inventories at lean levels, and spending plans are muted. In my view, the growth estimates for the second half of this year are significantly overstated. At some point investors will make that connection.
Recently, my son had the good fortune to have dinner with Dr. Leroy E. Hood, president and director of the Institute for Systems Biology in Seattle. Last year Dr. Hood received the 2002 Kyoto Prize for Advanced Technology. This prize is modeled after Sweden's Nobel Prize. Dr. Hood was honored for his original contribution in the mapping of the human genome and for his successful pioneer work in the automated instrumentation for DNA sequencing. Dr. Hood has been a founder of 9 successful companies. The best known is Amgen. His focus going forward is his concentration in the field of preventative medicine. This area holds much interest for me as well, and I too will meet with Dr. Hood to discuss this work. I consider Dr. Hood the world's leader in furthering the healthful well-being of mankind.
While on the subject of healthcare, I would like to emphasize my strong belief that Pfizer should be included in the Dow Jones Industrial Average. The reason is not because I have an interest in the company or believe it is an appropriate core holding for the long term. It's not because it is close to having the largest market capitalization of any public company. The main reason is that Pfizer is the leading ethical pharmaceutical company in the world. Healthcare makes up over 16% of the U.S. GDP and this percentage continues to grow. Next year Pfizer's sales will approach $55 billion. Pfizer has some heavy duty drugs in the pipeline- for malaria; small pox; epilepsy; neuropathic pain; anti-anxiety medication; a drug to raise the levels of HDL; and a drug to assist smokers in their efforts to stop the addiction. The company is spending over $7 billion on R&D this year. Pfizer should be listed in the Dow.
A month ago the Commerce Department had estimated that the first quarter U.S. GDP had risen at a 1.9% pace. In fact, that number was revised downward to 1.4%, and that matched the low growth rate of the fourth quarter in 2002. This is a 26% revision, and, in my view, unacceptable. It doesn't take almost three months to get a number correct. Time and time again I have written about government numbers. Only a fool would believe them. I continue to question whether they are released honestly in the first place or simply a tool to manipulate forecasts for future quarters. If the revisions were rare it would be one thing. They are the norm. The government also revised upward the unemployment numbers for the prior week. In essence, why should anyone believe the latest number of 404,000 idled workers.? They are certain to be revised- it happens weekly. Other than WalMart, Home Depot, Krispy Kreme, Starbucks, and companies like them, the only company I have seen hiring is Wells Fargo. I have seen plenty of job cuts. Second quarter GDP numbers will not be much different than those produced in the last two quarters. Companies continue to keep workers and inventories at lean levels, and spending plans are muted. In my view, the growth estimates for the second half of this year are significantly overstated. At some point investors will make that connection.
6/26/03 Waiting For Hope to Arrive
It's important that each one of us has hope. I wake up with hope and go to bed with it. However, hope does not run wild. It is tempered by reality. That's a fine line for everyone to find and realize. Emotion and psychology and hope play an important role in the stock market- not just today but every day. Lately, hope has played a role which has overshadowed reality. Others may disagree. It doesn't matter who is right or wrong. Over time we will find what the fine line of reality and hope produced. Opinions, such as mine, don't mean much in the scheme of things. We have enjoyed a magnificent stock market rally for the past three months. We have been blessed by new-found riches. The stock market had not produced much in the way of smiling since 2000.
Let's examine the past three months and revisit the hope shared in March. The Iraq war was a successful campaign. Everyone is agreed there were, at one time, WMD. We probably won't find them, but it was a successful campaign. However, it is disrespectful to announce the war is over on May1 and for our soldiers to be killed daily as the battle continues. A loving leader doesn't paint a false picture of hope. The latter has not arrived in Iraq. It won't as long as our soldiers are killed.
Over the past three months we have witnessed the scuttles between the Senate and the House over the Bush tax package. It finally arrived in a diluted format, but it arrived. It's never too late to get reduced taxation. However, hope is not realized when discretionary spending continues at the 4% level at the same time the economy is expanding at half that rate. Such a ratio makes for disappointment and not a hopeful outcome. The state and local governments are hurting across this land. Make no mistake about it. There will be increased taxes and fees to make up for the deficits. They won't bring hope. They won't end soon. The deficits will be with us for some time to come- many moons. The bottom line is that consumers won't have much more cash in their pockets- they will be nickeled and dimed to daily dismay. Just ask WalMart. The consumer is not spending much more money. It's a teeny bit more. We did not have a teeny bit stock market rally.
There are only two elements of our economy that continue strong- housing and the refinancing market, and both have been manufactured by the Fed's lower interest rates. Unless we join Japan and pay people to borrow, it is clear that interest rates can only drop 1% to get to zero. The bottom is in sight. We hoped for lower interest rates and got them. However, those lower rates did not produce increased business spending and did not produce job hiring. In fact, business leaders appear quite content to part with their company ownership shares as insider selling continues to rise monthly. That is a very bad sign. It should also be pointed out, as John Talbott has, the national growth rate for existing home sales prices in the six months ended March 31, 2003 is zero per cent. That is something to consider.
I am also concerned by the battle on overtime pay. Some time back I wrote about the auto company who has made it more difficult to realize overtime pay. An analysis is being released today by the Economic Policy Institute. They discuss the Labor Department's revisions to the overtime rules proposed in March. I pay attention to what happens to people on Main Street. Wall Street has a way of ignoring these folks. Under this plan, the Institute states that 8 million workers would lose overtime pay. How can this happen? The Bush Administration has permitted the Labor Department to reclassify the definitions of job classifications in many of 257 white-collar occupations. The new definitions of professional, administrative, and executive employees remove specific duties and education requirements, and thus employers are provided wide latitude to reclassify workers. Union contract workers will not be affected. This is but one more event which screws the average American. It should be noted that this is a proposal. The comment period ends on Monday. You can bet much of this proposed plan will be put into effect. There must be trust in the workplace for the workplace to be effective. I see this trust fading into the sunset. Main Street will impact Wall Street. It always does.
