The Big Picture | February 2004

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Music Industry: Whoops, our bad . . .

Sunday, February 29, 2004 | 08:26 AM

Oh, about that whole "Please help us, our industry is being killed by illegal file sharing? Sorry, our bad:"

"With album sales rising and the phenomenal growth of ringtones and legal downloads, plus record-breaking years for merchandising and publishing rights, it seems the death of the music industry has been greatly exaggerated.

According to recent record industry figures, UK sales rose by 4% in the first half of last year. The Publishing Rights Society reported that performance royalty collections (everything but record sales) in 2003 were the highest since records began in 1914.

In the US, Billboard Boxscore reported that the number of live music events worldwide was up by 25% in 2003 (generating £1.2bn in North America alone). Legal sales of downloadable songs topped 2m units a week for the first time last week. Apple's iTunes service has sold more than 30m songs, and has yet to celebrate its first birthday.

Moreover, the astonishing growth of the ringtone market continues to take everyone by surprise. Estimates as to its true size vary widely from a conservative £600,000 from Jupiter Research to a bullish £1.9m by the ARC Group.

And all this is happening in the age of illegal filesharing.

But hey, this doesn't mean we need to roll back all of that anti competitive legislation, do we? Its all right if we keep extending copyright far far beyond the original intent of the constitutional framers, um k? (Hey, we got a business to run).

Don't blame our legislative affairs department -- they were only doing their jobs. OK, maybe they did it a bit too well. Just because we in the music industry played Congress for a bunch of chumps, getting them to do our bidding doesn't mean that any of that needs to be undone. We bought the Congress fair and square, and are entitled to keep our ill gotten legislative plunder.

That whole P2P thing? Also our bad:

"It also looks as if digital downloads are the saviour of the industry rather than their destroyer. As John Ingham, of O2, pointed out during the debate: "When videotape came out, the film industry fought it tooth and nail. Today, video and DVD outstrips cinema."

So, despite years of executives bemoaning the death of the music industry, we are instead in a situation where people are spending more on music than ever, thanks largely to the music being available in more formats than ever.

If anything is in crisis, it is the record industry. The wider music industry is far from it."

Whoops . . .

Source:
Second sight
Sean Dodson
The Guardian Thursday February 26, 2004
http://www.guardian.co.uk/arts/features/story/0,11710,1155713,00.html

Going Critical with Niall Ferguson

Sunday, February 29, 2004 | 07:42 AM

in Books | Finance | Media

Last Summer, while flicking around the dial, I happened across an utterly fascinating Bill Moyers interview on PBS with Niall Ferguson and fellow historian Simon Schama. It was intriguing, and in many was, chilling. What I found so fascinating about it was that these two courtly conservative British scholars were sounding the alarm about the decaying U.S. financial condition, and nobody was paying very much attention.

This was in July 2003. Here it is, 8 months later, and a paper Ferguson (along with Laurence Kotlikoff) published in October 2003 is starting to cause waves. Its discusses many of the same issues which were covered in the PBS interview, only this time, its starting to gain traction amongst economists. Just this week, Arnold Kling of the Library of Economics and Liberty and Alex Tabarrok of Marginal Revolution referenced the Ferguson Kotlikoff paper.

I strongly suggets reading the full text (its only a dozen pages). To put it into richer context, read the Moyers interview with Ferguson and Schama. That frames the overall argument. If you want to read the abridged version, I put a few exercpts up here: The Triumphant Return of the British

Its a fascinating perspective, and one Americans have slowly been coming around to . . .

Sources:
U.S. Power and Fiscal Over reach
National Interest, October 2003
http://econ.bu.edu/kotlikoff/Going%20Critical.pdf.pdf (PDF)

Niall Ferguson, Simon Schama interview
PBS NOW July 18, 2003 transcript
http://www.pbs.org/now/transcript/transcript228_full.html
(about halfway down the page)

Radio Consolidation and CD Sales

Saturday, February 28, 2004 | 01:46 PM

in Music

Yet another comment in our continuing series as to the real reason CD sales have been slowing:

I harp on Radio consolidation for a reason. The table below explains why: Consolidation is part of the music industry's woes. Its yet another reason accounting for the slowing CD sales.

According to Edison Media Research, the most influential media impacting music consumers is radio. Amongst consumers who have purchased a CD in the past 12 months, a whopping 75% said their purchase was influenced by what they heard on the radio. Friends and family? A distant second, at 46%. Music television is third -- at least it was, back when MTV was actually playing music.

Source: emarketer

Consider this part 2 of basic lesson in simple math and economics. Radio is the dominant source impacting consumer purchases. They purchase what they hear broadcast. Due to consolidation, today Radio plays a fewer variety of artists, and airs less songs. Consumers hear less music.

You don't need a spreadsheet to figure out what happens next: Consumers buy less music. This phenomena is independent of any economic weakness we have previously discussed.

If the RIAA were smart -- and if you suspect by now I think they are not, congratulations, you've been paying attention -- they would hire a lobbyist to petition against pretty much everything Clear Channel Radio ever requests of Congress.

