Yesterday's release of the minutes from the Federal Open Market Committee's April 29-30 meeting shook the markets. In particular, investors were put off by forecasts for slower economic growth and indications that no more rate cuts are in store. Just about the only good news that could be found in the minutes were references to stronger exports and slowing core inflation. At the same time, however, the Fed raised concerns about elevated overall inflation and rising expectations for future inflation. Committee members also expressed concern about slowing economies abroad, especially in Japan, the U.K., the euro zone, Canada, and Mexico.
The Fed actually expects U.S. GDP to contract during the first half of 2008, which of course is almost over. This is one way to say recession. The Fed remains hopeful, however, that the American economy will strengthen during the second half due to "accommodative monetary policy and fiscal stimulus." The former refers to the significant interest rate cuts that the Fed has already delivered. The latter refers to the tax rebate checks. Despite this expectation for a stronger second half, Fed economists reduced their projections for GDP growth for the full year. Their projections now range from just 0% to 1.5%, down significantly from the 1.0% to 2.2% range delivered just three months earlier.
Rebate checks are not likely to provide much stimulus. This money will probably be used to pay down debt or fill the family car's gas tank a few times. Real fiscal stimulus requires tax cuts. Unfortunately, there is no hope of that happening in the current political climate.
The minutes also said that "most members viewed the decision to reduce interest rates at this meeting as a close call." They don't want to cut rates again unless things really go to hell in a handbasket. The Fed said, it is "unlikely to be appropriate to ease policy in response to information suggesting that the economy was slowing further or even contracting slightly in the near term."
Two FOMC members actually voted against the latest cut. Richard Fisher warned that rate cuts were hampering economic activity by reducing the value of the dollar and contributing to the rise in import and commodity prices.
So there we have it. According to the Fed, although we can expect much slower economic growth than we previously anticipated, we can no longer count on further interest rate reductions. There certainly wasn't much in the report to be optimistic about. Of course, that explains the big sell-off in stocks that took place soon after the minutes were released.
Thursday, May 22, 2008
Monday, May 19, 2008
Because I recently completed a book on Warren Buffett, and because Buffett is touring Europe right now, I've been asked a number of times why he is there. In particular, Fox Business asked me today if it made sense for Buffett to be trying to purchase European companies at a time when the dollar is so weak relative to the euro.
The first thing to keep in mind about Warren Buffett is that he does not actively seek companies to buy. Instead, he waits for good companies to contact him. He is in Europe just to make it clear that he is available and ready to buy if they are ready to sell.
Second, Buffett's European tour is not a bet on the dollar. He is still bearish on the dollar for the long term because he believes U.S. economic policy is geared to make the dollar weaker, but he also says he has absolutely no idea what the dollar will do in the short term. Just two weeks ago, he told shareholders he would like to diversify Berkshire's revenue stream. He wants more revenues from foreign economies. And because he has so much money to invest, he is focusing on Europe. He prefers to buy very large established family businesses.
Stuart Varney had a difficult time with my name, but he managed to pull it off at the end. Click here to view.
The first thing to keep in mind about Warren Buffett is that he does not actively seek companies to buy. Instead, he waits for good companies to contact him. He is in Europe just to make it clear that he is available and ready to buy if they are ready to sell.
Second, Buffett's European tour is not a bet on the dollar. He is still bearish on the dollar for the long term because he believes U.S. economic policy is geared to make the dollar weaker, but he also says he has absolutely no idea what the dollar will do in the short term. Just two weeks ago, he told shareholders he would like to diversify Berkshire's revenue stream. He wants more revenues from foreign economies. And because he has so much money to invest, he is focusing on Europe. He prefers to buy very large established family businesses.
Stuart Varney had a difficult time with my name, but he managed to pull it off at the end. Click here to view.
Thursday, May 15, 2008
Broadcom Co-Founders Snagged for Backdating Options
According to the SEC, Broadcom founders Henry Nicholas III and Henry Samueli and two other executives were involved in a scheme to backdate employee stock options. Backdating, which may have been more widespread than we know, didn't come to light until just a few years ago.
