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.
Tuesday, November 28, 2006
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.
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.
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.
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.
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?
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.
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?
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.
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.
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.
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.
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.
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.
Friday, October 27, 2006
Weak GDP Figure Means Rate Hikes Are Likely Over
There is no longer any doubt about slowing economic growth. Today's advance estimate of 1.6% real GDP growth for the third quarter is well under the 2.1% consensus estimate. It is also much lower than the 2.6% figure recorded for the second quarter.
The advance estimate is the most inaccurate because it is derived from incomplete data. Most likely, the figure will be revised. Yet the 1.6% growth figure provides no comfort. Many economists were warning about slowing growth, but few foresaw growth slowing this much.
Surprisingly, the consumer is holding up. Real personal consumption expenditures expanded 3.1%, contributing 2.13 points to GDP growth. But real residential fixed investments plummeted 17.4%, subtracting 1.12 points from GDP growth. Net exports subtracted 0.58 points from GDP growth.
Perhaps the best news in the report is the price index for gross domestic purchases. It was up just 2% as compared to the second quarter's gain of 4%. This means the Fed can worry a little less about inflation.
The recent rally in stocks was largely based on a bet that GDP would keep growing at 2-2.5%. Now we know that growth is slowing more than most investors had been expecting. We are also getting signals that the housing market is more troubled than many thought. Calls are rising for the Fed to start easing. Perhaps it's a good time to take some cash off the table.
The advance estimate is the most inaccurate because it is derived from incomplete data. Most likely, the figure will be revised. Yet the 1.6% growth figure provides no comfort. Many economists were warning about slowing growth, but few foresaw growth slowing this much.
Surprisingly, the consumer is holding up. Real personal consumption expenditures expanded 3.1%, contributing 2.13 points to GDP growth. But real residential fixed investments plummeted 17.4%, subtracting 1.12 points from GDP growth. Net exports subtracted 0.58 points from GDP growth.
Perhaps the best news in the report is the price index for gross domestic purchases. It was up just 2% as compared to the second quarter's gain of 4%. This means the Fed can worry a little less about inflation.
The recent rally in stocks was largely based on a bet that GDP would keep growing at 2-2.5%. Now we know that growth is slowing more than most investors had been expecting. We are also getting signals that the housing market is more troubled than many thought. Calls are rising for the Fed to start easing. Perhaps it's a good time to take some cash off the table.
Monday, October 23, 2006
OPEC's Credibility Problem
Boy, does OPEC have a credibility problem. The cartel was rumored to be considering a production cut of a million barrels per day. However, it was concerned the market wasn't taking it seriously. So, it held an emergency meeting and announced it would cut production by 1.2 million barrels per day. What did oil traders do? They bid down the price of oil.
Let's see if we've got this straight. OPEC announces a greater-than-expected production cut and oil prices fall. It seems no one is taking OPEC seriously--and for good reason. OPEC doesn't have a good record of making planned production cuts stick. That's because member nations have an incentive to cheat and produce more than their assigned quotas.
I bet OPEC nations know they've been getting a great deal. Thanks largely to Osama bin Laden and his terrorist network, oil prices have been factoring in a fear premium of perhaps $10 to $20 per barrel. Now that the fear is subsiding, so is the premium. Lower prices are also the result of a mild hurricane season, and a marginal decline in demand caused when gasoline prices hit $3 per gallon in August.
Can OPEC make production cuts stick this time? That depends on how much member nations love high prices. The planned cuts are supposed to go into effect on Nov. 1. They may stick for a while, but if history is any guide, many countries will soon be pumping more oil than they agreed to. As always, the burden will fall on Saudi Arabia. If the Saudis cut production in a meaningful way, oil prices will stabilize. If they don't, prices could fall to the mid-$40s in no time at all.
Falling oil prices get at least some of the credit for the rally in stocks. The S&P 500 is well above the yearend target set by the firm's investment policy committee. But Standard & Poor's Chief Investment Strategist Sam Stovall says it could go higher. He tells us why in the current segment of MoneyMasters.
Let's see if we've got this straight. OPEC announces a greater-than-expected production cut and oil prices fall. It seems no one is taking OPEC seriously--and for good reason. OPEC doesn't have a good record of making planned production cuts stick. That's because member nations have an incentive to cheat and produce more than their assigned quotas.
I bet OPEC nations know they've been getting a great deal. Thanks largely to Osama bin Laden and his terrorist network, oil prices have been factoring in a fear premium of perhaps $10 to $20 per barrel. Now that the fear is subsiding, so is the premium. Lower prices are also the result of a mild hurricane season, and a marginal decline in demand caused when gasoline prices hit $3 per gallon in August.
