Wednesday, August 31, 2005

MICRO-PAYMENTS--GOGGLE WALLET DEFENSE?

PayPal will now offer micro-payments. The new fee schedule will charge a nickel plus 5% on very small payments. The new fee schedule means that the purchase of a song for $1 cost only a dime to pay thru the PayPal service.

The new service does cause one to wonder if the Google Wallet will have a similar fee schedule. It also makes one think that PayPal is trying to set up a good defense before Google Wallet is announced. Do you suppose Google can set up a system that will allow payments to be free of fees?

DO THE GOOGLE GULP! THIS COMPANY IS GOING TO BE VERY BIG! MSFT, TWX AND YAHO ARE BECOMING VERY DIFFERENT COMPANIES AS THEY COMPETE WITH GOOGLE. SBC (AT&T), OTHER PHONE COMPANIES AND OTHER CABLE TV COMPANIES HAVE A LOT OF CHANGES TO MAKE TO MATCH GOOGLE.

OPEN SOURCE INSTANT MESSAGE-CALLS

Skypehas quickly grown huge. This free download has rapidly reached the 50 million level. The service has alot of neat features: voice quality is excellent; the service is free computer to computer phone calls and extra features including SkypeOut allows calls to any phone number for 2 cents per minute.

Google has started with an instant messaging service and will add a VoIP service. The key difference is that Google will use standard open source protocols. This means that other services will be able to connect with Google and vice versa. For example, the Gizmo Project is an excellent soft phone along the lines of Skype. In fact it offers a number of free features not offered free by Skype. Again, Gizmo uses SIP which means that Google's new VoIP will be compatible.

In the area of instant messaging. There is already a long list of compatible clients. These include:

Adium
Gaim
iChat
Miranda
Psi
TrillianPro $25

The "big boys", AOL, YAHO and MSFT all have proprietary programs. MSFT announced the purchase of a VoIP service today. The neat feature of this program is to integrate the MSFT contacts manager with the address book so that users can click on any phone number posted on the web to make the call.

The Google business model will probably be mimicked by most others. In other words, the click to talk will be free but there will be an advertising fee paid by the vendor. My wife and I would have loved to have paid per call for thousands of calls made during the past 20 years. Our web site helped us rent resort property but it would have been great to be able to talk to the prospects and customers at the same time that they were viewing the web. We could have help them navigate through the pages to the condo that fit their needs. Our increased sales would have paid for the click to talk advertising fees hundreds of times over the cost.

Download click to talk now, hook up a microphone and try it out. Call me to discuss stocks, bonds, economics or any topic of your choice. The call is free!

GOOD NEWS FOR INVESTORS!

The news is bad all over! Much of it is good news for investors.

Preliminary government numbers show a small slow-down in personal consumption expenditures from 3.3% to 3% growth and the Chicago Purchasing Index dropped all the way from 63.5% to below 50%! The economy is slowing down.

HAVE YOU SEEN THE BOND MARKET!

The ten year bond is pushing against 4% again! Expectations of future inflation are extremely low. The stock market does extremely well when inflation expectations are low, except when the Y-Curve goes into high gear. If you are not familiar with the Y-Curve you should check the work by Shiller or read Bulls Eye Investing by John Mauldin.

By the rule of 20, twenty minus 4% bonds leaves 16 times S&P forward earnings. Forward earnings for the S&P are under 15. Stocks keep getting cheaper every day as "bad news" has the shy heading for cover. If you don't believe me take a look at Put Call ratios, new high-lows, or other gauges of market sentiment. Some of these can be found at MarketGage

Warren Buffet said to fear greed but to be greedy when others are fearful. He may be amongst the majority who are fearful but his advice still holds. There have only been a few times in the past 20 years when the rule of 20 has been so positive. In each of those times the market did well.

THE BRAKES ARE OFF!

The evidence mounts that Greenspan is letting up on the brakes! I am not talking about his verbage, but about market indications. The futures markets have lower expectations for fed funds rate increases and more importantly, broad measures of money supply are finally on the upswing. A significant bottom may be in the works.

THE OIL CRISIS IS OVER!

Once everyone in the world is aware of a supply shortage in any commodity the crisis is over. The evidence is everywhere. A good example is Indonesia. The government just lowered its oil price subsidy for 250 million people. While it is true that this relatively poor country does not consume nearly as much oil as the United States, the price just went up sharply for a population almost equal to the US. On the supply side, companies have paid big bucks for Canadian Tar sands and even OPEC is looking for ways to increase production. The pressure is on the Iraqi Sunnis to make a deal. The whole country would love to export more oil while the prices are high. With new supplies coming on line and consumption cutbacks underway, it is only a matter of time before crude prices fall. Resources are plentiful. Everything from the Baltic dry goods shipping rates to the price of lumber shows the pressure is coming off prices. Labor is plentiful. Industrial capacity is available. Yes, the developing countries are consuming much more oil and gas. Yes, the developing countries are preparing to substitute nuclear power and coal power. Twenty-three nuclear power plants are currently under construction.

TRADING VOLUME HAS DIED!

Last year, trading volume declined all year until August. The market made a big move from September through December. This year the volume has declined all year. The next few months could be a repeat of last year.

