Thursday, September 08, 2005

Stock Market News and Investment Information |

Reuters reports that the Google secondary offering has added 17 underwriters. One might expect a number of companies to add coverage after the secondary has been completed. Their bias will likely be positive.

A MarketWatch report this morning suggests that EBAY may be involved in a $5 Billion bid for Skype. Skype is adding customers at the rate of 130,000 per month! Only a small percentage pay anything to Skype but one should always remember that innovative markets do not look for revenues or profits during the "build" stage; think Yahoo. None-the-less, it is estimated that Skype is pulling in revenues at an annualized rate of from $72 to $100 million dollars.

Despite the expected short-run slowdown to be caused by Katrina (the rebuilding will actually be a stimulus to growth once it gets cranking), our economy is very strong. The only unemployment that exists today is structural. Good jobs are available; training and relocation are needed to match employers and employees.

The betting has swung back and forth concerning the probability of another rate hike. Greenspan is aware that once demand pull inflation grabs hold, it is hard to shake. He has tried to get in front of the expansion phase of the economic cycle. Greenspan and all market participants should be well aware of the passage of a massive highway bill and a massive energy bill. Add the stimulus of at least $200 Billion of government and private (Katrina) spending and it becomes clear that Greenspan will probably hold the wheel steady and move up rates again this month. After all, the energy supply shock has raised the price of gas significantly.

My family is conserving fuel. I have not filled up since a few days before Katrina hit. I will see how long I can stretch this one tank of gas. I see gas prices declining because the conservation efforts are world wide. For example, India and Indonesia have each lowered their government’s subsidies for fuel. Ironically the fact that pump prices have started to recede a little will cause folks around the world to conserve and to delay their next purchase.

I was able to get a peak at a private energy report (I did not ante up the $2,500 to get my very own copy). This report examined, from the bottom-up, energy production around the world. Production is expected to rise significantly over the next 18 months. The debate still rages in regard to new production keeping up with depletion. The losers in this argument must surely and mistakenly discount the production possible from shale. At current prices, a tremendous amount of oil is recoverable in good old North America. WE ARE NOT ABOUT TO RUN OUT OF FUEL! Supplies are temporarily tight. We have a lot of energy available off the east and west coasts of our great country. We need to construct a reasonable compromise and then go get it.

The left-wing environmental whacko wants us to hunker down and live like hermits. One irony is that the automobile was a huge improvement for the environment about 100 years ago. (Was it 1905, when Henry Ford developed interchangeable parts?) Anyway, can you imagine all the horse manure and flies that were everywhere in 1905? Continued improvements in technology will allow us to further improve our environment. Hydrogen fuel emits a little water vapor. Air quality improvement is on the way.


During a business cycle, we expect our economy to expand to its maximum non inflationary potential. The problem in each cycle is that sooner or later the economy grows above the long-term trend long enough to cause inflation.

The fiscal and monetary stimuli of the past few years have done their job. The real economy has grown faster than is sustainable for long periods. In the past year, Greenspan has practiced the ages old job of the Fed to "un-spike" the party punch bowl. In the old days, the business cycle was a one humped camel. The economy would quickly go from too much boom to too much bust. However, in the mid 1980's and again in the mid 1990's we enjoyed a two hump camel economy. For example, interest rate increases throughout 1994 did not bring on a recession but only a slow down in GNP and a slow down in the rate of inflation. After the slow down, the economy was good for another 5 years of decent non inflationary growth. During this time, the yield curve remained relatively flat. Inflation was held in check and the innovative technological boom helped by making a higher non inflationary growth rate possible.

The technological boom is not over. The building out of cell phone and internet high speed networks over the past 10 years have set up the possibility of numerous additional innovations. To a large degree, these innovations are not capital intensive. For example, Skype has acquired 51 million customers while a few venture capitalists have invested a relatively modest amount of money! Google raised $2 billion when it went public and still has the cash!

The situation is what one should call a "sweet spot". Of course, the big land line telephone companies or even Microsoft and Oracle might not call this a sweet spot. The land line phone companies are a bit like the wagon makers around 1915. In 1915, Henry Ford was building cars at a price that made the purchase of a new team and wagon a foolish act. Right now, one would be silly to add a land line phone when an internet line will do much more at less than half the price.

