The Big Picture | October 2004

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Election Outcome Overshadowed by Structural Concerns

Saturday, October 30, 2004 | 07:10 AM

The election of your lifetime.

That's what the vote on November 2nd vote has been called. It's probably a fair description in many, many policy areas. The two major party nominees for President differ on a host of issues, ranging from international affairs to economic strategy to tax policy. Even on basic issues of science – stem cell research (biology), global warming (chemistry), missile-defense (physics) – there are huge distinctions between the Republican and Democratic candidates.

When it comes to the capital markets, conventional wisdom assumes that the outcome of this election will matter a great deal.

I disagree.

Why? There are simply far too many structural factors that will hamstring whoever assume the Office of Presidency on January 20, 2005. The post-bubble environment has problems that will likely be cured only by the passage of time. Large budget deficits will continue, as will the ongoing weakness of the dollar. The economy is likely to grow, albeit at only a very modest pace, for the foreseeable future.

Further, U.S. presidents have far less influence over the macro-environment than most believe. The United States economy is a multi-trillion dollar behemoth, and its business cycle is not readily changed by minor – or even major – course corrections.

Consider the environment the president-elect steps into: With the 2003 stimulus fading, the economic expansion has already started to slow down. The trend of the past four quarters of GDP growth is revealing: 7.4% in the third quarter of 2003, 4.2% in the fourth quarter, 4.5% in the first quarter of 2004, and 3.3% in the second quarter. The end of the softspot was supposed to be 2004's 3rd Quarter GDP -- that came in below consensus, at a (disappointing) 3.7%.

This movement is even more pronounced if we back out government spending on military and wartime explanations.

Unless another trillion-dollar stimulus package is forthcoming – and given the huge deficit, that is highly doubtful – economic growth will be in the 2.5% to 3% range.

And that's without factoring in the impact of $50-plus-a-barrel crude.

Continue reading "Election Outcome Overshadowed by Structural Concerns"

Deficit Issues

Saturday, October 30, 2004 | 06:09 AM

in Economy

Ben Sargent via Yahoo!

Graphic courtesy Ben Sargent

Sargent makes this a partisan issue by juxtaposing George W. Bush's campaign rhetoric against his budgetary track record. However, as the post that follows this will make fairly clear, the deficit issue (as well as other structural problems) will affect whoever is sworn in as President on January 20th, 2005.

Last of the Swing States?

Friday, October 29, 2004 | 11:54 AM

in Politics

wsj_format_logo

Click for larger graphic

Graphic courtesy WSJ

One of the last of the swing state polls

Consolidation in Financial Media

Friday, October 29, 2004 | 05:57 AM

in Finance | Media

Here's two news stories you may have overlooked this week:

CNN will shut down its struggling CNNfn financial news network in mid-December, giving up its attempt after nine years to compete in a market dominated by CNBC. CNNfn was believed to be marginally profitable.

CNNfn only reaches 30 million homes (out of a possible 110 million). Its deal with Sat provider DirecTV was about to expire, and Murdoch/Fox is rumored to be considering a challenge to CNBC. In that battle, CNNfn would have been collateral damage.

On the internet side, CBS MarketWatch has been put up for sale by MarketWatch. They hope to get ~$400 million for the company. Possible suitors rumored to be bidding are CBS (Viacom) Dow Jones/ WSJ, New York Times Company, the Financial Times Group, as well as Yahoo.

I wish I could say this is a contrary indicator suggesting a long term bottom in the stock market. Instead, I suspect it is merely a sign of additional consolidation in the increasingly competitive media area, as dead tree editions look to bulk up their internet offerings.

Sources:
Financial network to end after nine years
Seattle Times
Friday, October 29, 2004
http://seattletimes.nwsource.com/html/businesstechnology/2002076026_bizbriefs29.html

MarketWatch, Web News Site, Is Up for Sale
Andrew Ross Sorkin
NY Times, October 28, 2004
http://www.nytimes.com/2004/10/28/business/media/28net.html

Big Biz Bails on Bush?

Thursday, October 28, 2004 | 07:20 AM

in Politics

"If President Bush loses on Nov. 2, the finger-pointing among Republicans will begin immediately. Some may ask whether corporate America did its part. "The business community has to recognize that the public-policy arena is a very competitive place," says Mr. Fuller. "If you aren't going to participate fully, you aren't going to get results that are very satisfactory."

Indeed. We continue to observe a number of demographic groups slipping from the incumbent's grasp: Cubans, Arab Americans, Hispanics, Soccer moms -- even conservative states such as Coors hometown, Colorado, is in the swing column.

How did the GOP let these traditional strongholds slip from their grasp? Alan Murray of the WSJ notes the deafening silence from big business as one possible factor:

"President Bush holds a lead of less than three percentage points among "likely voters," according to an average of recent national polls. Some Republican strategists worry that isn't enough to offset a potent mix of antiwar warriors, anticapitalism capitalists and organized labor working night and day to turn out legions of new voters.

