The President's address this week laid out our economic problems pretty clearly. Deficits, loss of global markets we used to own and endemic high unemployment. On top of that, he talked about health care as an economic issue rather than simply an entitlement.
Well after all, 2010 was disappointing in terms of slower than expected economic growth and continuing high unemployment. After the Presidents' party was routed in the November election, it was also for him certainly disappointing politically. A bit bruised, Obama sees the target pretty clearly now, he has to reverse America's economic slide. But can he hit the bulls eye using hand grenades?
His proposals came down to the following. Focused spending on infrastructure, green industry development and education with the idea of increasing employment now and in the future by making America more competitive in the technologies of the future. These grand ideas have been aired and funded already and so far mostly ineffective. Why? Mostly because we waste the money, because no politician expects an outcome for the taxes they spend and because our structural costs are much too high to make these grand proposals a reality.
The President, for instance, has seemingly a good idea in building high speed rail networks (HSR). However, has he or any other politician weighed the cost? California has approved the construction of America's first 400 miles of HSR and now the politicians, construction industry and the parasitical legal profession are busy arguing, suing each other and jockeying for contracts.
The stated cost for the main 400 mile section as sold to California voters was $45 billion but independent estimates are already at $60 billion or $150 million per mile. How can a rail network that costs $150 million per mile be a good idea? The Chinese certainly don't think so and I think they are one of the competitors the President is talking about.
China knows about HSR. They are the worlds' greatest HSR builder. They are well on their way to having built a 16,000 mile HSR network across their country that is due to be finished in 2020. The total cost of this epic venture is $300 billion an amount that will have been spent over about 20 years. Without going into all the benefits China has and will accrue from their investment, I will point out that China's High Speed Rail per mile cost is just under $19 million.
China's $19 million per mile HSR costs 1/8 as much to build as California's $150 million per mile HSR. On top of that, California's High Speed Rail system's technology, design and special equipment will be sourced from abroad. In fact China is now qualified to be a bidder for the project. No bother worrying about creating a US industry building HSR's or about value for money spent.
So here we see once again the waste of money America's political leadership is willing to commit us to. Unfortunately, such is the nature of a cornerstone of the President's proposal. Nice words with no credible execution are not ok or even possible anymore. We just don't have the money.
I think we should be in favor of proposals like High Speed Rail for the efficiencies and freedom from imported oil it promises, but not at these prices. The same issue applies to the Presidents education proposal. His view is that the US doesn't spend enough money on educating its people and if it does, we'll be more competitive. But recent statistics show the US spends 41% more dollars on K-12 eduction than the average developed country.
Since we already spend 41% more than our competitors to educate our kids, why is spending even more going to work? Well the answer isn't at hand because it is worse than that actually. The US ranks 19 out of 20 countries on achievement tests so spending 41% more has only kept us from coming in last. It isn't likely we are going to support spending more money on education with that track record.
Many Americans don't want the government to get bigger (Tea Party's raison d'etre), ie to blow our money and bankrupt us. People don't really believe government can get the job done and this is what President Obama and our whole decision making process have to acknowledge. Public spending has to yield results and if our political leadership won't take responsibility for this, we have to stymie them until the next election. In the meantime, we get broker and broker waiting.
Investment Conclusion: The President's proposals are half measures and avoid reality, adding to long term uncertainty for the economy. Caution warranted
Friday, January 28, 2011
Monday, January 10, 2011
Electric Cars Look Like They are for Real at the Detroit Car Show
The expectant air at this week's Detroit Auto Show bodes of increased sales, innovative products and a resurgent auto industry in the United States. This year the electric car concept is center stage and in the midst of all the excitement, the new electric Chevy Volt has been named Car of the Year. The Volt has been hyped for a few years now and was talked about a lot in the Fall of 2008 in front of Congress as GM execs tried to show why the car would be important for the future and therefore why a bailout was warranted.
Two years later the Volt has finally appeared along with Nissan's electric Leaf. The pair already has plenty of competition right on their heels. At Detroit, the new electric car launch pad has been cranked up by a factor of three or more, and perhaps most notable was Ford as it announced the new electric Focus due later this year. In addition, Ford said it was only the first of a line of autos and vans targeting a full spectrum of uses and different energy efficient power configurations.
