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Thursday, March 31, 2005

We're all a Bunch of Sharecroppers

Monster Employment Index Surges Higher in March, Continuing Strong Three-month Growth Trend in U.S. Online Job Demand

The index jumped to 130 in March from 122 the previous month. That’s a sizable upward move. Tomorrow we’ll get the employment report before the open and that will definitely sway the markets.

We also had a personal income report come out today. Income rose 0.3% while personal spending climbed 0.5%. I guess Buffet’s right; we’re all destined to be sharecropping for foreigners.

Got news for you. If you own property your already a sharecropper. Try not paying your property taxes and see what happens.

posted at 5:50 PM 0 comments

Buffet Bear, or Currency Speculator

The following is an excerpt from Berkshire Hathaway’s annual report:

Should we continue to run current account deficits comparable to those now prevailing, the net ownership of the U.S. by other countries and their citizens a decade from now will amount to roughly $11 trillion. And, if foreign investors were to earn only 5% on that net holding, we would need to send a net of $.55 trillion of goods and services abroad every year merely to service the U.S. investments then held by foreigners. At that date, a decade out, our GDP would probably total about $18 trillion (assuming low inflation, which is far from a sure thing). Therefore, our U.S. “family” would then be delivering 3% of its annual output to the rest of the world simply as tribute for the overindulgences of the past. In this case, unlike that involving budget deficits, the sons would truly pay for the sins of their fathers.

This annual royalty paid the world – which would not disappear unless the U.S. massively underconsumed and began to run consistent and large trade surpluses – would undoubtedly produce significant political unrest in the U.S. Americans would still be living very well, indeed better than now because of the growth in our economy. But they would chafe at the idea of perpetually paying tribute to their creditors and owners abroad. A country that is now aspiring to an “Ownership Society” will not find happiness in – and I’ll use hyperbole here for emphasis – a “Sharecropper’s Society.” But that’s precisely where our trade policies, supported by Republicans and Democrats alike, are taking us.

Last year Buffet increased his bet against the U.S. Dollar by 78% $21.4 billion spread across contracts on 12 foreign currencies. He gained $1.84 billion hedging against his own U.S. holdings. He ended 2003 with $12 billion in foreign contracts spread across 5 currencies.

But $21 billion spread across twelve currencies is actually a very liquid portfolio. He can turn Japanese yen into dollars faster than he could jet home from there. So is he really so down on U.S. equities or is that just a justification for the extensive leveraged currency speculation he’s doing within an otherwise conservative holding company?

Buffett’s outlook for the U.S. economy and equities is quite contrary to the conclusion I posted yesterday. But you really should be skeptical about information you get from people at Buffett’s level. Think of Soros’ reflexivity. At that level winning comes first, how else do you get to be the most powerful investor in the world?

posted at 2:49 PM 0 comments

The Piggybackers

Who am I to criticize Warren Buffett? What’s my track record? Cry the Buffett followers.

Let’s get something straight, I’m acknowledging Buffet’s excellent track record. Berkshire Hathaway (BRK.A) is up about 50% compared over the past five years, while the S&P 500 ($SPX) is still off 20%.

All I’m asking is that investors realize how these incredible returns are achieved. Don’t idolize the guy, and don’t think you can do the same thing following his methods as numerous books suggest.

The fact is that a large part of Berkshire’s results come from brilliant marketing and PR. Not just great stock picking and value investing. I know I’m swimming upstream here and I stand little chance of swaying the Buffett followers, but I’m going to do my best.

Berkshire Hathaway is trading at $87,000 per “A” share. The next highest stock price is of course Berkshire’s “B” shares at just under $3000 and after that comes a company trading at about $1000. How else can you explain this except as a marketing gimmick and brand mystique designed to intrigue investors?

But Berkshire doesn’t just market itself; it markets its investment interests. The organization makes sure not just its investors but the public knows where the company’s money is. There’s nothing unusual or wrong with this, except that Berkshire has enough of a following attract significant interest in its holdings, which serves as a catalyst for its investments.

Whatever Buffett already owns, people want to buy. But investors will seldom know anything about when he’s buying or selling, just after the fact. This substantially boosts returns and further locks in Buffets status as an investing legend.

Individual investors can’t duplicate Buffet’s results because they can’t influence the markets the way he can. Anyone who thinks he can’t or doesn’t intentionally influence markets to his benefit is incredibly naïve.

People have been doing so as long as the markets have been around. In the late 90s day traders figured out all sorts of ways to influence some of the most heavily traded stocks in the markets, if only for brief moments.

Similarly if you don’t think speculation is having an impact on commodities prices consider please recall the Hunt brothers who with the help of just few wealthy Arabs managed to corner the silver market. In 1980 the silver bubble burst and prices fell 50% in a single day bankrupting the brothers and crushing many speculators who were piggybacking on them.

I’m not at all suggesting Buffett has illegally manipulated markets rather I’m just illustrating that a single individual is capable of influencing market prices, especially when that person is the most influential investor in the world.

Now, do you really want to be on Buffet’s back if things get messy with this investigation?

posted at 1:29 PM 0 comments

Are Buffet Followers in Denial?

I conducted a widespread search of the web to see what people were saying about the Berkshire Hathaway (BRK.A) / AIG (AIG) investigation and found that the major news outlets merely copycatted the basic facts as the WSJ published them, while the bloggers continued to praised and idolize Buffett. You know an issue is thorny and the idolatry is boundless when the bloggers won’t even touch the story.

The only gutsy article I was able to dredge up came from TheStreet.com. The author said, “The painfully careful wording and the narrow focus of the release suggest that Berkshire isn't able to mount a wide-ranging and robust defense of the reinsurance policies being probed. It also shows that Berkshire now realizes that Buffett's position as CEO could be threatened.”

Most disappointing was the fact that not a single source could even roughly explain the nature of the product or accounting at issue. I have yet to read anything mentioning the specific accounting aspects involved such as the possibility that if AIG overstated its reserves by $500 million then somewhere there has to be either an accounting black hole where numbers simply don’t match up or else there’s a corresponding accounting issue outside the company. The latter would either have to be at Berkshire Hathaway, another third party company involved, or hidden within one of AIGs secret island companies.

It’s also interesting that the WSJ reported its source as saying that Buffett felt the transactions could be handled properly. If true implies that Buffett knew it would take some finagling to it legal or appear to be legal. It’s not good for Buffett’s defense because either he was more involved than he’s conceding or he took a disinterest in a transaction that he well knew was at best iffy.

Here are a few of the comments I dredged up around the net:

The Blogs

Byrne’s Marketview
I think he's probably too popular to lose his position -- this isn't a flash-in-the-pan kind of adulation; Buffett-worship has been a popular cult for over a decade.

Jaloti
Buffett may have his flaws, but he's very aware of where the ethical and legal lines are. If he's over the line, then we've got some EXTREMELY serious problems here--like buy gold and guns because the whole system as we know it is in trouble.

Russ Towne’s InvestmentThoughts
I just read an absolutely ludicrous article by someone advocating firing Warren Buffett for his alleged role in the finite investment ‘scandal’. It saddens me that there are some in the investment media who are so ignorant of the facts and in Buffett’s role that they could even make such a suggestion.

