The Big Picture | August 2003

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Gasoline Prices

Saturday, August 30, 2003 | 07:18 AM

A few factual tidbits re: rising gas prices; (labor day weekend often marks the peak in gasoline prices for the year). Its a subject I find many people are surprisingly naive about:

First off, by nearly any way you can think of measuring or comparing it, gasoline is extraordinarily cheap in the United States.

Compared to consumer prices in Europe or Japan, we pay about 1/6 of the taxes on it; Taxes in Europe are why gasoline costs more than double the US -- Over $1 and change per liter -- what it does here.

In terms of adjusting for inflation, the price of gasoline has remained a bargain. You are paying far less than what you paid in inflation adjusted

The price has hardly gone up over the past two decades; Its fluctuated from about $1.75 per gallon -- the same price as 1980. In 1980, about $1.15 a gallon was for the actual fuel:

Click for larger image (popup)
Source: Oilnergy.com

The balance of what you pay are state and federal taxes, marketing and refining costs:

Click for larger image (popup)
Source: DOE

Compare the price of gasoline ($1.75/gal) with Coca Cola (~$2.50/gal). Gasoline first requires crude oil to be explored and found, than extracted form the ground, shipped to a refinery, refined, then distributed and ultimately pumped into your tank. Meanwhile, Coca Cola is essentially colored, sugared tap water.

Lastly, a note on the "branding" of gasoline -- most flavors are completely interchangeable; What is called branding is actually little more than marketing/advertising.

There are a few interesting exceptions: The 3 most prominent are Chevron, which uses a patented additive called Techron, (primarily a fuel injector cleaner); Some brands use an octane booster (ie, Sunoco, which sells a 94 plus octane). Lastly, BP/Amoco has their own proprietary formula for premium gas; Its unique, not pumped through pipelines, and only sold at Amoco stations. Many high performance car owners (I know) only put Amoco premium into their high horsepower (Ferrari, Porsche) engines.

Related Stories:
Startled Drivers Fill It Up, Up, Up
http://www.nytimes.com/2003/08/30/business/30FUEL.html

One Vehicle on the Road, Two Others in the Garage
http://www.nytimes.com/2003/08/30/business/30TRAF.html

States Embarrassing the Feds, part III

Friday, August 29, 2003 | 07:19 AM

in Current Affairs | Finance

The very able Jesse Eisinger of the WSJ this morning observes that the Feds have nobody to blame but themselves for Oklahoma stepping into the yawning vacuum that was the lack of Worldcon prosecution. In a piece titled "The Okies Take Over," Eisinger states:

Note to those Feds who cringe every time Oklahoma Attorney General Drew Edmondson denounces Bernie Ebbers and works on his klieg-light tan: You brought this on yourselves.

For this is the result of federal investigators -- at the SEC and the Justice Department -- not enforcing the nation's antifraud statutes to the fullest extent of the law.

At least lately, federal justice don't work too well. Cendant's Walter Forbes still hasn't been brought to trial; The Feds also let the statute of limitations expire against Sunbeam's Al Dunlap. Meanwhile, Ken Lay, Jeff Skilling, Richard Scrushy and Bernie Ebbers are still walking about free -- and very, very wealthy.

Apparently, crime does pay. Eisinger continues:

And so ambitious pikers from the states step in. The Feds should have learned their lesson from Eliot Spitzer and seen this coming. In the case of WorldCom (now called MCI), public frustration is palpable. The accounting fraud was revealed well over a year ago.

Now any possible case against Mr. Ebbers could be jeopardized, the Feds complain. It's true. We have national securities laws, national regulators and national authorities because the markets wouldn't function with 50 different sets of law (not to mention what Guam might say). That's all the more reason for the Feds not to give any local authority an opening to meddle.

The Feds complain about how difficult it is to prove accounting fraud. But it is their culture that sets them up for second-rate results. They love to settle. When the SEC settles, the guilty party neither admits nor denies wrongdoing. This isn't a bit of harmless Kabuki theater in which we all know the truth. Indictments and convictions for accounting fraud are exceptions, not the rule. Settlements are less significant than prosecutions that result in prison. Prison deters white-collar criminals. Household names need to be busted quickly and some need to head to jail.

Meanwhile, the States are doing what the Feds would or could not: Killing Worldcom/MCI. In another WSJ which also reveals the huge schism between the WSJ's reporters and her editorial writers, comes this rather empathetic view of the States flexing their muscles when the Feds refuses to do so: In the article, titled: "States Mull Civil Suits Charging Worldcom/MCI With Widespread Tax Fraud," Yochi Dreazen writes:

For MCI, it may be death by a thousand cuts.

The embattled long-distance carrier, reeling from the criminal indictments filed against it and several former executives by Oklahoma prosecutors Wednesday, may soon face civil lawsuits from other state attorneys general alleging widespread tax fraud. The first of the suits, which is being prepared by West Virginia Attorney General Darrell McGraw, may be filed within days, according to people familiar with the matter. At least one other state suit is expected by the middle of next month . . .

The new lawsuits would be another blow for WorldcomMCI, which is struggling to emerge from the long shadow cast by an $11 billion accounting fraud, the largest in U.S. history. The company recently agreed to a $750 million settlement with the Securities and Exchange Commission and had hoped to come out of bankruptcy later this year.