The counterbalance to the [left leaning 527 donors] of course, should be the hordes of American business leaders who support capitalism and limited government, who have benefited handsomely from the policies of this administration and who would like to see George Bush re-elected. Where are they? Surprisingly quiet.

It is one of the great ironies of Election 2004. Mr. Bush's opponents attack him daily for being the tool of big business. But big business is hardly heard."

Why is that so? Say what you will about the colder aspects of the markets, but at its heart, modern capitalism is a meritocracy. Why would the business community endorse an administration that by all measures appears to be bumbling incompetants?

Maybe its the economy. After all, the recovery has been feeble, and executives are loathe to put their quarterly numbers at risk. But I doubt that's it. Corporate America's balance sheet is in the best condition it been for years. Debt has been refinanced, profitibility is very high.

So what then? So far, we have heard that the new campaign finance rules have kept corporations sidelined to some extent. Others blame the trial lawyers, and even Eliot Spitzer (where are the Law & Order Republicans when you need them?)

Perhaps there's another reason: It's just bad business publicly backing Bush.

Look at the Sinclair debacle. Shareholders punished the stock. Fund managers screamed at their self-indulgent politicizing of shareholders assets. Calls for an FCC investigation have been made, shareholders law suits have been filed, and there is a grassroots movement to publicly challenge their licenses the next time they come up for renewal.

The bottom line is, well, the bottom line.

And it appears in an evenly divided nation, alienating exactly half of your clientele is simply bad business.

UPDATE: October 28, 2004 10:04
Just noticed that The New York Times has a related story: Private Political Donations Can Carry a Business Price
More of the same . . .

Sources:
Cubans, Hispanics, Arabs: Are Key Demographic Shifting Party Affiliation?
Barry Ritholtz
The Big Picture, Thursday, October 21, 2004
http://bigpicture.typepad.com/comments/2004/10/arabs_hispanics.html

Wary Big Business Is Loath to Speak On Bush's Behalf
By Alan Murray
The Wall Street Journal, October?26,?2004;?Page?A4
http://online.wsj.com/article/0,,SB109874306239655206,00.html

Private Political Donations Can Carry a Business Price
Glen Justice
New York Times, October 28, 2004
http://www.nytimes.com/2004/10/28/politics/campaign/28donor.html

Can Colorado Swing ?

Wednesday, October 27, 2004 | 11:19 PM

in Politics

wsj_format_logo

Can Colorado swing blue? That's an issue hardly anyone thought would be up in the air a week before the election. Bush appeals to "rank-and-file conservatives" in Colorado, which he won by nine points in 2000 (51%, to Al Gore's 42% and Ralph Nader's 5%).

Which, as the WSJ point out, only means nothing is certain:

Wsj_colorado_10252004 "There are red states and blue this fall, and then there is Colorado: a mile-high brew all its own, where just a few political inches could be huge in the struggle for Congress as well as the White House.

President Bush is ahead in polls here, but by small enough margins that he returned again yesterday for a rally in Greeley. Sen. John Kerry drew thousands in Pueblo on Saturday, and Democrats hope for a record turnout by Hispanic voters, drawn by a remarkable pairing of fifth-generation Mexican-American brothers who are running for Congress as Democrats.

Republicans agree they have dominated Colorado in recent years by making Democrats look risky. The big question now is whether today's real-life problems of Iraq, rising health-care costs, dwindling water supplies and a state fiscal crisis are frightening enough that voters may be willing to take a chance on the party out of power.

All that makes Colorado a potential swing state at every level in next week's election. "People have forgotten that this is not a partisan state. It is not an ideological state," says Bill Armstrong, a former two-term Republican senator from Colorado. "So while people say Republicans are losing their grip, the truth is they never had a grip."

Republicans have clear advantages: They enjoy a 178,000 edge over Democrats among registered voters and a proven ability to maximize turnout. "Fight Terrorism, Vote Republican" is a favorite slogan. Party ads on Christian radio stations include a toll-free number to facilitate early voting, which is attracting record numbers this year.

But some Republicans complain that their party may have pushed to the limits its antitax and socially conservative ideology. The second especially rubs against a Western libertarian streak on issues such as gay rights and stem-cell research."

Question: Is Colorado really in play? I never would have surmised that 6 months ago. Here's a quote that provides some good insight as to why this is likely so:

"I'm a 1964 Goldwater Republican and I'm not happy where the neo-Republicans are taking us," says Mark Larson, a state legislator from Cortez. In fact, the party's leader, Gov. Bill Owens, is no longer the partisan powerhouse he once was and has been hurt by his well-publicized separation from his wife. The brightest new political star may be Denver Mayor John Hickenlooper, a Democratic businessman who cultivates a brand of nonpartisan politics and a friendship with the Republican governor."