On the other hand, Microsoft and Oracle must feel like Henry Ford in the mid 1920's. Consumers were no longer willing to pay cash for a black Ford when GM offered a beautiful Buick, Pontiac or Oldsmobile in trade for your old Chevy. Now, as Google adds more and more software features free, Steve Ballmer of Microsoft fame has stated that he plans to "kill Google". (It is reported that he threw a chair across his office when he learned of another executive loss to Google.)


The number of Nervous Nellies seems to grow daily. The reasons for their worry are endless. I do get a kick out of the concern about consumer savings and spending. If there is anything the market can count on it is that American women are going to shop!

One of the grossly misunderstood numbers is the level of consumer debt. The Nellie’s would have us believe that the consumer cannot afford to buy anything else because he is in debt up to his eye balls. The Nellie’s like to repeat "scary numbers". "Total credit market debt is up to 300% of GDP"!

This raw number leaves out many important factors. For example, mortgage payments have been substituted for rent. To say that a family which is now paying $750 per month in house payments is overextended relative to last year when he was paying $750 per month is rent is ludicrous. The family’s ability to pay $750 per month for housing and its decision to pay interest and principle instead of rent does not increase the likely-hood of failure to make the monthly payment. Indeed, the homeowner is all the more likely to make the payment. Homeowners will cut back in other areas if necessary to make their house payment. The equity now owned by people who were considered poor three years ago is already a significant amount of money.

Negative articles have said with alarm that mortgage debt has grown from 16% of GDP in 1952 to 68% in 2005. So what! In the late 70's, consumers routinely maxed out numerous credit lines and credit cards. These lines were unsecured. Is nervous Nellie suggesting that the asset backed debt in today's world is more problematic than the billions of unsecured debt in those days?

Now-a-days, consumers can afford to make the payments on a second home. This is a blessing not a curse.

Don't take me wrong. Markets do swing until they are over-extended. This happens when demand pull inflation is the order of the day. Yes we have seen some demand pull inflation in the second home market but hardly anywhere else. All the fussing over commodity prices is about cost push inflation. By its very nature, cost push inflation defeats itself. Markets automatically adjust. Demand pull inflation can be a tough animal to cage because it becomes instead of defeating itself, it feeds on itself.

Take a look at the cost push of oil prices and the demand pull that just occurred in second homes. Our neighbors to the north are enjoying a strong economy. After all, the USA imports more fuel from Canada than from any other country in the world. The increase in raw material values has caused Canada to increase production and the Canadian economy is running at almost full capacity. The country is enjoying a substantial trade surplus. Their dollar has been strong. At the same time, inflation has been low to moderate. Expansion of oil production has increased at a moderate pace because companies there know that the market will adjust. The adjustments will come on both the supply and demand sides. After all, it is a fundamental rule of economics that if the price of a good increases, the supply of that good will increase and if the price of a good increases the demand for that good will decrease. The law of substitution plays a very important role in this process.

Now, some of the good folks from Canada, who have prospered as a result of strong energy prices, have purchased second homes in places like Hilton Head and Miami Florida. When the market got hot, it did not matter what the cost of production was. Indeed, 5 year old beachfront homes that could be purchased for $500,000 were passed up while newly constructed homes were purchased for $750,000. For a while, the market was so crazy that the $750,000 home could be resold for $900,000 or more even before construction was finished.

Yes, gasoline prices were temporarily in this mode just last week. Folks with half a tank purchased at $2.55 rushed to top off their tanks at $3.29. The demand pulled the price far above the cost of production.

The stock market Bubble was a time of demand pull inflation. Today, the sentiment is not even close. Five Trillion Dollars is sitting in money market instruments because the psychology is the exact opposite of "BUBBLE PSYCHOLOGY". Demand Pull is simply not prevalent. Indeed, companies continue to cut costs in an attempt to be the low cost producer. The number of layoffs has slowed and the labor market is strong. Greenspan is trying to engineer a smooth transition from recovery to expansion. Yes, he will either overshoot or undershoot a little but only a modest adjustment will be required to get back on track.

It is my hope that at least one more rate hike will be needed. Just one more hike in interest rates could easily build the wall of worry to an extreme height. I love to be loaded up on stocks when the market begins to climb a steep wall of worry. We are close!