Technology firms continue to rip higher this year. The Nasdaq is already up over 18% so far this year. This is after a technology firms underperformed for quite some time even up through the first part of this year.
The tech story is a mirror image of the the Internet bubble of the late 90's. Today technology firms are growing rapidly, have superbly strong balance sheets, high free cash flow, high net income and they have nothing to do with mortgages or subprime.
But here is the best part. The large tech companies are huge beneficiaries of the global growth story. Google, Apple, Cisco, Hewlett Packard, Dell, Microsoft all have a very large percentage of their revenues come from international operations. The falling dollar is further enhancing these companies results.
We are experiencing an unprecedented global growth story around the world. All of these strong global economies need computers, software, telecommunications, search, etc. We are also in what is traditionally the strongest seasonal period for tech companies. I believe that tech will see a strong finish going into the end of the year.
Disclosure: at the time of this posting the author was long GOOG, AAPL, CSCO, HPQ, DELL, MSFT.
Wednesday, October 31, 2007
Year-End Stock Market Forecast
A number of people have asked me what I think the stock market will do the last part of 2007. There are really two markets right now: a continuing bull market in minerals and mining, energy, agriculture, technology, global infrastructure and emerging markets; a bear market in financials, home builders and anything touching the toxic slime of sub-prime mortgages.
I think it is more likely that the market will be higher by January 1st than lower. Even though the total return of the stock market has been very good this year, there continues to be a wall of worry the the credit and subprime mess, slowing U.S. economy and sky high oil and commodity prices will cause a sharp downturn in the market.
My understanding is that hedge funds have the highest short ratio that they've ever had. A lot of protection has also been purchased in the form of defensive put options. In addition, due to a lot of caution resulting from the sharp downturn in February and again in August, many market managers have underperformed the market. There are just a lot of people that have "hung back" this year.
I think it is more likely that the market will be higher by January 1st than lower. Even though the total return of the stock market has been very good this year, there continues to be a wall of worry the the credit and subprime mess, slowing U.S. economy and sky high oil and commodity prices will cause a sharp downturn in the market.
My understanding is that hedge funds have the highest short ratio that they've ever had. A lot of protection has also been purchased in the form of defensive put options. In addition, due to a lot of caution resulting from the sharp downturn in February and again in August, many market managers have underperformed the market. There are just a lot of people that have "hung back" this year.
Why is all of this important? Because it means that there is a lot of money that is available to come into the market on the long side. Money managers that have underperformed are going to have to chase performance going into the end of the year. They won't have any choice but to pile into the stocks that are still going up. People that have been overly cautious may very likely rush into the market as it continues to get away from them.
Trades that should be working, like shorting VMWare while being long EMC are not working, as VMWare just goes up and up. People that don't remember how rapid and brutal an emerging market correction can be are pouring money into China, further inflating the bubble. All of this leads me to believe that themes that have been working will continue to work in the race to the end of the year. And you know what? Bubbles can continue to inflate for a long time before the inevitable implosion comes.
Oil sure looks toppy. I have lightened up on some of my energy positions believing that there could be a correction sooner rather than later. Refiners and integrated oil companies have not done as well lately due to the very narrow cracking spreads. The crack spread should widen as we get further into winter helping the refiners' margins.
I've heard some prognosticators suggest that financials are in position for a strong move up since they have been so beaten up. But I think there are so many other good ideas that are continuing to work why should I take a chance on Citigroup and the risk that a few more billion of bad SIV's crawl out from under its balance sheet?
The economy had slowed but there hope of a soft landing and reacceleration. The just released 3rd quarter's GDP number showed growth of 3.9% - the strongest performance in 4 years. Employment remains strong. Real wages are growing. Disposable income in real terms has increase 4.7% in the past year. Inflation is in check.
The Dollar continues to fall but American exports are surging and imports are falling, significantly reducing the current account deficit. The housing downturn took a bite out of last quarter's GDP number but the increase in exports put back in almost exactly the same amount.
The Federal Reserve just cut the overnight lending rate by 25 basis points as an insurance policy. The Fed may cut another 25 basis points in December but we are getting closer to neutral.
Assuming I'm right I can certainly see a significant downturn early in 2008 due to tax gain selling after a big 2007. Hopefully I will be one of them.
Disclosure: at the time of this posting the author was long VLO, EMC, DVN, LFC, CHL and short POT, XOM, USO.
Tuesday, October 30, 2007
A Legacy of Alarmism - From Malthus to Gore
In the mid-nineteenth century Malthusian theory predicted the mass starvation of the world's population because the number of people would increase faster than the food supply. In the last 150 years the planet has increased from 1B to 8B souls. There are plenty of problems with the distribution of food around the world. But I suspect that about the same percentage of the world's population is hungry that was 150 years ago.
Karl Marx predicted that the proletariat would rise up and create a worker's utopia. Marx was wrong (and dead to boot - Castro to join him in hell shortly).
The Democrats of the 1960's predicted that the world was destined for a nuclear winter and a "Mad Max" scenario.
The Club of Rome predicted 30 years ago that the world would soon run out of energy resulting in economic collapse.
This year Al Gore won an Oscar and the Nobel Peace Price for a movie that scientists who actually study the environment for a living, and specifically the composition of the atmosphere and the effect of changes on it, say is preposterous nonsense.
Never underestimate the will of humans to survive and the inventiveness of people to solve the next problem facing the planet - or the fact that alarmism will always be alive and well.
Karl Marx predicted that the proletariat would rise up and create a worker's utopia. Marx was wrong (and dead to boot - Castro to join him in hell shortly).
The Democrats of the 1960's predicted that the world was destined for a nuclear winter and a "Mad Max" scenario.
The Club of Rome predicted 30 years ago that the world would soon run out of energy resulting in economic collapse.
This year Al Gore won an Oscar and the Nobel Peace Price for a movie that scientists who actually study the environment for a living, and specifically the composition of the atmosphere and the effect of changes on it, say is preposterous nonsense.
Never underestimate the will of humans to survive and the inventiveness of people to solve the next problem facing the planet - or the fact that alarmism will always be alive and well.
Counting the Cockroaches at Merrill Lynch
I believe that Merrill Lynch, and probably some of the other big financial institutions, don't fully understand the extent of their losses in Structured Investment Vehicles (SIV). I previously commented that the fact that Merrill Lynch increased their write-off from $5B to $8.4B in a week shows that they are guessing - marketing to model. It reminds me of the old adage that if you see one cockroach there are many, many more that you don't see.
The real danger to the shareholders is that there is no way of knowing how deep Merrill Lynch is into this mess. Much of their SIV holdings are hidden in off-balance sheet accounts - some that have been moved off shore for further secrecy. No ones knows how many billions of dollars in SIV's are held by Merrill Lynch and what mix of mortgage securities are backing these SIV's.
The tipping point appears to have been last summer, when 3 senior executives were fired by Merrill Lynch. It was reported by CNBC today that at this point Merrill Lynch's mortgage backed securities portfolio stood at about $2B. Subsequently the firm expanded its SIV exposure dramatically, from as low as $20B to what some have speculated was as high as $40B.
Merrill Lynch fired its CEO today. Maybe "fired" is a bit strong a word, since Stanley O'Neil received $161M in compensation for leaving. Clearly Mr. O'Neil did a terrible job in allocating capital and managing risk. But at this point the Board of Directors has a fiduciary responsibility to the shareholders to shine a bright light in the dark room of off-balance sheet shenanigans.
Mr. O'Neil should receive credit for the fact that he was instrumental in turning Merrill Lynch around after it fell into hard times a few years ago. Nevertheless it is his responsibility that Merrill Lynch took the leading role on Wall Street in dealing these CDO's.
I thought the whole point of the post-Enron reforms was to make sure that opaque off-balance sheet debts would not be allowed. The SEC is absent as usual. The government's proposal to create the enormous pool of shared securities will only keep these SIV's off the books of the big firms, and that is wrong.
Wall Street is stumbling around with no idea about how to price this stuff. I predict we will see further write downs for the next several quarters as a result of this mess.
The real danger to the shareholders is that there is no way of knowing how deep Merrill Lynch is into this mess. Much of their SIV holdings are hidden in off-balance sheet accounts - some that have been moved off shore for further secrecy. No ones knows how many billions of dollars in SIV's are held by Merrill Lynch and what mix of mortgage securities are backing these SIV's.
The tipping point appears to have been last summer, when 3 senior executives were fired by Merrill Lynch. It was reported by CNBC today that at this point Merrill Lynch's mortgage backed securities portfolio stood at about $2B. Subsequently the firm expanded its SIV exposure dramatically, from as low as $20B to what some have speculated was as high as $40B.
Merrill Lynch fired its CEO today. Maybe "fired" is a bit strong a word, since Stanley O'Neil received $161M in compensation for leaving. Clearly Mr. O'Neil did a terrible job in allocating capital and managing risk. But at this point the Board of Directors has a fiduciary responsibility to the shareholders to shine a bright light in the dark room of off-balance sheet shenanigans.
Mr. O'Neil should receive credit for the fact that he was instrumental in turning Merrill Lynch around after it fell into hard times a few years ago. Nevertheless it is his responsibility that Merrill Lynch took the leading role on Wall Street in dealing these CDO's.
I thought the whole point of the post-Enron reforms was to make sure that opaque off-balance sheet debts would not be allowed. The SEC is absent as usual. The government's proposal to create the enormous pool of shared securities will only keep these SIV's off the books of the big firms, and that is wrong.
Wall Street is stumbling around with no idea about how to price this stuff. I predict we will see further write downs for the next several quarters as a result of this mess.
The Impact of High Oil Prices
The price of oil has become disconnected from the economics of supply and demand. There is a risk premium due to geopolitical events: tension between Turkey and the Kurds, a potential military strike of take out Iran's nuclear capability. We are an event or two from $100 oil.
Long term oil will go higher based on the depreciation of the dollar and continued strong growth of the world's economies. Nevertheless I b
elieve there is a better chance that it will go lower in the short term.
The difference between former "oil shocks" is that this one is based largely on demand due to strong economic growth rather than a constraint on supply. Yesterday, oil finally surpassed its all time high from 1979 in constant dollar terms. But higher oil prices do not have the same impact on our economy that they once did. A big reason is that we are so much more productive and so much more energy efficient that we were in decades past.
There was a terrific discussion on last night's Kudlow & Company on CNBC on the price of oil and its impact. This chart is from that program. Today it takes well less than half the energy it took in 1949 to produce a dollar of GDP. It takes just over half the energy to produce a dollar of GDP than it did even 26 years ago in 1980. This is dramatic progress in terms of efficient use of energy. The result is that our economy relies far less on energy to produce GDP than we did even several decades ago.
Disclosure: at the time of this posting the author was long DVN, VLO, CCJ and short USO.
Long term oil will go higher based on the depreciation of the dollar and continued strong growth of the world's economies. Nevertheless I b
elieve there is a better chance that it will go lower in the short term.The difference between former "oil shocks" is that this one is based largely on demand due to strong economic growth rather than a constraint on supply. Yesterday, oil finally surpassed its all time high from 1979 in constant dollar terms. But higher oil prices do not have the same impact on our economy that they once did. A big reason is that we are so much more productive and so much more energy efficient that we were in decades past.
There was a terrific discussion on last night's Kudlow & Company on CNBC on the price of oil and its impact. This chart is from that program. Today it takes well less than half the energy it took in 1949 to produce a dollar of GDP. It takes just over half the energy to produce a dollar of GDP than it did even 26 years ago in 1980. This is dramatic progress in terms of efficient use of energy. The result is that our economy relies far less on energy to produce GDP than we did even several decades ago.
Disclosure: at the time of this posting the author was long DVN, VLO, CCJ and short USO.
Sunday, October 28, 2007
Investments I'm No Good At
Pharmacuticals - I've made some money but always seem to behind the "8-ball" in this sector. My latest attempt: I bought Celgene last week.
Semiconductors - this sector is impossible for me; nothing but suprises to the downside.
Day Trading - but I do very well with month trading sometimes when I see a good idea - but trying to guess on day trades is not my thing.
And of course, any day the market is open is a good day to sell airline stocks.
Disclosure: at the time of this posting the author was long DNA, AMGN and CELG.
Semiconductors - this sector is impossible for me; nothing but suprises to the downside.
Day Trading - but I do very well with month trading sometimes when I see a good idea - but trying to guess on day trades is not my thing.
And of course, any day the market is open is a good day to sell airline stocks.
Disclosure: at the time of this posting the author was long DNA, AMGN and CELG.
GOP Principles vs. Democratic Policy Wonks
Recently Dave Helfert, a former Appropriations spokesman who now works for Rep. Neil Abercrombie (D-Hawaii) sent out a memo to all Democrat House press secretaries and communications directors detailing his frustrations with the Democratic message.
The gist of his concern was that the GOP almost always wins the Washington war of rhetoric. While the Republicans craft messages that are simple, clear and based on well understood principles the Democrat's messages all seem like they were put together by policy wonks.
Helfert's memo "got out" as these things will do. Brian Kennedy, spokesman for House Minority Leader John Boehner (R-Ohio), bemusedly stated that, “House GOP communicators would take his remarks as a compliment.”
Apparently the staff of the House Democratic Caucus, which is responsible for setting the Democratic message, were “a little less than pleased.”
Dave Helfert's has a track record of being extremely critical of the Bush Administration and its policies. But his memo also implies that the GOP's successful rhetoric is aided by neurological response. By using emotional appeals and warning of dire threats, Republicans can trigger neurons called “amygdalae” in the temporal lobe, which is the seat of the “fight or flight” response in the brain.
“Almost every Republican message contains a simple and direct moral imperative, a stark contrast between good and evil, right and wrong, common sense and fuzzy liberal thinking,” states Helfert's memo. “Meanwhile, we’re trying to ignite passions with analyses of optimum pupil-teacher ratios.”
I'm no neurologist, and don't know much about "amygdalae", but I do think Helfert is onto something. Crafting messages that work is easier for the Republicans than for the Democrats. The reason is that Republicans believe in principles and logic and facts while the Democrats think in terms of policy and emotion.
Principles and logic and facts make it very easy to craft messages that are exactly as Helfert complains about: "simple and direct moral imperative, a stark contrast between good and evil, right and wrong, common sense and fuzzy liberal thinking." I'm not sure a GOP strategist could have said it any better!
Fortunately the facts and logic do not typically support Democratic positions. It makes the rhetorical war a bit one sided. Bringing an emotional argument to a factual debate is a lot like bringing a knife to a gunfight.
The gist of his concern was that the GOP almost always wins the Washington war of rhetoric. While the Republicans craft messages that are simple, clear and based on well understood principles the Democrat's messages all seem like they were put together by policy wonks.
