10/12/02 The Cliff

The big story on Friday was not the sharp rally in stocks and the big decline in bonds. The consumer was the main event, and properly so. When you account for two-thirds of the economy, there's no question but that the consumer is all powerful. Unfortunately for the economy, in the latest readings, consumer confidence and expectations fell off a cliff. The drop was a massive plummet. Therefore, it's not surprising that retail sales had their largest drop since November 2001. There are many reasons- the weak job market, Iraq, and growing household debt combined with low savings. Analysts refer to a market being oversold. Well, the consumer is overbought and overspent and overwrought. WalMart listens to the customer better than any other company. WalMart has said for the past three months that its customer, that's you, is slowing down in the buying department. With the holiday season approaching, that's a disaster waiting to happen.

A rally for a few days does not mean the market is oversold. There are always going to be rallies. Analysts simply have a need to provide reasons for happenings after they happen but rarely before they happen. As such, they are mainly worthless despite their large salaries. Listening to analysts is, for the most part, a losing proposition. Do you think Warren Buffett hangs on the words of Wall Street?

This market is highly volatile, and increasingly so. This creates a greater risk, and especially in the derivatives market, which is 10 times the size of our yearly GDP and dwarfs the stock and bond markets. In a perfect world counterparty risk is intended to create zero risk. The world is not perfect, and therefore, not risk free. As such, those creating the custom derivatives, the financial institutions, are increasingly at risk. With heightened geopolitical worries, that aforementioned risk could create massive market dislocations. I don't believe the market adequately accounts for this potential meltdown.

10/11/02 Maintain Trend Focus

Rallies in a bear market provide welcome relief. One might characterize them as a Wall Street Prozac tonic. Unfortunately, the prescription is not necessarily renewable.

Over-all comparable retail sales grew just 1.5% in September. Warnings are being issued about a possible anemic holiday shopping season.

GM is out of stealth mode. They are now offering a new car "purchase" plan- no money down and no payment for 90 days. At least they could include a toaster or possibly the right to return the car after 90 days- a little like an Oreck vacuum.

There is $6 trillion in mortgage debt outstanding. Why would anyone consider the possibility of a bubble in housing?

The other day three men were huddling after returning from a funeral. They were comparing notes on their refinancing experiences. In 1999 these same men probably were discussing day trading and the Nasdaq.

10/10/02 It Was Almost Like Old Times

Other than the Dow at a 5 year low and the Nasdaq at a 6 year low and the Nikkei at a 19 year low it could have been 1999.
Amidst the carnage Yahoo, Sun, Intel, Amgen, EBay, Veritas, Seibel, Broadcom, Brocade, Verisign, Amazon, Cisco, and Gilead were all higher yesterday. I was psyched but then I read about GE laying off 1000 at the jet engine division and Abbott Labs laying off 2000 and Virginia laying off 1000 and household debt as a % of GDP at record levels.

Then the sun came out with Glenn Hubbard. He enabled me to sleep better. He said deflation appeared unlikely... that home refinancing had not been excessive...that home refinancing hadn't propped up consumption growth. Now I'm ready for another day.

Winnebago reported record sales and profits for their 4th quarter. Retirees must be taking to the roads. Meanwhile jets increasingly adorn the Mojave landscape. Maybe that's a reason the airline industry has lost $15 billion over the past 24 months. Yes, Boeing did layoff more folks yesterday. If the economy is so sound, as Glenn Hubbard declares, then why are Ford bonds trading at junk levels and Boeing creating an unemployment nightmare in the Seattle environs?

10/9/02 Port Lockout Ends. Credit President Bush Invoking Taft Hartley

For the first time in 19 years Japan's Nikkei falls below 8500.

Yesterday's Wall Street mini rally had more declines than advances.

Shared National Credit Review reveals loan losses rising by 34% at banks and other institutions.

Fiat to cut 6000 jobs.

SBC warns on profits.

Cisco finds revenue generation a challenge.

Hussein channels money to Palestinian terrorists.

10/8/02 Rumors To The Contrary The World Beyond Pluto, Quaoar, Does Not Hold A Bull Market

Since December 1999 U.S. government bonds have outperformed U.S. stocks by 56%. Pimco now the nation's biggest mutual fund.

Sears warns 3rd quarter earnings will fall short of expectations due to more credit card delinquencies.

Credit Suisse First Boston lays off 1700.

Mitsubishi Illinois production plant halted by port lockout.

August saw the slowest rise in consumer debt in 8 months. Christmas might be white but clearly not green.

10/7/02 Nikkei Plunges To 8688 In Biggest 1 Day Drop Since June

War on Iraq seen by Administration as liberating not conquering.