Instead, WorldcomMCI is running into a growing number of roadblocks erected by rivals like Verizon Communications Inc. that believe the company hasn't been punished enough and would enjoy an unfair competitive advantage if it emerged from bankruptcy debt-free. Verizon has relentlessly lobbied state and federal policy makers to come down hard on MCI. And Verizon has already helped persuade the federal government's contracting arm to suspend its dealings with MCI and bar the company from new government contracts.

Compare the Worldcom case with the Arthur Anderson/Enron debacle. A few things leap to mind: Arthur Anderson recieved the death penalty. But the vast majority of Anderson employees -- I would hazard to say most -- had nothing to do with Enron. This could have easily been compartmentalized, with the offending Anderson partner (and everyone who worked for him) excised like a tumor. Instead of removing the cancer, the patient was put to death.

I would note that the Anderson execs at the time played it wrong; They should have moved aggressively to cooperate, mea culpa-ed themselves for not finding out sooner, amd cordon off the rot ASAP. That could have saved the company.

Still, its hard to explain that kind of poor judgement on the Feds part; And, you cannot discuss Enron without noting that the comapnies and its execs were the President's single largest campaign contributors. It taints the entire issue, making it hard to remove a political component from the entire process.

Enron was put down like the mangy dog it was, but why no charges against the founders and leaders of this vast criminal conspiracy?

Worldcom, unlike Anderson, rotted from the head down. It was corrupted nearly all the way through; We're still learning about some of their fraud, like routing calls thru Canada and falsely dumping the bills on AT&T and Verizon. There seems to be no end to these miscreant's bad behavior.

Their punishment? They receive a huge contract to rewire Iraq's telecomm infrastructure . . .

Does that make any sense to you?

URLs:
The Okies Take Over
http://online.wsj.com/article/0,,SB106210514824844000,00.html

States Mull Civil Suits Charging Worldcom/MCI With Widespread Tax Fraud
http://online.wsj.com/article/0,,SB106211056488006100,00.html

States Embarrassing the Feds, part II

Thursday, August 28, 2003 | 05:29 PM

in Current Affairs | Finance | Politics

Houston Chronicle shut out of 2 more hearings By MARY FLOOD
Fastow transcript still denied release,

A federal judge held two more closed hearings in the criminal case against Andrew Fastow and two other former Enron executives on Tuesday and refused to unseal the transcript of a July 28 hearing he also held in secret.

U.S. District Judge Kenneth Hoyt said he might continue to close hearings if he thinks it necessary.

"There are matters that do not need to be discussed in public in ways that embarrasses or humiliates the government or the defense and particularly the court," he said.

I don't know who Judge Hoyt is, but he seems unqualified for the bench . . . At best, he's guilty of incredibly poor judgement -- not the shortcoming you want in a person who's job it is to exercise judgement . . .

Why the States are embarrassing the Feds

Thursday, August 28, 2003 | 08:04 AM

in Current Affairs

First, the handwringing. Solemn, serious soliloquies.

Then comes angst: “This will interfere with our methodical case building process.”

Next up, a discussion of State versus Federal jurisdiction.

Finally, some announcer will -- sigh -- talk about the local political ramifications of State Attorney Generals.

Overlooked in all of this will be the gradual decay of Federal Enforcement and Prosecutions at nearly every level, and for a bewildering variety of issues and transgressions.

What was once a feared and mighty arm of the government has become a vast bureaucracy overmatched by corporate legal departments. Opponents of enforcement have spent millions of dollars lobbying to have enforcement laws relaxed. Though mostly successful, on the occasions when they would run into trouble on that end, they shifted gears, lobbying successfully to have department budgets cut and headcounts reduced.

They even managed to get their own defense attorneys -- i.e., think Harvey Pitt as SEC Chairman -- appointed as the head of the watchdog agencies.

Undermanned, underbudgeted and undermotivated, the federal agencies charged with enforcing securities laws, anti-trust laws and fraud prevention have simply been outgunned by the lawyers on the other side.

Of course NY State Attorney General Elliot Spitzer went after the corruption on Wall Street; The SEC, NYSE and NASD all turned a (mostly) blind eye to what was going on, and what is still going on. After all, who wants to interrrupt a rally?

Worldcom (perhaps Worldcon is a better name) was one of the biggest corporate frauds in the history of mankind. Before Oklahoma ran out of patience, indictments for the ringmasters were few and far between. Any first year law student could have figured out how to indict the people behind 12 billion dollars worth of fraudulently reported revenue. What on Earth is taking the Feds so long?

How is it possible that Ken Lay, CEO and creator of the force that was Enron, has yet to be indicted? This was the biggest scam of all times, the ultimate Ponzi scheme. Are we living in some episode of the Twilight zone? It's simply embarrassing.

They may have to move the trials of both Bernie Ebbers and Ken Lay to new Zealand, because that’s the only place where a conviction is not guaranteed.

Of course, that's if they ever get indicted . . .

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Update:
There's legal, and then there's shady: A new report, titled "Executive Excess" details the specific CEOs personally had the greeatest profits from layoffs, pension shortfalls, and tax dodges:

CEOs at companies with the largest layoffs, most underfunded pensions and biggest tax breaks were rewarded with bigger paychecks, according to a new report, “Executive Excess 2003: CEOs Win, Workers and Taxpayers Lose.”