Helfert's memo "got out" as these things will do. Brian Kennedy, spokesman for House Minority Leader John Boehner (R-Ohio), bemusedly stated that, “House GOP communicators would take his remarks as a compliment.”
Apparently the staff of the House Democratic Caucus, which is responsible for setting the Democratic message, were “a little less than pleased.”
Dave Helfert's has a track record of being extremely critical of the Bush Administration and its policies. But his memo also implies that the GOP's successful rhetoric is aided by neurological response. By using emotional appeals and warning of dire threats, Republicans can trigger neurons called “amygdalae” in the temporal lobe, which is the seat of the “fight or flight” response in the brain.
“Almost every Republican message contains a simple and direct moral imperative, a stark contrast between good and evil, right and wrong, common sense and fuzzy liberal thinking,” states Helfert's memo. “Meanwhile, we’re trying to ignite passions with analyses of optimum pupil-teacher ratios.”
I'm no neurologist, and don't know much about "amygdalae", but I do think Helfert is onto something. Crafting messages that work is easier for the Republicans than for the Democrats. The reason is that Republicans believe in principles and logic and facts while the Democrats think in terms of policy and emotion.
Principles and logic and facts make it very easy to craft messages that are exactly as Helfert complains about: "simple and direct moral imperative, a stark contrast between good and evil, right and wrong, common sense and fuzzy liberal thinking." I'm not sure a GOP strategist could have said it any better!
Fortunately the facts and logic do not typically support Democratic positions. It makes the rhetorical war a bit one sided. Bringing an emotional argument to a factual debate is a lot like bringing a knife to a gunfight.
Another Frustrating Stock I Own - Toyota Motors
I began investing in TM early this year with it trading at about $130 per ADR (the ADR equals 2 TM shares). After getting as high as $138 it last week went below $105. On the way down I have bought LEAP calls, sold LEAP puts and sold short term puts. I have made money on a number of the short term puts but overall am so far underwater I need a periscope. Friday's close was just north of $110.
I believe the Toyota ADR is worth $165 a share. This is a company that will only increase its dominance of the auto industry over the next decade. Why is the stock struggling? I believe there are several reasons. First, The economic slowdown in the U.S., 40% of Toyota's revenue, is problematic. The housing and credit troubles raise concerns about auto sales being negatively impacted. There are fears that the credit problems will start to crop up in auto loans.
Second, the Yen continues to hold even with the dollar even as the Dollar continues to depreciate against other foreign currencies such as the Euro. A strengthening Yen will have a negative impact on Toyota's top and bottom line numbers.
Although the Bank of Japan continues to keep interest rates at 0.5% there is concern that the Yen carry trade may suddenly unravel. If that were to happen a lot of money managers would have to buy large quantities of Yen, driving the value of the Yen up against the Dollar. Also, if the Bank of Japan decided to begin raising interest rates the Yen in all probability would strengthen.
But lets look at the positives for Toyota. Toyota continues to gain market share almost every month against the America automakers. Last month was an anomaly in that General Motors' U.S. sales increased slightly while Toyota's sales declined by 4%. However Ford's sales declined 21% for the month (year over year) after a more than 30% decline the month before.
Toyota is immensely profitable vis a vis its American and other global counterparts. Last year Toyota Motors made twice as much profit as Ford, GM and Honda Motors combined.
I believe the Toyota ADR is worth $165 a share. This is a company that will only increase its dominance of the auto industry over the next decade. Why is the stock struggling? I believe there are several reasons. First, The economic slowdown in the U.S., 40% of Toyota's revenue, is problematic. The housing and credit troubles raise concerns about auto sales being negatively impacted. There are fears that the credit problems will start to crop up in auto loans.
Second, the Yen continues to hold even with the dollar even as the Dollar continues to depreciate against other foreign currencies such as the Euro. A strengthening Yen will have a negative impact on Toyota's top and bottom line numbers.
Although the Bank of Japan continues to keep interest rates at 0.5% there is concern that the Yen carry trade may suddenly unravel. If that were to happen a lot of money managers would have to buy large quantities of Yen, driving the value of the Yen up against the Dollar. Also, if the Bank of Japan decided to begin raising interest rates the Yen in all probability would strengthen.
But lets look at the positives for Toyota. Toyota continues to gain market share almost every month against the America automakers. Last month was an anomaly in that General Motors' U.S. sales increased slightly while Toyota's sales declined by 4%. However Ford's sales declined 21% for the month (year over year) after a more than 30% decline the month before.
Toyota is immensely profitable vis a vis its American and other global counterparts. Last year Toyota Motors made twice as much profit as Ford, GM and Honda Motors combined.
Bob Nardelli will likely run Chrysler into the ground the way he did Home Depot. John Snow, former Treasury Secretary and the head of Cerberus Capital, hired Bob Nardelli. As Treasury Secretary John Snow did not impress has being the sharpest knife in the drawer.
Toyota is making strong inroads into China, as is General Motors. Finally there is valuation. Toyota sells for a P/E of 11.38. On every valuation metric Toyota stands alone in the automotive industry. I suppose that Honda may have a premium valuation due to the fact that it is smaller and may be able do better regarding the law of large numbers. But I think Toyota is going to rule the automotive world. They are making steady process in competing for the full size truck, the last segment of dominance of U.S. car makers.
Toyota has more than 10% of the value of its shares in cash. In fact, Toyota can afford to pay cash for General Motors given GM's market cap and Toyota would have some change left over.
Hopefully Toyota will move up as we continue to gain more clarity on the credit mess and whether the U.S. economy will re-accelerate into 2008.
Direct Competitor Comparison statistics a
re from Yahoo Finance.
Disclosure: at the time of this posting the author was long TM.
Saturday, October 27, 2007
Tax Plan & the Media's Lazy Absence of Analysis
http://www.ajc.com/metro/content/printedition/2007/10/26/taxes1026.html
The above link is an Associated Press article describing the tax plan proposed by Charlie Rangel, Democrat Chairman of the House Ways and Means Committee. This is the article that was picked up by most newspapers that do not have the resources to research and write the article themselves. This includes all but the largest newspapers such as the New York Times. The link is from the print edition of the Atlanta Journal Constitution. So most people's print understanding of the proposal comes from this article.
It is a great example (in a sorry sort of way) of how the media passes on the Democratic message without any true analysis or skepticism. Rush Limbaugh calls it the "drive by media" due to the superficial nature of coverage combined with a natural tendency to accept what the Democrats say as good and true. The media is just lazy.
To read the article without any other source of information the reader is left believing the the following:
What has John Abrams of the AP left out? Well, here are a few items:
The above link is an Associated Press article describing the tax plan proposed by Charlie Rangel, Democrat Chairman of the House Ways and Means Committee. This is the article that was picked up by most newspapers that do not have the resources to research and write the article themselves. This includes all but the largest newspapers such as the New York Times. The link is from the print edition of the Atlanta Journal Constitution. So most people's print understanding of the proposal comes from this article.
It is a great example (in a sorry sort of way) of how the media passes on the Democratic message without any true analysis or skepticism. Rush Limbaugh calls it the "drive by media" due to the superficial nature of coverage combined with a natural tendency to accept what the Democrats say as good and true. The media is just lazy.
To read the article without any other source of information the reader is left believing the the following:
- The plan will provide "tax cuts to almost all families with incomes under $500,000."
- Rich people, implied to be families that make more than $500,000 a year, will pay somewhat higher taxes.
- Rich families will be subject to a phase-out of deductions and exemptions.
- The corporate tax will be lowered from 35% to 30.5%. Some companies will have to pay a little more.
- $29B in additional money will be paid out through the earned income tax credit (not a tax reduction as the recipients don't pay taxes)
- $9B in additional child credits will be paid out.
- The Alternative Minimum Tax will be eliminated.
- 91 million families will receive tax relief.
What has John Abrams of the AP left out? Well, here are a few items:
- Families making over $200,000 a year will pay a 4% "surcharge". This surcharge will be against total income instead of taxable income which means it will subtract from all itemized deductions such as the mortgage deduction. So it is actually a bigger hit than 4%.
- The marginal rates will be raised from including raising the top marginal rate 35% to 39.5%. This tax rate increase is separate from the 4% surcharge. The surcharge is on top of this.
- I'm not sure what John Abrams means by saying that the rich will be subject to "a limitation on itemized deductions and a phase-out of deductions for personal exemptions." I can't imagine what these might be. If you make more than $200,000 as a family most of the deductions are already phased out. Then the AMT eliminates much of everything else. Since this phase-out will raise $29B for the government I can only assume that Rangel is integrating many of the AMT deduction caps into the mainline tax code.
- Carried interest, which is the capital gain that is paid to hedge fund and private equity managers as pay for performance, will be redefined as ordinary income raising the tax rate on these gains from 15% to 44%.
- A number of other measures will be enacted pulling in many tens of billions from companies.
- The 91 million receiving tax cuts number is smoke and mirrors. 20M are have already been shielded from the AMT by a previous GOP patch. Many more millions only receive a "cut" if you assume that the 10% rate expires and that the $1,000 child credit expires (both provided through the GOP tax cuts of 2001 and 2003). Others that will benefit from expanding the earned income tax credit don't actually pay taxes. We're just going to redistribute more income to them.
Off-Balance Sheet, Off-Shore, Offensive
Merrill Lynch and a number of the other big New York financial institutions made the mistake of taking huge risks on Structured Investment Vehicles (SIV's) for the potential reward of a modest return but not hedging the downside. These CEO's have been paid enormous sums of money to make money and manage risk. It is becoming very clear that, with the exception of Goldman Sachs, risk was not managed.
Merrill Lynch stated a week ago that they would take a $5B hit on their sub-prime and SIV's. Then when they released their earnings it had turned into a $8B write-down. This is for a firm that makes maybe $6B in profits in a year.
The fact that it went from $5B to $8B in the course of a week tells us that they have no idea what the ultimate hit will be. It shows that they are still not marking to market but are marking to model. I suppose they took another look at their model and decided that the write-down should include and additional $3B. But instead of $5B or $8B it could be $10B or who knows what.
Perhaps even scarier Merrill Lynch and others are hiding their SIV assets in off-balance sheet entities. Some of these off-balance sheet entities have even moved off-shore for even greater opaqueness. This is exactly the type of fraud that was perpetrated by Enron, hiding huge losses off its balance sheet until it was too late for the firm to stop its ultimate collapse.
Where is the SEC? Absent as usual. Without Eliott Spitzer as New York Attorney General to do the SEC's job for them, the SEC continues to be the feckless, financial statement collecting bureaucrats that they always have been.
Not a single one of these CEO's that failed their shareholders by not managing risk has been fired. No government investigation is underway to reveal what is being hidden in these off-balance sheet entities. It is appalling.
Disclosure: at the time of this posting the author was long GS.
Merrill Lynch stated a week ago that they would take a $5B hit on their sub-prime and SIV's. Then when they released their earnings it had turned into a $8B write-down. This is for a firm that makes maybe $6B in profits in a year.
The fact that it went from $5B to $8B in the course of a week tells us that they have no idea what the ultimate hit will be. It shows that they are still not marking to market but are marking to model. I suppose they took another look at their model and decided that the write-down should include and additional $3B. But instead of $5B or $8B it could be $10B or who knows what.
Perhaps even scarier Merrill Lynch and others are hiding their SIV assets in off-balance sheet entities. Some of these off-balance sheet entities have even moved off-shore for even greater opaqueness. This is exactly the type of fraud that was perpetrated by Enron, hiding huge losses off its balance sheet until it was too late for the firm to stop its ultimate collapse.
Where is the SEC? Absent as usual. Without Eliott Spitzer as New York Attorney General to do the SEC's job for them, the SEC continues to be the feckless, financial statement collecting bureaucrats that they always have been.
Not a single one of these CEO's that failed their shareholders by not managing risk has been fired. No government investigation is underway to reveal what is being hidden in these off-balance sheet entities. It is appalling.
Disclosure: at the time of this posting the author was long GS.
Finding the Next 5,000 Percent Gainer
Financial publications are fond of writing about the fabulous gains in great companies if you'd only gotten in early. Examples of stocks that would make you a millionaire if you bought early and just held on include Walmart, Microsoft, Home Depot to name just a few.
Microsoft provides a good case study. Microsoft peaked at $58 and change right at the end of 1999. Then came the collapse of the tech bubble. Microsoft has done nothing but go sideways for seven years. Finally on Friday Microsoft hit a six year high of $35 after reporting a superb quarter that showed all lines of business were executing exceptionally well.
Microsoft IPO'd about 1985. On a split adjusted basis a share of stock was worth 9.5 cents. From that point to the peak is a return of 6,110%. Many times people look at a stock that has moved strongly from the lower right to the upper left and feel that they've "missed the boat". If you'd bought Microsoft at the beginning of 1990 a share would have cost about $0.64. The stock would already have gone up 670%. But you would still have made a 910% return at the peak. If you bought Microsoft in 1995 a share would have cost $3.71 on a split adjusted basis. Over the next 5 years you would have a return of almost 160%, or an annualized return of 32% a year.
Somewhere today there is the next 5,000% stock. While hindsight is entertaining it is not particularly profitable. What are the characteristics of a stock that can return 5,000% over 15 or 20 years?
In the case of Microsoft it was a defensible franchise in a fast growing industry, personal computers. Microsoft's operating system dominance meant that they grew as the industry grew. Many additional products put out by Microsoft over the years, such as Microsoft Office and Internet Explorer, have been successful and profitable in their own right, but essentially were developed to protect the core operating system franchise.
I own a lot of different stocks and I own them for a lot of different reasons. But of all the stocks I own the one that I think may turn in a Microsoft performance over the next 10 years is Google. Google IPO'd 3 years ago for $85 a share. I first bought Google in late 2006 for $410. At that time Google had already posted a return of 482%. Friday, Google's closing price was $674.60, representing an increase of 794% since the IPO.
Google has not split its shares and the high stock price along with concerns over the sustainability of its growth have meant that the shares have climbed a "wall of worry" and moved up in a rational way based on its continued strong earnings. The stock remained fairly flat last year and early this year. But with the latest quarter analysts are starting to become more comfortable that growth and earnings are not going to slow down precipitously - at least not in the foreseeable future.
Like Microsoft, Google has a dominate position and a defensible franchise in an industry that is expect to grow for a long time - search and Internet advertising. Google's search algorithms continue to improve and this latest quarter showed financial gains based on more accurately targeted advertising based on search results.
Like Microsoft, Google's business model generates huge amounts of free cash flow. This gives Google the ability to invest in widening its moat and invest in other products and services for future growth. Google has its fingers in a lot of pies, but they have been disciplined in that most of these initiatives are either meant to defend the core franchise (like Microsoft realizing that it had to win the Internet browser war), or meant to expand its footprint within the scope of it's stated mission. That mission is to organize the world's information and monetize the access of that information. There has been no move by Google that just doesn't fit, like Ebay's acquisition of Skype (which Ebay just took a massive write-down on).
