Wealth International, Limited

Finance Digest for Week of April 26, 2004


Investors convinced that the recent spate of good economic news will cause the Federal Reserve to raise interest rates before the end of the year. They are dead wrong. But that is okay... it is a great opportunity for you to buy gold and precious metals at a discount, and make some short-term profits in a few sectors. Here is the fact investor are missing: consumers cannot afford rising interest rates. Need proof? Away we go...

Bottom line: the economy cannot grow until the consumer can spend more. And the consumer cannot spend more when prices and interest rates are rising. If consumer incomes do not inflate, inflation in producer prices or consumer prices will not matter. Until consumer incomes rise, the Fed stands pat.

That is not to say that the Fed will be effective in stopping the sell-off in bonds and in interest-rate-sensitive stocks (REITS, for example). But it is to say the Fed still considers deflation its sworn enemy. And until consumers incomes pick up, rising rates are likely to lead to much lower consumer borrowing and spending... which, in the last fifty years, has been very bad for American GDP.

Link here.

The new Fed paradigm.

“For at least some investors,” writes James Gipson of the Clipper Fund, “the relevant lesson of history seems to be that repeating the major mistake of the recent past is a really great idea.” To paraphrase in Mogambo-ese: “For the morons in the government and the Federal Reserve, the relevant lesson seems to be ignoring the One Great Lesson Of History.” Namely, creating excess money and credit is a recipe that does NOT result in a delicious chocolate cake.

The old aphorism was that the Fed is supposed to take away the punch bowl after the party really gets started. The new Fed paradigm is something more bizarre: the Fed is pouring pure grain alcohol down the throats of partygoers who are passed out drunk on the floor.

Link here (scroll down to piece by “The Mogambo Guru”).

Greenspan between a rock and a hard place.

By late 2000, the US economy was threatened by the implosion of a stock market bubble and a sharp downturn in business investment. Many observers, myself included, expected that the economy would face a hard landing as consumers retrenched and the imbalances in the US economy were wrung out of the system. Savings would rise, the trade deficit would be righted and the stock market would return to fair value. Such adjustments were bound to be painful, but they were necessary.

It was not to be. Instead, the Fed Chairman Alan Greenspan engineered the briefest of recessions by cutting interest rates 550 basis points and then holding them for a prolonged period at 1 per cent. Conventional wisdom now holds that economic recovery is secure enough for interest rates to rise. Such a view, however, ignores the weak foundations upon which this recovery is based.

Faced with the collapse of a stock market bubble, the policy of the Federal Reserve has been straightforward. Keep interest rates low enough to stimulate consumer spending and promote sufficient inflation in other assets to offset any negative effects from the decline of the stock market. This policy has been strikingly successful: between 1999 and the end of 2003, real personal consumption rose every year. Furthermore, despite the sharp decline in the stock market, a strong housing market has ensured that the net worth of US households has actually risen over the past five years.

Yet there has been a price to pay for this policy. Over the past five years both total household assets and gross domestic product have risen roughly by 10%. During the same period household liabilities have increased by over 40%. This suggests that both the rise in asset prices and consumption have been largely fuelled by credit growth. The problem is not simply that household balance sheets and spending depend on supplies of fresh credit. Rather, it is that the economy has become adapted to the conditions of a perpetual credit boom.

The inflationary manifestations of the Federal Reserve’s easy money policy are clearly visible throughout the global economy. House prices are soaring around the world. An unprecedented capital investment boom in China is also forcing up commodity prices. Interest rates need to rise. But what will happen in the United States if they do?

The Federal Reserve now finds itself caught between a rock and a hard place: if it leaves interest rates untouched at their current level, then consumer price inflation will almost certainly take off. Rising interest rates, however, threaten to stall the US economy and bring about a deflationary collapse. Current Fed thinking blames both the Federal Reserve in the 1930s and the Bank of the Japan in the early 1990s for pursuing excessively tight monetary policies after the collapse of earlier speculative bubbles. This suggests that low interest rates will be with us for some time to come.

Link here.


Invective against outsourcing will never stop being wrong-headed, not even unto the outsourcing of the last available job. To see this, first consider that national borders are arbitrary lines, divisions which are only imaginary political constructs, possessed of no fundamental economic significance whatsoever.

More on this story here.


