Table On-Topic Summary - 14-Aug-2002
A compilation of this board's financial/economic posts From 40428 to 40499

Post  40428  by  pmcw       Reply
Bri, Certainly you're making sense and you might be right. However, I just don't see businesses changing their strategic spending in this economy for the price of a slight percentage drop in the interest rate. We're not talking the change between an interest cost of $10 to $5 per hundred, we're talking two to four bits per hundred. And, if it is injected now, there is little left for later.

Actually, the segment the cut might help (or the opposite) is banking. I have no idea how a quarter point or so would affect the complex derivative contracts. Remember, AG does take this into consideration (remember LTCM). Simplistically, I would think a better spread would give them some room to breath, but if this were the case, I'll bet we would have seen it today.

Maybe slowing the bleeding would actually be a bad thing too. I think that's something to really consider. We aren't going to get stimulus to get the assets to work so we need to lower the cost at which they are carried on the balance sheets. In other words, the pumps are being primed with money by even the likes of Buffett just waiting for the bankruptcies to pour cheap assets into the market. Putting assets to work will put people to work.

Bri, it's simply hard to say, but I certainly don't feel threatened by inflation and I don't see that AG is either. Due to this I have to think that he is basing his position on one or more of the following:

1) It wouldn't make any difference now due to the economy, pending potential of war, and the pending anniversary of 9/11 businesses simply aren't going to accelerate spending unless they are given a specific stimulus that is significant (ie. S.88 includes a credit up to 20% for second generation broadband).

2) A drop today might have had an adverse effect on derivative contracts at the big banks.

3) A drop today coupled with a negative change in bias might has sent a sharply negative message to the consumer and actually slowed spending. Also remember that many rely on fixed income instruments for a considerable amount of their money and a cut would reduce the yield and therefore the money they have available to spend. Therefore, it could negatively effect the spending of some and scare others at the same time.

4) Slowing the consolidation of assets (write down and liquidation via reorganization) might actually prolong the pain. Sometimes ya just need to get the gas off your stomach and a big loud burp is what it takes.

Bottom line: Batten down the hatches and be ready with some dry powder. Don't buy anything that you aren't willing to hold very long term and avoid anything that will be torn to shreds by a soft economy. IMO, the first sectors for recovery will be those that either offer cheaper ways to do what we're already doing and those that sell productivity tools.

Regards, pmcw

Post  40429  by  lkorrow       Reply
Thanks Ark, yes, another time, please. :-) Do you do this for a living? You seem very engaged . . .

I have had a couple of clunkers, I know what you mean. But not on the scale of some. Yes, a perilous market!

Post  40430  by  pmcw       Reply
A poster who lurks mostly on Table wrote me this evening asking several general questions I believe are on many of our minds. Due to this, I asked him if I could respond here.

This poster had lost his primary job, but replaced it recently. The new job is different and sends home a smaller check, but like most of us parents, his concern was not for himself; it was for his two kids in college. He simply wanted to know where they would find jobs that would be fulfilling and secure.

My advice is simple, but it may not be the instant pudding recipe some want to hear. Nothing external is for sure. Therefore, fulfillment and security must come from within. Table is a venue to discuss investing and the economy, but I feel that most here realize the money we hope to make is a means rather than an end. Those who don't are doomed to lead a hollow and unfulfilled life.

There's no doubt that I could list dozens of careers that will demand talented workers during the next half century; we could all do that. However, those attracted to a career just because it is the coming thing, high paying, in demand and full of "opportunity" often discover they gave up far too much for what they thought they wanted.

I suggest two simple things to young people who approach me with questions similar to what this poster asked. First, follow your dreams. If you don't have any, find some. Second, learn business. In our society, knowing business is just as necessary as it was for a pioneer to know how to ride a horse. If he didn't know how to ride, he had little choice but to follow the path of others who did.

Today, if you kids want to be butchers, bakers or candlestick makers it matters little if they understand the fundamentals of business. I've had the good fortune to be associated with many young artists. The concept of learning business is inherently foreign to them, but I press the point anyway. I tell them that if they don't learn business someone else will eventually be telling them what to paint or draw and that someone probably has never held a brush in their life. The thought of a suit telling an artist what to do is usually just enough to stop them in their tracks and make them rethink their priorities.

Beyond these two fundamental lessons, teach your kids the joy of learning. If they learn this, the world will constantly amaze them rather than simply frustrate or confound them. They will learn to adapt and find opportunity where others say there is none. Also teach them the basic tenants of saving and encourage them to "spend" their money on assets rather than liabilities. This simple lesson can make millions of dollars of difference while it actually reduces stress.