Median CEO pay skyrocketed 44 percent from 2001 to 2002 at the 50 companies with the most announced layoffs in 2001, while overall CEO pay rose only 6 percent. These layoff leaders had median compensation of $5.1 million in 2002, compared with $3.7 million at the 365 large corporations surveyed by Business Week.

You can download the PDF "Executive Excess" Report here.

Pointer courtesy of Dave Callaway

Car Sales Slow Despite Spending on Incentives

Wednesday, August 27, 2003 | 10:53 AM

in Finance

The NYT reports that "Car Sales Slow Despite Spending on Incentives"

DETROIT, Aug. 26 — In another sign of how competitive the car market has become, auto companies spent a record amount on incentives in July, yet their vehicles sat unsold on dealers' lots for a record length of time.

Moreover, Ford Motor and the Chrysler Corporation lost market share in July, though the average incentives for Detroit's auto companies grew to the highest level ever, according to Edmunds.com, a company in Santa Monica, Calif., that offers consumers buying advice and tracks industry trends.

In figures scheduled to be released on Wednesday, Edmunds estimates that car companies spent an average $2,668 on rebates, interest-free loans, lease deals and other discounts last month, up $519 or nearly 25 percent from July a year ago. Edmunds bases its calculations on industry sales data and transactions at dealerships.

At the same time, Edmunds said the average time a vehicle spent in the showroom before being sold rose to 78 days in July. Put another way, that meant a vehicle that arrived on a dealer's lot on July 1 would not be sold until mid-September. That compared with 54 days at the beginning of 2003, and 60 days in July 2002.

Zero % financing amounted to channel stuffing; After nearly a year of those aggressive sales tactics, the auto sellers have exhausted all demand at the margins. There is now zero pent up demand for autos, and we are approaching zero pent up demand for homes . . .

August Market Reversals

Wednesday, August 27, 2003 | 10:25 AM

in Finance

Dorsey Wright credits Peter Eliades of Stock Market Cycles in compiling an overview of August Market turns:

While most people view the last 2 weeks of August as vacation weeks, over the last 16 years important turns have taken place then:

August 25, 1987 - the exact top prior to the crash..
August 23, 1988 - low has never been returned to..
August 24, 1995 - low has never been returned to..
August 19, 1998 - top preceding 18% plunge in 2 weeks..
August 31, 1998 - important market bottom..
August 31, 2000 - 2 days before all time high..
August 24, 2001 - end of rally ,market drops 22% in under a month..
August 22, 2002 - exact rally top, market drops 21% in under a month.

Four out of the last five years have seen a major turn in August . . .

BoA raises oil price forecast

Wednesday, August 27, 2003 | 09:36 AM

in Finance | Politics

Bank of America's energy analysts were busy this am; They raised their 2003-2004 oil price forecast to a 19% premium to the First Call consensus.

If BoA revised estimates are correct, this is potentially a significant drag on the economy. (Here's an Oil chart).

On a related note, check out this recent chart on Gasoline prices:

Source: Chart of the Day

A few worthwhile reads

Tuesday, August 26, 2003 | 04:25 PM

in Finance | Media

Some interesting articles out today:

Bloomberg European Share Rally Belies Economic Growth Slump

Aug. 25 (Bloomberg) -- Depending on which headlines you look at, Europe has two different economies right now. If you are reading the market reports, you could be forgiven for thinking that business in Europe is in great shape. Germany's benchmark DAX index has surged 22 percent this year and has gained about 60 percent since its lows in March. Spain's IBEX has added 19 percent this year, Sweden's OMX is up 20 percent, and Switzerland's SMI has increased 12 percent.

Looks like everything's rosy, right? Not exactly. Listen to the flow of economic statistics, and a very different story emerges.

Reuters Analysis: Is 'Perfect Storm' Brewing for Bush?

WASHINGTON - As the 2004 election nears, President Bush could face an international "perfect storm" -- more attacks in Iraq and Afghanistan, an overextended deployment of U.S. troops eager to come home, and blackening clouds over the Middle East, North Korea and Iran. The confluence of world events will test Bush's foreign policy leadership even as he must concentrate on the U.S. economy and other domestic issues that could determine whether he wins a second term.

Although most Americans still have a favorable opinion of the president, his job performance rating has slipped to 52 percent positive and 48 percent negative in a recent poll of 1,011 likely U.S. voters by Zogby International. This compares with a post-Sept. 11, 2001, peak rating of 82 percent positive.

STORM BREWING "A perfect storm (on security) is brewing for the rest of the year," said one military planner, referring to a catastrophic clash of three storms that menaced the U.S. Northeastern coast in 1991. In Iraq, a major lightning rod is the issue of troops -- whether the 139,000 U.S. military on the ground should be supplemented with more Americans or foreign forces.

CBS.Marketwatch A word of caution from Value Line

"the market, which was attractively valued six or nine months ago, now looks pricey, ... since much of the favorable news on the economy and earnings still lies in the future... The market has come too far too fast to continue along this road without some profit taking along the way. We would take a cautious investment posture now, as a result."

WSJ 'Small Is Beautiful' to Stock Funds

Mutual funds have been turning to smaller stocks to help generate better returns this year.

As the economy has begun to show signs of recovery, many fund managers investing in large-capitalization or midcap stocks have said goodbye to some of their bigger-company holdings that had given them shelter during the bear market. Instead, they sought companies whose market capitalizations -- or stock prices times the number of shares outstanding -- were smaller in search of stronger growth prospects.

