INFLATION FEAR!

It is amazing that inflation fears are everywhere. The Fed Beige Book does not normally move the market but this time words about the strengthening of inflation worries has dropped stocks and bonds.

Is has been said that Generals and Brokers fight the last war. The big bull market that ended 1929 ended in a protracted deflationary spiral. The big bull market that ended in 1969 ended with a protracted inflationary spiral. We are currently in an inflationary down trend that started in 1980. Long term interest rates have fallen from 15% in 81 to 4.5% in 2005. Is the decline over? Is the next problem the same as the last one?

I believe the next big problem will be deflation not inflation. The forces at work are killing one old inflated industry after another. I just wrote about the dying circulation of news papers. Folks are still reading the news and responding to advertising. They simply do not need reams of newsprint to dispose. This is another example of the law of substitution at work. The CPI probably shows that the cost of the average newspaper went up from 41 cents to 43 cents last year. So what? How many people saved the 43 cents by reading online news? The price of internet service may have gone up but the number of people who added a new service, such as VoIP, is not captured except in the deflator measures of prices.

I can't remember the numbers but I recall reading that revenues at the baby bell phone companies will be down significantly this year. Newspaper circulations are dying. Electronics are reducing auto fuel consumption. Consumer interest costs are not tax deductible. Productivity is reducing the cost of product after product. Office, retail and mall space is going begging. Will baby boomers who have not saved adequately for retirement suspend spending while playing catch-up?

The market has "believed" for two years that long-term interest rates must go up. EBAY has put back into circulation billions of items that might have been hauled off to dumps or languished in basements and attics. Why do interest rates need to go up if consumers can recycle used goods as a fraction of the cost of new goods?

The economy should be strong for the next few years. There is no need for interest rates to go up enough to choke off the expansion. After a good strong non-inflationary expansion, interest rates may hit the lows of the 30's.

Los Angeles Business Journal Online

Now is not the time to buy printing ink stocks if the news from the L.A.Times is indicative of the current trend. Newspapers are losing circulation to online sources. The Times suggest that the company is simply dropping unprofitable circulation. Papers have been dropping unprofitable circulation at a more rapid pace in the past few years.

I spoke to a real estate agent a couple of days ago. I asked him about the advertising he does to sell a house. He said he markets homes over the internet but he runs one ad in the local paper to keep the seller happy! This is a telling story. I wonder how many ads are being run in newspapers, not because they are effective but because "this is the way it is done"?

A friend of mine is attending the World Poker Tour Tournament in Las Vegas. He contacted the Greensboro News before going and has arranged to post a series of stories about the tournament. His purpose? To get a press pass! He hopes to hobnob with Doyle Brunson and the other champion players. Greensboro is one of the first papers to actively seek out "blogging" stories. Greensboro plans to offer more articles for a lower price.

The news media is dead; long live the news media!

John Battelle's Searchblog GOOGLE $250?

John Battelle's Searchblog

John reports that Safa Rashtchy a noted analyst from Piper Jaffrey, has initiated Google as an Outperform with a price target of $250.

Rashtchy offers a long-term forecast $22 Billion in revenues by 2010! Google is number one in search with a commanding 50% global market share and Google has show an ability to leverage off of search to offer other popular services. I believe the 50% share will erode over-time but I believe it is a "sticky" share.

Those of us who have signed on for AdWords and AdSense programs are not likely to be easily moved. Those who sign up for free Gmail and Blog sites are equally planted. Maps, books, movies, indeed virtually all digital media are being cataloged by Google. The bottom line is that Google's business model works. Google is making money while offering an ever expanding array of "free" services. Some are afraid that the next new software will prove to be superior to Google. I see Google as leading the pack for years to come.

Random Roger's Big Picture: Reader Question

Random Roger's Big Picture: Reader Question

One of Rogers readers asked a few questions about short-term trading. I posted the following comment on Rogers site.

From deep in memory, John Train's first book was called The Money Masters and it was in this book that he reported that he could not find a single rich person who made his money through successful short term trading.

Obviously, there are market makers who do well by earning a eighth or so off of hundreds of transactions per day. Also there are many stories similar to the guy that bought his BMW in one day off of a good QQQQ option trade. But I have been to Las Vegas with folks who claimed to win every trip!

Who do you know that has gotten wealthy calling short-term trades? I know at least 200 millionaires and none of them "trade" stocks. The odds of winning the lottery are probably better. Playing can be fun but the guys I know who quit their jobs to trade full time are back at work. Even with luck, the taxes eat you alive. The spreads are the real killers.

A quarter-point spread once a day will take 50% of your portfolio away!

Continental Airlines--American Airlines--America West Airlines

Airline earnings are coming in better than projected. CAL lost $2.89 per share but the First Call forecast was for $3.10. This is a significant "beat" that would cause excitement if it were a positive $3.10 versus a positive $2.89.

AMR is up this morning on an equally good report. America West, which also had a good report, is trading down on the report that it is well into discussions to merge with bankrupted USAir. Merrill Lynch is reported to have issued a negative report on the advisability of merging with the bankrupted carrier.

The second half of a business recovery is often called the expansion phase. During the expansion phase, business travel is typically very strong. Business travel is typically the high margin business. I project an expansion phase of three to five years. The cumulative profits for the surviving airlines during the expansion should be substantial.

EXPENSING OPTIONS-CAN YOU SEE TROUBLE AHEAD?