Fascinating stuff.

Source:
Colorado Has Swing Potential
Democrats Seek Inroads in Races That May Have a Broad Impact
By DAVID ROGERS
THE WALL STREET JOURNAL
October 26, 2004; Page A4
http://online.wsj.com/article/0,,SB109874604703455299,00.html

Aggregate Demand versus Job-Creation

Wednesday, October 27, 2004 | 07:21 AM

in Economy

Over the past year, we have extensively discussed how important job creation was in order for an economic recovery or expansion to keep running. This is especially true now that the leading economic indicators have decayed for 4 consecutive months.

Paul McCulley of bond giant PIMCO waxes eloquent on why we continue to see mediocre job creation, despite the past years improving demand side of the equation:

Click for larger graphic

Graphic courtesy PIMCO

McCulley:

"Despite aggressive and massive easing in 2001 - from 6½% to 1¾% for Fed funds - monetary stimulus was simply not getting sufficient "traction," notably in fostering job creation and tempering disinflation expectations. The record of history said that such massive easing should be "working." And, indeed, it was in stimulating aggregate demand, notably in the household sector. But there was a large slip between the aggregate demand cup and the job-creating lip.

Corporate America just wasn’t in the mood to meet indications of rising demand with more job supply, choosing instead to meet rising demand by goosing the productivity of the existing work force. Boosting profits by exploiting operating leverage is, of course, a time-honored tradition of capitalists. But this time ‘round, would-be employers had an overriding reason to exploit operating leverage: a concurrent need to reduce financial leverage.

This was particularly the case in 2002, in the wake of revelations that there were crooks - yes, crooks! - among the capitalist class, who had been blowing heinous smoke up the backsides of both stock and bond holders alike. Stock holders took their losses abjectly. But corporate bond holders didn’t, blowing out corporate bond spreads and de facto refusing to finance or re-finance any but highest grade issuers. Simply put, corporate bond investors demanded that Corporate America check into the Betty Ford Center for Balance Sheet Rehabilitation, most urgently those on the rating cusp between investment grade and junk.

McCulley has consistently had a level headed and insightful view of the economy and the Fed. He's worth adding as a regular monthly read . . .

Source:
Managing It Forward
Paul McCulley, Managing Director
PIMCO, October 2004
http://www.pimco.com/LeftNav/Late+Breaking+Commentary/FF/2004/FF_Oct_04.htm

Frankenstein Economy Revisited

Tuesday, October 26, 2004 | 03:39 PM

in Economy

October’s reputation as one of the year’s scariest months appears well deserved this year. The frights began piling up weeks in advance of Halloween: Record oil prices, weak corporate guidance, disappointing pre-announcements, the Insurance bid-rigging scandal and a spate of mostly mixed economic reports have been pressuring the indices. This has driven the Dow down to the lowest point of the year.

But this low has set the markets up for the seasonal rally. We have observed that November to January each year tends to be amongst the strongest 3-month periods, while the 6 months from Halloween until May Day has a solid bullish bias. For the intermediate term, we advise investors to think about starting to deploy capital on the long side.

When considering the longer-term, however, we are quite mindful of the Presidential Cycle (mentioned previously). This 4-year cycle tends to see market’s bottom in the 2nd year of a Presidential term, and peak in the 4th year. That proved true for the present 4-year cycle, with lows in October ‘02 and peaks in January ’04. Were that to replay itself out, as we expect it will, 2005 will be the precursor to a significant correction. That is likely to start sometime in the second half of ‘05, and reach its denouement in 2006.

How will that likely come about? A year ago this week, we discussed our fears of the “Frankenstein Economy.” The lifeless, post-bubble financial system was reanimated through massive doses of stimulus. Historical levels of tax cuts, interest rate cuts, increased monetary supply, devalued currency, and deficit spending jolted the economy back to life - at least temporarily.

We may be witnessing the nightmare scenario we feared most last year coming to pass. Colossal though the stimulus was, it could not defeat the immutable business cycle. Recent data points to an expansion that is slowing, mostly due to the lack of both job creation and capital spending. With the stimulus behind us, we continue to see its effects waning. The LEI has dropped for 3 consecutive months, and that bodes poorly for the mid-2005.

Without some significant change in the economic climate, we expect recent trends to continue: a feeble economic expansion with high oil prices ($40-50), modest job creation, and anemic Capital Expenditures.

The 2002-04 stimulus has been extraordinary; Yet the economy remains recalcitrant. What unknown harm awaits when the failed reanimation - Frankenstein’s body, now deceased again - slumps back onto the slab?

Chart of the Week: Dow Industrials (Feb - Oct 2004)

Tuesday, October 26, 2004 | 03:22 PM

in Finance

The Dow continues to trade in its downwards channel. As the chart below shows, each cyclical top has been followed by a lower low. The key as to whether this pattern can be broken would be a higher low (in circle with “?”), possibly leading to a break of the upper downtrend line.

