Wealth International, Limited

Finance Digest for Week of March 15, 2004


In a recent article (“The Curious Bush Recovery”), I suggested that several trends were creating a scary picture of our economic situation. The most significant concern was that our government’s manipulation of interest rates and the money supply was encouraging citizens and the government to engage in an irresponsible EZ credit spending spree (the purpose of this policy is to create an illusion of wealth before next November’s presidential election). This has, in turn, caused a mushrooming trade deficit which imperils the dollar’s value in overseas currency markets. Over the past week or so, several flares have gone up that make one wonder if the downward spiral has not really started in earnest.

Very ominous is the price of oil. One of the things that has enabled the Fed to wallpaper the world with dollars and not have our economy immediately tank is the fact that OPEC prices oil in dollars. Thus, if the dollar plunges, the price of oil here remains the same. Well... it appears as though the Arabs have the knives out for President Bush. They have been systematically cutting back on oil production. This, along with unforeseen instability in various oil producing nations and problems with goofy environmental additives, is causing a spike in the price of gasoline (and if the unstable situation with Chavez in Venezuela boils over, we could be looking at $4 a gallon in a heartbeat). Obviously this will cause an economic slowdown due to rising costs to businesses. These businesses are already reluctant to hire, and this could make them more so. Second, the increased cost of imported oil is making our trade deficit figures worse.

And here is the real danger. Any normal country with our gigantic budget and trade deficits would have experienced an economic debacle by now due to a plunge in its currency. But the unique status of the dollar as the reserve currency has enabled us to live beyond our means for quite some time. But this is not fool-proof. Anyone who thinks that we can continue on this path and not experience a profound currency shock is delusional. Sooner or later, foreigners are going to look at the balance sheet and realize that they should not loan us any more money. And God knows we cannot finance the deficit on our own, since we have essentially a zero domestic savings rate. When that happens, everyone will start to dump their dollars, and its value will plunge as interest rates skyrocket. And with it, will plunge our standard of living. I have seen estimates that up to 1/3 of Americans’ standard of living derive not from productive activity, but rather from the status of the dollar as the world’s reserve currency. This party will end.

Way off in the horizon, I see a strange, dark cloud slowly churning its way in our direction. One can barely see its outline. Where did it come from? What is it? Could it be a giant flock of... chickens?? Yep... and they are coming home to roost.

Link here.


Imagine a household with a pair of 30-somethings earning an annual income of between $50,000 and $100,000. Actually it takes no imagining at all, since the U.S. includes millions of these households. And with the above in mind, try to make an educated guess about the average amount of personal debt such households have these days (including credit card, auto, education, and equity line of credit loans). Well, nobody would carry more personal debt than annual income, so no way could the average personal debt reach $100,000 -- could it? It could, and more. As in, $107,000 of average personal debt for households that match the profile.

But what if a household with a pair of 30-somethings earns double that annual income range -- between $100,000 and $200,000? There is NO WAY the average personal debt would reach $200,000 -- right? Wrong again. It has, and then some. As in, $247,000 of average personal debt for these households. What is more, the debt levels do not change much when you revise the household profile to a pair of 40-somethings. Older is not wiser. Average annual incomes between $50k and $100k carry average personal debt of $108k, while incomes from $100k to $200k carry average personal debt of $212k.

None of this is hypothetical. Consumer debt stands at or near record highs, personal savings as a percentage of income at or near record lows. The household data appeared recently in The Wall Street Journal. It is more than a few cases of irresponsibility or hard luck: it is the entire upper and lower end of the middle class. On average, U.S. households owe more than they earn. The undeniable truth is this: the data is extreme because the behavior of people in most U.S. households has been extreme. Most alarming of all is the fact that they do not seem to know it.

Link here.


People insist that the Fed can expand credit all it wants. Sometimes an analogy clarifies a subject, so let’s try one: It may sound crazy, but suppose the government were to decide that the health of the nation depends upon producing Jaguar automobiles and providing them to as many people as possible...

Link here.