When a corporation grants stock options to an employee, it is supposed to be honest about the grant date. Backdating refers to the practice of selecting a date from the past when the stock price was at a lower and more favorable level for the employee. This is one way to recruit or retain valued employees. If the options are already in the money, the employee is less likely to leave.
About two years ago I had a conversation with former SEC chairman Harvey Pitt about this issue. Interestingly, he said the practice itself may not necessarily be illegal as long as it is fully disclosed. Microsoft, for example, routinely backdated options, but it also disclosed doing so in its SEC filings. Pitt, however, said that failing to disclose is outright fraud.
Apparently a number of other high profile companies, most notably Apple, have also engaged backdating options. However, some commentators have said the SEC is reluctant to go after Steve Jobs, Apple's founder, savior, and CEO. But these latest charges against the Broadcom executives indicate that the SEC considers backdating a serious offense. We may hear about more such cases in the future.
When a corporation grants stock options to an employee, it is supposed to be honest about the grant date. Backdating refers to the practice of selecting a date from the past when the stock price was at a lower and more favorable level for the employee. This is one way to recruit or retain valued employees. If the options are already in the money, the employee is less likely to leave.
About two years ago I had a conversation with former SEC chairman Harvey Pitt about this issue. Interestingly, he said the practice itself may not necessarily be illegal as long as it is fully disclosed. Microsoft, for example, routinely backdated options, but it also disclosed doing so in its SEC filings. Pitt, however, said that failing to disclose is outright fraud.
Apparently a number of other high profile companies, most notably Apple, have also engaged backdating options. However, some commentators have said the SEC is reluctant to go after Steve Jobs, Apple's founder, savior, and CEO. But these latest charges against the Broadcom executives indicate that the SEC considers backdating a serious offense. We may hear about more such cases in the future.
Monday, May 12, 2008
A Stronger Dollar and Falling Demand Should Cause Gas Prices to Retreat
According to the AAA's Daily Fuel Gauge Report, the national average price of gasoline just hit a record $3.72 per gallon, up 35 cents per gallon in just one month. Many consumers now believe the $4.00 mark will be broken very soon.
I am absolutely convinced that the run-up in oil and gasoline prices has more to do with the weak U.S. dollar than it does with supply and demand considerations. To a large extent, Federal Reserve policy decimated the dollar and caused inflation in dollar-denominated commodities. The Fed felt a need to aggressively loosen monetary policy because of the U.S. financial crisis and the slowing economy. However, it went way overboard by slashing the target fed funds rate from 5.25% in September all down to 2% where it stands today. Although the dollar had been weakening against the euro since 2002, the Fed's recent actions contributed to the dollar sell-off and the rush toward oil and other commodities.
This is not to say, however, that supply and demand played no part. Most oil producers are running close to full output and there isn't as much slack in the system as there was in the past. Furthermore, several oil-producing nations have serious problems. In Nigeria, it seems there is a new attack on production facilities almost everyday. Iraq, which has among the largest proven reserves in the world, is still mired in conflict and isn't producing anywhere near its full capability. And Venezuela has hampered its production by nationalizing assets and driving out foreign companies.
As for demand, it continues to climb in China and India. However, demand is actually falling in the U.S. We are currently consuming close to a million barrels of gasoline a day less than we were during last summer's peak. While demand is likely to climb as a new summer season dawns, it is unlikely to rise as much as it usually does if prices remain at elevated levels.
Now that it appears the Fed is through (or almost through) cutting interest rates, there is hope that the dollar will soon start to strengthen. With a stronger dollar and waning U.S. demand for gasoline, it is hard to believe that prices won't ease off a bit from current levels.
I am absolutely convinced that the run-up in oil and gasoline prices has more to do with the weak U.S. dollar than it does with supply and demand considerations. To a large extent, Federal Reserve policy decimated the dollar and caused inflation in dollar-denominated commodities. The Fed felt a need to aggressively loosen monetary policy because of the U.S. financial crisis and the slowing economy. However, it went way overboard by slashing the target fed funds rate from 5.25% in September all down to 2% where it stands today. Although the dollar had been weakening against the euro since 2002, the Fed's recent actions contributed to the dollar sell-off and the rush toward oil and other commodities.