Over the past three months not much has changed in the workplace. Employment continues to drop. The news on the factory floor is gloomy. Numbers for durable goods can't get out of their own way. Shipments of business equipment produce yawns. They are a non-event. Orders for transportation equipment continue on their monthly decline. Economists continue to hope that business spending will be a factor in the anticicpated second half recovery. Month after month hope does not arrive. It's not that it's late arriving. The arrival is nowhere in sight.
On a national scale the trade deficit growth continues unabated. The monthly budget deficits continue their cancerous growth. The Fed continues to wallow in their meaningless chit chat. The dollar has bounced around and has settled at the 1.15-1.16 level for a bit. However, we have new offerings from banks. A St. Louis bank now is offering the person on Main Street an opportunity to buy China's currency, the renminbi. In addition, Everbank has started to offer renminbi accounts to its depositors. The renminbi has a fixed peg to the dollar. It won't be long before this peg is revised upward in value to favor the renminbi. The U.S. currency is in a state of decline around the globe. This decline is in the early stages. It doesn't help to be running a $100 billion annual trade deficit with China.
As I have mentioned so often, in Europe much trouble persists. Fiat will cut 12,300 workers between now and 2006. French manufacturers have seen their confidence level drop to the lowest level since 2001. There are economic problems throughout Europe and Japan. The dollar may have declined in value, but our exports are still hurting.
Over the past three months we have seen an increase in the optimism index- both for the consumer and the small business owner. That's great to see. Unfortunately, without more economic meat on the bone, that hope does not count for much. The expectation is for the economy to improve over time. That is a nebulous thought. It is an expectation expressed yesterday by the Fed. Would you want to stake the on-going success of your investments on an economy which "has yet to exhibit sustainable growth?" Maybe it will. Maybe it won't. I only know hope does not always deliver the goods.
It's important that each one of us has hope. I wake up with hope and go to bed with it. However, hope does not run wild. It is tempered by reality. That's a fine line for everyone to find and realize. Emotion and psychology and hope play an important role in the stock market- not just today but every day. Lately, hope has played a role which has overshadowed reality. Others may disagree. It doesn't matter who is right or wrong. Over time we will find what the fine line of reality and hope produced. Opinions, such as mine, don't mean much in the scheme of things. We have enjoyed a magnificent stock market rally for the past three months. We have been blessed by new-found riches. The stock market had not produced much in the way of smiling since 2000.
Let's examine the past three months and revisit the hope shared in March. The Iraq war was a successful campaign. Everyone is agreed there were, at one time, WMD. We probably won't find them, but it was a successful campaign. However, it is disrespectful to announce the war is over on May1 and for our soldiers to be killed daily as the battle continues. A loving leader doesn't paint a false picture of hope. The latter has not arrived in Iraq. It won't as long as our soldiers are killed.
Over the past three months we have witnessed the scuttles between the Senate and the House over the Bush tax package. It finally arrived in a diluted format, but it arrived. It's never too late to get reduced taxation. However, hope is not realized when discretionary spending continues at the 4% level at the same time the economy is expanding at half that rate. Such a ratio makes for disappointment and not a hopeful outcome. The state and local governments are hurting across this land. Make no mistake about it. There will be increased taxes and fees to make up for the deficits. They won't bring hope. They won't end soon. The deficits will be with us for some time to come- many moons. The bottom line is that consumers won't have much more cash in their pockets- they will be nickeled and dimed to daily dismay. Just ask WalMart. The consumer is not spending much more money. It's a teeny bit more. We did not have a teeny bit stock market rally.
There are only two elements of our economy that continue strong- housing and the refinancing market, and both have been manufactured by the Fed's lower interest rates. Unless we join Japan and pay people to borrow, it is clear that interest rates can only drop 1% to get to zero. The bottom is in sight. We hoped for lower interest rates and got them. However, those lower rates did not produce increased business spending and did not produce job hiring. In fact, business leaders appear quite content to part with their company ownership shares as insider selling continues to rise monthly. That is a very bad sign. It should also be pointed out, as John Talbott has, the national growth rate for existing home sales prices in the six months ended March 31, 2003 is zero per cent. That is something to consider.
I am also concerned by the battle on overtime pay. Some time back I wrote about the auto company who has made it more difficult to realize overtime pay. An analysis is being released today by the Economic Policy Institute. They discuss the Labor Department's revisions to the overtime rules proposed in March. I pay attention to what happens to people on Main Street. Wall Street has a way of ignoring these folks. Under this plan, the Institute states that 8 million workers would lose overtime pay. How can this happen? The Bush Administration has permitted the Labor Department to reclassify the definitions of job classifications in many of 257 white-collar occupations. The new definitions of professional, administrative, and executive employees remove specific duties and education requirements, and thus employers are provided wide latitude to reclassify workers. Union contract workers will not be affected. This is but one more event which screws the average American. It should be noted that this is a proposal. The comment period ends on Monday. You can bet much of this proposed plan will be put into effect. There must be trust in the workplace for the workplace to be effective. I see this trust fading into the sunset. Main Street will impact Wall Street. It always does.
Over the past three months not much has changed in the workplace. Employment continues to drop. The news on the factory floor is gloomy. Numbers for durable goods can't get out of their own way. Shipments of business equipment produce yawns. They are a non-event. Orders for transportation equipment continue on their monthly decline. Economists continue to hope that business spending will be a factor in the anticicpated second half recovery. Month after month hope does not arrive. It's not that it's late arriving. The arrival is nowhere in sight.
