Scroogeview

Waves

2005-06-24T08:43:00.000-07:00

Jack Miller writes of playing and watching the waves roll in at the beach. I frequently have to remind myself the market operates much the same. The trick is to get in on the rising tide. The waves will always roll but if you are on the rising tide..in the long term you will be OK.

True story. Once there was a newsletter that asserted investment results were directly linked to the long term tides. I never bought the newsletter but the concept is interesting.

Far be it for me to doubt anything when it comes to human behaviour.

Oil and Water; Economics and Politics

2005-06-24T08:08:00.000-07:00

Unocal is for sale and two offers have come. One offer is from Chevron and the other from Cnooc aka the Chinese government. CNOOC offers two billion more for the company.

In the last two days I have watched the talking heads on CNBC, for whom I have much respect, discussing and in most cases trashing anyone who believes as I do that the Chinese government should be allowed to buy this company. Their reasoning is the oil reserves which are located in SE Asia, according to Steve Leismann, CNBC Economist, are a strategic asset and must be owned and protected by the US.

I am sorry as Steve correctly pointed out the majority of US oil refinery is owned by a foreign company, BP, and other alien company's own US company reserves as is, including company's owned by the Saudis. Now the argument placed before us is simply does our government have the right to pick and choose which government and alien company can own what asset throughout the world.

Here is how we win. Americans purchase inexpensive or cheaper products from the low cost provider of products. I would suggest looking at your wardrobe for starters to determine if you are a buyer of any of these goods. Now Americans have a choice of purchasing these items from US producers but in most cases choose the less expensive brands. This is the rational thing to do.

Now the Chinese are major producers of these goods. What do they do with this newly found money. Well initially they have been investing into the treasury market. OK at higher rates but look at the rates recently. As pointed out by Jack Miller, the rational thing for them to do is seek the greatest return on their money and they have chosen the oil market...for now.

We sought free trade with the Chinese and this seems to be the natural extension of this arrangement. If we are so concerned about this oil, which is one of many commodities in the world, we should as a country purchase open contracts of oil futures to hedge against any aggressive action by the Chinese to prevent us from getting the oil we need it and when we need it. ( The absurdity of Chinese controlling world oil makes me laugh!! Quick call 007!)

There is another way to look at this and hopefully history will allow us to profit from. In the 1980's the Japanese mirrored the current Chinese in irrational fears about their impact on our future via economic "warfare". The covers of magazines spouted off about the Japanese soon would dominate the world and own everything. Hopefully everyone remembers they were buying real estate in the US like nobodies business. Paying exorbitant price while they were doing it. Americans were scared they would own the country. Well we know what happened. They ended in a stagnant economy and lost billions on overpriced purchases.

I believe this could be a good sign of a top in the world oil prices. We shall see.

Real Rates of Return

2005-06-17T05:14:00.000-07:00

Much is made of the current housing bubble. Fortunately not everyone is listening to the pundits. In business school or the typical brokerage firm's training class, it is taught that real estate is illiquid and therefore should require a higher premium in returns as related to stocks or bonds.

I contend this illiquidity is the reason more average people receive greater returns over extended periods of time than the so-called liquid investments. Mathematically this is not true. Remember investing is part science and much art. The science requires buying the right investment and holding on the good or even average investment for the long-term.

In my experiences as an observer and as one of the class of average investor, most people cannot hold onto a stock for a very long period of time. It is that reason that most people never receive their long term mathematical average in stocks whereas in housing very few of us sell.

I have plenty of anecdotal evidence but let me divulge a little of my experience from the late 1990's through now. In my 401K I invested in long term investments with very little changes made. After the crash that account was down approximately 30% as were all of my accounts. The 401K was left untouched; the regular brokerage accounts were sold during and after the crash. Now the 401K has dramatically outperformed the regular account.

Many in the investing profession will warn of the old buy and hold method of investing. Look at your results of the so called buy and hold assets, house included, versus the more actively managed assets.

I would love to know the average return of the average actively managed full service brokerage account as compared to the buy and hold accounts. I doubt that information will ever be released.