Google is a global growth story with about 50% of its revenue coming from outside the United States. Google continues to gain market share in almost every market in which they compete. They are even gaining market share in the U.K. where their market share is already 70%.
It is much harder to see the future than to review the past. But I believe Google has a good chance of being a 5,000% gainer. Check with me in 10 years and we'll see how it turned out.
Disclosure: at the time of this posting the author was long MSFT and GOOG.
Microsoft provides a good case study. Microsoft peaked at $58 and change right at the end of 1999. Then came the collapse of the tech bubble. Microsoft has done nothing but go sideways for seven years. Finally on Friday Microsoft hit a six year high of $35 after reporting a superb quarter that showed all lines of business were executing exceptionally well.
Microsoft IPO'd about 1985. On a split adjusted basis a share of stock was worth 9.5 cents. From that point to the peak is a return of 6,110%. Many times people look at a stock that has moved strongly from the lower right to the upper left and feel that they've "missed the boat". If you'd bought Microsoft at the beginning of 1990 a share would have cost about $0.64. The stock would already have gone up 670%. But you would still have made a 910% return at the peak. If you bought Microsoft in 1995 a share would have cost $3.71 on a split adjusted basis. Over the next 5 years you would have a return of almost 160%, or an annualized return of 32% a year.
Somewhere today there is the next 5,000% stock. While hindsight is entertaining it is not particularly profitable. What are the characteristics of a stock that can return 5,000% over 15 or 20 years?
In the case of Microsoft it was a defensible franchise in a fast growing industry, personal computers. Microsoft's operating system dominance meant that they grew as the industry grew. Many additional products put out by Microsoft over the years, such as Microsoft Office and Internet Explorer, have been successful and profitable in their own right, but essentially were developed to protect the core operating system franchise.
I own a lot of different stocks and I own them for a lot of different reasons. But of all the stocks I own the one that I think may turn in a Microsoft performance over the next 10 years is Google. Google IPO'd 3 years ago for $85 a share. I first bought Google in late 2006 for $410. At that time Google had already posted a return of 482%. Friday, Google's closing price was $674.60, representing an increase of 794% since the IPO.
Google has not split its shares and the high stock price along with concerns over the sustainability of its growth have meant that the shares have climbed a "wall of worry" and moved up in a rational way based on its continued strong earnings. The stock remained fairly flat last year and early this year. But with the latest quarter analysts are starting to become more comfortable that growth and earnings are not going to slow down precipitously - at least not in the foreseeable future.
Like Microsoft, Google has a dominate position and a defensible franchise in an industry that is expect to grow for a long time - search and Internet advertising. Google's search algorithms continue to improve and this latest quarter showed financial gains based on more accurately targeted advertising based on search results.
Like Microsoft, Google's business model generates huge amounts of free cash flow. This gives Google the ability to invest in widening its moat and invest in other products and services for future growth. Google has its fingers in a lot of pies, but they have been disciplined in that most of these initiatives are either meant to defend the core franchise (like Microsoft realizing that it had to win the Internet browser war), or meant to expand its footprint within the scope of it's stated mission. That mission is to organize the world's information and monetize the access of that information. There has been no move by Google that just doesn't fit, like Ebay's acquisition of Skype (which Ebay just took a massive write-down on).
Google is a global growth story with about 50% of its revenue coming from outside the United States. Google continues to gain market share in almost every market in which they compete. They are even gaining market share in the U.K. where their market share is already 70%.
It is much harder to see the future than to review the past. But I believe Google has a good chance of being a 5,000% gainer. Check with me in 10 years and we'll see how it turned out.
Disclosure: at the time of this posting the author was long MSFT and GOOG.
Thursday, October 25, 2007
Airline Arrogance
The federal government is threatening to impose hard caps on the number of flights, including Delta flights, that can be scheduled for JFK airport in New York City. One third of the flights out of JFK are either canceled or delayed. The airlines insist on flight schedules that are impossible to maintain even in the best of circumstances. The airlines are aghast that caps may be imposed and have sworn to fight this with every ounce of energy they can muster.
I saw the CEO and Chairman of United Airlines interviewed today on one of the business news channels. When challenged about the unrealistic flight schedules and chronic flight delays was his answer to accept any responsibility? No. His response was that they scheduled flights when people want to fly and if the air traffic control and airport infrastructure can not accommodate those flights then it is their fault - not the fault of the airlines.
This is a great example of the way in which airlines combine arrogance and incompetence. As a frequent Gold member of Delta's frequent flier program I know only too well about the vagaries of unrealistic flight schedules, canceled flights and poorly maintained planes.
The airline industry has been the greatest destroyer of shareholder value of any industry sector of the last century, and I suspect it will continue to do so.
I saw the CEO and Chairman of United Airlines interviewed today on one of the business news channels. When challenged about the unrealistic flight schedules and chronic flight delays was his answer to accept any responsibility? No. His response was that they scheduled flights when people want to fly and if the air traffic control and airport infrastructure can not accommodate those flights then it is their fault - not the fault of the airlines.
This is a great example of the way in which airlines combine arrogance and incompetence. As a frequent Gold member of Delta's frequent flier program I know only too well about the vagaries of unrealistic flight schedules, canceled flights and poorly maintained planes.
The airline industry has been the greatest destroyer of shareholder value of any industry sector of the last century, and I suspect it will continue to do so.
Rangel Wrangles the Tax Code Mess
It is hard not to like Congressman Charlie Rangel. He is engaging, likable, self-depreciating and he always spins a great story. As I watched him outline his tax reform proposal today I found myself being drawn in. Then I looked at the details.
Fixing the AMT must be done. This part is not in question. The AMT was imposed decades ago to address about a dozen very wealthy taxpayers that followed the tax code of the day but did not pay income taxes. The AMT was to make sure these taxpayers paid taxes no matter what. In the grand tradition of the U.S. Congress they screwed it up. The bill was not indexed for inflation. Over the years the AMT dragnet has ensnared more an more taxpayers, reaching well down into the middle class. Without at least a temporary fix something like 27M taxpayers will have to pay the AMT. That is a lot more than 12.
The AMT represents money that was never meant to be collected by the government. So by repealing the tax why do we have to raise other taxes to replace it? It was a mistake. Just repeal it and move on. But that's not the way the government works. They can't do without the money, but they believe you can do without the money.
Another item that Charlie Rangel wants to address is to lower the corporate income tax to a level where American companies are on par with their foreign competitors. He also want to provide more benefits to lower and middle income families.
I'm not going to get into the semantics of a "surcharge" on the rich verse a higher tax rate. I'll just do the math and let the numbers fall where they may.
For individuals making more than $150,000, or families making more than $200,000 the top marginal tax rate will increase 26% from 35% to 44%. This means that the top rate will translate into taking home 56 cents of every dollar instead of 65 cents of every dollar. It also means that there will be a huge marriage penalty for filing jointly.
The top corporate tax rate will be lowered to 30.5%. This makes us somewhat more competitive with the rest of the world; at least a step in the right direction. Corporations don't really pay taxes anyway. Individuals end up paying all the taxes at the end of the day.
A tax break to encourage manufacturing in the U.S. will be repealed. This tax break was just passed by the Democrats a couple of years ago over the objection of President Bush. Now they don't like it.
Another big tax increase will be on so called "carried interest", or the payments made to private equity and hedge fund managers based on capital gains in the funds they manage (no gains, no payment). Most other developed countries (U.K., France, Spain, etc. all treat carried interest as capital gains). This will raise the tax on long term capital gains for these individuals from 15% to 44%. This proposal will undoubtedly drive capital away from the U.S.
The beneficiaries of this massive tax hike ($1 trillion dollars minimum over 10 years) will include an expansion of the people that receive the earned income tax credit. Now this isn't really a tax cut. The people receiving this benefit don't pay taxes. We'll just write more people checks.
Many other people will receive additional tax breaks and benefits, such as through an expansion of the standard deduction by $850.
The end result is a very large tax increase on small businesses and capital investment. These are the elements of our economy that create the jobs for everyone else. To increase taxes just when the economy is slowing, hopefully to a soft landing, if the height of irresponsibility. It almost guarantees a recession.
But if your a Democrat and sorely desire that the next Presidential administration be a Democratic Administration having a soft landing is not politically beneficial to you. Harming the economy instead while at the same time buying votes through a massive redistribution of income sounds pretty good.
The Bush tax cuts and pro-growth policies have created jobs, grown real wages and delivered a surge of revenue into the federal coffers resulting in a historically low deficit. Charlie Rangel's plan would constitute the largest tax increase in U.S. history and a transfer of wealth on a massive scale.
I do think Charlie Rangel deserves some credit. He knows that this proposal will not be the final answer but he has put out a position that can be debated and molded. It is a complex issue. But I hope we end up promoting a strong economy that benefits all and not just punishing success.
Fixing the AMT must be done. This part is not in question. The AMT was imposed decades ago to address about a dozen very wealthy taxpayers that followed the tax code of the day but did not pay income taxes. The AMT was to make sure these taxpayers paid taxes no matter what. In the grand tradition of the U.S. Congress they screwed it up. The bill was not indexed for inflation. Over the years the AMT dragnet has ensnared more an more taxpayers, reaching well down into the middle class. Without at least a temporary fix something like 27M taxpayers will have to pay the AMT. That is a lot more than 12.
The AMT represents money that was never meant to be collected by the government. So by repealing the tax why do we have to raise other taxes to replace it? It was a mistake. Just repeal it and move on. But that's not the way the government works. They can't do without the money, but they believe you can do without the money.
Another item that Charlie Rangel wants to address is to lower the corporate income tax to a level where American companies are on par with their foreign competitors. He also want to provide more benefits to lower and middle income families.
I'm not going to get into the semantics of a "surcharge" on the rich verse a higher tax rate. I'll just do the math and let the numbers fall where they may.
For individuals making more than $150,000, or families making more than $200,000 the top marginal tax rate will increase 26% from 35% to 44%. This means that the top rate will translate into taking home 56 cents of every dollar instead of 65 cents of every dollar. It also means that there will be a huge marriage penalty for filing jointly.
The top corporate tax rate will be lowered to 30.5%. This makes us somewhat more competitive with the rest of the world; at least a step in the right direction. Corporations don't really pay taxes anyway. Individuals end up paying all the taxes at the end of the day.
A tax break to encourage manufacturing in the U.S. will be repealed. This tax break was just passed by the Democrats a couple of years ago over the objection of President Bush. Now they don't like it.
Another big tax increase will be on so called "carried interest", or the payments made to private equity and hedge fund managers based on capital gains in the funds they manage (no gains, no payment). Most other developed countries (U.K., France, Spain, etc. all treat carried interest as capital gains). This will raise the tax on long term capital gains for these individuals from 15% to 44%. This proposal will undoubtedly drive capital away from the U.S.
The beneficiaries of this massive tax hike ($1 trillion dollars minimum over 10 years) will include an expansion of the people that receive the earned income tax credit. Now this isn't really a tax cut. The people receiving this benefit don't pay taxes. We'll just write more people checks.
Many other people will receive additional tax breaks and benefits, such as through an expansion of the standard deduction by $850.
The end result is a very large tax increase on small businesses and capital investment. These are the elements of our economy that create the jobs for everyone else. To increase taxes just when the economy is slowing, hopefully to a soft landing, if the height of irresponsibility. It almost guarantees a recession.
But if your a Democrat and sorely desire that the next Presidential administration be a Democratic Administration having a soft landing is not politically beneficial to you. Harming the economy instead while at the same time buying votes through a massive redistribution of income sounds pretty good.
The Bush tax cuts and pro-growth policies have created jobs, grown real wages and delivered a surge of revenue into the federal coffers resulting in a historically low deficit. Charlie Rangel's plan would constitute the largest tax increase in U.S. history and a transfer of wealth on a massive scale.
I do think Charlie Rangel deserves some credit. He knows that this proposal will not be the final answer but he has put out a position that can be debated and molded. It is a complex issue. But I hope we end up promoting a strong economy that benefits all and not just punishing success.
Invested in Failure
There was not a single civilian or military casualty in Iraq’s Anbar Province last week. This seems like a big milestone. It has not been reported in the NYT’s or NBC or any of the other liberal media outlets. Amazing, but it makes sense. If the situation continues to improve in Iraq it will hurt the chances for a Democratic administration.
I just watched a video of a couple of Democratic Congressmen being interviewed prior to the Petreaus hearings. The interviewer asked the Congressmen what would it mean if General Petreaus was able to testify in September that the security situation was improving? The Congressmen responded, “That would be a big problem for us.”
The Democrats are so invested in failure they don’t know how to react when we succeed.
I just watched a video of a couple of Democratic Congressmen being interviewed prior to the Petreaus hearings. The interviewer asked the Congressmen what would it mean if General Petreaus was able to testify in September that the security situation was improving? The Congressmen responded, “That would be a big problem for us.”
The Democrats are so invested in failure they don’t know how to react when we succeed.
Wednesday, October 24, 2007
Home Depot - My Most Frustrating Stock
I've lost more money on other stocks. In fact, I've been complicit in some spectacular collapses. Nevertheless perhaps my most frustrating stock of all time is Home Depot. I purchased Home Depot in 2000 for about $48 a share. It closed today for $30.88. Unfortunately it is in an account that is a hassle to access and expensive to trade so I've left it in there hoping for an eventually turnaround.
The last seven years have been a chamber of horrors. Bernie Marcus and Arthur Blank wisely understood that for Home Depot to reach the next stage they needed to bring in a top flight CEO. Unfortunately they hired Bob Nardelli instead.
Actually Bob Nardelli did some good things operationally that were needed. He brought disciple to the supply chain. He simplified the management structure. But he also destroyed a very positive culture and under invested in the stores. Bob Nardelli was no merchant.
I was actually supportive of Mr. Nardelli's expansion into the commercial supply business. Thinking like the GE trained executive he was he saw an opportunity to leverage Home Depots' improved supply chain and enormous purchasing power.
But all of those commercial supply assets were purchased at top dollar. With Nardelli gone Home Depot began to dismantle his industrial vision to return to its shopkeeper roots. But now those assets were unloaded at bargain basement prices. The money was supposed to go a long way toward a massive stock buyback that was going to finally get the shares moving. But they screwed even that up. The price of Home Depot Supply had to be lowered even more and the share buyback was diluted as a result.
Just prior to Nardelli getting the boot its was rumored that Home Depot could be taken out in a private equity deal. To deter this Nardelli immediately leveraged up the balance sheet by issuing a huge bond offering lowering the company's credit rating.
Nardelli's crowning achievement in arrogance was the infamous stockholder meeting. I won't recount the whole sordid tale but I've never seen anything like it. It was clear that Nardelli was going out of his way to tell the shareholders that he could care less what they thought.