My answer is probably not what this poster was expecting, but if it was it wouldn't really be worth saying. We all know what industries will be in demand, but these are hands undealt. If ones knows business and finds something they love to do, they are ready no matter if they're dealt four aces or simply random cards. This leads to fulfillment and security that is independent of wealth or the trappings of what is often mistakenly called success.

Regards, pmcw

Post  40431  by  lkorrow       Reply
Briguy, you made sense to me, except for the last part about would you rather borrow $100 for $105 or $110. Clearly $105, but are companies lining up to borrow with little demand? I was hoping for a further rate cut for borrowing, yes, but for refinancing even more. With so many companies billions in debt and cash flow slowing, wouldn't this help? I suppose there's a long vs. short term debt issue there. Is there no impact on long term rates as well, shouldn't this bring them down a bit?

Post  40432  by  pmcw       Reply
Ironically, no matter what the economy decided to do after the bubble we would be facing consolidation today. Even if the Internet was built out through the last mile and we all had multi-megabit connections and TriMedia to our desk, there would be no way around consolidation. Even if businesses had gigabit Ethernet availability with bandwidth on demand, IP phones and video conference capabilities were common, consolidation was inevitable. Consolidation is simply a fact of life as technology evolves or stalls. Consolidation happens!

As we were caught up in the Internet craze of the late nineties and early in the year 2000, many didn't stop to consider that someone would need to spend money with all of these new businesses and, if they did, many old businesses would no longer have customers. After all, there is only so much money, so many people and so many needs to fulfill. Well, I guess a few thought Amazon would put every neighborhood bookstore out of business, but that wasn't reality and was really a very small part of the much larger picture.

Certainly some businesses were focused on earning their keep via hyper improvements in productivity (in other words, displacing labor), but others were dependant on putting the incumbent out in the street. There were a series of winner take all plays going on that the general public still can't seem to grasp. Consider that if one company is delivering local phone, long distance, cable and broadband Internet to your door it means that the two three or four companies currently providing the services will have to consolidate or die. That's where we were heading and that's where we will eventually end up.

You see, it was a survivor game played in real time with real money. Those playing knew full well they were fighting for their lives. The perfect storm of the Internet, cheap money and the Telecom Act of 1996 converged to create a massive flurry of inefficient spending. Everyone thought that the first one there was going to get the prize and nothing would be left for number two.

Building the fat long pipes was relatively easy; all it took was money and right of way. However, the fat pipe people didn't own the keys to the city and they also neglected to consider that those who did wouldn't be to quick to risk their domain. The Bells were already making a play to thwart local competition yet comply with enough of the new rules to start selling long distance yet again. They didn't need or really want to hook up broadband and let yet another potential barbarian inside the gates. "One at a time" they cried while they continued to thrash the new CLEC's and watch as these upstarts ran out of cash. The Bells knew how to play this game.

That's right, no matter how it turned out, consolidation was most certainly in the cards.

Like we're seeing today, there would have been failures and fire-sales. There would have been desperate acts by desperate people trying to survive, but at the same time, there would have been healthy companies to take the spoils, absorb the assets and put them back to work with considerably less wasted time. Winners and losers rather than losers and survivors trying to eke out a living.

No matter how one slices this crumbling pie, assets need to produce in order to pay their keep. If they are on the books at a price too high to show a return, they must be written down to a point where they can provide an appropriate return. It would certainly be better to find ways to utilize these assets without these drastic measures, but that's simply not in the cards. Due to this, we need to hold our nose, take our medicine and hope the regulators have enough good sense to allow the assets to be put to work once their cost basis is adjusted.

Regards, pmcw

Post  40433  by  lkorrow       Reply
Briguy, that was a good one. How about a Congressium followup? :-)

Post  40435  by  Briguy       Reply
IBM just announced 15,000 job cuts...

UAL is slashing 7000 jobs...

JPM is ready for collapse...

Looks like Bush is getting ready to go to war much sooner now...

By the way, I'm not really PRO-WAR. But what is the alternative? Lesser of the two evils comes into play here- and I don't like either.

Don't you all just love it? So much good news to share? LOL!

Post  40437  by  ljpit       Reply
Decomposed, looks to me it takes another 10 months before we reach naz 500, which seems to be goal.


Post  40440  by  pmcw       Reply
lj, I've been maintaining a similar chart for quite some time as well. This is what lead me to post about the dangers of breaking the five year support in June (happened in July). Actually, if the charts continue to match, we'll bottom around 677 in January.

I think the difference in presentation is that I set the zero day for my chart on the day the respective markets peaked. I think that provides the most accurate perspective. Using peak day as the zero day one can evaluate both sides of the slope for similarity.

Regards, pmcw

Post  40441  by  pacemakernj       Reply
Linda, maybe they'll just have to cut spending. Can you imagine if the Federal government limited speding increases to no more than the rate of inflation! Just think of how much money we would have today if we practiced that simple policy over the last 10 years. Pace.

