Tuesday, November 28, 2006

Bernanke Thinking About Raising Rates Despite More Weakness in Housing

Today's existing home sales report was mixed. The good news is that October's 6.24 million homes sold is better than expected. It is even slightly higher than September's 6.21 million figure. The bad news is that it is down 11.5% from October 2005. Even worse, the median price is down 3.5% from a year ago. And inventories are up almost 2% over the past month, and 34% over the past year. There is now a 7.4 months supply of previously-occupied homes on the market.

The price drop is particularly worrisome. That's because sellers don't have to sell if they don't like the offer. It's not reassuring for the housing industry that more homes sold than expected, but at lower prices.

After initially rising on the news, shares of homebuilders reversed course and sold off. There is growing concern that the housing market may not have yet bottomed.

On top of all this, Fed Chairman Ben Bernanke gave a talk today that stressed the risks of rising inflation. He disappointed investors by not making any mention of a possible interest rate cut. Many investors had been hoping the Fed would start easing soon. They weren't happy to hear the Fed is thinking more seriously about another interest rate hike.

Monday, November 27, 2006

Sales Up 19%. Sorry, That's 6%

It's funny how numbers are frequently used to promote a specific agenda. The National Retail Federation released spending figures yesterday for Black Friday weekend. Several media outlets jumped on one figure and put it in their headlines: "Retail Sales Jump 19%."

It would truly be astounding if retail sales actually increased 19% in one year. Of course, that is not what happened. The 19% increase refers to the average amount of money spent by shoppers. This year, shoppers spent an average of $360.15. A year ago, they spent $302.81. That's the good news. The bad news is that there were an estimated 5 million fewer shoppers this year; and sales on Black Friday were up only 6% from a year ago. That's still an impressive rate of growth, but no where near the 19% figure highlighted in the headlines. In fact, the NRF is sticking with its forecast of 5% overall growth this holiday season.

Some retailers will be having a very Merry Christmas. Apparently, Wal-Mart is not one of them. The nation's largest retailer said November same-store sales are down 0.1%. On-line retailers are expected to do very well. The on-line market is still small compared to bricks and mortar stores, but on-line is where the real growth is.

Wednesday, November 22, 2006

White House Says Slower Growth; Higher Inflation

Yesterday Edward Lazear, Chairman of the Council of Economic Advisers at the White House, lowered his growth forecasts. These forecasts are produced twice a year for budgeting purposes.

He called for 3.1% economic growth for 2006. That is a healthy figure, but down significantly from the June forecast of 3.6%. For 2007, he is projecting growth of 2.9%. The reduction in the forecast is primarily due to the slowing housing market.

The White House is also projecting 2.3% inflation for 2006. Despite slowing growth, it expects inflation to rise to 2.6% in 2007. But with unemployment at only 4.4% and calls for a higher minimum wage, there is a good chance that inflation will be higher. And if oil prices reverse themselves and start moving back up toward $70 a barrel, inflation will become problematic.

The housing slump and energy prices are key to what the future holds. The numbers of homes available for sale are rising quickly. Home prices will continue to fall. Homebuilders will continue to report declining earnings.

As for energy, that really depends on what OPEC does. Energy traders are skeptical about OPEC's ability to stick to announced production cuts. Saudi Arabia is the big player in this game. If the Saudis were to cut production significantly, oil prices would move higher. But if the Saudis see that other OPEC countries are not doing their fair share, they may actually raise production to teach them a lesson. That, of course, would cause oil prices to plummet.

Friday, November 17, 2006

Democrats Wait for 2008

I had an interesting discussion with Mike Holland, Chairman of Holland & Co., a New York City private investment firm. Old-timers will recognize his name from his frequent appearances on Louis Rukeyser's Wall Street Week.

Mike and I discussed the Democrats taking over Congress and what this may mean for tax policy. I asked him if the election results will prompt him to change his investment strategies. His answer was no. He still continues to favor large-cap, blue chip, dividend paying stocks. This MoneyMasters discussion is currently available for viewing.

Thursday, November 16, 2006

Dining with Investment Legend Jack Bogle

There are few people in my line of work who can be called legends. There are fewer still who are living legends. Warren Buffett is one. Jack Bogle is another.

Yesterday I had the honor of interviewing Bogle for my MoneyMasters video program. Afterwards, I had the pleasure of taking him to lunch. He is a wonderful and gracious man.

As most investors know, Bogle is an advocate for passive investing. Because he believes investors cannot expect to do better than average in the long run, they are best served buying index funds that have very low fees. He has strongly criticized the money management industry for putting its own interests ahead of investors' interests. In particular, he says funds run by public corporations and conglomerates focus on maximizing returns for owners and managers--not for investors.