Dow Industrials (Feb - Oct 2004)
click for larger chart

Source: Arms Advisory

The sharp downward move has penetrated the lows of late September. The vertical blue lines indicate the very regular cyclicality of the tops. The ellipses are indicating the bottom of each cycle.

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Quote of the Day:
The test of success is not what you do when you are on top. Success is how high you bounce when you hit bottom.
-General George S. Patton

Cavuto on Business: (10/26/04)

Tuesday, October 26, 2004 | 01:01 PM

in Media

A heads up: I'll be appearing on on Fox today (Cavuto on Business @ 4:10pm EST).

It’s a special panel on the Election and the markets – what happens in the event of a “no decision” on November 3rd, etc.

In addition to Neil, I'll be on with Poli Sci Professor Costas Panagopoulos from Yeshiva University and Don Luskin of Trend Macro Analytics.

As always, I am the moderate, there as the voice of reason. I cannot say I know the Poli Sci Professor's work, but I assume (based on his CV) he is left leaning; Don has long been right leaning (to say the least).

Should be fun . . .

Carnival of the Capitalists - October 25 2004

Monday, October 25, 2004 | 10:47 AM

in Economy | Finance | Web/Tech | Weblogs

Hello and welcome to this week's Carnival of the Capitalists! We have an exciting and wide ranging line up, which I have tried to categorize (a mostly futile exercise, I might add) for your reading pleasure.

So with no further adieu, I present this week's entrants:
If I missed your trackback, email it to thebigpicture -at- optonline -dot- net.

Internet

Russell Buckley of mobile-weblog.com wonders what the next 10 years on the internet might hold in store:
Sorry I missed your Birthday

"October 17th was the day that the web was officially born just 10 years ago. That day a company called Spry (later CompuServe then AOL) introduced a product called "Internet in a Box." For the first time, you could trot down to a store, buy a software package, take it home and have everything you needed to connect to the Internet and the World Wide Web . . ."

Giselle A. Tesoro of OSCommerce Experts ponders the "Well-Formed Web Forms" and advises

"How to get your customers to fill you in – with the information you need in forms to be filled up. Let them form a good impression of you and your store – give them forms with function"

Wayne Hurlbert of Blog Business World thinking along similar lines, advises on Converting Visitors into Customers

"The frustration for Johnny was obvious. His website had strong visitor traffic numbers, he thought. Johnny’s site offered a complete line of very good, and highly reputable products. He thought he had set up an acceptable way to buy them online.

There were plenty of visitors arriving daily to make any online business a major success. The problem for Johnny was, despite the large number of people visiting his site, not many of them bought his products."

Last of the internet series is Lipsticking's Yvonne DiVita's entry: Jane Encourages Small Businesses

Blogs are becoming the "topic" of the day, all over the web, it seems. Jane
cannot open any newsletter, magazine, ezine, or even regular email, without
a question or comment on blogging present in the content.

We are delighted to see our favorite form of communication getting the
attention it deserves, but... the true purpose of web-logging is getting
lost in the rhetoric bouncing around the net.

Incidentally Yvonne gets a bonus mention for "Dickless Marketing: Smart Marketing to Women Online," -- I can't comment on how effective that title may be -- but it sure got my attention.

Alan Greenspan & the Federal Reserve

In my own entry (The Big Picture) to CotC this week, I advise investors to Ignore the Cheerleader-in-Chief

Rawdon Adams of Capital Chronicle discusses Mr. Greenspan's Oil Choice

Continue reading "Carnival of the Capitalists - October 25 2004"

Half a Million Hits!

Sunday, October 24, 2004 | 07:44 PM

in Weblogs

Wow! Check that out . . .

That's just for the Big Picture -- Truly astounding.

UPDATE: October 25, 2004 10:12 am
A big percentage of traffic -- at least as of late -- has been Google searches on the phrase "Projected Electoral College Results." That tells me there is an inordinately high amount of interest in this election. . .

LEI softens 4th straight month

Saturday, October 23, 2004 | 06:24 AM

in Finance

wsj_format_logo

The Conference Board's composite index of leading indicators "slipped" in September for the fourth straight month, signaling that the economic soft patch will persist.

The fall of 0.1% to a reading of 115.6 in September, came after August's 0.3% decline. Economists believe that three consecutive declines in the index typically signal a oncoming recession. (The counter argument is that small decreases may not suggest an imminent recession).

WSJ:

"While the leading index is not yet signaling a downturn, the growth rate of the leading index has slowed," said Ken Goldstein, an economist with the Conference Board. Economic growth should continue, but more slowly than expected, he added. The index is designed to predict the economy's path during the next three to six months.

Oil prices have had a negative impact on the economy, but not enough to produce a broad spike in inflation. Recent hurricanes may also have held down economic activity, the Conference Board said.