Post  40442  by  Arkural       Reply
pmcw-Pcl-What's your opinon in light of UBS's est?

Post  40443  by  lkorrow       Reply
Pace, Yes, budget caps indexed to inflation would have been nice. I guess the argument against it would have been the need for Cold War spending. I'm in favor of flat budgets until efficiencies are achieved, with exceptions. I think they're making some strides in that direction, like online filing of income taxes, but have a ways to go. Now, though, we need spending. Speaking of which, govt spending on PCs and servers is about to skyrocket, according to CNBC. I guess we've heard a lot about the dated PCs and such at some of the agencies . . .

Post  40445  by  pmcw       Reply
Ark, I think PCL is a very well run business. Like all businesses, they will go through strong and weak markets. However, like all well run businesses, they will emerge from each weak market stronger and thereby improve their value incrementally over time.

I think the current price of PCL is an over reaction to the sentiment that real estate is inflated. I think some of this inflation is carried on their books, but not to any significant extent. I like PCL from virtually every perspective from their conservation plan to their plans for alternate use and liquidation strategy if/when land has intrinsic value well beyond what it is worth within the PCL model. Therefore, my position is that investors looking for a long term exposure to a well managed REIT that has a solid model for using their assets look to PCL as a good potential investment. This opinion was reinforced by their recent presentation.

For a better view of PCL I encourage you to evaluation their long term performance through both strong and weak markets.

Regards, pmcw

Post  40446  by  Briguy       Reply
Anyone looking for an undervalued stock?

Check out SANM

Stock is trading in the high $2's right now. I just bought 700 shares at $2.95. I figure the risk/reward ratio is definately in the favor of going long. May have to wait a quarter or two to see substantial gains, but it will be worth the wait.

If it drops further, I am going to add more. EMS stocks have been hammered like CLS, SANM, FLEX etc and that is the time to go long- when no one wants them.

Post  40447  by  Decomposed       Reply
re: Nasdaq/1930s Comparison


You're right, in that the chart comparison implies that the Nasdaq will fall further. I used the words "about bottomed" because the chart shows that in the 1930s, the Dow quickly returned to this level (chartwise) after it actually did bottom. If we stick to the curve shown on the chart, stocks purchased from this point forward, will fall a little more, but will prove to be good investments before long.

A flaw in this reasoning, though: The chart reflects the Dow, not the market as a whole. I suspect that in the 1930s, the market as a whole did not do as well as the Dow. The Dow consists of larger -- presumably more robust -- companies. I believe that during the Great Depression, a disproportionate number of smaller companies went bust.

Someone correct me if I'm wrong.

Post  40448  by  tinljhtkh       Reply
This CEO certification signoff

is starting to remind me of last minute tax filers on April 15th!

If they were all that proud of their accounting why had only 330 or so filed before the last day? Are they all going to make it by the 4:30 ET deadline, or are they headed for the border as we speak? If this kind of delay is affecting companies with 1.2 billion of revenues and above, I can't even imagine what under 1.2 billion might look like!



Post  40449  by  tinljhtkh       Reply
Sorry, that's 5:30 ET instead of 4:30!


Post  40450  by  Briguy       Reply
Time to invest in EMS stocks...

A clip from Merrill Lynch from their report 2 weeks ago...

Time to Invest in EMS

We believe the stocks of the leading EMS providers are
poised for significant upside potential in the coming 12 months after being beaten and bruised from the aftermath of the steepest and most vicious decline in the history of the technology world.

After getting off to a rocky start in 2002, the sentiment
toward the EMS providers has become even more
pessimistic in recent weeks and the stocks have plummeted
to levels not seen by certain companies since 1998 or
earlier. In other words, we believe investors have taken a
“sell it at any price” mentality, a sign that the group has
finally reached the capitulation phase.

Today, the MerrillLynch North American (MLNA) EMS Universe trades at just 0.45x trailing-twelve-month revenue versus historical averages (from 1994 to present) of 1.0-1.2x. This
represents a trough valuation level for the group.

As the stocks continue to tumble, we believe business
appears to be leveling off and revenue likely troughed in
the June quarter. Picking the exact bottom in the stocks is
nearly impossible, however, we believe justifying the
purchase of the EMS stocks at this level is reasonable and
we expect most to trade at much higher levels over the
next year or two.

We believe the coming months offer investors an ideal entry point with limited downside risk. Already in 2002, the EMS stocks have plummeted by about 60% versus a 32% fall for the NASDAQ Composite and we believe valuations have become attractive.