Perhaps the music industry may find some small salvation in Satellite Radio. This relatively young industry looks to be beyond the reach of both payola and the moralists at the F.C.C.

Of course, the century is still young, and there's plenty of time for either Satellite Radio, the F.C.C., or even the music industry to screw things up . . .

UPDATE March 2, 2004, 1:56 PM
Following our mention last week of Satellite Radio as some small potential salvation for the industry, comes this article from Monday's WSJ:

"Sirius has always touted its "pure music" philosophy and commercial-free format as an important advantage in the battle for satellite-radio dominance. XM suddenly did a U-turn last month, announcing it would make its music channels commercial-free, too. Starting this week, Sirius and XM each plan to launch local weather and traffic reports for a handful of major metropolitan areas, including New York and Los Angeles."

Amid the FCC's Decency Push, Satellite Radio Is Poised to Grow
Sarah Mcbride and Andy Pasztor,
The Wall Street Journal, March 1, 2004 1:28 a.m. EST
http://online.wsj.com/article/0,,SB107809808894842347,00.html

Good stuff.

What Will Determine the Outcome of the 2004 Election

Friday, February 27, 2004 | 06:59 AM

in Finance | Politics

Simple analysis: the 2004 Presidential election will turn on economic issues -- notably, jobs.

Complex analysis: While a number of other issues will continue to get media play -- the Iraq situation, the National Guard story, Gay Marriage -- I'm not convinced that these are outcome determinative. They will very likely reinforce partisan views, perhaps moblilize one side or the other. They may impact some (but not many) swing voters. Perhaps the negative issues softens up the incumbent up a bit, and distracts his team from pursuing their own media agenda.

But none of these are unequivocably conclusive.

Tactical considerations aside, these are not the strategic issues (and I'm all about strategy) which will swing an election. More likely, these issues offset to some degree the awesome advantage incumbency gives a sitting President. But I remain unconvinced they will swing the election.

On the other hand: Two charts demonstrate where Presidential vulnerability lay. The first, from Thursday's WSJ, shows the increasing job losses in rust belt state Ohio. As much as the Dems would like to blame this on W., its part of a longer term trend going back decades. The past few years do look particularly awful, however:

Source: WSJ

This is not the chart which will swing the election. Manufacturing jobs have been leaving the Mid-West for a long, long time. And while it probably is not a good election strategy to say, "Hey, that's global trade for ya!" -- just ask Greg Mankiw -- this is by no means a new phenomena.

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

Continue reading "What Will Determine the Outcome of the 2004 Election"

Reluctant Buyers on Strike at Nasdaq

Thursday, February 26, 2004 | 03:01 PM

in Finance

Occasionally, we can learn something profound about the nature of rallies by looking at market internals. When combined with other data, this is often revealing. Amongst other things, we may deduce the disposition of large fund equity traders, and whether they are likely to persist in their present behavior of buying or selling.

In particular, it’s possible to garner insight into the behavior of institutional fund managers. Their actions are significant: these large players are responsible for about 75% of the exchange volumes. Its been estimated that the 50 largest funds are responsible for half of all institutional trading. Whatever acuity we may have into the mindset of the professional money manager, it may reveal clues into their future behavior (if only for the short-term). Even the pros can tend towards “herd think” on occasion. The key question is, “are they buyers, sellers or mere spectators?”

A defining characteristic of the rally has been its excellent breadth. This is primarily seen in the advance/decline line, but also revealed through strong up/down volume. Starting mid-January, the character of the rally began changing. Overall volume started falling. By February, the tenor of the markets was notably different than it had been prior.

Consider the following two apparently unrelated metrics: mutual fund inflows, and up/down volume. Both of these have changed conspicuously since late January - not coincidentally when the Nasdaq made its short-term peak. Mutual fund inflows were about $17.5 Billion dollars in December 2003. That inflow spiked to $40.8 Billion dollars during January. Based upon weekly data, fund inflows are back to the sub $20 billion levels for February.

During this same period of weakening inflows, we have also observed a decrease in the day-to-day overall volume - especially on the Nasdaq. In early January, Nasdaq volume was ~1.2 to 1.4 Billion shares daily. That has weakened by 30% to around billion shares a day. This falloff in volume is acutely occurring within the Up Volume.

This suggests to us that Fund managers have gone on a Nasdaq “Buyer’s Strike.” Lighter fund inflows have forced managers to be more selective buyers, steering away from pricey tech stocks, to the benefit of higher quality issues. The new preference is for more profitable, lower P/E, dividend-yielding companies.This change reflects a maturing of the rally, perhaps into something more sustainable over the long run.

We expect the institutions to stay Nasdaq spectators for the immediate future.

This lack of buying, rather than aggressive selling, suggests that this correction is merely that: A short-term interruption within a longer rally. As such, we expect the Nasdaq to find support levels at 2000 and 1860; the SPX at 1125/1070; and the Dow at 10,450 and 9,870.

Chart of the Week: Nasdaq Support

Thursday, February 26, 2004 | 01:39 PM

in Finance

NASDAQ closed right near minor resistance just above 2,020. Secondary and more important resistance for this snap back rally would occur near the 2,050 level.