Yahoo News Optimism Premature After Intel's Surprise Forecast

SAN FRANCISCO (Reuters) - Investors may have brought out the party hats a little too early after Intel Corp., the world's largest microchip maker, boosted its revenue target for the current quarter. Since its surprise announcement Friday morning, Intel executives have twice tried to dampen expectations for a strong recovery in technology spending. Taking the cue, investors have since cooled on technology stocks, especially shares of companies in the microchip industry. . .

The rally Intel sparked was short-lived. On Friday, stocks eventually fell back to mostly flat levels after a wave of optimism generated by Intel's announcement. Speaking in Taiwan on Monday, Intel Chief Executive Craig Barrett put the brakes on hopes that the company's higher revenue forecasts marked a turnaround in technology spending. "It's too early to suggest it is a total turnaround," Barrett told a news conference. His comments mirrored those of Andy Bryant, Intel's chief financial officer, who on Friday said the company might be among the last to declare an end to weaker business conditions. He similarly declined to call a recovery

WSJ: Are Productivity Gains Bad for US Workers?

Tuesday, August 26, 2003 | 11:57 AM

in Finance

David Wessel of the WSJ wrote:

"The argument is simple, convincing -- and wrong. Surging growth in productivity, the amount of stuff we make for each hour of work, is not the cause of our current economic malaise. Wishing for slower productivity growth so we can have more jobs is foolish.
-Productivity Gains: Never Bad, Even for American Workers

I’ve been meaning to address this issue since “Productivity Gains: Never Bad, Even for American Workers” came out. The prior extensive work I've done on this subject convinvces me that there are negatives for US workers; (See: The New “Productivity Paradox); The bigger issue is for policy makers such as the Fed:

In 1987, Nobel laureate Robert Solow famously observed: “You can see the computer age everywhere but in the productivity statistics.” Despite massive investment in IT infrastructure, productivity growth was nonexistent. At the time, this was known as the “Productivity Paradox.”

Since the mid-‘90s, the Productivity Paradox appeared to have been solved, as U.S. productivity growth surged. Since 1995, labor force productivity has been increasing at 2.25% per year, double the annual rate of the previous two decades. This “productivity feast,” as its been called by Fed Chairman Greenspan, is the largest increase in non-farm business output per hour in 30 years.

Therein lies the new Productivity Paradox: Productivity continues to increase year after year at 2.5%; At the same time, the labor force itself is growing at ~1.3% per year. Thus, Real GDP has to increase at 3.8% per year just for the economy not to hemorrhage any more jobs.

During the boom year, productivity increases got the credit for a myriad of positives: increased living standards, higher corporate profitability, boosted tax revenues, better funded pension plans. Now, we are confronting the dark side of productivity: Companies need less laborers to produce more goods and services; Less workers means less consumer spending, lowered tax receipts, weaker corporate profits . . ."

I think the WSJournal writer is focusing on the wrong issue -- its not whether productivity is good/bad for US workers; That argument merely "tilts at windmills;"

The relevant issue is "How high must GDP rise in order to stop losing jobs, and start creating them?"

At the present levels of labor pool growth (1.3% / year) and Productivity (2.5% / year), a 3.8% GDP merely stops losing jobs; A GDP rate in excess of 4% will slowly start creating jobs. It may take a 5% GDP (+/-) to robustly create jobs.

This is of greatest significance to the Fed, who typically tends to slam on the brakes at those GDP levels. In the present, post-bubble, excess capacity environment, the Fed should (even at the risk of inflation), not constrain the job creation ability of the economy by raising rates until we see significant improvement in the jobless rates.

URL: http://online.wsj.com/article/0,,SB106141948614575300,00.html

Baggadonuts Marks Intermediate Top

Tuesday, August 26, 2003 | 10:21 AM

in Finance | Media

I'm putting the finishing touches on a huge research piece on Contrary Indicators; It should be released some time after the Labor Day weekend.

I bring this up because a huge (external) contrary indicator just flashed on my screen: Friday night's Louis Rukeyser’s Wall Street Airdate: August 22, 2003. It was announced this past weekend that the coming (8/29/03), the main guest on "Louis Rukeyser’s Wall Street" will be Joseph Battipaglia, chief investment officer at Ryan Beck & Co.

Battipaglia, in case your memory is failing you, was the perma-Bull who remained staunchly upbeat on the market throughout most of the crash. Why is his appearence on Rukeyser a contrary indicator? This strategist's Bullishness is legendary; He was totally blindsided by the bear market. Throughout the crash (see links below) he remained shockingly Bullish. Look here, no one is right all the time, or even most of the time. But to maintain a resolute Bullishness in the face of a total crash suggests a model not particularly rigorous; Hey, even a broken watch is right twice a day . . .

Battipaglia's appearence on Rukeyser is only possible in an environment of giddy positivity. That calls for at least a mild correction.

Here are some links worth perusing on his prior calls.