Senior citizens would prefer the government to pay for their prescription drugs rather than spend millions of dollars on increasing Medicare payments to doctors and hospitals. A growing problem is healthcare for retirees prior to medicare eligibility. More U.S.
retirees making their homes in Mexico.

The department of labor says the average household unit made about $40,000 in 2001, spent $7000 on cars, and owes $7000 on credit cards.

The World Economic Forum conference in East Asia began in Kuala Lumpur on Sunday. Kenneth Courtis, vice chairman Asia, Goldman Sachs Japan, said "Asia's growth has probably peaked." China is the wild card, and has invested $60 billion this year into Asia. Malaysia has become China's largest trading partner in SE Asia.

10/6/02 Wilshire 5000 At 5 Year Low

Over 500 negative earning and or revenue warnings in the past 5 weeks.

On Friday puts ahead of calls by 2 to 1 ratio.

Fourth quarter growth likely to be no more than 1%. Earnings will be lower than the 3rd quarter.

Israel Defense Minister: "Possible that the U.S. will begin attacks on Iraq toward the end of November."

10/5/02 Dow At 7500- Near 5 Year Low

Being up into the early morning hours this blog will be a bit short today.

Ethan S. Harris, chief economist Lehman Bros, "from the point of view of the average person, we're still in a recession. What the average person cares about is jobs."

President Bush: "there are still too many ppeople who wonder whether or not they're going to find employment."

Senator Sarbanes: "the jobs aren't there right now."

JP Morgan to layoff 4000 investment bankers.

Hiring on hold at temp agencies.

10/4/02 Nasdaq At 6 Year Low

Warnings from Boeing, EMC, Prime Hospitality, Schering Plough, Bank of N.Y., Park Place, and others.
Awful results at Alcoa. Additional layoffs at Verizon and EMC. Terrific results at Starbucks, one of the great ones over the past 10 years.

The 4 week moving average of jobless claims was the highest since the first week in May. For the month there was a decline of 43,000 jobs; however, the government said the unemployment rate declined to 5.6% and that the reason was a decrease in teenager unemployment. I can't even comment on this!

For the very first time there was a delivery of Russian oil into our Strategic Petroleum Reserve.

Only 34% of large companies offer retiree health coverage, down from 66% in 1988. Only 5% of small firms with fewer than 200 workers offer coverage. Benefits are declining. Under existing plans, retirees will pay for 90% of total medical costs by 2031.

The Business Council is an association comprised of CEOs, and they are currently having their half-yearly gathering at the Greenbrier in West Virginia. The chairman is Bill Esprey, the CEO of Sprint. Has Mr. Esprey ever tried getting thru to Sprint's customer service line? He must not value his customers very highly. Another member is Carly Fiorina, CEO of HP. She stated "this is a climate that doesn't reward risk-taking- yet the fundamentals of business are to take prudent risks at the right time." She doesn't get it. Michael Dell does. Dell has entered the server and printer markets. Dell understands risk/reward, and they are eating their competitor's lunch, and that includes HP. Bill Harrison, CEO of JP Morgan Chase, stated that "Business Council members retain a very cautious view of the U.S. economy's near-term growth prospects." I would remain cautious too with Morgan's dismal performance over the last 6 quarters. Scott McNealy, CEO of Sun Microsystems, said "executives had to spend massive amounts of time executing on the rigmarole around Sarbines-Oxley." Rather than wine maybe McNealey should be concentrating on making Sun's servers more price competitive in the current environment. If he did, possibly Sun would not be facing additional layoffs and the stock wouldn't be selling at $2+. Former illustrious Business Council members are Kenneth Lay and Dennis Kozlowski. Maybe receiving an invitation to join the group isn't worth the paper on which it's printed.

10/03/02 Little To Smile About

Cisco's Chambers: "There's little to smile about when it comes to the short-term outlook for Cisco."

CEOs, in a survey, see slower economic growth in the months and year ahead.

Our oil inventories are at a 20 year low.

Tokyo stocks closed at a new 19 year low. Bad loans at Japanese banks continue to weigh on any recovery.

Foreigners cut their net purchases of US corporate bonds to a 7 year low in July. Purchases down 74%.

AMD has a significant revenue warning. Others warning: Dow Chemical, Libbey, and Charter Communications.

After 128 years the Younkers corporate offices are being moved out of Iowa. The new owner, Saks Inc, sacks 270 people.

Analysts continually try and compare this economy with prior economies in hopes the comparisons will provide a reading for future stock market movements. There's one problem. Our economy does not resemble prior periods like 1990 and 1974. Healthcare is now 15% of our GDP. The manufacturing sector represents only 14% of total jobs. Corporate balance sheets have a different look.