Why was the Great Depression so Great? Because the Fed did not implement the policies it has today, argues Ben Bernanke. The “Mogambo Guru” tells Mr. Bernanke he needs to get his glasses checked... unless he is purposely avoiding seeing the truth. For example:

Bernanke admits that “the gold standard appeared to be highly successful from about 1870 to the beginning of World War I in 1914. During the so-called ‘classical’ gold standard period, international trade and capital flows expanded markedly, and central banks experienced relatively few problems ensuring that their currencies retained their legal value.” So it worked well! So something happened, he says, between 1914 and the Depression. He does not admit, however, that the newly formed Federal Reserve system, in operation for fifteen short years, had anything to do with subsequent calamitous economic events. The simultaneous appearance of these two things were, I suppose, merely a, you know, huge coincidence or something.

Link here (scroll down to Mogambo Guru piece).


The true scale of WorldCom’s financial woes has been revealed after the telecommunications outfit announced a whopping $74.4 billion restatement of income. WorldCom is expected to exit Chapter 11 next month. According to the new figures, WorldCom generated a loss of $48.9 billion in 2000 against revenues of $39.3 billion; in 2001 the company lost $15.6 billion against revenues of $37.7 billion; and in 2002, losses were $9.2 billion against revenues of $32.2 billion. This month, disgraced former boss Bernie Ebbers was charged with fraud and conspiracy related to the collapse of WorldCom in July 2002

Link here.


The rapid loss of manufacturing jobs has many causes (its not free trade), but we must also remember that most Americans no longer aspire to get a manufacturing job. Furthermore, these jobs will continue to lose out to automation and foreign competition. Yet, every night Lou Dobbs drones on CNN about “broken borders” and the outsourcing of American jobs to help drive up his show’s ratings enough to save his own job. The Democratic presidential candidate complains about the lack of good-paying jobs for Americans while the Republican candidate takes credit for new job creation and hopes that more will be created. Neither knows anything about finding work or creating jobs. Protectionism, fair trade, government education and retraining, and tax breaks will only make the job market conditions worse.

Complaining about jobs is an old tactic of the socialists and unions. What is making this old rhetoric ring so resonantly in 2004? After all, the official unemployment rate is now below the “natural rate”. We have been officially out of the recession for quite some time. Why all the complaints?

The drop of 500,000 in short-term unemployment is encouraging, but is overshadowed by the increase in longer-term unemployment of nearly 2,000,000. As the length of unemployment increases people often become “discouraged workers” -- people who would and could work if jobs were available, but who are no longer actively looking for work and therefore are no longer counted in the government’s statistics. The average duration of unemployment has increased significantly during the Bush recession (more than two weeks longer than average) and it continues to increase.

The drop in labor participation rate from 67% to 66% over the last three years does not seem to be a big deal, but that translates to more than 2 million people. If we put those 2 million people back into the labor force numbers as unemployed, the unemployment rate increases from 5.6% to 7%. The rate of 7% has only occurred six times since WWII and all six were recessions. Of course the number of “discouraged” workers has accumulated over time and is actually much larger than the 2 million figure used here.

It seems that Lou Dobbs does have something to crow about. Too bad he has no idea what is causing the problem or how to cure it. The cause of “unemployment” is government -- inflation, debt, taxation, regulation, spending, the uncertainty and liability it engenders, and war. The cure for unemployment is less government, not more.

Link here.

The “Exporting Jobs” Scam

As the prevailing wisdom would have it, greedy corporations are taking advantage of lower wages in foreign countries -- taking jobs away from Americans and giving those jobs to foreigners who will work for much less money. In other words, American companies make their products overseas and then bring them to America to sell to Americans who were denied jobs producing those wares. The politicians who are upset about this practice rarely suggest any specific solution; they just promise to put a stop to it. The TV commentators who are exercised about it also are short on solutions; they just seem to enjoy viewing with alarm.

Politicians are notoriously economically illiterate. And even when they know what would be the right thing, we do not really expect them to do it. But we do expect financial and economic reporters and “experts” who appear on television to have some grasp of whatever they're discussing. Thus, when these “experts” join in the chorus of outrage over greedy corporations exporting jobs, it is easy to believe there must be something to the complaint. But just once I would like to see someone on television ask one of these politicians, reporters, or “experts” the following questions, such as: Since American wages have always been much higher than wages in Thailand, India, Indonesia, and other Asian countries, why were American companies not exporting jobs to those countries 30 or 40 years ago?