Worldwide productivity growth is remarkably strong. While the US has enjoyed 10 very strong years, our productivity has paled in comparison to several developing countries. This trend will continue because the internet infrastructure has been built. The process is now the simple matter of learning how to use the internet to save time and effort. The ways are countless.

KATRINA IS NO LAUGHING MATTER!

Katrina was a very bad storm and my heart goes out to all of those who have suffered losses. My family will make donations to the Red Cross, the United Methodist Relief Fund (UMCOR) and other charitable organizations. Please consider making donations to assist.

While it is difficult to appreciate the magnitude of the suffering, it is true that the news and the market over react to tragedy. There has been talk of recession. A recession is certainly possible but the reality is that the rebuilding efforts serve as a stimulus to the economy. As my friend Lamar Jones points out, the talking heads like to tell how much business Wal-Mart will lose because 123 stores are closed. They don't like to discuss the fact that many folks will use insurance proceeds to repurchase items that were lost or destroyed.

The GOOD NEWS FOR INVESTORS IS THAT THE BAD NEWS IS OFFERING A BUYING OPPORTUNITY. BUY THE BULL!

Tuesday, August 30, 2005

Iraq's Worrisome Constitution - Christianity Today Magazine

Iraq's Worrisome Constitution - Christianity Today Magazine

The new Iraq constitution is far from perfect but so is the US constitution. Democracy is going to change the lives of the Iraqi citizens for the better. Other middle eastern nations will eventually follow the lead. The road is hard. The US took 10 years to adopt our constitution. The upcoming Senate confirmation hearings are apart of our struggle to be free. God bless Iraq.

Business 2.0 - Magazine Article - Printable Version - Free Wi-Fi? Get Ready for GoogleNet.

Business 2.0 - Magazine Article - Printable Version - Free Wi-Fi? Get Ready for GoogleNet.

GOOGLE-GOOGLE-GOOGLE
DO THE GOOGLE GULP! BUY SHARES EVEN IF YOU DO HAVE TO SWALLOW HARD. THE POTENTIAL IS REAL!

Would you enjoy telling your cable company where they can stick their $100 bill? What if you were able to get free broadband service from Google? What if the service included free VoIP telephone service? What if it included free video on demand services?

GOOGLE has been buying up "dark" fibre networks. These networks are considered "dark" because after the over-construction during the bubble, these fibre-optic cables have not been used. Google is buying on the cheap. It is also buying high speed internet connection gear. In other words, Google is building its own network.

According to Business 2.0, Google currently pays about $60 per megabit per second per month in IP transit fees. Google can cut out these fees by carrying its own traffic and by getting credits for carrying other big networks traffic.

In the event that WiFi service should become ubiquitous, folks will reduce their use of cell phones if Google offers free phone service. It sounds too good to be true but remember that Google offers most services without charging a direct fee. GMail, Blogging, Desktop Search, Maps, etc.

Top quality products for free!

When the Google IPO was just out, an analyst from Switzerland made fun of me as an "American Cowboy" willing to risk an $85 stock. I hope he is reading this because I am now willing to risk a $285 stock.

The really good news for Google buyers is that few financial writers, stock analysts, or other professionals "get it". They only look at the numbers that show Google sells for high current multiples. They cannot believe that Google can grow earnings at a rapid rate from here. They do not understand that most folks will routinely carry pocket computers that serve all the functions of a phone, TV, radio, TIVO, map, dictionary, GPS, etc, etc, etc.

Competitors such as Time Warner (TWX) are creating neat toys but they are not even in the same ball park in regard to innovation. For example, TWX offers a neat trick in regard to VoIP calls. When a subscriber is watching TV and a call comes, the caller ID info appears on the bottom corner of the TV screen. The subscriber can use his remote to handle the call. If he takes the call the TV is automatically muted and he can talk over a speaker phone or over a regular phone. Neat trick, but no where near the value of free service.

The reality is that Google helps individuals find the service or product they want. Google dramatically increases the ratio of interest in the advertising that is provided. The total amount of advertising can be reduced to sell the same amount of products; we all win.

Dramatic changes are coming. Google has a huge head start on the competition and Google is widening its lead! Yahoo may spend a billion to purchase Skype and Vonage may come public for almost as much but can these guys meet Google on price? Skype has been a free service computer to computer and is 2 cents per minute to "Skype-Out". Yahoo is a formidable competitor. It has deals with the biggest of the phone companies; VZ and SBC. These players may not be able to adjust to "free" easily. VZ and SBC have lost land-line subscribers for years but they keep charging high rates. The exodus will pick up steam rapidly now that millions of Google GMail participants are inviting 100s of millions of others to sign up for free, open source Google Talk.