THE BULLS JUST DON’T GET IT
http://www.nationalinvestor.com/mrkt%20com-5-31.htm

Leading the bulls in their case these days is perpetual shill Joe Battipaglia of Gruntal and Co., who probably spends more time than any other single guest on CNBC. A couple days ago (as I pen these words) he confidently predicted that not only was the Fed now done raising interest rates after their 50 basis point move of mid-month, but that the market would soon come roaring back, with year-end 2000 witnessing a Nasdaq at 5500--up a scant 70% from current depressed (?) levels--a Dow Jones Industrials at 12,500 and an S&P 500 at 1625.

"Resurgent Economy Will See Higher Rates"
Commentary: Resurgent economy will see higher rates
By Joseph V. Battipaglia, CBS MarketWatch.com 3-18-02
http://cbs.marketwatch.com/news/story.asp?guid=%7B9674A7A2%2D694A%2D4EA8%2DA84B%2DE767C72437B7%7D&siteid=mktw

"Our view has been, and still remains, that the U.S. economy will gather steam as the year progresses and inventory restocking commences. We believe that the real annualized fourth-quarter growth rate will be 3% and will help meaningfully lift the broad market -- not just the largest companies -- by year-end."

Wall Street Media Star
http://www.wharton.upenn.edu/alum_mag/issues/summer2000/feature_4.html

"An April Business Week story that took a somewhat disparaging view of Wall Street and the media's role in hyping the stock market cited his number of television appearances - 238 within the past year - second only to influential Goldman Sachs economist Abby Joseph Cohen's 259. Television, the article said, is fueling a trend toward media-savvy "celebrity" analysts and strategists who tend toward overly rosy views of the market and have the power to move markets, sometimes dramatically."

Source: http://www.wallstreetbaloney.com/wsb_ratings.asp?wsbrid=30

Barron's X2!

Monday, August 25, 2003 | 04:32 PM

in Finance | Media

Boy, when it rains it pours:

Thursday's piece, "Market McGuffins!," also got nabbed by Barron's:
http://online.wsj.com/barrons/article/0,,SB106158956796814200,00.html

Barron's

Monday, August 25, 2003 | 11:28 AM

in Finance | Media

Last Monday's piece, "The Job-loss Recovery," got picked up by Barron's:
http://online.wsj.com/barrons/article/0,,SB106158956796814200,00.html

Intermediate Top!

Monday, August 25, 2003 | 10:45 AM

in Finance

The present rally began on March 12. That was a key reversal day, where the markets gapped down hard, only to reverse and go positive, closing near the highs of the day.

Friday’s action was nearly a mirror image: On the positive Intel news, the markets gapped up hard, only to reverse and go negative, selling off and closing near the low of the day.

That’s a key reversal day; It occurs whenever a market makes a nominal new high, reverses down to take out the previous day’s low and close lower than the previous day’s close. Historically, when you see one of these reversals, it signals the end of the up move and the beginning of a new leg down.

That trading action also suggests that, at least for the near term, most of the positive economic developments have been priced into the markets. That’s why a “Sell the news” mentality took hold. Smart money that positioned their funds in INTC or similar names (i.e., the Semis) had gains of 30, 40% in the sector. Their profit taking was not unexpected.

Additionally, many institutions are running at fairly fully invested levels. Equity fund flows have been positive for the past four months, but at levels nowhere near those seen in the late 90s. Its not as if managers are sitting on huge hordes of cash they must deploy.

Another factor working in favor of a pullback/consolidation rather than a continuing rally is the declining leadership of the Finance sector. The banking index – BKX – could not get out of its own way last week when the market was strong Monday-Thursday; On Friday’s weakness, the banking index cracked, breaking both its 50 day moving average and its up trend. A likely scenario is a pullback of 8-12% in the BKX from Thursday’s 883 close.

We are more constructive about the intermediate temr than the short term. The markets are about to enter their seasonally weakest two months; September and October have historically been very challenging. We expect a continued consolidation of recent gains to occur over the next 60 days.

For those who either missed this past rally, or have additional capital to deploy, any sell off in the near future will provide an advantageous entry point.

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follow up to K&C

Saturday, August 23, 2003 | 07:11 AM

in Media

A few quick thoughts re my first K&C appearence:

First off, what you see on TV and how people are in real life are totally different; Larry Kudlow is an utterly charming man. He stopped into the green room before the show, chatted us up. On the tube, he's comes across as this bombastic, conservative uber-bull -- but its mostly TV persona. He's a pussycat in person, very gracious and friendly.

Liz Ann Sonders is a pro. She's this extremely handsome women, very bright and so articulate. A friend said that if you get nervous, find something else to focus on -- anything other than your own nerves. So I locked onto her smile . . . She has absolutely the most beautiful teeth I've ever seen, just perfect. Made me want to floss in the car on the way home. But my friend was correct -- once I started marvelling over that enamel, I kinda forgot that I had to pee the whole show.

As to the show: I think I mostly got my points across -- I did get cut off a few times -- but not too bad. Despite feeling like I was gonna throw up on the table (which I'm told is prefered on Fox, not CNBC), once I started yapping, the nervousness rapidly faded away (thanks to the teeth!).

Except for the hand gestures, which were a dead give away as to the nerves. It looked like I was conducting an orchestra. And my voice -- when your nervous, the vocal cords tighten up -- so I sounded 2 octaves higher than usual nasal twang (by the end of the show, I was almost back to normal).

LK disagreed with me that white collar jobs have been exported is a new phenomena -- in the past, its been blue collar manufacturing jobs. I also forgot to mention IT, call centers, software programming jobs, but I did mention accounting, law, and medical moving overseas.