Airlines Improving Fortunes

2005-05-27T10:29:00.000-07:00

In many businesses I see, what appears to be a negative can turn out to be a long term postive. Airlines can use the problem of higher oil prices to adjust ticket prices up. However when oil prices come down, the odds are the ticket increase will not be returned to reflect those lower costs. Airlines were always considered classic oligopolies or businesses that move in directions together rather than competitive businesses like grocery stores.

I believe they will attempt to recapture some of the oligopolistic tendancies that served them better in the old days.
Furthermore the airlines are restructuring and reducing their number of flights. I would imagine NWAC would be more than glad to operate a little more like the low cost providers, like LUV, and only run two daily flights from Raleigh to Chicago as opposed to the current 4.

We shall see.

More Profits, Same Sales

2005-05-26T12:12:00.000-07:00

I am fascinated with all of the talking heads concerned with low sales growth and higher profits in today's economy. Is this not what one would expect with the combination of low job creation and higher productivity.

Its called leverage. Leverage can come in many forms. Most people can understand financial leverage or using borrowed money. Others understand leveraging with labor and the multitude of methods to specialize or shift production to most efficient labor methods available.

Technology has also created another mode of leverage in that more can be done with less people and capital than in years before.

This leverage of the above components of production has allowed companies the ability to squeeze higher profit out of sales.

I am a big proponent of manufacturing and distribution software like MAS 90 here in the Raleigh and eastern North Carolina market. One of my clients is not producing double the sales volume of five years ago with the same quantity of general admin and accounting personnel. Additional resources can now be added in the sales and marketing function to increase sales.

This has been happening ever since the recession fo 2001. It should be no surprise in the earnings reports.

Imagine what we will see if the economy continues to grow and we will have improved sales and profits. Warning: at that time the talking heads will start complaining of great sales growth and slower profit growth. That's when I will start to worry about the stock market.

Bill Cara: Capital Markets & Social Equity

2005-04-13T23:58:00.000-07:00

Bill Cara: Capital Markets & Social Equity

Bill suggest that if 10,360 is broken, the Dow will quickly drop to 9,800. Bill correctly called that Monday's strong market would not continue on Tuesday.

The call of "if the market drops another 40 points then it could drop another 560" leaves a lot of wiggle room. My bullish outlook is even more imprecise. I have said there will be a very strong up-move this year but have said it may not start until November! My posture is to stay fully invested to catch the major move and to not worry over the back and forth and forth and back action of recent months.

Trying to make serious money off these short-term moves is difficult at best. I simply do not know anyone who has made it to the Forbes richest list playing these short moves.

The Bulls to Bears ratio is getting into healthy territory. This week we hit another big winner. In only a few days, our USG stock of the week selection went up 30%. The call was based on fundamentals and the timing was lucky. Who could have guessed that two liberal senators would sign on to asbestos legislation?

This is the way markets work. The reason I can't tell you when the next BIG BULL BOOM BUBBLE will start is because the catalyst will likely be a surprise. Maybe the Fed will reveal that it does not need to raise short rates any more, maybe Iraq will write a constitution, agree to share oil revenues among the provinces and start pumping 7 million barrels a day or maybe 5 democratic senators will make a deal to support Social Security reform.

There have been many surprise catalyst over the years. My favorite one to relate happened when I was 13 years old in 1963. The first half of the BIG COMPUTER, BIG BULL BOOM BUBBLE had already run its course. After a wonderful market run, stocks stalled in 1961 and 1962. President Kennedy dealt with the crises of the day which included run away steel prices and the Bay of Pigs incident in Cuba. Sentiment had turned negative. Who could have guessed that the catalyst to the second half of the BIG BULL BOOM BUBBLE would be that Kennedy was shot!

The following Tuesday, when the market re-opened, the best one day gains in 24 years surprised everyone. Within two weeks the Dow was at an all time high. The market from 1963 until 1969 was one of the best markets in history. Many of the hot names of the day made people wealthy. I remember incredible gains my Dad made in companies like Xerox, Control Data, Burroughs and National Cash Register.

Yahoo will announce earnings this week and Google on the 21st. These companies are growing at rapid paces. They each announce new services regularly. There is concern that they will "give away the store" to increase market share but like EBAY in China, these companies are out to "lock-up" content and relationships knowing that revenues will come. For example, Yahoo just announced free web sites for small businesses. A business that builds a web site with tie-ins to many services makes for a "sticky" hosting service. The history is that companies pay substantial sums to promote their web site after they build it.