ProfessorBainbridge.com
I'm no fan of Warren Buffett's politics, as long-time readers know, but I hate to see the MSM smearing the guy by innuendos. Maybe there is a problem that the SEC and Spitzer will turn up, but at this point the press is just speculating.

The Kirk Report
If Warren Buffett isn't putting Berkshire Hathaway's money in stocks, can this be a good time for anyone else to do it?

The News

Buffett draws praise for probe cooperation
Warren Buffett, the billionaire chairman of Berkshire Hathaway, has been "very cooperative" with New York Attorney General Eliot Spitzer's insurance probe, and ..

AIG's Greenberg: the anti-Buffett MSN Money

Buffett was told of AIG deal -- report MarketWatch - Mar 30, 2005NEW YORK
(MarketWatch) -- Warren Buffett was told briefly in advance about a transaction at the center of an investigation into an insurance unit he controls ...

Buffett was told of suspect AIG deal MSNBC - Mar 30, 2005NEW YORK
Warren Buffett, chairman of Berkshire Hathaway Inc., was told briefly in advance about a transaction his corporation’s General Re unit made with ...

Buffett's Weak Defense TheStreet.com - Mar 30, 2005
Berkshire Hathaway, of which Buffett is CEO, is being targeted by regulators because its insurance subsidiaries have been ...

posted at 11:41 AM 1 comments

Wednesday, March 30, 2005

Economic Conclusion

The commonly held belief that the twin deficits are detrimental to the economy and the dollar, is a misnomer and a complete unscientific fabrication designed in an unorganized fashion by the paranoid bear meme to prey on our fears and increase their short profits. While it is probably true that there is some point at which deficit growth would be economically unhealthy, there is no evidence to suggest that the current deficits are anywhere near that point or even abnormal.
In fact the budget deficit is not trending at all but rather correlated with economic conditions and tax revenues. And the trade deficit relative to growth in GDP and real disposable income is quite normal as this paper I just happened on illustrates quite well, coming to the same conclusion that economic growth and a rising trade deficit are highly correlated. Furthermore, I conclude that is highly probable that the dollar will continue on its long-term upward trajectory along with the GDP, disposable income, and equities. In doing so it will catch investors in foreign securities by surprise just as overinvestment in the S&P 500 caused stock prices to grow at a rate of nearly three times the rate of earnings growth during the late nineties.
After several years of repairing the books of corporate America, equities are poised to withstand a reasonably higher valuation offering a more stable risk premium than foreign competitors that have little or no policing of the few regulations they do have. Despite the many misgivings I have about consolidating assets into indices without any regard to valuation, knowing the system that has been established via the 401k and other retirement accounts, the brunt of investment is likely to be directed in to the S&P 500. Though the current interest in alternative investments as a result of getting burned in equities, has many investors concerned about repeating the same mistake, even as they may be about to make a similar one in foreign securities and commodities.

Therefore, I suggest increased diversification, which can easily be obtained via the many ETFs such as the Vanguard Total Stock Market VIPERs (VTI), which tracks against the Wilshire 5000 Total Market Index or a combination of the SPDRS (SPY) tracking the S&P 500, MidCap SPDRS (MDY) tracking the S&P MidCap 400, and the iShares S&P SmallCap 600 (IJR). Or you can do the same thing with just the iShares S&P 1500 Index Fund (ISI), but it has far less volume than the three funds individually receive.

posted at 4:05 PM 1 comments

The Budget Deficit

Finally, below is a chart of the budget deficit as a percentage of GDP. What this chart illustrates is that the current deficit is actually not the worst we have experienced in relative terms. In fact it doesn’t illustrate a growing deficit at all, but rather a chaotic one driven by economic circumstances and politics.

The budget deficit is correlated to tax revenues (also charted below), which are correlated to the economy. So you can see that all the periods of high deficits correspond with economic downturns, the most recent one, the mini recession in the early nineties, etc…

posted at 3:01 PM 0 comments

The Dollar and the Twin Deficits

Now here’s a chart I put together comparing the dollar with the twin deficits. Probably, the first thing you will notice is how out of whack the budget deficit is. I’ll get to that later. For now I want to focus on the correlation, or rather lack of, between deficits and the dollar. The only correlation is between the trade deficit and the dollar.

The dollar has climbed roughly along side equities, which have climbed as our country has grown and prospered, this in turn has provided people with more disposable income, which they’ve increasingly spent on cheap goods overseas. They’ve increased spending in the U.S. too, but just not as quickly as they have overseas.

Farther down you will see a chart showing the growth in disposable income. And I know your about to say, "Yeah but, what about inflation?". Real disposable income is the next chart down. Notice that disposable income is mirrored in the trade deficit almost like a mountain reflecting on a lake.

posted at 2:43 PM 0 comments

The Truth About the Dollar

I won’t apologize for my sarcasm and cynicism today. I’ll make no bones about the fact that I am trying to agitate you, make money, and gain publicity. But I’m doing so by trying to show you the truth about the markets. Certainly not the fastest way to fame and fortune, I’m asking you to work, I’m not making it easy for you. But I sleep better at night.

Nearly everyone believes that private accounts are the way to go for social security and this is not risky because stocks, like real estate, always rise in the long run. True. But they also now believe the dollar will never come back again and commodities will keep go up forever without hesitation or pause. Did investors feel the same way about stocks in 2001 as they do now? They surely did not.

People don’t think the dollar can rise in the face of out of control double deficits. But that belief begs the question as to whether deficits are really out of control and whether or not the dollar can rise regardless.

First I’m going to point you to the chart below of the U.S. dollar index. Now click over and take a look at this chart of the S&P 500. Very similar aren’t they? One could argue that the dollar will continue to rise over the long run because it’s done just that right along side equities. But, I bet there’s something that strikes you as wrong about that.

Now you’re probably starting to sense a bit of a paradox. Stocks have to rise because they always have and we believe in our ability to progress and grow as a country. And the dollar has risen steadily too but we have a harder time believing it can continue to do so.

Investors, the dollar and equities are strongly correlated. Their relationship is not a spurious one. The value of the dollar is directly correlated with our ability to grow as a country, invent, create, improve our lives, be productive, and prosper.

So if you believe in stocks then you’ve got to believe in the dollar or vice versa.

In my next post I’m going to illustrate the relationship between deficits and the dollar.

posted at 2:31 PM 0 comments

Investing in Communism: It's all the Rage

Here’s some more irony for you. A reader once called me a nazi for my strong views on social security.

I believe that the presidents plan tries to appease everyone, and in doing so actually will do absolutely nothing to fix the real and looming problems with the system. Furthermore, while I do think it would be incredibly beneficial to have some sort of private accounts program, I just don’t think it should be part of the Social Security program, which would then be neither a social nor a secure program.

I’m advocating creating an entirely new form of tax deferred retirement savings program that would allow you to invest in equities and whatnot, and do so via electronic funds transfers and direct deposits. Something similar to the IRA, without the caps, locked up in your name until retirement, with simplified electronic funding, and without corporations limiting your investment choices as they usually do with the 401k. Take the companies out of the picture altogether. They’ve served us well, but the technology is now readily available to correct the limitations of that system.

It really isn’t a complex concept. If you deposit money after taxes have been removed from your paycheck, then you get to deduct that amount from your taxes when you file. Or an employer can offer direct deposit pretax. Once it hits your account the money is electronically routed to your investment choices. You can be certain that investment companies would be very accommodating in standardizing and simplifying the deposit process.