Bogle is a man who could have been fabulously wealthy. Instead, he created a mutual fund company, The Vanguard Group, based on minimizing fees. His whole life mission has been to increase the wealth of his investors rather than his own. While I'm sure he is comfortably well off, there is no question he could have done better for himself if he had chosen that as his goal. It was extremely refreshing to be in the company of a man who truly cares about ethics.

I learned a lot about Bogle during lunch. He told me how he had to work his way through Princeton, and how he almost failed. He told me he struggled with Paul Samuelson's economics text, but getting through that book marked a turning point in his life. He told me about some of his conversations with Warren Buffett. Many people would be surprised to learn that Buffett actually favors index funds for ordinary investors.

Bogle is an incredibly prolific writer. He has written several books. There are many more written about him. He roams the country delivering speeches. Best of all, he is more than willing to share his knowledge and opinions. You can read many of his writings at his personal website.

While we were having lunch, I noticed many people in the restaurant looking our way. Of course, they recognized Bogle. As we were leaving, one gentleman got up and came over to say hello. He thanked Bogle for sticking up for integrity in the money management industry.

My MoneyMasters interview with Jack Bogle will be available for viewing on Nov. 30. This is one video you won't want to miss.

Wednesday, November 15, 2006

Housing Foreclosures are on the Rise

Yesterday I heard through a reliable source that the credit union of a major corporation headquartered in Connecticut is suddenly seeing a larger than usual number of employees in financial distress. Several have approached their credit union seeking help.

Most of the problems are housing related. Many of these troubled employees had purchased homes in recent years. Others had refinanced existing mortgages. The problem is they relied on new and exotic mortgages including interest-only mortgages with very low teaser rates. These mortgages are now being adjusted to a higher rate. In addition, borrowers have to start making principal payments. They were already stretching themselves as it was, but suddenly their required monthly mortgage payments have at least doubled.

RealtyTrac, which follows foreclosure rates, says the number of homes nationwide that are in some stage of foreclosure is growing. The highest foreclosure rate is in the Detroit area, which has suffered from the automobile industry's slowdown. Many parts of Florida are also seeing rising numbers of foreclosures.

Yet many economists continue to ignore these warning signs. They all seem to be focused on holiday sales. Perhaps consumers will keep up the spending for a while, but how much longer can that last if some of the air is coming out of the housing bubble?

Monday, November 13, 2006

Options Backdating Scandal Hits KB Home

Way back in 1998, I had breakfast with Bruce Karatz, CEO of KB Home. At the time, the company was still called Kaufman & Broad. Karatz was extremely bullish about the home building industry and the prospects for his company. He turned out to be right. About a year later, I added the stock to the Special Situation Survey's recommendation list, and as everyone now knows by now, home building stocks went on a tear.

Of course, I didn't know at that time that Karatz was personally benefiting from backdating his own employee stock options. Harvey Pitt calls backdating fraud and explains why on my MoneyMasters video. There is no question that backdating is wrong. After all, it requires that you lie about when the options were actually issued. Instead of pricing them on the issuance date, you simply pick a more favorable date from the past.

Ironically, there was no reason for Karatz to backdate his options. After all, the Wall Street Journal reports that Standard & Poor's estimates that Karatz reaped $180 million from the exercise of stock options alone since 1992. In 2005, his total compensation, including options, amounted to $150 million. KB Home said backdating benefited Karatz to the tune of $13 million, which he will repay. Compared to his total compensation over the years, this is chump change. It won't make a dent in his bank account. Of course, by the time the SEC gets through with him, he may end up paying a whole lot more.

Karatz isn't the only one leaving the company. Richard Hirst, chief legal officer, and Gary Ray, head of Human Resources, are also leaving. But Ray is the only one being fired. Karatz and Hirst were allowed to resign. It seems they cooperated in the company's internal investigation while Ray refused.

Backdating is gearing up to be the next big corporate scandal. Karatz is the biggest name to fall so far, but it looks like there will be plenty more coming up in the near future.

Thursday, November 09, 2006

The Middle East is not the Soviet Union

Having written recently that the economy favors the Republicans in the mid-term elections, I suddenly find myself having to defend that point of view. After all, the Republicans got trounced. However, those who read my writings carefully know that I also said the economy would not be the deciding factor in the elections. That burden fell on the war in Iraq. Most voters seem satisfied with economic conditions at the moment, but they are fed up with the Bush administration's bungling of the war. Even though the Democrats don't have a coherent plan, voters obviously felt it was time for a change.

I suspected Donald Rumsfeld might be forced to step down if the Democrats won, but I never would have guessed it would have happened so quickly. The stock market was down for the day until Rumsfeld's resignation was announced. Suddenly the market rallied and closed up for the day. If that isn't adding insult to injury, I don't know what is.

President Bush nominated Robert Gates to replace Rumsfeld. Knowing how paranoid people can be in certain parts of the world, Bush should have stressed that this Gates is from the CIA, not Microsoft.