Can OPEC make production cuts stick this time? That depends on how much member nations love high prices. The planned cuts are supposed to go into effect on Nov. 1. They may stick for a while, but if history is any guide, many countries will soon be pumping more oil than they agreed to. As always, the burden will fall on Saudi Arabia. If the Saudis cut production in a meaningful way, oil prices will stabilize. If they don't, prices could fall to the mid-$40s in no time at all.
Falling oil prices get at least some of the credit for the rally in stocks. The S&P 500 is well above the yearend target set by the firm's investment policy committee. But Standard & Poor's Chief Investment Strategist Sam Stovall says it could go higher. He tells us why in the current segment of MoneyMasters.
Friday, October 20, 2006
Eating Crow with Egg on Face
Regular readers of this blog know that I have not been bullish on Google (GOOG). It's not that I don't like the business. I think it's a great company. It's just that I also think the stock is overvalued.
One valuable lesson I have learned over the years is that overvalued stocks can get a whole lot more overvalued before coming back to earth. Google certainly isn't in the same boat as some of those Internet stocks back in the 1990s that reached unrealistic valuations despite having no earnings. Google makes good money. But is it really worth 15 times sales and 45 times projected earnings?
Amazon.com might provide a basis for comparison. At its peak, the stock was selling for 30 times sales. Today it sells for only 1.5 times sales.
I love Google the company, but I'm still avoiding Google the stock.
Tuesday, October 17, 2006
High Prices Will Reduce Dependence on Foreign Oil
Today's Wall Street Journal has an interesting article about what lower gasoline prices are doing to the alternative-fuels industry. Although gasoline is still on the expensive side, there is concern that interest in ethanol, hybrid vehicles, and other fuels and technologies may quickly wane if gasoline prices go much lower.
I've written about this vicious cycle before. When gasoline prices spike, we see a marginal reduction in demand. That results in higher inventories, which cause prices to come back down. When prices fall, drivers fill up their SUVs and hit the road again.
President Bush is very concerned about this. He says America is addicted to oil and considers our dependence on foreign energy a serious national security and economic threat. He has made it a priority to push alternative fuels and technologies. Although he's happy to see gasoline prices go lower, he is worried that lower prices may kill the enthusiasm for alternatives.
Ironically, Bush and the Republicans have also been accused of somehow causing gasoline prices to fall in order to improve their chances in the upcoming mid-term elections. This is baloney. Oil and gasoline are commodities whose prices are set in open markets by buyers and sellers. Other than ordering the release of oil from the Strategic Petroleum Reserve, the president cannot affect prices in the short term.
As I've written before in the Forbes Growth Investor, I am opposed to price caps on gasoline. Capping the price will result in shortages. However, I am in favor of a price floor.
Price is the best way to affect behavior. If you want people to use more of something, make it cheaper. If you want them to use less, make it more expensive. By setting a floor on gasoline prices, we can get consumption under control. Gasoline would not be wasted and there would be a real incentive to move toward alternatives.
The government would collect the difference between the floor price and what the market price would have been without a floor. Don't get me wrong. I am not in favor of giving the government more of our money. Those revenues should be used to fund research into alternatives, and to reduce other taxes.
Of course none of this is likely to happen. Setting a floor requires the kind of political fortitude that many elected officials lack.
I've written about this vicious cycle before. When gasoline prices spike, we see a marginal reduction in demand. That results in higher inventories, which cause prices to come back down. When prices fall, drivers fill up their SUVs and hit the road again.
President Bush is very concerned about this. He says America is addicted to oil and considers our dependence on foreign energy a serious national security and economic threat. He has made it a priority to push alternative fuels and technologies. Although he's happy to see gasoline prices go lower, he is worried that lower prices may kill the enthusiasm for alternatives.
Ironically, Bush and the Republicans have also been accused of somehow causing gasoline prices to fall in order to improve their chances in the upcoming mid-term elections. This is baloney. Oil and gasoline are commodities whose prices are set in open markets by buyers and sellers. Other than ordering the release of oil from the Strategic Petroleum Reserve, the president cannot affect prices in the short term.
As I've written before in the Forbes Growth Investor, I am opposed to price caps on gasoline. Capping the price will result in shortages. However, I am in favor of a price floor.
Price is the best way to affect behavior. If you want people to use more of something, make it cheaper. If you want them to use less, make it more expensive. By setting a floor on gasoline prices, we can get consumption under control. Gasoline would not be wasted and there would be a real incentive to move toward alternatives.
The government would collect the difference between the floor price and what the market price would have been without a floor. Don't get me wrong. I am not in favor of giving the government more of our money. Those revenues should be used to fund research into alternatives, and to reduce other taxes.
Of course none of this is likely to happen. Setting a floor requires the kind of political fortitude that many elected officials lack.