Four of the 10 components of the leading index increased in September, including the real money supply, stock prices, orders for nondefense plant and equipment, and building permits.

Among the negatives in September were slower vendor deliveries, a flattening bond-yield curve, a shorter factory workweek and higher initial claims for jobless benefits.

There is some small irony in this: Before President George W. Bush was sworn into office, his economic team had already been talking down the stock market and economy as "fragile" and "recessionary." That was a smart strategy, as it gave them a plausible explanation for future poor economic performance and a causa belli, so to speak, for the tax cuts. (Yes, I know that's not what it means -- but since there was no true basis for war, let's just apply the phrase to the tax cut).

If the incumbent is defeated, and John F. Kerry is elected, look for a similar jawboning between November 2nd and January 20th. The goals is to pressure Congress into signing off on many of the planned economic reforms during the Honeymoon period . . .

Sources:
Leading Indicators Fell Last Month
Decline is Fourth in a Row; Hurricanes, High Oil Prices Slowed Growth of Economy
By Michael Schroeder, Joseph Rebello
The Wall Street Journal
October22,2004;PageA2
http://online.wsj.com/article/0,,SB109836163427551746,00.html

Spitzer goes after the Music Industry

Friday, October 22, 2004 | 06:32 AM

in Finance | Music

It must be my birthday or something: First Wal-Mart pushes for $10 CDs, and then Eliot Spitzer takes on our favorite industries: Music labels and Radio!

Eliot Spitzer is casting his eyes on the music industry, particularly its practices for influencing what songs are heard on the public airwaves.

According to several people involved, investigators in Mr. Spitzer's office have served subpoenas on the four major record corporations - the Universal Music Group, Sony BMG Music Entertainment, the EMI Group and the Warner Music Group - seeking copies of contracts, billing records and other information detailing their ties to independent middlemen who pitch new songs to radio programmers in New York State.

The inquiry encompasses all the major radio formats and is not aiming at any individual record promoter, these people said. Mr. Spitzer and representatives for the record companies declined to comment.

We have known for quote some time that the industry is a disaster and that radio sucks. Why haven't the music labels figured out there is a correlation between these two factors?

The quasi-payola arrangement is a fairly complicated scheme. Here's the NY Times breakdown of it:

The major record labels have paid middlemen for decades, though the practice has long been derided as a way to skirt a federal statute - known as the payola law - outlawing bribes to radio broadcasters.

Broadcasters are prohibited from taking cash or anything of value in exchange for playing a specific song, unless they disclose the transaction to listeners. But in a practice that is common in the industry, independent promoters pay radio stations annual fees - often exceeding $100,000 - not, they say, to play specific songs, but to obtain advance copies of the stations' playlists. The promoters then bill record labels for each new song that is played; the total tab costs the record industry tens of millions of dollars each year.

The new scrutiny comes at an inconvenient time for the major record companies, which have been pressing federal and state law enforcement officials to shut pirate CD manufacturers and the unimpeded flow of copyrighted music online.

I don't care what this guy's political goals are -- I am now firmly a supporter. Want a check? Someone to make phone calls? Don't matter -- you got my vote!

$10 CDs, and Spitzer after the labels & radio: Happy Birthday to me!

Source:
Record Labels Said to Be Next on Spitzer List for Scrutiny
By Jeff Leeds
October 22, 2004
http://www.nytimes.com/2004/10/22/business/22music.html

Wal-Mart Wants $10 CDs

Friday, October 22, 2004 | 05:41 AM

in Finance | Music

Rs_960_logo_232x526539005

"There is some impending doom associated with us not helping them."
-unnamed music industry exec

Does a CD have to cost $15.99? That's the question mass retailers like Wal-Mart and Best Buy have been asking for some time now. The Major labels have come to realize that when Wal-mart asks a question, well, it not a request. The nation's largest retailer is also the country's biggest record seller, and if it cannot lower its prices -- they are threatening to take their ball and go home. Wal-Mart has quietly implied it will back out of the music retialing business.

Labels claim the low price demands are impossible to achieve. Best Buy senior vice president Gary Arnold counters, "The record industry needs to refine their business models, because the consumer is the ultimate arbitrator. And the consumer feels music isn't properly priced."

This breakdown of the cost of a typical major-label release by the independent market-research firm Almighty Institute of Music Retail shows where the money goes for a new album with a list price of $15.99.

$0.17 Musicians' unions
$0.80 Packaging/manufacturing
$0.82 Publishing royalties
$0.80 Retail profit
$0.90 Distribution
$1.60 Artists' royalties
$1.70 Label profit
$2.40 Marketing/promotion
$2.91 Label overhead
$3.89 Retail overhead

Whether a market-research firm who sells their work tto the industry can truly be called independent is an issue we shall save for another day. But the data provided above certainly reveals plenty of fat in the equation: Just three ill-definded and squishy line items -- Marketing/promotion, Label overhead and Retail overhead -- account for $9.20 of $15.99 CD.