On a national scale the trade deficit growth continues unabated. The monthly budget deficits continue their cancerous growth. The Fed continues to wallow in their meaningless chit chat. The dollar has bounced around and has settled at the 1.15-1.16 level for a bit. However, we have new offerings from banks. A St. Louis bank now is offering the person on Main Street an opportunity to buy China's currency, the renminbi. In addition, Everbank has started to offer renminbi accounts to its depositors. The renminbi has a fixed peg to the dollar. It won't be long before this peg is revised upward in value to favor the renminbi. The U.S. currency is in a state of decline around the globe. This decline is in the early stages. It doesn't help to be running a $100 billion annual trade deficit with China.
As I have mentioned so often, in Europe much trouble persists. Fiat will cut 12,300 workers between now and 2006. French manufacturers have seen their confidence level drop to the lowest level since 2001. There are economic problems throughout Europe and Japan. The dollar may have declined in value, but our exports are still hurting.
Over the past three months we have seen an increase in the optimism index- both for the consumer and the small business owner. That's great to see. Unfortunately, without more economic meat on the bone, that hope does not count for much. The expectation is for the economy to improve over time. That is a nebulous thought. It is an expectation expressed yesterday by the Fed. Would you want to stake the on-going success of your investments on an economy which "has yet to exhibit sustainable growth?" Maybe it will. Maybe it won't. I only know hope does not always deliver the goods.
Wednesday, June 25, 2003
6/25/03 Chachmah (Wisdom), Binah (Comprehension), And Da'at (Knowledge)
We sure could use more wisdom, comprehension, and knowledge in today's world. Unfortunately, they appear in short supply. They seem to have been replaced by the three stooges- consumer optimism about the future, the surging money supply, and higher stock prices. Yesterday the headlines read: Consumers' outlook in June rises for third month; consumer confidence better than expected; and The Conference Board's Consumer Confidence Index turns flat in June but expectations are up. The headlines did not say that the present index fell to 65 from 67. The headlines omitted that less consumers rated the current conditions as good and that less consumers felt jobs were plentiful. Plenty of economists state that the economy will acelerate to 3.5% in the second half of the year; however, if there were more wisdom, comprehension, and knowledge on the part of those economists they would know that only 3% of households expect to buy a home in the next 6 months- the lowest figure since September 2000. They would know that only 6% plan to purchase an auto in the next 6 months, the lowest level since October 1996. They would have absorbed a survey by Grant Thornton which revealed that only 41% of middle-market executives (middle-market companies have annual revenues between $100 million and $2.5 billion) expect to increase hiring in the next six months, down from 50% in November 2002. If you want to trade with the headlines, be a stooge. Now we come to rising stock prices. According to a survey sponsored by Ariel Mutual Funds and Charles Schwab and Co. Inc., 33% of whites said they don't trust the stock market. That's up from 23% in 2000, and 49% of blacks don't trust the stock market, and that's up from 34% in 2000. Not surprisingly, a smaller percentage of whites and blacks are invested in the stock market today than they were in 1998. Stock prices may be enjoying a bear market rally, but the latter will not be sustained due to the erosion of trust on the part of investors. Fifty two per cent of blacks are bearish and 40% of whites are bearish. The survey has shown that more and more investors have turned to real estate and away from the stock market. The trend is not bullish for stock prices. A little wisdom, comprehension, and knowledge will bear fruit in this arena. Lastly, we come to the surging money supply. Dollars can be found everywhere- even in the toilet. That's where the value of the dollar has been headed over the past 12 months. Economists proclaim that the increased liquidity will produce a rejuvenation in our job market and in business investment. The money supply surges and just yesterday I read of job losses at Northern Trust, Viacom, KLM, AMP, and Ericsson. Tomorrow I'll probably read about more at Boeing. You get the picture? Do you see business investment spending rising? I see plants closing. I don't see expansion. It doesn't take much.- just a bit of wisdom, comprehension, and knowledge. It's there for the taking. It's free. It's not even taxed- at least not yet.
Do you think I should move to Japan? I need to give this consideration. Japan's overnight call rate is now below zero. That is so wonderful. That means as a borrower the lenders would pay me interest. Does it get better than this? I need to learn the language immediately. The first word I'll learn is schmuck. You need to be a schmuck to move there.
I need to acknowledge an interesting development. Yesterday, Ericsson announced it signed an agreement to outsource the development, implementation, and maintenance of IT applications supporting its business to IBM. As such, there will be a day of mourning in India, the king of outsourcing countries.
A great deal of credit must be given to the present regime in Mexico. Since 1998, 28 day Treasury yields have dropped from 48% to 4.72%. Over the past two years, Mexican pension funds have increased 85% to 356 billion pesos. Because of low rates and demand from pension funds, companies are beginning to offer peso-denominated bonds. Volkswagen de Mexico plans to sell about 1 billion pesos and Kimberly-Clark de Mexico sold 2 billion of 10 year bonds. This development is very positive for Mexico's present and future.
Italy, on the other hand, continues to languish. Italian June consumer confidence fell to its lowest level in more than 6 1/2 years. Bernardo Bocc, president of Confturismo, an organization which represents about 30,000 Italian hotels and tour operators, said "we are certainly in a recessionary climate. It's worrying and I don't see an improvement this year."
AMD, the world's number 2 maker of personal-computer processor chips behind Intel, cut its second quarter sales forecast by 14%. Intel had said its sales will rise about 7 1/2% this quarter. It appears that AMD has been hurt in the Asian market and has more exposure there than does Intel.
