July 27, 2005
Capital Goods Orders Chart
I just got the chart below from Scott Grannis, my good friend (and former colleague long ago at Claremont Economics Institute when neither one of us had any gray hair) at Western Asset. Hard to look at this chart and be pessimistic isn't it?
Last week the growth worriers whined about how growth was slowing so profits will slow. This week they are whining that growth is too strongso interest rates will go up. They just like to be pissy (technical term). Don't let the growth worriers keep you out of the market.
JR
Posted by John Rutledge at 4:04 PM
Asia doing well today too.
Asian stocks are very strong today. China has been a storm system on my weather map for a while. I am not a fan of the forced revaluation last week. Fixed rates were much more stable for both China and the U.S.
I do like the way China has managed it, though. It left the currency not convertible--still capital controls in pace--which makes speculating much more difficult and costly for a speculator who wants to move big money into the RMB. The Chinese central bank also engaged in open-mouth operations yesterday saying no more revaluations. And moving to a currency basket shifted some of the political pressure from the U.S. to Japan and the EU, both of which trade more with china than we do. If you look closely, you will see the shadow of Robert Mundell in the press release. Bob is an advisor to Chinese officials there. There is no one better.
I like placing the China bet through EPP (the exchange traded fund for the Pacific Rim excluding Japan.) Is holds the stock markets of Australia, New Zealand, Singapore and Hong Kong. I have an EPP position that's up 22% since October; another is up 39% in 18 months. I am not selling either one.
I also like EWY, the ETF for Korea, China's major technology source. Korea (EWY) is the epicenter of telecom-equipment R&D and is the driving force behind mobile-phone production in China, where 300 million cell phones will be sold this year. I own some EWY up 42% since last September and still like it. I also like Japan (EWJ) where companies are just beginning to pay dividends.
JR
Posted by John Rutledge at 3:28 PM
Telecom Stocks Strong Today
I posted a comment over at TheStreet.com's RealMoney today on the market's reactions to today's telecom bill.
I have been tracking the telecom reform storm system on our website rutledgecapital.com for some time. I saw the building pressure for a new telecom law from people all around the country who want broadband access to compete with companies in Asia. That new law would raise the return on network-building assets relative to the market, establishing a high-low return weather front, in the same way high and low pressure systems create thunderstorms on a weather map. That return differential would then drive investors to rebalance their holdings toward the favored asset class, which would move prices.
The prices are moving today. I have been holding a position in telecom sector stocks via (IYZ), the Exchange Traded Fund for the Telecom Sector betting that congress will get telecom reform more right than wrong this year. The sector is up sharply across the board today since the new bill was announced.
Getting the law right will trigger big investments in high-speed networks. That would be great for the equipment makers like Lucent (LU), Nortel (NT), Cisco (CSCO), and Corning (GLW) -- all of which are up big today. (Corning is up more than 5% so far today.) It's also good for telecom service companies like Verizon (VZ), BellSouth (BLS), SBC (SBC), Qwest (Q), AT&T (T) Sprint (FON) and Nextel (NXTL). They, too, are up today; Sprint and Nextel are up about 5% at this point.
Keeping my fingers crossed and holding on to my IYZ position.
JR
Posted by John Rutledge at 3:10 PM
More on Today's New Telecom Bill
Randy May, at the Progress and Freedom Foundation (where I am a member of an advisory board) has a very good review of the telecom bill that Senator Ensign announced today. Randy is a real expert at this stuff; he gives a detailed explanation on how the particulars in the bill will impact the sector and the economy. Enjoy!
JR
Posted by John Rutledge at 2:59 PM
June Durable Goods Report Supports Strong Growth View
Today's June Durable Goods report was stronger than dirt. As you know, I have been arguing that the economy is growing strongly, especially small companies who are benefitting from the gusher of bank and non-bank business lending going on. This report adds more wood to the fire.
New orders were up 1.4% in June, following May's 6.4%. Excluding cars and airplanes it was up 6.4%. Best of all, computers and electronic products increased 8.6% with communications equipment up even more than that. Along with today's very favorable telecom reform bill announced by Senator Ensign, there are signs that US telecom capital spending is starting to wake up. Defense capital goods increased 16.9% for the month!
Inventories fell in May as well, which suports the case for continuing strength. Finally, all revisions to the May data are in the direction of stronger growth.
Growth and profits will continue to surprise the street. I am fully invested. Still like the small caps.
JR
Posted by John Rutledge at 2:14 PM
New Telecom Bill Important for US Growth
Earlier today Senator John Ensign, Chairman of the Senate Republican High Tech Task Force and Chairman of Senate Commerce Committee Subcommittee on Technology, Innovation, and Competitiveness, introduced a bill that proposed to end economic regulation of the telecommunications industry.
Called the Broadband Consumer Choice Act of 2005, this bill is the answer to outsourcing of U.S. jobs abroad. If passed, this will trigger massive – and much needed - capital spending on fiber optics and high-speed networks, giving American workers the tools they need to compete with China and India. This is a free market alternative to the invasive 1996 Telecom Act that created the total collapse of telecom investment in the U.S. in the last 5 years – rendering the U.S. 16th in the world in high-speed telecommunication access.
This legislation restores property rights, removes price controls, moves most issues from the state to the natiopnal level, and deals with both the video franchise issue that has been holding up fiber deployment and the municipal broadband controversy. It is very similar to the recommendations we made in the telecom study we wrote for the US Chamber of Commerce last fall. I think it could add 200,000 jobs and and generate upwards of $600 billion of GDP, resulting in higher productivity growth and lower inflation and interest rates over the course of the next 5 years.
This is not just a regulatory issue - telecommunications is the central nervous system of our economy. Telecom and technology policy should be the number one agenda item in every discussion of economic growth in Washington.