Most likely, companies are heading overseas because U.S. regulators just will not quit heaping more and more demands on American corporations. ...

Link here.


When Martha Stewart sold her ImClone shares, the capitalized value of her own company was somewhere in the range of $2 billion. Today, it is closer to $500 million. (ImClone has since bounced back.) There has not been a wave of panic selling following Martha Stewart’s conviction. There should have been. The source of the company’s expected stream of net income is going to jail. I suppose I should bewail the loss of $1.5 billion in capitalized value. On paper, this is what the Martha Stewart affair has cost investors, of whom Mrs. Stewart is the largest. Investors who had shares in their retirement portfolios are now going to have to work an extra month or year or decade to make up for the losses they have experienced.

Yet I cannot get too excited about this. Why not? Am I a cold-hearted man? Can’t I see what has happened? Can’t I feel their pain? No, I am not cold hearted; yes, I can see what has happened; and no, I cannot feel their pain. That is because I feel too much pain on behalf of tens of millions of lambs headed for the slaughter, who are going to feel a lot more pain than Martha Stewart’s investors did. The pain that the Stewart investors have felt is going to be multiplied across the boards. I will not be one of them, I hope, but the economic fall-out will be unavoidable for most Americans. I will get hit by the after-effects.

The disappearance of $1.5 billion has received little media attention. The media focus on Martha the control freak, Martha the crook, Martha the liar, Martha the emotionally distant. What should be in every discussion of her case is the ease with which $1.5 billion in capitalized value went poof. No muss, hardly any fuss, and whammo: the wealth disappeared. Or did it? Was it wealth? Or was it the illusion of wealth?

I think it was the latter. It was the illusion of wealth created by a stock market where investors assume that most people will never sell. “The market always goes up in the long run.” Really? If so, then what has happened to Martha Stewart’s shares had better be an anomaly. The disappearance of all that capital was so easy, and it happened so quietly, while everyone was discussing Martha the Whatever, that those who think the stock market always goes up had better show us why this case really is an anomaly. The perceived capital value of the stock market is an illusion, and that illusion can be exposed at any time by a seemingly trivial event.

Link here.


Do government deficits -- and by extension, government debt -- matter? I would argue that they do. In fact, over time, they erode the long-term ability of an economy to create wealth... making the pie smaller for all concerned. Government borrows not to create wealth, but rather to redistribute income. And because the government pays off its bonds with tax revenues which it commands from citizens under threat of imprisonment, it is able to borrow at much lower interest rates than the private sector.

To the extent that non-productive government borrowing crowds out productive, private investment, the economy is in trouble. But how do you measure the size of the deficit? At what size does it begin to matter? If you measure government deficits as a measure of GDP, they may not seem historically large. But that is not the main issue -- rather, the key economic question, in terms of sustainability and capital formation, is how large government deficits are as a percentage of gross saving. How much is the government claiming from the pool of available funds? In other words, to what extent is government borrowing crowding out private investment and capital formation?

In the 1970s, the federal deficit was 11% of private saving. By contrast, last summer, the projected federal deficit of $304 billion was just under 20% of gross saving of $1.5 trillion. Today, with this year’s projected federal deficit of $521 billion and gross savings in 2003 (excluding December) of $1.8 trillion, the federal deficit is nearly 30% of gross savings. That is an outrageous ratio.

Government borrowing diverts savings away from productive investment. Over time, capital formation and business investment slows down. The long-term ability of the economy to create capital and wealth is compromised. That is my main economic argument against government deficits. But my most serious bone of contention is moral. The more content we are with regular government deficits, the less responsible we become for ourselves. Borrowing increases actual indebtedness... but it increases dependence, too. People get used to expecting things to be paid for and provided by the government. Once created and funded, how many government programs have gone away? Very few. These programs develop a constituency of bureaucrats whose paychecks depend on them, and/or taxpayers on the receiving end of the wealth distribution. The whole exercise in democracy then becomes a shameless debasing game of looking out for your piece of the loot at the expense of your neighbors and friends... and your children and grandchildren.

