Wednesday, December 01, 2004


This morning I wrote about how the US economy is in a sweet spot; high GDP growth, high productivity growth and low inflation. Wow! did the market respond today. The market was all set to go when oil supplies came in strong, the oil price dropped throughout the day and the market responded all day.

Some of my recent optimism has been based on the confusion over the decline in the US Dollar. The financial press leads one to believe that Americans will sell more goods to Europeans because the dollar has dropped but that both the American sellers and the European buyers will be cheated.

The decline in the dollar is a natural phenomena. The USA has taken the appropriate measures to stimulate the World Economy. The US has been the engine that pulled the world out of recession. The classical methods of excess spending and excess money supply resulted in natural financial and trade deficits. In the process, foreigners accumulated lots of dollars. The pressure is on the foreigners to spend the dollars! The US economy is about to kick into a second gear!


Another lament by various Cansandras in the financial press has been how awful it is that Americans are not saving money. Ed Yardeni has published the numbers to refute these cry-babies. Ed points out that Americans currently have record total assets, record total net worth and record liquid assets. The numbers are large. Americans hold 57.5 Trillion Dollars of assets and even after deducting their debts they own 48 Trillion of assets. Furthermore, Americans savings is at a record level as a percentage of disposable income.

The reported zero savings rate is a result of an anomally in regard to American Pensions. While it is true that Americans are withdrawing a net of 289 Billion Dollars per year from pensions, the pension accounts are still growing. Americans are simply spending a portion of the capital gains and interest earned in these accounts.

One can always use statistics to argue both sides of an issue. Right now, investors see a glass half empty that is acutally being filled. For example, few investors know that average real wages in America are at record highs while unit labor costs are at record lows; the result of productivity. The average big company will earn 19% more profit this year and 9% more next year. HOW SWEET IT IS!


For several weeks I have written about the upcoming second phase of the economic recovery. I have suggested that as the bull market progresses one should gravitate porfolios to "second half" stocks. There are good stocks to own in all sectors but as a general rule one should focus on large cap versus small cap, value stocks versus growth stocks, and defensive steady growing stocks versus high beta stocks. Companies will make money and grow earnings but, as intrest rates rise, the easy money will be hard to find. Investors should always use caution but one needs to be especially careful during a time of rising interest rates.

An interesting stock to consider is Sprint (FON). Main line long distance companies are second half stocks and this industry has suffered through some very tough times. MCI and T are no where near the companies that they once were. VOIP is growing quickly and dual band cell/voip service is on the way. Sprint is up against monsterous companies and must innovate to survive.

Like other phone companies, Sprint is working to convert regular customers to DSL lines and is offering package deals including everything from satellite TV to cell service. The competition is tough. After the purchase of AT&T Wireless by Cingular, Sprint is now up against the cell phone behemoths of Verizon and Cingular. Verizon, SBC and BLS as "baby bells" also compete in the other areas of service. Of course NXTL, T-Mobile and others offer strong competition in the cell phone area.

What's to like about FON?

I believe the cell phone is about to go through an amazing metamorphosis. I am joined in this belief by executives from major TV networks, game software producers, major cell phone manufacturers and others. TXN estimates that 70% of all cell phones sold in 2006 will include a TV tuner.

Investors Business Daily just published an article about the new ESPN phone service. ESPN has signed a wholesale air-time agreement with Sprint. ESPN will encourage folks to sign up for "phone" service in order to see streaming sports high-lights and shows. Sprint will use its existing network to provide the service but ESPN will sell and bill the service. Others who have signed wholesale agreements include Quest, Virgin Mobil, and AT&T. It is rumoured that Disney (the owner of ESPN) also plans to start a Disney "phone" service for children. FON is already selling 30% of its air-time through "wholesalers".

Monthly service costs are dropping quickly. It is easy to imagine men at a football game checking on other games on their pocket "TV" or teenagers playing games from afar with one another for hours on end or children watching the cartoon they want to watch while other children watch their favorites.

Cingular just let contracts to start building-out its 3G network. This network will give Cingular the speed to offer TV and other services by phone. Lucent was one of the contract winners. This first contract is limited but it is a good sign for Lucent. Qualcomm is also a big winner as the new system will owe give additional royalty payments to Qualcomm. MOT and NOK will sell the phones and TXN chips will be in many of the phones.

Readers know that I suggest a balanced portfolio but am over-weight in telecommunications and internet services. This is largely due to the large gains accumulated in EBAY, YAHO, NXTL, QCOM, AMX, NT, LU, MOT and even GOOG. My recent investments have included defensive issues such as PEP, PFE, and WMT and the transportation purchase of CAL and NSC. I sold DUK yesterday to buy NSC and was rewared immediately. My family portfolios include about 50 different stocks; more than necessary for proper diversification (15 is a good number).

FON should be a good stock to own for the next several years. It takes a little thought to appreciate the benefits of the wholesale agreements. ESPN has become a Mobile Virtual Network Operator or MVNO. It is a concept similar to a University branded credit card. Maryland National Bank sold a lot of credit cards by sharing s small cut with the sponoring University. It cost the consumer nothing extra to whip out his University Visa and many consumers carry more than one card. Do you suppose some consumers will carry an ESPN phone for sports info and a second phone for calls or investment info?

FON has simply worked out a way to get paid for the use of its excess phone capacity. Expanding networks is capital intensive but these wholesale agreements should be good for comanies such as GLW, LU, NT, or LVLT. NXTL is taking its time before deciding on its high speed network equipment provider.

ESPN, Disney, AT&T, Quest, Radio companies and others can get into the phone, mobil data, TV, and radio business without building the physical network. There are already several companies offering software that allows one to control his DVR by phone and watch recorded shows on the phone. Ten years from now, children will not understand why anyone would want to talk on the phone to someone without seeing them.

As a final note, when I talk about holding on to this bull market like a cowboy riding a bucking bronco, I am paraphrasing Ken Fisher in an article written in Forbes around 1991. I steal my best ideas from others and pass them along; for now, my best idea is to make sure you are fully invested in this wonderful market.

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