Alan Greenspan has become all but irreplaceable. His current term expires in June, and President George W. Bush has already stated that he can have his job for another four years. Senator John McCain, campaigning for the Republican presidential nomination in 2000, promised famously that if Greenspan died, he would prop him up in his chair and let him carry on -- perhaps taking a cue from the treatment of Lenin by his Bolshevik cohorts.

This is particularly ironic since U.S. policymakers like to extol the virtues of the American economic system and encourage others to emulate it. Could it be that the fate of the world’s largest economy and its largest financial market, accounting for 46% of the total global stock market capitalization, is riding on the shoulders of a 78-year-old former economic consultant? After all, a solid economic system should not depend too much on those who administer policy. It is high-wire acts and magic tricks that are completely reliant on the skill of the performer. There is something here that does not quite add up.

In fact, there is a major problem with the Bush-Greenspan economic boom. It has been largely based on fiscal stimulus, resulting from two rounds of tax cuts and runaway military and domestic security spending. The budget deficit is forecast by the Economist Intelligence Unit at nearly $500 billion this year and at $700 billion by 2008.

Had this been a developing country, like Russia or Argentina, such fiscal and monetary profligacy would long ago have led to the dispatch of worried IMF officials. But the United States is different: It has the dollar, the world’s reserve currency. Foreigners will accept dollars in return for their goods and services, regardless of how many of them the Fed keeps printing. Foreign central banks will continue to support the dollar -- spurred by fiscal and monetary stimulus, the U.S. market is the only source of demand growth in a world plagued by excess supply.

These factors have kept U.S. consumer price inflation low. Still, excess liquidity has to go somewhere. Having been burned on the “new economy” boom in the late 1990s, Americans remain weary of the stock market. Instead, they are busy buying homes, and a potentially devastating bubble has developed in the real estate market. To cite just the most outrageous example, the average two-bedroom apartment in Manhattan now sells for nearly $1 million. When the housing bubble bursts, it will be much more painful than the deflation of the Internet bubble, and it will take much longer to mop up. This is why the Fed will not raise U.S. interest rates any time soon, and even then only by a modest margin. The worldwide gorging on liquidity is likely to continue for a while longer.

Foreign economies have benefited from U.S. fiscal and monetary largesse. Real estate bubbles are now plaguing all dollar-bloc economies, from Britain to New Zealand, and emerging stock markets have long entered the bubble stage. ventually, this will all come to an end. When or how is difficult to predict but, as one famous economist once said, things that can’t go on forever usually don’t. There will be hell to pay, and emerging economies, such as the Asian tigers, China or, most notably, Russia, which have their own indigenous imbalances to contend with, will be hit especially hard. But for now the feast just goes on.

Link here.


No committee fo federal employees sets the price of soybeans, autos or equities. Why should we have one trying to set the price of money? Alan Greenspan is a knight commander of the British Empire and Ben S. Bernanke is a distinguished scholar, but each draws a government paycheck. So when reading about the deliberations of the Federal Open Market Committee, the Fed’s policymaking arm, I mentally substitute the words “government workers” for the loftier term “central bankers”. Government workers are only human.

Central bankers are susceptible to believing themselves to be somehow more than human. To listen to Greenspan, Bernanke and the other ten members of the FOMC, you would suppose they had advance copies of the 2005 editions of the Wall Street Journal. They dream up an interest rate -- the federal funds rate, now 1% -- and impose that rate on the worldwide dollar economy. But what do government workers know about interest rates?

For those who seek shelter from government-imposed interest rates and exchange rates, I continue to favor gold and silver. Neither asset produces income or cash flow, and each, for that reason, must be regarded as a speculation. But there are speculations and there are speculations. The proposition that our monetary masters will badly miscalculate is, I believe, about as sure a thing as life affords.

Link here.


The strong growth in March payroll employment gave succor to the bond bears. They have been telling you that the next big move in interest rates is up, ending the rally in Treasurys that began last August. They foresee substantial business spending on inventories, equipment and software, which is supposed to propel the economy to full employment and inflation before long. So the Federal Reserve, they say, will jack up rates in anticipation, maybe before the November election. These baleful forecasters also think that foreign central banks will stop their huge buying of Treasurys. That would then push up U.S. rates ruinously. I disagree. As the extra income from tax cuts and mortgage refinancing cash-outs fades, continuing layoffs will curtail consumer spending in this year’s second half. Sluggish sales will retard business spending and keep the Fed at bay while reviving the specter of deflation.