Link here.

Bloated government threatens long-term prosperity.

From 1951 to 2000, federal tax revenues averaged 18.1% of GDP. Tax-cut opponents frequently imply that Bush’s tax cuts have emptied government coffers and created long-term fiscal chaos, but the Congressional Budget Office (CBO) projects that tax revenues for 2012-2014 will average... 18.1% of GDP. You do not have to be a math whiz to realize how absurd it is to claim that tax cuts cause long-run deficits when tax revenues will mirror their long-term average. (This analysis, by the way, assumes that the tax cuts are made permanent.)

Critics note that tax revenues currently fall below 18.1% of GDP. But this is a short-term phenomenon caused by the recent recession and the temporary stock market-driven collapse of tax revenues from capital gains. No one expects these short-term factors to last. The CBO, for instance, estimates that tax revenues soon will return to historical norms, averaging 18.1% of GDP over the 2007-2009 period.

Deficits, however, are not the issue. The real problem is government spending, and we should view rising deficits as a symptom of Washington’s profligacy. The spending crisis is both a short-term and a long-term problem. Federal spending has jumped dramatically in recent years, climbing from 18.4% of GDP in 2000 to more than 20% of GDP in 2004. But this short-term expansion of the federal government’s burden is minor when compared to what will happen after the baby-boom generation begins to retire.

Bigger government, though, is economically harmful. When politicians spend money, regardless of whether they get it from taxes or through borrowing, they are taking it from the productive sector of the economy. This might not be so bad if lawmakers used strict cost-benefit analysis to determine if the money was being well-spent -- particularly when compared with the efficiency of private sector expenditures. Unfortunately, that rarely happens. Instead, politicians allocate funds on the basis of political rather than economic considerations. This inevitably weakens economic performance. Lower spending would be a good idea even if we had a giant surplus.

Today’s deficit debate is largely a charade. The proponents of big government shed crocodile tears about the deficit because they want higher taxes. Yet historical evidence clearly shows that higher taxes tend to encourage more government spending and hurt the economy -- and both of these factors can cause the deficit to climb still higher.

Link here.


Expounds on virtues of high prices, high margins, barriers to entries, etc.

A 1997 e-mail note from Jeff Raikes, a Microsoft group vice president, asked billionaire Warren Buffett to consider investing in the software company. Some observers have likened Microsoft’s lucrative operating system dominance to a “toll bridge”, Raikes wrote. With a worldwide sales force of just 100 to 150 people, Raikes wrote, “this is a 90%+ margin business.” One of the world’s most successful investors, Buffett is famous for his aversion to technology stocks. “A PC is just a razor that needs blades, and we measure our revenue on the basis of $ per PC,” Raikes wrote. “In FY96, nearly 50 million PCs were purchased and Microsoft averaged about $140 in software revenue per PC or $7 billion... I don’t really see our business as being significantly more difficult to understand than the other great businesses you’ve invested in.”

“On the other hand,” Raikes acknowledged, one difference between Microsoft and Coca-Cola is the width of the “moat” protecting the entrenched company from upstart rivals. “With Coca Cola, you can feel pretty confident that there won’t be a fast shift in user preferences away from drinking sodas, and in particular Coke. In technology, we may more frequently see ‘paradigm shifts’ where old leaders are displaced by new. Graphical user interface replaces character user interface, the Internet explodes, etc.,” Raikes wrote.

In his reply, Buffett said that compared to Coca-Cola, Gates “has an even better royalty -- one that I would never bet against but I don’t feel I am capable of assessing probabilities about, except to the extent that with a gun to my head and forced to make a guess, I would go with it rather than against. But to calibrate whether my certainty is 80% or 55%, say, for a 20-year run would be folly.”

Since then, Buffett has not changed his mind. He continues to talk about the “economic moat” that successful companies must have. In Berkshire Hathaway’s 2003 annual report released this month, Buffett said he was still interested in buying businesses, but only simple ones: “If there’s lots of technology, we won’t understand it.”

Link here and here.


The Emerging Markets Directory provides selected links to Web sites related to the emerging markets nations of the Americas, Europe, Asia, the Middle East, and Africa. The Directory is a private, independent project, established in 1996, and is not affiliated with any government or institution.