Jo Ann Bass is the granddaughter of the founder of Joe's Stone Crab in Miami and its current owner. Her restaurant was hit with a discrimination suit which was filed by two women. Both were interested in applying to the restaurant for a job in 1990 but did not because some acqaintances had told them Joe's did not hire women. That is not true, and never has been true. I know. I've been going to that restaurant for 30 years. A lower court had ruled that the restaurant had discriminated against two women between 1986 and 1991. These two women had applied years later for jobs and were rejected. The U.S. Supreme Court rejected the restaurant's appeal of the lower-court ruling. The legal battle cost Jo Ann Bass between 1 and 2 million dollars, and the legal award is $103,662 and with interest about $150,000. Currently, about 20% of the server staff are women. Bass said "we just have to accept it and accept the fact that life isn't fair. I don't think there's any place else to go, except God." She went on to say that "I learned there's a lot of truth to the adage that you can't fight City Hall and you can't fight the government. Their pockets are too deep, and they have all the time in the world." Unfortunately, the pockets are lined with taxpayer money and they have nothing but time because the taxpayers provide the time. What City Hall and the government don't have are wisdom, comprehension, and knowledge. That we know.
We sure could use more wisdom, comprehension, and knowledge in today's world. Unfortunately, they appear in short supply. They seem to have been replaced by the three stooges- consumer optimism about the future, the surging money supply, and higher stock prices. Yesterday the headlines read: Consumers' outlook in June rises for third month; consumer confidence better than expected; and The Conference Board's Consumer Confidence Index turns flat in June but expectations are up. The headlines did not say that the present index fell to 65 from 67. The headlines omitted that less consumers rated the current conditions as good and that less consumers felt jobs were plentiful. Plenty of economists state that the economy will acelerate to 3.5% in the second half of the year; however, if there were more wisdom, comprehension, and knowledge on the part of those economists they would know that only 3% of households expect to buy a home in the next 6 months- the lowest figure since September 2000. They would know that only 6% plan to purchase an auto in the next 6 months, the lowest level since October 1996. They would have absorbed a survey by Grant Thornton which revealed that only 41% of middle-market executives (middle-market companies have annual revenues between $100 million and $2.5 billion) expect to increase hiring in the next six months, down from 50% in November 2002. If you want to trade with the headlines, be a stooge. Now we come to rising stock prices. According to a survey sponsored by Ariel Mutual Funds and Charles Schwab and Co. Inc., 33% of whites said they don't trust the stock market. That's up from 23% in 2000, and 49% of blacks don't trust the stock market, and that's up from 34% in 2000. Not surprisingly, a smaller percentage of whites and blacks are invested in the stock market today than they were in 1998. Stock prices may be enjoying a bear market rally, but the latter will not be sustained due to the erosion of trust on the part of investors. Fifty two per cent of blacks are bearish and 40% of whites are bearish. The survey has shown that more and more investors have turned to real estate and away from the stock market. The trend is not bullish for stock prices. A little wisdom, comprehension, and knowledge will bear fruit in this arena. Lastly, we come to the surging money supply. Dollars can be found everywhere- even in the toilet. That's where the value of the dollar has been headed over the past 12 months. Economists proclaim that the increased liquidity will produce a rejuvenation in our job market and in business investment. The money supply surges and just yesterday I read of job losses at Northern Trust, Viacom, KLM, AMP, and Ericsson. Tomorrow I'll probably read about more at Boeing. You get the picture? Do you see business investment spending rising? I see plants closing. I don't see expansion. It doesn't take much.- just a bit of wisdom, comprehension, and knowledge. It's there for the taking. It's free. It's not even taxed- at least not yet.
Do you think I should move to Japan? I need to give this consideration. Japan's overnight call rate is now below zero. That is so wonderful. That means as a borrower the lenders would pay me interest. Does it get better than this? I need to learn the language immediately. The first word I'll learn is schmuck. You need to be a schmuck to move there.
I need to acknowledge an interesting development. Yesterday, Ericsson announced it signed an agreement to outsource the development, implementation, and maintenance of IT applications supporting its business to IBM. As such, there will be a day of mourning in India, the king of outsourcing countries.
A great deal of credit must be given to the present regime in Mexico. Since 1998, 28 day Treasury yields have dropped from 48% to 4.72%. Over the past two years, Mexican pension funds have increased 85% to 356 billion pesos. Because of low rates and demand from pension funds, companies are beginning to offer peso-denominated bonds. Volkswagen de Mexico plans to sell about 1 billion pesos and Kimberly-Clark de Mexico sold 2 billion of 10 year bonds. This development is very positive for Mexico's present and future.
Italy, on the other hand, continues to languish. Italian June consumer confidence fell to its lowest level in more than 6 1/2 years. Bernardo Bocc, president of Confturismo, an organization which represents about 30,000 Italian hotels and tour operators, said "we are certainly in a recessionary climate. It's worrying and I don't see an improvement this year."
AMD, the world's number 2 maker of personal-computer processor chips behind Intel, cut its second quarter sales forecast by 14%. Intel had said its sales will rise about 7 1/2% this quarter. It appears that AMD has been hurt in the Asian market and has more exposure there than does Intel.
Jo Ann Bass is the granddaughter of the founder of Joe's Stone Crab in Miami and its current owner. Her restaurant was hit with a discrimination suit which was filed by two women. Both were interested in applying to the restaurant for a job in 1990 but did not because some acqaintances had told them Joe's did not hire women. That is not true, and never has been true. I know. I've been going to that restaurant for 30 years. A lower court had ruled that the restaurant had discriminated against two women between 1986 and 1991. These two women had applied years later for jobs and were rejected. The U.S. Supreme Court rejected the restaurant's appeal of the lower-court ruling. The legal battle cost Jo Ann Bass between 1 and 2 million dollars, and the legal award is $103,662 and with interest about $150,000. Currently, about 20% of the server staff are women. Bass said "we just have to accept it and accept the fact that life isn't fair. I don't think there's any place else to go, except God." She went on to say that "I learned there's a lot of truth to the adage that you can't fight City Hall and you can't fight the government. Their pockets are too deep, and they have all the time in the world." Unfortunately, the pockets are lined with taxpayer money and they have nothing but time because the taxpayers provide the time. What City Hall and the government don't have are wisdom, comprehension, and knowledge. That we know.
