Wednesday, December 22, 2004


Mega merger and acquisitions have not slowed a bit. It is a global phenomena. HSBC is bidding 2.5 Billion for Korea First Bank. Every industry is consolidating. Cisco just made its 12th 2004 purchase!

At a time when the public thinks stocks are over-priced, companies are buying other companies stocks or their own stocks. Stocks on average are cheap. The excitement is not over. Not when companies like DELL and GOOG are each sitting on $2 Billion in cash.

Should GOOG decide to buy a big player, it has cash and stock to offer. It can buy just about anything it wants. The good news for GOOG holders is that the company is growing so fast it does not need to buy anyone. Companies continue to raise dividends, buy back stock or buy other companies. Smart investors should beat them to the purchase.

A common argument against buying stocks now is that insiders are selling. The charts of insider selling show that the current situation is similar to what happened after the 1982 recession. The market took off and insider selling reached record levels. After a prolonged tough market, everyone stuck in stocks purchased before the crash are eager to cash-in. NASDAQ stocks in particular went too high befor the bubble popped and then went too low afterwards. Most of them have much higher earnings now that 5 years ago but sell for much lower prices.

Ooops! I spoke too quickly.
A few days back, I said to avoid foreign stocks and invest in good old "big, dumb and ugly" American companies. Part of my rational was the contrary indicator that the American public is transferring retirement funds to international stock funds. I also suggested that you use the Business Week article about Brazil and other developing nations as a contrary indicator.

I stand by the main points but must correct for Germany, Japan and other developed countries. The sentiment is very negative in these countries and investors are very risk averse. Stocks are still cheap. These markets trade much more in line with ours now-a-days so the diversification benefits are not great. Never-the-less, if you want foreign funds, buy EWJ or EWG. These exchange traded funds give you foreign holdings for a very small expense ratio.

Germany is finally doing something about its overly generous unemployment benefit program. East Germans are still having trouble accepting the capitalist idea that you have to work to earn a living. The laws in place for the past decade have paid high unemployment benefits to German workers for years of leisure. Laws inacted to reduce the benefits will take effect in 2005.

Forecasts Rise!
Professional stock gurus are increasing estimates for next year. The rational is typically that the new social security program could put up to 100 Billion Dollars per year into the stock market. I find this is the type of idea that one should front-run. The market will rise in anticipation of the money coming. If you wait to invest after the law has passed, you will have missed most if not all of the move.

Trade Deficit Misunderstood!
If the trade deficit were only a factor of strength or weakness in the dollar, how is it that the US Dollar is weak and the Aussi Dollar is strong but both countries are running huge trade deficits? We read about the strength of the Euro and the British Pound all the time but England runs a trade deficit that is proportional to the US deficit.

The answer lies in the free trade all three countries have with China and other developing nations. It is only common sense to buy goods made by workers making $.65 per hour versus those making $21 per hour. The deal is a good deal for the buyer and the seller. The standard of living for an average person in China has improved dramatically in the past 10 years. The deal is specially good for the buyer when the seller reinvests the money with the seller.

It is smart for the orange grower to trade with the wheat grower and smart for us to buy socks made in China. Americans who lose their jobs are typically sad for only a short time. America is a job machine. We have the best jobs of any nation and year after year we create more and better jobs. We can afford to pay more because we buy cheap socks from China. Don't fight what is good; embrace it; invest wisely; make lots of money and help your neighbor.


Jack's Old Merrill Pal said...

Good for the goose...Politicians have fomented the notion that America is exporting the manufacturing engine of the US to cheap labor markets eg China and Mexico. The US has also benefited tremdously with the job exports. We should not forget high profile job transfers from Honda, Mercedes, BMW. The list is very long of foreign manufacturers who have moved or opened entire operations to the US.

Also another interesting point to remember is the number of US manufacturing jobs that are transferred to foreign soil for cheap labor but also tax reduction mechanisms. For example GM has auto parts transferred outside US and then the value added part comes back into US. GM will not pay tax on its foreign operation while the US shareholders receive this benefit. Tax avoidance is not a bad thing. Remember what Reagan said, "Corporations do not pay taxes, people do."