The irony is I’m a nazi for not supporting the president’s inadequate social security plan, but the public is putting more money into international funds than into our own, which includes investing in communist government owned companies that don’t even pay out dividends or provide you with quarterly reports. It’s gotten to the ridiculous point of disconnect that the even the word ‘communist’ has been relegated to the attic with so many other derogatory words our grandfathers used to throw out at the supper table. Anyone having anything bad about communists is like an old man grumping about ‘those damn commies’. They’re a crackpot to be ignored.

Heaven help ya if you’ve got anything negative to say about the immaculate investor Warren Buffett.

The point of all this is I’m trying to stress the importance of critical thinking and seeing the relative perspective of various risk reward ratios in the markets. If you are missing the greater points because I’ve thrown you off balance with banter about iPod cults, Buffett utopian investors, or off topic irrelevant mundane details, then you’ve probably got an unhealthy attachment to these things and an equally unhealthy attachment to your investments that isn’t allowing you to see risks clearly.

Some people are incapable of getting beyond this, but my hope is that through this blog I just manage open up a few minds, as I have had mine opened by the people I’ve been privileged to know and learn from.

I promised charts. They are forthcoming. My publisher tells me we’ve gotten quite a few responses on my Buffett post yesterday, and though I haven’t seen them all yet I imagined even as I was writing that they would be scathing to say the least. So I felt compelled to be less subtle about my intentions.

posted at 1:37 PM 0 comments

May I have my Dividend Please?

Yesterday I corresponded with a gentleman who was telling me about the fantastic results he had achieved investing in some British dividend paying stocks. He mentioned something like a 50% appreciation in the stocks value and 8% in dividends. My response was to tell him that I thought he was very wise to emphasize the dividend aspect of this investment.

This is something I strongly recommend you consider with regard to foreign investments, particularly where emerging markets and communist countries are concerned. Now this applies less so for many British and large well-known foreign companies than it does to lesser-known companies in only partially industrialized countries. But here’s the rationale: If you know very little about the company, its relationship with its government, the controls and regulations in that country, but you know that the company has been paying a dividend consistently then you will have that in your pocket regardless of exchange rates or price appreciation.

Please face a few realities about foreign investment. I don’t think most people realize just how different a foreign security can be from one in the U.S. I find it quite ironic that many people have turned to investing in foreign securities as U.S. companies have come under scrutiny for accounting irregularities, because in reality the only reason we’re not hearing about accounting problems with many foreign companies is because often there is very little regulation or very little enforcement of those regulations.

Here’s another thing to consider, we only just started really enforcing our regulations a few years ago. Now we have a wave of companies; taking themselves private, being bought out by private investment groups, and moving overseas or down into the islands.

They say they are getting away from all the bureaucracy public companies are undergoing here in the U.S. And they are, but that begs the question, are they doing so to continue their cheating ways? It’s easy for me to imagine a private investment group approaching a company’s executives and saying to them, “We know you’ve got problems, you’re running scared, the hammer’s about to fall. Sell to us, we’ll take you private, and keep you out of the SEC’s spotlight.” The executive is thinking and out from behind bars. This is not at all an unrealistic scenario.

How many companies do you think have managed to quietly move on, sweeping problems under the rug? Two years ago the average operating earnings for companies in the S&P 500 index was $11.94 per share, while reported earnings bottomed out at $3.00, the lowest level since 1991, which was also the last time we were in a recession. Comparatively, reported earnings are now up 364% to $13.94 per share.

What took reported earnings to near record low levels was in large part the many ‘one-time’ charges and cleaning up pension issues. In other words, getting their books in order. Now we all know that it wasn’t all on the up and up, and we know that because of the many companies that have had to publicly go back fix errors and restate past earnings.

Anyway, I find it incredibly ironic that cleaning up the books of corporate America so that our companies’ valuations are more accurate has prompted so many people to invest in companies and countries where regulations and enforcement of securities is virtually nonexistent. Now I’m referring mostly to emerging markets here.

But I don’t think this will last and here’s why.

First of all, the cleaning up of our securities markets will be tremendously beneficial to U.S. equities in the long run. Look at our treasury market for example. Foreign investors buy more debt from the U.S. than any other country for two reasons. Maybe not so humorously, it’s because we issue more of it than any other country, to the point at the moment that our yields have become less competitive. But it’s also because it’s considered the most secure debt in the world, backed by the power to tax the people of the most prosperous country in the world.

Cleaning up corporate America makes our equities market less risky in the long run, which in turn will mean a higher equilibrium for PE ratios. Investors will expect less risk premium so they will be willing to accept a higher price relative to earnings to the point that they are accepting the same amount of risk as before the books were cleaned up.

Secondly, a long-term reinvestment into U.S. securities would pump the dollar back up. But what really moves the markets is speculation of these things occurring in the future.

And we’re seeing the start of that cycle now. We truly are. Hedge funds and private equity groups are snatching up every undervalued and depressed stock they can get their hands on. Small-cap stocks have been leading large caps by a fairly wide margin, something that didn’t happen in the late 90s when everyone was throwing money at the major indices, which grew at several times the rate of earnings.

But as small-caps continue to climb, money will start to spill over to larger and larger companies. If and when that starts happening it would attract the attention of the masses. American investors would then sell foreign securities and in the process buy dollars to bring their money back home and reinvest it in local companies. Investors late in seeing this move would be caught off guard, punished by a potentially rapidly strengthening dollar, and pay a premium for U.S. stocks, by that time attracting increasing numbers of foreign investors buying dollars.

It’s likely that many foreign countries and companies would then have to compete with U.S. companies to attract capital and would go through a similar clean up process. That process would push even more money into the U.S. just as it has been keeping money away for the past several years.

The gentleman I corresponded with last night asked me why I thought the dollar would make a comeback with the trade and budget deficits as massive as they are? I am going to continue with that topic in my next post with some illustrations and statistics I dug up in the wee hours last night.

posted at 12:42 PM 1 comments

Tuesday, March 29, 2005

Free financial content threatens YHOO, TSCM and other portals/news sites

Will the proliferation of high quality finance blogs threaten mainstream finance portals and news sites? Yes. Three factors are fueling the emergence of next generation finance portals that will challenge Yahoo! Finance (owned by YHOO), TheStreet.com (ticker: TSCM) and MarketWatch (owned by Dow Jones, ticker: DJ):

1. Explosion of financial content: The number of finance blogs is rising sharply. Seeking Alpha maintains a list of the best finance blogs covering the stock market, the economy, venture capital and personal finance. It now totals about 70 blogs, with new blogs added every week.

2. Rising quality: Many of the new finance blogs are written by professional money managers, financial advisors, academic economists and venture capitalists. The quality of finance blog content is often equal or superior to financial content written by professional journalists.

3. Ease of aggregation: Most new finance content sources are RSS-enabled, because they are authored using blogging software. This allows other web sites to aggregate high quality content from multiple sources in one location:

* At the most rudimentary level, Bloglines (now owned by Ask Jeeves, ticker: ASKJ) allows users to share and track feeds from multiple blogs. Feeds from the entire Seeking Alpha list of the best finance blogs, for example, can be viewed at http://www.bloglines.com/public/SeekingAlpha. This effectively gives users a one-stop shop for financial content - in other words, a next-gen finance portal. Furthermore, the entire list of blog feeds can be easily downloaded (instructions) into a desktop or web-based RSS reader, allowing users to customize their own finance portal by selecting their favorite feeds.