After the show, we chatted a little politics -- it was surprising to learn that Kudlow's next book is on -- get this -- JFK. He's a big fan, called Kennedy the original supply sider. Larry's theory is that JFK wouldn't be able to get elected today as a Dem, due to his politics. Interesting stuff. He also had some very good things to say about Bill Clinton. (Really!) Very interesting.

Its funny how off your self perception is. My first thought after the show was relief that I didn't totally blow it. Hey, maybe not great, but at least I didn't embarrass (or piss) myself.

When I watched the show, I was surprised to see that I actually made some sense. During the taping (its live to tape) I felt like a babbling idiot. Waiting for the big hook to come from stage left, cartoon style, and just yank me off stage.

All in all, a fun night.

I'm on Kudlow & Cramer tonite

Friday, August 22, 2003 | 03:32 PM

in Finance | Media

Just a quick head's up -- I'll be publicly embarrassing myself this evening on Kudlow & Cramer, CNBC at 8 and 11pm.

Its just Me, Larry Kudlow (Cramer is on vacation) and Liz Ann Sonders of Schwab -- she's kinda a buy & hold bull, (I'm less sanguine about the market, and I'm a big believer in capital preservation)

It should be fun . . .

Cheers

Return Of The "It" Stock

Friday, August 22, 2003 | 11:10 AM

in Finance | Media

I have a pretty decent quote in this month's Money magazine (September issue).

You can see the web version here: The Return Of The "It" Stock.

The funny thing is that this conversation took place months ago; Even still, the sentiment remains true. Discipline is the key to buying and selling stocks.

When will they learn?

Friday, August 22, 2003 | 10:40 AM

in Finance | Media

Quite the prescient page 1 article in WSJ today: Tech-Stock Surge Brings Back A Hint of the Late-1990s Frenzy.

The article was written before todays INTC news.

At the open, the market gapped up hard, only to give most of it back; The S&P went negative, by 10:30, the Dow gave most of its gains (its plus 12 as I type this). Nasdaq remains the strongest index.

Take at look at the chart from E.S. Browning's article:

I'm reminded of a terrific quote from one of my favorite writers:

"Human beings, who are almost unique in having the ability to learn from the experience of others, are also remarkable for their apparent disinclination to do so." -Douglas Adams

URL:
http://online.wsj.com/article/0,,SB106150301076796100,00.html

Intel asks, "What News Vacuum?"

Friday, August 22, 2003 | 10:06 AM

in Finance

Intel raises revenue guidance for the Q.

So much for the quiet news day; Usually, it takes a little longer to prove me wrong. What was that, sumpthin like an hour and twenty minutes? Cheesh

Dog Days

Friday, August 22, 2003 | 07:11 AM

in Finance

The lazy, hazy days of Summer: There's not a whole lot going on during these low volume, final weeks of August. Traders are on vacation, earnings season is mostly over. We’re in a news vacuum, a "drift and bounce" mode.

The biggest stories this morning are Anna Kournikova's new sports bra, and the new flavor slurpee at 7-11. Talk about your slow news day.

My takeaway from much of the recent economic releases is how every number comes with an *asterisk, every release has some hair on it. Whether this is a coincidence or not I am unprepared to say at this time.

Example 1: Take this week’s and next week’s New jobless claims data with a grain of salt: Claims fell 17,000 to 386,000 for the week ending August 16th; Sounds good, until you realize that this number under reported new claims -- the Northeast was closed late Thursday and all of Friday due to the blackout; By the same token, the report next week will overreported new claims.

What was lost in the jobless discussions was the prior week's jobless claims were revised upwards to (ping!) 403,000. I hasten to point this out only because so many people have proclaimed 400,000 as some kind of a magic number.

Another example, the Philly Fed index of current activity "increased notably this month, from 8.3 in July to 22.1 in August." That's a tripling in a month. What makes this survey number so suspect is:

Despite the pickup in overall activity, shipments, and new orders, more firms than normal scheduled plant shutdowns and production slowdowns over the past several months. Thirty-six percent of the firms indicated that they regularly schedule plant shutdowns or production slowdowns during summer months, but 45 percent indicated they did so this year. For those reporting shutdowns this year, around 40 percent indicated that the production decreases were greater than usual. The most common reasons given for scheduled reductions were demand conditions, plant maintenance, and summer vacations.

Apparently, they are 3 times as active this summer in the Philly are, yet plant idlings are up nearly a third, from 36% to 45%. Fascinating. I wonder how employment is doing in the area:

The purported improvement in manufacturing conditions this month is not yet resulting in increased employment at the region's manufacturing plants. More firms reported declines in employment (20 percent) than reported increases (11 percent), and the current employment index fell from 0.8 in July to -8.7 this month. The diffusion index for the average workweek, however, remained positive for the second consecutive month.

The Philadelphia Story: More activity with 1/3 less plants open and the employment index dropping 8.7%. Now if only we could spread the Philly miracle to the rest of the country . . .

Our 3rd and final *asterisked release is the leading economic indicators (LEI). This composite of ten economic indicators “predicts” economic activity six to nine months in future.