The new electric Focus stands out because its marketing and features make electric for the first time look both practical and potentially mainstream. First it has double the range, 100 miles, on batteries as the Volt and won't need a backup gas motor. Ford has hinted it will sell for a lot less than a Volt too. It will be a lot easier to keep running as it will only take 4 hours to recharge it on its special charging unit that is kept in the garage and $3.60 of electricity will move you 100 miles. The charger will be sold at Best Buy for a reasonable price and uses Microsoft software to work at night when rates are lower. Co-branding and appeals to the American suburban lifestyle are at work here as well.
Attractive and well marketed, costing only 3.6 cents/ mile to operate vs.more than 10 cents/mile for the gas version, having adequate daily range, it seems the new Focus is at or near the threshold of real sales success in the mass market. If that is the case, electric cars like the Focus cars can pave the way for the United States to finally reclaim its own energy destiny by freeing itself from the use of imported energy.
Electricity has other benefits. Electric cars will be cleaner, quieter and run on domestically produced energy, but by what power plants? The greater electricity demand that electric cars will require will mostly have to come from new, probably nuclear power plants since they are the only mass scale, 24/7 and clean energy option we really have.
Electricity has other benefits. Electric cars will be cleaner, quieter and run on domestically produced energy, but by what power plants? The greater electricity demand that electric cars will require will mostly have to come from new, probably nuclear power plants since they are the only mass scale, 24/7 and clean energy option we really have.
The Investment Themes Here are Powerful but Somewhat Longer Term.
Ford Motor Company's successes since 2007 have brought the stock a long way. But with success now seeming likely in the electric car niche as well, is the market ready for a really new era at Ford? I think we are seeing shows that the company will probably do much more than reclaim its previous market share. It seems to be positioning itself now to become the largest car company in America and maybe the world.
As electric car demand ramps up, the demand for the electrical components, batteries, electronic controllers and minerals required to produce these cars will bring a lot of business to the relevant companies and industries.
Nuclear energy will be ramped up and have to be fast tracked to meet the extra demand over a similar time frame. On top of that, whatever growth in the nuclear power industry that is taking place in the United States is a fraction of the growth that is happening overseas, especially in the emerging economies. This looks like a great industry over at least the next 15 years or more. Look at nuclear construction companies and uranium miners. .
Tuesday, January 4, 2011
What Will Drive Markets in 2011?
The Trends in Place from 2010 are Still Strong
Gold is Money
Reserve Banks Injecting a lot of Money to Help Stocks and Real Estate.
Bubbles Result and Real Estate Still Struggles
Debt Crises Stalking Us
Business Improving Despite Problems. Some Pickup in Jobs.
Big trends don't change course quickly just like big ships and 2011 will see more of the same opportunities and risks as last year.
I think the biggest wind in the sea this year is still the attempt of the reserve banks of the developed countries to reflate the value of assets like real estate and stocks in order to get a recovery going. The amount of money they are injecting is historic in its scale. It is visible in the ultra low interest rates we've seen and really still have.
Meanwhile, debt crises in both the US and Europe are visible in the distance as they form into tempests that will hit us at some point this year. Portugal, Illinois, Spain, California and potential defaults in numerous municipalities across America and perhaps other European countries are all queued up to come ashore, probably sometime in 2011. All that even as last year's storms, Greece and Ireland, have yet to be resolved.
Economists were surprised again (and again and again) when their predictions of some improvement in the job market last year failed to appear. The lack of jobs was probably the biggest reason the number of home borrowers in default is still growing which feeds back to the likelihood that property values will only fall more in 2011, at least in areas that have a large supply of foreclosed homes on the market.
Despite these negatives, the economy is still mending and gaining some traction. It can keep doing that because there is a growing demand for cars, clothes, homes etc that need repairs or replacement. Business will be improved generally like it was this year, and there should be some pickup in hiring unlike last year.
How these trends translate into the investment world:
Deficits and money printing mean alternative money is becoming important. Gold is money today, just like it was for all the rest of human history excepting the past 20 or 30 years. If deficits are reversed and stimulus curtailed, this will be less so. However, the debt crises coming our way in 2011 and the reserve bank stimulus should only further the cause of alternative money so gold will remain desireable.