Nasdaq Composite Daily Chart
Source: Technimentals

NASDAQ reversed course right in and around the 2000 level. However given weak momentum and internals we would watch these levels support levels - closely any violation would exaggerate the current corrective activity.

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Cyclical bull, secular bear market part II

Thursday, February 26, 2004 | 04:44 AM

in Finance

Some more excerpts from Technician Walter Deemer from Barron's.

Q: How do we know this is the lower high for the Nasdaq?

We know this is the high for a couple of reasons. No. 1 is that my good friend Ian McAvity of Deliberations Research has done some work comparing what he calls busted-bubble markets with the Nasdaq. The U.S. market in 1929, for instance, was a busted bubble, as was the gold market at the 1980 peak and the Tokyo market from the 1989 peak. His work shows the initial decline bottoms out approximately 2? years after the top. This time around that gave us a low in late 2002 and early 2003. Typically, there is a rally of 50% to 100% from that low. That rally usually lasts nine to 12 months. In terms of amplitude we are in line with the prior rallies and in terms of time we are a little long in the tooth. I lived through the Nifty-Fifty growth-stock era in the early 'Seventies at Putnam Management. Big growth stocks topped out in 1973, went down tremendously in 1974, rebounded in 1975 and then went essentially nowhere for five to six years, even though in the vast majority of cases the growth in earnings still came through. One of my favorite charts is a long-term chart of McDonald's from the 'Seventies and early 'Eighties. McDonald's in 1973 peaked at approximately 75, went down to 22 in 1974, rebounded to 66 in early 1976 and then went sideways for the next five years. Interestingly, the earnings continued growing throughout that decade at a compounded rate of 25% a year and the company never missed a quarter. Despite all that, by its 1980 low, McDonald's was selling at 10 times trailing 12-months' earnings, compared with selling at 75 times trailing 12 months earnings in 1973.

Q: So has this been a sucker rally?
A: In the case of the Nasdaq. But then step back and look at other areas of the market. The mid-cap and small-cap indexes are making all-time highs. They are in secular bull markets. It is like a sailboat out in New York Harbor. The wind is pushing it one way and the tide is pushing it another way. The wind in this case is the technology stocks going south and the tide in this case is the rest of the market going north. And so the tug of war is between the two forces, and how much exposure they have to the wind versus the tide tells you which way they are going.

Q: How long, then, before a break in the Nasdaq occurs?
A: It could occur at any time. I turned negative on the Nasdaq in early November and it has gone up since then. I like to be early but not that early. The question is, if the Nasdaq goes down what will the rest of the market do? I prefer to observe what unfolds from other than a fully invested position, given the fact that when the Nasdaq goes down on a short-term basis of late, the rest of the market goes down in sympathy. The sectors that have done well -- mid- and small-cap stocks have had sensational advances -- could stage a 10% correction and not put a dent in their uptrends.

Source:
Trend Spotter: An Interview With Walter Deemer
Nasdaq, which has been pacing the current bull run, is poised to tumble, says technician
SANDRA WARD
Barron's, MONDAY, FEBRUARY 23, 2004
http://online.wsj.com/barrons/article/0,,SB107732303981035500,00.html

CD Sales Rise as Economy Recovers

Wednesday, February 25, 2004 | 06:30 AM

in Finance | Music

The economy slows, CD sales slow.
The economy recovers, CD sales recover.

If I am going too fast for you with this complex and sophisticated economic argument, please let me know. I can't make this explanation any simpler, but perhaps I can find some crayons or blocks for you to play with.

The simple truism above is well known to everyone outside of the music industry. For unknown reasons, the music industry and the RIAA act as if they are exempt from the business cycle. Most sectors of the economy suffer during recessions -- the exceptions are "interest-rate sensitive" groups, like Autos, Home, and Durable Goods, which benefit from the falling rates which usually accompany economic slow downs.

As we have been discussing for quite sometime now, sales of discretionary entertainment products like CDs are not an exception.

Despite the high, illegally price-fixed costs of a CD, you don't yet need to take out a mortgage to buy one. So there is simply no reason to believe that CD sales have ever benefited from a broader economic slowdown. Yet judging strictly from the public statements of the recording industry over the past 3 years, one would never have even known that a post tech-bubble recession happened from 2000-2003. They simply never mention it. The New York Times, in an article about the continued uptick in music sales ("CD Sales Rise, but Industry Is Still Wary"), never reaches the issue of the economic weakness during the past three years.

As the economy weakened, so have CD sales:

Annual CD sales

Source: New York Times

Not surprisingly, industry sales are running parallel to the broader economy.

Indeed, in the aftermath of the world's greatest speculative bubble, during a recession and a bear market which saw the Nasdaq lose 80% of its value, the sector only saw a 12% drop in sales during the same period. Its hard to undestand why music executives are wringing their hands over this; Most businesses would have been thrilled with "only" seeing their business off by 12% during this period.

Since then, we have seen an improving economy. Although consumer confidence remains shaky -- mostly due to anemic job growth -- we have seen a general improvement in spending. This has been especially true in the second half of 2003, as the hottest part of the Iraq war passed.