The big countdown clock limiting shareholder comments to just a few minutes each combined with the security goons dressed in orange Home Depot aprons was something out of a bad movie. If a shareholder ran over their 2 minutes the microphone was turned off and the security thugs began moving in to silence the share owning corporate interlopers.
Now Home Depot Supply has been sold off in a fire sale. The balance sheet is loaded with debt. The Home Depot landscaping supply business is being shut down. The Home Depot Expo high end stores have never moved beyond a hobby. The sharp downturn in the housing industry is adding insult to injury.
It is finally time to bite the bullet, sell this dog, and continue shopping at Lowes.
Disclosure: at the time of this posting the author was long HD.
The last seven years have been a chamber of horrors. Bernie Marcus and Arthur Blank wisely understood that for Home Depot to reach the next stage they needed to bring in a top flight CEO. Unfortunately they hired Bob Nardelli instead.
Actually Bob Nardelli did some good things operationally that were needed. He brought disciple to the supply chain. He simplified the management structure. But he also destroyed a very positive culture and under invested in the stores. Bob Nardelli was no merchant.
I was actually supportive of Mr. Nardelli's expansion into the commercial supply business. Thinking like the GE trained executive he was he saw an opportunity to leverage Home Depots' improved supply chain and enormous purchasing power.
But all of those commercial supply assets were purchased at top dollar. With Nardelli gone Home Depot began to dismantle his industrial vision to return to its shopkeeper roots. But now those assets were unloaded at bargain basement prices. The money was supposed to go a long way toward a massive stock buyback that was going to finally get the shares moving. But they screwed even that up. The price of Home Depot Supply had to be lowered even more and the share buyback was diluted as a result.
Just prior to Nardelli getting the boot its was rumored that Home Depot could be taken out in a private equity deal. To deter this Nardelli immediately leveraged up the balance sheet by issuing a huge bond offering lowering the company's credit rating.
Nardelli's crowning achievement in arrogance was the infamous stockholder meeting. I won't recount the whole sordid tale but I've never seen anything like it. It was clear that Nardelli was going out of his way to tell the shareholders that he could care less what they thought.
The big countdown clock limiting shareholder comments to just a few minutes each combined with the security goons dressed in orange Home Depot aprons was something out of a bad movie. If a shareholder ran over their 2 minutes the microphone was turned off and the security thugs began moving in to silence the share owning corporate interlopers.
Now Home Depot Supply has been sold off in a fire sale. The balance sheet is loaded with debt. The Home Depot landscaping supply business is being shut down. The Home Depot Expo high end stores have never moved beyond a hobby. The sharp downturn in the housing industry is adding insult to injury.
It is finally time to bite the bullet, sell this dog, and continue shopping at Lowes.
Disclosure: at the time of this posting the author was long HD.
The Alchemists of Wall Street
The practitioners of technical analysis are the alchemists of our modern financial world, attempting to conjure gold out of stock charts. Whole careers have been made out of calling out buy and sell signals based on this line crossing that line and the like without regard to the fundamentals or economic cycles. Does it work? Sometimes it does.
Does it work because it is true, or because people believe it is true and therefore act on it? I believe that more often than not it is self-fulfilling prophecy. People believe in it and trade based on it so it becomes true. I suppose in some ways it is a way of understanding one element of investor psychology.
The result is that you have to pay attention to it, because so many people ascribe to it and buy and sell based on it. But do I think that the dreaded "double top" is all powerful? Not really. Like the alchemists of old, technical traders are always trying to find that "system" or "formula" that is guarranteed to make them money without having to understand the underlying company. It apparently is seductive because almost all of the adds I see on CNBC for trading systems are marketed on this basis. Many newletters are based on one flavor or another of technical analysis too.
I invest and trade based on fundamentals, the economic cycle, psychology and yes, technicals. But I take it with a grain of salt.
Does it work because it is true, or because people believe it is true and therefore act on it? I believe that more often than not it is self-fulfilling prophecy. People believe in it and trade based on it so it becomes true. I suppose in some ways it is a way of understanding one element of investor psychology.
The result is that you have to pay attention to it, because so many people ascribe to it and buy and sell based on it. But do I think that the dreaded "double top" is all powerful? Not really. Like the alchemists of old, technical traders are always trying to find that "system" or "formula" that is guarranteed to make them money without having to understand the underlying company. It apparently is seductive because almost all of the adds I see on CNBC for trading systems are marketed on this basis. Many newletters are based on one flavor or another of technical analysis too.
I invest and trade based on fundamentals, the economic cycle, psychology and yes, technicals. But I take it with a grain of salt.
How Dry is the Desert?
I've seen several stories and comments by the likes of CNN and Harry Reid about how the fires in Southern California are the result of global warming and that we are entering a long term period of conflagration. The rationale is that global warming is making Southern California and the Los Angeles area too dry.
OK, let's break this down. Many people don't know that Los Angeles is in the middle of a desert. In fact, the only reason a city can even exist there is that an entire major river was re-routed from the Sierra-Nevada mountains to Los Angeles to provide water.
I hate to disappoint Senator Reid, but deserts are DRY, global warming or not. Being from Nevada Harry Reid should understand this but unfortunately he often struggles with basic concepts.
The hot, dry Santa Anna winds that are fanning the flames are a long standing weather phenomenon that often occur this time of year - and have since time immemorial.
Now there are reports that some of the fires were deliberately set. Perhaps the arsonists were global warming warriors trying to "fan the flames" of this controversial issue.
OK, let's break this down. Many people don't know that Los Angeles is in the middle of a desert. In fact, the only reason a city can even exist there is that an entire major river was re-routed from the Sierra-Nevada mountains to Los Angeles to provide water.
I hate to disappoint Senator Reid, but deserts are DRY, global warming or not. Being from Nevada Harry Reid should understand this but unfortunately he often struggles with basic concepts.
The hot, dry Santa Anna winds that are fanning the flames are a long standing weather phenomenon that often occur this time of year - and have since time immemorial.
Now there are reports that some of the fires were deliberately set. Perhaps the arsonists were global warming warriors trying to "fan the flames" of this controversial issue.
Facebook Folly
Microsoft just announced that they signed a definitive agreement to take a stake in Facebook for $240M. A complete acquisition of Facebook by Microsoft is being valued at $15B, with a "B".
Facebook is reported to have revenues of $150M and profits of $30M. That means that Microsoft is paying 100 times sales. Madness.
The other company bidding for Facebook was Google. I suspect that Google would have been glad to acquire Facebook for a reasonable price but instead probably bid up the company to force Microsoft to pay top dollar.
Is there a wisp of desperation in the air as Microsoft trys to be "cool" and relevant to the younger generation, a position that was long ago lost to the the likes of Apple and Google?
Disclosure: at the time of this posting the author was long MSFT, APPL and GOOG.
Facebook is reported to have revenues of $150M and profits of $30M. That means that Microsoft is paying 100 times sales. Madness.
The other company bidding for Facebook was Google. I suspect that Google would have been glad to acquire Facebook for a reasonable price but instead probably bid up the company to force Microsoft to pay top dollar.
Is there a wisp of desperation in the air as Microsoft trys to be "cool" and relevant to the younger generation, a position that was long ago lost to the the likes of Apple and Google?
Disclosure: at the time of this posting the author was long MSFT, APPL and GOOG.
Monday, October 22, 2007
Apple Crushes Earnings
Apple just released 4th quarter earnings. Even with Apple's characteristic sandbagging, the numbers where absolutely huge. The company earned $1.01 vs. analysts estimates of $0.86. Apple beat on the top line as well. Some highlights of the most important points:
Disclosure: at the time of this posting the author was long AAPL.
- Profits increased 67% year over year.
- Raised guidance for the next quarter. This is quite significant due to the fact that Apple is always very conservative with guidance.
- Sold 1.2M iPhones and more than 10M iPods. This is important because iPod growth continues at 18%, iPhones exceeded expectations, and the iPod does not appear to be cannibalizing iPod sales.
- iPod market share is lower outside of the U.S. meaning that there is a lot of growth potential internationally.
- iPhone will be launched in Europe and the U.K. soon.
- Apple continues to have an extremely strong balance sheet with $15B in cash and zero debt.
- Apple sold more than 2M Macintosh computers for the first time in its history. Apple might have taken "computer" off of their name but it is still a very large driver of revenues and profits.
- Apple's new operating system, "Leopard", begins shipping on Friday.
- Perhaps most important, gross margin for the quarter was 33.6%, up from 29.2% the previous year. That is vastly better than Apple’s competitors in either the computer or cellphone industries.
Disclosure: at the time of this posting the author was long AAPL.
Sunday, October 21, 2007
Oil - Slip Slidin' Away
Rising oil prices can be either positive or negative depending on the reason for the high price. High oil prices due to a shortage or production and supply can be catastrophic. Currently there is enough oil production, albeit with not a large margin for error. But in fact world oil production is increasing and inventories are robust. In fact, oil prices have risen due to the strong, synchronized economic growth around the world. This strong growth is extremely positive and can absorb high oil prices.
Oil topped $90 a barrel last week. In no way do the fundamentals of supply and demand support $90 oil. There continues to be a $15 to $20 terror premium on the price of a barrel of oil. But even backing out the terror premium oil is still too high.
Tensions between Turkey and Kurdish radicals in northern Iraq continue to be extremely high. Secretary Rice has managed to get Turkey to hold off on military intervention in northern Iraq - for now.
Hopefully Nancy Pelosi's stupidly lame attempt at foreign policy with her "Armenian Gambit" will not inflame matters further than than it already has. Perhaps Nancy does not know that an important oil pipeline transporting oil from Iraq runs through Kurdish Iraq and Turkey. Perhaps she also does not know that the heavy armored vehicles needed by our soldiers are reaching Iraq primarily over land routes through our NATO partner Turkey. Perhaps she does not know that the Ottoman Empire no longer exists.
Barrons this week highlights an opinion by Oppenheimer & Company that argued oil prices are primed for a downturn. They also anticipate that an attack on Iraq by the United States could come within a number of months. Of course this would result in a spike in oil, but as Oppenheimer stated, "Iran needs oil export revenues more than the world needs its oil exports."
I am strongly considering shorting oil via the USO ETF Monday and perhaps shorting Exxon as well. I believe oil has overreached and is due for a pullback.
I am also hopeful that refining margins will improve. After a nice move up after the late summer lows refiners have pulled back a bit. Cracking spreads are under pressure because gas prices have not kept up with oil prices. A pullback in oil could actually increase cracking spreads and give a lift to refiners. The period from September to June is historically the be time to own refiners.
Disclosure: at the time of this posting the author was long DVN, VLO and TSO.
Oil topped $90 a barrel last week. In no way do the fundamentals of supply and demand support $90 oil. There continues to be a $15 to $20 terror premium on the price of a barrel of oil. But even backing out the terror premium oil is still too high.
Tensions between Turkey and Kurdish radicals in northern Iraq continue to be extremely high. Secretary Rice has managed to get Turkey to hold off on military intervention in northern Iraq - for now.
Hopefully Nancy Pelosi's stupidly lame attempt at foreign policy with her "Armenian Gambit" will not inflame matters further than than it already has. Perhaps Nancy does not know that an important oil pipeline transporting oil from Iraq runs through Kurdish Iraq and Turkey. Perhaps she also does not know that the heavy armored vehicles needed by our soldiers are reaching Iraq primarily over land routes through our NATO partner Turkey. Perhaps she does not know that the Ottoman Empire no longer exists.
Barrons this week highlights an opinion by Oppenheimer & Company that argued oil prices are primed for a downturn. They also anticipate that an attack on Iraq by the United States could come within a number of months. Of course this would result in a spike in oil, but as Oppenheimer stated, "Iran needs oil export revenues more than the world needs its oil exports."
I am strongly considering shorting oil via the USO ETF Monday and perhaps shorting Exxon as well. I believe oil has overreached and is due for a pullback.
I am also hopeful that refining margins will improve. After a nice move up after the late summer lows refiners have pulled back a bit. Cracking spreads are under pressure because gas prices have not kept up with oil prices. A pullback in oil could actually increase cracking spreads and give a lift to refiners. The period from September to June is historically the be time to own refiners.
Disclosure: at the time of this posting the author was long DVN, VLO and TSO.
Saturday, October 20, 2007
Krauthammer's Razor
There are lots of fuzzy minded op-end columnists out there. Others are just angry. Perhaps they weren't held enough as children. But Charles Krauthammer is not one of them. He is thoughtful and reasoned and provides interesting insights into the strange world inside the Washington, D.C. beltway where normal thought processes and common sense rarely come into play.
Mr. Krauthammer's latest column focuses on Nancy Pelosi's "Armenian Gambit". I especially liked "Krauthammer's Razor". The last paragraph reads as follows:
"Is the Armenian resolution her way of unconsciously sabotaging the U.S. war effort, after she had failed to stop it by more direct means? I leave that question to psychiatry. Instead, I fall back on Krauthammer's razor (with apologies to Occam): In explaining any puzzling Washington phenomenon, always choose stupidity over conspiracy, incompetence over cunning. Anything else gives them too much credit. "
Well said. He also provides some very interesting historical context regarding America's humanitarian assistance during the Ottoman/Armenian tradgey.
How badly do you have to bungle something to have John Murtha, Democratic Party thug in residence and Abscam unindicted co-conspirator, back away and say that you're making a mistake. Ouch.
http://www.washingtonpost.com/wp-dyn/content/article/2007/10/18/AR2007101801579_2.html
Mr. Krauthammer's latest column focuses on Nancy Pelosi's "Armenian Gambit". I especially liked "Krauthammer's Razor". The last paragraph reads as follows:
"Is the Armenian resolution her way of unconsciously sabotaging the U.S. war effort, after she had failed to stop it by more direct means? I leave that question to psychiatry. Instead, I fall back on Krauthammer's razor (with apologies to Occam): In explaining any puzzling Washington phenomenon, always choose stupidity over conspiracy, incompetence over cunning. Anything else gives them too much credit. "
Well said. He also provides some very interesting historical context regarding America's humanitarian assistance during the Ottoman/Armenian tradgey.
How badly do you have to bungle something to have John Murtha, Democratic Party thug in residence and Abscam unindicted co-conspirator, back away and say that you're making a mistake. Ouch.
http://www.washingtonpost.com/wp-dyn/content/article/2007/10/18/AR2007101801579_2.html
Friday, October 19, 2007
Masters of the Obvious
Wall Street stock analysts are sometimes helpful but more often are suspect. I won't rehash the many ethical lapses of this industry leading up to the collapse of the Nasdaq and the stock market in general in 2000. Hundreds of millions of dollars of fines were imposed but I wonder how much better it is.