The June quarter results for the EMS industry did not live
up to its cataclysmic past as earnings and revenue were a
tad better than we anticipated, while the overall outlooks
were somewhat less gruesome compared to the past few
quarters. With that said, our estimate changes for the
September quarter were a mixed bag, but in general, our
sales numbers were tweaked a bit lower and earnings
raised a bit (about $0.01) for some due to the cost benefits
from restructuring initiatives. We have published amongst
the lowest estimates on the Street for quite some time,
therefore, our numbers did not change much but the
consensus estimates were reduced for most companies but
not to extent that we have seen in the past.

Raising Opinion on EMS Sector
After being on the sidelines and avoiding recommending
the stocks since mid-2001 with amongst the lowest
earnings estimates on the Street, we believe the time has
come to buy some of the highest quality EMS providers in
the world.

Therefore, we are raising our opinion from NEUTRAL to
intermediate-term STRONG BUY on Celestica,
Flextronics, Plexus and Sanmina-SCI and from
NEUTRAL to BUY on Jabil Circuit and Solectron.

Our more positive stance on the EMS sector is based on
our belief in the following:

• The economy has shown signs of improvement this
year and the technology sector is currently in the
bottoming phase

• Sales and margins for the MLNA EMS Universe
likely bottomed in the June quarter

• Valuations have become attractive

• The industry continues to show improving working
capital metrics and inventory-to-revenue levels
continue to decline

• We expect a record amount of outsourcing
announcements this year and this should benefit the
leading companies in 2003

• The deal structure of OEM asset agreements has
become more flexible and prices have been declining

• Restructuring efforts will provide a leaner cost
structure that should result in improved profitability

• The industry is better positioned in low-cost
manufacturing locations such as Asia

• During this downturn, the validity of the EMS
business models were proven and the companies
generated record operating cash flow

• The leading EMS providers should continue to gain
market share as OEM consolidate their supplier base

The outsourcing of manufacturing-related services is one
of the more compelling trends in the technology sector and
we continue to believe the leading EMS providers can
grow faster than their OEM customers, while also
providing investors with exposure to a diversified portfolio
of many different technologies, products and customers.
We suspect the road to recovery will not be without some
challenges along the way and one of our biggest concerns
remains how the financial crisis amongst the service
providers will play out over the next 12-24 months and the
repercussions this could have on the telecommunications
and data networking vendors...

Post  40451  by  Decomposed       Reply
Discounter Ames to close all stores

Fourth-largest retail chain calls it quits

ROCKY HILL, Conn., Aug. 14 — A year after seeking bankruptcy protection, Ames Discount Stores announced Wednesday it would close all 327 stores in the chain and wind down business.

AMES, WHICH BOUGHT Hills Stores Co. of Massachusetts in 1998, became the nation’s fourth-largest discount retail chain behind Wal-Mart, Kmart and Target. Its stores, mostly in the East and Midwest, employ about 22,000 people.

“This was a wrenching decision, but the right course to take. Continued softness in sales, combined with tightening terms and slower shipments from our suppliers, have reduced our funds availability below critical levels,” Ames chairman and CEO Joseph R. Ettore said.

Economic analysts have said the Hills-related debt created financial troubles for Ames.

In its announcement, Ames said that, subject to the approval of the Bankruptcy Court, it expected to promptly designate a liquidator to conduct “Going Out of Business” sales at all Ames store locations.

The company said stores are expected to remain open for approximately 10 weeks during the process.

Ames filed for bankruptcy last August. It had hoped to emerge from bankruptcy protection by the end of the second quarter. The discount chain already has gone through four rounds of store closings in the last several months.

Post  40452  by  Arkural       Reply
pmcw-Thanks for your reply. eom

Post  40453  by  sharonb       Reply
Briguy: I just stopped myself out of this stock for the short term. Down from 4.75 or so when this article appeared to 2.95 today. That is a pretty steep decline and to try and catch this falling knife in this environment may not be the wisest course. I like the industry and until the company stops laying off employees, it may not be such a good deal.
Best of luck and I'll be lurking and seeking a better re-entry level

(Voluntary Disclosure: Position- No Position; ST Rating- Hold; LT Rating- Strong Buy)

Post  40454  by  Decomposed       Reply
Okay, Briguy. I've joined you on SANM. (I'm not sure for how long.)

Post  40455  by  sharonb       Reply
De-compossed,wal-mart will get the customers.eom

(Voluntary Disclosure: Position- No Position; ST Rating- Hold; LT Rating- Strong Buy)

Post  40456  by  lkorrow       Reply
Agere to Cut 4,000 Jobs, Exit Optical Parts Business
By Holly M. Sanders

Allentown, Pennsylvania, Aug. 14 (Bloomberg) -- Agere Systems Inc., the communications chipmaker spun off from Lucent Technologies Inc., will eliminate 4,000 jobs and exit the fiber- optics parts business after the company forecast a sales decline.