The policy of reflating investment assets by injecting money and keeping interest rates super low is also going to remain in the cards for 2011. The 9.6% unemployment rate is the number that guarantees it. When or if the injection of money ends, it will cause a change a traumatic change in the markets.
The reserve banks effort to reflate assets will help the stock market and the economy but also have unintended beneficiaries such as commodities or Chinese IPO's. Some of that may be a side show, but if oil prices are one of them, they will hurt the real economy. Values for some of these assets will seem unrealistic at times but they may not be. After all, the money has been put into place by the central bank.
An improving economy will help cure the credit issues in the economy. Banks and others who lend will benefit. Dividend payouts from banks are expected to increase quite a bit this year. Mergers in banking and other business sectors are expected to be very strong this year as well. All these trends create opportunities for investors.
Debt storms, new price levels and the huge share of total assets now managed by short term trading firms, will give us more volatility this year. There will be times when it will be possible to be very pessimistic about the economy and others to be optimistic. The sentiment and the prices will swing wildly at times, particularly in the commodity and gold sector. The arguments there about the right price for things will become very fierce as price levels exceed prior values.
The power of the cross currents at work mean I won't venture a guess what the outcome for the market will be since it could be raining or sunny at year end just like it will be a couple of weeks from now. I also don't hold early January market optimism to be much of a guide either.
It does seem the odds lean more towards a sunny outcome in 2011 as stimulus and imroving business can probably over come all else. I will predict, however, there won't be calm seas getting to year end and that more than anything is what we must be prepared for.
Disclosure: I own gold and at times other investments mentioned in this article.
Gold is Money
Reserve Banks Injecting a lot of Money to Help Stocks and Real Estate.
Bubbles Result and Real Estate Still Struggles
Debt Crises Stalking Us
Business Improving Despite Problems. Some Pickup in Jobs.
Big trends don't change course quickly just like big ships and 2011 will see more of the same opportunities and risks as last year.
I think the biggest wind in the sea this year is still the attempt of the reserve banks of the developed countries to reflate the value of assets like real estate and stocks in order to get a recovery going. The amount of money they are injecting is historic in its scale. It is visible in the ultra low interest rates we've seen and really still have.
Meanwhile, debt crises in both the US and Europe are visible in the distance as they form into tempests that will hit us at some point this year. Portugal, Illinois, Spain, California and potential defaults in numerous municipalities across America and perhaps other European countries are all queued up to come ashore, probably sometime in 2011. All that even as last year's storms, Greece and Ireland, have yet to be resolved.
Economists were surprised again (and again and again) when their predictions of some improvement in the job market last year failed to appear. The lack of jobs was probably the biggest reason the number of home borrowers in default is still growing which feeds back to the likelihood that property values will only fall more in 2011, at least in areas that have a large supply of foreclosed homes on the market.
Despite these negatives, the economy is still mending and gaining some traction. It can keep doing that because there is a growing demand for cars, clothes, homes etc that need repairs or replacement. Business will be improved generally like it was this year, and there should be some pickup in hiring unlike last year.
How these trends translate into the investment world:
Deficits and money printing mean alternative money is becoming important. Gold is money today, just like it was for all the rest of human history excepting the past 20 or 30 years. If deficits are reversed and stimulus curtailed, this will be less so. However, the debt crises coming our way in 2011 and the reserve bank stimulus should only further the cause of alternative money so gold will remain desireable.
The policy of reflating investment assets by injecting money and keeping interest rates super low is also going to remain in the cards for 2011. The 9.6% unemployment rate is the number that guarantees it. When or if the injection of money ends, it will cause a change a traumatic change in the markets.
The reserve banks effort to reflate assets will help the stock market and the economy but also have unintended beneficiaries such as commodities or Chinese IPO's. Some of that may be a side show, but if oil prices are one of them, they will hurt the real economy. Values for some of these assets will seem unrealistic at times but they may not be. After all, the money has been put into place by the central bank.
An improving economy will help cure the credit issues in the economy. Banks and others who lend will benefit. Dividend payouts from banks are expected to increase quite a bit this year. Mergers in banking and other business sectors are expected to be very strong this year as well. All these trends create opportunities for investors.