BUY THE BULL! THE OIL MARKET PROBLEMS ARE TEMPORARY. IF ANYTHING THE PRICE OF OIL WILL ACCELERATE THE ADOPTION OF SERVICES SUCH AS GOOGLE TALK! MY ASSISTANT WILL WORK FROM HOME MORE OFTEN AND COMMUNICATE WITH GOOGLE TALK! BUY THE BULL! DO THE GOOGLE GULP! CAUTION: GOOGLE HAS TO GROW DRAMATICALLY TO JUSTIFY ITS CURRENT PRICE, ONE SHOULD ALWAYS DIVERSIFY ONES HOLDINGS. GOOGLE IS CHANGING THE WORLD BUT A LARGE PORTION OF THE GROWTH OVER THE NEXT 5 YEARS WILL BE CONSUMED BY A REDUCTION IN THE PRICE TO EARNINGS RATIO. REMEMBER THAT A COMPANY CAN DOUBLE ITS EARNINGS BUT IF THE MARKET PAYS 50 TIMES THE OLD EARNINGS AND 25 TIMES THE NEW EARNINGS THE PRICE OF THE STOCK STAYS THE SAME.

American Red Cross - Preparing for and Responding to Hurricane Katrina



Victims of Hurricane Katrina Need Your Help. Visit Red Crossto learn about the needs and how you can help.

Sunday, August 28, 2005

CHEAP STOCKS--LOOK OUT!

A regular reader has asked, Why do you keep buying more Google even at almost $300 per share when there are $5 stocks available?

The nominal price of a stock has almost nothing to do with whether the stock is cheap or not. Indeed, many low priced stocks are not cheap at all. The question is like asking how much will you pay for a piece of Apple Pie if the pie is cut into 2,000 pieces. I have written about this problem before in regard to SIRI. This satelite radio stock has over a billion shares outstanding. The price per share has a billion reasons to be low, but this does not make the shares cheap.

One of the methods used by a number of value investors is to ask if they would be willing to buy the whole company. If a $6 stock has one billion shares outstanding, it would cost $6 Billion dollars to buy the whole company. One can then compare what other company one could buy for $6 Billion. One might find a stock selling for $60 per share that only has 50 million shares outstanding. The total price of this company would be only half that of the $6 stock even though the per share price is 10 times as large. If the two companies were to make the exact same amount of profits, the $60 piece of pie would be 20 times as large for only 10 times the price.

Of course all pies and all companies are not the same size. When I talk about cheap stocks, I am talking about cheap in relation to ratios that can be compared. For example, if one stock sells at 10 times its annual earnings and another sells at 2o times its earnings, the first stock sells at half price based on this one measure.

There are always two sides to every trade. Therefore, if you sell a stock trading at 20 times earnings to buy a stock that trades at 10 times earnings, you are selling a stock that the market believes will grow faster than the stock you are buying. This last point is that there are no absolute answers to successful investing.

I personally tend to avoid stocks selling for less than $5 and I suggest that most other investors would be wise to avoid these stocks. On the other hand, I know a very wealthy person who has made huge returns on low priced stocks. He has studied this style of investing for about 60 years. He knows what he is doing. He is like the juggler who is willing to catch twirling knives. He has a lot of fun and makes a lot of money but a portion of what he makes is from law suites he files against bankrupted companies. Not a game most of us should play.

Buy stocks that are cheap realtive to other stocks. If you like growth stocks, no problem, buy growth stocks that are growing at a higher rate than others with the same cash flows. The list of reasonable stategies is long. Buying stocks because their nominal price is low is a poor strategy for most.

Crude oil surge hurts Asian stocks - Markets/Exchanges - Market News

CRUDE OIL HIT $70!

In early Monday morning trading, crude has hit $70. Katrina may be one of the worst storms of all time. Only three category 5 storms have hit the mainland.

Oil from the Gulf could be reduced for several weeks to several months. Bush may allow refiners to borrow from the SPR again.

Stock investors should remember that markets are seldom devastated from known risks. Markets get clobbered from things that are beyond the current radar of most people. Remember to always try to look forward not backward.

My outlook for the market for the next several years is quite good. The next really tough time after the pullback we currently enjoy will be after the 2008 Presidential Elections.

BUY THE BULL!

Friday, August 26, 2005

GOOGLE FINANCE OR GOOGLE HOSTING?

Some (including the Silicon Beat site) are speculating that Google Finance will be the next big item introduced; something along the lines of CBS MarketWatch or Yahoo Finance. It may be next but the really big thing to come is Google Hosting.

I believe a Google payment system similar to PayPal will be introduced about the same time as hosting. Since there are registration fees to pay, I believe hosting will not quite be totally free to the user. It will make sense for the user to have an account to be used for payment of the service and for any advertising the site owner might want to conduct. Should his site generate advertising revenue, the funds could be routinely deposited to the site owners account.

The beauty of such a system would be its automatic nature. And few transactions would ever need to be made between a site owner's Google account and his bank account. A comment was made that perhaps personal adds would be next. Again, why not offer free web sites first. It might only take the click of a button to include ones profile in a "personals" data base.

The snow ball is building momentum. Google's "communication system" is about to reach a critical mass level from which it will expand in many directions rapidly. My "Old Merrill Pal" bought more Google today!

Thursday, August 25, 2005

NO HELP WANTED!

Conference Board statistics show that help wanted advertising is in the tank. Market seers discount the value of this information because jobs are now posted on the internet.

The numbers are still remarkably low and to some extend supported by other data. Job growth has been relatively tame thoughout this business cycle. As always there is a two edged sword ready to strike.