This is not to say, however, that supply and demand played no part. Most oil producers are running close to full output and there isn't as much slack in the system as there was in the past. Furthermore, several oil-producing nations have serious problems. In Nigeria, it seems there is a new attack on production facilities almost everyday. Iraq, which has among the largest proven reserves in the world, is still mired in conflict and isn't producing anywhere near its full capability. And Venezuela has hampered its production by nationalizing assets and driving out foreign companies.
As for demand, it continues to climb in China and India. However, demand is actually falling in the U.S. We are currently consuming close to a million barrels of gasoline a day less than we were during last summer's peak. While demand is likely to climb as a new summer season dawns, it is unlikely to rise as much as it usually does if prices remain at elevated levels.
Now that it appears the Fed is through (or almost through) cutting interest rates, there is hope that the dollar will soon start to strengthen. With a stronger dollar and waning U.S. demand for gasoline, it is hard to believe that prices won't ease off a bit from current levels.
Saturday, May 03, 2008
In Omaha at the Warren and Charlie Show
I’m posting this from Omaha. I arrived here yesterday for the Berkshire Hathaway shareholders’ meeting. My trip was exhausting. I got up and 3 a.m. and headed for LaGuardia Airport. I made a connection in Chicago, but due to bad weather sat on the runway for almost three hours. I finally arrived in Omaha, rented a car, and raced to Borsheim’s Fine Jewelry, a Berkshire subsidiary. I went there to do an interview about my new book, Even Buffett Isn't Perfect, with Liz Claman of the Fox Business Network. I was starving and had a splitting headache. Except for some water, I had not eaten anything all day. Fortunately, the interview went very well.
After the interview, I headed off to my hotel in Bellevue, which is about 15 miles south of Omaha. Because 30,000 Berkshire shareholders came to Omaha for the meeting, there were no more rooms available in the city. I checked into my hotel and immediately fell asleep for several hours. As soon as I awoke, I headed back to Borsheim’s for a reception. The place was packed. As I walked past displays of $20,000 watches and other kinds of expensive trinkets, I could not help but notice the diversity of people, all of whom were Berkshire shareholders. They were young, they were old, and they were from all over the world.
The actual meeting began this morning at the Qwest Center. There was a large exhibit hall with many of Berkshire’s subsidiary companies showing off their wares. Shareholders could buy everything from See’s Candies to Fruit of the Loom underwear at discounted prices. Soon, the real show began. Susan Lucci, star of the soap opera “All My Children,” took the stage and announced that Warren Buffett decided to leave the company. She said she had just been appointed the new CEO of Berkshire Hathaway and that her first decision would be to initiate a dividend payment. Suddenly, Buffett came on stage and put a stop to that. This was all in keeping with his great sense of humor.
For several hours, shareholders bombarded Buffett and Munger with questions. Many of the questions had little to do with Berkshire’s business operations. Young people asked what they should do with their lives, a teacher asked what she should teach her students, and one man wanted to know if Buffett had accepted Jesus Christ as his Lord and Savior. Others asked about nuclear proliferation and mass transit policies. One man made a plea that Buffett read the U.S. Constitution and then call Roger Pilon of the Cato Institute. It quickly became evident that for many people in the audience, Buffett and Munger were more like cult figures than great businessmen. All of these people were clearly smart to invest in Berkshire stock. Nonetheless, some were quite wacky.
Although most people in the audience revere Buffett and Munger, not everyone was enamored with the dynamic duo. Several indigenous Americans complained that PacificCorp, which is owned by MidAmerican Energy Holdings, another Berkshire subsidiary, was damaging waterways with its damns. They wanted to know what Buffett intended to do about it. They also complained that they weren’t treated very nicely at last year’s meeting. Buffett was polite, but tossed these questions to David Sokol, chairman of MidAmerican, who gave some very diplomatic answers that did not quite seem to satisfy the questioners.