Debt storms, new price levels and the huge share of total assets now managed by short term trading firms, will give us more volatility this year. There will be times when it will be possible to be very pessimistic about the economy and others to be optimistic. The sentiment and the prices will swing wildly at times, particularly in the commodity and gold sector. The arguments there about the right price for things will become very fierce as price levels exceed prior values.
The power of the cross currents at work mean I won't venture a guess what the outcome for the market will be since it could be raining or sunny at year end just like it will be a couple of weeks from now. I also don't hold early January market optimism to be much of a guide either.
It does seem the odds lean more towards a sunny outcome in 2011 as stimulus and imroving business can probably over come all else. I will predict, however, there won't be calm seas getting to year end and that more than anything is what we must be prepared for.
Disclosure: I own gold and at times other investments mentioned in this article.
Wednesday, December 29, 2010
5 To 1 Says They're Overpaid (Part I)
Swiss Army Brand Turnaround Benefitted Both Employees and Shareholders, Not Top Management
Swiss Army knives are a pretty good product and you may have noticed the brand has shown up on some other nice things in recent years. Swiss Army brand watches, luggage and fragrances are on the market now too and keeping to the quality, value and style of the knives they have done well.
The parent company, Victorinox, is headquartered in Switzerland, one of the more expensive places in the world in which to do business. In this age of outsourcing and the pressure to lower costs, expensive Switzerland’s economy is still doing very well. Unemployment is only 3.65% and the currency is stronger than either the US dollar or the Euro.
The Financial Times wrote last week that after 911, Victorinox faced a 30% drop in sales of its’ Swiss Army knives due to new strict airport security measures. Since airport security was going to remain strict, the company decided that this was probably a permanent loss of sales and scaled back its' operations and began to develop and invest in new products.
Victorinox has a commitment to its' workforce as well as its' stockholders. During the adjustment period, the company went to great pains to protect the whole workforce and didn't, like many American companies, reward management for firing workers and outsourcing. Cutting costs like extras across the firm and lending unneeded people out to other firms temporarily minimized the job cuts. The payroll policy also came into play. The company has a rule of limiting its' top paid employees to a ratio of 5 to 1 to the wages of the lowest paid employees, a policy that helped control payroll costs at the time.
The expansion into watches, luggage and fragrances was a success and the new products now make up 60% of sales, a track record which makes Victorinox’s turnaround notable. Despite scoring a small triumph, the company’s management team hasn’t been given bonuses worthy of a czar and instead can enjoy a rate of pay five times that of the bottom of the company’s pay scale as well as the job security, esteem and respect such good work merits. Victorinox’s shareholders and employees have also been rewarded and the company’s future seems to have been only enhanced as the quality and value and reach of the Swiss Army image has only benefitted.
By the way, Swiss Army knives are not made in China. They are still made in Switzerland.
Investment Conclusion: Question management teams whose strategy to add value is to outsource jobs without a realistic strategic plan that will make the company succeed in the long run and are paid huge salaries and bonus packages to do so. Hint: There are lots of them out there right now.
Swiss Army knives are a pretty good product and you may have noticed the brand has shown up on some other nice things in recent years. Swiss Army brand watches, luggage and fragrances are on the market now too and keeping to the quality, value and style of the knives they have done well.
The parent company, Victorinox, is headquartered in Switzerland, one of the more expensive places in the world in which to do business. In this age of outsourcing and the pressure to lower costs, expensive Switzerland’s economy is still doing very well. Unemployment is only 3.65% and the currency is stronger than either the US dollar or the Euro.
The Financial Times wrote last week that after 911, Victorinox faced a 30% drop in sales of its’ Swiss Army knives due to new strict airport security measures. Since airport security was going to remain strict, the company decided that this was probably a permanent loss of sales and scaled back its' operations and began to develop and invest in new products.
Victorinox has a commitment to its' workforce as well as its' stockholders. During the adjustment period, the company went to great pains to protect the whole workforce and didn't, like many American companies, reward management for firing workers and outsourcing. Cutting costs like extras across the firm and lending unneeded people out to other firms temporarily minimized the job cuts. The payroll policy also came into play. The company has a rule of limiting its' top paid employees to a ratio of 5 to 1 to the wages of the lowest paid employees, a policy that helped control payroll costs at the time.