* Sites are emerging that allow search focused on new financial content. PhatInvestor, for example, allows users to search by ticker or keyword accross multiple finance blogs.

* Micro-cap company Financial Content (ticker: FCON.ob) is beginning to syndicate financial content from blogs to second-tier news and finance sites. SFGate's Business & Finance area, for example, delivers content from The Internet Stock Blog, Media Stock Blog and China Stock Blog in response to ticker queries.

In sum, lower barriers to web publishing (using off-the-shelf blogging sofware), rising quality, and ease of aggregation due to RSS are providing the tools for the creation of next generation finance portals. This is the competitive impact of The Long Tail.

Full disclosure: at the time of writing I'm short TSCM.

This article also available on The Internet Stock Blog.

posted at 3:11 PM 0 comments

Cat Call Creates Buying Opportunity

Shares of Caterpillar (CAT) fell more than four percent today after a Morgan Stanley analyst told investors they should take profits after recent strength in the construction equipment sector.

Wake up contrarians. With the Dow Industrials now at two month lows this makes for a great long-term buying opportunity for Cat. There’s no denying the world is industrializing at an exponential pace and that means more sales for Cat. And while financial and other companies try to get a foothold in China, Cat has been selling there for a couple of decades. Cat also expects to quadruple sales in China over the next decade. I think its reasonable to expect similar results in many other developing countries.

And yes. That does mean increased demand for commodities as well. Just not instantaneous as the market has been pricing in, which is very similar to the way the S&P 500 index outpaced earnings growth in the late 90s nearly 3 to 1.

posted at 3:09 PM 0 comments

New Blogs

Tech analyst firm Forrester Research announced a print magazine and six new blogs today. It’s very worthwhile to expand your market information sources beyond traditional market information sources.

posted at 2:29 PM 0 comments

Berkshire/Buffett Denies Knowledge

This just out, Buffett and Berkshire denies knowledge of structure of agreements. The denial comes as no surprise, and may turn out to be accurate given the number of companies Berkshire holds and the fact that Buffett is not in a direct controlling position such as Ebbers was at WorldCom. This will be interesting to watch as it unfolds. I think the truth will come out. People are very afraid not to tell the truth, and in deals such as this, there are always a number of people in the know.

posted at 12:49 PM 0 comments

The Emperor Has No Clothes

I’ve not said anything to date about Warren Buffett or Berkshire Hathaway (BRK.A) with regard to the insurance company investigations and the connections between AIG and the Oracle of Omaha’s General Re. Knowing the way, to my chagrin and dismay, that investors idolize Buffett I’ve chosen not to say anything at all for not having anything good to say and not having much to back up my feelings.

I recognize the profits that Berkshire has brought its investors. But I have a strong distaste for the unhealthy obsession so many investors have with this man and his organization. And there’s a whole lot of off topic issues such as what value Berkshire Hathaway adds to the companies it holds that investors couldn’t have gotten directly without paying investment fees to Berkshire. But I won’t get into any of that now.

All that has suddenly changed with today’s excellent WSJ article on the AIG (AIG) / General Re investigation.

Now readers know that I generalize and knock traditional journalism here quite a bit for its obvious downfalls. Particular for the kinds of stories that data mine and round up biased sources to argue some position or other on the markets. We see this kind of biased journalism all the time with stories of why you should be in commodities and why you should be down on stocks because of deficits and other such completely unscientific nonsense.

That said, I make my living off this disinformation. And I do appreciate, routinely utilize, and regularly reference the “just the facts ma’am” regurgitation of earnings reports, economic news, etc…

And stories such as this one on AIG and General Re today are in a completely separate category, a league of their own. There is, in my opinion, no other media outlet that has anywhere near the connections and the attention to detail that the WSJ has. No one has wanted to touch Buffett. He’s a living legend among investors, literally. But the WSJ didn’t shy away from it and they got the important details that investors really needed to know.

I want to call attention to a single very important sentence from this article that tells us a great deal about what may be coming in this investigation: “Mr. Buffett often checks in daily with the heads of major units at Berkshire, the insurance and holding company he controls.”

It appears from the article that this information came from investigators, though a specific source is not mentioned. But, as you can imagine, the article is chock full of ‘declined to comment’. If so, it tells us a lot about the nature of the investigation, that they want they are very interested in knowing more about the nature of Mr. Buffett’s relationship with his companies.

This is very similar to the approach that prosecutors took in the case against Ebbers who as you well know was recently found guilty of defrauding investors for his role in the demise of WorldCom. The case came down to proving that Ebbers was not only in a position to know about the fraud, but also in control of it.

With regard to General Re’s relationship with AIG investigators have already established that Mr. Buffett was at least roughly aware of the transactions and may have even played a significant role in their design. If this is found to be true Mr. Buffett could potentially be charged with accounting fraud. And I personally think investigators would love to make an example out of the king of investors if he indeed did have a part in these transactions. They will want to send the message that no one is exempt.

The transactions to which I am referring are ones in which insurance companies played with accounting numbers by transferring assets between companies in the guise of an insurance product that transferred no risk.

It will be interesting to see where this goes next. I can say that I wouldn’t want to be a Berkshire or AIG shareholder at this point in time.

posted at 11:36 AM 0 comments

Monday, March 28, 2005

Forgotten Market Facts

We are quick to forget, so I’m here to remind you that from 1996 through 2000, the Bull Market, the average operating earnings for companies in the S&P 500 grew 40%, while the S&P 500 index grew 113%.

Over a period of four years stock price gains outpaced earnings growth at a rate of nearly 3 to 1. Why did this happen? There are a lot of reasons. But the greatest one was that the Internet made it much easier and cheaper for people to be individual stock investors. Internet brokers cut commissions more than in half and the e-brokerages enabled people to open accounts from the comfort of their home.

Today Exchange Traded Funds, such as the iShares Japan (EWJ) fund, or the newly created Vanguard Emerging Markets VIPER (VWO) fund and PowerShares Golden Dragon Halter USX China (PGJ) fund are making it easier for people to invest overseas. And until a couple of weeks ago fund flows to International funds were far outpacing money going into domestic equity funds.

Similarly, with the launch last fall of a gold ETF (IAU) and the rising interest in the commodities markets, more commodity ETFs are sure to arrive soon. When they come, if the Fed hasn’t managed to stymie the current mass speculation in commodities, interest is sure to pick up.

I applaud the choice, but caution you that investors are probably overzealous with them.

posted at 4:20 PM 0 comments

What Kind of Investor are You?

Asked to describe their investment ‘style’, people will generally say they adhere to fundamental or technical analysis, practice Buffetolgy, they apply Soros reflexivity, etc...

I’ll never give any of these answers. As an investor I practice common sense derived from looking at a variety of information sources from macro economic data to corporate accounting. I then identify opportunities to profit from others misinterpretation, ignorance, or ignoring of the facts, all of which are very common facets of the human psyche.