Cleverly, the bill carves out universal service issues from the bill to be dealt with in separate legislation. Universal service is the biggest pot of pork in Washington, more than $6 billion last year. This improves the chances the bill will actually be passed this fall.
I have my fingers crossed on this one.
JR
Posted by John Rutledge at 11:24 AM | Comments (2)
July 26, 2005
Housing Prices Continue Up
June prices of existing homes rose 6.3% from May, and are up 14.7% over a year ago. This was triggered by the June drop in long-term rates below 4% that drove the 30 year fixed mortgage down with it.
The housing market is not a bubble; this is an interest rate story. The drop in interest rates has caused a massive one-time repricing of the housing stock. The housing market will not collapse because U.S. inflation and interest rates will stay low. U.S. inflation is anchored by prices in India and China.
This housing game is in the ninth inning, though. The recent revaluation of the Yuan triggered a sharp rise in Treasury bond rates. Mortgages will follow. Expect a final patooie of activity as people race to buy and refinance fearing the end of low rates. I expect the run-up of prices to stop. Don’t leverage yourself into real estate, but don’t sell your house either. (By the way, stocks are a better long term investment than houses anyway; they have out performed housing 3 to 1 over the last 25 years.)
JR
Posted by John Rutledge at 12:28 PM
George Melloan is a Brilliant Man
George Melloan is a Brilliant Man
You need to read George Melloan's GLOBAL VIEW column on the op-ed page of today's Wall Street Journal. There are two reasons why I think George Melloan is a brilliant man. First, George mentioned the Rutledge Blog today. Second because, well, he really is. I have known George for about 25 years, since I wrote my first op-ed for him and Robert Bartley on why US rates would fall in spite of budget deficits. He is vastly experienced on both the ideas and the practice of global economics and investing. And he is dead right today to tell the US government to knock off our raging China-phobia before we make a real mess.
As George points out, China's government has a difficult policy problem. They have to deliver rising living standards fast enough to keep the Chinese people off the streets. There are currently some 200 million migrant workers in Chinese cities who have left their farm and state company jobs in the countryside to do construction labor and other day jobs. Last week's political disturbances in the Shanghai suburbs should be a reminder that a major stumble in their growth rate could cause problems we don't want to see.
China's fixed exchange rate against the dollar was a valuable source of stability for both countries. By pegging against the dollar, the Chinese authorities had essentially outsourced the Chinese inflation rate to Alan Greenspan & Co. And it took both currency and inflation risk off the table for foreign direct investors.
I have made it no secret that I believe forcing China to revalue the RMB was a major policy blunder. But the damage could still be contained. The big question is whether currency speculators will get their jaws around the RMB. Normally, the answer would be "of course they will." But the RMB is still not freely convertible, which makes speculation slower and more costly. Ironically, last week's move will increase hot money flows into China and could actually put off the day when China will be able to have a convertible currency with a market determined price.
JR
Still own EPP (pacific ex-Japan) and EWY (Korea) to collect gains in Asian markets from the repricing.
Posted by John Rutledge at 10:39 AM | Comments (1)
July 23, 2005
No Strategery Here
Several subscribers have asked me the same question regarding China's revaluation of the yuan this week. Is it possible that the US policy makers who pushed China to abandon their fixed exchange rate against the dollar did so for the secret purpose of intentionally destabilizing and undermining the growth of the Chinese economy.
Possible? Yes, but highly unlikely. My experience in and around the White House is that they have very little time to sit around and devise clever schemes. They spend most of their day reacting to pressures that arise from outside the government (oil prices, Iraq, terrorists, economic and financial news) rather than driving change. A President only has time and energy for a small number of strategic drives. They tend to focus on those. In President Bush's case, he told us in January what the defining topics were for his second term; tax reform, social security reform, tort reform, and homeland security. That's exactly what he is doing.
The one possible global exception to the above is China. Chinese politicians have shown that they have a longer-term point of view that we do in the US. (They of course do not have to worry about being reelected, do they.) That viewpoint gives them the patience to wait out western governments on strategic objectives. The Hong Kong handover was an example. Taiwan will be another. A third is their multi-objective approach to Chinese energy policy, simultaneously pursuing initiatives in Russia, Iran, Venezuela, Japan (the disputed gas deposits in the Sea of Japan), the US (Unocal), and other countries.
A factoid worth remembering. All nine members of the Chinese Politburo (China's highest-ranking political committee) are trained engineers.
The biggest damage terrorists have done in the the US is not what happened on september 11, 2001. It is what they have done to our thinking. Instead of devoting our resources to checking each other's boarding passes we should be focusing on our relationship with China. china, not bin Laden, is going to be the topic that dominates political and economic discussions for the next 50 years.
JR
Posted by John Rutledge at 2:25 PM
July 22, 2005
Forbes on Fox Tomorrow, Saturday, July 22, 11AM EDT
Forbes on Fox Tomorrow, Saturday, July 22, 11AM EDT
On Saturday morning I will be on Forbes on Fox with Jim Michaels and the other Forbes editors talking about the need for increased defense spending and the case for small cap stocks. Hope you can make it.
JR
Posted by John Rutledge at 10:49 PM
China Revaluation Will Lower Chinese Wages, Prices
China Revaluation Will Lower Chinese Wages, Prices.
You may have noticed by now that there is a sharp difference in opinion among economists about the impact of yesterday's yuan revaluation on the US and China. I will start you out with my view, as given in the following statement I gave a Gannett reporter yesterday.
"We are playing with fire," China's economy is going to slow. You cannot diddle with a currency without affecting interest rates in both places, economic growth, prices and wages. What this change is going to do is raise interest rates, lower U.S. growth, lower China growth and lower China's prices and wages."
My point is that by forcing China to stop buying Treasuries we are also likely tightening Chinese monetary policy, which will ultimately push Chinese wages and prices even lower. Not an American dream scenario. The chart below shows China's foreign reserves (mainly US Treasuries) and China's bank reserves. The link is not an accident.