We are recovering from the national tragedy of 9/11. The consumer is tapped out financially and emotionally. At this point only 20% of Americans remain without credit cards. Life hangs on a thread- jobs are scarce, jobs have little security, and employers have no visibility. The Fed is powerless to provide a monetary policy which could change the economic landscape. Interest rates have little to fall until they reach zero. As a last resort the Fed might increase the money supply and the dollar will suffer. The world economies are weak. The banking structure in Japan is unstable, and ours is showing cracks too. WalMart, Microsoft, Dell, P&G, Colgate, and a few others cannot carry our economic burdens. Nor can the government. The latter has difficulty just funding medicare, medicaid, and social security.

A significant problem for today's economy is that we have too much of everything (except cash and housing) with too little demand. That creates little pricing power and an emphasis on cost cutting, and the latter usually entails lay-offs. When the majority of Americans have little net savings and depend on the next paycheck, the stability of the system is at risk. It would be prudent to limit comparisons with the past. Enough trillions have been lost to this point.

10/02/02 October

It is a month with tricks and treats; however, the average October manages a slight gain in the Dow. Yesterday we started the month with a bang.

These are not average times. Almost all of the S&P 500 companies have a pension deficit; 401K plans have been taking it on the chin; and we have financial institutions who have guaranteed equity returns. Those guarantees are suspect at best. Even with 0 percent financing for 60 months GM's September sales were down 13%. The factory sector weakened for the first time since January, and the ISM Index slipped below 50%.

Then you have the rising spectre of healthcare costs. Medicaid and Medicare cover 75 million Americans with a yearly cost of $400 billion. This cost will rise in 2003, and the numbers covered with an aging population will rise as well. Of course, we also have 41 million Americans without health insurance- 19% of Californians are in this group, and this number is rising annually too.

The times are not average. Building of offices, plants, and stores have hit a 6 year low. At the same time oil has hit a 19 month high at $31 per barrel.

We are experiencing a slowdown in R&D spending, the first such cut since 1960. It is not surprising that this is the first time the venture capital industry has had back to back years of negative returns.

The National Association of Business Economists said the economy would continue to show solid growth. I don't have a masters or a doctorate degree in economics but I know profit skids when I see them. You can listen to the economists or make the trend your friend. There are very few great companies- WalMart, Microsoft, Dell, and some others. Dell just raised revenue forecasts for their upcoming quarter as they increased sales at the expense of other companies. However, until the economic turmoil reverses for the great majority of companies, we will continue in a bear market. The duration is anyone's guess. If I were taking a guess, I'd say the turn is not just around the corner. In fact, it could get worse. It's good to remember that in all months, and not just October, that the market accomodates the fewest number of people at any one time.

10/1/02 The Market And The Ozone Layer

The recent experiences of both are astounding. In 2000 the Antarctica ozone hole was 10.5 million square miles. Now it's 6 million square miles, the smallest size since 1988. Warmer temperatures have caused this reduction. We all know where the Dow and the Nasdaq were in 2000, and we just finished the worst quarter since September 1987. A much cooler economy and disappointing profits have reduced equity prices. At this stage it is important to guard against skin cancer and to safeguard your nest egg.

Glenn Hubbard, Chair of the White House Council of Economic Advisors: equity price declines "would not come anywhere close to tipping the economy into recession." I feel so much better. Our tax dollars have created a penetrating mind.

On Sunday I talked about the great ones and what happens to the also rans. Yesterday Target and Federated and JC Penney told investors their September sales would be well below plan. Walgreen missed their numbers. Cirrus Logic, Extreme Networks, and Harmonic also issued warnings for the quarter. Goldman Sachs, Fidelity, and Carpenter Technology all announced layoffs.

The NAPM in Chicago announced their index dropped to 48.1 from 54.9, the first decline since February and the order backlog slid to 40 from 48. The Midwest is having trouble- even with zero per cent auto financing.

9/30/02 The US Consumer

With consumer sentiment down for 4 straight months it would be a mistake to depend on the consumer to bail out our economy. The consumer is barely maintaining a stable environment. That leaves the possibility of business capital investments as a buoy to the economy; however, that appears highly unlikely with growing layoffs, dwindling profit growth, and plant closures. Hopefully no one is looking to the Fed to inflate or for the government to increase spending, and with it, the deficits to mushroom from present levels.

We have had one week of the Fall season. One week doesn't make a season; hoowever, the horizon doesn't have much visibility.

7/29/02 Keep An Eye On The Great Ones

In my view the two greatest corporate successes over the past 25 years have been WalMart and Microsoft. Over the past two months I made mention that WalMart's recent same store sales have been below expectations. For the past 25 years Microsoft's desktop applications growth has approximated 12% per year. Now management projects that growth to slow to 7-8% per year.

