The tug of war for investor outlook continues with the Bulls and Bears vying for philosophical dominance. If you only knew which side to trust, investing would be much easier, wouldnâ€™t it? But for most, looking no further than your favorite newspaper for clues of verification might be the easiest thing to do.
As I write this column on the last trading day of the first quarter of 2007, the Dow has posted a small loss for the year, and the S&P 500 is flat. And that report comes during what is generally accepted as one of the best times of the year for stocks. Surely a good reason exists for such lackluster performance amid the â€˜â€™Goldilocks economyâ€™â€™ talk coming from the financial media!
While you may be tempted to dismiss the following suggestions on the basis that newspapers thrive on bad news, feel free to allow your better judgment to override that concern. But check for yourself what is reported and determine the implications for investors.
Letâ€™s begin with job losses in our economyâ€™s manufacturing sectors in northern states like Michigan and Ohio. They have led to slower economic conditions, and itâ€™s logical to assume that recent housing downturns there seemed likely to happen. The loss of good paying jobs and the known ripple effects from them should have warned investors about possible and likely outcomes.
Of course, in recent years, searching for a strong indication one way or another regarding the long-term effects of such job losses has been rather confusing. Some economists and market promoters are always available to claim that losing our best paying jobs will actually prove beneficial over time. And since most of us have limited knowledge about economics, taking the assurances of those purporting to be knowledgeable seems only logical. But I am confused with their logic, since higher wages seem to lead to higher consumer confidence and spending. So wouldnâ€™t the loss of better paying jobs have the opposite effect?
Weâ€™ve also heard over and over by apologists and paid promoters that, in the best interests of corporate America, we should lose our manufacturing jobs to low-cost places like China and simply move our workers to well-paid service jobs. Those are the jobs that must be performed here and canâ€™t be outsourced.
By now, you must have read what electronics retailer Circuit City has planned for its service workers. The company recently announced the planned firing of more than 3,000 of its higher-paid workers, those making over $18/hour, and replacing them with workers doing the same jobs, but for less pay. If those workers losing their jobs were making too much money, might this suggest a real problem?
My calculations show that a full-time worker making that wage would earn about $37,000/year. Does that look like a high-paying service job to you? And if Circuit City can do this, wonâ€™t other companies follow? And what will the prevailing wage rate be for full-time service workers in the retail sector if $37,000 is too much to pay them? What would that trend suggest about consumer spending in the near future? And consider, too, that the savings rate for American workers is already negative, meaning that we currently spend more than we earn.
Also in my newspaper today are articles about the one of our largest and most widely respected technology companies, Dell Computer. It seems that managers at that bellwether company have been â€œfudging the books,â€ since an internal investigation into the companyâ€™s accounting practices has uncovered â€˜â€™evidence of misconduct.â€™â€™ Now, if our economy is so good and if Dell is one of our leading corporations, why is there any need to alter the accounting? It seems to me, if business was strong, no accounting creativity, whether accidental or intentional, would have occurred in a company with a team of accountants on the payroll. And itâ€™s not just Dell that has this issue to deal with, with Apple and about 200 other companies doing audits on stock option issues now.
Do you think that the news about Dell is â€˜â€™company specific,â€™â€™ as stock market promoters continue to repeat, or is it a sign of stress in the technology sector? Some older news regarding inventory pile-ups at Intel and its fierce pricing wars with AMD lead me to think that industry conditions arenâ€™t as good as we hear.
But â€œfudgingâ€ is an isolated event happening occasionally at some major corporation, right? Meanwhile, also in the news are revelations emanating from Congressional testimony, showing that U.S. Attorney General Alberto Gonzales may have lied about his involvement in the firing of eight U.S. attorneys. If this report proves true, does it mean that the leading law enforcement officer in our country may not be trustworthy?
In somewhat unrelated news, I read that a leading law firm, Dallas-based Jenkins and Gilchrist, which once employed 600 attorneys, was forced to shut down and pay a $76 million fine to the IRS for â€˜â€™developing and marketing abusive tax shelters and issuing fraudulent legal opinion letters,â€™â€™ according to U.S. authorities. So is anyone telling the truth anymore? But then, if the Attorney General is playing fast and loose with the truth, what example does that set for others?
What that says about our government is one thing, and why it took a Congressional investigation to discover it is another. And perhaps Gonzalesâ€™ boss might not be considered â€œthe straightest arrow in the quiver,â€ considering that the War in Iraq allegedly gained citizen acquiescence under false and misleading circumstances. The legitimacy of that war has long been questioned in the U.S., but news stories now report that Saudi Arabiaâ€™s King Abdullah calls U.S. presence there â€˜â€™an illegitimate occupation.â€™â€™ And how many investors skimmed over that bit of news without considering the implications involved?
The last time our largest supplier of oil took such a defiant tone about U.S. policies in the region resulted in the Arab Oil Embargo in the early 1970s. Back then, the Saudis simply took some oil off the market, and the result was one of the worst recessions of the last century.
Of course, the Saudis would not incur financial hardship by refusing to sell the U.S. less oil. They have new customers now, China and India, which werenâ€™t buying oil in the early 1970s. So the Saudis would emerge from this tussle with their largest customer just fine. But what would this move do for President Bushâ€™s last chance for success in Iraq and the wider region? And what potential fallout could it cause for the U.S. economy and markets?
Too many investors hold risky assets with what seems to be little or no concern for the outcome of our very costly involvement in the Middle East. The strong possibility that we are not winning the war in Iraq doesnâ€™t seem to equate for some that we our losing there. But what are the implications of our leaving that area with nothing to show for it but an angry population in Iraq and surrounding countries and, potentially, regional conflict for years to come? And what about the enormous debts we now owe to foreign lenders and the future costs of care for returning soldiers, all requiring money that we donâ€™t have lying around and will have to borrow from foreign countries, too?
And finally, I saw on CNBC this morning the count-down of minutes until the U.S.D.A.â€™s release of an announcement about how many acres of farmland will be planted with corn, soybeans, wheat and other grains. Yes, it looks like our government will be loading up our largest farmers with subsidies to grow corn for conversion into ethanol.
Yet with all that corn removed from the food supply, and with other crops not planted to make room for more rows of corn, what effect might that have on the price of food and feed grain in coming years? Tyson Foods is already warning about resulting higher food costs. Should we be looking for inflation to become too high for the government to continue â€œfudgingâ€ about it with the same straight face they lie about it now?
Prices are going up much faster than the 2.4% increase announced this week, and they will rise faster in the coming years while the ethanol debacle plays out. I expect investors to plow more money into commodities in the coming months, and, with stocks disappointing so far in 2007, that looks like an easy call to make. Yes, you will always find confusion when listening to the Bulls and Bears about the status of the economy and stock market. But plenty of other clues are available, and, in many cases, right in front of your eyes every morning. Theyâ€™re in the news! Just be aware of whatâ€™s going on and surmise what will come from whatâ€™s happening now. The best investors seem to have a knack for doing just that!
Have a great week, Bob
Bob Wood ChFC, CLU Yusuf Kadiwala. Registered Investment Advisors, KMA, Inc., firstname.lastname@example.org.