A lot of economists will see this differently. They will see a drop in the dollar against the yuan as reducing US export prices in China and increasing Chinese import prices here which, over time, would reduce imports and increase exports, raising GDP. What's the difference in the thinking?
There are two main fault lines in the thinking about all this--issues where you have to stand on one side or the other. The first is whether you are focused on agregate demand or on the capital markets. The second is whether you are focused on the trade accounts or on the capital accounts. Here's what I mean.
Most of what you read about macroeconomics focuses on who--consumers, businesses, government, foreigners--is spending how much money. Spending more money is good; spending less money is bad. To these guys, cheapening your currency is almost always "good" for the economy. I think this approach is a load of crap. It never works.
I like, instead, to focus on the capital accounts for a simple reason. Size matters. Our $11 trillion GDP last year is dwarfed by our $155 trillion balance sheet. Or, as James Carvell would have said, "It's the assets, stupid." This line of thinking forces you to focus on the capital stock (which determines productivity) rather than on spending. And it forces you to focus on who wants to hold the existing assets, not on who wants to buy the new assets (flows of funds analysis of saving, budget deficits) when thinking about interest rates. I have used this framework since the Reagan days and made a lot of money with it. It works.
The second point has to do with global capital markets. My good friend Robert Mundell won a Nobel Prize not long ago for teching the economics profession that you cannot diddle with currency markets without having an impact on domestic monetary policy. I wrote about this yesterday. Essentially, it means that when China buys a US Treasury Bill in order to hold their currency fixed, as they have been doing in recent years, they pay the seller with a check issued by the central bank. The seller deposits the check in his bank, which increases Chinese bank reserves by the same amount. The bank then loans the money to a customer which ultimately increases the Chinese money supply, stimulating growth and pushing wages and prices higher.
Revaluing the yuan and shifting to a basket of currencies is certain to reduce Chinese purchases of foreign assets, including US Treasuries. That's why US bond yields increased yesterday. It also means China's bank reserves will shrink. (Some will say this won't happen because the Bank of China will "sterilize" this effect by simultaneously buying Chinese government securities in their domestic bond market. I say they can't do it--the Chinese government bond market is not big enough to allow this to happen.) I don't think creating a gorilla competitor with even lower wages and prices in china is what we had in mind here.
Mostly I am concerned about monkeying with a situation as fragile as Chinese growth, credit markets, and politics. they have their hands full already. There were riots in the suburbs of Shanghai earlier this week and lots of recent violent incidents in rural areas. They have almost as many migrant construction workers as we have people. Doesn't seem to me that China blowing up would be a good thing for any of us.
More to come on all of this later today.
JR
Posted by John Rutledge at 10:11 AM | Comments (7)
July 21, 2005
China's New Currency Basket
Today, China announced they would switch from pegging fixing their currency against the dollar at 8.3 yuan = $1. They will now peg the yuan against a basket of currencies, with a new rate announced each day. The basket will reflect China's trading partners.
Thought you would like to see what that basket might look like. The chart below shows the shares of China trade (imports plus exports) with major currency regions.
As you can sese, the US accounts for only 14.8% of China's trade. We are tied with Japan (14.8%), but behind Europe (15.5%) and the countries of the Pacific rim excluding Japan (34.9%). the latter include Hong Kong, Singapore, Taiwan, Mayalsia, Indonesia, Australia, New Zealand, Thailand, Phillipines, and the smaller members of ASEAN. The final 20% is "Other", which includes Russia, Canada, Mexico, Venezuela and others.
So, a rough guess about the new Chinese basket would be to match the composition of the basket to the pie chart. But many of the countries in the Pacific and Other slices peg to the dollar too, so the role of the dollar could be somewhat larger than it would at first seem.
If the Chinese central bank decides to hold only US dollar, Euro, and yen assets, spreading the remaining slices proportionally across the three major currencies, they would hold 33% dollars, 34% Euros,and 33% yen. If they choose to use the dollar to represent the Pacific and opther categories they would hold 70% dollars, 15% Euros and 15% yen. These numbers could also be affected by growth considerations (EU trade is growing fast), and investment considerations (big US capital flows in technology and telecom equipment) which wold skew the basket towards the dollar. they could also carve out a separate slice for the Pound.
However they slice the pie, however, there will be less dollars in it that today. This means smaller Treasury purchases and higher interest rates in the US.
Translation: If you line in America, your wealth just went down.
More to come on stock markets.
JR
Posted by John Rutledge at 4:44 PM | Comments (2)
China Revaluation Impact on US Economy #1: Higher Mortgage Rates, Bye-bye Housing Boom
China Revaluation Impact on US Economy #1: Higher Mortgage Rates, Bye-bye Housing Boom
China announced today they would increase the value of the yuan, also known as the renminbi (RMB), today from 8.3 per dollar to 8.1 per dollar, which amounts to just over 2%. From today forward they will also peg the yuan against a basket of currencies, rather than just the dollar, and allow daily fluctuations of +/- 0.3% per day.
One summary of this might be "Stand Back, They're Revaluing!". This 2% change is not big enough to do anything to import prices or trade. US companies can hire an engineer in China for $150 per month. The revaluation will raise the cost of that engineer by $3 per month.
The announcement is very important, however, in other ways. I will write a series of short pieces today outlining why this is important for US investors, workers, and consumers. Most of those impacts are negative.
This was a bad piece of policy making. If this were a movie, my title would be "Dumb and Dumber." By pressuring China to revalue the yuan, we have unleashed a host of other demons. As my friend Robert Mundell showed long ago, currency policy and monetary policy are two sides of the same coin. It is not possible to act on one without impacting the other. Bob won a Nobel Prize for his work. Apparently, they don't have a copy of it in Washington.