Link here.


The decision by UK Inland Revenue to grant the Cayman Stock Exchange “recognized” status has met with a mixed response from the jurisdiction’s financial community. A representative from a leading North American corporate and investment bank said that “as most of our equities are listed in Toronto and New York, I don’t think it will really have too much impact on us directly.” However, others feel that the recognition by the UK authorities will undoubtedly boost the exchange’s credibility internationally, and that with that will come more funds listings. Since opening its doors in 1997, the CSX has attracted over 700 listings, with a market capitalization of more than $46 billion.

More on this story here.


The European Commission announced that it has put forward plans for a new Directive on statutory audit in the EU, which aims to ensure that investors and other interested parties can rely fully on the accuracy of audited accounts and to enhance the EU’s protection against the type of scandals that recently occurred in companies such as Parmalat and Ahold. The proposed Directive clarifies the duties of statutory auditors and sets out certain ethical principles to ensure their objectivity and independence, for example where audit firms are also providing their clients with other services.

It introduces a requirement for external quality assurance, to ensure robust public oversight over the audit profession and improve co-operation between regulatory authorities in the EU, and allows for swift European regulatory responses to new developments by creating an audit regulatory committee of Member State representatives, so that detailed measures implementing the Directive can be rapidly taken or modified.

The proposal also foresees the use of international standards on auditing for all statutory audits conducted in the EU and provides a basis for balanced and effective international regulatory co-operation with third country regulators such as the US Public Company Accounting Oversight Board.

More on this story here.


Chairman of the Federal Deposit Insurance Corporation, Don Powell, has suggested the US credit unions should lose their tax-exempt status in view of the high rates of growth the sector has enjoyed in recent years. “Credit unions ought to pay taxes. The playing field has shifted in recent years,” observed Mr Powell in a speech to the Independent Community Bankers of America. “We’ve gone from 20 credit unions with assets of more than $1 billion ten years ago to 83 such institutions today,” he explained.

“In my view, if they are going to compete with banks then we should do our best to ensure that the competition is fair. Our back-of-the-envelope research shows that taxing credit unions would bring in about $2 billion to the Federal Treasury -- and would eliminate a current credit union subsidy of between 33 and 36 basis points,” argued Powell.

His view is one generally supported by the nation’s banking industry. However, there are currently no plans by the government to abolish tax exemption for credit unions, and the Bush administration has officially stated that it would be against such a move.

More on this story here.


If stock investors have recently behaved as if there never was a three-year bear market (2000-2002), today’s bond investors act though there never was a 1998. The first two months of that year saw record junk bond sales of some $34 billion. But in the spring came renewed financial troubles in Asia; in the summer a full-blown crisis began to erupt in Russia. The Long-Term Capital Management hedge fund collapsed in the fall and nearly took the world financial system with it. Russia’s default on its debt produced huge credit “spreads” and turmoil in global bond markets.

Junk bond prices began a slide that lasted until 2002. In October of that year, bond investor aversion to risk was measurable indeed: The spread (difference in yield) between high-risk junk bonds and ultra-safe U.S. Treasuries was more than 10%. Yet the collective memory of 1998 began to fade from bond investors’ minds in 2003: Junk bond sales reached $134 billion, more than double the previous year. And on January 23, 2004, junk bond yields fell to an all-time low of 6.94%; the spread between junk bonds and Treasuries was about 3.4%. Junk bonds default all the time, yet investors accept this risk for just a few percent points over virtually no-risk Treasuries Junk bond sales in the first two months of 2004 were nearly $28 billion, the fastest start to a year since -- you guessed it -- 1998.

All of this serves to illustrate a larger trend: Investors are wildly bullish in almost every financial market, and by almost every objective measure. Contrast this with all that we know about market history: When true long-term lows arrive, the public remains bearish for years.

Link here.


When you hear or read “No Money Down”, “Creative Financing”, and even “Bankruptcy? No Problem!”, it very well may be an advertisement from a mortgage lender. All through the ups and downs in the stock market & economy in recent years, the media repeatedly said that the real estate market remains prosperous. Interest rates fell to remarkably low levels and stayed there; the percentage of home owning families rose to record levels.