As the economy continued to gather strength, sales of CDs recovered. The last quarter of 2003 saw a marked marked uptick in total album sales.

Continue reading "CD Sales Rise as Economy Recovers"

NYTimes on Job Creation: Yes! No! Maybe!

Tuesday, February 24, 2004 | 11:42 AM

in Finance | Media

In an apparent bid to completely confuse their readers, the NYTimes today has 3 separate stories on lagging job creation and the economic expansion.

The first one, in the Business section, answers the issue with a resounding No:

"Job growth is likely to remain tepid even as the economy moves ahead, according to a survey of professional forecasters by the Federal Reserve Bank of Philadelphia. Indeed, the bank said yesterday, the economists' outlook for employment has grown gloomier even as their predictions of economic expansion are becoming more robust.

Economists have been puzzled for months by the sluggishness of the employment market. The new forecast suggests that they have come to terms with the pattern established in this recovery: fast economic growth being driven by even faster expansion in productivity, with businesses meeting demand by squeezing more output from their current employees instead of hiring more workers."

The second article is decidely more rosy.

Continue reading "NYTimes on Job Creation: Yes! No! Maybe!"

UK Protectionism for Music Retailers

Tuesday, February 24, 2004 | 11:17 AM

in Finance | Music

We mentioned recently that U.K. had record breaking CD sales in '03 -- up 7% year over year ("UK Albums Have a Record Year in 2003").

For a brief moment there, I thought the BPI (British Phonographic Industry) -- the British equivalent of the RIAA -- might have a better understanding of market forces than their foolish U.S. brethren.

[Sigh] . . . I was wrong. Two recent stories from the BBC makes it crystal clear that music execs in the UK suffer from the same sort of dementia associated with late stage syphillis all too common amongst music execs here in the U.S.

The first, "Amazon investigated over CD sales," notes the article:

"The British Phonographic Industry (BPI) is questioning whether Amazon was “selling CDs obtained outside the European Economic Area, contravening UK law.”

A BPI spokesman said: "This is a standard routine. We look at many websites to determine if the product is legitimate. If we find a net retailer is importing music from outside Europe, then they are infringing copyright law."

Many web retailers have built up their businesses by offering CDs considerably cheaper than high street shops. But there is a concern that products are being brought in from areas such as Asia, therefore bypassing import laws.

The second article, CD settlement forces prices up, notes that "An online music seller has been forced to raise its prices after settling out of court with the music industry in a row over imported CDs."

And here we just were pointing out how the UK had a more vibrant and competitive retailing environment for music than the U.S. I guess they just weren't happy with positive year over year sales increases. Let's smother that baby before sales really take off.

MY PREDICTION: U.K. music sales will do worse in 2004 than 2003.

Sources:
Amazon investigated over CD sales
BBC, 8 January, 2004, 17:55 GMT
http://news.bbc.co.uk/1/hi/entertainment/music/3380307.stm

CD settlement forces prices up
BBC, 21 January, 2004, 12:25 GMT
http://news.bbc.co.uk/1/hi/entertainment/music/3416437.stm

Structural Decay

Monday, February 23, 2004 | 02:02 PM

in Finance

We continue to observe weakening pockets in certain sectors of the markets. Momentum continues to fade. In particular, the Nasdaq has diverged away from the mid and small caps, as well as the Dow. While many stocks have been making fresh 52-week highs, the Nasdaq is failing to keep up. This is a bothersome development worth watching closely. The “clear “line in the sand” is the Nasdaq 2000 level. If that’s broken on a closing basis, it will signal the start of a significant corrective action, in our view.

This is especially true, considering the markets are now past the strongest part of their seasonal cycle, with no obvious catalysts in the near future. The next few months may be a bit of a slog. Whether this will be an extended sideways action or the start of something more sinister is not clear, which is why critical support levels are so important.

Several other cracks are starting to appear also. The superb breadth has been noted as one of the “hallmarks of this entire rally.” Even on days when the SPX has been flat, breadth often favored advancers by 2 to 1. Now, Breadth (A/D line) has started to weaken. As the chart nearby shows, cumulative up/down volume is also weakening, reflecting the fading Momentum.

While the markets are not yet in a distribution period, the balance of buyers and sellers is starting to tilt. Since January, average daily volume has also been eroding on the Nasdaq (although not so for the NYSE). Perhaps institutional buyers are losing interest in chasing stocks - especially expensive ones - much higher.

Money flows into equity Mutual Funds were extremely aggressive in January. AMG Data reported that equity funds saw net cash inflows of $40.8 billion in January (71% going to Domestic sectors), similar to the $40 Billion inflow in December 2003. From a contrarian perspective, that is worth noting, as the last time mutual fund inflows were that strong was in the first quarter of 2000. Perhaps you may recall how that did not end well.

When we combine this data with the Nasdaq’s short term January 26 peak, we are left with the conclusion that mutual fund inflows for the month of February are likely to be significantly below those seen in January. Unless this changes, we would expect to see institutional buyers deploying their capital much more cautiously than they have been up to now.