The workforce will be reduced by 36% . . .


Post  40457  by  pmcw       Reply
Decomp, Actually the chart I based my comments on was the 1929 S&P500. Even more than today, the S&P500 accounts for the vast majority of the US market cap. There was no Wilshire 5000 Index back then so my guess is that anything simulating such would be theory rather than fact.

That aside, the bubble of 1929 was primarily a large cap industrial bubble and the bubble of 2000 was primarily NASDAQ. That is why I used the two for my analysis. However, a significant amount of the 1929 bubble was also represented by the DOW. As a result, the charts are similar and the relationship is, IMO, meaningful.

If you have a chance, you might review the special report I sent out on July 1st for more details on this contrast.

Regards, pmcw

Post  40458  by  Briguy       Reply
Collection of research on SANM...

Here you go...

Hopefully that will give you some insight on what Wall Street is saying.

Gotta run for a while.



Post  40459  by  jeffbas       Reply
tin, a comment on #40337. Your comment, "Most of your major insurance players have one other thing going for them--no debt!" is highly misleading.

Almost all insurance companies are VERY highly leveraged. By that I mean they have a very small percentage of equity (like 5%) relative to the value of their liabilities for benefits payable to policyowners. What that means is that if asset values decline much they become technically insolvent. During the savings and loan crisis era old-line Mutual Benefit Life went out of business because it had invested too much in speculative real estate development. This exposure is why most insurance companies have most of their assets invested in quality bonds and mortgages on
commercial real estate. Any company with liabilities that can last for 100 years can't afford to have an investment strategy that is oblivious to the possibility of a "100 year storm".

By the way, banks have a similar profile. I will almost never invest in either, because there is virtually no way to know whether the asset side is any good or not, and the equity is so small versus liabilities.

Post  40460  by  tinljhtkh       Reply



Post  40461  by  nacl01       Reply
Interest rates dropping

"U.S. government notes and bonds rang up a fourth winning session on Wednesday, driving benchmark yields to all-time lows.

. . .

"A 10-year Treasury note was recently up 24/32 at 103 4/32 to yield ($TNX: news, chart, profile) 3.99 percent, down 9 basis points from the previous session. This note ... has never so low a yield before.

. . .

"The 10-year Treasury yield can have important implications for the mortgage market, leaving some analysts to laud its impact in aiding an economic recovery over the shorter-term borrowing instrument used for the Fed's monetary policy."

Briguy, isn't the market rate on longer term securities more important than what the FED did (or didn't do) with the short term rates? It seems this affects mortgages and liquidity more than short term rates.

Just my thoughts,


Post  40462  by  maniati       Reply
pmcw: Investment spending & capital allocation

A few weeks ago, you were asking me about a post that I had written some time back, and I wasn't sure which one you meant. Could this be it? (From Feb 20, 2001)

Here's the text...

. . . . .

Investment Acceleration Revisited....

[My original post on investment acceleration was #18270, to which this post is a response. In it, I described how a small decrease in sales can produce a very large decrease in capital investment. I also explained how, in a steady-state boom economy, the year-over-year increases in capital spending do not fully capture the potential downside of even a mild slowdown in sales.]

I don't think there was ever much question that what we have been witnessing over the past few months is "investment acceleration" in reverse (i.e. "deceleration", or a rapid cutback in capital investment) - precisely the consequences that investment acceleration would predict when sales growth slow.

The inventory adjustments we keep hearing about are part of the investment deceleration phenomenon, but not all of it. For one thing, the increase in inventories and reduction of orders for a particular item directly affects the decisions to expand production capacity for that item. That is the TSMC story, which ECM wrote about in posts 19606 and 19637.

In addition, there is the problem of all the equipment that has already been purchased, but which was overbought because of incorrect assumptions about growth in demand. This part of the problem takes longer to adjust than does a simple inventory build-up.

So, while we might expect a V-shaped recovery from an inventory adjustment alone, I believe there is more going on here than just an inventory correction. In a few months, I believe this will become obvious when people realize that sufficient time has elapsed to adjust inventories, yet the economy is still stalled.

This is not to say that business investment is the sole cause of this downturn. As I sad in my original post, the problem is that business investment is highly susceptible to changes in demand, so we could view business investment not as a "cause", but as an "effect" of slowed sales growth, which, in turn, was caused by a number of factors, depending on the industry.

At the same time, isolating business investment as a factor is useful (to us average investors) for two reasons: first, it helps to explain how sales can still be reasonably strong when compared to a year ago, yet we still have an economic downturn (that's because even slowed growth has a multiplicative effect on business investment); and second, it sheds some light on whether the recovery will be V-shaped or otherwise. (I think it will be otherwise, but whether you agree or not, I think you have to accept the fact that we have more than just an inventory correction here; we also have lots of idle equipment.)