In theory, low interest rates produce more affordable fixed-rate mortgage payments, a formula for long-term stability. But let’s look at the reality. The data suggests that, if anything, low interest rates have invoked the law of unintended consequences. New homeowners have taken on far more debt than they can afford; lenders churn out ever-riskier “creative mortgage” options, with the burden of that risk shouldered squarely by the borrowers.

This week’s Wall Street Journal ran a piece that catalogs some of these “nonconventional” choices, from miss-a-payment to fixer-uppers to mortgages that finance utility bills. In every case, the borrower literally pays a price beyond what a conventional mortgage would require. One especially popular creative mortgage goes by the name “interest only.” The borrower gets a reduced interest rate, but none of the monthly payments go to principle for as long as 15 years.

More on this story here.


At the September 24, 1996 Federal Open Market Committee meeting Fed Chairman Alan Greenspan stated “I recognize that there is a stock market bubble problem at this point... it is not obvious to me that there is a simple set of monetary policy solutions that deflate the bubble. We do have the possibility of raising major concerns by increasing margin requirements. I guarantee that if you want to get rid of the bubble, whatever it is, that will do it. My concern is that I am not sure what else it will do.” In a January 3, 2004 speech Chairman Greenspan stated “There appears to be enough evidence, at least tentatively, to conclude that our strategy of addressing the bubble’s consequences rather than the bubble itself has been successful.”

What prompted Mr. Greenspan to recognize a stock market bubble in 1996? Based on his 1996 criteria to diagnose a bubble, has the “bubble problem” receded or has the bubble actually become worse? Buried in an obscure Federal Reserve Board publication are two sentences that provide the definitive answer. Here Mr. Greenspan clearly defined the bubble that was present in 1996. As of today the “bubble problem” he defined has not gone away.

Link here.

The Fed loves power and creating profits for finance companies.

In February, when the Federal Reserve’s Monetary Policy Report to the Congress was presented by the Fed Chairman, Alan Greenspan, he made the goals of his legacy crystal clear: For the core business of Wall Street, investment banking and banking (the “carry trade”), he wants to be remembered in the Hall of Fame for having made the finance business the greatest profits in the history of our nation.

The “carry trade” is the business of borrowing short and lending long. The carry trade has created the United States finance economy, and about 30% of all profits for S&P companies come from financing activities. The business of borrowing short and lending long has allowed the unprecedented increase in mortgage and consumer borrowing. This has been used by the Fed Chairman to pump up housing prices 45% in the past 4 years so that they can claim household net worth, at $44 Trillion, is the greatest it has ever been. Since wages and salaries are growing at less than the inflation rate, home equity extraction is the only source of unending cash to the U.S. consumer. If the consumer stops spending, not only would it mean that George Bush might not be elected President in November, but the whole world might enter recession. America is the buyer of last resort.

To keep our economy rolling, Alan Greenspan now has only one hope -- he must bring the U.S. housing price bubble to even more ridiculous heights with more free money from the mortgage market. In order to serve this “greater good” and help the current President earn a second term, the Fed Chairman has extraordinary advice for the homeowner: get a variable-rate mortgage today because it offers a lower monthly payment. A lower monthly payment will, of course, mean the consumer will: 1) have more after tax money to spend; 2) be able to afford a more expensive house; and 3) take more money out of their home. What a guy! On one hand, Greenspan is warning financial institutions in the carry trade that interest rates will go up, and on the other hand he is telling consumers they will pay less interest if they get a variable rate mortgage!

The Fed’s problem, as it brings inflation and rising interest rates back, is the homeowner with a fixed rate mortgage. When inflation picks up, that same homeowner will receive a big windfall because his low monthly payment of fixed rate debt will be virtually forgiven. Meanwhile, the banks and pension funds owning those low coupon FNMA securities will be pulverized. If I were a major player in the carry trade, I would be using the central bank buying by Japan and China to get out of all positions by the end of the summer. As a consumer, I would listen to the Fed Chairman urging me to get a variable rate mortgage, and then run the other way and immediately lock in the lowest long-term interest rate we have seen in 46 years (and may never see again in our lifetime)!