Monday, October 16, 2006
Dancing With Myself
Billy Idol released the hit song Dancing With Myself in 1981. Sometimes, I feel like I'm debating with myself. So it's nice to get some feedback.
Of course, it's not always pleasant. For example, one blog reader recently said he was tired of me always being negative. I'll admit, I've been skeptical of the stock market's recent rally, but I'm not always negative. I was bullish on stocks until late 1998. I turned bearish about 14 months too soon, but it turned out to be a good call. I turned bullish again in September 2002. The market briefly rallied, came back down, then started a nice bull run that is still going.
But I am bearish once again. I just don't see what all the excitement is about. So far, the Fed seems to be doing an admirable job of orchestrating a soft landing, but I think GDP growth is likely to fall below 2% for at least several quarters--perhaps for all of 2007. And I don't believe the Fed is getting ready to cut rates any time soon. I still see inflation and inflationary expectations running above the so-called comfort zone.
It's nice that oil and gasoline prices have come down from their August highs, but I defy anyone to argue gas is cheap. Anyway, gasoline prices almost always come down after the summer driving season. Admittedly, the recent decline has been more like a plunge, but even today the national average price is well above $2 per gallon.
In the immediate future, however, two things will drive the market. The first is housing. Data on housing starts and building permits will be released on Wednesday. The market is looking for about 1.65 million starts and 1.72 million permits. The second is third-quarter corporate earnings. This is the first big week of earnings releases. While I'm not sure if there is such a thing as a bellwether anymore, several key companies will announce results in the coming days. EMC, Johnson & Johnson, and United Technologies will report tomorrow morning, as will a number of banks. IBM, Intel, Motorola, and Yahoo will report tomorrow after the market closes. Each of these companies has market-moving potential.
Finally, I want to thank Karthik Narayanaswamy for his nice comments about my blog. I now know that at least one person out there wants to see more of my musings. Turns out Karthik has a nice blog of his own called Karthik's Random Ramblings. You should check it out.
Of course, it's not always pleasant. For example, one blog reader recently said he was tired of me always being negative. I'll admit, I've been skeptical of the stock market's recent rally, but I'm not always negative. I was bullish on stocks until late 1998. I turned bearish about 14 months too soon, but it turned out to be a good call. I turned bullish again in September 2002. The market briefly rallied, came back down, then started a nice bull run that is still going.
But I am bearish once again. I just don't see what all the excitement is about. So far, the Fed seems to be doing an admirable job of orchestrating a soft landing, but I think GDP growth is likely to fall below 2% for at least several quarters--perhaps for all of 2007. And I don't believe the Fed is getting ready to cut rates any time soon. I still see inflation and inflationary expectations running above the so-called comfort zone.
It's nice that oil and gasoline prices have come down from their August highs, but I defy anyone to argue gas is cheap. Anyway, gasoline prices almost always come down after the summer driving season. Admittedly, the recent decline has been more like a plunge, but even today the national average price is well above $2 per gallon.
In the immediate future, however, two things will drive the market. The first is housing. Data on housing starts and building permits will be released on Wednesday. The market is looking for about 1.65 million starts and 1.72 million permits. The second is third-quarter corporate earnings. This is the first big week of earnings releases. While I'm not sure if there is such a thing as a bellwether anymore, several key companies will announce results in the coming days. EMC, Johnson & Johnson, and United Technologies will report tomorrow morning, as will a number of banks. IBM, Intel, Motorola, and Yahoo will report tomorrow after the market closes. Each of these companies has market-moving potential.
Finally, I want to thank Karthik Narayanaswamy for his nice comments about my blog. I now know that at least one person out there wants to see more of my musings. Turns out Karthik has a nice blog of his own called Karthik's Random Ramblings. You should check it out.
Wednesday, October 11, 2006
Thinking Negative Thoughts
As I write this entry, there is a building burning on the upper east side of Manhattan. It appears that a small airplane or helicopter crashed into the building. Although it's probably just an accident, in this post-9-11 world, you have to wonder if it is terrorism related.
Perhaps news of a burning building has put me in a sour mood. It got me thinking about overvalued stocks. With the Dow at a record high, it might be a good time to think about this.
Google (GOOG) is the most obvious one that comes to mind--especially after it announced plans to buy a company that makes no money for $1.65 billion (see previous post). Google itself is a profitable company, but it is selling for more than 40 times expected earnings, more than 15 times sales, and almost 10 times book value. There are stocks out there that are more overvalued, but none that has a larger market capitalization.
Starbucks (SBUX) is another stock that appears overvalued. It is selling for 51 times expected earnings, almost 4 times sales, and 11 times book value. That seems like a lot to pay for what amounts to a chain of restaurants. Of course, Starbucks has tremendous growth prospects, but that doesn't warrant buying the stock at any price.