There was an interesting article in the Washington Post today, identifying the investment acceleration phenomenon as the primary culprit for the downturn. The article did not explicitly use that phrase, but they're talking about the same thing. The link is:

It's a long article, so here are a few excerpts:

"In trying to understand how -- and why -- the U.S. economy stalled out late last year, economists have zeroed in on one culprit: business investment in new equipment.

"In the first three months of 2000, corporate spending on equipment and software was growing at an astonishing annual rate of 21 percent, according to the Commerce Department. But by the final three months, the government estimates that the rate of corporate capital investment was falling at an annual rate of nearly 5 percent.

[I omitted a lengthy focus on the trucking and truck-manufacturing industries. -Maniati]

"And it's not just trucks and trucking. Across a wide swath of the economy, a tidal wave of business investment during the late 1990s produced similar circumstances with other heavy machinery as well as computers and telecommunications equipment. And when the degree of overcapacity suddenly became apparent last fall, business investment fell sharply, bringing the economy down with it.

"There is a hot debate...over how long the pullback in business investment will last....

"The optimistic consensus is that the economic downturn is caused primarily by a temporary excess of unsold finished goods in warehouses and retail stores....[This is the "inventory adjustment" argument, without taking any other investment deceleration into account -Maniati]

"But a growing number of economic analysts have begun to warn that the economy has more problems than a short-term inventory buildup, that the bottom has not yet been reached and that any rebound will take some time.

" 'The excess inventory of finished goods building up in warehouses and retail shelves is relatively easy to get rid of -- you slow production, lower the price and in six months it's gone,' said John Makin, an economist at the American Enterprise Institute. 'But the excess here is much deeper than that -- it's all that equipment that was bought when the stock market was booming and capital was cheap. That kind of an overhang is much more difficult to work off.'

"It was the British economist John Maynard Keynes who first noticed the exaggerated effect that business investment has on the business cycle, and the American economist Paul Samuelson [Funny, I learned about investment acceleration 25 years ago - from Samuelson's textbook! -M.] who reduced the "multiplier effect" to a set of equations. Both believed that overinvestment by businesses was a prominent feature of every boom-and-bust business cycle.

"Now, Makin and other economists see the pattern repeating itself, not only in old-economy sectors, such as trucking, but also in key high-tech sectors.

" 'Unsustainably rapid growth in knowledge-worker employment has been accompanied by an even greater excess in information-technology spending,' Stephen Roach, chief economist at Morgan Stanley Dean Witter, said last week. 'This smacks of a business sector that rushed headlong into the information age with little discipline in either hiring practices or investment spending.'

"Exhibit A in Roach's argument is the telecommunications-equipment industry, where a flood of cheap capital not only financed a build-out of high-capacity fiber and wireless networks around the country, but also encouraged more companies to enter the fray."

[There's more on fiber and telecom in the article. -M.]

Post  40464  by  oldCADuser       Reply
And Ames didn't even have to send in their CEO/CFO statements for a another month yet (due 9/17/02). This, or something similar, could become a common site. I'll bet that before they expand the reporting requirements to ALL publicly traded companies (which I think is the goal in a year or two) that we will see a bunch either go private, merge with others, or, like Ames, just throw in the towel.

Of course we have to get through today first. As of the last time I looked at the SEC list (about 15 minutes ago) there were a few big names still missing including Amgen, Caterpillar, FMC, GM, Halliburton, McDonalds, etc. One that will be interesting to watch is Enron, which technically is supposed to certify today as well (Question, do companies in bankruptcy get an extension or exemption?).


Post  40465  by  pmcw       Reply
maniati, It was along those lines, but I seem to remember it using the word "misallocation" of capital quite frequently. I do believe it was within a set of posts going back and forth between you and ECM so I guess it could have been ECM's post that stuck in my mind. However, as I recall, and as this post substantiates, you were both thinking along the same lines. Obviously these thoughts have been proven both correct and ahead of most others.

As we stand today, our central problem is under-utilized or poorly utilized (pick your term) assets. There are only two choices. Improve the utilization of assets or write them down to where the current rate of return justifies the carrying cost of the asset.

Regards, pmcw

Post  40468  by  un_pierrot1       Reply
Hi PMCW- Questions on ISIL:

1-Do you know why ISIL is being hit so hard these days?

2-Are you buying at this level?

3-Do you foresee it going much lower.

Thanks for your input


Post  40470  by  tinljhtkh       Reply

"Almost all insurance companies are VERY highly leveraged. By that I mean they have a very small percentage of equity (like 5%) relative to the value of their liabilities for benefits payable to policyowners."