The fact that Google is able to offer a free 2 gig hard drive to all comers with unlimited access shows just how cheap web services have become. Cramer likes big newspapers. OK, fine, but realize that they must adapt to the new realities. They must adapt to web publishing to survive.
The cost to produce, store and distribute information has dropped like a rock. What paper should pay a reporter to cover the local high school football game when there are several bloggers covering it for the fun of it. The Greensboro News is one of the first to try to incorporate bloggers into its distribution channel. The action in publishing is a great example of the way the substitution effect quietly lowers inflation. At the same time that whiners and alarmist are writing about the horrible inflation in oil and commodities, they are cancelling their high dollar newspaper and magazine subscriptions while gaining access to more news for free!

The internet is the greatest invention since the printing press. The benefits have just begun to be realized. The next several years will be years of growth in VoIP and web publishing just to name two areas. The huge productivity gains being made in China, India, etc. are an under-appreciated part of the whole story that supports the thesis that another BIG BULL BOOM BUBBLE are on the way.

Buy the this dip in this market; hang onto the bucking bronco; don't get bucked off by short-term whinning. Stocks are under-valued relative to bonds and real estate is gathering steam for another big run. My bet is that we reach a Dow of 15,000 before we hit 9,800. Even if we hit 9,800, I am prepared to hang on tight. I want to make 100% over the next 4 years. If I drop 15% and then make 130%, I can live with the move.

Mr. Jones, I posted this article on www.stocksorbonds.blogspot.com and here. I want to do a keyword search to see if I can find it on both sites.

Random Roger's Big Picture: Alert

2005-04-13T17:12:00.000-07:00

Random Roger's Big Picture: Alert

Jones and I are experimenting. We plan to post a few entries on each others blogs to get a better feel for the capabilities of the system.
We think group or specialty linked blogs might be useful. The Alpha--Internet Blog group may be a good model. With 8 million accounts, Blogger appears to be just starting up the growth curve.

Speaking of curves, Random Roger is focused on the S&P 500's 200 day moving average. He is talking about moving his accounts to a defensive stance. He uses a break in the 200 day moving average as his guide. Nothing against Roger but it is my nature to get more bullish when I read about "flights to quality". It takes two to tango and at least two to make a market.

Earlier on this site, Jones, aka My Old Merrill Pal, wrote about the similarities of the 1990's to the 2000's. Everyday someone makes comparisons to prior periods. Today on Mad Dog, a caller said "this feels like the 80's". Anyway, Jones is right. There are many similarities in the two decades. The recent decline in long rates looks like a good set up for stocks. The economic "slow down" is not over but slowing down from 4% GNP growth to say 3.2% would not be a horrible thing. Inflation is really not bad so we don't need high interest rates or a big slow down.

Slowing down the hot, hot, hot real estate market is not a bad thing either. The tricky part is how? Every time Greenspan raises short rates, the bond market realizes that Greenspan is indeed in sync or even ahead of the curve; long rates go down. Mortgage rates are about the same now as they were eight months ago when short rates were first raised. European and American baby boomers are buying second homes.

Is is not a marvelous thing that so many people can afford two homes? Are you old enough to remember having one phone that was on a party line with the neighbors? We always knew that Mrs. Thornburg listened in on our calls. Two cars in one family used to be a big deal. The new norm is two or more homes per family. The tax laws support first and second homes. Is it a bubble if many families who can afford two homes buy and hold for personal use? My big concern relates to those who need rental income from the second home to cover interest, principle and operating costs. At current prices, many buyers will have to subsidize payments for several years until rents rise.

Maybe I am a natural optimist but I see a good year ahead in stocks and real estate and even a decent year in bonds. The expansion is underway. New businesses are being started and old businesses are generally doing well. Roger may not hit the moving average. I hope he is able to hang in for the good ride I see ahead.

Just Desert

2005-03-19T06:41:00.000-08:00

I am 45 years old and am one generation away from the "Great Depression". The attitude shift we have experienced in my lifetime is amazing. As a child growing up in eastern NC., I remember the common phrase of "No thank you, I don't need a handout". I was fortunate not ever needing to ask but anyone growing up in the South or elsewhere in the US most likely, heard that phrase. Many attribute such an expression to pride and pride is one of the seven deadly sins, but that expression embodied much of the spirit that made America great. The independance allowing people to live on their own. Now that expression has been replaced with "I'm gonna get mine while I can!"