Link here.


It hit me late last night as I watched George Soros being interviewed... there are the Grumpy Old Men... and then there are the Elite Old Guys. The Elite Old Guys are the investors you would REALLY want to have on your side. The Grumpy Old Men are the folks that have been bearish their whole lives. There are thousands of these guys -- smart and poor -- because they never stepped up to the plate to buy. Then there are the Elite Old Guys -- and these are the guys worth listening to. To carry any credibility with me, you have to have said both “buy” and “sell” in your investment life.

Sounds simple, I know. But you would be amazed how short the list of Elite Old Guys is -- the list of investors that are concerned about making money rather than being proven right. Let us take a look at the most credible investors on Wall Street -- that small handful of Wall Street old-timers that have actually survived horrible bear markets, that bought stocks heavily when prices were low and nobody was willing to buy, and are still around today and are still relevant.

Richard Russell is 79 years old. He has written his Dow Theory Letters newsletter since 1958. He is incredibly bearish today. He has nearly all his assets in tax-free municipal bonds. But he is no Grumpy Old Man. When nobody believed stocks could go higher, Russell put all his assets AND all the money he could borrow into the stock market in 1958. He held tight through 1966, then sold it all, catching one of the great runs in stocks in history. Today, he sees the big money in gold and gold shares, his largest position outside of his bonds.

Then there is David Dreman. Last week, I read the original 1980 version of his book, Contrarian Investing Strategies. In the 1960s he was frustrated with how expensive stocks were compared to the 1930s, 1940s and 1950s. But then 1980 came. Stocks were cheap, and Dreman became a mega-bull, saying in his book... “Since the 1930s [with the exception of the 1974 market] stocks have never been as totally washed out as they are today...the stock market appears cheap by nearly every historical standard.” These days, Dreman manages billions of dollars and writes a column for Forbes. He has been recommending financials and smoking stocks.

George Soros, the most successful investor alive -- including Warren Buffett -- needs no introduction. Lately, the 74-year-old’s biggest trade is betting against the U.S. dollar -- by buying other currencies and gold. John Neff called the bottom in stocks on the cover story of Barrons in September of 2002. His personal portfolio is loaded with homebuilders... interesting to note.

Link here (scroll down to Steve Sjuggerud piece).


When people talked about the U.S. “exporting jobs” jobs a decade ago, they always assumed the jobs had moved to Japan and Germany. Why? Because those countries exported more than they imported, and thus had chronic trade surpluses. They still do. At last count, Germany still had a huge trade surplus -- $153 billion over the past year -- and an unemployment rate of 10.3%.

What was really happening? From 1990 to 2000, industrial production increased by 49.5% in the United States, 13.4% in Germany and 1.5% in Japan. Japan’s 2003 industrial production index was still much lower than it was in 1990. Trade surpluses appeared in Japan and Germany only because their economies, and therefore their imports, grew slowly, not because exports grew rapidly. Japan’s merchandise exports grew by only 3% a year from 1990 to 2001, slower than Europe’s 4% pace and only half as fast at the 6% yearly increase in U.S. exports.

In the United States, unlike Japan and Germany, the secular trend toward automation of arduous manufacturing tasks was more than made up for by increased employment opportunities in finance, health, education and various professions. From 1990 to 2001 (which includes two recessions), employment rose 1.2% a year in the United States, compared with 0.3% in Japan and 0.1% in Germany.

Despite the evident nonsense of equating trade deficits with job loss, and surpluses with job gains, that assumption is nonetheless still used by the AFL-CIO and Progressive Policy Institute to estimate or “impute” job losses to trade deficits. It follows that Japan and Germany must still be gaining all those jobs we are supposedly exporting. But nobody is foolish enough to try repeating that claim again. So those afflicted with chronic trade phobia have recycled their faded stories by simply replacing the words “Japan and Germany” with “China and India”.

Link here.


For Europe’s two biggest countries, enough is enough -- at least when it comes to the euro-dollar exchange rate. President Jacques Chirac and Chancellor Gerhard Schröder have been talking lately about the poor state of their economies and how the recent strength of the European single currency against the dollar was not helping their attempts to create growth. Now they want something done about it. Unfortunately, it is too little, too late.