On the one hand, inflation will not be too strong unless the labor market is tight. Inflation is more important to your wealth than you probably appreciate. Stocks do well when companies earn substantial real returns. Periods when the inflation rate is high relative to interest rates are usually hazardous.

During the energy crunch of the 70's, making money in the market required good economic knowledge. Buy and hold investors who jumped into the market in 1970 did great for a couple of years. However, they were losing money by mid decade and even after 10 years they were up only 4%. The years of 77 and 78 were not bad years but they were wedged in the middle of down drafts.

At the same time, these were periods of big wage increases. It took thousands of workers to build all the nuclear power plants. Real interest rates could never seem to catch up. By 1980, President Carter flailed away at inflation by weakly imposing controls on credit cards. The situation was a heck of a mess. Not only did the economy slow, the inflation rate did not! One of President Reagan's first acts in office was to do away with price controls imposed in Nixons term. As any free American should expect, the market then solved the energy crisis. A tough recession was required but the problems were solved.

The good news today is that we do not have price controls. The price of energy has floated high enough to increase production and to decrease demand. I receive my oil checks last week and they were up 80% year over year. It seems that the price is high enough to find ways for old depleated wells to pump a little more.

The passage of the highway bill and the energy bill means construction workers are going to be in demand again. It will take a year or more for many of these projects to get approved, designed and under-way. There are already 23 nuclear plants under construction around the globe. More good news is that several of these plants will come on line in the next year. The number of snow birds who will leave the north for Florida will be particularly high this year.

The point is that the markets are in better shape than the common perception and solutions to the oil crunch are multiplying daily. Also, President Bush is one smart politician. He has been routinely under-estimated. I suspect he will be a popular guy again leading up to the elections next fall. Good things will need to happen between now and then. Perhaps Mr. Greenspan will stop raising shot rates. Perhaps some troops will be on the way home. Perhaps the Strategic Petroleum Reserve will be topped out in a few days and energy rates will decline even while the terrorist fight.

Oil prices are having an effect on consumer confidence. The economy is going to slow. The important thing for you to know is that the stock market and the economy often go along different paths. In Bear Markets, corporate earnings are often very strong and vice versa. A slowing economy would be good news because long rates would stay low and Greenspan would be forced to keep short rates low. Stocks would remain cheap realtive to bonds and to real estate. This low inflationary environment also makes Gold a poor place to store value. We are back to real interest rates which means it cost real money to hold Gold.

No help wanted but unemployment claims are still moderate. The news stock investors need is that a lot of folks have been laid off from work!

BUY THE BULL! I CAN'T TELL YOU WHEN IT CHARGES AGAIN BUT THIS SIDEWAYS MARKET IS GIVING THE BULL THE TIME TO REST BEFORE THE NEXT BIG RUN!

Technology News: Hardware : Intel to Call Entertainment PCs by Name of 'Viiv'

Technology News: Hardware : Intel to Call Entertainment PCs by Name of 'Viiv'

INTC is in for a major upgrade cycle. Everyone is going to want a new computer that is also a media center. Several good growth years ahead.

BUY THE BULL!

NUCLEAR POWER TO THE RESCUE

"Wind requires 460 tons of steel and 870 cubic meters of concrete per MW.

Nuclear requires 40 tons of steel and 190 cubic meters of concrete for the equivalent output." Copied from Econbrowser.com.

One can easily tell an energy expert from a loud mouth. No harm is done, everybody has an opinion and it is good to spout off every now and then. It is a bit tiresome to hear the same points argued over and over. The above comment was posted in response to a fellow pushing the idea of wind power. We would all like to believe that all we have to do to solve the energy crunch is to "harness the wind". We always like to believe there is a free lunch somewhere; sorry, it can't be found!

There are currently 23 nuclear power plants under construction in the world. Now that the energy bill has been passed, plans are being finalized for plants in the US. It is possible we will have new plants on line in 5 years. Thank heaven the plants in India, China and elsewhere will be on line soon.

In the meantime, we will waste time an energy converting corn to fuel and continuing to experiment with wind power. Perhaps, one day, wind power will make sense. In the meantime, let's focus most of our time and efforts on a more efficient and reliable power source. Those who wish to take personal responsibility to help with the crunch should move to down town areas on public transportation routes or buy a motor scooter. The market will provide enough fuel for the rest of us who will have to pay the fair price.

SOLD TIVO--BOUGHT GOOG!

TIVO has great potential. However, TIVO is up against the biggest and the best.

INTC is going after the "media" market like a duck after a crawfish. This major chip maker is going all-in (Did you notice the poker humor?). It's latest computer chip is designed to make it easy to move media files from one computer to the other. In other words, if you record a TV show on a hard drive, it becomes easy to transfer it to another computer, TV, DVD or other device. Ones ability to manipulate video in a computer will be superior to ones ability to do so in a TIVO box. INTC will also produce a low power chip for mobile devices. The juice required to play a full length movie is falling like a hot meteor.