In this case, there will be a direct impact on the US housing market. China's currency announcement today translates directly into higher mortgage rates for American home owners. And it accelerates the end of the great American Real Estate Boom by pushing home prices lower.
How? By forcing China to stop pegging to the dollar, we have put them out of the business of buying U.S. Treasury Bills. In May, foreign investors (chiefly The central banks of China and Japan) bought $60 billion of US securities. They are major buyers in the Treasury market.
Fewer buyers means lower prices and higher interest rates. Within minutes of today's announcements US bond yields moved higher. The U.S. ten year bond yield increased by 12 basis points today to 4.27%; it was 4% 2 weeks ago. Mortgage rates are certain to follow.
Higher mortgage rates mean the end of rising home prices. Rate reductions were the driver for the 50% increase in US home prices and huge home building numbers over the past 2 years. Higher mortgage payments on adjustable rate mortgages--more than half of recent mortgage issues--mean less disposable income and fewer car buyers. Not good.
Essentially, today's announcement amounts to a massive transfer of wealth, measured in home values and stock market values, from home owners to a small number of textile and other companies. I hope they have the good manners to send all of the home owners thank you notes.
I will write separately about implications for growth, stock prices, and currency markets. As you can tell, I am not a fan of today's policy announcement.
JR
Posted by John Rutledge at 4:12 PM | Comments (1)
July 19, 2005
The Real Story Behind Wireless Telecom
The Real Story Beyond Wireless Telecom:
On Squawk Box last week, Maria Bartiromo asked me about investment opportunities in the wireless market. The markets were watching Research In Motion (RIMM: Nasdaq) edge its way up after they got a favorable ruling on some patents after a three year dispute with NTP. The patents are only a small part of the story. There’s more competition in the market and in competing technologies. Research in Motion’s BlackBerry technology has dominated the wireless email market because ActiveSync was never as effective as push email, but BlackBerry’s are not the only player anymore. Microsoft has added push email to its Windows Mobile and Exchange platform, Nokia is planning to offer a free push email according to software vendor Seven, and Intellisync announced add new push email called Wireless Email Express that will go on nearly all cell phones. I saw an ad for a Verizon phone made by Samsung's (SCH-i730) which they will start selling sometime this summer. This phone will support the EV-DO network. EV-DO is a wide band wi-fi access over most cities right now. This 3G high-speed wireless network opens a wide channel for data on an existing CDMA network that can travel at very high speeds, up to 2.4 Mbps. On this network, the phone will not only have push e-mail but the access speed makes using the internet and downloading large files, like music and videos, something you can actually do.
This is definitely going to impact RIMM's BlackBerry because the competition is not just Palm any more. So, yes, they’re winning the patent story, but RIMM is now competing with all wireless operators with coverage.
But competition is the real game in this wireless story. Lately the news has been very focused on China, with the controversies over the Unocal offer, undervalued currency accusations, and a rising trade deficit. Those are chump change compared the real story. The real story is technology and they’re beating us to death. It’s not just in education, although that’s important. China graduates six engineers for every one of ours, and the average age of an engineer in China is 29 years old compared to 45 years old in the U.S.
It’s technology. Recent stories out of the newspapers report on the fastest broadband in the world, at speeds of 40 gigabytes, being developed in China, development of new internet standards, and government subsidized wide scale roll out of broadband access.
Too many people, including the regulators, are worrying about the 20th century stories, like Lenovo acquiring IBM. These are PCs in boxes, hard assets, and they are not the source of advances in technology.
Right now, the game is how fast and how wide you can make broadband and fiber wireless coverage. In the U.S., broadband is strung across the country like Christmas lights between the NFL cities—and that’s not a joke. China is bringing high speed access into small towns all over the country and using it for education and technology. Here in the U.S., we've gone from number 1 to number 16 in the world in the last five-years. China is doing things to promote the development of high speed communications while we are doing things to retard it. China is about expanding fiber. The big story in America is about whether we will get rid of the $3 a month “temporary” telecom tax that we put in to finance the Spanish-American war 109 years ago. We don't get it, but China does. This is a very dangerous situation for U.S. service companies and our next generation of workers, because without that access, they just can’t compete.
The last 5-years have seen the collapse of telecom capital spending in the U.S. largely due to the 1996 Telecom Act. That law is being rewritten now in Congress. If Congress gets that right, we will see capital spending coming back on here in the U.S. Telecom and communications investment is booming already in Asia and most of the rest of the world. The companies well positioned to take advantage of this are the telecom equipment makers, companies like Cisco, Intel, Nortel, and Lucent. Those are great bargains because their trailing history is so bad, but their prospects are getting much better.
JR
Posted by John Rutledge at 1:04 PM
Guest Blog Topics & Sector Bets
Had a great time yesterday as the Guest Blogger for the CNBC Squawk Box’s blog (squawkblog.com). In case you missed it, here are the topics and sector bets I blogged about:
1. Rubber Boat CEOs
Maria Bartiromo interviewed Ed Gallup, Immucor Chmn. & CEO. It is so refreshing to see a CEO who not only knows every number about his business and has specific, numerical objectives for his company’s sales objectives. The kind of guy you’d like to have with you when you invade China in a rubber boat. Very impressive.
I’m interested in your opinions about other Rubber Boat CEOs you have seen on Squawk Box or elsewhere. Who do you think does an especially good job explaining their company to investors, as well as operating their company?
2. On Citigroup & BofA Results
I think the contrast between weak Citi and strong BofA results today is partly a reflection of the different markets they have targeted. As Marc Oken, BofA’s CFO, said on the show this morning, they are mainly a U.S. bank. The U.S. economy is very strong and credit risk is declining sharply. BofA is a good way to bet on the U.S. growth story.