Yes another one of the seven deadly sins, greed, rears its ugly head but unfortunately the payer is the US govt or all US citizens. This is one of the problems with adding cumbersome and bloated federal or state gov't programs. I recently met someone who earned $195,000 in one year of which $5,000 was unemployment wages. On top of this is the fact part of the earned income was self-employment income. More anecdotal evidence is available from my own experiences as well. I am not against helping those in true need. Somehow our system of helping those in need has become purely an entitlement for all.

"Those were the days!"

Deja Vu or patience is a virtu 1992-1999 vs. 2002-2009

2005-03-18T06:12:00.000-08:00

I am beginning to believe we have been there done that. If you compare the US economic performance in terms of GDP in the 1992-1999 vs. 2002-2009, there are many similarities. Both periods were coming off slow economic periods, some would classify as recessions, and then had the initial recovery in the years ending in 2. In the case of 2002 the economy did sputter somewhat in 2003 but rebounded nicely in 2004. We still are in the nice economic market in terms of US productivity. Interestingly the US performed nicely from 1993 through 1999 with GDP ranging in the 3-4% growth range which in modern terms is healthy.

In 2003 the US enjoyed very strong GDP with over 4% growth. 2004 was also another strong performer.

So here we can compare the actual economic performance of the the two periods with a very similar performance. We all remember the 90's stock performance with Greenspan characterizing as "irrational exuberance". I will not argue the point. Remember the 1994 stock market. I could not either; so I looked it up. The Dow bounced between 3775 to 3840. Nothing to get excited or write home. In retrospect a one year time frame appears almost meaningless. However it is possible we will enjoy the same results in 2005. At the moment this type of back and fill market will erode your confidence, frustrate you and eventually turn many away from the markets. Accumulation by big boys is occurring now. Google Buffet or Soros and read their latest statements about searching for opportunities in 2005.

So maintain the course, buy equities and remain patience. Remember "they" don't ring bells when the market moves!

Technology and Productivity

2005-03-16T06:00:00.000-08:00

We are a accounting and consulting firm that sell/support MAS 90 a business and accounting package. This software package has best been described as a business solution for manufacturers and distributors. In no way does that mean it is limited to these types of businesses.

The reason I write this piece is to outline the benefits of this type of technology for small businesses, defined as companies with annual sales of $100 million or less. Imagine the old days when a small manufacturer maintained a bank of clerks and accountants to support, record and account the business functions. Today with a small investment in software such as MAS 90, a manufacturer can eliminate thousands of dollars of payroll costs and divert those valuable resources and capital to more productive uses.

More importantly many of these small businesses struggle with inventory and production issues. This is one area where MAS 90 excels. MAS 90 also has added modular e-commerce features that can be installed in two days and connected with a companies website. Modularity of the MAS 90 package is a far less expensive method of e-commerce than custom built e-commerce technology.

To be continued.

Now Playing "What a Onewireless World"

2005-03-09T09:17:00.000-08:00

Pretty interesting times we live in. I have attached an article about Chicago installing Wireless capabilities in the entire city. The article is self-explanatory. I am not in favor of governments involving themselves with non-critical services. However that discussion is for another day.

Clearly the internet will become much more ubiquitous and routine than it already is in our daily lives. The economic impact is hard enough to get a grip on much less the social and political dynamics at play.

Make your own judgements but I would bank on the internet coming to your neighborhood in much the same way as Chicago looks to be doing soon. Remember the days when every "world-class" city had to have a professional sports team. This will be the same drama played in your town.

Also note the city plans on generating revenue from this!

Here it is:

Chicago City Council to examine wireless access today
March 9, 2005
BY FRAN SPIELMAN City Hall Reporter

Chicago would be empowered to build an $18 million wireless Internet access system across the city under an ordinance expected to be rushed through today's City Council meeting to beat Springfield to the punch.
"Instead of having to go to a Starbucks coffee or another upscale coffee or sandwich shop to get wireless access for your laptop, it could be available throughout the city. Any police investigator could immediately log onto the Internet and be in receipt of a mug shot or criminal history anyplace in the jurisdiction," said Finance Committee chairman Edward M. Burke (14th).
Chicago could either install its own Wi-Fi cellular devices on streetlights, traffic signals and public buildings across the city or entertain bids from private sector companies eager to do so in exchange for a hefty fee, Burke said.
"The city could . . . enter into an agreement to receive a percentage of the revenues that the operating company might receive from providing the service . . . This, in theory, could be quite a large source of revenue for a city that's already strapped," Burke said.