These two companies are the leaders in their field- in the entire world. If their growth is slowing, how do you think their competitors are doing? In actuality, their competitors are, for the most part, afterthoughts. The economic environment has changed even for WalMart and Microsoft. That should be a warning sign.

For the most part home equity loans are being used for new credit card purchases and not for retiring existing credit card debt. The private sector debt is now 1.5% of the $10 trillion GDP. The savings rate has dropped to 3.5%.

9/28/02 2.2 Ratio Of Negative 3rd Quarter Earnings Pre-Announcements To The Positive

Thru September the bear market is 40 months in duration.

September consumer sentiment still dropping.

Wyeth warns. Barrick Gold warns. Delta Airlines warns and announces job cuts.

Merrill Lynch lowers 4th quarter earnings projections for the S&P and cuts 2003 too.

GE's CFO: "2003 is looking more challenging than it was when we talked in May." He is saying that GE's growth rate in 2003 will be down about 50% in 2003 to about 8%.

Monday is the last day of the quarter. How many mutual funds will want to eliminate stocks from their portfolio and raise cash?

9/27/02 More Layoffs And Earnings Disappointments

SBC Communications slashes 11,000 workers and its capital expenditures. Aetna to layoff 2750.

Philip Morris misses earnings projections by wide margin. Callaway Golf warns. Solectron has quarterly loss. Nortel warns-again.

Japan has its 3rd consecutive year of deflation. Our 30 year mortgage rates fall below 6%, the lowest ever. Is this a sign of deflation?

Unfortunately more Americans owned stocks at the beginning of 2002 than in 1999. Poor timing I'd say.

Underfunded pension funds a growing problem. The stock market is the culprit. The latter certainly has created havoc for 401K plans.

The question for the day: can mortgage refinancing save the Christmas season? If we have 0 percent auto financing, why can't we do the same for the homebuyer? How about 0 monthly payments on credit cards? Can life be a free lunch or is there a payment at some point?

9/26/02 Greenspan: "Our Ability To Forecast Is Limited"

Glenn Hubbard, Chairman of the White House Council of Economic Advisors: "On balance the economy's recovery looks pretty typical." Tell that to HP who are laying off another 1800 or Handspring who are laying off 20% of the workforce or Gucci that warned about results or....

If Knight Greenspan is having forecasting difficulty, then how would an investor expect individual companies to assess with accuracy expected results for the 4th quarter and 2003? With limited visibility p/e ratios should be reduced and with them stock prices. A smaller and smaller percentage of companies are making their earnings forecasts, and those forecasts in most cases have been reduced at least once.

9/25/02 Posting #2 "I Don't See A Spark"

As I write this blog, the Dow is up 200 points and the Nasdaq abouy 40. One of the reasons cited is GE reaffirming their third quarter numbers. Investors might have been better served to focus on Jeff Immelt's comments made in Boston today. He said that he doesn't see a spark generating a macroeconomic recovery and that CEO's should not expect a strong recovery for the 4th quarter or early 2003. I noticed that Immelt did not provide guidance going forward for GE.

Interestingly, the IMF lowered their estimates for growth going into the 4th quarter and for next year.

As I have often remarked, there are sharp rallies in bear markets; however, they occur at lower and lower levels, and this has been true for the last 2+ years. The idea is to lighten up on the losers during those rallies. I last made these comments when the Dow rallied to 9000 and the Nasdaq to 1400. Of course, this is my opinion and I am prone to making mistakes- just not the same one twice I hope.

9/25/02 Dow Had Its Lowest Close IN 4 Years

US consumer confidence declines for 4th consecutive month.

Fed says growing risk of war creates more economic uncertainty. Two Fed members vote to lower interest rates.

US oil supplies continue to shrink, and crude rises to 19 month high.

Several European Union states are experiencing trouble meeting budget goals- Germany may exceed deficit limits and may not balance its budget in 2003.

Japan's trade surplus continues to expand. Unfortunately, they are paying a big price for deflation.

9/24/02 Cisco's Chambers: Customer Visibility Lessening

Earning warnings issued by Maytag, Target, Steelcase, Temple Inland, and Weyerhaeuser

Traditionally, customer visibility should increase as we move towards the holiday season. For Wall Street November, December, and January most often mean good times. With consumer confidence on the downslope, this holiday season maybe a different one, and things could get worse before they level off. It may be wise to play it close to the vest, and hopefully you will feel cozy in that vest. Don't be ashamed to consider shopping at a thrift store. The savings are real, and the money goes to a good cause.