I also expect foreigners to keep recycling dollars into Treasurys. Our current account deficit goes hand in hand with the federal deficit. The recent jump in foreign official Treasury holdings (see chart) also reflects the dollars the central banks buy to support the buck. If foreigners, especially governments, stop buying Treasurys, there could be trouble in our bond market, and if they unload what they now have, big trouble. But these actions are unlikely. Do not believe rumors that Japan will no longer support the dollar because it can afford to downplay exports. Similarly, China cannot abandon its dollar buying. It needs a strong dollar to keep its exports competitive and to keep its underemployed population busy. The day may come when the Chinese government stops being the lender of last resort to America, but if it does stop, there are a billion or so Chinese citizens ready to take up the cause.

The legendary stability of Treasurys and the ubiquity of the dollar make Treasurys very appealing to central banks overseas. The Euroland economies are a mess. Dollar alternatives to Treasurys, such as American stocks and real estate, are out for central banks. As for gold, they are in the process of selling, not buying, it. Treasurys’ special allure remains intact, and I see the next big move in interest rates as down.

Link here.


It is big nanotechnology news: Nanosys has announced the industry’s first Initial Public Offering. Nanosys is not just a company with “nano” in its name. It is a company that is doing real, creative work at the nanoscale. It is likely to be followed by a number of other companies that represent so-called “pure nanotech plays”. Right now there is a lot of interest in these companies from investors, notwithstanding that -- based on past experience in other new technology areas -- it is a near-certainty that most of them will fail.

Nanotechnology blogger (and journalist) Howard Lovy points to the statement of risks listed in Nanosys’s registration statement, as a comprehensive list of what can go wrong. As I look over the risk statement, I see one item that, to my mind, looms large. Nanosys notes the risk from “government and environmental regulations” and “legal restrictions due to ethical concerns or export regulations”. These are big risks and from the standpoint of the industry as a whole, as opposed to any particular company, they represent a very large risk indeed.

More on this story here.


Back in the good old days, the mortgage securities market was one of the safest investment havens. The market was highly stable and paid excellent yields; the getting was so good that the government created not one but two entities (Fannie Mae & Freddie Mac) to add grease to the wheels of the mortgage lending/securities industry. Yet a suitably potent mix of time, monetary policy, and mania psychology can turn even the safest haven ... well, into something it did not use to be. Freddie Mac stopped being “steady Freddie” and started acting like a hedge fund. Institutions that held large amounts of mortgage securities figured out ever more elaborate ways to transfer large interest rate risks. Derivatives and interest-rate options found their way into the mix.

Then interest rates fall to 40-year lows, and the cost of debt service for large institutions actually was less than the yields of mortgage securities. So those institutions load up on debt and on mortgage securities. It seems like free money. Meanwhile, back at the center of this elaborate web, record numbers of homeowners were refinancing. An immense amount of mortgage debt got paid off before maturity, replaced by new mortgage debt at lower rates. This means a decline in yields on mortgage securities -- which is what the elaborate hedging and risk transference was all about.

And maybe -- just maybe -- the stupendous scheme could hold, based on one gigantic if: namely, if interest rates stay low. The story above only captures part of how large the liquidity risks have become to the overall financial and banking system. It is the little told and even less understood background to the “U.S. Home Sales Rocket to New Record” story in today’s headlines.

Link here.


This past January/February, for the first time since 1996 the Dollar Index had fallen below 85. The euro stood at record highs against the greenback. A well-known weekly financial publication compared the dollar’s plight to the calamity that befell the currency of a certain Latin American nation: “As any Argentine must know by now, the markets, like the mills of the gods of old, grind slow, but they grind exceedingly fine. At the moment, the markets threaten to grind the dollar to powder.” However, we said “The Dollar is Close to a Reversal” at the end of January, and “A strong bullish key reversal week was had in the U.S. Dollar Index.... providing the first sign that the dollar has indeed bottomed” on February 20.

What now for the U.S. dollar? Interestingly enough, bullish sentiment has reached an extreme not seen for two years. Given what we see in the wave pattern, this sentiment data is interesting indeed.

Link here.


Verizon: Wireless Growth, Wireline Woes

Verizon Communications, already the dominant cell phone carrier in the U.S., continues to trounce its main rivals and appears to be taking particular advantage of the turmoil caused by the pending buyout of AT&T Wireless by Cingular. The company’s wireless arm, Verizon Wireless, added an impressive 1.4 million subscribers and $1.1 billion in revenue in the past year, while also improving its industry-leading margins and customer retention.

At the same time, however, Verizon (NYSE: VZ) proper continues to be battered by declines in its core business -- selling local phone service. Verizon reported that customers cut off 2.4 million lines in the past quarter, a drop of 4.3%. Last week, rival BellSouth (NYSE: BLS) said customers cut off 800,000 lines, a 3.6% decline, while SBC Communications (NYSE: SBC) customers also disconnected 2.4 million lines, or 4.3%.

In the year ahead, the big question for Verizon and the other Bells is: How powerful will the latest technological threats to their local business prove to be? So far, second-line disconnections and the switch to cell phones have driven local-phone declines, but those factors seem to have reached a plateau. However the other two threats -- competition from cable companies and VoIP -- have yet to really bite. As of last September, cable companies had only 2.5 million phone subscribers, or just over 1% of total U.S. phone lines. Vonage, the leading VoIP provider in the U.S., has just over 100,000 lines. There are many signs the second duo could eventually make the early drops pale by comparison.

Link here.

Riding the new Wi-Fi Wave

The administrators at San Antonio Community Hospital in Upland, California have concluded that the newest generation of Wi-Fi (stands for “wireless fidelity”) phones is so reliable and secure that it can be trusted with confidential patient information and critical medical instructions. Using the system, which goes live this month, doctors will be able to call from stairwells and other crannies where cell phones and regular cordless phones fail. Fancy features will let nurses instantly locate empty beds and admit patients from the waiting room. What is more, because phone calls ride on board the hospital is own wireless network, there will be no monthly phone bills from cellular carriers.

The new Wi-Fi technology heralds a telecom future that is both brilliant and bleak: fantastic devices and free services for consumers, disappearing dollars for telecom companies and their long-suffering investors. A similar cycle began in the late 1990s when phone calls traveling between distant cities and continents began hitching cheap rides on Internet-style networks built for data. By 2000, after fiber-optic cables whittled the price of carrying a call to just about zero and new competitors flooded the market, the long-distance industry had peaked and begun a steep slide. It has since seen a third of its annual revenue vanish in four years -- $35 billion, poof! -- and the future is grim.

Now the same kind of destruction is engulfing the local phone monopolies and even threatens the cell phone industry. It promises to transform the phone system with new competition, plunging prices and a passel of new features. This next wave begins with “Voice over IP”, which means zapping phone calls over the Internet (or private networks built like the Internet). It continues with “Voice over Wi-Fi”, Wi-Fi being a free wireless on-ramp to the Net. It appears so unstoppable that even the old Baby Bells and cellular carriers have accepted it. Now they are about to accelerate the migration, launching a multibillion-dollar rebuilding binge to overhaul their old networks and offer cut-rate Net phone service. This, of course, will speed the demise of their mainstay business of voice traffic. But they do not have any choice.

This new round of turmoil follows a few years of unprecedented upheaval. In four years $1.7 trillion in value has disappeared from telecom stocks. Bondholders have taken another $103 billion wallop ($26 billion from WorldCom alone), according to Fitch Ratings, as some companies went bust and others were seen to be less than gilt-edged. Which prompts the question: Will investors get stuck yet again?

“Our business models will have to change; we have to rethink our network.” says Vinton G. Cerf, who helped build the original Internet and is now the head of technology strategy at MCI. That means giving up the century-old idea that selling phone service is a sustainable business. “The things the telecom industry sells may become an adjunct to what’s on the Internet,” Cerf says.

Link here.

Pushing VoIP through the door.

Portals like Yahoo! and MSN let you shop for cars, check your stocks and manage your love life. Now some folks think they should handle your phone calls too. Voice-over-Internet Protocol (VoIP), the process of making a phone call over the Internet, has been making steady inroads against traditional phone technology. Its proponents, who see that progress as too slow, are touting an idea they say could turn that pace into a rout: bundle the technology into an Internet portal. The idea is not too far-fetched -- the portals already offer e-mail and broadband. But it may be a case of putting the cart too far ahead of the horse.

The large majority of consumers have yet to be convinced of the advantages of VoIP -- other than its low price. But deeper partnerships with the portals could do the trick by unleashing a realm of new services. But that may not be enough to get the phone companies to call. Until the threat from standalone VoIP pioneers like Vonage or aggressive cable companies such as Comcast (NASDAQ: CMCSA) really registers with the phone companies, none of us is likely to call our friends from the Yahoo! portal.

Link here.


If you think home prices have gone out of sight, you are not imagining things, as this index of P/E ratios illustrates. Price/Earnings ratios for houses? Sure. Compare a building’s purchase price with its net rental value -- that being the rent that could be had from it, minus property taxes and insurance. Our source, Charles Peabody of research boutique Portales Partners, does not have absolute P/E ratios, only relative ones; the chart, therefore, shows only how the multiple has changed over time. The index says that houses are even more overvalued than they were at the peak of the last two price run-ups, in 1980 and 1990.

If you have an idea what houses rent for in your neighborhood, you can calculate your own P/E ratio. Consider, for instance, a four-bedroom home in the Kansas City suburbs recently on the market for $360,000. Now divide that price by what similar homes renting in the area are earning their owners -- in this case, $30,000 a year, net of property taxes and insurance. Result: a P/E of 12.

A steal? Maybe. But rental vacancies across the country have reached a 17-year high, a phenomenon likely to put a damper on rent increases. Paying a high multiple for a house now, in other words, is a bit like buying a high-P/E growth stock just before the earnings go flat.

Link here.

REIT index tanks.

February’s Elliott Wave Financial Forecast said: “January brought several indications of a top in real estate prices.” The EWFF discussed one of these “indications” at length, specifically the growing celebrity of the world’s best-known real estate developer, Mr. Donald Trump: “Trump, one of the great heroes of [the bull market], is a master at climbing into the limelight near important market peaks.” Some 12 weeks later, it appears Mr. Trump has done it again. An exchange-traded fund that mimics Real Estate Investment Trust indexes shows that a decline of just seven market days erased 50% of the fund’s gains since October 2002.

Chart here.


It is a Wednesday morning in a ritzy neighborhood in São Paulo, Brazil, and at the Pão de Açúcar supermarket trim housewives in trendy workout gear pore over a rich selection of imported Camembert and Gorgonzola cheeses. Twenty minutes away, in a grittier part of town, working-class shoppers at CompreBem Barateiro grab specials like an 11-pound bag of rice for $3.40 and two frozen fish for 68 cents.

Though the two chains cater to opposite ends of Brazil’s economy, both are operated by the country’s largest retailer, Companhia Brasileira de Distribuição (CBD). Controlled by Brazil’s billionaire Diniz family, CBD has weathered many a storm since its founding in 1948, from the perpetually turbulent Brazilian economy to divisive internal squabbling. Today CBD faces an even bigger challenge: Wal-Mart, which in March suddenly expanded its presence in Brazil fivefold with the $300 million acquisition of 118 stores in the Northeast region.

But CBD’s chairman, Abílio Diniz, 67, is unfazed. “We have no problems competing with Wal-Mart,” he says dismissively. “We are Brazilians. We know this market.”

Link here.


Peter Cundill has seen false dawns in the nightmarish Japanese market before. The last one was in 2001. But the Canadian money manager is indifferent to the overall state of the Nikkei, down 56% since its late-1989 peak. It is enough for him that Japan is a place where malaise has long ruled the day -- and a lot of good values can be found. His one U.S. fund, four-year-old Ivy Cundill Global Value Fund, is 40% in Japanese stocks. It has returned 9.5% yearly since inception, besting its benchmark (Morgan Stanley’s dollar-denominated Europe Australasia & Far East index, or EAFE) by six percentage points. He thinks his Japanese stocks have a lot more room to climb.

Little-known in the U.S., where his new fund has only $110 million, Cundill, 65, has been successfully doing global investing for a good while. Cundill is worldly even by the standards of global money managers, making his home in London yet running most of his business from Vancouver. Wiry and energetic, Cundill welcomed 2004 with a five-week tour of companies in Tokyo, Hong Kong and Shanghai. Although he owns some stocks inburgeoning China, like power generator Citic Pacific, he prefers to invest inChina via Japanese companies selling there.

He first visited Japan in 1969 and began investing through his Canadian funds in 1985, enjoying a “good ride” up to 1987. Then he went short -- a few years too soon, it turned out -- and stayed short in the Tokyo market until covering in 1995. A prescient call. The Japanese mutual fund market, which in 1990 was larger than the U.S. fund industry, collapsed under the weight of overpriced stocks and a sclerotic economic system. In 1997 Cundill returned to buying Japanese equities. Again, a little too soon. But now the Japanese market has come back to life. The Nikkei is up 9% this year.

Still, good values remain. Cundill avoids macro analysis, such as weighing the viability of Japan’s banking industry or the strength of its imports. Cundill prefers his own method of finding value, which borrows from the classic Graham and Dodd approach. In pure Grahamism, all that matters is assets, not their earning power. Cundill’s variation on the theme involves assessing the going-concern value of each of a company’s divisions, then estimating whether the company is likely to increase earnings and revenue over the next three years. Don’t, he says, fall into a value trap -- where a stock is cheap but just keeps getting cheaper as the business falls apart. He prefers companies that trade at a third less than breakup value. One favorite is Kirin Brewery, Japan’s second-largest beermaker, trading at 80% of Cundill’s private-market valuation.

Link here.


The old market line used to be “three steps and then a stumble”. This implied the Fed would raise rates three times and then the markets would begin to feel the effects. Today, Greenspan needs to merely hint that maybe, possibly, some time in the future they are going to raise rates and the markets throw up. Let’s be clear about this. They are going to raise rates. The question is not if but when.

I agree that rates should be higher. But the Fed painted themselves into a corner last year, and now they (and we!) have to live with that reality. Simply changing the language is going to create a big move in the bond markets. Absent strong inflation and rapidly rising employment numbers, both of which I do not think we see in the next few months or so, I think they wait until at least August. I think the bet is still until after the election, but I must confess to looking over my shoulder on that prediction. If the facts change, I will change as well. We will need to monitor the data coming out over the next few months very closely.

But in any event, to the extent you have exposure to rising rates, whether as a trader, in your personal debt or mortgages or investments, I think it is time to begin to lighten up. Greenspan told us the train is going to leave the station. He just did not say when. I think it was J.P. Morgan who said something like, “I made all of my money by getting out too early.” [Ed: The version we remember was Rothschild saying he made his fortune by “Always buying before the bottom and selling too soon.”] We are getting ready to enter a period of potentially serious market volatility. Watching the markets the past few days gives me the feeling that things could break quickly.

Link here.


There has been a lot of discussion lately regarding the expensing of stock options by corporations and with the first quarte’qs earnings season under way, this issue takes on added importance. Executives like Craig Barrett of Intel Corporation, Ms. Carleton Fiorina of Hewlett Packard and John Chambers of Cisco Systems have argued against the expensing of stock options granted to managers and employees, as there is no “accurate” method for valuing the options.

On the flip side financial analysts and some mutual fund managers have argued for expensing, citing the need for “more transparent” corporate reporting. In line with this view the Financial Accounting Standards Board has recently announced a proposal to require publicly traded companies to record as a compensation expense all forms of share-based payments to employees, including employee stock options. The value of this stock compensation would “generally be measured at fair value at the grant date.” Ostensibly the determination of “fair value” is left to the companies. Both these arguments ignore the fundamental purposes of financial statements of public corporations.

Financial Statements of corporations are intended to serve several purposes. In part they are supposed to disclose the “assets” and the “liabilities” of the company, using “real” and verifiable data wherever possible. They are also expected to inform the investors as to how their money has been used by management and the benefits delivered to them, the owners of the company. To this latter point, the financial statements are a “report card” on management’s performance.

Investors already have “one strike” against them -- the “report card” on management is “prepared” by management. It is simply unconscionable to pollute this report card further by giving management the ability to “value” options or other non-cash compensation that they either provide for themselves, or that they receive from the board (often with “assistance” from management).

Financial Statements should be considered “sacred” and treated with respect -- clearly not something that has been done in the era of the off-balance sheet financings and other shenanigans. All “money” coming in and going out should be in the form of cash. There is an underlying philosophical question as to why management needs to be “incented”, in addition to getting paid handsomely, to do a “job”. It is not at all clear whether stock options are effective in motivating management and employees in an ethical manner (WorldCom and Enron come to mind). In order to determine if the “incremental” value provided to the shareholders is a sufficient “return” on the “incremental” cost of stock options we need to know the “exact cost” of the stock options. What happened to the good old (ethical) value of doing a job well because you are getting paid for it, in cash?

Link here.


A news article on the pending Google IPO actually said, quoting an “expert”: “In the 13 years we’ve been researching IPOs, we’ve never seen a more hyped IPO.” A bit of digging into IPOs generally found some data from a professor of finance at the University of Florida. He compiled a list of common stock IPOs that had at least doubled in price on the first day of trading, in the years 1975 to 2002. To make the list the offer price had to exceed $5, with proceeds of more than $5 million.

The 10 largest first-day IPO percentage increases came during a 16-month period from November 1998 to February 2000. Topping the list was VA Software (NASDAQ: LNUX), which climbed 697.5% on its first day of trading; it has since declined by 99%. None of the 10 largest IPOs has come remotely close to revisiting their first trading day highs.

I cannot produce a better example than this of the before and after of a financial mania. For that matter, I cannot think of a better example than the Google IPO frenzy to show that the mania psychology lives on. The facts about the IPOs above are not in dispute: Most investors may not know the facts, but little would change if they did. The Google frenzy is on, even though the actual IPO is still to come.

Link here.


What is and what is not free trade is a source of unending confusion, as the new World Trade Organization ruling on US cotton demonstrates. It is a good thing to have the US cotton subsidy racket receive a thorough thrashing, even if at the hands of an unnecessary and objectionable body such as the WTO. If it results in a pullback for such subsidies, all to the good. It is sheer nonsense for the US cotton industry to claim that cotton somehow “stands above all other crops” in “its contribution to the US economy” -- or, rather, if this is true, let cotton stand on its own two feet.

The Bush administration pulled back from its disastrous steel tariffs only when threatened with WTO-approved sanctions. A regime whose policies are protectionism at home and war abroad, ignoring all critics and indefinitely locking up dissident citizens as “enemy combatants”, needs to be checked by some institution. And as contentious as these WTO disputes are, they remind us of how much more civil the world of economics is than that of war.

Put aside the picture-perfect price models that Brazil used in its WTO argument, and consider the case on principled grounds. The WTO decision is certainly a victory for US taxpayers. It might also be a benefit to Brazil’s cotton growers, though no one can say for sure how the prices and industry would shake out in a real market economy. It is not, however, a victory for free trade as such. To understand why requires us to try to think about this topic with some degree of intellectual discipline.

Link here.


They slogged through violent waves to reach shore. Their gold coins, and their way home, thrashed against a rocky, violent ocean floor. Corpses of loved ones and fellow sailors lined the beach. The 1,500 survivors set up camp and salvaged what they could. Pirates came for the rest. Three centuries later, gold, silver, gems and other rarities fit for a queen’s dowry still hide beneath sea and sand, until dreamers and divers such as Rob Westrick and Rex Stocker unearth them.

Heartland Treasure Quest is one of about 20 private companies that Florida contracts with to search for treasure in state waters. The state claims the first 20% of whatever is found, typically the most valuable items, which go into state museums. Treasure hunters pay a $600 fee to get started -- then $1,200 for an artifact contract to excavate, all before landing any treasure. The companies lure investors with dreams of the queen’s treasure. The hunters say the risk sweetens their reward -- for those who can afford to come up empty-handed.

Link here.


A House Financial Services subcommittee approved legislation to revitalize the gold dollar coin program by establishing a series of dollar coins that would feature U.S. presidents in the order they served. Under the measure approved by voice vote, the presidential coin program would start Jan. 1, 2006, with George Washington. The gold coins would resemble the Sacagawea dollar.

In addition to the presidential coins, a new, pure-gold-bullion coin would be minted with images of the first ladies and would be released in sequence with the presidential dollars. There would be two first lady coins for the two presidents who remarried while in office. The image of the Statue of Liberty would be used for presidents who were single while in office. The gold bullion first lady coins would cost $250 each.

More on this story here.


Increasing criminalization, diminishing third-party reimbursements and the onerous assault on patient privacy under the new HIPAA privacy regulations are combining to send more doctors back to the cash-based practice of medicine, according to testimony given by members of the Association of American Physicians and Surgeons (AAPS) to the Congressional Joint Economic Committee, at a hearing called “Consumer-Directed Doctoring: The Doctor is In, Even If Insurance Is Out.”

Even the usually combative single-payer supporter, Rep. Pete Stark listened carefully, saying “he had no problem with what he had heard here today.” When Rep. Stark challenging the concept of patients as educated consumers, saying “I think patients are clueless as to what it costs for medical care and for shopping,” AAPS member Alieta Eck, M.D. of New Jersey, nimbly fielded the question. “Well sir, you shopped around for your pediatrician, didn’t you?”

Thousands of doctors across the country have chosen to go back to “Simple-Care” cash-based practices. In doing so, they have reduced administrative and compliance costs and passed those savings along to patients, such as $35 office visits and $15 laboratory testing fees, according to AAPS member, Dr. Robert Berry, director of the PATMOS EmergiClinic in Greeneville, Tennessee. “The only way I can keep my price so low is by avoiding the crushing overhead and hassles that other physicians allow third-party payers to impose on their practices,” testified Dr. Berry, who plainly posts prices in his office, ranging from “Poison Ivy -- $25” to “Simple Lacerations -- $95.”

When patients buck at the concept of foregoing their insurance and $10 co-pay, Dr. Berry uses a simple analogy. “If you don’t have insurance for routine car maintenance, then why have it for routine medical care since fees at our clinic run anywhere between an oil change and a brake job.”

Physician income is controlled by the government and health plans, but there is no control on their expenses. AAPS members, David MacDonald and Vern Cherewatanko, founders of SimpleCare, started their cash-based clinics after the managed care market squeezed them so severely by increasing overhead and hassles while cutting reimbursement to the point that they were losing money. With five clinics and $10 million in billings, their average reimbursement was $43 per patient, while the average costs ran $50, of which $20 alone was attributed to billing.

And it is not just the private plans that are causing the cost spiral to skyrocket. Physicians have made great changes to their practices to comply with Medicare regulations, most involving less time for patient care or additional cost, including spending more time on documentation, restricting services, hiring more compliance and billing staff, or just quitting Medicare. A 2003 survey revealed that physicians and their staff spend almost one-fourth (22%) of all of their time devoted to Medicare paperwork and compliance.

Link here.


In an environment of money printing and excessive liquidity, which leads to strong debt growth and high asset inflation, real bargains and truly distressed assets could be a thing of the past until such time as an economic or financial accident again creates value in one or another asset class. I mention this because when I look around the world at equities, bonds, commodities, and real estate, I find it increasingly difficult to identify assets that meet my criterion of being “great values” that I would feel comfortable in just putting aside and waiting to appreciate substantially at some point in the future.

Moreover, I get the feeling that, with very few exceptions, most assets will be available at lower prices sometime in the next few years. Take as an example New Zealand. A few years ago, assets in New Zealand and the cost of living there were extremely low because of a depressed N.Z. dollar and an overbuilt real estate market. But now, with the N.Z. dollar having doubled in value against the U.S. dollar, I found on a recent visit to this remote but scenic country that prices were almost as high as in the United States. A few years ago, Australia was a real bargain compared to the United States, but today property prices in Sydney are as high as, or even higher than, in New York, and the cost of living is close to that of the United States -- again, partly because of the strength of the Australian dollar against the U.S. dollar.

If we recall colleague Richard Strong’s prediction in 1996 that in the future U.S. stocks could be valued as highly as Japanese stocks were in the late 1980s, I think it is conceivable that assets such as real estate, equities, commodities, or even bonds could continue to appreciate and reach much higher prices than I have been expecting. At the same time, I am fully aware that not one single credit-driven asset inflation has ended “harmoniously” and led to “the best of all possible worlds”; instead, these inflations have always been followed by a severe bust and financial crisis, which then erased most, or even all, of the previous gains.

I was leaning toward the view that in 2004 some assets would continue to increase in value, while others, such as bonds, would begin to fall by the wayside and enter longer-term bear markets. Upon further consideration, I am now increasingly concerned that sometime in the near future“qeverything” could begin to unravel! Whereas in the past I have had the tendency to dismiss Robert Prechter and Gary Shilling’s deflation scenario as unlikely, I now feel that the current universal asset inflation will be followed by a serious bust and asset deflation, which will kill consumption in the United States. But when? I must admit I am at a loss as to when this bust will occur.

Link here (scroll down to Marc Faber piece).
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