The market is doing fine. Our top performing stocks today include Corning (GLW), GOOG, YHOO, AMR, SCST and RNWK. Among the stocks taking it on the chin today are the consumer discretionary stocks. The cycle is playing out "by the book".

The "big trouble" ahead is in regard to expensing options. The public will not understand that the real before tax earnings are the same whether companies expense options or not. I invite my accountant friends to chime in here but I believe it is actually likely that after tax profits may be higher after options are expensed.

It is difficult to appreciate that a ball player should make 15 million a year and equally difficult to appreciate that the Yahoo Chairman deserved a $200 plus million bonus last year. I don't want to try to argue the point but I believe it is good that options are going to be expensed--the transition is there to give the market a little indigestion.

Remember that the time to buy is when there are lots of things to worry over. Of the all time great investors, Jesse Livermore was one of the ones who knew to buy against the grain. The irony is that he strictly practiced the concept of letting winners run and cutting losers short. Still he got into a lot of trouble with his friends and followers when he made money during times when they had lost. The most notable time of all was in 1929. Right at the start of the crash, he turned bearish, sold his stocks and sold stocks short. He made a lot of money off the crash but was despised by former friends.

It can be hard to go against the grain. Many recent stock market newsletters are very negative. I can't say that the worst of this market is over but I have been through these tough markets many times and it seems that this market is not likely to crash from here but that it could soar like an eagle. It may need time to mature but when it takes off it will be a beautiful sight. Understanding that reported earnings declines in June will be paper entries should help you hold on if the bronc tries to buck you off.

Furniture Business--North Carolinas Bread and Butter

North Carolina has long been the furniture manufacturing capital of the world. Recent years have been tough for most labor intensive manufacturing businesses in the states. Yesterday, I received my semi-annual report from the High Point Home Furnishings Market. (This long standing market place is being threatened by a new market in Las Vegas. The apparent theory is that buyers would rather party in the after hours in Vegas. The High Point Market is a serious market but certainly a part of the sales promotion is to wine and dine the big buyers. In my opinion, the major market will remain in High Point.)

It is interesting that some of the top selling pieces this year are very expensive "home made" products. Ironically, some of the very best "home made" products were only designed here. Those furnishing their dream home are apt to spend more on furnishings. In case you missed it, the home business has been in a super strong cycle for ten years or more. Millions of Americans having built a large equity in their first home have now "moved-up" to their dream home. Millions of others have purchased second homes and most of these are not the rustic cabins or beach cottages of days gone by. Buyers who feel threaten by the ups and downs of stocks are comforted by seeing the gradual climb in market values of homes. The last few years the gradual climb has steepened.

The above is not written to suggest that the furniture business has not been "leaning" itself down--lowering production cost, reducing over-time pay, substituting capital for labor and over-turning every stone to increase productivity. In today's Winston-Salem Journal it was reported that Canac Kitchens, a wholly owned subsidiary of Kohler Co, is building a new factory in Statesville NC. The company plans to hire 400 employees over 3 years. The Governor of NC has released a $250,000 grant to attract the business to NC. The company is based in Wisconsin and it is the largest supplier of frame-less cabinets in North America.

The $250,000 invested by the state is a drop in the bucket compared with the money spent to woo Dell Computer to the middle of furniture country. The investment by Kohler of $20,000,000 is about one tenth of the investment by Dell but still an important deal for NC.

Cabinetry is a fragmented business. Cabinets are typically lower cost products than stand alone furniture with more hidden components made of cheaper materials. The margins are tighter and the cabinets are often made in the same region of the country where they are used. In other words, shipping cost must be significant enough relative to production costs to encourage regional manufacturing. However, it is also true that like stand alone furniture, more and more of the mill work is being done in developing countries or by computer programed machines that allow more flexibility of manufacturing, higher productivity and longer distribution lines. Some American manufacturers are converting at least part of their business to becoming assembly plants with parts being shipped in from far and wide.

As an investor, I have mixed feelings about investing in furniture stocks at the current time. The manufacturing economy is recovering, consumers are buying homes and consumers are flush with liquidity. Taxpayers have just been hit with the most alternative minimum taxes ever but capital gains tax rates are already set to go down again in the next couple of years. The demand side should remain fairly strong for the next several years. The problem I have is in capacity. Whenever an industry starts adding capacity, the beginning of the end is at hand. One could say that the housing industry added capacity 10 years ago and continues to add capacity but the demand is absorbing the new capacity. This would be true, but the demand for real estate is basically an investment demand whereas the demand for furniture is more of a discretionary item.

Obviously, the cabinet business mentioned is tied strongly to the construction of homes. But extra capacity could reduce margins even in a period of strong demand. Regardless of what happened in the past ten years, the housing business is a cyclical business. America has enjoyed the benefits of immigration and our baby boomers and echo boomers have taken advantage of liberalization of financing laws. There are still millions of Americans who can afford a second home who have chosen not to buy one.

My wife and I are planning to work hard this winter via the internet. We have our first home for sale and we plan to do our work this winter from a rental unit in the deep south. We see no point in buying a winter home when there are so many available for rent at reasonable rates. A recent study showed that in some markets the rental costs are now only 47% of the costs of ownership. The owners renting at such spreads must be banking on future capital gains. If the capital gains of these markets slow, the housing boom will stop dead in its tracks.

I believe in buying the "big" US companies in the current market. Furniture is fragmented and subject to foreign competition more than the "big" companies. I am a Bull on the market. I simply have not gotten excited about any particular furniture company. If you have one to suggest, I would be happy to hear from you.