Tuesday, June 24, 2003
6/24/03 Irrational Transparency
Before I get to all the news that's fit to print, there's a bit of housekeeping that needs to be accomplished. Several readers had their nose out of joints that I had abandoned the U.S. dollar in favor of the New Zealand dollar. Had the readers been carefully assessing my postings, they would have realized that this was not a new revelation. I am a very compassionate person. As such I shall provide a primer for stress management:
1. Picture yourself near a stream. 2. Birds are softly chirping in the cool mountain air. 3. No one but you knows your secret place. 4. You are in total seclusion from the hectic place called "the world." 5. The soothing sound of a gentle waterfall fills the air with a cascade of serenity. 6. The water is crystal clear. 7. You can easily make out the face of the f---er you're holding underwater.
George W. Bush: "Terrorists declared war on the United States of America, and war is what they got."
Thomas Paine: "The sublime and the ridiculous are often so nearly related, that it is difficult to class them separately. One step above the sublime makes the ridiculous, and one step above the ridiculous makes the sublime again."
Thomas Paine: "War involves in its progress such a train of unforeseen and unsupposed circumstances that no wisdom can calculate the end. It has but one thing certain, and that is to increase taxes."
Robert Elliott: "Two rules for stress management- rule one- don't sweat the small stuff. Rule 2- it's all small stuff."
The Fed has provided a roadmap whereby rates will be lowered for the 13th time. They say it is cheap insurance against the threat of deflation. Interestingly, in all the prior cuts, the Fed has been unsuccessful in its attempt to influence business spending. It has influenced the housing market with lower interest rates producing historically low mortgage rates and with them a boiling refinancing market which has thrown off some needed cash flow for the home owner. Unfortunately, weak European and Japanese economic conditions have resulted in weak demand for U.S. exports and this has served to exacerbate our trade deficit. The Fed knows this week's rate decrease will only serve as a diversion. The real story is to target the quantity of bank reserves and thereby increase the money supply and inflation. All depository institutions in the U.S. are subject to reserve requirements on customer deposits. It may be a surprise to many that no reserves are required against time deposits or savings accounts. None. Your money in the latter two are completely unprotected save for the insurance provided by the government. Since the government is busted, that insurance is worthless. It may come as a surprise that no reserves are required on the first $6 million of checkable deposits a bank holds. None. Between $6 million and $42.1 million deposits are subject to a 3% reserve. Above $42.1 million they are subject to a 10% reserve. These breakpoints are adjusted annually in accordance with money supply growth, and the money supply is growing like rabbits multiply (a gross exaggeration but amusing nevertheless). But one thing is very important. Despite what you might think, reserves bear no likeness to the size of the money supply. That's what I call irrational transparency. For example, over the past eight years or so the M2 money aggregate increased by two thirds while the banking system reserves decreased by one third. How could the Fed let this happen? The Fed let banks violate Federal Reserve banking requirements by implementing overnight sweep accounts. It's ok for the customer to do that but not a bank. The sweep accounts place the banks in violation of their reserve ratios. The Fed knows this and they have looked the other way. The Fed has violated a trust, the trust provided by depositors, and banking institutions also in violation are, in my opinion, not worthy of our deposits. How can anyone have trust in the dollar if you can't trust the Fed or our banks? It's your money. It's your decision. I've made mine.
In May the UBS Index on investor optimism rallied from 42 to 77. Sixty five per cent of those surveyed in June believe now is a good time to invest, and that is up from fifty eight per cent in May. Hope springs eternal.
Mexico, Latin America's largest economy, sells about 90% of its exports to the U.S. and they account for one quarter of its $600 million GDP. Mexico's May manufacturing exports slid about 6% as U.S. demand weakened due to our slow economy and to our increased imports from China.
Yesterday it was like old times in the Silicon Valley. Venture capitalists put a significant amount of money to work. Mobile software maker Visto of Redwood Shores extended its recent financing round with an additional $20 million; Wi-fi products maker Vivato of San Francisco raised $44.5 million; and Cradle Technologies of Mountain View, a fabless semi company, rang the register for $21.5 million.
With the aging of the population there will be a growing need for long-term care. Should a growing number of families be wiped out financially paying for that care? Should the government (really the taxpayers) pay for that care? Should long-term care premiums be made available to all Americans? We know that 44 million Americans are uninsured for health care at this time. It is unaffordable for too many. Who should pay for those premiums? As a nation we need to answer these questions. Don't leave it up to government officials. You will regret the outcome.
Before I get to all the news that's fit to print, there's a bit of housekeeping that needs to be accomplished. Several readers had their nose out of joints that I had abandoned the U.S. dollar in favor of the New Zealand dollar. Had the readers been carefully assessing my postings, they would have realized that this was not a new revelation. I am a very compassionate person. As such I shall provide a primer for stress management:
1. Picture yourself near a stream. 2. Birds are softly chirping in the cool mountain air. 3. No one but you knows your secret place. 4. You are in total seclusion from the hectic place called "the world." 5. The soothing sound of a gentle waterfall fills the air with a cascade of serenity. 6. The water is crystal clear. 7. You can easily make out the face of the f---er you're holding underwater.
George W. Bush: "Terrorists declared war on the United States of America, and war is what they got."
Thomas Paine: "The sublime and the ridiculous are often so nearly related, that it is difficult to class them separately. One step above the sublime makes the ridiculous, and one step above the ridiculous makes the sublime again."