There is a difference is leverage and actual debt!

Generally, the 5% figure that you refer to is known in the business as surplus! It is the amount of assets that individual companies have that are not encumbered by some obligation. Companies try to add to the surplus as often as they can as a hedge against downturns and unexpected losses.

You also need to differentiate between life insurance carriers and all others because of the assumptions, based on actuarial tables that are used, in part, to create surplus. When I worked for Metropolitan back in the very early 1980's, the got a release of assets from improvements in mortality as expressed in the commissioner’s mortality tables. Back then I think it was the 1958 standard mortality table. Met was probably able to gain the release of assets that they already had control of by proving that their mortality had improved over a long enough period of time to justify the release of these funds. Met had a choice with what to do with this windfall from their own balance sheet. At that time, their story was that they chose to increase their dividend payment (you have to remember that they were then a non-public mutual company) to their policyholders rather than apply the money to expenses such as agent compensation, which was quite low at that time!

Insurance companies do have debt in the form of cash draw down accounts and they also do issue bonds to raise money for various purposes, including expansion into new areas that they wish to invest in. The cash draw down accounts, or lines of credit, enable them to avoid liquidating long-term investments when they get into trouble or have unanticipated expenses! The Equitable of New York got into big problems a number of years ago by issuing guaranteed pension contracts using assumptions out of the 1970's that involved interest rates that were not sustainable in the later 1980's lower interest rate environment. Having to honor these contracts drew down their surplus to the point that they had to seek a "partner" to see them through. They thereby lost their independence to the French that way!

It is interesting to note the changes that came upon the life insurance business as a result of the interest rate surge that occurred from 1979 through 1982. During the interest rate bubble that happened, companies like Northwestern Mutual Life had to suspend investing as they honored loans of cash value that their high income clientele took to place at the higher interest that was so readily available at that time. People could take a loan on their cash value life insurance as rates as low as 4 percent or even less and place it in financial instruments that were paying well above 10 percent!

As a result of this kind of activity, products such as universal life were developed that made it easier for people to simply withdraw funds rather than taking loans that had to be carried on the balance sheets of the various companies even though they might never be paid back until the client became deceased! Some clients let the loans roll without even paying the interest due, eventually resulting in the contracts cashing themselves out prior to death.

The industry also got itself into a mess by using high interest rate assumptions to sell policies that they assured clients would be paid up for life after as little as 6 to 7 annual payments. As the interest rate environment decreased, companies began to send out demands for additional premium payments that their clients were not anticipating that they would receive. This is the mess that Prudential found themselves in. Complaints poured into the various state departments of insurance to the point that regulatory action had to be taken. In addition to that, Prudential woke up one morning after the 1992 hurricane swept across Homestead Florida with around a billion dollars of homeowner’s claims that they had no idea might occur!

I woke up the same morning, working for Allstate, and they had considerable more than that amount. They too seemed to have little idea of the exposure that they had developed along the Atlantic coast! This disaster led, aided by the Northridge earthquake of January 1994, to the spin off of Allstate to the independently publicly traded company that it is to this very day.

Most of the major life insurers have "gone public" in order to be able to tap funds that, as mutual companies, they could never touch! One of the major problems facing these companies is the loss of pricing power! The competition in the casualty area, in those states that do not regulate premium, has been intense and has kept premiums down, as well as reserves! Most states that regulate premium outside of the no-fault states usually do so at the expense of the insurance companies, who are constantly trying to play catch-up as they justify losses to regulators in order to try to justify their rates.

A major developing tragedy is in the life insurance sector! There is a major term insurance war that has been going on for years. Remember the penny's a day life insurance ads that we all see on television and everywhere else. Those rates are also based on an ever-expanding mortality rate and have little margin for error if a major outbreak of disease were to occur in the United States. You speak of a 100-year storm. We should remember that we are not yet 100 years away from the great influenza outbreak that occurred during the First World War. We are also still in an environment where there is no effective killer antibiotic left. The major drug companies seem to worry more about boutique diseases like high cholesterol, impotence, and the like to the exclusion of basic life saving drugs!

In a way, I think that AIDS lulled everybody into thinking that if that threat could be contained, there would be nothing else worse. That theory is akin to thinking that the Oklahoma City bombings.... Well, you all know where that went!

"By the way, banks have a similar profile. I will almost never invest in either, because there is virtually no way to know whether the asset side is any good or not, and the equity is so small versus liabilities."

This may be true, but remember what President Bush said yesterday when he commented on the 8 billion in construction projects at a stand still because of the lack of terrorism insurance.

Do you personally want to self-insure all of your risks, particularly liability exposures?

