Posts Tagged: CNBC

Business / Economics / Financial / Political — 0 Comments
14
Jun 10

Caution! Spin May Be Harmful to Your Portfolio

CNBC, Fox Business and Bloomberg feed us a steady stream of bullish analysis.  Barron’s, The New York Times and the Wall Street Journal push more of the same, and amplify the bullish message: buy stocks now, they are undervalued.  However, these analysts have been consistently wrong.  A new McKinsey study analyzes this phenomenon:

“Analysts have been persistently over-optimistic for 25 years,” a stretch that saw them peg earnings growth at 10 percent to 12 percent a year when the actual number was ultimately 6 percent. “On average,” the researchers note, “analysts’ forecasts have been almost 100 percent too high,” even after regulations were enacted to weed out conflicts and improve the rigor of their calculations. …[A]nalysts have been forced to lower their estimates after it became apparent they had set them too high. See For Analysts Things are Always Looking Up.

Why the persistent bullishness?  Human beings are optimistic and want to believe in good outcomes.  And why not?  When the markets rise, Wall Street investors make more money. Bullishness comports with the Administration’s political agenda to make Americans feel better.   When Americans are bullish about the economy and spend more money, they set the stage to create a virtuous self-reinforcing economic recovery.

Unfortunately, this economic recovery is different from previous post-war recoveries and does not respond in the same ways.

What are Stocks Worth?

David Goldman in Inner Workings writes some of the most incisive commentary on the markets.  He believes that stocks may trade in a range of Dow 8,000 to 12,000 and at the moment, at Dow 10,000 probably reflects an accurate value for the market.  However, he is worried about a “double dip”  recession, which is a renewed downturn in the second half of this year and cites five areas of concern:

  1. Fiscal austerity and bank failures in Europe could transmit economic weakness to our banks and economy.
  2. US consumers will continue to be under pressure from poor employment prospects and a declining housing market.  Focusing on a housing recovery, Goldman pours cold water on that thought:

The notion of a housing recovery seems fanciful when America has only 25 million households with two parents and two or more children, but 72 million housing units with three or more bedrooms. The baby boomers bought far more house than they required and hope to sell it at a profit; now they will retire to smaller quarters and the overhang of large-lot single family homes may take decades to work off.  See What are Stocks Worth?

3. Fiscal austerity is already taking place at the state and municipal level.

4. Pressures are increasing to reign in federal deficits.Asia will not turn out to be the growth engine leading the US and the world out of recession.

5. Analysts are underestimating the negative wealth effect from losses in the housing and equity markets.

The Great Correction

Bill Bonner, founder of the Daily Reckoning, calls our current economic environment the Great Correction. See Heavenly Recovery or Hellish Correction? We are paying the price of becoming overly indebted.  The “recovery” spotted by so many pundits differs from all post-war corrections:

  1. We would have seen a recovery in jobs.  Since the beginning of the correction 8.2m jobs have been lost and none recovered.
  2. Inflation would have increased.
  3. Money supply would have increased and people would have been borrowing, spending and investing.
  4. Housing would be on the upswing with prices recovering.

We have spent trillions of dollars to try and stop a correction and we are failing.

Think More, React Less

Bonner and Goldman are two of the most incisive and prescient economic and financial analysts and are cautioning investors.  While I do not give investment advice on this blog, perhaps this is one of those times where we need to turn off financial television, put down the newspaper and ignore the financial markets.  The spin can make us both dizzy and poorer.

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American Society / Business / Economics / Political — 0 Comments
5
Feb 10

It is All a Derivative of Productive Enterprise

The bulls on CNBC touted the increase in health care employment in the most recent Non-Manufacturing Institute for Supply Management Report on Business. Similarly, Fox Business News trumpeted growth in health care employment, but did point out these jobs paid substantially less than jobs in the manufacturing sector.  What both news outlets missed was that these jobs were derivative.  These positions are substantially funded by the productive sectors of the economy.

Economic Illiteracy

Michael Shedlock this week focused on a major theme plaguing America, economic illiteracy. See Are Teachers to Blame for Economic Illiteracy? Nowhere is this lack of economic literacy more evident than in the service sector in general and health care in particular.  If polled, most Americans would most likely answer that the government or insurance companies provide health care in the United States.  Medicare and the current debate on health care reform only add to this misperception.