Large institutions account for about 75% of all trading activity. Until fund inflows move back up, the markets could, in our opinion, enter an extended period of consolidation.

Update: February 26, 2004, 12:49 pm
Correction: Mutual fund inflows were $17.5 Billion in December; $40.8 Billion in January; and ithis month, looks to be heading for a sub $20 Billion February. (I committed the cardinal error of using a different data source for January and December . . .) See AMG Data for more info.

Apologies for any incovenience this may have caused.

Chart of the Week: Nasdaq A/D Volume Line

Monday, February 23, 2004 | 12:56 PM

in Finance | Media

Nasdaq’s A/D Volume Line for the Nasdaq Composite broke below the trendline from the start of the rally. This indicator also broke below the 50-day Moving Average for the second time this month. The 50-day moving average has been successfully tested in August, October and December (gray arrows).

Nasdaq A/D Volume Line

Source: Stockcharts

The trend line break and move below the 50-day EMA signal that volume in declining stocks is outpacing volume in advancing stocks. With more fuel powering declining stocks, traders should prepare for a correction or consolidation in the Nasdaq.

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Quote of the Day
"The man who follows the crowd will usually get no further than the crowd. The man who walks alone is likely to find himself in places no one has ever been."
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You're taxes have ALREADY gone up!

Monday, February 23, 2004 | 10:13 AM

in Finance

Yet another taxing article, this one overlooked from Friday's WSJ, "Taxes Divide National, State Republicans."

The article observes that "even as President Bush and his national Republican Party boast of record tax cuts and vow to hold the line against future tax increases, Republicans here and elsewhere are undercutting the election-year message: They are for raising taxes."

Unlike the Federal deficit, state and local goverments cannot run in the red. That leaves them with one of two unpalatable choices: Raise taxes or cut services. Cuts in local services such as schools or police are often felt more keenly than the budget cuts made distantly in Washington, D.C. (unless its something major, like a military base closing or an extension of unemployment benefits). Many states are worried about their bond ratings.

click for larger chart

Surprisingly, "only six states resisted the urge to raise taxes last year, while 15 raised them by more than 2.6%." Anecdotally, I've seen this forst hand, as my real estate taxes have nearly doubled. (Although I live in Nassau County, which is not yet over 4 decades of massive corruption).

"The upshot is that taxes are creating a new divide between Republicans at the national level and those in the states, one that transcends the more familiar ideological rift between ascendant antitaxers and traditional budget-balancers. The federal-state split is particularly awkward given that the party controls both the White House and Congress and, at the same time, more statehouses than ever before.
"At the national level, it's a settled question: Republicans don't raise taxes. Done," says antitax activist Grover Norquist, head of the Washington-based Americans for Tax Reform and a close ally of senior Bush adviser Karl Rove. But the states, he says, are "full of old-line Republicans" and, especially in the recently converted South, former Democrats. Both types, he says, favor bigger government and balanced budgets over lower taxes.

So while we have been talking about the coming Federal tax increases over the next few years, on the state and local levels, the tax increases are already here.

Source:
Taxes Divide National, State Republicans
JACKIE CALMES
WALL STREET JOURNAL, February 20, 2004
http://online.wsj.com/article/0,,SB107724124060934820,00.html

Walter Deemer: cyclical bull, secular bear market?

Monday, February 23, 2004 | 06:36 AM

in Finance

Technician Walter Deemer is the focus of a terrific interview in Barron's this week. Deemer hits the nail on the head in his explanations as to why this is such a challenging environment. (I'll post a few other excerpts later this week).

Here's Deemer's explanation of the cyclical bull, secular bear market:

"The easy part of the cyclical bull market that began either in October 2002 or March 2003, when the market tested the October lows, is just about over, and life gets tougher from here on in. It doesn't mean the bull market is over.

People in 2002 and early 2003 were jumping all over the concept that this was a secular bear market. Defined by me, at least, a secular bear market is one in which a major low is lower than a prior low and a major high is lower than the prior high. In other words a lower low and a lower high. Quite obviously, we are getting that in the Nasdaq because in round numbers it topped out at 5000, went down to 1100, which was lower than the 1998 low, and most people probably would agree it is not going to get back to 5000, and that's the prior high. The Nasdaq is in a secular bear market. But mid-caps and small-caps just made all-time highs, and by definition new all-time highs are not made in secular bear markets.

The S&P is betwixt and between. The Dow Jones Industrials is a little less betwixt and between, because it is more a mirror of the real world and so it is closer to its old high. I've been calling this a secular non-bull market. It is going to be tough for the S&P to get above its 2000 high. So by definition it can't be a bull market. But the secular-bear-market argument means the S&P has to go down and break the 2002 low, and that is anything but a foregone conclusion. To call this a secular bear market may be a little bit too harsh. When somebody says 'secular bear market,' it kind of implies you don't want to be in any stocks anywhere for any reason. The market that we have been in and the market that I believe we are likely to be in for the next 10 years is going to have places that will do well and places that will not do well."

Great take on the complexities of these trifurcated markets: The Nasdaq is rallying within the framework of a broader entrenched bear market, while the Dow is only 12% below its highs. At the same time, small caps are at all time highs.