Not to make a pitch here, or agree with Hillary Clinton on anything. However, if we could find a way to implement an effective national health insurance program that included good preventive medicine, it would relieve a lot of stress off of the insurance industry and open opportunities for real expansion for us all! We need to remember that the insurance industry reflects who we are because it mirrors who we are—it insures us! Just as some things—telecom and possibly even airlines—need to be monopolies, so do some insurance functions. There is a place for privatization and there is a place for monopolies. Whether they be government controlled or not depends on the quality of life that we want to have. Having a longer life without the neat things such as passenger trains or the mailman adds quantity at the expense of quality. We watch today as 695 companies are forced to file a form swearing to both the quality and the quantity of their business ethics. We may, one day, be forced to watch far worse things than that!

"tin, a comment on #40337. Your comment, "Most of your major insurance players have one other thing going for them--no debt!" is highly misleading."

Everything, in a way, is highly misleading! It just depends on where you want to be led!




Post  40473  by  ljpit       Reply
book recommendation on US business finances

As one from Europe, I'd appreciate it if anyone could recommend an excellent book on US business finances. I'm mostly interested in explanations of things like DSO, CCC, CAGR, WACC, etc., an explanation of how the US tax system works (what is taxed exactly, for how much, etc.), and what the general rules are that US companies have to comply with (e.g. I know US companies must use GAAP, I'd like to know a bit more about the details of that principle). Preferably written from the perspective of starting a US business (not from an investing perspective).


Post  40474  by  Decomposed       Reply
re: SANM

Thank you for the tip on SANM, Briguy. I didn't get in at quite as good a price as you, but $2.99 is close enough. A few hours later, I'm up about 8%. Even better, SANM's volume is holding up nicely throughout the move. I'd guess that $3.40 or better (maybe much better) is on its way before the run levels off.

Since I'm not nearly as familiar with SANM as you, I'll put in a low stop limit to protect my principal, but I'd be very surprised from what I'm seeing if I'm not able to walk it up a bit.

I know you're interested in SANM for the long haul. Wish I shared your confidence, but I just don't know enough about it.

Post  40475  by  pmcw       Reply
lj, maniati and Culmus might have some good suggestions for books, but I prefer to use the web. Books were fine five or ten years ago and I spent many hours in libraries reading up on subjects I found to be interesting. However, today I feel a search engine can show me a selection of available materials on virtually any subject. From these, I can then read several sources on subjects that are subjective and usually find the root source of data for subjects objective.

Based on the breadth of information you wish to learn all I can say is I hope you're young. ;O) The US tax code in and of itself could strain anyones back let alone eyes. You'll probably gain a new appreciation for the word "loophole" before you're done as well.

Regards, pmcw

Post  40477  by  ljpit       Reply

the past few days I've been eyeing ESS Technology (ESST), a manufacturer of chips that run DVD players. It caught my eye after I read their announcement of a stock repurchase plan (which I generally take as a sign of healthyness). They'll be buying 5M shares back, of 45M outstanding.

Revenue rose 43%, their current P/E is slightly below 9, they have zero debt, Q3 forecast shows a further rise in revenues and earnings of 36 cents per share (current price at $11). Looking at their latest Q reports, their balance sheet and cash flow I only see positives.

It got hammered lately because of a Barron's report suggesting a possible drop to book value of $4.6 (currently $5.0), risk of competition (from Taiwan) that might jump into their market segment slashing prices, and supposedly production problems with new chips that allow recordable DVDs.


Post  40478  by  pdowd       Reply
Wow !!!! What a rally !!!!!!!Give me 20000 shares each of CMGI , PMCS and even JNPR ! We are gonna be rich ! LOL. PD.

Post  40499  by  tinljhtkh       Reply

Going back over my research, I was shocked to find that there is far more debt in that sector than I first thought!

As far as the time bomb issue goes, I would not discount that possibility in the least. I was going to add that the failure of any of the major companies could trigger a major problem but I don't know where it would come from at this point. I didn't know about Worldcom either, or so many of the others until it was to late. Perhaps the saving grace of the insurance industry is its tremendous diversity, and the fact that it is state regulated. Being the closed off business that it is, it tends to take care of its own to a certain extent.

I will say this, if the industry does get into major problems, we are all in major problems. If you look at its asset base and what it underpins with that money, it will frighten you! I used to think that federal regulation of insurance would be a good idea. However, seeing the failures that have occurred at the federal level, particularly with the SEC, I'm not so sure anymore!

I'm still writing creatively and will try to share some of it with you all on "the weekend table." Elvis is back and you cannot believe the mess he's gotten himself into this time! The hot water he had to deal with at McDonalds is nothing compared with trying to explain to Marilyn about that 37 million dollar annual income! Raymond Burr is Marilyn's lawyer and even he meets his match this time around!