Thank Goodness for the Private Sector

Health care money comes from the support of the private sector which directs a portion of a workers’ compensation to paying health insurance premiums for their employees.  Public sector employers also pay health insurance premiums for their employees.  However, in the case of the public sector, that employer is recycling tax receipts, real money, received from private sector activities.  In short, without a productive private sector there would be no health care support.

Restoring Economic Literacy

Americans have come to expect a “free lunch” from the government. Of course, this is fantasy; there is no free lunch.  Health care is paid for by our productive enterprises and manufacturing was the lynchpin.   Further, other service industries such as law, insurance, travel, leisure, entertainment, and others are derivatives of productive manufacturing enterprises.  When the economy turned down law firms were among the first to layoff partners and associates.  Without a vibrant private economy legal activity declined, with fewer contracts real estate transactions, mergers, acquisitions and frivolous lawsuits.  Corporations reduced their legal budgets.  Similarly, other service businesses contracted.

Outsourcing lucrative manufacturing jobs and global wage arbitrage have only worsened the unemployment situation in the United States.  Reliance on a service economy and public sector employment has been false bedrock for our system.  If we want first class health care, we must bolster the private manufacturing sector and reduce the public sector.  Government dominance of our health care system and other service sectors (think banking) only ensures larger deficits, continued recession, higher unemployment and an inadequate, underfunded, cheap, quick and dirty, band aid solutions health care system.

That is not a good prescription for anyone’s health.

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American Society / Banking / Business / Financial / Technology — 0 Comments
27
Oct 09

Can You Lend for Thirty Years?

Financial news from CNBC and Fox Business focuses investors on the micro picture while overlooking the macro picture.  When I started investing in the early 1970’s as a graduate student the world looked quite linear.  It seemed reasonable to look at a 30-year investment horizon.  Banks, insurance companies and governments assumed they could either loan or borrow money with a 30 year investment horizon.  Conversely, employees could look forward to 30 year careers and generous pensions from the iconic companies of the time: GM, AT&T, Sears and others.  What changed?

The Financial World Becomes Non-Linear

There is no longer a linear 30 year path for either investors or employees.  Look back to the early 80’s and the Route 128 research highway around Boston.  Revolutionary companies were spawned at the time that threatened the old IBM order:  Prime Computer, Digital Equipment, Wang, Data General, Bowmar and others.  Where are these companies today?  Either out of business or subsidiaries of giant technology conglomerates. Even outside the technology arena, look at traditional manufacturing companies that previously dominated the economic landscape: GM, Chrysler, Bethlehem Steel, and National Steel, to name a few.  Where are they now?  Bankrupt! My own career exceeded 30 years with a Fortune 25 company.  My former company has laid off employees each and every year since 1981 and has frozen its traditional defined benefit pension plan.

Oh To Be A Long Term Investor in Early Twentieth Century!

If we go back to the early twentieth century, an investment banker surveying the financial landscape would feel pretty confident about loaning money for 30 years to a large American company.  For example, a US Steel or General Motors had formidable barriers to competition:  large plants with sophisticated machinery needing large numbers of workers, plentiful and cheap local natural resources such as oil, iron ore and coal, two oceans as barriers to imports, proprietary technology and the ability to attract capital.  Lending for 30 years in a burgeoning American consumer market was like shooting fish in a barrel.

The Investment Landscape Today

A 2009 investment banker surveys an entirely different scene.  Technology and freely available capital have democratized business formation.  Anyone with an idea can go into business. Until the current recession business seed money gushed from pension funds and venture capitalists.  Technology has made it easier to establish a virtual company. You no longer need large plants with heavy machinery and thousands of employees to produce goods. Regulatory barriers have been reduced so anyone with capital and some ingenuity can start a telephone company, bank or airline.  But the inverse side of this phenomenon is that businesses and careers are unlikely to be around for 30 years.  Technology has the capability to destroy companies as well and at the speed of light. see Why All Irrational Structures Fail? Would you want to lend money to Dell or Cisco over a 30 year period and bet they will be the survivors?