Also, as I have been writing recently, the big story lately has been the strong performance of the U.S. small caps, driven by a dramatic acceleration of business loan availability to private, middle market, companies in the U.S. BofA is a big lender to this market; their middle market loans grew 12% in today’s numbers. In that sense, BofA is a proxy for the small cap bet.
Finally, Citi talked about the lousy trading and capital markets last quarter. This reveals something I worry about. Since Gramm-Leach in 1989, big banks have generally shifted capital out of lending, into capital market activities, which have a much higher ROE (when things go right). But trading and capital market revenues are not sustainable; neither are the earnings they generate. This shift toward capital market strategies, to me, makes bank earnings less sustainable, and over long periods shold weaken multiples. That makes me like the small banks more than the large ones while this is going on.
I do not own either stock personally, but I but own DVY - which has shares of both
3. The Next iPod - Hearing Aids For Boomers
Boomers are aging, losing their (our) hearing, are vain and insecure. How about an IPOD that doubles as a hearing aid so a n Old Boomer can look cool and hear what people are saying at the same time?
4. Economy Stronger Than Dirt
Maria interviewed Kevin Kliesen, National Association for Business Economics, about the NABE Survey of the U.S. economy. The NABE survey is right on the nose. The U.S. economy is stronger than dirt. That’s why the broad market (SPY) is doing well and the small caps (IWM, IJR) are on a tear.
5. Genentech Blindness Drug Plus Viagra = Happiness
Here’s another aging baby boomer play. Genentech is announcing a new cure for aging blindness today. This is great news for the guys who have been taking Viagra. Seems to me that you should be able to take both together; then you could have sex and see what you are doing at the same time.
PS: A recent poll of all the men who went blind from taking Viagra showed that 100% of them said that it was worth it!
6. On Capital Flows
What we can do that might turn around the flow of capital out of the U.S. to China?
That’s exactly the right question. Yesterday I told the governors at the National Governors Association annual meeting that we are not competing for jobs with China, we are competing for capital.
The dirty secret most Americans don’t know is that the core of the impact on the U.S. trade accounts is not cars or shoes, it is technology. U.S. regulatory policies have shut down capital spending in telecom while China has made telecom capital spending a priority. China is also targeting incentives for our best technology companies to relocate there. Not good. U.S. technology and telecom equipment companies are moving to China at a record pace.
To stop that we need to first repair our policies so we are not driving companies to leave. Congress is rewriting telecom laws now; hope they get it right.
7. China Investing—Will China Stay Strong?
Fundamentals for China growth are still very strong, and should be 8-9% for next year or two. The risk is that political pressure within the U.S. is making our government do things that cold interrupt China’s growth. Last week the Commerce Dept. embargoed Chinese cotton goods, for example. Another example is U.S. talk of tariffs, and our pressure to revalue the currency. If China growth stopped, even for a short while, commodity prices would drop like a stone. So, while China still looks good, I think we should be a little careful not to have too much exposure there today.
8. Sector Mix & ETFs
Sam Stovall’s interview on Squawkbox (7-18) recommended a sector allocation based on a strong U.S. economy. Reminder that asset allocation across security classes, countries, and sectors may be responsible for as much as 90% of total portfolio returns. I like the ETFs as a way to place those bets.
9. Maytag Deal
The bidding war for Maytag is continuing. Things to watch for. A board of directors will have a hard time turning down a bid from a strategic acquirer (Whirlpool) in favor of private equity bidders. Their main concern will be the risk of a busted deal, where they pick a buyer then the buyer either fails to close or re-trades the price lower at the last minute. Both are easier with a strategic buyer. Deal issues and shareholder value will dominate xenophobia in the directors’ minds.
10. Little Screens, No Engineers
Music videos on iPods with tiny screens? One squawkblogger suggested that the next generation would be better off reading a book or newspaper so they might learn something.
The point is well taken. Education is THE issue for the country. This year China will graduate 350,000 engineers, more than the U.S. + Japan + Germany. The U.S. will graduate just over 50,000.
FYI, there is a Korean government agency, ETRI, that has 1500 engineers working on those little screens Joe Kernan talked about. They have also developed a wireless standard called WIBRO that will allow a commuter to watch a real-time TV broadcast on a train going 60 miles per hour.
Time for us to quit whining and get back to work.
11. Index Composition
One commenter wondered if it time for the Dow Jones to do a major rebalancing since all the names added in the recent years have been losers.
That’s right-- which points to a weakness in all the top-size-tier index portfolios. A company gets put into a top tier index because it went up LAST YEAR. So it is a momentum buyer’s portfolio. May be one of the reasons madcap and small cap indexes have done so well.
Here’s an idea. Why don’t we create an index based on the intrinsic value of the stocks in the Dow or S&P. That way we would not put a stock in just because its price has gone up.
12. Big Exit Packages - What Do You Think?
Good FT article this morning (7-18) on Morgan Stanley exit packages. Co-president Stephen Crawford got $32 million when he quit. David Sidwell will get $21 million if he is terminated as CFO or resigns for good reason, according to the Financial Times. Mitch Merin and John Schaefer have also been given new guaranteed packages.
I think big parachutes for executives suck; they are a sign the board is not doing its job. Would love to hear nominees for the Exit Package Pig of the Year prize.
I will start by nominating Gilette.
13. I own SPY, IWM, IJR as well as call options on IWM.
Want to close with two bets I like. My two largest positions are small cal U.S. stocks (IWM) and dividends (DVY).
I like small caps because they are the epicenter of the turnaround in bank lending. From November, 2000 banks loaned businesses minus $230 billion, From a year ago, bank loans have increased by $120 billion. Increased loan availability is dramatically improving the performance of small companies and will continue to do so for the next year. I own both IWM and IJR.