Like Condoleezza Rice, Gates has a lot of expertise in matters relating to the former Soviet Union. That's all well and good, but isn't it time we stacked our government with some Middle East experts?

Money Matters

I traveled to Bala Cynwyd, PA yesterday to do an interview with Money Matters, a Comcast program on investing that airs on certain stations in the Philadelphia area. The co-hosts were David Ebner of Merrill Lynch and Tami Fratis of Phoenician Ventures.

We talked about the weakening housing market, slowing GDP growth, inflationary pressures, etc. They also asked me to explain the investment strategies behind the Forbes Growth Investor and Special Situation Survey investment newsletters.

In the "small-world" department, Money Matters is produced by Richard Whitfield, my cross country coach at Lower Merion High School in Ardmore, PA. It was great seeing Rich again and finding out that we are dong similar things.

The video should be available in a few weeks on the Internet. You can check it out at Money Matters.

Tuesday, November 07, 2006

Interview with American Superconductor's Greg Yurek

Today I interviewed Greg Yurek, the founder and CEO of American Superconductor (AMSC). In the interest of full disclosure, I have owned this stock for several years.

This company went public 14 years ago to commercialize superconducting technologies. Finally, after all these years, its largest business segment is profitable. But the company is still spending heavily on R&D so it won't be profitable on a company-wide basis for quite some time.

However, there are a couple of exciting projects. AMSC has a contract to develop superconducting motors for the U.S. Navy. These superconducting ship propulsion systems have several advantages over conventional motors including smaller size and weight. AMSC is also installing superconducting cables in a project for Long Island Power Authority.

This MoneyMasters interview will be available for viewing on Nov. 23.

Friday, November 03, 2006

BELM is a Close Out, Not a Sell

Yesterday, I dropped Bell Microproducts (BELM) from the Special Situation Survey recommended list. I didn't drop it because I think it is overvalued. In fact, I think the stock should be selling for $8-10 per share. I dropped it because it had been on our list for 28 months. We typically keep stocks on our list for no more than two years.

Yet I'm shocked at the reaction. The stock fell as much as 12% soon after our close out. I'm sure much of this is coming from swing traders who buy or sell a large number of shares in reaction to any news that comes out. News of our close out even made it onto the Yahoo message boards.

A Special Situation Survey close out is not necessarily a sell recommendation. In fact, I still believe BELM is an undervalued stock. I've owned it myself for several years and haven't sold any shares. I suspect this stock will be bouncing back rather quickly.

Thursday, November 02, 2006

Wal-Mart's Results Augur Poorly for Holiday Sales

The National Retail Federation defines holiday sales as sales that take place in November and December. In 2005, holiday sales were up 6.1% to $435.6 billion. The NRF is forecasting a more subdued 5% gain in 2006 to $457.4 billion.

Yet even this forecast may be too optimistic. Wal-Mart, the nation's largest retailer, announced today that same-store sales in October were up only 0.5% year-over-year. If stores affected by last year's hurricanes are excluded, growth was 1.7%. Wal-Mart is seeing particular softness in women's apparel. What's worse, Wal-Mart is projecting no growth in U.S. same-store sales for November.

Ironically, just a few days ago investors cheered when Wal-Mart said it will slow capital spending in future periods. The stock rallied a couple of dollars per share in response. But that just turned out to be a selling opportunity. Wal-Mart has already given back those gains.

Some of Wal-Mart's losses may be going to Target, but that stock is selling off, too. So are other retailers such as Gap, Abercrombie & Fitch, and AnnTaylor, which also reported disappointing sales figures today.

The NRF's 5% growth forecast for the holiday season may be a bit too optimistic. Don't be surprised if it is revised downward in the near future.

Wednesday, November 01, 2006

Economy Still Favors Republicans

I got a call from Fox News yesterday asking if I thought the state of the economy plays in favor of the Republicans or the Democrats. As I write in the current issue of the Forbes Growth Investor, which was released today, I believe the Republicans still have the upper hand on the economy. Unfortunately for the Republicans, the economy will not play a big role in the mid-term elections. Polls indicate that voters are more concerned about Iraq.

Although the trends are not favorable, for the most part the economy is doing well. GDP growth is slowing, but it's still healthy. Companies are laying off workers, but the unemployment rate is low. Inflation is rising, but it's relatively tame.

One thing to keep in mind, however, is that the economy was doing well during the Clinton administration, too. But when it began to slow toward the tail end of that era, Republicans started warning that the economy was headed into recession. Democrats scoffed at the notion, yet the Republicans turned out to be correct. Today, the tables are turned. The Republicans are the ones in power with a good but slowing economy. So far, I still think the chances of recession are remote. However, the probability keeps rising. Energy and housing will play key roles.

Meanwhile, corporations keep reporting outstanding profits. Standard & Poor's Howard Silverblatt who tracks the numbers is my next guest on MoneyMasters. This video will be available for viewing Thursday morning at 6:00 am.