Implications

To those who started investing more than 30 years ago the implications of the new landscape are pretty radical:

  • investors should invest in equity rather than debt and expect higher returns over a shorter period of time
  • debt of any duration should carry a higher risk premium than is now being accorded in the credit markets
  • pension funds and insurance companies that have written annuities are going to have a hard time matching long lived liabilities with suitably safe and predictable long term investment vehicles
  • concomitantly shortfalls in pension plans will be a drag on corporations and governments
  • employees can no longer count on 30 year careers and a guaranteed pension at the end
  • employees will have to save more for their own retirement and reduce consumption
  • the government is being unrealistic in thinking that there will be a recall of large numbers of workers to their jobs as employers have learned to substitute technological capital  for labor.

In short, all of our time horizons have become much shorter and the expendable factor in all of this is human labor.

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American Society / Economics / Technology — 0 Comments
7
Oct 09

Is the Internet Deflationary?

In the early-1990’s Arthur Andersen Consulting visited our company and put on a small demonstration of the power of the internet.  This was at the beginning of the browser era.  Netscape had simplified the ability to go online and Yahoo had started its search engine.  For demonstration purposes, Arthur Andersen created a search program to find the lowest price for the Top 50 compact discs.  Brick and mortar stores and Tower Records, one of my favorite locations for music shopping, were selling the Top 50 CDs for about $14.  As I remember we searched online for a 1993 Mariah Carey Album, Music Box, and the search engine came back with prices ranging from $8.95 to $16.  CDs are the ultimate commodity; that is, they are uniform, shrink wrapped and need little service (just return the CD for an exact replica if it arrives damaged).  The winning bidder on the search was a no-name distributor in Nevada who was cheapest, even including shipping.

The Internet as a Deflationary Force

I had an “Aha!” moment.  The internet was the ultimate force of deflation.  In economics, price is a function of information. The internet made price information available to everyone simultaneously and in real time.  Why would I spend more than $8.95 for the CD?  Do I care who sells me this CD? Am I going to need a lot of after care for the CD?  Do I care if the seller is in Nevada or India?  All I want is the CD at the lowest price.

On the retailing side, the game changed as well.  I don’t want a large brick and mortar store, too expensive.  How do I win the new retailing game?  I need to buy in bulk from the record company to obtain the lowest wholesale price. I need the lowest cost warehouse space, the cheapest packing and shipping and little or no returned merchandise.

If this model works for CDs, it works for all standardized manufactured goods from cars, televisions and home goods to running shoes and clothing.  This puts enormous pressure on the entire supply chain to produce the lowest price goods.  FedEx and UPS and high speed telecommunications via the internet enable manufacturing and shipping from anywhere in the world.  Labor and capital are now squeezed in totally new ways.

This natural evolution of the internet unmasked true price information in services, as well.  With the click of a mouse, consumers can now see the real and hidden pricing on everything from travel (Priceline, Travelocity, Expedia) to mortgages (Quicken Loans, Lending Tree) to insurance (IntelliQuote, Insure.com).   The consumer can also utilize online professional or customized services such as law, medicine and tax preparation.

Deflation is Inevitable

The Federal Reserve and Treasury’s attempts to offset the deflationary effects of massive credit destruction are sailing straight into the headwinds of the new internet driven deflationary force.  Despite the cheerleading on CNBC, many consumers and retailers are suffering their own personal Great Depression.  Every consumer dollar counts and consumers now must avoid impulse purchases and become savers.   Inevitably, they need to migrate from the pleasant surroundings of the local shopping center to lower cost, no frills internet commerce.  Judging by the growth in Amazon sales and the decline in traditional shopping centered retailers’ sales this trend is well under way.

Implications

Do you want to hold a 30 year mortgage on the Mall of America or the Garden State Plaza?  Do you want your law or medical practice in an expensive office building in mid-town Manhattan?  Do you want to be a pension fund holding signature shopping malls and expensive office space? The specter of declining real estate values and lower profit margins for traditional retailers does not bode well for the equity markets or the chimerical economic recovery.

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