The problem for euro policy so far is that it has been run by a European Central Bank that is too busy trying to establish its political independence, therefore ignoring pleas by politicians, and that pays far too much attention to inflation rates. The ECBs hawkish stance was part of the reason why it failed to cut its interest rates as swiftly as the US Federal Reserve Bank did in late 2001 and 2002. This meant that it missed out on a chance to boost eurozone growth at the same time as America boosted its own.

Link here.


Thanks to a lower tax rate on dividends, several major U.S. companies increased their payout in the past year. Even Microsoft began coughing up the cash. Berkshire Hathaway, which has long eschewed dividends, should follow suit. Berkshire Chief Executive Warren Buffett, the second-wealthiest person in the world, was one of the loudest critics of a dividend tax cut. But, after reading Buffett’s eagerly awaited annual letter, shareholders of the $95,000 stock may start asking when they will see any of the $36 billion in cash Berkshire has amassed following a turnaround in its insurance businesses.

Berkshire shareholders generally have accepted the firm’s traditional avoidance of dividends, preferring to let Buffett and Charles Munger, the vice chairman, reinvest the cash for higher returns. Might Berskhire be considering a change in policy? Someone reading between the lines of Buffett’s letter might detect some hints that the Oracle of Omaha may be laying the groundwork for a shift on dividends.

Link here.


Of all the things a company can spend money on, property, plant and equipment are among the most important. After all, a business cannot prosper without investing in itself -- either for expansion or just to maintain what is already there. With this in mind, we screened for a few capital spending standouts. To do so, we started with several criteria related to capital investment and looked at the asset turnover ratio to gauge whether they were putting their assets to good use, then screened for companies with a 10% historical and projected growth rate with positive free cash flow, and with long-term debt to capital less than 60%. Five companies made it through the all the hoops.

Link here.


With only $29 million in assets, Gartmore U.S. Growth Leaders is small in size but that is little consolation to manager Christopher Baggini who must operate within the fund’s mandate of limiting its stock holdings to no more than 30 equities. Though the fund got off to a rocky start in 2001’s bear market, a blazing 54% return in 2003 has put Baggini 12 percentage points ahead of the S&P 500 since the fund’s inception. His new challenge: After a robust 2003, Baggini must now pick stocks in a market that has, seemingly, lost its momentum.

At the moment, Baggini has about a quarter of his assets invested in his top-five holdings: Symantec (SYMC), National Semiconductor (NSM), Xilinx (XLNX), Lowe’s Companies (LOW) and Emulex (ELX). Although he pays close attention to financial metrics such as price to expected earnings, Baggini focuses on finding companies that operate in sectors that have high barriers to entry and that he believes will deliver positive earnings surprises by the end of the year. Such logic is why Symantec is his second-largest holding.

Baggini continues to hold a significant position in Watson Pharmaceuticals (WPI), a generic drug maker with a lineup of 130 formulations, and two biotech companies: Amgen (AMGN) and Gilead Sciences (GILD). He has recently added Williams-Sonoma (WSM) to his portfolio, with the expectation that continued low interest rates will keep consumers spending on their newly acquired or refinanced homes.

Link here.


A basic assumption in the traditional practice of asset allocation holds that stocks are a riskier asset class than bonds. After all, if a company goes belly-up, debt holders often have a legal claim to the assets of a company, while shareholders typically wind up losing their investment. So from a creditworthiness standpoint, it is true that shareholders shoulder a bigger risk than bondholders. But bonds are also subject to another kind of risk -- interest rate risk.

For Jim Lowell, editor of the Needham, Massachusetts-based Fidelity Investor newsletter, that is perhaps the biggest kind of risk investors need to be aware of in the near-term. When the Federal Reserve eventually begins to raise interest rates, he believes that many people who thought they were invested in “safe” bond funds will be quite shocked to see their holdings lose value. Lowell points out that such a tumble in bonds has happened before -- in February 1994. Fidelity’s Government Income fund lost 7% in five months -- nothing like the bursting of the NASDAQ bubble in 2000, but still a very rude awakening for anyone who thought their bond fund investment was safe.

Link here.
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