In the hall of mirrors that is Wall Street, we see some of the same datapoints bootstrapping each other. The S&P500, money supply, and the interest-rate spread (10-year Treasury and fed funds rate) are 3 key components of LEI. Money supply and the rate spead (or yield curve) are within the control of the Fed, and Alan & Co. Have been obviously working overtime to get the economy going again. So the LEI is a bit of a reflection of what the Fed hopes will happen, rather than what is actually happening.

As to the SPX, and its predictive value, lets do a quick Rally Comparison.

I direct your attention, dear readers, to the 4 prior rallies since March 2000. These SPX rallies ranged from 29 days to 108 days, with an average run of 70 days. The present move peaked on June 17th, lasting 97 days. The range of these gains were from 21.7% to 28.7%, with the bounces averaging 24.7%.

So I must ask the unpleasant question: What is the predictive value of any rally, given the prior four failures to predict anything?

Post script: I do not want to leave you with the impression that I’m some Uber-Bear.

My analytical model is based on five factors: 1) MacroEconomic data; 2) Technical Trends; 3) Monetary Conditions; 4) Market Sentiment; 5) SPX Valuation.

Each component is over/under weighted depending upon different factors.

Presently, the model shows a mixed picture: 2 positives, 1 negative and 2 mixed data series. Both the technical trend and monetary conditions are positive; Sentiment is now mildly negative (a little too bullish); In March, Sentiment was wildly Bearish, and hence positive.

Mixed components include MacroEconomics (Improving GDP and ISM, terrific Productivity, versus bad employment, low capacity utilization, and very bad debt data) and Valuation (the so-called Fed model is good, while P/E, P/B, P/S are all at historically pricey levels).

We are somewhat overbought at present, so I’m looking for a pullback into Sept/Oct, which we view as a buying opportunity.

I have no idea of where the indices will be year end, but I look at the market as ~12% undervalued based upon forward S&P500 earnings estimates, which are of course, frequently incorrect nonsensical analyst guesstimates.

Of course, this is subject to change -- mostly based on interest rates, employment data and end user demand.

The Beeb asks the rest of the World about U.S.

Thursday, August 21, 2003 | 10:06 PM

in Current Affairs

The BBC hosted a unique global television debate about America's place in the world with 10 other national broadcasters. As part of the What The World Thinks of America programme, 11,000 people in the UK, France, Russia, Indonesia, South Korea, Jordan, Australia, Canada, Israel, Brazil and the US responded to a poll asking their views and opinions on America.

The respondents were asked about their general attitudes towards America and US President George Bush.

The poll also posed a range of other questions on America's foreign policy, military power, cultural influences and economic might.

You can see the results here.

URL:
http://news.bbc.co.uk/1/shared/spl/hi/programmes/wtwta/poll/html/default.stm

Market McGuffin!

Thursday, August 21, 2003 | 11:47 AM

in Film | Finance

Alfred Hitchcock created the McGuffin: A plot device designed to catch the viewer’s attention, and drive the storyline. Every character was concerned with the McGuffin, yet they were just an artificial mechanism, lacking any real relevance. McGuffins were the excuse around which the plot would unfold.

In late August, the Market has its own McGuffins. With so many traders on vacation, these low volume days are lacking in substantive elements to drive trading action. To stem the tide of boredom, the WSJ has identified at least 2 market McGuffins: the strengthening Dollar, and a rise in Commodity prices. The Journal identifies both as possibly derailing the recovery; I believe they are wrong in both cases.

During an economic recovery, commodity prices should increase in response to improving demand. The WSJ’s observation that constrained supply is increasing prices, rather than an increase in demand, is at best misleading. They note Lumber has run into supply problems due to Canadian wildfires, while tight Saudi inventories is keeping Crude over $30 barrel.

I must respectfully disagree. New housing starts have been at record levels for several quarters now; SO have refinancings (altohugh refis are finally slowing). Anecdotally, half the homes in my neighborhood have had recent additions or renovations done - building and renovating homes don't use legos, they use lumber -- and lots of it.

As to Oil, energy demand should pick up as any economy recovers; Given the geopolitical situations in Venezuela, Nigeria and Iraq, Crude at $30/barrel really is not all that bad. Perhaps it’s a side benefit of our mild recovery that Crude has not spiked to closer to $36.

Gold, described by the WSJ as a “traditional sign of nervousness by investors,” is also up. But this is due to the reflation of the economy, thanks to massive Fed stimulus, and a steep yield curve - not supply constraints or fear.

As to the Dollar increasing versus the Euro, its worth noting that the stronger U.S. currency suggests that foreign investors are placing their bets in U.S. dollar assets - and that helps to keep our markets rising. When the dollar was weakening prior to the war, it was due in part to lots of repatriation of overseas assets. That process seems to be reversing, as overseas money pours into the US markets.

We would expect Commodities, Interest Rates, and the Dollar to gradually rise in a healthy, reflating economy. What continues to disturb us is the lack of Job creation, despite record stimulus and other economic improvements. Until the economy stops losing jobs, and starts creating them, we will continue to view this recovery as only “mild.”

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Quote: “"The wealth of nations literally rests upon their ability to sell into the U.S. market, and they guard that jealously. Countries like Japan, Germany and China find it in their national interests that U.S. purchasing power remains strong. Their national prosperity is tied to that, so it should be no surprise that when the dollar gets too low, policy engages to bring the buck back up again." --Mike Norman "The Dollar Rebound"

Fair and Balanced PAC

Wednesday, August 20, 2003 | 05:20 PM

in Politics

Check out the new Fair and Balanced PAC :

Is this guy Franken lucky, or what?