One of the new rules was put in place due to the grivious conflicts of interest with firms recommending stocks for whom they sought or performed investment banking services. The firms are required to disclose if the have or are actively seeking investment banking business with a company for which they provide stock market analysis and recommendations.
How do these Wall Street firms implement this regulation? They simply slap a disclaimer at the bottom of every stock report stating that they may be seeking or intend to seek investment banking work with that respective company. The same statement on every company report. So I don't know any more before I did in 2000.
Through my several brokerage accounts I have access to a number of reports including those from Charles Schwab, Standard & Poor, Merrill Lynch, Goldman Sachs and Morningstar among others.
An exception to the independence issue is Morningstar, since they do not have an investment banking line of business. They have an interesting methodolgy that is very Warren Buffett like. They strongly favor companies with a defensible franchise, or moat. I find that Morningstar is often in disagreement with the other brokerage recommendations on both the buy and the sell side.
Disclosure: at the time of this posting the author was long LFC.
One of the new rules was put in place due to the grivious conflicts of interest with firms recommending stocks for whom they sought or performed investment banking services. The firms are required to disclose if the have or are actively seeking investment banking business with a company for which they provide stock market analysis and recommendations.
How do these Wall Street firms implement this regulation? They simply slap a disclaimer at the bottom of every stock report stating that they may be seeking or intend to seek investment banking work with that respective company. The same statement on every company report. So I don't know any more before I did in 2000.
Through my several brokerage accounts I have access to a number of reports including those from Charles Schwab, Standard & Poor, Merrill Lynch, Goldman Sachs and Morningstar among others.
An exception to the independence issue is Morningstar, since they do not have an investment banking line of business. They have an interesting methodolgy that is very Warren Buffett like. They strongly favor companies with a defensible franchise, or moat. I find that Morningstar is often in disagreement with the other brokerage recommendations on both the buy and the sell side.
One of my frustrations with Morningstar, however, is that as far as I can tell they will not recommend companies in highly cyclical industries. Some of the greatest investing profits can be made in cyclical industries as the normal economic cycles wax and wane.
I do not find Merrill Lynch particularly helpful. I find Goldman Sachs quite good and I trust Goldman Sachs' insight and judgement more than most. When Goldman puts a stock on their "Conviction Buy" list I pay attention. Charles Schwab's rating system seems to mostly be about momentum, and the ratings change a lot. Stocks making strong moves up are upgraded and visa versa, perhaps encouraging more frequent trading and therefore fees to Charles Schwab.
More often than not analysts change ratings and price targets after the fact. I would certainly be more helpful to tell me to "sell" a stock before it drops precipitously. The same goes for telling me when to "buy". A stock will move through a firm's price target by a substantial amount and only then will the price target be raised. Do the work and provide me some actual insight that I can't figure out by myself.
Here is a good one. S&P began coverage of China Life Insurance in mid 2004 with a "hold" when the stock traded for about $10 (split adjusted). Since that time the stock has always been rated either a "hold" or "sell" by S&P. In the big selloff today China Life Insurance closed down more than $6 per ADR (each ADR equals 15 common shares) at $96.54, or a ~950% increase in about 3 and 1/3 years. I've only been in for the last 150%.
Due to copyright restrictions (I don't want McGraw Hill to get grumpy at me) I can't attach S&P's brokerage report here, but let me paint a picture with words. Imagine a 4 year chart where the stock price moves steadily and inexorable from the lower left to the upper right. S&P overlays its price target for the shares over the stock price graph. Amazingly the two are almost the same graph. Each time China Life moves up the target price is raised to match or slightly exceed the price of the ADR.
Is this helpful? Of course that is a rhetorical question. What would be helpful is to recommend a stock that goes up 950% over 3 years before it happens.
China Life Insurance is a play on the emerging Chinese middle class who now have enough disposable income to afford insurance, and enough to protect that they want to buy it. Competition has been heavily restricted in the life insurance industry with China Life being the chosen company. They have taken advantage of these restrictions in terms of brand development and building a country-wide network of dedicated sales representatives.
At this point the stock is not cheap, but it is not in bubble territory either. It is just on the expensive side. I doubt that I would initiate a new position in China Life right now. Even though they continue to grow revenue and income by leaps and bounds a significant percentage is being derived from investments in an admittedly overheating market.
I have no idea why S&P wastes their time with completely unhelpful reports for this stock. Not all of S&P's analysis is so poor. Some is quite good. But their China Life recommendations and price targets are an example of what is all too common in the industry.
One final problem in the stock analyst business is that they are never bullish enough on a sector that is really strong and never bearish enough on a sector that is really weak. The analysts will feel they can not put a sell rating on every stock in a sector, even though that is exactly what they should do. Likewise they feel they can only have so many "buy" ratings in a particular sector, often ignoring stocks that can make you a lot of money.
For better or worse I read all the reports. You never know when something insightful will turn up. But all to often they are masters of the obvious with a very limited ability to make you a lot of money. If the analysts and those darn price targets were always right we'd all be rich.
Disclosure: at the time of this posting the author was long LFC.
Happy Anniversary
Today is the 20th anniversary of the stock market crash in 1987. How did Wall Street celebrate? By selling off in a huge way. The Dow 30 industrial stocks fell 366 points. Pessimistic comments from Caterpillar about the U.S. economy got the ball rolling - downhill.
Of course today's decline was just 2.6% verses the more than 22%. But it still hurts. To keep it in perspective since the 1987 crash the Dow is up 660%. Since mid-1982 the Dow is up 1,600%. Since the great crash in 1929 the Dow is up 5,300%.
Disclosure: at the time of this posting the author was long CAT.
Of course today's decline was just 2.6% verses the more than 22%. But it still hurts. To keep it in perspective since the 1987 crash the Dow is up 660%. Since mid-1982 the Dow is up 1,600%. Since the great crash in 1929 the Dow is up 5,300%.
Disclosure: at the time of this posting the author was long CAT.
Googlicious
In spite of making my share of blunders in the stock market I continue to win more than I lose. One of my biggest current winners is Google. I was late to the party, getting in last October at $410, almost 5X the IPO price of $85. I was also brave (or reckless?) enough to buy $450 Jan '08 calls when Google dropped to around $430 earlier this year. Now I look like a genius.
Google's growth is truly astounding considering how large the company already is. It continues to defy the law of large numbers. It is criticized for being a "one trick pony", but that is some trick. This week Google announced results for its 3rd quarter: revenue increased 57%, profit increased 46% year over year. Google has more than $12B in cash and continues to make very large capital expenditures in both infrastructure (e.g., data centers) and R&D.
They have quite a few initiatives in order to diversify the business. But these initiatives are largely focused on their stated mission of advertising across different medias and devices, organizing the world's information, and monetizing the access of that information.
Google continues to take market share in every country where it competes. The highest market share is in the U.K., an astounding 70% and going up! About half of Google's revenue comes from outside of the U.S. making it a play on the strengthening currencies in Europe and the emerging markets. Compared to say, Ebay, Google's international strategy and execution has been excellent.
Is Google an expensive stock at a price of $644 per share and a P/E of 32 times forward earnings? I read an article by an analyst claiming that based on this and a number of factors, such as selling at more than 9 times book value, that Google had to be overvalued. This analyst falls into the trap of trying to apply financial ratios and stock evaluation metrics uniformly across all industries. Many technology companies, particularly software companies, sell for a large multiple of their book value.
Even Microsoft, a stock that has gone absolutely nowhere for years, while increasing revenue and earning dramatically, has a price/book ratio of over 9 (based on today's closing price Google's price/book ratio is 10.1). Now if you ever found a bank selling for 9 times book value it would be the short selling opportunity of a lifetime.
Let's compare Google to some of the other technology high-fliers and its direct competitor Yahoo (not a high flier).
Google has a forward P/E of 32.58, a PEG of 1.23 and a profit margin of 27.48%. The P/E and PEG ratios assume that analyst's estimates for 2008 are correct (Google does not provide guidance). Google has beaten estimates almost every quarter, often by a wide margin. That means that it that PEG ratio could actually be too high. Conventional wisdom on Wall Street is that a company with a PEG of less than 1 is a value play.
Amazon trades at a forward P/E of 57.91 and a PEG of 3.55. Just for fun the price/book for Amazon is 67.45. Amazon has a profit margin of 2.51%. Why does the profit market look like is belongs to a grocery store? Because Amazon is retail company, with the margins of a retailer. But it trades like a technology stock. I continue to hear that Amazon is going to blow out earnings this quarter; perhaps they will. Amazon bulls point to the potential for growth in China and leveraging its infrastructure by being the technology and fulfillment provider for other on-line retailers. Nevertheless I can't get comfortable with Amazon, but you can't short it. Traders shorting Amazon have been the road kill of Wall Street this year.
Research in Motion has a forward P/E of 36.38, a PEG of 1.6 and a profit margin of 20.7%. RIMM has a defensible franchise, giving it a narrow moat. RIMM is growing like mad and dominates the business side of mobile push e-mail.
Apple has a forward P/E of 37.21, a PEG of 2.04 and a profit margin of 13.85%. Lower component costs for the iPods are benefiting gross margin. Apple is taking market share in PCs. The iPhone has been a phenomenal success and will soon launch in Europe and the U.K. Apple continues to be the world leader in turning complex technology into easy to use technology.
Yahoo has a forward P/E of 53.76, a PEG of 2.84 and a profit margin of 10.98%. Yahoo can't get out of its own way. It has not been a good short but I wouldn't buy Yahoo with your money.
The risk with Google is that its earnings growth suddenly slows resulting in multiple contraction. It certainly appears that Google's growth will continue to be impressive for some time. Assuming the DoubleClick deal closes, which Google was positive about on this week's conference call, Google will grow its dominance of on-line advertising.
DoubleClick will make Google a leading provider of display advertising verses the text advertising that is currently its largest driver of growth and income. They have the money and enough time to diversify its lines of business. I'm not going to bet against them.
Disclosure: at the time of this posting the author was long GOOG, RIMM and AAPL.
Google's growth is truly astounding considering how large the company already is. It continues to defy the law of large numbers. It is criticized for being a "one trick pony", but that is some trick. This week Google announced results for its 3rd quarter: revenue increased 57%, profit increased 46% year over year. Google has more than $12B in cash and continues to make very large capital expenditures in both infrastructure (e.g., data centers) and R&D.
They have quite a few initiatives in order to diversify the business. But these initiatives are largely focused on their stated mission of advertising across different medias and devices, organizing the world's information, and monetizing the access of that information.
Google continues to take market share in every country where it competes. The highest market share is in the U.K., an astounding 70% and going up! About half of Google's revenue comes from outside of the U.S. making it a play on the strengthening currencies in Europe and the emerging markets. Compared to say, Ebay, Google's international strategy and execution has been excellent.
Is Google an expensive stock at a price of $644 per share and a P/E of 32 times forward earnings? I read an article by an analyst claiming that based on this and a number of factors, such as selling at more than 9 times book value, that Google had to be overvalued. This analyst falls into the trap of trying to apply financial ratios and stock evaluation metrics uniformly across all industries. Many technology companies, particularly software companies, sell for a large multiple of their book value.
Even Microsoft, a stock that has gone absolutely nowhere for years, while increasing revenue and earning dramatically, has a price/book ratio of over 9 (based on today's closing price Google's price/book ratio is 10.1). Now if you ever found a bank selling for 9 times book value it would be the short selling opportunity of a lifetime.
Let's compare Google to some of the other technology high-fliers and its direct competitor Yahoo (not a high flier).
Google has a forward P/E of 32.58, a PEG of 1.23 and a profit margin of 27.48%. The P/E and PEG ratios assume that analyst's estimates for 2008 are correct (Google does not provide guidance). Google has beaten estimates almost every quarter, often by a wide margin. That means that it that PEG ratio could actually be too high. Conventional wisdom on Wall Street is that a company with a PEG of less than 1 is a value play.
Amazon trades at a forward P/E of 57.91 and a PEG of 3.55. Just for fun the price/book for Amazon is 67.45. Amazon has a profit margin of 2.51%. Why does the profit market look like is belongs to a grocery store? Because Amazon is retail company, with the margins of a retailer. But it trades like a technology stock. I continue to hear that Amazon is going to blow out earnings this quarter; perhaps they will. Amazon bulls point to the potential for growth in China and leveraging its infrastructure by being the technology and fulfillment provider for other on-line retailers. Nevertheless I can't get comfortable with Amazon, but you can't short it. Traders shorting Amazon have been the road kill of Wall Street this year.
Research in Motion has a forward P/E of 36.38, a PEG of 1.6 and a profit margin of 20.7%. RIMM has a defensible franchise, giving it a narrow moat. RIMM is growing like mad and dominates the business side of mobile push e-mail.
Apple has a forward P/E of 37.21, a PEG of 2.04 and a profit margin of 13.85%. Lower component costs for the iPods are benefiting gross margin. Apple is taking market share in PCs. The iPhone has been a phenomenal success and will soon launch in Europe and the U.K. Apple continues to be the world leader in turning complex technology into easy to use technology.
Yahoo has a forward P/E of 53.76, a PEG of 2.84 and a profit margin of 10.98%. Yahoo can't get out of its own way. It has not been a good short but I wouldn't buy Yahoo with your money.
The risk with Google is that its earnings growth suddenly slows resulting in multiple contraction. It certainly appears that Google's growth will continue to be impressive for some time. Assuming the DoubleClick deal closes, which Google was positive about on this week's conference call, Google will grow its dominance of on-line advertising.
DoubleClick will make Google a leading provider of display advertising verses the text advertising that is currently its largest driver of growth and income. They have the money and enough time to diversify its lines of business. I'm not going to bet against them.
Disclosure: at the time of this posting the author was long GOOG, RIMM and AAPL.
Wednesday, October 17, 2007
Nancy's Turkish Delight
What could possibly motivate Nancy and her chamber of horrors to go after one of our few true allies in the region over something that happened in 1915 in the waning days of the Ottoman Empire? Is this really the "work of the people" that Congress needs to be spending time on? Did we already solve all the other problems facing our country?
Either Nancy and the House leadership are not very smart, or they are purposely trying to antagonize a key U.S. ally in the region hoping it will hurt our ability to succeed diplomatically and militarily in Iraq and the surrounding region. I suspect the latter.
http://www.nytimes.com/2007/10/17/washington/17cong.html?_r=1&hp&oref=slogin
Either Nancy and the House leadership are not very smart, or they are purposely trying to antagonize a key U.S. ally in the region hoping it will hurt our ability to succeed diplomatically and militarily in Iraq and the surrounding region. I suspect the latter.
http://www.nytimes.com/2007/10/17/washington/17cong.html?_r=1&hp&oref=slogin
Tuesday, October 16, 2007
Income Tax Madness
I mailed my extended 2006 income taxes yesterday on the October 15th deadline. There was a waiting line to get into the parking lot. Inside there was a line of 25 individuals, most mailing their taxes. The air conditioning was out. The Automated Postal Center machine was "down" with a Postal employee leaning over the open chassis, poking at this gear or this scanning element.