Thomas Paine: "War involves in its progress such a train of unforeseen and unsupposed circumstances that no wisdom can calculate the end. It has but one thing certain, and that is to increase taxes."
Robert Elliott: "Two rules for stress management- rule one- don't sweat the small stuff. Rule 2- it's all small stuff."
The Fed has provided a roadmap whereby rates will be lowered for the 13th time. They say it is cheap insurance against the threat of deflation. Interestingly, in all the prior cuts, the Fed has been unsuccessful in its attempt to influence business spending. It has influenced the housing market with lower interest rates producing historically low mortgage rates and with them a boiling refinancing market which has thrown off some needed cash flow for the home owner. Unfortunately, weak European and Japanese economic conditions have resulted in weak demand for U.S. exports and this has served to exacerbate our trade deficit. The Fed knows this week's rate decrease will only serve as a diversion. The real story is to target the quantity of bank reserves and thereby increase the money supply and inflation. All depository institutions in the U.S. are subject to reserve requirements on customer deposits. It may be a surprise to many that no reserves are required against time deposits or savings accounts. None. Your money in the latter two are completely unprotected save for the insurance provided by the government. Since the government is busted, that insurance is worthless. It may come as a surprise that no reserves are required on the first $6 million of checkable deposits a bank holds. None. Between $6 million and $42.1 million deposits are subject to a 3% reserve. Above $42.1 million they are subject to a 10% reserve. These breakpoints are adjusted annually in accordance with money supply growth, and the money supply is growing like rabbits multiply (a gross exaggeration but amusing nevertheless). But one thing is very important. Despite what you might think, reserves bear no likeness to the size of the money supply. That's what I call irrational transparency. For example, over the past eight years or so the M2 money aggregate increased by two thirds while the banking system reserves decreased by one third. How could the Fed let this happen? The Fed let banks violate Federal Reserve banking requirements by implementing overnight sweep accounts. It's ok for the customer to do that but not a bank. The sweep accounts place the banks in violation of their reserve ratios. The Fed knows this and they have looked the other way. The Fed has violated a trust, the trust provided by depositors, and banking institutions also in violation are, in my opinion, not worthy of our deposits. How can anyone have trust in the dollar if you can't trust the Fed or our banks? It's your money. It's your decision. I've made mine.
In May the UBS Index on investor optimism rallied from 42 to 77. Sixty five per cent of those surveyed in June believe now is a good time to invest, and that is up from fifty eight per cent in May. Hope springs eternal.
Mexico, Latin America's largest economy, sells about 90% of its exports to the U.S. and they account for one quarter of its $600 million GDP. Mexico's May manufacturing exports slid about 6% as U.S. demand weakened due to our slow economy and to our increased imports from China.
Yesterday it was like old times in the Silicon Valley. Venture capitalists put a significant amount of money to work. Mobile software maker Visto of Redwood Shores extended its recent financing round with an additional $20 million; Wi-fi products maker Vivato of San Francisco raised $44.5 million; and Cradle Technologies of Mountain View, a fabless semi company, rang the register for $21.5 million.
With the aging of the population there will be a growing need for long-term care. Should a growing number of families be wiped out financially paying for that care? Should the government (really the taxpayers) pay for that care? Should long-term care premiums be made available to all Americans? We know that 44 million Americans are uninsured for health care at this time. It is unaffordable for too many. Who should pay for those premiums? As a nation we need to answer these questions. Don't leave it up to government officials. You will regret the outcome.
Monday, June 23, 2003
6/23/03 The Crossroads
The question is not how far Greenspan will lower rates. The question is not where the S&P and the Nasdaq will be at year end. The question is not whether the new Harry Potter book will sell more than its first printing of 8.5 million copies. There are answers to all those questions. Some are more difficult to answer with conviction. There are other questions, such as, where are the WMD? I am not in any way belittling any other important questions of our time. We're talking investing. I am certain that John Templeton or Jim Rogers or George Soros considers the question I am about to present on a constant basis. I'm new to this. It's been only a short time for me. For that, I may come up short. I apologize in advance.
Some time back I felt uncomfortable placing money in treasury bills. The government's fiscal landscape is foreign and unacceptable to me. I chose the New Zealand dollar. I have been most comfortable with my choice. That decision led to my asking this question: should I be looking elsewhere for investments? Should I leave the U.S. stock and bond markets to others until matters are more to my liking? I wrestled with this question. It seems unAmerican. Then I realized that emotion does not play a part in my investment decisions. Companies are not my family. They are a vehicle for making money. I decided to limit any new investments to specific risk arbitrage opportunities. I would look outside the U.S. for any other new investments. I am comfortable with that decision, and I recommend such an alternative to everyone. There is much value elsewhere, and, in countries devoid of our financial hysteria.
There was a program on the History channel, and my family was nice enough to tape it for me. It was an interview with Frank Langone. He's not a household name. He should be. He is a financial man, and, with Bernie Marcus, co-founded Home Depot, a company where I have had an investment for years and years. Frank has always talked smart. He doesn't have a Ph.D or come from a fancy background. Frank said "if you don't have a customer, you don't have a business." Too bad all the money lost in dotcom start-ups didn't figure that out ahead of time. Home Depot, Frank said, kept it simple, and still does. The formula for success: low prices, high service, and wide assortment. This year Home Depot will hire over 100,000 new employees. As I have said over and over again, stay over time with the growing great companies. Home Depot stumbled a bit. McDonald's stumbled a bit. They are on the road to being better than ever. Great managements recognize mistakes, and in the case of Home Depot, they got so big so fast that their systems, processes, and IT were way behind their size. In addition, there was a learning curve for Nardelli. Bernie Marcus and Frank Langone made certain Nardelli wuld not fail. They gave him the tools and the support. They had a sincere interest in so doing. Home Depot is a member of their family. It's one of their children. It's not just any investment.