Rolling Stone had a full article on the subject; Here's an excerpt :

"Wal-mart wants every CD you buy to cost less than ten bucks. And the nation's largest retailer -- which moved a quarter of a trillion dollars' worth of goods last year -- usually gets its way. Suppliers who don't accede to Wal-Mart's "everyday low price" mantra often find their products bounced from the chain's stores, excluded from being sold to the 138 million people who shop at a Wal-Mart store every week.

In the past decade, Wal-Mart has quietly emerged as the nation's biggest record store. Wal-Mart now sells an estimated one out of every five major-label albums. It has so much power, industry insiders say, that what it chooses to stock can basically determine what becomes a hit. "If you don't have a Wal-Mart account, you probably won't have a major pop artist," says one label executive.

Along with other giant retailers such as Best Buy and Target, Wal-Mart willingly loses money selling CDs for less than $10 (they buy most hit CDs from distributors for around $12). These companies use bargain CDs to lure consumers to the store, hoping they might also grab a boombox or a DVD player while checking out the music deals.

Less-expensive CDs are something consumers have been demanding for years. But here's the hitch: Wal-Mart is tired of losing money on cheap CDs. It wants to keep selling them for less than $10 -- $9.72, to be exact -- but it wants the record industry to lower the prices at which it purchases them. Last winter, Wal-Mart asked the industry to supply it with choice albums -- from new releases from alternative rockers the Killers to perennial classics such as Beatles 1 -- at favorable prices. According to music-industry sources, Wal-Mart executives hinted that they could reduce Wal-Mart's CD stock and replace it with more lucrative DVDs and video games.

"This wasn't framed as a gentle negotiation," says one label rep. "It's a line in the sand -- you don't do this, then the threat is this." (Wal-Mart denies these claims.) As a result, all of the major labels agreed to supply some popular albums to Wal-Mart's $9.72 program. "We're in such a competitive world, and you can't reach consumers if you're not in Wal-Mart," admits another label executive.

Long overdue . . .

Sources:
Wal-Mart Wants $10 CDs
Biggest U.S. record retailer battles record labels over prices
Warren Cohen
Rolling Stone, Oct 12, 2004
http://www.rollingstone.com/news/story/_/id/6558540/thekillers

Cubans, Hispanics, Arabs: Are Key Demographic Shifting Party Affiliation?

Thursday, October 21, 2004 | 06:40 AM

in Politics

"It's not a community that any party has a lock on," says Ismael Ahmed, the executive director of Access, the biggest Arab-American social services agency in the country, which is based in Dearborn. "Especially a community like this one where 60% weren't born here. We're not really committed to either party."
"We were motivated when we backed Bush and we are motivated now," says Osama Sablini, Aapac's chairman and publisher of the Arab American newspaper, who backed Mr Bush four years ago. "The Bush administration has been a major disappointment to this community and we cannot afford four more years of this."
-Under siege since 9/11, Arab voters shift to Kerry

When the dust settles on this election, a significant shift will have taken place in several key demographics. Due to a random twist of fate, this will be especially true in the swing states.

The resulting shift in traditional party affiliations could very well throw the election to the challenger.

Since early this year, we've been watching a number of key voting blocs "flip flop" (sorry) away from their prior voting patterns. The demographic ethnic groups with the greatest potential to impact the 2004 Presdiential election are both Cubans and Hispanics in Florida, and the Arabs-Americans in the Midwest.

On numerous occasions this year, we have noted, Cuban American voters in Florida continues to be a potential problem for President Bush in the upcoming election. Further, we similarly observed that the President's support amongst Arab American's have tumbled, and significantly for this election, in the swing states.

Whether this is a permanent change of party affiliation, or just a reaction to the present regime, is unknown. But it is clear that major changes are taking place. So says The Guardian:

Continue reading "Cubans, Hispanics, Arabs: Are Key Demographic Shifting Party Affiliation?"

Of Black Helicopters & Such

Wednesday, October 20, 2004 | 02:39 PM

in Finance

Some interesting conspiracy theories out there on the fringe. Here are four currently circulating from the tin foil crowd:

1. George Soros will destroy the dollar before the election to hurt George Bush.

Soros may not like the President, but he knows that you cannot fight the tape. If there is money to be made on the short side of the dollar -- a trade Warren Buffet said he made with his fund's money last year -- then I would expect many currency traders to make that bet anyway. If not, they -- and Soros -- won't. This theory was put forth earlier this year in a few conservative publications.

2. Soros Manipulating the Presidential Futures Exchanges

I received a PR mailing from Intrade.com, which repeated a variation on the theme. They claimed that a sudden spate of Bush sells in the Iowa Presidential futures market were being investigated by the firm, and they repeated the internet rumor that Soros was behind that.