I was surprised that no one asked about Joe Brandon, General Re’s former CEO who suddenly resigned just a couple of weeks ago. Buffett has frequently praised Brandon in his annual letters to shareholders. The rumor is that Brandon resigned because federal prosecutors pressured Buffett to let him go. These authorities seem to believe Brandon was closely associated with some of the fraudulent schemes involving General Re and American International Group. Four people, included General Re’s former CEO, Ron Ferguson, were recently convicted for these schemes. Brandon, however, has not even been charged with any wrongdoing. Yet his reputation has been tarnished. It would have been nice if Buffett had shed some light on Brandon’s departure.
All in all, while I am glad I attended the event, I can’t say it was particularly instructive. It certainly was fun to meet and mingle with many of Buffett’s fans and to see all of Berkshire’s products on display in one place. However, I am convinced that one can learn a whole lot more by studying Berkshire’s annual reports than by attending its shareholders’ meetings.
After the interview, I headed off to my hotel in Bellevue, which is about 15 miles south of Omaha. Because 30,000 Berkshire shareholders came to Omaha for the meeting, there were no more rooms available in the city. I checked into my hotel and immediately fell asleep for several hours. As soon as I awoke, I headed back to Borsheim’s for a reception. The place was packed. As I walked past displays of $20,000 watches and other kinds of expensive trinkets, I could not help but notice the diversity of people, all of whom were Berkshire shareholders. They were young, they were old, and they were from all over the world.
The actual meeting began this morning at the Qwest Center. There was a large exhibit hall with many of Berkshire’s subsidiary companies showing off their wares. Shareholders could buy everything from See’s Candies to Fruit of the Loom underwear at discounted prices. Soon, the real show began. Susan Lucci, star of the soap opera “All My Children,” took the stage and announced that Warren Buffett decided to leave the company. She said she had just been appointed the new CEO of Berkshire Hathaway and that her first decision would be to initiate a dividend payment. Suddenly, Buffett came on stage and put a stop to that. This was all in keeping with his great sense of humor.
For several hours, shareholders bombarded Buffett and Munger with questions. Many of the questions had little to do with Berkshire’s business operations. Young people asked what they should do with their lives, a teacher asked what she should teach her students, and one man wanted to know if Buffett had accepted Jesus Christ as his Lord and Savior. Others asked about nuclear proliferation and mass transit policies. One man made a plea that Buffett read the U.S. Constitution and then call Roger Pilon of the Cato Institute. It quickly became evident that for many people in the audience, Buffett and Munger were more like cult figures than great businessmen. All of these people were clearly smart to invest in Berkshire stock. Nonetheless, some were quite wacky.
Although most people in the audience revere Buffett and Munger, not everyone was enamored with the dynamic duo. Several indigenous Americans complained that PacificCorp, which is owned by MidAmerican Energy Holdings, another Berkshire subsidiary, was damaging waterways with its damns. They wanted to know what Buffett intended to do about it. They also complained that they weren’t treated very nicely at last year’s meeting. Buffett was polite, but tossed these questions to David Sokol, chairman of MidAmerican, who gave some very diplomatic answers that did not quite seem to satisfy the questioners.
I was surprised that no one asked about Joe Brandon, General Re’s former CEO who suddenly resigned just a couple of weeks ago. Buffett has frequently praised Brandon in his annual letters to shareholders. The rumor is that Brandon resigned because federal prosecutors pressured Buffett to let him go. These authorities seem to believe Brandon was closely associated with some of the fraudulent schemes involving General Re and American International Group. Four people, included General Re’s former CEO, Ron Ferguson, were recently convicted for these schemes. Brandon, however, has not even been charged with any wrongdoing. Yet his reputation has been tarnished. It would have been nice if Buffett had shed some light on Brandon’s departure.
All in all, while I am glad I attended the event, I can’t say it was particularly instructive. It certainly was fun to meet and mingle with many of Buffett’s fans and to see all of Berkshire’s products on display in one place. However, I am convinced that one can learn a whole lot more by studying Berkshire’s annual reports than by attending its shareholders’ meetings.
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