Tax Increases, part III

Sunday, February 22, 2004 | 09:24 PM

in Finance

On Friday, we discussed the realities of tax rises in the coming years. Also mentioned were some of the Tax Scams which the IRS commissioner said makes us all pay about 15% higher taxes.

Now, even Congress has recognized the fiscal realities. But leadersin Congress have a small problem -- "they are in a dilemma over the budget time frame. If they draft a 10-year plan showing the tax cuts ending, they defy their president's wishes. But a 10-year plan showing the tax cuts continuing would project a huge deficit, which lawmakers do not want to address in an election year."

Hmmm, seems like a tricky problem. So how do our spineless representatives deal with so difficult a conundrum? They don't. They turn instead to a five-year plan that avoids both problems:

"Congressional budget writers next month will likely draft truncated blueprints for tax-and-spending policies that will effectively ignore President Bush's call to extend his tax cuts beyond their 2010 expiration date, House and Senate budget aides said yesterday.

The decision to draft five-year budget plans -- rather than the 10-year plans of recent sessions -- would mean that any effort this year to extend the cuts will take 60 votes to block a Democratic-led filibuster in the 100-member Senate. That is a hurdle that even Republicans say is insurmountable in an election year."

Brace yourself. Reality avoidance ahead!

Source:
Budget Plan May Block Extension of Tax Cuts
Jonathan Weisman
Washington Post Staff Writer
Friday, February 20, 2004; Page A04
http://www.washingtonpost.com/ac2/wp-dyn/A55934-2004Feb19?language=printer

Saved by Manicurists!

Sunday, February 22, 2004 | 07:08 AM

in Finance | Media

Huzzah! We are saved: The economy is being rescued by manicurists!

At least, that is the proposition put forth by Virginia Postrel in the Sunday New York Times Magazine (Essay: "A Prettier Jobs Picture?"). Not just manicurists, but a whole slew of other positions that are bring under counted. Postrel argues, as have so many before her, that the economy is actually vibrantly creating many, many new jobs; Government statistics -- at least the Payroll survey -- is unfortunately under counting them.

The Times balances out this starry eyed view with a more sober questioning of the survey divergence issue in their Business section (Economic View: "Two Tales of American Jobs"). Edmund Andrews discusses the diverging employment counts between the Payroll and Household employment surveys.

Source: Economy.com

In reality, it has long been known that these two surveys diverge, and often dramatically. Fed Chairman Alan Greenspan tried to put this issue to rest recently:

“Unfortunately for the optimists, the Federal Reserve has just thrown cold water on the household data. It concludes that the gloomy payroll data is essentially accurate and that the household survey is probably off base.

"I wish I could say the household survey were the more accurate,'' Alan Greenspan, the Fed chairman, said in his testimony at a House hearing on Feb. 11. "Everything we've looked at suggests that it's the payroll data which are the series which you have to follow.''

This is not the first time the Fed has looked at the dichotomy. The NY Fed analyzed the issue in 1999 ("Explaining the Recent Divergence in Payroll and Household Employment Growth"). Their conclusion was that the household survey can indeed under count employment numbers -- but not necessarily in a good way. The champions of the Household survey (i.e., Postrel et. al.) overlook an important distinction between the two surveys -- one measures jobs, while the other measures employed persons: The New York Fed noted why this matters:

"The employment increases reported in the Payroll survey are likely to exceed those reported in the Household survey because the payroll survey counts the number of jobs in the economy while the household survey counts the number of employed people. Since many workers hold more than one job, the payroll survey would be expected to yield higher estimates of employment" (emphasis added).

You read that correctly. It is not that the Payroll survey under counts employment -- according to the NY Fed, it over counts it.

Proponents of the Household survey overlook several other statistical niceties. The Household survey is based upon 50,000 people, and then extrapolated to fit a nation with 293 million people. Tiny errors in the original data run get dramatically magnified in the process. Now, compare that methodology with the monthly Payroll records of half a million businesses, which employ 50 million people. Its not too hard to see why Greenie relies on the latter and not the former.

Then there's the different data collection methodologies employed -- the Household is a "self reporting survey," whereas Payroll employs an objective corporate data collection method. Self reporting surveys are notoriously unreliable. Many people exaggerate, if not outright lie. Whenever you ask personal questions about matters which impact pride and self esteem, you create a naturally unreliable process. As Thomas Gilovich wrote in "How We Know What Isn't So,"

"One of the most documented findings in psychology is that the average person purports to believe extremely flattering things about him or herself -- beliefs that do not stand up to objective analysis. For example, a large majority of the general public think they are more intelligent, more fair minded, less prejudiced, and more skilled behind the wheel of an automobile than the average person. This phenomena is so reliable and ubiquitous that it has come to be known as the "Lake Wobegone effect," after Garrison Keillor's fictional community where the women are strong, the men are good looking, and all the children are above average."