Sauce for the goose

2005-03-02T11:34:00.000-08:00

Poll: Social Security plan support drops
By Jim Drinkard, USA TODAY
WASHINGTON — Only one in three Americans approve of President Bush's handling of Social Security, his lowest rating on the issue since he took office. A USA TODAY/CNN/Gallup Poll conducted Friday-Sunday found that 35% approved of Bush's Social Security record, 56% disapproved and 9% had no opinion. That was down from three weeks ago, when 43% approved. In March 2001, just after he took office, 49% approved.

I add this article from the "USA Today" dated 28 Feb 2005 because the market sentiment is still negative or at the very least wary of buying. Every day you listen to US Congressmen discuss their stance on the privatization of Social Security ("Soc" for brevity's sake) and all mention they discuss with their constituency and are uncertain of the direction they wish to take. Now Bush can hammer this through with the bully pulpit no doubt. The bigger message is the negative sentiment the public has toward the stock market. Yes fear is created by the politicians on the democratic side. The simple fact is if we were in the last days of a bull market, similar to late 90's, the average American would say put all of my soc money into a private account.

From the article above the clear majority are not interested in putting money into the market. My friend Jack Miller states there are large amounts of cash sitting on the sidelines. We still do not see the headlines stating, "New Bull Market" etc.

"They" will not ring a bell when its time to buy or sell, but there sure will be alot of signs.

LVLT

2005-02-24T07:04:00.000-08:00

Be on the lookout for LVLT. The company announced the issuance of some new convertible debt paying 10% annually with conversion strike price at $3.60 a share. One management company, Southeastern Asset Management, already owns a sizable position in the stock and is now taking an additional $400 million of the convertibles. Even the venerable Legg Mason owns the stock in their funds. ( No I don't believe Bill Miller's Value Trust is an owner )

One last thought it appears the institutional ownership has increased in the last three months.
It does appear large money sees intrinsic value in the technology and electronic lines they own. As data becomes more prevalent in digital form, the demand for their product will increase and quite possibly dramatically. I will admit I am in the dark on the supply/demand specifics of their product but follow the money. Big Money.

THIS STOCK IS NOT FOR THE FAINT-HEARTED! You could lose all of your money.

Verizon on the Horizon

2005-02-18T12:28:00.000-08:00

I am a buyer of Verizon, VZ. Let me state upfront I am a user of their service. I went to Verizon after several years of poor service from other large cellphone service providers ( I use the word service reluctantly) The other companies offered no assistance with equipment, their coverage was weak and frequently, almost daily, calls were abruptly cut-off. Then I switched to Verizon.

Yes Verizon is more expensive than the other guys. You know the old adage, "You get what you paid for!". I had to equipment problems with Verizon. They repaired the phone once and replaced the second time. The coverage is unparalleled for my area and rarely does a conversation get dropped mid-call. Look at their sales growth and financial performance over the last few years and I am convinced they will be around a long time.

There is a another astounding number I noticed the other day. VZ will generate $20 billion in cashflow in 2005 alone. That represents over $7.50 a share. I could not believe the number when I saw it and had to double check with the venerable Valuline.

Dividend is nice, earnings are nice but cash is always king. The price is right at $36 a share. Buy VZ!

Sing Little Birdie or Wazzamatta U.