URL:
http://bigpicture.typepad.com/writing/2003/08/fair_and_balanc.html

Dollar, Commodity strength possible danger signal?

Wednesday, August 20, 2003 | 03:17 PM

in Finance

Two interesting articles in today's WSJ discuss how a fragile economic recovery can be derailed by its own success. I find myself in partial agreement (or disagreement) with both.

The first article, "Increases in Commodity Prices Send Mixed Signal on Hopes for Recovery,” is the less scary of the two. The second, "Dollar's Strength Against Euro Could Trim U.S. Corporate Profits," raises serious questions regarding the nascent economic recovery.

The commodity issue is a bit misleading. In the 1st Q '03 for example, the S&P500 had a nice gain in earnings; When we drilled down sector by sector, we learned that a very big part of the overall gains was due to the surge in energy prices. That spike, courtesy of the Iraq War, led to energy having a one time windfall profit. With Energy sector earnings up by an astounding 180% - back that out of the index, and Q1 would have been a disappointing reporting season.

The market had no problem absorbing that news. After a long profit drought, they took it anyway they could.

We recognize that a one time earnings spike was due to unusual circumstances. Even still, its not unreasonable to expect energy demand to pick up when an economy recovers; With the present geopolitical situations -- Venezuala, Nigeria and Iraq -- Crude at $30 barrel seems downright reasonable. Indeed, we should consider ourselves lucky that Crude hasn't spiked closer to $40. Perhaps relatively low Oil prices are a benefit of an anemic recovery.

The Journal also looked at Copper and Lumber price rises; They note the price rise was due to constrained supply rather than an increase in demand. I find it difficult to separate the two -- Prices couldn’t be maintained at such high levels if there wasn’t some sort of increased demand. Still, I see their argument;Its just another datapoint worth watching -- but I would add that the prices of Aluminum, Pulp, Gold, Silver, and Stainless Steel Scrap are just as important.

Note the CRB Index below; Its not exactly on fire. It also suggests an anemic recovery, with the manufacturing sector not yet starting to really gain much traction.

click for larger image

Source: Hays Market Focus

Indeed, the CRB Index has been going up steadily since October 2001, peaking just before the War started in February 2003. For the past 6 months or so, commodities have been mostly going sideways. You can see the CRB Index chart here: http://stockcharts.com/gallery?$CRB; And the Goldman Sachs Industrial Metals Index here: http://stockcharts.com/gallery?$GYX, has a similar chart.

Gold, however, is a special case. The Journal wrote:

Gold, which is traditionally a sign of nervousness by investors, is up 4.4% this year, or $15.40, to $363 a troy ounce on the Comex division of the New York Mercantile Exchange. It sagged $10.50, or 2.9% in June and July but has taken off again this month. Tuesday, it rose $3.10 partly because of disappointing consumer-confidence data.

After several eons of being in a Bear market, Gold has moved up smartly over the past year. The most plausible explanation is the re-inflation of the economy, thanks to massive Fed stimulus; Even the steep yield curve suggests a reinflating economy. I don't find that a negative all by itself.

So much for commodities; Now lets look at the Dollar:

A sustained dollar rise certainly raises questions about the health of the rest of the World's economy; When the buck was weak, the industrial sector had a nice currency based rise in Q2 earnings; Now we are looking at the potential flipside of the issue. The WSJ quoted Derek Halpenny, a currency economist at Bank of Tokyo-Mitsubishi in London: "A significantly stronger dollar would raise concerns over the incipient recovery in the U.S. manufacturing sector." About a third of the net gains in S&P 500 companies was due to currency factors, with revenues up 7.4% versus estimates of 5.5%, according to First Call’s Chuck Hill. (BTW, I keep a list of everyone in finance with an onomatopoeic name, and a currency analyst named "Halpenny" certainly qualifies . . . )

While I agree with that assessment, its worth noting that a stronger U.S. currency means that foreign investors are placing their bets in U.S. dollar assets – and that helps to keep the markets rising. When the dollar was weakening prior to the war, we saw a lot of repatriation of overseas assets.

Gary Shilling, writing in Forbes a few months ago, had the right idea anticipating a dollar rise:

Odds are, though, that the dollar's weakness is only temporary. The U.S. is too strong economically for the dollar to stay down much longer. Besides, whatever problems we face will not be cured by foreign exchange rates . . .
Short run, the dollar should strengthen because global economic weakness abounds, and the U.S. is the best of a bad lot, particularly since most other countries rely on it as a destination for their excess goods and services. And the buck should benefit from the U.S.' superior efficiency over Continental Europe, where socialist regulations, language barriers and labor immobility prevail, and over woebegone Japan.

In the long run America's commanding lead in new tech suggests that the dollar will reign for at least a decade or two. Historically the country with the fastest productivity growth is the center of the action and a magnet for foreign investment. That was true of Britain with its Industrial Revolution in the 1800s. It is true of us now.
-Strong Dollar Ahead, A. Gary Shilling, 07.21.03

Lastly, I don't often find myself agreeing with the frenetic Mike Norman, but he made an astute observation today:

"The wealth of nations literally rests upon their ability to sell into the U.S. market, and they guard that jealously. Consider, for example, China's reluctance to let its currency float, desp