As mentioned previously, I think "presidential futures" have little if any predictive value. Further, Alan Murray of the WSJ and CNBC does himself and his viewers a disservice every time he mentions these teeny tiny exchanges. Just as you cannot foretell the U.S. economy from a few micro-cap stocks, you cannot predict the outcome of the U.S. election from these even smaller, micro-mini cap exchanges.

3. October Surprise comes not from Karl Rove, but from NYAG Eliot Spitzer

I've read in some of my favorite political blogs a criticism that Spitzer (a Democrat and possible candidate for NY Governor or U.S. Attorney General) purposefully brought these charges against MMC et al this close to the election on purpose.

The suggestion that a law enforcement officer should delay a prosecution because it is politically inconvenient reveals a poor understanding of the prosecutorial process. It is naive to think that something as complex as the Marsh McLennan investigation could be so precisely timed -- it began quite a while ago, and as these things tend to do, it developed a momentum and timeline of its own. I also agree with Rev who observed earlier that "the market is already in weak shape and more vulnerable than usual to negative news."

James Cramer told a story at TheStreet.com's stock seminar this weekend, and it reflected the absolute integrity and commitment to the law of Eliot Spitzer. While I highly doubt that Spitzer is a crass political operator -- i.e., not Rovian -- I defer any questions about that to Jim Cramer. But the bottom line is that the guys who ran MMC were corrupt, stole from their fiduciaries, and got caught.

End of story.

4. Secret 9/11 report blames both sides

Finally, the latest conspiracy theory making the rounds is that the final "9/11 secret report" -- that names names and assigns blame -- is being suppressed. Some people think that it is equally as hard on Clinton as it is on Bush (not me), and both parties are working to suppress it (again, I'm not so sure both parties are equally opposed to its release). The chatter is that the ranking Democratic and Republican members of the House Intelligence Committee had demanded the report, and that its release is being stonewalled by the White House.

Of these four theories, this last one is the one I find most persuasive, as I suspect there is plenty of blame to go around.

Projected Electoral College Vote: Swing States, 10/19/04

Wednesday, October 20, 2004 | 07:35 AM

in Politics

wsj_format_logo

What's significant about this latest poll is the MOE -- margin of error. Every lead the incumbent has is within the margin of error. The President has not managed to garner a lead in a single battleground state won by Gore in 2000. The challenger, on the other hand, is ahead in at least one 2000 Bush state -- New Hampshire, by 5.1% -- and is competitive in every battleground state Gore lost in 2000: Florida (-1.2%), Arkanasas (-1.3%), Tennessee (-2.5%), West Virginia (-2.8%), Ohio (-3%), Missouri (-3.1%). The swing state Kerry is furthest behind in is Nevada (-3.9%).

The outcome now depends upon turnout -- new voter registration and motivation of the base -- and how well each party executes on its ground game.

Battlegrounds States Poll - OCTOBER 19, 2004
click for larger chart

Here's the WSJ's observations:

With two weeks left until Election Day, President Bush posted his best performance since June in key battleground states, according to the latest Zogby Interactive poll.

In the wake of the second and third debates, Mr. Bush now leads in seven of the 16 battleground states, up from the three states he held two weeks ago, in a poll conducted after the first Bush-Kerry contest. But Mr. Bush's leads in several states -- including closely watched Florida -- are tenuous, and rival Sen. John Kerry managed to hang on to big, electoral-vote-rich states including Pennsylvania and Michigan.

All of the president's leads are in the margin of error. Of the nine states in Mr. Kerry's column, his leads are outside the margin of error in six. The margin of error varies from state to state and ranges between +/- 2.1 and +/- 4.4 percentage points per candidate. The battleground states Mr. Bush leads have a total of 85 electoral votes, while Mr. Kerry's states have 92.

The latest poll was conducted Oct. 13-18, starting after the end of the third presidential debate, which addressed domestic issues, and also includes the effects of the second debate, a town meeting in St. Louis. Many pundits said Mr. Kerry won the first debate, which focused on foreign policy, but the results of the later debates were more mixed.

The next week should see the incumbent's numbers remain frozen, barring an October surprise,while the challenger starts gradually moving up in approval, if not in the actual polling . . .

Sources:
Battlegrounds States Poll - October 19, 2004
http://online.wsj.com/public/resources/documents/info-battleground04-1019print.html

Electoral College Analysis http://online.wsj.com/public/resources/documents/info-battleground04-an1019.html

1987 Crash Revisited

Tuesday, October 19, 2004 | 03:10 PM

in Finance

Rob Fraim is a reader of mine who puts out his own amusing comments each day via email. Today, on the 17th anniversary of the 1987 stock market crash, he put out his recollections from that day.

I found them so interesting that I suggested Rob (who is blogless) post them here. He gladly agreed. Without further adieu, here is Rob's version of 1987 Crash Revisited

October 19 – the day that each year gives old-timers in this business a renewed facial tic and post-trauma flashbacks.