This last issue ties into our own observations of the "so-called self-employed consultant." Many people do start solo practices and consultancies which then scale up into legitimate and self sustaining profitable businesses. Indeed, many of the Big Picture's friends in both programming and graphic design transitioned "between jobs" as consultants. I wish to emphasize how important these people are to both the entrepreneurial environment and the broader economy as a whole. Gregory Mankiw, chairman of the White House Council of Economic Advisers, has noted a rise in the "self-employed workers," saying the "extent of self-employment has changed as the economy has changed.'' However, we here at the Big Picture have noted the obvious discrepancy this creates: the sad tale of the so-called Self-Employed Work-at-Home Contractor. Simply stated, there are many so-called contractors who are simply unemployed. Its far more palatable to friends and families -- and potential employers -- to adopt the persona of the consultant.

I hasten to add that these consultants were not buying homes or cars or other big ticket items, simply because their cash flow was either insufficient or just too erratic. Try getting a mortgage when you tell the bank you are a "Self-Employed Work-at-Home Contractor." (Good luck!)

Then, there is the small reality of starting a new business: They tend to fail, and in large numbers. Indeed, the majority of all new businesses are fighting an uphill battle. That's not saying that people shouldn't try, nor does it by any means denigrate those who create from scratch something vibrant and profitible. It is merely a recognition that many -- indeed most -- of these new business won''t be around a year from now. Hey, that's capitalism, where only the fittest survive.

The Household survey "has not historically been a better leading indicator of job growth," noted Mark Gongloff in an article last October ("The job market: a matter of opinion"). He cited a recent study by Anthony Chan, chief economist at Banc One Investment Advisors:

"According to his research, in the first 21 months of economic recoveries since the 1950s, the payroll survey showed average job growth of about 3.59 million, while the household survey showed job growth of just 3.09 million. In other words, Chan said, the payroll survey usually does a better job of picking up a labor-market rebound.

"This clearly shows that relying on the household survey's employment measure as a barometer of labor market conditions is not only risky, but also an incorrect assumption," Chan said.

What's more, the household survey employment numbers include a "1 million-job jump from December 2002 to January 2003 that was simply the result of Labor Department adjustments in number-crunching. As a result, this year's employment data aren't comparable to last year's."

Finally, we must beware of those bearing an agenda. Gongloff noted that many of those advocating relying on the Household survey "seem to have a political agenda, since they're tied to conservative causes or have been vocal proponents of President Bush's economic policies."

Source: CNN/Money

Final Thoughts
I have on several on several occasions noted my annoyance with the "massaging of data, the presenting of false projections, the politicizing of matters best left unpoliticized." I do not read Postrel that often, so I will reserve my final judgement until I have seen a greater sample of her work. That said, this article does not bode well for either her economic insight or analytical acumen.

Her arguments that the BLS undercounts jobs in professions such as stone cutting (granite kitchen counter tops) and manicurists and massage therapists and gardeners and graphic designers, as well as many other categories, may even be right. The problem is that the BLS has always under counted these jobs. Always.

What is missing from the advocates of the Household survey is a persuasive explanation as to why this is a new phenomena. Show me that these are brand new jobs, created during the past 3 years. And to be fair, there is some small support for that view.

But consider the tortured path we must take to rely upon that conclusion: anecdotal evidence of historically under counted jobs, which we then must believe on faith are being created anew. This, despite the Fed chair saying this data source is not to be strongly relied upon. Not only must we use the old saw "the data must be bad" to prove the point -- but in this case, its not just that the data which is bad -- we must also ignore the data which the Fed notes as "more accurate"

OK, rely on the bad stuff, discard the good stuff, overly rely upon anecdotal evidence, and make several unsupported leaps of faith. Forgive my skepticism, but I tend to get suspicious when a flagellating argument runs counter to everyday ordinary experiences.

As we have been saying for some time now, this has been a very unusual recovery. Structural changes in the job markets caused by post bubble over capacity, productivity gains, and outsourcing are additional reasons for these changes. This is significant for the macro economy, the labor market, and quite possibly the 2004 Presidential Elections.

Pretty Job Picture? No, not really. Household survey advocates need to take off their beer goggles . . .

UPDATE: 02/22/04 2:46PM
Prof Brad DeLong notes the methods used to collect the data in the three (not two) surveys: Don't forget the "Survey of Occupations" in addition to the Household and the Payroll Surveys.

"There is no reason to think that the totals of nationwide employment--which are derived from these second and third of these data sources--are substantial under counts because of any significant "bias against small enterprises and self-employment"

Sources:
A Prettier Jobs Picture?
PDF version
Virginia Postrel
N.Y. Times, February 22, 2004
http://www.nytimes.com/2004/02/22/magazine/22ESSAY.html

Two Tales of American Jobs
Edmund L. Andrews
N.Y. Times, February 22, 2004
http://www.nytimes.com/2004/02/22/business/yourmoney/22view.html

How We Know What Isn't So
Thomas Gilovich, 1991
pages 76 -77

The job market: a matter of opinion
Mark Gongloff
CNN/Money, October 2, 2003: 3:01 PM EDT
http://money.cnn.com/2003/10/02/news/economy/job_walkup/

Explaining the Recent Divergence in Payroll and Household Employment Growth
http://www.ny.frb.org/research/current_issues/ci5-16.pdf

UK Albums Have a Record Year in 2003 (yet the U.S. is moribund; Why?)