The budget for the IRS is about $11.5B with 115,000 government workers employed! Americans have the dubious distinction of having the most complicated income tax code on the planet. The number of hours spent by many people is huge. An entire industry supports completing and filing income taxes under this hugely complex system. The fact is that if you are fairly productive and successful it is very difficult, if not impossible, for you as a layman to complete your own taxes.
The U.S. is losing the battle for global capital due partly to the fact that our corporate income taxes are the 2nd highest in the world. France, that bastion of socialism and the 35 hour work week, has lower corporate taxes that the U.S.! This high tax rate is an added cost to goods and services that we export, making us less cost competitive in the global economy.
There must be a better solution. There is. We should eliminate the corporate and personal income taxes and replace it all with a national consumption tax. Rebates for comsumption up to a certain level can be provided monthly to ensure that the tax is not regressive for lower income families. No complicated filings, no IRS, no loopholes for special interest, no machinations of any kind.
Large amounts of federal and state revenue would be saved by eliminating the IRS and its state counterparts. Investment would be encouraged and U.S. exports would be more competitive enhancing the economy and job creation. Taxing wages and investment income is a huge disincentive to risk taking and innovation, which powers the economy and creates jobs and wealth for all.
Liberals hate this idea of replacing the income tax with a consumption tax because it limits their ability to confiscate an increasing percentage of wealth from the productive and successful and buy votes with it with all others. In other words, it's fair. But for all the reasons listed above it is such a positive and elegantly simple solution it commands serious consideration.
The budget for the IRS is about $11.5B with 115,000 government workers employed! Americans have the dubious distinction of having the most complicated income tax code on the planet. The number of hours spent by many people is huge. An entire industry supports completing and filing income taxes under this hugely complex system. The fact is that if you are fairly productive and successful it is very difficult, if not impossible, for you as a layman to complete your own taxes.
The U.S. is losing the battle for global capital due partly to the fact that our corporate income taxes are the 2nd highest in the world. France, that bastion of socialism and the 35 hour work week, has lower corporate taxes that the U.S.! This high tax rate is an added cost to goods and services that we export, making us less cost competitive in the global economy.
There must be a better solution. There is. We should eliminate the corporate and personal income taxes and replace it all with a national consumption tax. Rebates for comsumption up to a certain level can be provided monthly to ensure that the tax is not regressive for lower income families. No complicated filings, no IRS, no loopholes for special interest, no machinations of any kind.
Large amounts of federal and state revenue would be saved by eliminating the IRS and its state counterparts. Investment would be encouraged and U.S. exports would be more competitive enhancing the economy and job creation. Taxing wages and investment income is a huge disincentive to risk taking and innovation, which powers the economy and creates jobs and wealth for all.
Liberals hate this idea of replacing the income tax with a consumption tax because it limits their ability to confiscate an increasing percentage of wealth from the productive and successful and buy votes with it with all others. In other words, it's fair. But for all the reasons listed above it is such a positive and elegantly simple solution it commands serious consideration.
Monday, October 15, 2007
Water Bizzaro-World
I have lived in Atlanta for 20 years and we are experiencing the worst drought in my time here. Lake Lanier and Lake Allatoona are being drained dry. For a burgeoning extended metropolitan population of about 5M a crisis is at hand.
The Chattahoochee River feeds Lake Lanier and is by far the largest supplier of water to greater Atlanta. Given the impressive size of the Chattahoochee River it actually drains a surprisingly small area of the Appalachian foothills of north Georgia. As the Chattahoochee goes so goes Atlanta's water.
In spite of the increasingly limited water supply local city and county government continue to approve development at a breakneck pace. Water does not seem to come into this equation. One of the largest consumers of water in Atlanta is a Pepsi Gatorade plant. Are you kidding me? Place a producer of flavored and "enhanced" water on an industrial scale in a city with no water margin of error? Madness. For all I know Pepsi was granted tax incentives to locate here. We would be better off paying for them to move to Chattanooga where they can tap in to the seemingly endless resources of the Tennessee River system.
Is the water being fed into Lake Lanier really that reduced? Surprisingly the answer is no. The Corp of Engineers, which has responsibility for the lake and the release of water, has different priorities than Atlanta. Instead of the traditional role of a reservoirs to control flooding and store water to be used in a time of drought, the Corp sees its role as maintaining a constant flow of water downstream from Lake Lanier, without regard to inflows.
Shockingly the Corp is releasing twice as much water from Lanier as is coming in! The rational: providing a consistent level of water downstream from Lake Lanier so a small coal fired plant can operate and to protect an endangered specie of freshwater mussels near the gulf end of the river.
I am a strong advocate for preventing extinction of flora and fauna by human means. But consider this - if there were no dams along the Chattahoochee River then the mussels would curretly be experiencing one half of the water flow that they are receiving today. Common sense dictates that this is not the first drought affecting the Chattahoochee in the last 5,000 years - yet the mussels survived. When Govenor Sonny Perdue recently implored the Corp of Engineers to reduce the amount of water leaving Lake Lanier, the Corp responded by releasing even more water.
On a recent tour of agricultural operations in South Georgia Govenor Perdue said that we needed to pray for rain. I don't know if God will respond, but hopefully the Corp of Engineers, who apparently see themselves at the right hand of God, will employ some common sense and support a balanced solution for all stakeholders.
Just splitting the difference between Atlanta and the mussels by reducing the outflows from Lake Lanier by some percentage would be a win-win. Atlanta would have considerably more water and the mussels would have more water than if there was not a single human being on the planet.
The Chattahoochee River feeds Lake Lanier and is by far the largest supplier of water to greater Atlanta. Given the impressive size of the Chattahoochee River it actually drains a surprisingly small area of the Appalachian foothills of north Georgia. As the Chattahoochee goes so goes Atlanta's water.
In spite of the increasingly limited water supply local city and county government continue to approve development at a breakneck pace. Water does not seem to come into this equation. One of the largest consumers of water in Atlanta is a Pepsi Gatorade plant. Are you kidding me? Place a producer of flavored and "enhanced" water on an industrial scale in a city with no water margin of error? Madness. For all I know Pepsi was granted tax incentives to locate here. We would be better off paying for them to move to Chattanooga where they can tap in to the seemingly endless resources of the Tennessee River system.
Is the water being fed into Lake Lanier really that reduced? Surprisingly the answer is no. The Corp of Engineers, which has responsibility for the lake and the release of water, has different priorities than Atlanta. Instead of the traditional role of a reservoirs to control flooding and store water to be used in a time of drought, the Corp sees its role as maintaining a constant flow of water downstream from Lake Lanier, without regard to inflows.
Shockingly the Corp is releasing twice as much water from Lanier as is coming in! The rational: providing a consistent level of water downstream from Lake Lanier so a small coal fired plant can operate and to protect an endangered specie of freshwater mussels near the gulf end of the river.
I am a strong advocate for preventing extinction of flora and fauna by human means. But consider this - if there were no dams along the Chattahoochee River then the mussels would curretly be experiencing one half of the water flow that they are receiving today. Common sense dictates that this is not the first drought affecting the Chattahoochee in the last 5,000 years - yet the mussels survived. When Govenor Sonny Perdue recently implored the Corp of Engineers to reduce the amount of water leaving Lake Lanier, the Corp responded by releasing even more water.
On a recent tour of agricultural operations in South Georgia Govenor Perdue said that we needed to pray for rain. I don't know if God will respond, but hopefully the Corp of Engineers, who apparently see themselves at the right hand of God, will employ some common sense and support a balanced solution for all stakeholders.
Just splitting the difference between Atlanta and the mussels by reducing the outflows from Lake Lanier by some percentage would be a win-win. Atlanta would have considerably more water and the mussels would have more water than if there was not a single human being on the planet.
Microsoft and the Fast Follower Delusion
Microsoft has made a $50B company by "scaling up" innovations pioneered by others and using its vast resources to make products viable with substantial market share that are in fact fairly pedestrian.
Xerox PARC invented the graphical user interface. Apple popularized it in its easy to use and innovative Macintosh. Microsoft followed Apple with its Windows interface, always behind technologically but a market leader due to Microsoft's Intel platform operating dominance.
Then came the internet and Netscape, the browser that invented, well, the browser. Microsoft followed with it's Explorer browser and eventually won the battle. I credit Bill Gates with his ability to turn the ship and achieve market dominance while almost always following someone else.
The Xbox followed the PS/2 and achieved a beachhead in the evolving battle for the entertainment console of the home. MS Word followed Wordperfect. MS Excel followed Lotus 123. Microsoft Outlook followed Lotus Notes. SQL Server followed Oracle's DB. Microsoft's "Wintel" servers followed several early leaders. Zune is following the iPod (not very well).
None of these products is dramatically better than the one that was "followed". But many (Zune strongly excluded) have become the de facto standard in their own right mostly due to the ubiquity of the Microsoft platform.
I run Vista on my PC, outfitted with 2 GB of memory, along with Microsoft Office 2007. It is slow. Microsoft Outlook crashes about twice a day. Microsoft Explorer crashes about once a day. It gets the job done but it is not particularly satisfying to use.
One of the next big battles in Microsoft's "fast follower" playbook is virtualization. VM Ware is the market leader. I have seen numerous references lately how the battle for virtualization dominance will be fought between Microsoft and VM Ware. The fact is that VM Ware has a 6 year head start. That does not sound like much of a battle to me.
Microsoft thinks of themselves as a fast follower. But they are not so fast. The Windows operating system took a decade to really find itself and is still only adequate. If Microsoft thinks it can knock off VM Ware and the iPod then I wish them luck, but I'm doubtful.
Disclosure: at the time of this posting the author was long MSFT and EMC (86% owner of VM Ware).
Xerox PARC invented the graphical user interface. Apple popularized it in its easy to use and innovative Macintosh. Microsoft followed Apple with its Windows interface, always behind technologically but a market leader due to Microsoft's Intel platform operating dominance.
Then came the internet and Netscape, the browser that invented, well, the browser. Microsoft followed with it's Explorer browser and eventually won the battle. I credit Bill Gates with his ability to turn the ship and achieve market dominance while almost always following someone else.
The Xbox followed the PS/2 and achieved a beachhead in the evolving battle for the entertainment console of the home. MS Word followed Wordperfect. MS Excel followed Lotus 123. Microsoft Outlook followed Lotus Notes. SQL Server followed Oracle's DB. Microsoft's "Wintel" servers followed several early leaders. Zune is following the iPod (not very well).
None of these products is dramatically better than the one that was "followed". But many (Zune strongly excluded) have become the de facto standard in their own right mostly due to the ubiquity of the Microsoft platform.
I run Vista on my PC, outfitted with 2 GB of memory, along with Microsoft Office 2007. It is slow. Microsoft Outlook crashes about twice a day. Microsoft Explorer crashes about once a day. It gets the job done but it is not particularly satisfying to use.
One of the next big battles in Microsoft's "fast follower" playbook is virtualization. VM Ware is the market leader. I have seen numerous references lately how the battle for virtualization dominance will be fought between Microsoft and VM Ware. The fact is that VM Ware has a 6 year head start. That does not sound like much of a battle to me.
Microsoft thinks of themselves as a fast follower. But they are not so fast. The Windows operating system took a decade to really find itself and is still only adequate. If Microsoft thinks it can knock off VM Ware and the iPod then I wish them luck, but I'm doubtful.
Disclosure: at the time of this posting the author was long MSFT and EMC (86% owner of VM Ware).
iPhone Innovation and the Right to a Just Reward
I am constantly amazed by the people that do not believe that someone has the right to create a product or service, and take it to market as they see fit, and then be rewarded for their success. The latest news on this front is a group seeking class action status for a suit claiming that by Apple's offering its iPhone exclusively through AT&T an illegal monopoly has been created. I might expect this in a pre-Sarkozy France, but not in America.
France attacked the iPod/iTunes product/service earlier this year along similar lines, threatening to force iTunes to be playable on any portable music device. Right now, music downloaded form iTunes can only be played on an Apple product such as an iPod or iPhone. This is exactly why so much technology innovation continues to be centered in the United States.
Individuals and companies only will take risks if they are able to reap the reward achieved through successful innovation and exection. Think about all the disruptive technologies that have been launched in the last 10 years: Google, Apple (let's call it a relaunch), VM Ware, Yahoo, Expedia, MySpace, etc.
The fact that people can take risks, create innovative and disruptive technologies, and monetize the success, is the reason these companies exist. Creating a defensible franchise by offering disruptive technologies is a big part of what free enterprise is all about. Why would anyone create a product or service if the government simply steps in and drains the moat - taking away your the ability to maximize success?
A great deal of the success in our country is due to the fact that intellectual property is respected and rewarded. Apple has chosen to market a bundled offering combining the iPod with iTunes. If the government can step in, wave its hand, and demand that the product and service be decoupled why would Apple continue to offer the product and services in France? There are plenty of digital music players and lots of ways to acquire and manage music for those players - its not like Apple has a monopoly, just a better product and service.
Similarly, how can it possibly be argued that by offering its iPhones exclusively through AT&T that an illegal monopoly exists. Apple has the right to bundle its products through whatever service providers it sees fit. Verizon, AT&T, Vodaphone all contract with the big cell phone designers and manufacturers for products that are available exclusively through their networks. The iPhone is no different.
India demanded from The Coca-Cola Company (KO) that they disclose its secret formula as a condition to manufacturing and selling its products in India. Rather than compromise its defensible franchise (moat) KO stopped doing business in India.
Rewarding innovation and the right to bundle and market those products and services in a bundled fashion creates wealth, creates jobs, and stimulates further innovation.
Disclosure: at the time of this posting the author was long Apple.
France attacked the iPod/iTunes product/service earlier this year along similar lines, threatening to force iTunes to be playable on any portable music device. Right now, music downloaded form iTunes can only be played on an Apple product such as an iPod or iPhone. This is exactly why so much technology innovation continues to be centered in the United States.
Individuals and companies only will take risks if they are able to reap the reward achieved through successful innovation and exection. Think about all the disruptive technologies that have been launched in the last 10 years: Google, Apple (let's call it a relaunch), VM Ware, Yahoo, Expedia, MySpace, etc.
The fact that people can take risks, create innovative and disruptive technologies, and monetize the success, is the reason these companies exist. Creating a defensible franchise by offering disruptive technologies is a big part of what free enterprise is all about. Why would anyone create a product or service if the government simply steps in and drains the moat - taking away your the ability to maximize success?
A great deal of the success in our country is due to the fact that intellectual property is respected and rewarded. Apple has chosen to market a bundled offering combining the iPod with iTunes. If the government can step in, wave its hand, and demand that the product and service be decoupled why would Apple continue to offer the product and services in France? There are plenty of digital music players and lots of ways to acquire and manage music for those players - its not like Apple has a monopoly, just a better product and service.