Dividends will dominate total returns over the next decade, due to tax law changes two years ago, due to changing capital structures as managers adapt to the new tax rates, and due to investor hunger for income. There are also signs this is starting to happen in Japan. I own DVY.
JR
Posted by John Rutledge at 12:57 PM
July 18, 2005
Guest Blogger
I was honored when the Squawk Box producers asked me to be the first Guest Blogger on the SquawkBox Blog today. I had a great time commenting on the stories the anchors discussed on the show and did my best to answer questions and comments that our blog readers send in during the show. This beat the heck out of waking up at 4AM to get to the studio for the real show. And I got to blog from the comfort of my home office where, as you can see, I was NOT, repeat NOT, wearing a tie.
Which reminds me to insert a plug for my next chance to be the guest host on Squawk Box on Monday, August 8. Be there or the gods will ruin your crops and your livestock will be barren.
A couple of ideas I have been chewing on over the weekend that I shared with the Squawkblog squawkers: I spent this weekend in Des Moines, Iowa (you mean you don't take your long weekends in Des Moines?). I was there to give a talk to the National Governors Association annual meeting on importance of high-speed communications networks for economic growth in their states. It's a pretty big show with all 50 governors in one room along with an army of sucker-uppers.
I told them we have 2 choices, learn to compete for capital or learn Chinese. How to grow your state? Simple: make your state a destination resort for capital and the jobs and paychecks will follow.
The reason we are so rich in America is that, along with Europe and Japan, we own most of the capital in the world. To me, capital means machines, technology, and educated people. Capital makes workers productive. Every farmer knows you can't eat more than you grow. Same is true for the economy as a whole; you can't get paid more than you produce. So productivity is the key to higher paychecks and living standards. Productivity comes from educated workers using lots of capital.
Capital today is extremely mobile. Twenty years ago if I wanted to make an investment in China it would take a lot of work, a lot of money, and conversations with both governments. Today I can do it in seconds on a cell phone for 2 cents a share, and neither government knows it happened.
This is a great thing for capital owners and for the stock market, one of the reasons I have been so bullish on stock prices. But it's not so good for the workers in the U.S. who have had the tools ripped out of their hands and shipped to Asia. The result is political backlash, like we saw last week when the Commerce Dept. embargoed Chinese cotton goods, and like the discussions in Congress about imposing tariffs or forcing revaluation of the Chinese currency.
That’s why I have been cautious about recommending Chinese stocks and commodity investments to our viewers. When investors ask me how they can get a piece of the Chinese growth story I first tell them to check their portfolios. They probably already have more China exposure than they realize, because so many of the large cap U.S. companies have investments there. If they want more China in their portfolios I prefer to do it through ETFs (Exchange Traded Funds) which own the stock markets of countries that profit from China's growth but have better governance and accounting practices than China. My two favorites are Korea (EWY), and Pacific-Rim ex-Japan (EPP), which owns Australia, New Zealand, Singapore, and Hong Kong stocks. Korea is driven by technology and telecom, the core of China's growth strategy. Australia and New Zealand feed China's appetite for natural resources. Singapore and Hong Kong provide them with access to financial markets. Together they are a mirror of Chinese growth. I own both ETFs.
JR
Posted by John Rutledge at 1:39 PM
July 14, 2005
Markets Discover Korea Too
The other big number on my screen today is Korea. The Korean exchange traded fund is EWY, it is up 2.3% today, with Hong Kong (EWH), and Pacific Rim ex-Japan (EPP), an ETF owning the markets of Australia, New Zealand, Singapore, and Hong Kong. Australia and New Zeealand are supplying resources to China (coal is the new oil); Singapore and Hong Kong are windows China is using to import capital as well as regional centers of advanced technical education.
Korea is interesting for several reasons. First, you can throw a rock from Korea to the high-tech manufacturing plants in China (can't wait til Wall Street discovers that Korea is located close to China). Second, Kiorea is kicking butt on technology investments, our butt actually. They have an state-run R&D agency called the Electronics and Telecommunications Research Institute (ETRI) in Daejon manned with 1500 engineers developing high-speed communications devices for Samsung, LG, SK Telecom, and other Korean companies to bring to market. ETRI has an annual budget of $345 million.
And the Korean government has a program called IT837 (stands for 8 services, 3 infrastructure projects, 9 new devices) that you are going to be hearing about. Projects include a telecom network 50 times faster than what we call broadband, RFID tracking devices to track everything from military grenades to imported beef products, and a wireless broadband standard that will allow commuters to stay to computer networks even while travelling on high-speed trains.
And by the way, China will sell more than 300 million cell phones this year to its own citizens--almost all of them have Samsung innards.
I own EWY, but not as much as I wish I did. The stock is up 38% since last September.
JR
Posted by John Rutledge at 1:07 PM
Shocking Truth Revealed! Market Discovers US Economy Growing, Inflation Low.
NASA was humbled today when the US stock market lifted off faster than their missile launch. The cause? Wall Street has discovered, once again, that the US economy is stronger than dirt, that it is growing strongly, that inflation is low, and that in spite of recent warnings the world is not going to end just yet.
I will write more on this later, but for now a few factoids to chew on:
1. Today's June CPI report (+0.1% in June, +2.5% over year ago) is OK. Translation, no big interest rate increases coming.
2. Today's June Real Earnings Report (average weekly earnings rose by 0.2% from May, 3.0% from year ago) is OK too. Incomes are growing.
3. Today's May Retail sales (+1.7% from April, +9.6% from year ago, are better than OK. Even excuding automobiles--remember the price cuts, they are giving away cars now--retail sales were +0.7% from April and +8.3% from May 2004).
4. Yesterday, the May trade report showed a smaller deficit than people anticipated.
5. Analysts are revising their Q2 profit estimates up, especially for small companies.
6. Yesterday, the White House announced this year's budget deficit will be about $100B smaller than they thought. Big increase in tax collections.