2005-02-11T07:30:00.000-08:00

I watch and listen to the current drivel from the democrats regarding Social Security. I do not want to write so much about the debate of changing our Social Security program but more about the vacuous state of one of America's major parties. All they preach now is AAB or "anything against Bush".
Sadly they have a continue to be on the losing side of many of our Country's greatest problems. The democrats have chosen to take an opposite position of the Presidents. Fine based on what arguments. They have none. For example this morning I heard Laura D'Andrea Tyson on CNBC. You may remember her as Bill Clinton's first National Economic Advisor. She was pulled from UC Berkely's Economics Department. Her basic argument against the semi-privatizing of the Social Security is that people may invest their money in the markets and may wake up one day with no money. If spewed by a politician I would find this humorous, but she is supposed to be an authority on economies and she is discouraging investment because you may lose money?!?!
Where are her rants about the fools who invest billions into 401K's and IRA's and now MSA's. I was an Econ major at UNC ( I guarantee a victory over Duke in C.H.!!!!) and never once believed a economics professor was a socialist. I sadly cannot say the same for her. And to think she once advised the President of the United States on economic policy. Say what you will about Clinton, I don't think he listened a great deal to her.

Headlines Headlines

2005-02-07T08:42:00.000-08:00

We have all learned that the time to exit the market is when everyone else is getting in. How do you tell when everyone is getting in? Well if you have very good hearing, you could listen to the hooves or the bell that is always rung. Didn't you hear it last time? The other way is headlines. Where are the headlines of the bull market? Remember the headlines and mania of the day traders. It was not that long ago. My point is we are not really experiencing any of the zeal ie headlines, one would expect from a bull market.

Therefore buy ET. The online discount brokerage houses are doing OK. Imagine how they will do when the public becomes convinced we are in the midst of a bull market. As Jack Miller has pointed out the professionals have great doubt. Therefore the public has not jumped in en masse.

If it makes you feel better, the fundamentals of ET are solid. Take a look.

Microsoft, Google and Redhat

2005-02-02T06:57:00.000-08:00

I am a big believer in the corporation Microsoft. It is one of the biggest arguments against liberalism whenever political discussions come up regarding "fairness" in tax codes, inheritance taxes etc. Bill Gates has built one of the biggest and best brand names in world history. He has done this in a relatively short period in time.

MSFT continues to earn huge returns on investment as well as cashflow that is the envy of almost any corporate chieftain. They are the 800 pound gorilla in corporate America especially high technology.

Is there room for two?

It appears Google may be the next 800 pound gorilla. They reported incredible, analyst busting results yesterday. Their model is different than Microsoft in that they receive advertising revenue. Now Microsoft has announced their new and "faster search engine". I beleive Goog is a great story and a reasonably good buy at 215. However that is not the premise of this article.

I believe the game has changed for Microsoft. They have enjoyed almost monopoly status for some time. Goog is very well capitalized and realizes the competitor most threatening to them is MSFT. Therefore, unlike 6-10 years ago when many companies tried to compete with MSFT, failed and sought assistance from the government, the market now appears ready to take on MSFT. GOOG is now attracting huge money which will attract very bright talent which is what has driven the technology field. If you doubt the GOOG versus MSFT talent attraction just look at how MSFT now treats stock options.

The game about to unfold between GOOG and MSFT reminds me of a Risk game where you have two large players and many smaller ones. The large players will occassionally attack each other directly but the main thrust will be to ally with smaller players who can inflict damage on one of the larger players. Redhat, the free Linux provider, could be the small beneficiary of this type of warfare. Certainly based on fundamentals the Company looks expensive ( where have we heard this before...take a look at the value line of MSFT and look at their fundamentals only 10 years ago). As an aside Microsoft is a Dow component!

The real attraction of Redhat/Linux is the stability it provides to worried IT corporate officers who will struggle with the question of "Do I lay my neck down to promote.switch to Linus when Microsft has served me "risk-free". Redhat is expected to grow 40-50% over the next several years. It offers an attractive alternative to Microsoft. As acceptance gains speed with new software applications , the short term growth of Rhat could accelerate beyond current expectations.

Inititial Thoughts

2004-12-08T05:39:00.000-08:00

Once again you prove to be insightful in the homespun way. I read this year that Warren Buffet announced he was buying foreign currencies and betting against the dollar. After further investigation I discovered he started his positions in 2002. Once again he did not call me to advise before his public announcement. My point is the smart money has already been in place and amazingly realized tremendous gains.

Through work I have been buying the swiss franc for about 3 years. I began at around 1.60 and have watched the dollar erode to current 1.14. ( All this time without my friend Warren advising me on his previous actions). Now voila, the greenbacks weakness is hitting the newstands.

Doctor you may be right. My only question is have we seen the usual flushing of the market ie the stampede to buy????