GOOG is going after the "media" market like a 1,000 ducks after a crawfish. This company is offering services for free that Microsoft sells for billions. This afternoon, Jones and I each downloaded the TO DO plug-in for our Google Sidebar. This free to-do list manager is far more convenient and therefore useful than the outlook to-do list. Jones pointed out that many a company, after purchasing very expensive CRM software, has found that the employees do not make the effort to key in the info. The Google Desk Top captures all kinds of info automatically. The automatic nature of the sidebar makes it very helpful. This first edition is a great tool; I can't wait to see what is added next. Jones thinks a full scale CRM program would be nice.

GOOG will offer many of the same services offered by TIVO. Both will offer systems to store video content. Why buy a box if INTC sells a cheap computer that will do all the same "stuff" and why pay for a large storage drive when GOOG will store the "stuff" for "free".

In one account today, we sold TIVO and purchased more GOOG! DOING THE GOOGLE GULP! GOOG ; a high priced company that is dramatically changing the world for the better. Do more work in less time with Gmail and other productivity enhancements. Never lose a file again!

GOOG shares will be dead in the water until after the secondary offering is complete. I have absolutely no good idea what GOOG will buy. It is clear that the company plans to take over the number one spot in computer software. Maybe GOOG does not need to buy any major company. If GOOG is preparing to offer free web sites to all comers, it may simply need to buy 40 million new servers. I am sure DELL and INTCwould offer them a good deal.

How many copies of MSFT Front Page will be sold to publish web sites if Google offers free web sites with built-in software? How many copies of MSFT Word will be sold if Google offers a free good quality word processor?

As a former owner of a $500 Lotus spread sheet program ($500 was a lot of money for a desk top computer program in 1985), I can appreciate just how MSFT must feel (in case you weren't aware, MSFT gave away spreadsheets, browsers and other programs to kill break the knees of competitors. Is Google going to take MSFT out to the wood shed for a spanking or is MSFT going to fight the good fight?

I wonder just how happy SBC, VZ, BLS and other big phone companies are this week. Yahoo and others have been offering "IM Talk" for a while. GOOG's program will force AIM and others to open up their systems. When we can all talk to each other over the internet, why will any of us pay for long distance telephone service.

I don't count YHOO out as a major player. Yahoo has deals with SBC,VZ and many other phone companies. Time will tell if GOOG can get the same kind of revenues off communications as it has gotten off of search.

MSFT has a market cap of almost 4 times that of GOOG. In 2003, MSFT had revenues 20 times that of GOOG. In 2004, MSFT had revenues of 13 times that of GOOG. In 2005, MSFT will have revenues in the neighborhood of 7 times that of GOOG. It is conceivable that GOOG will catch-up with MSFT's revenues in 6 or 7 years. Assuming the P/E shrinks to 20 in 7 years, the price of GOOG could easily be over $1,800 per share.

MSFT has been a phenomenal company. Not many would bet that GOOG will produce wealth equal to what MSFT has done. It is fascinating to speculate about the possibilities.

At current high valuations, GOOG should not be more than a relatively small portion of ones net worth. DO THE GOOGLE GULP BUT DON'T SWALLOW SO MUCH THAT YOU MIGHT DROWN!

GOOGLE PRODUCTS ARE GREAT!

My good friend, Lamar Jones and I have played with Google Talk this morning. It is neat. We talked for a solid hour and the voice quality was superb. Our main topics revolved around the Google Sidebar and how exciting it is.

I would guess that I have purchased MSFT Office products at least 20 times. It is amazing at the slow down in innovation after MSFT became a virtual monopoly. Google is ready to take over the desk top by default. My wife just asked me if an email had come in from a certain party. Instead of eyeballing my list of emails, I typed in the parties name in my search box and immediately had a list of emails and correspondence to this party. The list even included instances of correspondence to another party in which the first party was sent a copy. Now that blows MSFT Outlook away!

The mic I am using for Google Talk is a cheap one that came with a system I purchased about 7 years ago. I have decided to buy a new Plantronics Wireless headset. This morning, on my advice, my son in law purchased shares in Plantronics. PLT is not the cheapest stock on my list but wireless computer headsets are going to sell quickly as computer users quickly discover the beauty of Google Talk.

Three times already I have answered the question, Why do you think Google Talk is so much better than AIM or other services. The key point is the fact that it is open source. This means that folks on Google Talk will not have to open a different interface to talk with parties who are on other services. AIM, the market leading product of AOL, is going to have to open up or go the way of the dinosaur. When the majority of folks are signed up, why would anyone pay a long distance fee?

Like they say, Talk is Cheap! Google Talk is free!

I have not downloaded any plug-ins to my Google Sidebar. The one I want to get first is the to-do-list. I have tried to keep a to-do-list handy for years but it is a hard habit to make. Having one hidden but available with the movement of my cursor should be another neat benefit. Being able to search the list supper fast should also help.

To raise money to buy PLT, my son-in-law sold part of his TIVO holdings. TIVO has the patents and is doing the work to develop a neat system. However, Google, Yahoo, MOT and many other big fish are strong competitors to TIVO. Plantronics certainly has its share of competitors as well. I really do believe sales of headsets are about to ramp up quickly. Profits for the next few quarters should be unusually strong. Best Buy is going to sell a lot of routers, head sets, and other equipment.

