Thursday, March 30, 2006

Take a Pass on the CAFE

Transportation Secretary Norman Mineta yesterday announced new corporate average fuel economy standards (CAFE) for light trucks. Environmentalists are complaining that the standards don't go far enough. My view is that they are completely unnecessary. The bottom line is that drivers don't care about fuel efficiency when gasoline is cheap. But when it's expensive, like it is now, they care very much. The proof is that SUV makers are finding it difficult to sell these once very profitable vehicles without offering substantial incentives. I wrote about this for Forbes last August when the new rules were first proposed. Read more by clicking below:

We Don't Need No Stinking CAFE

Give Us Guidance

Congress recently heard testimony from those who want to abolish earnings guidance. This refers to management's practice of telling analysts and others what the company is likely to earn in coming quarters. Critics claim that guidance forces a greater focus on short-run results.

Many companies have already stopped providing guidance. Interestingly, these companies also tend to be the troubled ones. The last thing we need here is government intervention. Regulation FD already requires guidance--as well as all material information--be released to everyone (not just analysts) at the same time. Those who favor the elimination of guidance are really saying that investors are better off having less--not more--information. This is ridiculous. I've written a couple of pieces on this subject for Forbes. The links are below:

In Defense of Earnings Guidance

Tight Lips Sink Stocks

Tuesday, March 28, 2006

Has the Fed Gone Too Far?

For the 15th straight time, the Fed raised its target for the fed funds rate by 25 basis points. The new target is 4.75%. Has the Fed gone too far?

Here's what we know: The housing market is slowing. Inventories have taken a big jump on both coasts. Prices haven't yet declined, but if inventories remain high, prices will fall. Home builders are already ratcheting down earnings projections. We also know that home-price appreciation has fueled consumer spending to a large degree in recent years. With the end of the housing boom likely, consumer spending growth will also slow.

We also know that energy prices are way up, yet so far there is virtually no evidence that higher energy prices have resulted in inflation. If anything, higher energy prices appear to have drained disposable income, leaving consumers with less money to spend on other things.

Except for a few sentences in the first paragraph, today's statement was identical to the one issued on Jan. 31. The Fed assures us that inflation expectations are contained, yet warns us about elevated energy prices and says further tightening may be needed.

If there isn't much evidence of inflation, as the Fed claims, why does it keep raising interest rates? Either the Fed has already gone too far, or it knows something it isn't telling us. My guess is that the Fed is convinced that it is only a matter of time before higher commodity and energy prices result in higher inflation. I believe the Fed will keep raising rates until the yield on the 10-year note jumps to 5-5.5%. The danger is that the 10-year yield may suddenly jump higher.

We'll be discussing this issue and more on tonight's Kudlow & Co. on CNBC.

Thursday, March 23, 2006

We're Addicted to Oil Because Oil is Cheap

I just got back to my hotel room in Austin after taking part in a panel discussion at the University of Texas Club sponsored by the local CFA Society. The other participants were Rich Bernstein of Merrill Lynch and Michelle Foss of the Center for Energy Economics. The overall tone of the discussion was bearish. Rich is concerned about a corporate profits recession and is recommending that investors overweight consumer staples. Michelle believes that high energy prices have been offset by cheap labor in China and India. But as more people move into the middle class in those countries, they are demanding better wages. This is likely to result in higher import prices in the U.S. Cheap labor won't offset higher energy prices forever.

President Bush made a point of saying in his State of the Union address that "America is addicted to oil." Of course, it's not the oil we're addicted to; it's the price. We like oil because oil is cheap--not compared to what it cost two years ago, but compared to what alternatives cost today. If you want to see consumption drop quickly simply raise the price. By heavily taxing oil, or by heavily subsidizing alternatives, we can dramatically reduce consumption. Of course, either choice would take money out of taxpayers' pockets and may even cause an economic recession. So as long as oil remains a relative bargain, we should continue to use it.

On an unrelated matter, I noticed that Standard & Poor's said after the market closed today that it will add Google to the 500 Index. The stock jumped 20 or 30 points higher in aftermarket trading. In my view, this makes the stock even more overvalued. However, it may stay at current levels as index funds will be forced to buy it. This buying activity will end on March 31 when Google is officially added to the S&P 500 Index. Expect the stock to weaken shortly thereafter.

Monday, March 20, 2006

Coming Events

Tomorrow morning I'll be interviewing Kevin Landis, Chief Investment Officer of Firsthand Capital Management. Firsthand specializes in technology. It manages about a billion dollars and almost half of that is in its Technology Value Fund. I'll be asking Mr. Landis if "technology value" isn't an oxymoron, and why it makes sense to buy technology now. This MoneyMasters interview will be posted on on Thursday morning.

Later on Thursday, I will travel to Austin, Texas to take part in the CFA Society of Austin's market outlook dinner. I'll be sitting on a panel with Richard Bernstein of Merrill Lynch. Mr. Bernstein is well known for his rather bearish views on the economy and markets. At the current time, we seem to be in agreement on most issues. The panel will be moderated by Vinny Catalano, CEO of iView Research and former president of the New York Society of Security Analysts.

Thursday, March 16, 2006

Cautious on Stocks, but Opportunities Remain

Although I'm more concerned about an overvalued housing market, I'm often asked if the stock market is also overvalued. It's certainly no where near as overvalued as it was in early 2000. Yet I still have a cautious outlook for both the economy and the overall stock market. However, some stocks are performing exceptionally well; and the Forbes Growth Investor Top 50 recommended list is up almost 12% year-to-date.

For example, Sirenza Microdevices (SMDI) is up more than 60% since I added it to the recommended list on Jan. 12. This is a small ($300 million market cap) company that only recently began reporting profits. Yet management keeps revising higher its revenue and earnings projections.

Wesco International (WCC), an electrical construction products provider, is a much larger company ($3 billion market cap) that has almost quadrupled in value since it made it to my recommended list almost two years ago. Yet it's still selling for only 0.7 times sales and about 19 times expected 2006 earnings.

While I remain skeptical of the market's recent rally--especially in the face of $60 oil, an inverted yield curve, rising housing inventories, a negative savings rate, higher levels of personal debt, and only meager gains in real net worth--I still think it makes sense to look for promising investment opportunities.

Tuesday, March 14, 2006

NYSSA Corporate Governance Seminar

Last night, the New York Society of Security Analysts hosted a conference on corporate governance at Bloomberg headquarters. Speakers included Patrick McGurn of Institutional Shareholder Services, Nell Minow of The Corporate Library, Howard Sherman of GovernanceMetrics International, and Jack Zwingli of Audit Integrity.

These firms are in the business of monitoring, measuring, and ranking companies based on various corporate governance criteria. They presented evidence showing that companies that get into trouble are often the ones that have bad corporate governance practices. They argued that corporate governance ratings can help money managers monitor their portfolios and reduce risk.

Of course, their services aren't cheap. Yet the cost may be worth it to those who follow a long term buy-and-hold strategy and to those who take large positions in any one stock. But I'm not convinced this is a useful investment tool for shorter-term investors--especially those who follow momentum-based trading strategies. Nonetheless, it was an interesting conference. Corporate governance ratings are now available through Bloomberg.

Monday, March 13, 2006

Google: Blame Slowing Growth, Not the CFO

Last week, when I appeared on Kudlow & Co. on CNBC, the subject of Google came up. Although I expressed my view that the stock is still overvalued despite its precipitous fall, the discussion focused more on the CFO's blunders. It seems that many investors blame CFO George Reyes for causing the stock to fall. Mr. Reyes has certainly made some mistakes--most notably incorrectly estimating taxes--but you can't blame him for the stock's recent weakness.

The bottom line is that no stock--not even Google--can double revenues on a year-over-year basis ad infinitum. Yet, Google was priced as if it could. The stock is falling for one reason and one reason only: Investors have finally realized that growth is slowing. You can't blame the CFO for that.

Sunday, March 12, 2006

Housing Prices to Decline

Saturday's WSJ has a couple of excellent articles about non-traditional mortgages. Many recent homebuyers will soon see their monthly payments increase because interest rates are rising. It turns out a lot of these people are completely unaware this will happen. The concern is that they will not be able to meet the new and higher monthly payments, and will face foreclosure. Given that inventories of new and existing homes are at multi-year highs and rising, it is inevitable that prices will also fall. So not only will many homeowners be asked to make larger monthly payments; they will also see reduced equity.

It's ironic that just a couple of years ago when fixed mortgage rates were already quite low, former Fed Chairman Alan Greenspan argued that more people should be using floating rate mortgages. Instead of locking themselves into a low rate for 15 or 30 years, those who listened to Mr. Greenspan are now facing fairly sizeable increases in their monthly payments.

Saturday, March 11, 2006

Forbes Videos

Welcome to my blog. MoneyMasters is the title of my video program on You can catch up on past videos by going to and doing a search on "moneymasters". I've got four videos already posted. The first is an interview with Audrey Kaplan, an international mutual fund portfolio manager at Rochdale. Audrey talks about the importance of international diversification and tells you where the best opportunities are. The second interview is with Howard Silverblatt of Standard & Poor's who talks about corporate earnings forecasts. Howard says double-digit earnings growth will come to an end in the second quarter of this year. I've also posted a two-part interview with Liz Ann Sonders of Charles Schwab. We talk about everything from interest rates to savings rates to her work on President Bush's Advisory Panel on Tax Reform.