More growth, more profits, less inflation, less interest rate pressure. Shocking! Stock prices are going up.
Thing is, unless you just like to watch the green ink run across the screen you have to get your bets on the table for this sort of thing before the game begins if you want to make money.
My best two investments lately have been the dividend bet (DVY), and the small cap bet (IWM). DVY is $63.70 today, up from about $56 last August, and you get a 3% dividend yield to boot. And IWM, at $66.50, is up about 20% in the past two months (I bought a whack of out-of-the-money August 65 call options at $0.50 in April. Last trade today was at $2.80).
Don't bet against growth at this time.
JR
Posted by John Rutledge at 10:10 AM | Comments (1)
July 9, 2005
Screw Osama, I’m Buying Stocks
I will be joining Fox News’ Cavuto on Business Saturday morning. Needless to say, one of the things on everyone’s minds will be the reaction of the Dow to terrorist events.
We don’t need to kill or capture Osama for the Dow to reach 11,000 and beyond. We need to ignore him. (Or better yet, use our government’s newly enhanced powers of eminent domain to seize his house.) The stock market will see 11,000 this year based on strong performance of companies and low interest rates.
Osama bin Laden is actually a technology story. Advances in communications technology over past 10 years have turned on the lights around the world and given all of us real time looks at everything happening on Fox, CNBC, and CNN right in the comfort of our living room. This has increased the return on terrorist acts big time—the entire world watched the World Trade Center fall; we heard live gunfire when the Chechnyan terrorists invaded a Russian grade school; and we saw the dead and injured in the recent London bombings. It is much more ‘profitable’ to be a terrorist today. But this is a side show.
What’s more important is that people in the U.S. and other rich countries can now see, real time, how poor and violent the rest of the world is. This makes it more difficult for governments to do bad things to their people in the dark. (e.g., mass murders in Sudan). Sometimes that provokes us to take positive action. For example, American money and investment was the driving force behind the Easter Accord in Northern Ireland; they actually ‘bought out’ individual members of the core IRA and relocated them around the world. This is very good.
Also important is that poor people around the world have uncensored televisions now. They see how rich we are and they have reached the conclusion that it is not our intelligence, our work ethic, or our good looks that are the reason for our wealth. They want some of this wealth, too, and are pressuring their governments to deliver. These governments know the only way to do this is to attract capital. Capital is the source of growth; it is the key to raising their peoples’ productivity. Since the capital is all located here in the U.S. (as well as EU and Japan), these countries (like China, Korea, India, and Russia) are systematically changing their rules to attract foreign (mostly U.S.) investors, reducing investment risk. The resulting reallocation of capital has created the huge growth stories in China, India, and Russia. We are struggling with the side-effects of this growth now with high oil prices, trade deficits, and outsourcing, but it is an immensely positive story for capital owners all around the world, including U.S. investors.
To the extent that we allow terrorist acts to frighten us, we are throwing in the towel. Throughout history, people have adjusted to whatever challenges they faced. I think America is ready to hoist a single finger to bin Laden and get back to work. When that happens, a ton of cash will be invested in the stock market.
Conclusion: Terrorism is an unavoidable sideshow to the greatest investment story of our lifetimes. When bad things happen, as they did today in London, and stock prices fall, invest more, not less, in the stock market. It’s time for America to exhale, unclench their buttocks and buy stocks.
JR
Posted by John Rutledge at 10:30 AM
Anti-Terror Stocks
I’m always tempted to recommend BUD (beer always calms me down), LLY (Prozac), or GSK (Paxil), but enough with the jokes. I think everybody will have the idea to buy security companies, x-ray companies and the like.
I like to throw in Symbol Technologies (SBL), a $2B company that dominates the market for hand-held scanner equipment (their old business) and is going to dominate the future market for RFID (radio frequency identification) technology. Security is about knowing where stuff and people are. RFID chips are the answer.
Wal-Mart has mandated their vendors to use RFID by next year so they can track the shipping and sales process from start to finish no matter what vendor’s involved. Brittan Elementary School, north of Sacramento, had to abandon its plan to monitor attendance and prevent vandalism using mandatory RFID badges for students when parents and the ACLU got involved, and California legislators got excited about passing laws to restrict their use. But you can also put them on kids on nursery school playgrounds to avoid kidnappings like they do in Mexico. In Japan, they not only use RFID bracelets on school children but on hospital patients so they get the right dosages of drugs. Symbol CEO Bill Nuti is a former #2 at Cisco; he is a winner. I own the stock and know the management.
Another is Peabody coal (BTU). Besides their cool ticker symbol they own a ton of coal reserves (well, actually many tons). Terror equals oil prices. Coal is the new oil.
JR
Posted by John Rutledge at 10:30 AM
July 8, 2005
Real Estate Sucker Bet
I was on CNBC’s Closing Bell with fellow guest and old friend Brian Westbury to discuss the housing market on Monday, July 5. Brian and I have known each other since the Reagan White House. He’s a great guy and first class economist--one of the most prolific writers I know. Our topic was real estate prices. Brian reminded us tht the income, growth, demographic, and tax fundamentals behind housing are still strong. While I agree with Brian on the fundamentals, I am more worried that recent price increases are not sustainable. We both agree that stocks are a better place to invest than housing.
I think the easy money made in housing is over. Residential real estate is a sucker bet today. Real estate today reminds me of the late 1970's, when Trammel Crowe was building skyscrapers all across America funded by inflation-hedging investors, over-reaching Savings and Loans, and high tax rates on securities.
Today, we're riding a tiger. The economy is very strong—and I think it's getting stronger which makes me like the stock market a lot. Housing is up more than 30% over the last year in some of the hot markets. That’s just too much for me. Demographics were there 2 and 3 years ago. I think a lot of the appreciation came from the housing markets repricing for lower interest rates. It repriced upward one more time again in the last couple of months when bonds came down to 4%. But I don't think these price increases are sustainable. There are too many expectations of price increases in the transactions and not enough attention to cash flows and rent.