As a financial writer / analyst my favorite topic is debunking, identifying hidden agendas, and calling out cons. There’s never any shortage of fodder in this niche though there is always a shortage of people wanting to cover it, and unfortunately a shortage of people who understand what they have to gain from it.

I strongly believe the best thing an investor can do to increase their returns is simply learning to identify bogus information driving the markets. And statistics show this to be true. By not chasing returns in mutual funds, for example, you will nearly double your return as studies have shown that the average mutual fund performs far better than the average investor.

And one reason people chase returns is because they’re inundated by bogus information. Now if you can double your return in mutual funds by simply not following bogus information, imagine how much better your return would be if you can not only avoid being duped by bogus information, but recognize it and profit from it. So you’ve doubled your results just by not being an idiot, and maybe if you are diligent you can tack on a few more points by being a wolf in sheep’s clothing.

Now if you can do that in mutual funds, imagine then what you can do with ETFs and individual stocks.

How do you do this? You do your homework. You learn that on average when CEOs are ousted stock prices are lower three years later, then know better than to follow the advice of some commentator saying you should buy AIG (AIG) or Marsh & McLennan (MMC) because they’ve cleaned up their act.

Vice versa your buying when investors are overreacting to interest rate hikes.

Viola! You’re now on the right side of the bell curve, ahead of all those individual investors and even professional fund managers who are trailing behind the major indices.

These are the same people who will look askant at you, try to demean you, or just pity you when you can’t tell them what kind of investor you are, when you don’t claim to be a fundamental analyst or you reply, “No, I haven’t read the transcript from Buffet’s last shareholder meeting.”

When they ask you what kind of an investor you are just say to them, “An open-minded, educated one. What kind are you?”

posted at 3:28 PM 0 comments

Sears Holdings

Sears Holdings began trading under the ticker SHLD today, following the merger with Kmart. Not a company I’d recommend investing in. Both have seen better days.

posted at 2:20 PM 0 comments

Demand Disconnect Put to Test

I’ve been doing a little number crunching this morning. Last week I made the comment that durable goods data and commodities prices should be highly correlated. I said that the 0.3% increase in manufacturers’ new orders for durable goods didn’t seem to jive with the supposed demand for every sort of commodity we’re supposedly experiencing.

Of course one month of data doesn’t tell us much, and even two years worth of data is incredibly misleading as it turns out.

Over the past two years manufacturers’ new orders for durable goods has increased about 18%, while the Dow Jones AIG Commodities Index has increased nearly 60%. Now these numbers almost justify the increase in commodities prices, because it’s certainly possible that if there is a shortage of commodities then a small increase in demand can cause a large increase in price.

But when you back up a few more years, you begin to see the true disconnect between demand and prices. From the year 2000 until today durable goods orders have been completely flat, so we’re just getting back to the demand we had five years ago, while the commodities index has risen 72% over the same period!

So we’ve had zero increase in durable goods orders and a 72% increase in the price of raw materials used to make those goods! It’s a heck of a lot harderto deny the speculation component in commodities prices knowing that, isn’t it?

Let’s take things one step further and look at personal consumption expenditures for durable goods. They’ve risen 67% over the past ten years and have done so relatively steadily, while manufactures’ new orders for durable goods has been much more volatile over the same period. What this shows is a disconnect between consumer demand and manufacturers supply.

Manufacturers are always trying to forecast demand, and they are always tinkering with production output based on various economic factors. They don’t produce precisely what consumers demand at all times, and are frequently out of equilibrium.

So overall what we see is that consumer demand, manufacturer supply, and commodities prices are all very loosely correlated at best even over fairly long periods. And one could further argue that commodities prices are more greatly impacted by speculation than they are by demand. How could this be so? It can be if the fluctuation in demand isn’t really enough to have a major impact on prices in the short run.

This disconnect is in turn impacting companies to a greater or lesser degree depending on their vulnerability to commodities price fluctuations. It’s pretty clear that, the financing arm aside, General Motors (GM) is very heavily commodities dependent. And since 2000 its operating earnings have fallen roughly 28% while its revenues have grown 9%. While some of that difference may be attributable to pension issues, certainly having to pay higher commodities prices is a major factor.

General Electric (GE), which is relatively less dependent on commodities due to its greater diversification and higher revenues per pound of commodities used (ie rocket engines vs. car engines), has managed to grow operating earnings 33% over the same period.

Now if you want to see even more disconnect look back at 1996 to 2000, the bull market. During that period operating earnings for all the stocks in the S&P 500 grew 40% while commodities prices increased a mere 9%. In other words companies experienced significant demand, while commodities barely budged.

On an individual basis people will often argue that certain commodities are depleting resources and use that to explain a price increase. This is certainly possible, but the disconnect is readily apparent when you take all commodities as a basket and compare them to demand related economic data.

posted at 2:18 PM 0 comments

Thursday, March 24, 2005

Demand Disconnect

Investors please ask yourselves, how can demand for every sort of commodity be so great when demand for the goods those commodities are used to manufacture is only up 0.3%. That’s how little durable goods orders rose in February. The demand for raw materials and durable goods should be highly correlated. The demand for durable goods should be the driving factor behind demand for raw materials.

Today’s report managed to ease inflation fears a bit, because it told investors that demand isn’t all that strong. And we can’t have inflation if demand isn’t there, right? Wrong. Wrong. Wrong.

First off as we’ve seen, we are experiencing some inflation at the consumer level due to costs passed on by manufacturers. This could cause demand to slow down some. Though, yesterday I directed you to charts showing how much more volatile producer prices are compared to consumer prices.

Secondly, as I’ve pounded the table numerous times here, there can and is a short- to medium-term disconnect between commodities prices and actual demand for commodities.

If you don’t think commodities speculation is having an impact on companies and consumers, look no further than General Motors (GM), which is a company that incurs high commodities related expenses yet due to heavy competition cannot readily pass on those higher costs to the consumer.

Now look at General Electric (GE) by contrast, which today raised its first quarter profit forecast. You’d think these two companies might be very similar and in many ways they are. But they differ significantly in their risk exposure to volatility in commodities prices. I don’t think I’d be going out on a limb to say that pound for pound, GE’s goods are priced vastly higher. Meaning that for the same amount of commodities GE generates a great deal more revenue.

Now contrast that to gasoline companies. Not only are they able to immediately pass additional costs on to consumers, they are actually able to speculate on future costs and pass those costs on even before they are experienced. In this case, while there is substantial competition, consumer demand is fairly fixed. We need almost the same amount of gas no matter what price we must pay for it, as we are now doing.

Gas companies can so readily pass on higher oil prices because competition is fixed in the short run, so margins are at equilibrium. Changing oil prices doesn’t impact margins for refiners and distributors to the degree it impacts consumers. Though, refiners and distributors are often also drillers, which have experienced incredible margin increases recently.

So I’d say that investors have misinterpreted the durable goods report today, because they are making the basic economic assumption that demand and prices are directly correlated, when in fact they are sometimes only loosely correlated.

That being said, I still think there are plenty of other reasons why the long-term investor should be bullish, even if weak durable goods orders isn’t one of them.

posted at 1:50 PM 1 comments

Reader Comments

These comments regarding my bullish outlook for equities and the U.S. economy are worth putting forward for everyone to see.