It pains me to read that personal bankruptcy filings in NYC are up 25% over the past two years. NYC went through so much in the 1970s, and now it's deja vu all over again.
The question is not how far Greenspan will lower rates. The question is not where the S&P and the Nasdaq will be at year end. The question is not whether the new Harry Potter book will sell more than its first printing of 8.5 million copies. There are answers to all those questions. Some are more difficult to answer with conviction. There are other questions, such as, where are the WMD? I am not in any way belittling any other important questions of our time. We're talking investing. I am certain that John Templeton or Jim Rogers or George Soros considers the question I am about to present on a constant basis. I'm new to this. It's been only a short time for me. For that, I may come up short. I apologize in advance.
Some time back I felt uncomfortable placing money in treasury bills. The government's fiscal landscape is foreign and unacceptable to me. I chose the New Zealand dollar. I have been most comfortable with my choice. That decision led to my asking this question: should I be looking elsewhere for investments? Should I leave the U.S. stock and bond markets to others until matters are more to my liking? I wrestled with this question. It seems unAmerican. Then I realized that emotion does not play a part in my investment decisions. Companies are not my family. They are a vehicle for making money. I decided to limit any new investments to specific risk arbitrage opportunities. I would look outside the U.S. for any other new investments. I am comfortable with that decision, and I recommend such an alternative to everyone. There is much value elsewhere, and, in countries devoid of our financial hysteria.
There was a program on the History channel, and my family was nice enough to tape it for me. It was an interview with Frank Langone. He's not a household name. He should be. He is a financial man, and, with Bernie Marcus, co-founded Home Depot, a company where I have had an investment for years and years. Frank has always talked smart. He doesn't have a Ph.D or come from a fancy background. Frank said "if you don't have a customer, you don't have a business." Too bad all the money lost in dotcom start-ups didn't figure that out ahead of time. Home Depot, Frank said, kept it simple, and still does. The formula for success: low prices, high service, and wide assortment. This year Home Depot will hire over 100,000 new employees. As I have said over and over again, stay over time with the growing great companies. Home Depot stumbled a bit. McDonald's stumbled a bit. They are on the road to being better than ever. Great managements recognize mistakes, and in the case of Home Depot, they got so big so fast that their systems, processes, and IT were way behind their size. In addition, there was a learning curve for Nardelli. Bernie Marcus and Frank Langone made certain Nardelli wuld not fail. They gave him the tools and the support. They had a sincere interest in so doing. Home Depot is a member of their family. It's one of their children. It's not just any investment.
It pains me to read that personal bankruptcy filings in NYC are up 25% over the past two years. NYC went through so much in the 1970s, and now it's deja vu all over again.
Sunday, June 22, 2003
6/22/03 A Pitcher's Pitch
Alex Rodriguez (aka A-Rod) is currently recognized as the greatest all-around short-stop of all time. He is a future Hall-of-Famer. Growing up in Miami, he wasn't always the star he is presently. As a sophomore, he was benched for one game, and didn't win the starting job unil well into the season. He hit .270 and was placed seventh in the batting order. As a sophomore, his coach said A-Rod often swung at a "pitcher's pitch." Over the next summer Rodriguez practiced hard and learned the art of patience. As a junior, he hit .477 with six homers, stole 42 bases, scored 51 runs, and made the All-Dade first team. The rest is history. Investors can learn a great deal from A-Rod. He still works hard at honing his skills, and is still patient at the plate as he waits for "his pitch." I know from experience that the market will serve up "your pitch." When it does arrive, pull the trigger. Have the confidence to believe in yourself. Ignore what others say. It's your money. It's "your pitch." Don't wait for the pitch thrown from the pundits. They didn't earn your investing nest egg.
Silicon Valley's employment plunge is not unique. Silicon Valley has lost one of every six jobs, and employment is at the 1996 level. Since the December 2000 peak, 191,000 jobs have been lost. In Detroit employment is somewhat lower than the levels in 1996, and jobs peaked there in 1978. In Los Angeles County an employment record was set in 1990. In April 2003 there were 166,000 fewer jobs than the record of 1990.
Talking about employment, a study by Challenger, Gray, and Christmas shows that job searches for managers and executives in the first quarter of 2003 hit 128 days, a record high, and is double the 64 days for the average such job search in the second quarter of 2001, which was a record low. In addition, in the first quarter of 1977, discharged executives and managers received an all-time high severance of about six months. In the first quarter of this year that number has dropped to 2.3 months.
Health insurance premiums increased about 13% in 2002 and are anticipated to rise 15% this year. Roberta Grossman of Merrill Lynch points out an interesting fact. In 1960 consumers were paying almost 50% of national health care costs out-of-pocket. That fiure is about 15% today, and, for the next few years, is expected to remain at that level.
Even though about $16 billion in drugs went off-patent in 2002, and only 10 new drugs came to the market in 2002, prescription drug costs continue to increase. That rise is anticipated to be 11% in 2004 and 12% in 2005. One further note. The patent-expiration period will accelerate in the coming years. The waiting period for an FDA drug approval has not been reduced. That agency only approved 17 new drugs in 2002. The drug prescription market will only grow 1% this year. You can expect pharmaceutica companies to increase their focus on reducing costs. That will mean more job cuts and less spent on r&d as the latter is tied to revenue growth. The coming years will be challenging for the consumer, corporate health plans, Medicare, Medicaid, and for many of the drug companies.