Similarly, how can it possibly be argued that by offering its iPhones exclusively through AT&T that an illegal monopoly exists. Apple has the right to bundle its products through whatever service providers it sees fit. Verizon, AT&T, Vodaphone all contract with the big cell phone designers and manufacturers for products that are available exclusively through their networks. The iPhone is no different.
India demanded from The Coca-Cola Company (KO) that they disclose its secret formula as a condition to manufacturing and selling its products in India. Rather than compromise its defensible franchise (moat) KO stopped doing business in India.
Rewarding innovation and the right to bundle and market those products and services in a bundled fashion creates wealth, creates jobs, and stimulates further innovation.
Disclosure: at the time of this posting the author was long Apple.
Saturday, October 13, 2007
America's Greatest Export
Corporations should be, and usually are, most concerned about maximizing profit for shareholders. This potential for profits encourages investment, creates jobs, moves a country form a bifurcated system of a very few rich and mostly poor to a country with more rich, a large middle class and some poor.
Free market capitalism is the most certain path to prosperity and the development of a strong middle class.
It is widely accepted that the development of a robust middle class is the most important factor in moving countries form political extremism to moderation. A strong middle class is able to effect positive changes to a country in terms of the environment. A country where there is a small super-rich class and the rest mostly poor has little catalyst for positive change.
For example, this is what is going on today in Vietnam. The explosion of capitalism there is transforming the country in a way Johnson/McNamara/Westmoreland/Diem could not. Elsewhere in the world free market capitalism is reshaping the planet.
The United State's export of free market capitalism is the greatest positive agent for change in the world.
Free market capitalism is the most certain path to prosperity and the development of a strong middle class.
It is widely accepted that the development of a robust middle class is the most important factor in moving countries form political extremism to moderation. A strong middle class is able to effect positive changes to a country in terms of the environment. A country where there is a small super-rich class and the rest mostly poor has little catalyst for positive change.
For example, this is what is going on today in Vietnam. The explosion of capitalism there is transforming the country in a way Johnson/McNamara/Westmoreland/Diem could not. Elsewhere in the world free market capitalism is reshaping the planet.
The United State's export of free market capitalism is the greatest positive agent for change in the world.
Investing In China
In many ways China is the best of all worlds for the investor.
China is not a free market (sorry, no conservative vision free market capitalism here). Companies in key industries are selected to succeed by the government. Capital investment is carefully regulated. Competition is carefully managed. The currency valuation is artificially controlled.
After a while some additional companies are permitted to operate but they are always at a disadvantage to the “chosen” companies. If the government wants a company to succeed it will succeed. Foreign competition is severely restricted. For example, in the financial sector foreign competitors are just now being allowed to enter the market on a limited basis. If you are the chosen company in a sector then you have a huge head start in terms of market share, brand development and pricing power. This is great for the investor, not great for the consumer.
Right now I continue to be invested in China Life Insurance and China Mobile. They are the chosen companies in their respective industries. For a long time China Life was the only life insurance company allowed by the government to operate in the country and they were able to build a massive, dedicated direct sales network.
I have decided to invest in the growth of Chinese consumerism rather than China’s export economy. A bubble is forming in the Chinese markets, but that bubble could continue to inflate for some time.
Even with the strong run up in these stocks the financial ratios are not out of whack for these two stocks. Actually when the correction occurred in August both of these stocks came down quite a bit. China Life is worrisome in that a substantial part of its earnings are derived from investment gains in an overheated market. However, China Life is the dominant provider of a product that is very attractive to the emerging middle class.
China Mobile has such a dominate position in an underserved market it is hard to see it not going much higher in the long term. They have been very successful in adding value added services such as text messaging and music downloads to their customer's talk time. With 3G on the horizon this story will only get better in terms of revenue per user.
None of this means that financial valuations and other traditional measures of evaluation should not be employed when considering these stocks. There is rampant speculation in Shanghai 'A' shares and this cannot be overlooked. But there are certainly advantages to investing in a somewhat rigged market.
Disclosure: at the time of this posting the author was long CHL and LFC.
China is not a free market (sorry, no conservative vision free market capitalism here). Companies in key industries are selected to succeed by the government. Capital investment is carefully regulated. Competition is carefully managed. The currency valuation is artificially controlled.
After a while some additional companies are permitted to operate but they are always at a disadvantage to the “chosen” companies. If the government wants a company to succeed it will succeed. Foreign competition is severely restricted. For example, in the financial sector foreign competitors are just now being allowed to enter the market on a limited basis. If you are the chosen company in a sector then you have a huge head start in terms of market share, brand development and pricing power. This is great for the investor, not great for the consumer.
Right now I continue to be invested in China Life Insurance and China Mobile. They are the chosen companies in their respective industries. For a long time China Life was the only life insurance company allowed by the government to operate in the country and they were able to build a massive, dedicated direct sales network.
I have decided to invest in the growth of Chinese consumerism rather than China’s export economy. A bubble is forming in the Chinese markets, but that bubble could continue to inflate for some time.
Even with the strong run up in these stocks the financial ratios are not out of whack for these two stocks. Actually when the correction occurred in August both of these stocks came down quite a bit. China Life is worrisome in that a substantial part of its earnings are derived from investment gains in an overheated market. However, China Life is the dominant provider of a product that is very attractive to the emerging middle class.
China Mobile has such a dominate position in an underserved market it is hard to see it not going much higher in the long term. They have been very successful in adding value added services such as text messaging and music downloads to their customer's talk time. With 3G on the horizon this story will only get better in terms of revenue per user.
None of this means that financial valuations and other traditional measures of evaluation should not be employed when considering these stocks. There is rampant speculation in Shanghai 'A' shares and this cannot be overlooked. But there are certainly advantages to investing in a somewhat rigged market.
Disclosure: at the time of this posting the author was long CHL and LFC.
Petreaus Congressional Testimony Awards
I had the chance to watch some of the hearings on Capital Hill and some of the aftermath. Here are the awards for Congressional good, bad and ugly. General Petraeus is considered the best and brightest leader in the U.S. military. He literally wrote the book on counterinsurgency for the U.S. forces. He is quite impressive and I think gave well thought out testimony that showcased both the good and the bad.
Biggest Blowhard Award – John Kerry: gave long and tortured analogy questioning General Petreaus’ integrity by comparing him to General Westmoreland testifying before Congress in 1967. For John Kerry it is always about his hatred of the U.S. as seen through the lens of Viet Nam. Oh yeah, he threw McNamara in there too.
Most Articulate Blowhard Award – Barak Obama, you’ve got to admit, he’s smooth. I think he might of originally been against the war. Oh that’s right, he’s told us 6,000 times!
Worst Ad Hominem Attack Award – Tie - Hillary Clinton and Harry Reid: both called General Petraeus a liar.
Political Theatre Trumping Information Gathering Award – Every member of the House Foreign Affairs Committee: when the camera panned out every single Congressman had left by the time the last House Member was due to speak/question.
Most Unstable Rant Award – Barbra Boxer: went on a wild rant that used up all of her “questioning time”. It was complete with an avalanche of presentation boards. She crammed a 20 minute presentation into 5 minutes attacking everything about everything, aids frantically putting up and taking down presentation materials. Many of the Congressional members ran out of time but the Chairman always allowed General Petraeus or Ambassador Crocker to answer, except this time. The Chairman looked at General Petraeus and said, “General, why don’t you just respond to this one in writing later”.
Most Incoherent Award – Tie - Senators Kennedy and Byrd: You could only see the top of Senator Byrd’s head as he leaned over his speech while an aid reached over to move the microphone as his head bobbed around. It’s a long time since his spry days as a member of the Klu Klux Klan. Kennedy was, well Kennedy.
Wackiest Protester Award – There was a collection of protesters, all middle age women, that were wearing pink crowns that looked like they were cut out of pink construction paper. Periodically one of them would stand up and start loudly yelling something unintelligible. As the Capital Police would drag the protester out of the committee room she would yell at the top of her lungs, “AHHHHHHH, AHHHHHH…” I’m not sure they helped their cause as much as they think they did.
Most Irrelevant Political Theatre Award – Russ Feingold: demanded that General Petraeus provide his views and perspective and the allocation of global resources in the war on terror in Africa, Afganistan and other far flung parts of the world. When General Petraeus patiently explained that his theatre of operations was Iraq and he was not in a position to comment on these global issues Senator Feingold made a loud and exasperated display of accusing General Petraeus of refusing to provide relevant testimony.
Strongest Preemptive Attack Award – Carl Levin: as Chairman, read a long statement discrediting all parts of General Petreaus’ testimony before the General even gave his testimony.
Goofiest Smirk Award – Joe Biden: he always wins this one.
Most Bitter Award – Hagel: what is the chip this guy has on his shoulder?
Most Despicable Ad Hominem Attack Award – MoveOn.org: for calling General Petraeus a traitor to his country.
Liberal Media “Friends & Family Rate” Award – The New York Times: the regular rate for a full page ad in the NYT’s is $182,000. It was disclosed today that the rate MoveOn.org was charged for the “General Betray Us” ad was $65,000, an enormous discount. Hummm….
Best Personal Reminiscence Award – Senator Webb: rambled on and on about his personal military service in the Marines, his journalistic experiences in the Middle East, and his son’s fighting in Anbar province last year. I don’t remember if he actually ever asked a question.
Ineffective Democratic Spin Machine Award – Dem spin machine: accused Petreaus of “cherry picking” statistics to paint a positive picture of the troop surge. They said that he did not testify about the high rate of unemployment in Iraq, the fact that many legislators have resigned, that there is still limited electrical power, etc. Huh? It is General Petaeus. He is there to provide an update on the impact of the troop surge, not report on mega-watts of electricity.
Biggest Misinformation Award – General Petreaus refuted an urban political myth that the U.S. is arming the local tribes in the provinces. Emphatically not true.
Biggest Blowhard Award – John Kerry: gave long and tortured analogy questioning General Petreaus’ integrity by comparing him to General Westmoreland testifying before Congress in 1967. For John Kerry it is always about his hatred of the U.S. as seen through the lens of Viet Nam. Oh yeah, he threw McNamara in there too.
Most Articulate Blowhard Award – Barak Obama, you’ve got to admit, he’s smooth. I think he might of originally been against the war. Oh that’s right, he’s told us 6,000 times!
Worst Ad Hominem Attack Award – Tie - Hillary Clinton and Harry Reid: both called General Petraeus a liar.
Political Theatre Trumping Information Gathering Award – Every member of the House Foreign Affairs Committee: when the camera panned out every single Congressman had left by the time the last House Member was due to speak/question.
Most Unstable Rant Award – Barbra Boxer: went on a wild rant that used up all of her “questioning time”. It was complete with an avalanche of presentation boards. She crammed a 20 minute presentation into 5 minutes attacking everything about everything, aids frantically putting up and taking down presentation materials. Many of the Congressional members ran out of time but the Chairman always allowed General Petraeus or Ambassador Crocker to answer, except this time. The Chairman looked at General Petraeus and said, “General, why don’t you just respond to this one in writing later”.
Most Incoherent Award – Tie - Senators Kennedy and Byrd: You could only see the top of Senator Byrd’s head as he leaned over his speech while an aid reached over to move the microphone as his head bobbed around. It’s a long time since his spry days as a member of the Klu Klux Klan. Kennedy was, well Kennedy.
Wackiest Protester Award – There was a collection of protesters, all middle age women, that were wearing pink crowns that looked like they were cut out of pink construction paper. Periodically one of them would stand up and start loudly yelling something unintelligible. As the Capital Police would drag the protester out of the committee room she would yell at the top of her lungs, “AHHHHHHH, AHHHHHH…” I’m not sure they helped their cause as much as they think they did.
Most Irrelevant Political Theatre Award – Russ Feingold: demanded that General Petraeus provide his views and perspective and the allocation of global resources in the war on terror in Africa, Afganistan and other far flung parts of the world. When General Petraeus patiently explained that his theatre of operations was Iraq and he was not in a position to comment on these global issues Senator Feingold made a loud and exasperated display of accusing General Petraeus of refusing to provide relevant testimony.
Strongest Preemptive Attack Award – Carl Levin: as Chairman, read a long statement discrediting all parts of General Petreaus’ testimony before the General even gave his testimony.
Goofiest Smirk Award – Joe Biden: he always wins this one.
Most Bitter Award – Hagel: what is the chip this guy has on his shoulder?
Most Despicable Ad Hominem Attack Award – MoveOn.org: for calling General Petraeus a traitor to his country.
Liberal Media “Friends & Family Rate” Award – The New York Times: the regular rate for a full page ad in the NYT’s is $182,000. It was disclosed today that the rate MoveOn.org was charged for the “General Betray Us” ad was $65,000, an enormous discount. Hummm….
Best Personal Reminiscence Award – Senator Webb: rambled on and on about his personal military service in the Marines, his journalistic experiences in the Middle East, and his son’s fighting in Anbar province last year. I don’t remember if he actually ever asked a question.
Ineffective Democratic Spin Machine Award – Dem spin machine: accused Petreaus of “cherry picking” statistics to paint a positive picture of the troop surge. They said that he did not testify about the high rate of unemployment in Iraq, the fact that many legislators have resigned, that there is still limited electrical power, etc. Huh? It is General Petaeus. He is there to provide an update on the impact of the troop surge, not report on mega-watts of electricity.
Biggest Misinformation Award – General Petreaus refuted an urban political myth that the U.S. is arming the local tribes in the provinces. Emphatically not true.
Folsom Street Blues
The annual Folsom Street Festival in San Francisco is upon us once more. It is promoted as the largest homosexual sadomasochism festival in the world – and a family appropriate event. It is expected to attract 300,000 participants. It officially sanctioned by the city of San Francisco and is partly funded with city dollars that are collected by a 14% hotel tax. That means that everyone who travels to San Francisco and stay at a hotel is helping finance the festival through public tax dollars. The festival includes bondage demonstrations, people being impaled by metal hooks with chains attached, whipping demonstrations and lots of other festival fun.
This year’s official promotional poster for the event is a depiction of the Da Vinci’s Last Supper. But instead of Jesus and his disciples the scene is populated by half naked men and women in sadomasochistic leather gear. Bread and wine are replaced by sex toys. The proud festival sponsors’ logos are displayed across the bottom. In this country they have the right to the lifestyle they lead. But is this sort of gratuitous offense really necessary?
This all takes place in Nancy Pelosi’s district, the current Speaker of the House, and leader of the Democratic congressional majority. At a recent news conference a brave reporter asked Speaker Pelosi if it was fair to have people staying in San Francisco hotels pay for an event that is highly offensive to many of them? The intrepid reporter also asked if she considered the Last Supper poster damaging to Christians and whether she personally considered it offensive?