The expansion into watches, luggage and fragrances was a success and the new products now make up 60% of sales, a track record which makes Victorinox’s turnaround notable. Despite scoring a small triumph, the company’s management team hasn’t been given bonuses worthy of a czar and instead can enjoy a rate of pay five times that of the bottom of the company’s pay scale as well as the job security, esteem and respect such good work merits. Victorinox’s shareholders and employees have also been rewarded and the company’s future seems to have been only enhanced as the quality and value and reach of the Swiss Army image has only benefitted.
By the way, Swiss Army knives are not made in China. They are still made in Switzerland.
Investment Conclusion: Question management teams whose strategy to add value is to outsource jobs without a realistic strategic plan that will make the company succeed in the long run and are paid huge salaries and bonus packages to do so. Hint: There are lots of them out there right now.
Friday, December 17, 2010
Tax Bill Finally Passed
Now We Can Make Tax Related Investment Decisions
After weeks of wrangling and a long year of uncertainty, at least we know now what tax rates are going to be over the next two years. The bill extended the tax regime we have been in for a number of years but added an estate tax on estates over $5 million.
There was no estate tax this year so when Yankees owner George Steinbrenner died last summer, it seemed his his heirs were lucky and their Dad's $1.5 billion estate would pass tax free. This bill addressed that loophole, however. His heirs now have a choice whether to pay 35% now or keep the much lower cost basis on the estate and pay capital gains taxes on it sometime in the future. I imagine the Steinbrenners will keep the Yankees for now and pay taxes on it some other day.
Fidelity Investments did a nice summary on the new law's tax rates and investment ramifications. If tax policies are important to you, I recommend giving it a close read.
Fidelity's Take on the Tax Bill
Investment Implication:
This tax law is stock market friendly because it will reduce uncertainty and isn’t going to trigger new year end selling as it taxes long term capital gains and dividend paying investments at the same rates as today.
The big questions about this law in a year or so will be did the low tax rates stimulate the economy and was the benefit enough to increase tax revenues down the road enough to reduce the budget deficit?
First observation this afternoon: Bond yields fell very sharply today which seems to indicate the market felt the tax bill will stimulate the economy substantially to help balance the government’s budget without creating an inflation problem.
After weeks of wrangling and a long year of uncertainty, at least we know now what tax rates are going to be over the next two years. The bill extended the tax regime we have been in for a number of years but added an estate tax on estates over $5 million.
There was no estate tax this year so when Yankees owner George Steinbrenner died last summer, it seemed his his heirs were lucky and their Dad's $1.5 billion estate would pass tax free. This bill addressed that loophole, however. His heirs now have a choice whether to pay 35% now or keep the much lower cost basis on the estate and pay capital gains taxes on it sometime in the future. I imagine the Steinbrenners will keep the Yankees for now and pay taxes on it some other day.
Fidelity Investments did a nice summary on the new law's tax rates and investment ramifications. If tax policies are important to you, I recommend giving it a close read.
Fidelity's Take on the Tax Bill
Investment Implication:
This tax law is stock market friendly because it will reduce uncertainty and isn’t going to trigger new year end selling as it taxes long term capital gains and dividend paying investments at the same rates as today.
The big questions about this law in a year or so will be did the low tax rates stimulate the economy and was the benefit enough to increase tax revenues down the road enough to reduce the budget deficit?
First observation this afternoon: Bond yields fell very sharply today which seems to indicate the market felt the tax bill will stimulate the economy substantially to help balance the government’s budget without creating an inflation problem.
Friday, December 10, 2010
China's Stolen Software a Trojan Horse
China's growth in manufacturing is in large part due to the theft of technology and licenses. As a result of stolen software installed on the majority of China's computers, it is particularly easy for hackers to get into them....
-Investment Conclusion? Some day just maybe, software companies like Oracle and Microsoft will increase their revenues in China. In the meantime, it is the same thing as before. The Chinese are stealing western technology and neither business or government care to do much about it.