BUY THE BULL! WE LIVE IN AN ERA WHEN TECHNOLOGY INNOVATIONS ARE NOW BEING PUT TO WORK. THE INTERNET HAS BEEN AVAILABLE TO THE PUBLIC FOR 10 YEARS; GOOGLE TALK IS A NEW MAJOR WAY IT WILL BE PUT TO USE TO INCREASE PRODUCTIVITY AND WEALTH! DO THE GOOGLE GULP AND BUY A HEADSET WHILE YOU ARE AT IT.

Wednesday, August 24, 2005

THANK YOU; MARKET UPDATE

Many thanks to those who have written asking if I fell off the deep end. No I didn't, I am alive and well! Just very busy.

Rather than answering each email specifically, I will give general answers and include market opinions and updates along the way. If I do not answer your specific question, please write again.

1) Yes. Real estate still has a way to go this cycle. Second homes continue to make the big difference. Of the homes sold recently, 23% were second homes. This means household formation is still stronger than new home construction! Echo boomers still have first homes to buy and millions of boomers have not yet purchased a second home. Folks who do not own a second home are going to feel like the Lone Ranger in days to come. The norm is quickly evolving to be ownership of two or more homes. Even in relatively small towns across America, the trend is toward living and working in-town during the week and escaping to the second home on week ends. If you have ever tried to get to Cape Cod on a Friday afternoon, you know what I'm talking about.

2) Yes. Corporate executive pay did go to ridiculous extremes. I appreciate the graph sent and hope to find the time to post it. Yes. The market works. No. We do not need specific laws to limit CEO pay. Instead we need individuals to own stocks directly. One of the biggest sales jobs ever perpetrated on American citizens was to convince them to pay 150 basis points per year and to give up voting rights to mutual funds. The fees paid to manage 401-K accounts often are larger than the tax savings realized. Fund managers make big salaries and vote for entrenched corporate directors and executives. The little guy can only vote with his feet. Buy individual stocks and avoid high fee funds. If you must own funds, buy ETF's; however, don't gripe about corporate pay or other governance issures unless you are willing to read your documents and to vote your shares.

3) Yes. I am still excited about Google. In fact the powerful new products WOW! me. I have downloaded the new desktop search including the side bar and Google Talk. The difference in Google Talk and AIM is in attitude. Google Talk is open source. The difference is akin to the way Apple Computer started but then allowed IBM to take over. A good comparison to Beta Max and VHS could be made except that Google Talk is a better product and it is open source.

The power of the sidebar is particularly noticeable. Already, it knows of several web sites I like to visit, of stocks and industries I follow and of news topics that are of most interest to me. The sidebar is smart and it learns more every time I do something. It is neat to have important information so handy. For example, I don't have to navigate anywhere to check the weather at home, in Myrtle Beach or in Blowing Rock because I have saved those as places to follow. Neither must I navigate to check a stock quote because my favorite stocks have already been selected and are constantly updated. Future software updates will surely allow me to follow entire portfolio balances.

Yes. Google is on my add list and I will likely buy more when I receive the proceeds from the next condo sale. DO THE GOOGLE GULP--THE PRICE IS HIGH BUT THE FUTURE IS BRIGHT!

4) Yes and No! To the question are we really in a BULL MARKET! The answer depends on your definition of a BULL MARKET.

a) We have not broken to new highs in all major indices; we are not likely to hit new NASDAQ highs for many years to follow.

b) P/E ratios have declined sharply since 2000 and the decline is not over! The after inflation earnings yield on stocks is dramatically lower than historical norms; therefore stocks are not cheap! Note that my point has usually been that stocks are cheap relative to bonds and real estate. Bond rates will revert to the mean!

c) Short term considerations give reasons to expect a significant pause or even a 10% correction. The market went to over-bought levels a couple of weeks ago and the excess speculation has not been cremated; it is dying but not dead. September is historically the weakest month of the year. The possibility of sanctions against Iran hang over the oil market in particular. An oil disruption would scare the willies out of the strong. The FOMC would react quickly to a disruption but the short-run pain could be severe. The FOMC has shown no inclination to stop tightening short rates. Calls for the FOMC to stop now are short sighted if the short term trend in inflation continues. It is not the current rate of inflation that is a problem but the trend is worrisome. Payroll costs could rise by 4% or more this quarter.

d) On the other hand, many indicators show that the economy is following a familiar pattern. Similar to the mid-decade slow downs in the 80's and 90's, the economy is ready to slow prior to the economic expansion phase of the cycle. This phase will probably last at least until the Presidential Election year of 2008. The election year cycle has been a reliable cycle; odds are good, there will be a market peak in 2008 that is substantially higher than the market bottom of 2006. The wiggles in the market between now and the 2008 top are impossible to call. The top of 2008 may easily be topped again in 2009 but on the other hand P/E contraction is going to "win" at some point.

e) Earnings growth has been strong and is expected to stay strong during these next several years. Some of the growth in earnings may continue to be "absorbed" by the continuing decline in P/E ratios. However, I believe the decline in P/E's which has abated recently will continue to abate; I believe there will be modest P/E expansion between now and the 2008 market top.

f) While the upcoming slow-down is not likely to reach anywhere near recessionary levels, the recession that will follow the Presidential Election of 2008 is likely to be unusually nasty. There is no need for the FOMC to raise short interest rates much more in the near term. However, sooner or later, long bond rates will move up enough to make P/E multiples contract. The good news is that the increase in bond rates will happen in a strong economic expansion and decent stock market.

g) Ironically, the only thing this stock market needs right now is a significant uptick in new claims for unemployment insurance. When the market smells that the economy is slowing, long rates may test the lows one more time before the march to higher ground and the stock market will shift into BULL MODE--that is if you call a 20 to 30% S&P gain in six to 12 months a BULL MARKET.