“What?” you say. “You mean you were actually there, Grandpa? You remember the Crash of ’87?”

Yes, I was, and yes I do. Confirming rumors that I am, in fact, older than dirt I note that I was in this business in 1987 – and had been for a few years prior (I started in 1983.)

I was having dinner last week with a friend who runs a hedge fund (another graybeard, although he looks younger than me) and we ended up talking about 1987. He had a great story about the whole thing (which I’ll let him tell you about someday if you ever get to have dinner with him.)

So I thought I would take a moment to reflect on my own Crash Experience – and perhaps some of you will share your October 19, 1987 story (provided you’re not a whippersnapper who would be relating what was on freakin’ Sesame Street that day! I really hate you guys. You’re svelte and unwrinkled and smart and energetic and I’m just liable to whup you if you’re not careful.) Maybe we’ll even get a recounting of the aforementioned dinner tale from last week. So if you feel like it, drop me a note with your recollections. If I get enough to make it worthwhile, perhaps I’ll compile them for sharing.)

“What I Did During the War (or What Felt Like One Anway)” or…

“Dr. Strange-Broker or How I Learned to Stop Worrying and Love the Bear” by Rob Fraim

I was 29 years old, 4 years in the business, with two young children. I thought I had investing figured out, didn’t really, and was working for the old Dean Witter (now Morgan Stanley.) The market had been mostly good during my relatively brief time in the business and I had survived the crucial new-guy starvation years and had built up a fairly good book.

Continue reading " 1987 Crash Revisited"

Wall Street Positioning for Year End Rally

Tuesday, October 19, 2004 | 12:51 PM

in Finance

As Quarterly reporting begins in earnest – 100+ S&P500 firms are releasing numbers this week – we expect the Street to begin positioning itself for a post election rally. So far, earnings results have been decidedly mixed, with some good results (Texas Instruments (TXN) and IBM) and some not so good numbers and/or guidance (Sandisk (SNDK) and GM). Economic figures are a similarly mixed bag of good and bad, confusing the long-term picture for stocks.

We suspect that most of the time, it’s not the headlines that are driving the markets, but rather a complex mix of internal factors: fund flows, sentiment, money supply and valuation concerns are often primary movers. These interrelated elements can make it appear that markets are ignoring both good news and bad as they wend their way through their intricate cycles and tipping points.

Where are we now in the cycle? Seasonal factors lend a slightly Bullish tone. If you “sold in May, and then went away,” then your next buy point is Halloween. Further, we take the somewhat contrarian view on the election and markets: We do not think it is nearly as significant to stocks as most. Historically good performance of equities under divided governments (think Reagan & Clinton) should alleviate concerns for those who fear an incumbent defeat.

Further, we note that this has been a particularly rancorous and nasty partisan campaign. Once the attack ads leave the airwaves, we expect the country to breathe a deep sigh of relief, and get back down to the business of buying iPods, doing home renovations, and selling tchotckes on eBay – regardless of who is occupying 1600 Pennsylvania Avenue.

Right now, some markets look technically healthier than others: Nasdaq, taking a page right out of the TA textbook, traded down to the gap created on the first day of Q3. Once that gap was filled, the Nazz took off for higher levels. Meanwhile, SPX is the next best looking chart, as it put in a double bottom at 1105 late last month. It is now trying to build upon that decidedly modest base, with mixed success.

The Dow remains the most troublesome of the 3 indices. Its recent low was the first not below the prior three bottoms of March, May and August. However, it may be premature to presume that last weeks numbers will be the worst for seen this month. In July, the Dow struggled to after finding a higher bottom, rallying before making a new low. A replay of that scenario is a very realistic possibility at present.

Traders looking to get long for a year-end rally should consider the relative strength of these indices, and note that the Nasdaq remains the strongest of the markets.

Chart of the Week: Presidential Incumbent Approval Level (2001 - 2004)

Tuesday, October 19, 2004 | 12:46 PM

in Finance

The intractable problem of polling sampling error and bias continues to be an issue for those investors trying to track possible outcomes to the election. The WSJ covered this issue extensively last month.

Consider for instance the pollster Gallup: On election eve 2000, they had then Governor Bush with a double-digit lead; Bush actually lost the popular vote by some 540,000 ballots.

Presidential Incumbent Approval Level (2001 - 2004)
click for larger chart

Source: Professor Pollkatz

DePaul University economics Professor Stuart Eugene Thiel has come up with a rather elegant solution to the issue of bad or biased polling: He maintains a "Pool of polls," with every poll result from nearly all organizations simultaneously represented. It very cleverly solves a host of data problems.

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Quote of the Day:
"The Political problem of mankind is to combine three things: economic efficiency, social justice, and individual liberty."
-John Maynard Keynes

Tuesday, October 19, 2004 | 12:46 PM | Permalink |