Speaker Pelosi did not answer the question of whether she found it offensive. She did state it was not damaging to Christians and that she supported it as a matter of free speech. OK, I agree that people can say what they want as a “matter of free speech” even if it is stupid or offensive. But here is the real point of this issue. What if the tables were turned and a promoter of a Christian event published something that was equally offensive to the homosexual sadomasochistic community? I frankly can’t think of what could that could be but let’s assume it is possible.
The howl of rage from the liberals would be deafening. Nancy Pelosi and Harry Reid would hold a press conference denouncing the “haters”. There would be speeches in the congressional well by democrats about intolerance – condemning the narrow minded homophobes. Reverend Jackson and Al Sharpton would march in protest. And there is the double standard. It is OK to attack, satirize, or otherwise offend the Christian community but not the other way around. It goes to the fact that the group most intolerant to a broad and open discussion of ideas and free speech is the liberal community. Free speech is only tolerated if it subscribes to the liberal catechism.
I guess the Christians are an easy target to attack because they don’t shoot back (and I mean with guns, not verbally). Maybe next year the Folsom Street Festival can publish a brutally offensive satire of Mohammad. That might be the end of the festival as it goes up in a mushroom cloud after a Fatwa sanctioning it’s destruction is issued. But at least the festival would have exercised their right of free speech!
This year’s official promotional poster for the event is a depiction of the Da Vinci’s Last Supper. But instead of Jesus and his disciples the scene is populated by half naked men and women in sadomasochistic leather gear. Bread and wine are replaced by sex toys. The proud festival sponsors’ logos are displayed across the bottom. In this country they have the right to the lifestyle they lead. But is this sort of gratuitous offense really necessary?
This all takes place in Nancy Pelosi’s district, the current Speaker of the House, and leader of the Democratic congressional majority. At a recent news conference a brave reporter asked Speaker Pelosi if it was fair to have people staying in San Francisco hotels pay for an event that is highly offensive to many of them? The intrepid reporter also asked if she considered the Last Supper poster damaging to Christians and whether she personally considered it offensive?
Speaker Pelosi did not answer the question of whether she found it offensive. She did state it was not damaging to Christians and that she supported it as a matter of free speech. OK, I agree that people can say what they want as a “matter of free speech” even if it is stupid or offensive. But here is the real point of this issue. What if the tables were turned and a promoter of a Christian event published something that was equally offensive to the homosexual sadomasochistic community? I frankly can’t think of what could that could be but let’s assume it is possible.
The howl of rage from the liberals would be deafening. Nancy Pelosi and Harry Reid would hold a press conference denouncing the “haters”. There would be speeches in the congressional well by democrats about intolerance – condemning the narrow minded homophobes. Reverend Jackson and Al Sharpton would march in protest. And there is the double standard. It is OK to attack, satirize, or otherwise offend the Christian community but not the other way around. It goes to the fact that the group most intolerant to a broad and open discussion of ideas and free speech is the liberal community. Free speech is only tolerated if it subscribes to the liberal catechism.
I guess the Christians are an easy target to attack because they don’t shoot back (and I mean with guns, not verbally). Maybe next year the Folsom Street Festival can publish a brutally offensive satire of Mohammad. That might be the end of the festival as it goes up in a mushroom cloud after a Fatwa sanctioning it’s destruction is issued. But at least the festival would have exercised their right of free speech!
Presidential "pass it on": A Historical Retrospective
http://news.yahoo.com/s/ap/20071004/ap_on_go_pr_wh/bush_future_presidents_2
I recently saw this article (or is it an op-ed piece? - it's hard to tell anymore) critical of President Bush for not solving problems but "passing them on" to his successor. Given this article on the Bush Administration a longer term retrospective is helpful in providing a historical perspective and context.
TRUMAN:
Truman got us embroiled in the Korean civil war which became unwinnable when our push north triggered the Chinese to enter the conflict. Truman passed it on to his successor, President Eisenhower. President Eisenhower had to negotiate a truce that allowed an end to the active hostilities, although we have something like 30,000 troops in South Korea to this day. More than 50,000 American troops were killed and more than 100,000 were wounded.
JOHNSON:
Johnson dramatically escalated our role in Vietnam resulting in the death of 58,000 American soldiers and 350,000 American casualties. In total more than 5 million were killed in North and South Viet Nam with more than 4 million of these being civilians. President Johnson and McNamara illegally expanded the war into neighboring countries Laos and Cambodia.
Johnson was so devastated by his mess that he declined to run for a second term and passed on the quagmire to President Nixon. The loss of public support and key military setbacks passed on by Johnson meant that Nixon had no choice but to wind down our involvement and withdraw in disgrace from the roof of the U.S. embassy in Saigon (now Ho Chi Min City). Whether the Vietnam War accomplished anything is still being debated to this day.
CARTER:
Carter projected a weak and inept America to the world. When the Iranians seized the American hostages Carter’s only answer other than locking himself in the White House (he bizarrely refused to leave the White House and Rose Garden until the hostages were released) was to send a rescue team on a helicopter that had been patched together with salvaged parts. It crashed. The hostages were not released until Ronald Reagan was sworn in as President. Apparently Reagan’s “peace through strength” message was not lost on the Iranians.
President Carter passed on to Reagan a military that had been gutted and an economy that had been wrecked. We had the highest rate of inflation and highest interest rates of the last century. You could actually get a CD with an 18% interest rate. Reagan cut taxes to get the economy moving, which it did, got interest rates down, rebuilt the military, and brought down the Soviet Union and Iron Curtin (not bad for 8 years work).
CLINTON:
Clinton could not recognize that we were already at war with Islamic extremists and refused to respond decisively. President Clinton passed on an emboldened Al Qaeda, a revitalized Palestinian terrorist organization (President Clinton was instrumental in restoring Arafat to prominance, one of the most brutal terrorists of the last 40 years), a recession and a stock market crash to his successor. President Bush has had to clean up the mess.
BUSH:
It seems like the Republican successors are always cleaning up the Democratic President's messes. President Bush will pass on to his successor an economy that is stronger, an military that is stronger, a country that is safer than President Clinton passed on to him.
Economy:
Bush had to act aggressively to attack the recession passed on by Clinton. Bush cut income taxes to stimulate consumption (70%) of the economy) and cut capital gains taxes to stimulate investment and job creation. The result has been an economy that recovered, surged and is now headed toward a sustainable soft landing. The tax cuts have resulted in exploding federal tax revenue, translating to very low deficits as a percent of GDP. Unemployment is at an all time low.
The Democrats are proposing taxes and trade protectionism that will devastate the slowing economy if they are successful. More than 1,000 economists recently signed a letter imploring Democrats not to enact the types of protectionist measures they are threatening. I am astonished that the Democrats don't understand even the most basic principles of economics.
Nevertheless, it seems clear that Bush will "pass on" stronger economy to his successor than he inherited from Clinton.
Health Care:
Bush has proposed an elegantly simple solution to closing the health care gap by a combination of tax code changes and targeted government intervention. The Democrats won't even discuss it since it is not a government takeover of healthcare. The Democrats just passed a massive government program, which Bush vetoed, to provide taxpayer funded health care to children in families earning 400% of the poverty level. This would shift many children that currently have private health insurance to "free" government health care at the expense of the taxpayers. Bush has proposed $5B in additional funding to cover all the children that are in poverty, but the Democrats have rejected this proposal. In the Democrats' view just covering the children that need it does not provide as much political hay as forcing Bush to act responsibly and veto a bloated bill that doesn't make sense.
The bottom line: Bush has tried to address the health care problem but he has been blocked by the Democrats that will only accept a total government run solution.
Terrorism:
We’ve taken the fight to them. The rhetoric on the Democrat side has changed significantly since the Petreaus hearings, as they understand that the military success of the surge means they have to give Bush more time for a political solution to develop. The Bush Administration mismanaged the war for too long but is now doing the right things. We still have troops in the western U.S. (Indian Wars), South Korean (Korean War), and Japan and Germany (WW II). Even Hillary is saying that U.S. troops will be in Iraq for an extended period of times. Personally I think we could do worse than having a substantial military force in the most consequential region of the world today.
Energy:
Bush has continued to aggressively promote alternative energy sources. Bush has also realistically promoted all the things that the Democrats reject: responsible drilling on the continental shelf, drilling in the arctic wilderness (where no human will ever go otherwise), clean coal, nuclear, etc. Bush's combined renewable energy proposals and realistic traditional energy policies provide a well thought out and realistic solution.
The Democrats solution? No nukes, no coal, no drilling, no wind farms near wealthy liberal neighborhoods. Instead, their "ace in the hole" is corn-based ethanol which takes more energy to create than it provides. Plus, at best, it is a drop in the proverbial bucket. This policy has driven corn and other agriculture prices through the roof. Food generally, and beef specifically, have seen huge increases.
The Democrats energy policy is essentially a regressive tax on the poor without solving the energy problem. The bottom line is that the Democrats are basically ignoring the problem and proposing unrealistic solutions. The GOP is dealing with reality and proposing balanced, responsible solutions.
All in all, I'd have to say that the Bush Administration stacks up pretty favorably when it comes to "passing it on".
I recently saw this article (or is it an op-ed piece? - it's hard to tell anymore) critical of President Bush for not solving problems but "passing them on" to his successor. Given this article on the Bush Administration a longer term retrospective is helpful in providing a historical perspective and context.
TRUMAN:
Truman got us embroiled in the Korean civil war which became unwinnable when our push north triggered the Chinese to enter the conflict. Truman passed it on to his successor, President Eisenhower. President Eisenhower had to negotiate a truce that allowed an end to the active hostilities, although we have something like 30,000 troops in South Korea to this day. More than 50,000 American troops were killed and more than 100,000 were wounded.
JOHNSON:
Johnson dramatically escalated our role in Vietnam resulting in the death of 58,000 American soldiers and 350,000 American casualties. In total more than 5 million were killed in North and South Viet Nam with more than 4 million of these being civilians. President Johnson and McNamara illegally expanded the war into neighboring countries Laos and Cambodia.
Johnson was so devastated by his mess that he declined to run for a second term and passed on the quagmire to President Nixon. The loss of public support and key military setbacks passed on by Johnson meant that Nixon had no choice but to wind down our involvement and withdraw in disgrace from the roof of the U.S. embassy in Saigon (now Ho Chi Min City). Whether the Vietnam War accomplished anything is still being debated to this day.
CARTER:
Carter projected a weak and inept America to the world. When the Iranians seized the American hostages Carter’s only answer other than locking himself in the White House (he bizarrely refused to leave the White House and Rose Garden until the hostages were released) was to send a rescue team on a helicopter that had been patched together with salvaged parts. It crashed. The hostages were not released until Ronald Reagan was sworn in as President. Apparently Reagan’s “peace through strength” message was not lost on the Iranians.
President Carter passed on to Reagan a military that had been gutted and an economy that had been wrecked. We had the highest rate of inflation and highest interest rates of the last century. You could actually get a CD with an 18% interest rate. Reagan cut taxes to get the economy moving, which it did, got interest rates down, rebuilt the military, and brought down the Soviet Union and Iron Curtin (not bad for 8 years work).
CLINTON:
Clinton could not recognize that we were already at war with Islamic extremists and refused to respond decisively. President Clinton passed on an emboldened Al Qaeda, a revitalized Palestinian terrorist organization (President Clinton was instrumental in restoring Arafat to prominance, one of the most brutal terrorists of the last 40 years), a recession and a stock market crash to his successor. President Bush has had to clean up the mess.
BUSH:
It seems like the Republican successors are always cleaning up the Democratic President's messes. President Bush will pass on to his successor an economy that is stronger, an military that is stronger, a country that is safer than President Clinton passed on to him.
Economy:
Bush had to act aggressively to attack the recession passed on by Clinton. Bush cut income taxes to stimulate consumption (70%) of the economy) and cut capital gains taxes to stimulate investment and job creation. The result has been an economy that recovered, surged and is now headed toward a sustainable soft landing. The tax cuts have resulted in exploding federal tax revenue, translating to very low deficits as a percent of GDP. Unemployment is at an all time low.
The Democrats are proposing taxes and trade protectionism that will devastate the slowing economy if they are successful. More than 1,000 economists recently signed a letter imploring Democrats not to enact the types of protectionist measures they are threatening. I am astonished that the Democrats don't understand even the most basic principles of economics.
Nevertheless, it seems clear that Bush will "pass on" stronger economy to his successor than he inherited from Clinton.
Health Care:
Bush has proposed an elegantly simple solution to closing the health care gap by a combination of tax code changes and targeted government intervention. The Democrats won't even discuss it since it is not a government takeover of healthcare. The Democrats just passed a massive government program, which Bush vetoed, to provide taxpayer funded health care to children in families earning 400% of the poverty level. This would shift many children that currently have private health insurance to "free" government health care at the expense of the taxpayers. Bush has proposed $5B in additional funding to cover all the children that are in poverty, but the Democrats have rejected this proposal. In the Democrats' view just covering the children that need it does not provide as much political hay as forcing Bush to act responsibly and veto a bloated bill that doesn't make sense.
The bottom line: Bush has tried to address the health care problem but he has been blocked by the Democrats that will only accept a total government run solution.
Terrorism:
We’ve taken the fight to them. The rhetoric on the Democrat side has changed significantly since the Petreaus hearings, as they understand that the military success of the surge means they have to give Bush more time for a political solution to develop. The Bush Administration mismanaged the war for too long but is now doing the right things. We still have troops in the western U.S. (Indian Wars), South Korean (Korean War), and Japan and Germany (WW II). Even Hillary is saying that U.S. troops will be in Iraq for an extended period of times. Personally I think we could do worse than having a substantial military force in the most consequential region of the world today.
Energy:
Bush has continued to aggressively promote alternative energy sources. Bush has also realistically promoted all the things that the Democrats reject: responsible drilling on the continental shelf, drilling in the arctic wilderness (where no human will ever go otherwise), clean coal, nuclear, etc. Bush's combined renewable energy proposals and realistic traditional energy policies provide a well thought out and realistic solution.
The Democrats solution? No nukes, no coal, no drilling, no wind farms near wealthy liberal neighborhoods. Instead, their "ace in the hole" is corn-based ethanol which takes more energy to create than it provides. Plus, at best, it is a drop in the proverbial bucket. This policy has driven corn and other agriculture prices through the roof. Food generally, and beef specifically, have seen huge increases.
The Democrats energy policy is essentially a regressive tax on the poor without solving the energy problem. The bottom line is that the Democrats are basically ignoring the problem and proposing unrealistic solutions. The GOP is dealing with reality and proposing balanced, responsible solutions.
All in all, I'd have to say that the Bush Administration stacks up pretty favorably when it comes to "passing it on".
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