5) Yes! My daughter did make an 84% annual return in her retirement account a couple of years back and yes she did have a 29% annualized return, July 2005, in her regular account and yes my other daughter has nearly a 100% return over the past two years. The 84% return was made by putting 100% of a relatively small retirement account in international stocks during the 2003 BULL MARKET (by my definition). The 29% gain was a result of aggressive stock selection which included catching volatile airline stocks and high tech stocks coming off of lows. The 100% gain is in another relatively small and under-diversified account. The three largest posions are GT, GOOG and TXN.

6) Yes, I plan to get back on the blogging trail. My wife and I have much work left to close down our resort condominium rental business. Selling ones business, down-sizing ones house and planning for retirement are all time hogs. In case you have not heard, it is far more difficult to sell a business than it is to buy one. Blogging will be "catch as catch can" until these projects are completed.

Tomorrow, Cheryl Phibbs, Sandra Kupsky, Marilyn and I will meet to discuss our plans for the coming years. Some of the ideas follow:

We expect to post a comprehensive investment web site to a Google hosted location.

Our expectation is for the web site to be hosted by Google at no charge other than the sharing of advertising clicks.

The web site will be chart intensive. For example, I write about the real estate cycle and I believe investors need to know about the four phases of real estate. They need to know the characteristics of each phase and to see our estimate of where we are in the cycle. This information is best presented graphically.

We expect to continue to select stocks for our Stock of the Week portfolio. We plan to post the portfolio to the new site along with the details of each transaction and follow-up messages.

We expect to offer online educational seminars. One trap where investors are often caught is in paying attention to too much extraneous information. We believe investors need to focus on the important stuff and to screen out the "noise". We hope our seminars will teach the fundamentals. Investors can be overwhelmed when they listen to one sage say buy tech and other say sell tech to buy pharmas.

We plan to post an asset allocation model. We believe the concept of diversifying is often misused. We know of recommendations to buy a sector just to be diversified. Helping our readers make money is our goal. If a sector is significantly under-priced, it is reasonable to over weight that sector and it is reasonable to invest zero in a sector that is dramatically over priced.

An important decision we have deferred is whether to charge for our services. At the current time, we plan to maintain our "amateur" status. The posting of the web site will require many hours. We may eventually ask for donations or request subscription fees.

For now, lets just make money in the market and not worry about fees. Post a comment if you know of a good expansion phase stock. Clearly the equipment tech stocks are on a nice run. Do you have a favorite?

Friday, August 12, 2005

THE TREASURY BOND OUCH RATE

With enough leverage an 80 pound weakling can move the world. In the financial markets the fulcrum of leverage is the interest rate on long term treasury bonds. Forecasting the correct fulcrum rate (I call it the OUCH RATE) correctly can make you rich in a hurry and forecasting it poorly can make you poor equally as fast. What is the current OUCH RATE?

Answering the above question is akin to the question of where should the FOMC stop raising short interest rates. The problem is that the answer to the question changes every time there is a new piece of financial news! In other words the "OUCH RATE IS CONSTANTLY CHANGING"!

I call it the OUCH RATE because this is the most important rate that investors need to know. Should investors ignore or forecast it poorly, they do so at great peril to their financial health. Let me use a few numbers to illustrate the problem.

We know the Thompson forward earnings projections on the S&P 500 to be about $75.70. We know the S&P is currently trading around 1230. The forward price to earnings of the S&P is thus about 16 times. We know that historic 10 year returns on stocks when the P/E is around 16% to be between 8 and 9% compounded. The decision for long term investors is pretty easy. Good quality bonds are currently yielding less than 5% so 8 to 9% return is the best alternative.
Aggressive investors or anyone with a shorter time frame has a tougher decision to make. Flipping the P/E upside down we get the following calculation $75.70/$1230 = 6.15%. The result is the S&P forward earnings yield forecast of 6.15%.

Does this make the OUCH RATE on treasury bonds 6.15%? No!

There are too many variables to declare a yield of 6.15% guaranteed by the US Government to be superior to a projected yield of 6.15% in stocks--books and books have been written. Although we know that the bond rate must equal the inflation adjusted growth in the economy in the long run, we never really know how much of the rate is growth and how much is inflation. And, of course, our projections of earnings growth may turn out to be very wrong.

Back to the OUCH RATE. Lets presume that long rates reach 5.5%, the fed continues to tighten short rates and the S&P is still trading around 1230. Stocks are throwing off earnings of 6.15% and yet government bonds offer 5.5% guaranteed. However, the fed tightening slows the economy which in effect reduces corporate earnings and lowers the bond rate. Suppose you forecast that rates are about to return to 4.5%, a drop in long rates will cause your bonds to appreciate about 14%. This increase is in addition to the 5.5% interest yield. The total return in bonds would be better than 19% while the return on stocks would be negative by about the same magnitude.