The Fed is paying more attention to the field of behavioral economics. One of the pioneers in this field, Daniel Kahneman, last year won the Nobel Prize in economics. Recently, the Boston Federal Reserve held its annual conference. The topic for discussion was "How Humans Behave-Implications for Economics and Policy." Next year's topic could be on "how Federal Reserve members behave- implications for market manipulation." Any way, this aforementioned conference included looking at MRI scans of the brain. Like these folks really understand the workings of the brain. I guess because many economists are Ph.Ds they consider themselves real doctors. Inflated egos have the potential to be quite destructive. Maybe the conference participants should take a primer and read Adam Smith's "The Theory of Moral Sentiments." Since its an ancient work, there may be dust on the cover.
I don't play favorites. As such, I am not a subscriber to Barron's, Fortune, Business Week, the Wall Street Journal, Investor's Business Daily, the N.Y. Times, etc. It's amazing I am able to exist. One of my oldest friends has been one of the original participants in Barron's twice-yearly roundtable discussion. He emailed me, and said I needed to read the mid-year roundtable. I knew that would make me $3.50 poorer but I decided to be a big spender. Felix Zulauf talked about the big Fed manipulation. He talked about buying the Nikkei and shorting Japan's bonds. He still likes gold. Mario Gabelli talked about the aging of the population. Barton Biggs has a short postion in U.S. treasury bonds. Meryl Witner does not see many inexpensive stocks. Scott Black sees a weak economy. Marc Faber talks about the imbalance between U.S. consumption and Asian production. He feels that anyone buying the S&P now might not make money for the next five years. Others talked of the bubble in bonds. These are subjects I have covered in my blog for some time- with the exception of shorting Japanese bonds.
Alex Rodriguez (aka A-Rod) is currently recognized as the greatest all-around short-stop of all time. He is a future Hall-of-Famer. Growing up in Miami, he wasn't always the star he is presently. As a sophomore, he was benched for one game, and didn't win the starting job unil well into the season. He hit .270 and was placed seventh in the batting order. As a sophomore, his coach said A-Rod often swung at a "pitcher's pitch." Over the next summer Rodriguez practiced hard and learned the art of patience. As a junior, he hit .477 with six homers, stole 42 bases, scored 51 runs, and made the All-Dade first team. The rest is history. Investors can learn a great deal from A-Rod. He still works hard at honing his skills, and is still patient at the plate as he waits for "his pitch." I know from experience that the market will serve up "your pitch." When it does arrive, pull the trigger. Have the confidence to believe in yourself. Ignore what others say. It's your money. It's "your pitch." Don't wait for the pitch thrown from the pundits. They didn't earn your investing nest egg.
Silicon Valley's employment plunge is not unique. Silicon Valley has lost one of every six jobs, and employment is at the 1996 level. Since the December 2000 peak, 191,000 jobs have been lost. In Detroit employment is somewhat lower than the levels in 1996, and jobs peaked there in 1978. In Los Angeles County an employment record was set in 1990. In April 2003 there were 166,000 fewer jobs than the record of 1990.
Talking about employment, a study by Challenger, Gray, and Christmas shows that job searches for managers and executives in the first quarter of 2003 hit 128 days, a record high, and is double the 64 days for the average such job search in the second quarter of 2001, which was a record low. In addition, in the first quarter of 1977, discharged executives and managers received an all-time high severance of about six months. In the first quarter of this year that number has dropped to 2.3 months.
Health insurance premiums increased about 13% in 2002 and are anticipated to rise 15% this year. Roberta Grossman of Merrill Lynch points out an interesting fact. In 1960 consumers were paying almost 50% of national health care costs out-of-pocket. That fiure is about 15% today, and, for the next few years, is expected to remain at that level.
Even though about $16 billion in drugs went off-patent in 2002, and only 10 new drugs came to the market in 2002, prescription drug costs continue to increase. That rise is anticipated to be 11% in 2004 and 12% in 2005. One further note. The patent-expiration period will accelerate in the coming years. The waiting period for an FDA drug approval has not been reduced. That agency only approved 17 new drugs in 2002. The drug prescription market will only grow 1% this year. You can expect pharmaceutica companies to increase their focus on reducing costs. That will mean more job cuts and less spent on r&d as the latter is tied to revenue growth. The coming years will be challenging for the consumer, corporate health plans, Medicare, Medicaid, and for many of the drug companies.
The Fed is paying more attention to the field of behavioral economics. One of the pioneers in this field, Daniel Kahneman, last year won the Nobel Prize in economics. Recently, the Boston Federal Reserve held its annual conference. The topic for discussion was "How Humans Behave-Implications for Economics and Policy." Next year's topic could be on "how Federal Reserve members behave- implications for market manipulation." Any way, this aforementioned conference included looking at MRI scans of the brain. Like these folks really understand the workings of the brain. I guess because many economists are Ph.Ds they consider themselves real doctors. Inflated egos have the potential to be quite destructive. Maybe the conference participants should take a primer and read Adam Smith's "The Theory of Moral Sentiments." Since its an ancient work, there may be dust on the cover.
I don't play favorites. As such, I am not a subscriber to Barron's, Fortune, Business Week, the Wall Street Journal, Investor's Business Daily, the N.Y. Times, etc. It's amazing I am able to exist. One of my oldest friends has been one of the original participants in Barron's twice-yearly roundtable discussion. He emailed me, and said I needed to read the mid-year roundtable. I knew that would make me $3.50 poorer but I decided to be a big spender. Felix Zulauf talked about the big Fed manipulation. He talked about buying the Nikkei and shorting Japan's bonds. He still likes gold. Mario Gabelli talked about the aging of the population. Barton Biggs has a short postion in U.S. treasury bonds. Meryl Witner does not see many inexpensive stocks. Scott Black sees a weak economy. Marc Faber talks about the imbalance between U.S. consumption and Asian production. He feels that anyone buying the S&P now might not make money for the next five years. Others talked of the bubble in bonds. These are subjects I have covered in my blog for some time- with the exception of shorting Japanese bonds.
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