But Brian is right about the imoprtance of tax rates. Two of the hottest states in the markets are the states with 0% state income tax. People are flocking to Florida and to Nevada for just that reason. And both are also well known to be warm in the winter.
But I think it's a dangerous time to short the home builders because when the market gets a run like this, we don't know when it will stop. Short-term prices increases could bury you if you have a leveraged short position.
But stay away from REITs. The best investment I’ve ever made was turning $1 into $3 by selling a real estate investment to a REIT at the top of the 1990's REIT market. REIT accounting is opaque. I think REITs are vastly overpriced right now. But REITs at least have a big dividend yield, unlike most home builder stocks. Now we're seeing home builders using options to purchase land and home buyers using options to buy new homes. This smells a lot to me like the end of the bubble at the end of the ‘70s and again at the end of the '80s. So I’m a little worried. I don't want to have people risk their money by buying into the market right now, but I don't want it people to sell their houses either.
JR
Posted by John Rutledge at 4:40 PM
Going Global
I joined Dylan Ratigan on CNBC’s Market Hour on July 4 to talk about the best places internationally to place money in the next half of the year. First, I like the U.S. markets; I think they are in very good shape and have a very good core foundation.
But on top of that, I like to add international exposure. Not in Europe--Europe is not growing and not going to grow. But Asia is a great bet. A risky bet but very high return one for sometime to come. I like both South Asia for the commodities that feed China and North Asia as a manufacturer and producer of products. I think ETFs (exchange traded funds) are a good way of adding international bets to your portfolio. What I like about all these ETFs is that they have 50 to 100 stocks in each one. Although watch out, they have quite a heavy concentration in the banks which is the core of the market in most of these countries. Some examples:
There is an ETF (ticker, EWJ) which is a way to bet on Japan. Japan is having a turnaround that is partly driven by exports of capital goods into China and partly driven by changes over the last few years in their own monetary policy. But as an investment, that’s not a homerun. That’s a single.
You can buy South Asia with an ETF (ticker EPP) that is an index of the Australia, New Zealand, Singapore and Hong Kong markets. Think of that as the coal going from Australia up into China, feeding the industrial boom there and the capital markets of Singapore, and Hong Kong that are supplying China with the funds to grow their businesses. There are also exchange traded funds for Taiwan (ticker EWT) which is the home of the semiconductor business--but that is riskier because of the political issues with mainland China. The government of Malaysia just announced that they are bringing broadband through the power lines to every home in Malaysia starting this summer, so I expect some growth from that. The ticker for Malaysia is EWM.
India has had phenomenal growth, but most American investors have difficult time investing in India. One way is by investing indirectly through U.S. companies doing direct investments in India. Most technology and professional service companies are now using it as an outsourcing base. China is growing 9% a year, but India is growing 8% and will for sometime. India will pass China in size of their economy in the next 20 to 30 years. And inside India, they're doing things to make this growth sustainable. What have they been doing? They made a law that foreigners can own land. Foreigners can own bank. They have increased the share of telecom companies that foreign investors can own from 49 up to 74%. India has also lowered corporate taxes and made big infrastructure investments in telecom, fiber-optics and wi-fi. They’re hard wired up to us with fiber-optics. They will grow like crazy.
JR
Posted by John Rutledge at 4:29 PM
July 7, 2005
Cavuto on Business on Fox News, Saturday, 10:30 EDT
Cavuto on Business
I will be a guest on Cavuto on Business this Saturday at 10:30 EDT on Fox News. Safe to say we will spend time talking about the implications of this week's terrorist attacks on the financial markets. Hope you have a chance to tune in.
JR
Posted by John Rutledge at 5:52 PM
The Illusion of Order
Today's events in London have a lot of people crawling into their bunkers again. That's a big mistake.
Over the past 40 years I have traveled 15 million miles, wandered around South America, Eastern Europe, Northern Africa, and made more than 100 trips to the Middle East. I have good friends in all those places. I have been searched by 16 year old soldiers with machine guns, I have been detained by officials with stars on their shoulders but no brains in their heads. I have been in air raids and happened into food riots. I have been stopped by tanks. I am still here.
The world has never been safe; it never will be.
There are 300 million of us; whoever is mad at us can’t get all of us.
The big risk is not the risk of dying; it is the risk of not living.
It is not possible to spend enough money to protect people from other people who want to hurt them. The result would be man-on-man defense, just like in basketball. When I was 18 years old I lived for a time in West Berlin. The East German guards on the other side of the fence walked in pairs so they could keep an eye on each other. they were not having fun.
We should not pretend we can deliver total security. People should take more responsibility themselves for being alert to danger.
The real price of delivering excessive imaginary protection is not the money we pay the TSA employees at the airports, it is our loss of identity, which is a form of auto-immune disorder.
Biological Immune systems do not work by having a list of bad guys to look for. They work by being able to recognize “me”. When a healthy immune system encounters a cell, it is able to determine whether the cell is “self”, in which case it allows it to pass, or is “other” in which case it attacks, kills, or repels the invader.
Auto-immune disorders, such as AIDS, are situations in which the immune system loses the ability to identify itself and makes mistakes of both kinds, killing itself as a result. In that senses they are exactly loss of identity.
The most damaging long-term effect of terrorism is that we have become so focused on obtaining order that we are losing our identity.
In the case of America, our identity is to take risks, try things, and welcome strangers. Fear has driven us into our bunkers, behind our TSA guards, and into racism.
The good news is that we can fix this problem ourselves by remembering who we are.
We need to quit whining and get back to work.
JR
Posted by John Rutledge at 4:56 PM