The implied decline in earnings would be about $12.30. Even if the P/E ratio stayed the same, the drop in the S&P would be in the neighborhood of 16%.

I am a RAGING STOCK MARKET BULL. I see short term risk as the market has made a good run and sentiment has built up a head of froth but I am still a BULL. The reason is that the path for our economy seems to be pretty clear. We are growing at a relatively steady and strong rate of about 6.25% without running into resource shortages (oil being the one possible exception).

The result is that the inflation rate has been tame even with the FOMC offering money for the past few years for almost free! Now that the FOMC is taking the stance that you have to pay real money to borrow from the Fed, whiners are whining. The truth is that short rates had to go up and the evidence so far has been that the FOMC has moved up at about the right time and by about the right amounts.

Industrial capacity is available. Companies such as Dell, INTC and GLW are building new plants but most companies are meeting demand from existing facilities and labor is available. It is interesting to note that GLW pre-sold all its production at its new 1.5 Billion Dollar plant before building it.

The combination of growth and inflation will go up in the next few years. Bond yields will thus go up but the OUCH RATE is certainly well above the current rate on bonds. Indeed the total return on long bonds over the next year is likely to be negative. Should rates rise by 1% the decline in value of long bonds will be around 11%; the net will be negative 6.5%.

On the other hand, stocks will enjoy earnings growth of about 12%, while P/E ratios will likely contract a little. The total return including the current earnings yield of 6.25% will be around 15%. Fifteen percent is not chopped liver and it is certainly better than negative 6.25%. The most likely miss in my forecast would be the P/E contraction. In an emotional BULL MARKET multiples might remain at this level to boost the total return to 18.25% or they could expand taking the total return up to 20% or better.

Some folks believe the FOMC has already tightened too much. They see evidence in the low bond yields. This logic is close to a dogs tail chasing. If rates are already too low, there is less competition from bonds to fear. However, one must not rule out the possibility that the FOMC has tightened too much and the 1% decline in bond rates will be from 4.3 to 3.3%. In my opinion, the low rates are actually a forecast of very low inflation rather than slower economic growth.

BUY STOCKS--SELL LONG BONDS--SELL RESIDENTIAL RENTAL PROPERTIES--REDUCE MONEY MARKET SAVINGS ACCOUNTS TO 6 TO 12 MONTHS OF LIVING EXPENSES! BUY THE BULL!

IRAN IS GETTING SQUEEZED!

Our European allies are maintaining the pressure on Iran to halt its development of uranium enrichment facilities. Bush says the time for sanctions has not yet come.

There is much speculation as to whether the UN Security Council will go along with sanctions as China has veto power and has expressed reservations. Russia may also side with Iran.

The good news is that the price of oil has only risen to $66 while inventories are being stockpiled around the world. Clearly if a crisis is avoided, the excess oil will take months to use. The price would drop like a river rock.

September the 3rd is the "drop dead" date for the negotiations between France, Britain , Germany and Iran. Of course these things the tendency to get stretched. With the US SPR filled to the top this month, some of the pressure will be relieved and any hint of resolution will drop the demand for crude.

Don't take me wrong--I do not doubt T. Boone's prognostication that oil might hit $75. Also I agree that refinery capacity is at bottleneck levels. The current problem is not the supply of oil but the fact that there is not enough refining capacity to meet the demand--perhaps a bit of an over-statement but the point is that utilization at 95% is about as high as the industry can maintain over long periods of time.

Iran is key. Iran has allowed terrorist to take bombs into Iraq. Iran is pushing to become a nuclear power. France, Germany, Britain and other nations desire to engage in lucrative trade with Iran which is I believe the second largest oil producing country. The deal to be made must include the willingness of Iran to help stop the insurgency into Iraq. Having another nuclear powered nation is not a good thing but probably not a preventable thing. Pakistan and India hate each other, share miles of borders and are nuclear nations.

I can write the above paragraph but administration officials cannot talk in these terms. The talk must be about stopping nuclear development in Iran. It is always amazing how the economics of the world eventually dictate the politics. China was a communist nation but now the country practices capitalism with the best. Iran needs to become more and more linked to the west via more and more economic relationships. It is in everyone’s best interest for much world trade to be originated in Iran. The country is wealthy--it simply needs to use its oil to build more trade relations.

A pessimist might assume that a deal will not be made, that sanctions will crimp the world oil supplies, that a recession or war will be the result. I am an optimist. I believe a deal will get done and the oil currently sitting in almost every tank car in America will be surplus in a few months. The price of oil will drop back into the 50's and within a year I believe the price will be back in the 40's.

MAINTAIN YOUR BULL MARKET STANCE. STOCKS ARE CHEAP RELATIVE TO BONDS AND REAL ESTATE. A SHORT TERM PULL BACK MAY OCCUR BUT IN THE LONG RUN YOU WILL BE PAID WELL TO INVEST IN THE BEST VALUES--STOCKS CURRENTLY WIN THE PRIZE!