While I agree with your bullish conclusion about the market, I must disagree with one part of your logic. The market sets long rates and the fed sets short rates. The more the fed tightens short rates the more likely a decline in long rates. The reason to push up short rates is to try to avoid an over-heated economy. If the market perceives that the Fed has gone too far too fast, inflation, GDP and long rates will all come down.

The demand for dollars has been increased by the markets acceptance that the Fed will push up short rates to par or more with foreign short rates. Once the market perceives that the dollar will strengthen a self-fulfilling prophecy will develop. Foreign investors will be all the more willing to buy US bonds in the hope that they receive interest plus a currency pop! Capital spending is surging in America so long rates are likely to rise even in the face of the increased demand. It is not the best time to buy bonds but companies that can pass on higher costs will do well.

Mr. Miller clearly has a strong understanding of the interrelationships at work in the economy right now and I appreciate the feedback very much. I want readers to know, I’m not going to go on the defensive against all comments. Just cultist Mac fanatics and posts with hidden agendas that I don’t feel are in the best interest of the silent majority of readers. I refuse to cater to the noisy minority, which would only serve to dilute this blog to another tawdry touting investment site.

posted at 11:53 AM 0 comments

Corporate Fraud Hangover

How can companies move on and leave past wrongdoings behind? Maybe they can’t and in some cases maybe they shouldn’t be allowed to. In the past companies got off incredibly easy.

I recall quite a few years ago when I didn’t know any better and had a Sears (S) card, the company was sued for some sort of wrongdoing costing card holders I guess it was millions. I don’t remember all the details (and I’m not going to waste your or my time trying to look them up either), except that I actually got a coupon as part of the shareholder lawsuit. I vaguely recall that the company only paid out a fraction of what they had stolen. But what really got my goat about the whole deal and stands out in my memory is that the company’s reconciliation to the people it screwed over was to have them buy even more stuff via a plain old coupon, not even a gift card. That seemed to be the norm in the past.

There is one exception, however, to corporate bygones. The Sunbeam accounting scandal of 1998, the largest such up to that time, is still making headlines. You may recall this was the company run by “Chainsaw” Al Dunlap, one of the most revered and reviled CEOs in corporate history. He and his cohorts got little more than a slap on the hand for their part in defiling investors and employees.

But Morgan Stanley (MWD) is still going through a lawsuit related to Sunbeam’s purchase of Coleman. Soon after the purchase was made, investors caught on to Sunbeams accounting shenanigans and punished the stock brutally.

Ronald Perelman who got $1.5 billion in Sunbeam stock for the sale of Coleman was none too happy about the situation and has had an ongoing lawsuit against Morgan Stanley, charging that the investment banker knew about Sunbeam’s accounting problems. Yesterday a judge ruled that Morgan Stanley did indeed help Sunbeam inflate its financial condition.

My thinking is that we’re going to see a whole lot more of these sorts of residual cases going forward, against the companies that orchestrated the fraud and anyone who aided and abetted them. Suits will come from anyone and everyone damaged by the companies actions. They likely will, in my opinion, start coming from competitors who feel they were damaged by the cheating in some way, such as stolen market share.

The key will be in the settlements offending companies make. They will need to be ironclad and all-inclusive in protecting the companies from further future suits. But I don’t think any settlement can stop all possible future suits. Only bankruptcy can do that.

AIG (AIG) seems rife for being inundated with ongoing suits to me. The companies illicit insurance broker arrangements clearly stole policyholders from other insurance companies, for example. As does Marsh & McLennan (MMC) for funneling policyholders to AIG.

Speaking of settlements, the news today is that J.P. Morgan (JPM) settled for about $600 million more in the WorldCom case than was necessary due to complex liability issues as to whether the company was liable to bondholders for $5 billion or $10 billion. Which is it? That’s only a 100% $5 billion discrepancy.

And speaking of Sears, Kmart (KMRT) shareholders approved the merger/buyout today.

posted at 11:35 AM 0 comments

Picks of the Day -3/23/05

It’s a Stock-Picker's Market (courtesy of Jack Rothstein)
The current cyclical bull market that began in October 2002 is wearing thin. It is in the late innings of play. It is important to consider balancing the long side of a stock portfolio with shorts. There are many stocks that are still fine to hold. Would I buy more of the good holds that are out there? Of course I will at the right time. Energy stocks have led the market through this cyclical bull. Technology stocks hardly recovered. Homebuilders, along with chemical stocks and basic industrials, have led. Semiconductors have lagged. I am currently long quite a number of semiconductor stocks and will get into Marvell Technology group in a moment. Have you noticed the break down of the banks? Bank stocks are breaking and I will get into one bank stock that appears to be just right to short. This piece will focus on longs and shorts. The stocks mentioned are good candidates to focus on and eventually take on.

Longs

Headwater Inc (HDWR)

Headwater Inc. is involved in ways to enable energy to be used more efficiently. It has been a superior stock and those long-term holders are pleased with the performance that this stock has been able to generate over the last 5 years. This stock was at a buck a share 5 years ago. You can make money going long on a stock as long as it is the right stock -- despite the fact that shareowners were not always happy throughout the last 5 years with this company. It expressed hints of weakness when key inflection points were violated along the way, causing disciplined investors to act. In other words, protective stops would have caused you to dispose of the stock along the way. That is what happened last year when the stock for no apparent reason just crumbled. Today, after many months of building a solid foundation, the stock is in good shape and ought to be owned. It held the 200-day moving average early this year and bounced off that line to ignite the current advance. The stock is up over 16% this year and 41% in the last 52 weeks. Take advantage of market weakness and buy this stock coming in 3 to 5%. A good price after sticking a small toe in the water is 32. The 50-day moving average is 31.80, so traders ought to use that point to place a stop loss. Investors ought to be more patient and give the stock some slack. Use the 200-day moving average to stop the loss. That is 29.35.

Marvell Technology Group (MRVL)

Marvell Technology is in very good shape. It is the leading stock among the semiconductor group. The performance tells that clearly. The stock is up 6% so far this year and over 83% in the last 52 weeks. The evidence expressed by its trading action over the last year establishes its credibility. That has enabled buying power to expand and the stock is leading in a lagging group. It is hard to find any semiconductor stock that has risen over 80% in the last year. MRVL is a solid chart. The price movement of the stock is positive. It trades above all key inflection points. It is one of the few stocks in the semi- space that enjoys good fundamentals. I would stick a toe in the water. Get some on the books. Then buy it in stages. It’s a good stock to buy on pullbacks. Rely on key inflection points to determine whether to keep or dump. The toe in the water means a small piece right now. It causes you to watch it. Then look to add to that coming in to the 35.50 level. Traders place the stop below 35, while investors can give it room all the way don to 32.15.

Seagate Technology (STX)

This stock has been quite the performer, and I am delighted to be involved in it as well as the others mentioned. I started buying STX last year between 13 and 14 a share. Today the stock trades near 20 a share. STX is up over 13% this year and 30% in the last 52 weeks. It is a clear winner; and if you want to be involved in stocks it's important that you choose winners. What about right now for this stock going forward? Forget about the past and look toward the future concerning this stock, and is it worth getting involved with fresh money. I say it is. I am looking at a longer-term chart and see a lovely advance after it came public again after taking itself private for a few years. The stock ramped from 10 a share to peak at 31.35 in October 2003. It experienced a deep decline over the next 8 months, finally bottoming last summer at 10.11. The low made then was a higher low and that enabled the stock to right itself after forming a decent base. The current advance is mature but not done yet. It’s a good stock to buy at current levels down to 19. Traders can use the 50-day moving average to guide the point to place the stop. A good stop for traders is 17.75. Those that prefer staying with the stock over a longer stretch can place the stop at 14.89.