One persistent problem is that much of the pre-installed software still consists of pirated copies. While China has released statistics showing that the use of legitimate software in China has increased dramatically, the Business Software Alliance, an international software industry group, estimates that 79 percent of the software sold in China in 2009 was illegally copied, creating a loss to the industry of $7.6 billion in revenue. Even more important to Beijing, these statistics mean the vast majority of Chinese computer systems — government and private alike — remain vulnerable to malware.
China and its Double-edged Cyber-sword | STRATFOR December 2010
-Investment Conclusion? Some day just maybe, software companies like Oracle and Microsoft will increase their revenues in China. In the meantime, it is the same thing as before. The Chinese are stealing western technology and neither business or government care to do much about it.
Monday, November 15, 2010
Uncle Sam’s Government Works Best When on a Deadline.
Fiscal Commission Draft Report
Bipartisan Commission Tries to Deal with Reality
There is a threshold where the total debt* of a nation exceeds its’ ability to service the interest and have a hope of paying off the principal but no one knows exactly where that is. By different accounting, the US government currently has an outstanding debt of between 60% and 90% of our annual economic output (GDP). For comparison sake, the headline problem child in this arena is Greece at 120% of GDP. For the US, current rates of annual deficit spending of nearly 10% of GDP are pushing us too close to Greece’s situation and that is the deadline Uncle Sam faces.
With Federal budget deficits that are now embedded in our economy rather than just part of economic cycles and other stubborn problems like health care costs per capita that are double those of any other nation on earth, it was very good news last week when the President’s bipartisan fiscal commission released their preliminary draft. The 24 page report is gathering attention and support even as many political leaders dismissed it out of hand. It has been patently very easy for an elected official (of either party) to vote to increase spending, but the fiscal condition of the country and mood of the electorate seems to have swung around to wanting to go in the direction of fiscal responsibility and the report has provided sound talking points for the public and policy makers to work with.
To summarize generally the document’s recommendations:
• Rollback the last decade’s growth of government, government waste and military spending
• Freeze the growth of government pay.
• Eliminate earmarks from the budget process
From an investment point of view, sound fiscal policy is overdue and absolutely required to provide the back drop for future investment success. The rock solid credit worthiness of the US is a huge advantage for our economy in terms of the cost of borrowing, buying imported goods like oil and attracting investment. If our national deficits are not addressed, we can expect a downgrade in our credit status sometime in the future that will be detrimental to our children’s financial security, our portfolios and the economy. After all, who emigrates to Greece to find financial opportunities?
* The debt referenced in this discussion is the debt of the US Federal government.
Bipartisan Commission Tries to Deal with Reality
There is a threshold where the total debt* of a nation exceeds its’ ability to service the interest and have a hope of paying off the principal but no one knows exactly where that is. By different accounting, the US government currently has an outstanding debt of between 60% and 90% of our annual economic output (GDP). For comparison sake, the headline problem child in this arena is Greece at 120% of GDP. For the US, current rates of annual deficit spending of nearly 10% of GDP are pushing us too close to Greece’s situation and that is the deadline Uncle Sam faces.
With Federal budget deficits that are now embedded in our economy rather than just part of economic cycles and other stubborn problems like health care costs per capita that are double those of any other nation on earth, it was very good news last week when the President’s bipartisan fiscal commission released their preliminary draft. The 24 page report is gathering attention and support even as many political leaders dismissed it out of hand. It has been patently very easy for an elected official (of either party) to vote to increase spending, but the fiscal condition of the country and mood of the electorate seems to have swung around to wanting to go in the direction of fiscal responsibility and the report has provided sound talking points for the public and policy makers to work with.
To summarize generally the document’s recommendations:
• Rollback the last decade’s growth of government, government waste and military spending
• Freeze the growth of government pay.
• Eliminate earmarks from the budget process
From an investment point of view, sound fiscal policy is overdue and absolutely required to provide the back drop for future investment success. The rock solid credit worthiness of the US is a huge advantage for our economy in terms of the cost of borrowing, buying imported goods like oil and attracting investment. If our national deficits are not addressed, we can expect a downgrade in our credit status sometime in the future that will be detrimental to our children’s financial security, our portfolios and the economy. After all, who emigrates to Greece to find financial opportunities?
* The debt referenced in this discussion is the debt of the US Federal government.
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