Finally, I still think the homebuilders should be avoided. I can't argue they are overpriced. In fact, their multiples look incredibly attractive. However, they are negative growth stories. Earnings are not growing; they are declining. These stocks may not sink a lot lower, but I certainly would not expect them to go higher in the near future.
Perhaps news of a burning building has put me in a sour mood. It got me thinking about overvalued stocks. With the Dow at a record high, it might be a good time to think about this.
Google (GOOG) is the most obvious one that comes to mind--especially after it announced plans to buy a company that makes no money for $1.65 billion (see previous post). Google itself is a profitable company, but it is selling for more than 40 times expected earnings, more than 15 times sales, and almost 10 times book value. There are stocks out there that are more overvalued, but none that has a larger market capitalization.
Starbucks (SBUX) is another stock that appears overvalued. It is selling for 51 times expected earnings, almost 4 times sales, and 11 times book value. That seems like a lot to pay for what amounts to a chain of restaurants. Of course, Starbucks has tremendous growth prospects, but that doesn't warrant buying the stock at any price.
Finally, I still think the homebuilders should be avoided. I can't argue they are overpriced. In fact, their multiples look incredibly attractive. However, they are negative growth stories. Earnings are not growing; they are declining. These stocks may not sink a lot lower, but I certainly would not expect them to go higher in the near future.
Tuesday, October 10, 2006
YouGoogle
Is the Internet euphoria of the 1990s coming back into fashion? Things aren't quite that bad, at least not yet, but Google's announcement that it will pay $1.65 billion to buy
YouTube certainly makes me wonder.
YouTube is the king of Internet video. Any person can post videos of themselves, or anything else for that matter, on YouTube. Most of the videos are short in length and of poor quality. Most are tongue-in-cheek and have no important message. A good example is the one of a young man who films himself reacting to the tastes of different spices, which he stuffs into his mouth.
YouTube gets lots of eyeballs, but makes no money. Paying for eyeballs was all the rage back in the 1990s. But all the eyeballs in the world don't count for much unless their owners are willing to shell out bucks to buy something.
Some say eyeballs are all it takes to entice advertisers. But advertisers will pay only if the eyeballs belong to the right demographic. Advertisers will pay more to reach one pair of eyeballs belonging to a potential customer, than 100 pair belonging to those who couldn't care less about the message. And it remains to be seen how many viewers will stay loyal to YouTube if they have to watch commercials.
Google's CEO Eric Schmidt made some standard statements about how the two company's complement one another and share similar values when it comes to serving users. Google's founder Sergey Brin expressed hope that money will be made through video advertising, but no specifics were given.
Even though Google has about $10 billion in cash and marketable securities, it chose to pay for YouTube with stock. That was probably a wise decision for Google, and makes it a tax-free transaction for YouTube. However, the transaction price is fixed, so if Google shares fall in value, a greater number will be needed to close the deal.
The transaction is a great deal for YouTube and its founders. They are now rich men. But it's a big bet for Google. Right now it looks like Google is paying way too much. Unless it can come up with a way to turn YouTube's eyeballs into cash, it will regret this investment.
YouTube certainly makes me wonder.
YouTube is the king of Internet video. Any person can post videos of themselves, or anything else for that matter, on YouTube. Most of the videos are short in length and of poor quality. Most are tongue-in-cheek and have no important message. A good example is the one of a young man who films himself reacting to the tastes of different spices, which he stuffs into his mouth.
YouTube gets lots of eyeballs, but makes no money. Paying for eyeballs was all the rage back in the 1990s. But all the eyeballs in the world don't count for much unless their owners are willing to shell out bucks to buy something.
Some say eyeballs are all it takes to entice advertisers. But advertisers will pay only if the eyeballs belong to the right demographic. Advertisers will pay more to reach one pair of eyeballs belonging to a potential customer, than 100 pair belonging to those who couldn't care less about the message. And it remains to be seen how many viewers will stay loyal to YouTube if they have to watch commercials.
Google's CEO Eric Schmidt made some standard statements about how the two company's complement one another and share similar values when it comes to serving users. Google's founder Sergey Brin expressed hope that money will be made through video advertising, but no specifics were given.
Even though Google has about $10 billion in cash and marketable securities, it chose to pay for YouTube with stock. That was probably a wise decision for Google, and makes it a tax-free transaction for YouTube. However, the transaction price is fixed, so if Google shares fall in value, a greater number will be needed to close the deal.
The transaction is a great deal for YouTube and its founders. They are now rich men. But it's a big bet for Google. Right now it looks like Google is paying way too much. Unless it can come up with a way to turn YouTube's eyeballs into cash, it will regret this investment.
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