Wind River Systems (WIND)

I have been trading this stock for over 9 years. I would say that I am fairly familiar with its patterns. I have won and lost in the numerous times I have challenged to make money using this instrument. WIND is in good shape right now and deserves a try. The stock has a bullish chart and that is always helpful relative to the odds for success. The stock broke out of a base on February 25th It broke out in heavy trade, climbing to a new 52-week high. Good action i= n a lousy market. Market needs to turn a bit relative to NASDAQ, and WIND could assume a leadership role. The stock is up close to 10% this year and nearly 50% in the last 52 weeks. Not too shabby. Stick a toe in now and buy the bulk of the shares coming in near 14.Traders stop the loss at 12.99, and investors at 11.49. The stock has a high beta. It moves.

Shorts

National City Bank (NCC)

It is important to have the ability to short stocks, if you choose the stock market as a means to build capital. The market is not always bullish. That is reality. Stocks drop in value, and in bear markets having a few shorts and a few longs and a decent pile of cash is prudent. NCC is a stock I am short right now and favor it because the price movement of the issue is expressing a decline Stocks trade in stages. They rise for a while, form a plateau, rollover in= to a decline and then build a base at the bottom to get set for another advance. That is the stock market in a nutshell. Each stock is unique in its own pattern but all stocks follow the same essential overall price pattern. The best time to short a stock is at the outset of a decline. NCC is a good short. It has dropped too much too soon and ought to bounce in a rally. The resistance to look for is up around 35. That is a good place to start shorting this stock. I invite you to look at the chart and see the decline. Turn it upside down and you have a great long like MRVL. Place the stop at 36 for traders and 37.15 for investors. This is one of many banks that are moving into decline right now. Take a look at the charts of BAC and WFC.

Potash (POT)

I am getting cute with this stock right now. I am getting cute because I am anticipating a top. It is not ready to move into decline quite yet but my bet is that the stock is done rising. I know this by the action the stock has been expressing over the last two weeks. It is now flirting with its 50-day moving average. The 50-day line is 83.77. The 200-day line is 67.07. We can agree that the stock is extended. The stock is a potential good short and if I am right a great short caught near the top. So you are shorting POT near the top. Sell high and buy low, right? Sell this one up toward 89 a share. I am short right now at that level. That is a perfect spot to short the stock and place the stop at its 52-week high of 92.

Motorola (MOT)

Don’t be long this stock. Sell it short. It's in a good range right now to sell short and would be far better if the stock drops below 14.60. The stock is down 12% this year. It is actually up 3% over the last year. The decline moved into gear over the last two months, breaking down below key moving averages in heavy trade on January 18th. That is the day they announced earnings and failed to inspire analysts and investors concerning the future. The perception is negative and it shows in the chart and is therefore a good short. Place the stop at 16

That is the long and short of it. Those stocks are solid stocks in either direction. It’s prudent to be balanced. The current market is getting oversold, so a rally ought to occur before the week is over. Have a pleasant weekend.

Readers may contact Jack Rothstein at 1-888-343-4825, or visit http://www.wealthcast.com/ for more details.

posted at 11:11 AM 0 comments

Wednesday, March 23, 2005

Economic Data put in Perspective

The CPI rose 0.4% for all goods on a seasonally adjusted basis. Core goods, excluding volatile food and energy, rose 0.3%. Over the past twelve months prices for all goods are up 3% and 2.4% for core goods.

What’s important to note is what the annual rate will be if prices continue to climb at the current rate. For all goods prices are now growing at an annualized rate of 4.8%, while core prices are growing at a rate of 3.6%.

I wanted to put these numbers in perspective as I did with the Fed Funds rates.

What you will notice in comparing the various charts of the CPI to the PPI is how much less volatile the CPI data is. The difference represents price volatility absorbed by manufacturers and retailers, not passed on to the consumer.

You will also notice looking at the CPI data that despite the current concerns about inflation, the slope has been fairly steady across all time periods. I also found this nifty chart showing inflation on a decade-by-decade basis. You’ll see that the current rate of inflation is still reasonably modest on a historical perspective.

I’ve also included below an interesting chart of department store prices. It’s no wonder the consumer keeps right on spending since prices have fallen significantly since peaking in 1998. You think Wal-Mart (WMT) has had anything to do with this? Notice though, that they appear to be leveling out now. Whether or not they will reverse course and start climbing remains to be seen.

CPI All Items - 5yr chart
CPI All Items - 10yr chart
CPI All Items - Max chart

CPI Core - 5yr chart
CPI Core - 10yr chart
CPI Core - Max chart

PPI All Commodities - 5yr chart
PPI All Commodities - 10yr chart
PPI All Commodities - Max chart

I’ve included a few more chart links here just to a bit of comparison. The chart of goods and services is pretty scary, as the deficit is growing at an astronomical rate. This is however, likely to start slowing or leveling off because our export of goods has been growing since 2002 and our export of services is growing at a much faster than average pace.

Our export of investment products has, however, been highly volatile. Higher interest rates should make the U.S. look more favorable to foreign investors. It is a bit of a catch-22, though, because corporations will then also have to payout at higher rates on new issues to compete with more secure bond rates.

But higher rates will probably be enough to entice foreign investors now buying German bunds back to the U.S. and then the combination of increased goods, services, and investment exports could slow the overall deficit growth quicker than might seem possible given its current trajectory.

Balance on Goods and Services - Max chart
Balance on Investment Income - Max chart
Balance on Investment Income - 5yr chart
Export of Services - Max chart
Export of Goods - Max chart

Department Store Prices

posted at 1:47 PM 0 comments

Apple Reality

Hackers look to flip switches: Providers of power are targeted

Symantec also said that hacker attacks on Apple Computer Inc.'s Macintosh OS X operating system, thought by many who use the Mac to be virtually immune to attack, are on the rise.

"All these platforms have vulnerabilities - it's a fact of life,'' said Gartner analyst Martin Reynolds. "The truth of the matter is that Mac is only a couple percentage points of (computer) shipments so it's not an interesting target.''

Is Apple (AAPL) a good long-term investment?

posted at 11:14 AM 0 comments

Relative Fed Fund Rates

Here is a chart I assembled plotting historical effective Federal Funds rates on a monthly basis back to the 1950s. I’ve intentionally scrunched the x-axis representing time so that you could more readily see the frequency. The blue line roughly represents the current target rate of 2.75%.

The chart gives you a clearer picture of where rates are on a relative historical basis. I thought it might be helpful to see this, because it seems that the markets may be overreacting to the current series of hikes with the expectation that this should have been the last rate hike.

If the Fed can get inflation under control in just a few more quarter point hikes rates will still be in very low historical territory. I think it will take at least another full point before that happens, which is still a rate accommodating to commerce.

posted at 11:02 AM 0 comments

Tuesday, March 22, 2005

Contrarian Heaven

Mixed emotions over the Feds decision to raise the fed funds rate another quarter point to 2.75%. Not really over the rate hike, which was expected, but over the Feds keeping the ‘measured pace’ language in its reference to future rate decisions.

Bond yields jumped immediately upon the announcement. Stocks slipped. Traders had been speculating that this might be the last hike for the immediate future. Why didn’t they see it coming? Because so many, have convinced themselves or been convinced that commodities prices are purely demand driven and are merely ratcheting up to a new equilibrium. Though the insanity in this is plain to see.

I warned you otherwise. Yesterday, I posted that the Fed would continue to hike rates as long as the massive speculation in the futures markets continued, which is threatening push inflation over onto the consumer, as if it hasn’t already.

Have you noticed paying a bit more at the fast food joints lately? I have, especially for soft drinks.

However, the threat of more hikes to come could be just what is needed to take some of ‘irrational exuberance’ out of the futures markets.

And push the dollar up. I’m suddenly hearing more talk of that, and concerns about the European economy.

I’ve outlined above what I think is the most likely scenario. A couple more needed rate hikes will take down oil and other overpriced commodities, before the hikes can do too much damage to the overall economy. It will also bring up bond yields to a level more attractive to foreign investors. This will in turn drive dollar buying. And the expectation of this will drive immediate speculation on the dollar.

If commodities start to correct a whole lot of money will poor right back over into equities. Then the combination of higher returns on U.S. equities and a rising dollar is apt to scare a lot of money out of foreign investments back into the U.S. And people speculating on foreign companies might be surprised to see their returns reduced significantly by the unfavorable change in exchange rates.

Yes, this is indeed a good time to be contrarian and bullish on U.S. equities.

posted at 3:04 PM 1 comments

Cautiously Optimistic on Oracle

With the takeover of PeopleSoft in which it also got J.D. Edwards, Oracle (ORCL) now has the largest market share of the business management software sector. It’s a growing market as many companies move away from old proprietary accounting and other business management systems to modern systems providing instant feedback.

The outlook for Oracle, in my opinion, is one of the most positive of any of the major software and IT services companies such as IBM (IBM), Computer Associates (CA), and CSC (CSC). However, I want to point out a couple of concerns that you’re not ever going to hear from a traditional media outlet or analyst. And that is why you’re reading a blog, isn’t it? To hear what others won’t tell you?

The first caution is highly subjective and not entirely clear how it may impact the company in the long run. Larry Ellison is tremendously hubristic. The inks hardly even dry on the PeopleSoft deal and the company announced today that it is purchasing Retek (RETK) for $631 million.

Extreme hubris among corporate leadership often leads to problems for companies in the long-run. It has in fact already led to one in that the PeopleSoft employees are very disgruntled over the way the takeover was handled. They were very unhappy with the deal and many have been outspoken about not wanting to work for Oracle and many have jumped ship. I got into more detail on this matter in a previous post.

The second caution is something I’m not even going to speculate on, but you should be aware of. The CFO recently left the company after a stay of just eight months. This should concern investors; it should rub you the wrong way. Why? Because it’s impossible to know why the person in charge of the company’s finances would leave after such a short period of time.

You should be wondering after all the WoldComs and Enrons that we’ve seen in the past few years, did this guy see something he didn’t like? Was there something he didn’t want to be a part of, something he didn’t want to be responsible for?

I don’t know anything, and I’m not in any way suggesting Oracle has done anything wrong. It could just be that the guy is completely burned out over the PeopleSoft deal, or that things got heated during the deal and relationships were stressed. I’m just saying, it concerns me because the new way of thinking among C levels is ‘I really like my money. And I like my mistresses, but I prefer they not be nicknamed Bubba’.

posted at 2:03 PM 0 comments

iPod OR ELSE!

The Apple iPod is hot. There’s no denying that. So hot, the following is more cult like than faddish. Millions of pod people are listening to 10s of thousands of different songs, but they’re all singing the same tune and marching to the beat of the same drum. And they’re all shelling out .99 cents a song to sing that tune. Well ok, actually only 20% of them since somewhere in the range of 80% of the songs being carried around on iPods are stolen.

Apple (APPL) has always been a very proprietary company. Actually, Microsoft (MSFT) and Apple have carried along very similar business philosophies. Apple though, has more than struggled through its history trying to get people to buy its proprietary equipment with limited software availability. They’ve fought a standards battle, and it would be a stretch to say they won. The company has been left for dead by investors on numerous occasions over the years.

Using Apple computers has always been, and as far as I can tell always will be, sadomasochistic unless you just need your computer to do a few things and do them well. Mac’s to this day are still not standards friendly, software is still very limited, and not even very web friendly.

Hold your horses, simmer down, Mac fanatics. Anyone whose experienced on multiple systems knows this is true, though true Mac fans may not because they’ve spent years defending they’re choice of computers, years building up walls against other products, defenses against intruding systems, and justification out the wazoo.

I use Windows based PCs primarily. I’m not married to them. The PC is simply the best tool for the myriad of uses I put it through. I’ve used Macs in the workplace, so don’t try and tell me I don’t know what I’m talking about here, they are very confining and limiting to say the least. I’ve also got a PC running SUSE Linux, a server running Redhat, and many years experience on Unix and mainframe systems.

In fact my computer experience goes back to the beginning of time for the personal computer. I recall spending many hours in front of a friend’s Apple II, and I remember using TRS-80s, Atari 800s, Commodore-64s and TI 99s. Hey, we even had the Internet back then, though web pages were called bulletin boards, and the hyperlink was hanging up and dialing a different phone number.

Anyway to the point, Apple is still the same old extraordinarily proprietary company it has always been. Many web sites and web services simply don’t work with Macs. The Rhapsody music service, for example, dropped support for the Mac operating system.

Similarly, today I read this article about an iTunes loophole the company plugged. The fix forces iTunes music downloaders to use a new version of its software that will only allow iTunes songs to be played on iPod players. In other words the iTunes songs aren’t standard MP3s, they are Apple proprietary MP3s. That’s typical Apple proprietary confinement.

With that business philosophy it won’t be long at all before open standards friendly competition relegates the iPod to the same place the Mac has been for years, a quirky albeit easy to use alternative for fanatics.

posted at 12:33 PM 4 comments

Monday, March 21, 2005

"Measured Pace"

If I’m not telling you to short nor buy commodities, then why the heck am I talking about it so much? I need to tie this out for you. Investors need to be concerned about the commodities markets for two reason.

The first is obvious, inflation.

The second is the Feds concerns about inflation. The Fed is likely to keep hiking interest rates as long as commodities keep climbing. It’s likely to want to burst the commodities bubble to stave off inflation. The risk is that the Fed will stall the economy before it gets commodities driven inflation under control.

This is why I am so glad to here so many people now crying bubble with regard to commodities prices, something I was already doing here. Hopefully for investors’ sake, it will shake out some weak hands and keep some of the speculative capital out of those markets.

That combined with a ‘measured pace’ of interest rate hikes from the Fed, will be positive for equities. That, I think, is the most likely scenario.

But if commodities prices keep climbing and we keep seeing inflation creeping into the economic data, we could certainly be looking at lower equity valuations.

posted at 2:18 PM 1 comments

The Life Cycle of Bubbles

The futures markets are getting