Saturday, February 21, 2004 | 07:18 AM

in Finance | Music

Here's an interesting little factoid you may not have noticed: In 2003, the number of artist albums sold in the UK in 2003 rose more than 7% to almost 121 million.

The UK music industry magazine "Music Week" shows artist albums - and that excludes compilation albums - sold 120,968,891 in 2003.

That total is a rise of 7.6% from the previous year, according to the BBC.

Which raises a question: Why are CD sales in the UK doing so well, while the U.S. music industry has seen continual erosion of music sales since the late 90s?

Here are the 3 key differences between the U.S. and U.K. music industries:

• Radio concentration: The UK does not have the same degree of ownership concentration that is in the U.S. There is no dominant player like ClearChannel Communications in Great Britain;

•Stronger Economy: The U.K. did not suffer the same degree of post bubble effects as did the U.S. Indeed, the British Pound is up dramatically against the U.S. Dollar. They simply did not have nearly as severe a downturn. Hence, their consumers did not cut back on purchases the way we did in the States;

• More Creative Musical Environment: Call it a lack of "insipid boy bands." The British have always had a terrficially vibrant musical scene: From Beatlemania to the British Invasion to the Clash and the punk sound, the British Isles have produced as vastly disproportionate amount of great music relative to their size and population. And, with a much lower ownership concentration of radio stations, which must compete with an extensive public broadcasting system (the Beeb), there is a rich and diverse set of offerings over the public airwaves;

The bottom line is that the U.S. music market is suffering from infrastruture issues which are negatively impacting record sales. Some of it is broader macro economic factors; Parts are legislatively based -- allowing ever increasing concentration of radio station ownership reduces the amount of music which gets heard by the CD buying population.

Some if it is just those goddamned insipid boy bands . . .

Source:
Albums have a record year in 2003
By Stephen Dowling
BBC News, Wednesday, 14 January, 2004, 13:06 GMT
http://news.bbc.co.uk/1/hi/entertainment/music/3392825.stm

Predicting tax increases AND higher interest rates

Friday, February 20, 2004 | 03:49 PM

in Finance

Jon Burnham, portfolio manager (Burnham Financial Group) is on CNBC this instant, predicting tax raises and higher interest rates post election -- regardless of who wins in November.

Don't ya love being ahead of the curve?

Tax Increases Ahead

Friday, February 20, 2004 | 11:01 AM

in Finance | Politics

Today, apparently, is Taxing Friday.

Since linking to a WSJ article yesterday ("View From the Right: Tax Increases Ahead"), several readers have written asking me to republish the full piece.

I do not imagine the WSJ attorneys would take too kindly to that; However, I can (under Fair Use laws) include a short excerpt:

"There are deep differences between right and left on how big the federal government should be and how it should tax the people. And then there are pesky fiscal facts that can't be wished away. It's not just tax-and-spend liberals and Democratic presidential candidates who see something unsustainable about President Bush's tax-less, spend-more budgets. It's also some analysts on the right.

Mr. Bartlett, 52 years old, is one. He spent a decade on Republican staffs on Capitol Hill -- including a stint helping then-Rep. Jack Kemp of New York draft a precursor to the 1981 Reagan tax cut. He worked at the conservative Heritage Foundation think tank. He worked in the Reagan White House and later in the first Bush Treasury, where he was a quiet dissenter when it backed deficit-shrinking tax increases. He now writes commentary twice a week from a perch at the National Center for Policy Analysis, another conservative think tank.

Mr. Bartlett hasn't lost his supply-side faith. He still believes lower taxes are keys to a strong economy. "I'm not advocating tax increases," Mr. Bartlett says, a bit defensively. "I'm predicting them."

Good stuff. Its always better to face reality than to just wish it away. Hope and prayer are not legitimate investment strategies.

Here's another surprising angle on this issue:

"Republicans will find cutting spending hard. They don't want to cut spending on defense or homeland security. They don't have the courage to significantly restrain spending on Medicare or Social Security. "The stage hasn't been set for it, and they are sensitive to being cast as the bad guys," Mr. Bartlett says. Everything else, from federal highway aid to rangers at Yellowstone, accounts for less than $1 of every $5 the government spends. The notion that tax cuts will "starve the beast" of government by forcing spending cuts simply has been proved false, Mr. Bartlett says.

So his bet for next year or the year after: A tax increase of more than $100 billion a year. That's a lot of money. Rolling back the Bush tax cuts for taxpayers with incomes above $200,000, as Democratic presidential front-runner Sen. John Kerry proposes, yields just $25 billion a year.

There's ample precedent. Ronald Reagan agreed to tax increases in almost every year after his 1981 tax cut. "Those who think a Republican Congress will never raise taxes, take a look in Virginia where a Republican legislature -- a group that is probably more conservative than the Republican Congress -- is raising taxes," Mr. Bartlett says."

Not a pretty thought, but probably realistic.

If anyone desperately wants to see the full article, I can probably legally email it to a limited number of people (if I done manually). Send your requests to: britholtz at maxim grp dot com.

Source: