Thursday, April 28, 2005

REAL ESTATE SUCKS! 1984-1994-2004 Sideways Markets

There have been numerous comparisons made between the current decade and the 1990's. The striking similarities have been noted by portfolio managers and economists such as Ken Fisher and Ed Yardeni. Harry Dent has published a long-term decade comparison chart to illustrate the same point.

The point I find most interesting is the important similarity and difference in the Real Estate markets of 1985 and 2005. The first home market was different. The first home market had been decimated by the super high interest rates in 1980, 81 and 82. By 1983, the super high inflation rates of the late 70's were finally being snuffed-out. Single family homes increased in value by about 2.5% annually from 1982 through 1985 and picked up the pace in 1986 through 1989 to about 4%. At the same time, resort property prices were going out the roof.

The real estate market this decade makes the 1980's market look anemic. This time first home prices are going out the roof and resort property prices are on the way to the moon! It is natural to attribute the soaring prices to baby boomers who are at the peak age to buy second homes. This is true but the under-reported phenomenon is the degree to which investors are trading in real estate.

The big SUCKING sound we hear coming from the stock market is the sound of funds being sucked into the real estate market. If the "gangs" of investors at Myrtle Beach are duplicated at other coastal towns around the country then we are talking about a major change in our society. We are quickly moving to a two home family norm and investors who have caught the trend are taking full advantage.

Maybe the best visual is to picture a gaggle of geese. The top goose hangs around the beach looking for an easy meal. The prices of condos have moved so quickly that sellers often do not know the fair price. A seller offers to sell and the first goose to the table makes the deal. In many cases, the top goose signs the contract as the "buyer or his assigns". In some cases, these guys are nothing but "pin-hookers" and in other cases they are partners with a large group of investors. "Big Daddy Warbucks" can stay back home in the northeast and put up the cash when the top goose calls his number.

A friend of mine has encountered one group that he knows is at least thirty geese strong. My wife checked through some online court house records yesterday and in 30 minutes she found several d that many investors have purchased 5 or more condos in recent months or years. Those who bought a couple of years ago with all cash have often make more than 100% and those who put only 20% down have made more than 500%!

More and more investors are taking money out of stock accounts to buy real estate. The trend is not a bubble yet because the final demand is still high. However, investors who accumulate more debt than they can service will be in big trouble if they hold too long.

I was just on the phone for an hour with a real estate investor in California. This investor has flipped 100's if not 1000's of properties in her life. She is considering buying 6 ocean front condos from me; exciting times!

Wednesday, April 27, 2005


My family has owned Reebok (RBK) since 1985. The stock has done well and we are in no hurry to sell. However "well" is a relative term.
During the time we owned RBK it has increased in value by 1,100%. When we bought the stock, it looked like a value relative to Nike (NKE); it still does. During the time that we made 1,100%, NKE went up 7,600%! RBK pays a slightly larger dividend than NKE and this dividend is in addition to the capital appreciation. Jeremy Siegel makes the case that dividends add more to the total return than one would think but I doubt that the small dividend difference in these companies is enough to worry over. One lesson to take away is that generally it is best to buy the industry leader.
"Well" really is a relative term. Had we purchased Russell Corp. (RML) on January 2, 1985, our capital capital appreciation would have been 17%; not 17% per year but 17% total since 1985.
Comparing a "t-shirt" maker to Nike is unfair; calling Russell a "t-shirt" maker is unfair; but remember one of our themes is to buy stocks that are "under-loved". We now know that Nike is one of the most successful brands ever. Russell makes quality products and survived a very difficult 20 years in the apparel industry. The comparison of the three companies, shows that investing is an art. Buying good value is always the right approach, but value is a reflection of growth potential, management skill and many other factors.
The following report is about a solid company. A company that is probably a better company than is commonly thought. It does not have the panache of Nike but it is a cheap stock by several measures and we have made it our Stock of the Week.

Russell Corporation has the products to meet the needs of the serious athlete, the weekend warrior and everyone in between. Founded in 1902, The Russell Corporation located in Atlanta, GA. runs every step of the manufacturing process, from weaving raw fibers into fabric to dyeing, cutting, and sewing. RML designs, manufactures and markets a variety of apparel products. These products include fleece, t-shirts, casual shirts, jackets, athletic shorts, socks and camouflage attire for men, women, boys and girls. With eleven brands, Russell Corporation has something for everyone.

The Russell Athletic division is the world's largest supplier of team uniforms and is the Official Uniform Supplier to 14 Major League Baseball(R) teams, Little League Baseball(R), and USA Baseball(TM). Russell outfits over 200 NCAA(R) Division I college teams and is an Official Sponsor of the Women's Basketball Coaches Association (WBCA), the American Baseball Coaches Association (ABCA), and the National Fastpitch Coaches Association (NFCA). Russell apparel can be found in a variety of department stores and sports specialty retailers nationwide.

The JERZEES division is a major supplier of fleecewear and T-shirts to retailers and screen printers. Russell purchased SHC's sporting goods business (Spalding and all other non-golf brands) in May 2003.

The company holds a firm commitment to a very simple philosophy, "do the right things for the right reasons." In today's competitive global marketplace, Russell feels its greatest strength is its people. It employees 14,400.

Russell Corporation supports non-profit organizations with product donations, cash contributions and employee volunteer hours. The company focuses its efforts on programs, projects and activities that benefit the communities where its employees live and work. By working hand-in-hand with the local communities, Russell strives to make a difference in the towns and cities around the world that its employees call home.

Over the last two years, Russell has made the following acquisitions:
* December, 04 acquired Brooke Sports
* July, 04 acquired Huffy Sports
* April, 03 acquired Spalding
* Jan, 03 acquired Bike Athletic

On February 23, 2005 Russell Corporation reported fiscal 2004 fourth quarter sales of $334.0 million, an increase of 10.5% over the same period a year ago; 9.4% for the year. Sales for the quarter ended January 1, 2005, reflect a 3% increase in the Company's ongoing businesses in addition to approximately $22 million dollars in incremental sales from acquisitions owned for less than a year. Sales gains were again recorded for the Activewear Group, the Athletic Group and the International apparel segment.

"During the fourth quarter, sales increases in our domestic segment were led by our Athletic Group. Increases in Athletic were driven by our recent acquisitions, which have solidified and grown our position as a leading branded athletic and sporting goods company. Our International apparel segment continued its sales growth pace, with increases of more than 20% for the quarter and the year," said Jack Ward, chairman and chief executive officer. "For the quarter, our Activewear Group had a 3% increase in revenues, led by our JERZEES(R) sports apparel in the mass channel."

For the full year ending January 1, 2005, net sales increased $112 million to $1.298 billion, a 9.4% increase over the prior year's sales of $1.186 billion.

Those of you who are familiar with Jack Ward, know a fierce competitor. Back in the days when he was at Sara Lee, there was no one in Winston-Salem who garnered more respect. I lost track of Jack some years ago but seeing the number of acquisitions made by Russell in recent years and then reading Jack's name as CEO was a revelation. It made the idea of buying this historically slow growing stock a no brainer.

Russell expects sales for fiscal 2005 to increase approximately 15% to 17%, to approximately $1.50 billion to $1.52 billion.

The 52-wk high (12/28/2004) is $ 19.78 and 52-wk low (5/18/2004) is $ 15.60. The closing on April 27th was $17.70.
We hope you are a disciplined investor. One who diversifies into 12 to 20 stocks, who trades infrequently, who makes his own decisions, who lets winners run and cuts losers short and one who keeps commissions low. AS ALWAYS, WE MAKE NO RECOMMENDATIONS. INVEST AT YOUR OWN RISK!

Monday, April 25, 2005


Apple, Google, Comcast and others have been rumoured take over partners of TiVo. A deal is never done until signatures are on the documents but there continue to be signs that something is up. The stock movement is one of those things. Another is that departure of the chief architect of some of the new advanced features. This programming whiz received something like $35 million when he sold his company to TiVo last year. Now it appears that TiVo is accepting the changes needed to take the next step. All cannot be happy when changes are made.

My family accounts are fully invested. I won't buy more TiVo but I suspect good things are ahead. Even if there is no take-over, the new system is likely to inspire visions of what is to come.

Google Maps on TiVo | PVRblog

Google Maps on TiVo PVRblog

Now you can get those cool Google maps on your TiVo! Digital technology is changing the world.


Yield Curve--Spencer England's Review (click picture to enlarge)Posted by Hello

I have failed to find internet information about Spencer England's Review, other than the chart posted on The Big Picture by Barry Ritholtz. I am not familiar with Spencer's work but the above chart is an excellent picture of the history of our economy. I hope to see more of this excellent work; a good economic chart is worth 10,000 words. The article that follows this one includes a link to Barry's excellent site, The Big Picture.

The red line above is a plot of the yield differential between the 10 year treasury and the fed funds rate. This past Saturday, I posted a study done in 1996 showing how well the yield curve forecast economic growth. The above chart demonstrates an even tighter relationship when one adjust unemployment for the inflation rate (the black line).

I plan to spend at least a couple of hours relating this chart to the turning points in our economy. A quick look reveals that the two indicators are coincidental in nature. There are times when each leads the other. This means that when there is a divergence, then one can count on an adjustment to one or the other to bring them back into balance. The adjustment might be coming in the bond market or in the economy. You may not know which but at least you can approach that market with caution. At the current time there is no divergence, both indicators are forecasting 2% inflation adjusted growth which is not bad at all.

There have been many a time in my life that I have been able to take full advantage of a divergence. For example, after leveraging Treasury Bonds heavily in 1984 and making a wonderful return, a divergence occurred in the late fall of 1986. There were tax law changes that forced banks to sell municipal bonds. There was much confusion in the markets and many predicted that the law changes were about to cause long rates to rise dramatically. Holding millions of long bonds on margin, I was understandably very nervous. The solution was simple.

The crazy thing was that suddenly long municipal bonds yielded more than the long treasuries, before adjusting for the tax advantage! I sold the treasuries and purchase tax free bonds. Over the coming months the municipals appreciated significantly in value. Long rates really did not change very much but tax free municipals regained a health price differential over the taxable bonds, what a sweet trade!

The key point to take from this chart today is that current levels of these indicators are positive. The economy is in good shape. The recent sharp drop in unemployment claims might normally cause one to worry but ironically the current big concern in the market is that the economy is slowing too much. The commodity price bubble has basically broken and Nervous Nellie's are worrying over inflation and slow growth at the same time. The term for slow growth with high inflation is stagflation. Greenspan and I laugh at those expressing this concern. The economy is hitting on all cylinders. Whenever Greenspan is able to take his foot off the brake, the markets are going to take off!

Buy the Big Bull Boom Bubble that is coming! Beware the Bust that is about 4 or 5 years away!

The Big Picture: Economy Yield Curve vs. Unemployment Less Inflation

The Big Picture: Economy

This past Saturday, I pulled up an old Federal Reserve Study to show that one can predict economic growth by paying close attention to the yield curve. Today, I was delighted to find a beautiful chart on Barry's site that shows the same yield curve analysis versus the inflation adjusted unemployment change.

There are a number of reasons I like the chart. One is that it shows how the yield curve projected very strong growth in 1992 and it then called for gradually slower growth through the rest of that expansion. For some reason, many newsletter writers seem to be frightened that our current rate of growth is slowing. It makes no sense to be frightened of something that is natural and predictable.

I encourage my readers to take a look at the chart. Note the times the red line was below zero. You have to be on the look out for these troublesome periods but note that we are nowhere near the zero line and indeed we are close to the average area for the past 50 years.

Yes, growth has slowed, but coming off the recession our economy grew at a nominal rate of 8%! Who would ever expect that kind of rate to continue. Two percent inflation adjusted growth is fantastic. Just what we need and just what the yield curve is forecasting!


Our STOCK OF THE WEEK selections have done well. We are still struggling as to how to effectively post the portfolio. For comparison purposes, we "purchase" an equal dollar investment in the S&P 500 index each time we add a SOW selection.

The portfolio results then show how well the portfolio has done relative to this large stock index.

The following is a list of our selections so far. As you can see, our results to date have been excellent and especially good when compared to the tough market environment. Because the airline business is a distressed industry, we split our investment into two separate companies, CAL and AMR. This has given us a margin of safety while both stocks have done well. Here are the three best picks and the over-all results.

Continental Airlines (CAL), up 51.87%

GameStop (GME)up 20.38%

U.S Gypsum(USG) up 36.67%.

Overall the portfolio has gained 7.76%

The same investment in the S & P 500 has declined -1.67%.
Scroll down to see the entire SOW portfolio.

SymbChangeSharesLast TradeValuePaid$Gain%Gain
SRZ+.2185$48.24$4,140.$47.07$ 94.45+2.36%
Total Value $34,276.08+5.00%
S&P 5006.91$1162.$34,939.64+3.00%

Bill Cara: Capital Markets & Social Equity

Bill Cara: Capital Markets & Social Equity

Bill Cara may be onto something in that Ford is selling at a very low PE ratio. The last business cycle showed us that the motors can now do well even in a climbing interest rate environment. The key is that the motors have extra large profit margins built into the price and can give some of this away in the form of zero interest loans or rebates.

In regard to the over-all economy I believe Bill is missing an important fact. Earnings momentum is not expected in the second half of an economic expansion. The rate of growth is expected to slow during this time. Just like it did from 1994 to 1999. This was a good time to own stocks even though earnings growth rates slowed.

Market Snapshot: U.S. stocks gain on data, earnings, M&A deals - Telecommunications - Fiber Optics - Markets/Exchanges - Market News

Valero has done extremely well in recent years because it can refine "heavy sour" crude whereas most refiners stay busy in high demand years and low demand years by refining "light sweet" crudes. No one know how long the price will remain high enough to allow VLO to run at maximum capacity. Obviously the company has confidence in that it just paid a good price for Pimco.

The big story is that mergers are still a foot. Investor should buy stocks before they are bought by competitors or buy the companies themselves. Excess shares are being soaked up. This process basically keeps a floor under the price of stocks until the day comes when there is a bidding war for the remaining shares. We should see a four year bull market when the bidding war starts. Today is another strong day for the market. This could be the start of something big.


Weider Nutrition International

Without the necessary vitamins, minerals, and nutrients our bodies fall into a degenerative state, known as aging. You need the necessary amino acids, minerals, proteins, and vitamins to revitalize proper cell regeneration and without them, the body falls faster into disrepair. A little over fifty years ago, Denham Harman, a researcher at the University of California at Berkeley, realized one reason why people get old. Free radicals, molecules that can attack cells, are responsible. He theorized that substances found in our bodies and in food called antioxidants might just slow the damage.

Harman's free radical theory of aging was initially greeted with a mix of apathy and criticism. Industrial chemists had long known about free radical reactions--for example, free radicals make iron rust--but most scientists had doubted that they occurred in living creatures. That was then; this is now. Nutrition.

Today, thousands of studies have corroborated Harman's theory. "Antioxidant" has become a household word, and, according to the Nutrition Business Journal, Americans spend billions of dollars on antioxidants each year. Antioxidants can reduce your risk of heart disease, cancer, and Alzheimer's. They might even increase your life span.

While research shows that exercise and a nutritionally balanced diet can help improve our health, it also shows that our food supply is not what it used to be. Commercial practices such as over-harvesting are thought to contribute to the problem. The considerable evidence shows that supplements can help.

The Nutrition Industry facts reported sales of $63 billion dollars just 2 years ago and they project a steady climb in growth over the next 5 years.

Weider Nutrition International (WNI), located in Salt Lake City, UT develops, manufactures, markets, distributes and sells branded and private label vitamins, nutritional supplements and sports nutrition products. Weider distributes its products to over 60,000 retail locations. Using health food stores, drug stores, supermarkets, gyms and mass volume retailers like Costco and Wal-Mart, which account for about 50% of their sales. Their portfolio of recognized US brands include Schiff®, Weider Sports Nutrition, and Tiger's Milk® Protein Bars.

The Group is organized into three business units: The Schiff Specialty Unit which markets a complete line of specialty supplements, vitamins, and minerals under the Schiff brand as well as private label products. The Active Nutrition Unit develops and markets sports nutrition, nutritional bar and weight management products primarily under Weider and Tiger's Milk brands. Tiger's Milk, introduced in the 1960s, is known as America's first nutrition bar. Last but not least, another division called Haleko develops, manufactures, and markets nutrition products primarily under the Multipower and Multaben brands. Weider operates in the United States, Germany and South America.

History:Joe Weider is credited as the founder of the Sports Nutrition Industry in 1940. The company has a rich history as a leader in the nutritional supplements industry. Weider Nutrition began as the nutritional products division of Weider Health and Fitness. In 1989, Weider Health and Fitness established its three principal business divisions (Sporting Goods, Nutrition and Publications) as independent subsidiaries. The 418,000 square foot Salt Lake City manufacturing facility, opened in 1997, provides Weider with the capacity to quadruple its current annualized sales. In June 1999, Bruce Wood joined Weider as President and Chief Executive Officer. Mr. Wood brings over 25 years of food industry experience, primarily with divisions of Nabisco, Inc.

The Weider Group feels the key to the long-term growth has been the success of core brands. Weider is focused on supporting and building the strongest brands and developing and marketing high quality, innovative new products that meet consumer needs and demands.

As part of brand building and product development efforts Weider announced the sale of certain assets of its Active Nutrition Unit to Weider Global Nutrition, on April 1, 2005. A wholly owned subsidiary of Weider Health, a privately held company in California and the majority stockholder of the company. Bruce Wood, president and CEO, stated, “The sale of the Weider branded business enables us to focus on our core businesses: the Schiff Nutritional Supplements Brand and the Germany based Haleko business.”

Weider knows that anticipating and meeting customer needs is critical. The company has a track record of developing first-to-market products. To continue to seize these opportunities, the R&D and marketing teams are working closely together to develop and carefully test highly-targeted products. Each new product has anticipated measurable return on investment goals.

On November 11, 2004 The Schiff Group introduced a new joint care supplement called Lubriflex3™ that provides fast-acting joint comfort and promotes better joint health. The product’s triple action formula combines Uniflex™, Lubriflex a powerful antioxidant that protects cartilage and joints, with Joint Fluid, a compound that helps joints glide easily and smoothly, and Glucosamine, an ingredient well-known for supporting joint cartilage and maintaining healthy joint function. The net result is a faster-acting supplement that can provide improved flexibility and joint function in just a few days.

By adding Uniflex™ and Joint Fluid to Glucosamine, Schiff® is breaking new ground in the supplement industry. Emerging results from an ongoing study show that in the very first week of use Schiff® Lubriflex3™ was dramatically more effective than Glucosamine alone in improving overall joint function. In fact, 83% percent of users reported that they experienced improved joint comfort. 78% said that they could even function better during daily activities and 72% showed improvement in physical functioning scores.

“The wonderful thing about Lubriflex3™ is that it can do what traditional pain relievers don’t by addressing the root cause of the joint discomfort,” said Luke Bucci, Ph.D., vice president of research for Schiff®. “Glucosamine has earned its reputation as a truly effective supplement when it comes to building joint cartilage. By adding the comforting properties of Uniflex™ and the protective actions of Joint Fluid lubrication to the equation, we’ve found a powerful, faster way to provide joint comfort.” Suggested retail price of $22.99-$25.99 for a 60-count package.

The stock traded at its 52 week high ($7.15) on April 4th, 11 days ago. The stock is currently trading at $4.20 (written on April 22). We remind you that Jack and I are amateur investors and do not recommend stocks for purchase. We enjoy researching these stocks for our own pleasure and the benefit of our families.

Reporting a loss in 3rd quarter sales over the same period last year hurt the stock. Bruce Wood explained it this way, “We experienced a modest decrease in third quarter sales over the year-ago period. The reduction is primarily a function of a decline in domestic private label sales, as well as weakness in our Haleko business unit’s. We also experienced a reduction in our gross margin and operating margin percentages. Operating results were negatively impacted by volatile raw material costs in our joint care business, increased marketing spending in support of new products, and disappointing Haleko branded sales.” He goes on to say that he expects higher raw material costs and a challenging competitive environment in Germany to continue. “Nevertheless, we remain committed to a long-term strategy of strengthening our brands in what continues to be a very competitive and compressed margin marketplace, and our strong balance sheet provides us with resources to support this strategy.”

Thankfully, I have not had to use their Joint Care Supplement yet, but after my research and 777,000 hits from my internet on sites that recognized their name, I realize they are one of the most trusted and respected brands due to their focus on research, innovations and delivery of high quality supplements. They emphasize the use of the finest natural ingredients to ensure that its products meet strict standards for labeled potency, purity and stability.

They know growth relies upon sales and sales upon quality product and superior distribution. They have always perceived their customer relationships as huge resources and growth contributors so they will continue to model successful marketing programs to enhance communications and responsiveness to relationships with greater potential.

Bottom Line- Weider Nutrition International is a company worth watching. I keep getting older every day. Can vitamins help me regain my youthful look? You decide.

Comment from Jack: my sister and my basketball team member swears by the combination of Glucosamine and other ingredients. My sister's doctor says that many a joint replacement surgery could be avoided by the regular use of these products. There is also evidence that bone desease is attacking men almost to the degree of women. There are 55 million baby boomers in America. We look for long-term buys and this good be another good one.

Saturday, April 23, 2005

Economic Research and Data | FRB Cleveland

Some bloggers seem to be overly anxious about the slowing growth rate of our economy (ironically on the same week that unemployment claims hit a new low). I did a Google search to pull up the above article from the Cleveland Fed, written in 1996. Before discussing the article let me point out that it is natural if not automatic for the growth rate to slow after the first couple of years of recovery.

Lets say that during the recession you are afraid you will lose your job and that your family goes out to eat once per month. When the recovery comes, you have spent a year or more of tight budgets, you have paid off debt and you find yourself in good financial shape. Maybe you start going out to eat four times each month. Others in your community do the same. A year later, you and the economy are doing very well and you may go out five times each month. The restaurants experienced a high revenue growth percentage the first year and a smaller revenue growth percentage the second year. However, the restaurants can now raise prices because they are playing to a full house. All the bloggers start talking about inflation as there is moderate inflation in a healthy economy. Profit margins go up and total profits go up even more because there was growth in revenues and growth in margins.

Finally, the recovery morphs into an expansion. The restaurants are doing so well that they build at new locations. The expansion typically last several years but it is not always the best of times for every business. Sooner or later, one too many restaurants are built. The existing restaurants are no longer playing to a full house. To maintain margins, costs must be cut. If there has been over-expansion in enough businesses, there may be a recession as a cut back in employment at one business leads to lower sales at the next and so on. Sooner or later, the government must "prime the pump" through deficit spending to restart the cycle. Investors need to learn that the best time to invest is when the government is running a deficit and it is a risky time if the government is taking in more revenues than it spends.

One can understand much about where an economy is by studying the yield curve. The above article shows how the curve predicts economic growth reasonably well. In today's economy, it is natural and good that short rates are going up a little. This shows that the economy is strong enough for businesses to desire to borrow money. Market prices are largely determined by the "invisible hand of Adam Smith"; i.e. the market for everything tends to automatically correct itself. Therefore, when short rates go up, it says that there is demand for businesses to borrow but it also says that businesses that have already borrowed are feeling a credit crunch (most business loans are floating rate loans). As the interest costs go up, businesses will be more cautious about expanding and the rate of growth of the entire economy will slow; the GNP growth rate is low when the yield curve is relatively flat. Again, the main reason it is slow is because the year over year comparisons get to be tough after growth has recovered from the recession lows.

The good news for stock investors is that companies are already making big money and are cheaply valued. Business spending continues to be very strong without pushing up rates quickly because businesses are enjoying historically strong cash flow. The current situation is similar to what happened in 1994. The GNP growth rate slowed to a more sustainable level, companies continued to enjoy strong productivity gains, profits continued to increase and stocks did very well for the next five years.

Be a bull with me are be a bear with others but please don't be a whiner.

Blogs Will Change Your Business

Business Week is one more of the major media companies that has figured it out; blogs are changing the publishing world. The article gives a number of examples of how blogs have changed businesses. The place the article does not adequately discuss is the change coming to newspapers and magazines.

Friday, April 22, 2005

All Things Financial - A Personal Finance Blog

My friend at AllThingsFinancial asked why the price of milk remains so high? The following is the answer I posted on his site.

Are you or any of your friends on the Dr. Atkins, South Beach or other low carbohydrate diets? I know people who are and this is your answer to the price of milk!

The price of steaks went up when the fad was at its peak. Dairy farmers happened to be suffering at the time and they naturally thinned their herds, selling heifers for beef.

Supply and demand kicked in and here we are. The comments from those who live in areas where the milk price is "stabilized" show the extra barriers the milk market must fight. It takes longer to rationalize markets when there is interference from governments.

New breeding techiques have helped the markets adjust more quickly but it still takes time. The beef market was traditionally an 8 year market from peak to bottom prices. The reason it takes 8 years is the only way to increase a herd is by keeping heifers off the market.

Yesterday, beef tenderloin was selling for 18.99 at our local market. A couple of years ago, the price hit $6.99 on sale.

At $18.99 a farmer does not have to think twice about raising a heifer for the milk dividend or selling for the capital gain.

Real Estate Weekly: Real Estate Weekly -- April 22 - General News - Personal Finance

The 1031 tax free real estate exchange is getting big play. Several of the properties my wife and I recently sold at Myrtle Beach were purchased by those doing a tax free exchange. Those who have made big money in real estate are keeping it--real estate investors don't like to pay taxes. It appears that a number of folks who have owned rent houses and apartments for income are now converting to resort property so they can enjoy what they have made.

The key is to move from a hot market to a cool market. The big problem is the cool market is shopping malls and office buildings. Still there are opportunities. No need to pay capital gains taxes unnecessarily.

The stock market has been such a yo-yo for the past few days that it is a relief to talk about real estate. The trouble is that stocks, bonds and real estate are all linked at the hip. A GNMA bond is a reverse mortgage. The value of a fixed rate mortgage swings in the opposite direction of a bond. Obviously it is hard to sell real estate if the rate on a GNMA is high but it is easy to sell a GNMA if the rate is high.

The r-square correlation of real estate and value stocks is 73. The r-square correlation of real estate and US Treasuries is 24. The r-square correlation of value stocks to US Treasuries is 20. It is not news that if long interest rates go up that real estate and value stocks might struggle.

The current situation is that long-rates are not going up, real estate is soaring and value stocks are struggling. The only part of this sentence that does not fit is why are stocks not going up if real estate is going up and long rates are staying steady? Sustained low rates increase the relative profits from stocks and real estate.

Clearly the market has been afraid of rising rates for some time. The fear was present the first three quarters of 2004 and it

Motorola back on track for iTunes mobile -

Motorola back on track for iTunes mobile -

Motorola has been good to my family. The company struggled a few years ago. We sold all our stock and bought it back maybe two or three years ago. Since then it has gotten back on track. The company just announced a good quarter as did NOK. New phones with lots of bells and whistles are on the way.

Stocks of this type are in competitive businesses. Samsung and Motorola have battled back and forth for second place. Everyone wants to have the accepted technology and the old simple phones are commodity products like calculators.

There is still room for growth. The iTunes phone mentioned in this article is just one example of what is coming soon. Many folks will up-grade to new radio-TV-computer phones. Motorola has new leadership and innovative products. We plan to hold our shares through-out this business cycle.

Goodyear and Pilot Announce Agreement

Goodyear and Pilot Announce Agreement

Wednesday night a Morgan Stanley Broker and I had a good conversation about our favorite stocks. Phillip Morris has been one of his all time great stocks. We both reminisced about how wonderful this company has been to own when other stocks are in the tank.

Goodyear Tire is my all time favorite. I purchased the stock cheap after the 1982 recession, after the 1990 recession and again about three years ago. Each time the stock has been very good to me. It is one of the most cyclical stocks of all time. From its low after the big recessions, it produces 10 bagger results. This time, my cost is $4 and $5 per share and it has already traded above $15. It is currently trading back in the $11 area. My son in law asked me when we are going to sell it and I told him the only question we need to know is how many shares we will have when the stock hits 100.

The truth is that it is harder to know when to sell this one than when to buy. No one rings a bell at market tops. My guess is that I will sell around January 15, 2010. This stock was my families largest position for awhile but now Google and CAL have taken the lead. As the linked article shows, Goodyear is doing well. The company recently refinanced tons of old debt. The cost cuts in the union contracts were significant and this business is very levered. When it does well, it does extremely well. It seems to narrowly escape bankruptcy at the worst of each recession.

The recession pattern has lengthened. In recent times, the Fed has successfully avoided the mid cycle recessions of years gone bye. Here is the pattern for the past 35 years: 1973-74 real estate recession, 1981-82 manufacturing recession, 1990-91 real estate recession, 2001 manufacturing recession. Should the pattern hold the next recession should be a real estate recession beginning in 2010 or 2011. Oops, maybe I will sell my Goodyear in 2009, I don't want to be greedy. Catching the middle of a long run is often the wise way to be ready to prosper during a recession.

Futures Movers: Crude tops $55 with support from gasoline - Oil and Gas - Energy - Commodities

Futures Movers: Crude tops $55 with support from gasoline - Oil and Gas - Energy - Commodities

President Bush is pushing congress hard to complete an energy deal. Saudi Arabia says they have plenty of fuel--just send them the customers. ConocoPhillips has had a refinery restart problem after maintenance. A skeptic would say that the refiners are helping Bush pressure congress.

I have repeatedly suggested that one should not under-estimate Bush. The energy bill is important but Social Security reform is the big prize. The reform will help the people and the country. The accomplishment would add to the legacy of Bush.

Bush has stated that the passage of the energy bill will do nothing to help in the short-term. I suspect the refineries well operate a little more efficiently after the energy bill has passed. I do not look for quick passage because the judiciary filibuster issue well come to a head before the senate passes its version of the energy bill. If the democrats "slow-down" the senate as their response to the filibuster issue, the failure of the senate to pass the energy bill could become a club in the hands of the President. We could see very high gas prices this summer under this scenario.

Stocks may suffer while the senate fights through the problem. A resolution of the senate filibuster problem could be very positive for the stock market. Buy the big bull boom bubble before the bust.

Thursday, April 21, 2005


I have written the above many times. We have already had a false start or two. Anything can happen in the short run. Make sure you are on board when the train leaves the station. It is hard to catch a train that is speeding down the track.

The Big Picture: One day does not a rally make

The Big Picture: One day does not a rally make

Barry is right--one day means nothing. I am still bullish. My time frame is longer than the average investor so it is no big deal if the market resumes its sideways action. I will be on board when the big move comes. The Google earnings were big enough to make one think the stock will at least move to a higher trading range. Google is not the only stock of the quarter to do well. Earnings are strong, interest rates are low and the Fed continues to fight relatively tame inflation. I have backed up the truck and loaded it with stocks. The big move is coming.


Investors often pay too much for growth but the indications are that Google is going to change your life and mine. I think the change has just started. By a few shares and put them in your safe deposit box. Don't sell until every nation in the world has been Googled!

BIG Bull!

Over the past several weeks, I have stated time and again that stocks are under-valued. The public has socked away incredible sums in money markets and savings because of fear; at some point that fear will become the fear of missing the big move. I have suggested that when this market starts to move that it might move very rapidly.

Today was one of those "melt-up" days. Was today the start of something big? It is impossible to say because it never makes sense to try to call daily moves. There are simply to many variables. I have never known anyone who can predict short term moves profitably. I have seen people make tens of thousands of dollars in short-term trading but I have seen those same people lose it all back.

I have written time and again about Google. My post on December 30, 2004, Do the Google Gulp! has received wide distribution. The indications have been clear for months that Google is growing revenues and earnings fast. Today's numbers were fantastic. Mad Man Cramer went ballistic about Google on tonight's show. Suddenly he has gone from gloom and doom to forecasting $318 on Google.

My family has already loaded up the truck. We will probably not buy much more Google but we certainly plan to enjoy the ride. If Google can make $1.12 the first quarter, surely it can make $1.50 by the last quarter. It could easily do more and be on track for $10 per year in 2006. Let me put it this way, if the stock makes $1.50 by the last quarter and trades at $500 per share, I will not sell.

Google just made a deal with accuweather. This is not a huge blockbuster but it is noted here as an illustration of how much more advertising space Google still has to corral. Do you ever get frustrated when you turn on the local news to see the weather forecast? If you could hit one or two buttons on your cell phone to see the accuweather forecast in your area would you object if there were an advertisement next to the forecast?

If you want free information, you can count on Google. Google is just one of many of my families holdings. We will not go to the poor house if Google falters. The BULL is not in Google alone. Investors are very confused. One day they worry about inflation and the next about deflation but all the while American companies are making increased profits. Buy the Bull!

Judicial Nominees May Force Filibuster Fight (

The big show down is coming. There is horse trading and a game of chicken being played in the US Senate. I continue to believe that Bush is being under-estimated. Major change is coming. The country is on the right path but we have much more progress to make.

It is possible that the timing will be such that if the Dems shut down the Senate, it will be with the energy bill sitting on the table. High fuel prices this summer could put the Dems in a bad spot. The public might get wary of a shut down of the government while energy legislation and other important work is shut down.

If there is a shut-down, predicting the short-term swing or swings in the market is dicey. I suspect the market will go up. By the end of the year, I expect we will be in a full blown Bull Market if we are not already. First, we have to see if the Republicans have the guts to change the rules. Judges have not been filibustered in the past but Jesse Helms and many others have used Senate rules to frustrate the judiciary process.

Supreme Court nominations are the second prize. I also suspect that if Bush can trade a few votes for an energy plan and for Social Security reform, he may be willing to back off on the filibuster. Social Security reform has the potential to do this country and all its citizens a tremendous amount of good. Passage could put Bush in the category of greatest presidents of all time. It is important to note that the Supreme Court remained relatively liberal after Nixon, Reagan and Bush I. Moving the court too far to the left or right can be dangerous for the party in power. The public wants checks and balances to remain in our system of government. A packed conservative court could hurt the re-election chances of house and senate members and give the Dems a better chance in the presidential election.

The bottom line is that a republican president with a republican house and senate is going to move the country. The Senate can slow the move but it will eventually get dragged down the road. Social Security is the big prize. Young Americans need to build their own retirement and to take ownership of it. The best lock-box is putting the funds in the names of the owners.


Bill Cara: Capital Markets & Social Equity

I love to read Bill Cara's work because he does not mince words. If you have been reading his blog and mine, you know that he is bearish and I am bullish. The reason for the difference in our posture is highlighted in his article today.

He and others continue to wonder why long rates go down every time Greenspan raises short rates a little. There are a couple of simple answers. The key is that the market sees that there are numerous dis-inflationary forces at work and an increase in short rates is an obvious brake on the economy. We are still in a long-term down trend in inflation and in interest rates. This trend began back in the days when Paul Volcker was Chairman of the Fed. The trend has been aided and abetted by the opening of trade and the invention of the internet.

The fear of an inverted yield curve reminds me of the old saw that economist have predicted 15 of the last 5 recessions. If the market believed that inflation was out of hand, long rates would be going up, regardless of the quarter point moves by Greenspan. Greenspan's tiny little quarter point moves would only irritate the markets if inflation were really a problem. The reality remains that the costs of many products and services is going down. Even more importantly, labor costs are well under control.

The steep decline in unemployment claims is a bit troublesome. It is an indication that inflation may become a problem. The crazy thing is that one day investors are worrying about the "soft patch" and the next day they are worried about inflation. Today, when Greenspan was asked about the risk of stagflation, he laughed!

Today, when Greenspan was asked about the risk of stagflation, he laughed! GDP is growing at a fast rate and the PCED shows that inflation is historically low! In other words, the numbers are too good! In case you missed it, when Greenspan was asked about the risk of stagflation, he laughed. We are so far from a stagnant slow growth inflationary economy that it is laughable to worry about growth and inflation in the same breath.

Historically when GNP growth has been extremely strong, smart investor knew it couldn't stay strong without causing inflation and when inflation has been low, smart investors knew that the economy must be weaker than thought. The current numbers are too good!

The economy is strong and inflation is low! The environment for stocks can't get much better. Stop worrying about every bump up and down, buy good American companies and hold on for a great ride for about 4 years. There will be plenty of bumps along the way but at the end of the ride your account will probably be worth more than double its current size. - NYSE to Acquire Electronic Trader And Go Public - NYSE to Acquire Electronic Trader And Go Public

Merger mania continues. Archipelago is a part of the new world of trading and of course the New York Stock Exchange is part of the old world. Through the merger, the New York Stock Exchange becomes a part of the new world.

The good news continues to be that consumers are getting a better deal every which way they turn. Yes, it is true that the whiners focus on the increases in oil prices and other relatively "static" goods. They see inflation every where. Most of the whiners were not alive during the 70's or they do not remember.

Even the news that consumers are getting a better deal gets turned upside down. One reads about the price war in brokerage commissions or the new VoIP phones typically in articles telling how Schwab and SBC revenues are down. It is a fact that the new economy has forced companies in most industries to cut costs. The opportunity for substitution are great during times of revolutionary change. For example, I just received a real estate contract attached to an email. It is very easy to substitute a pair of socks made in China for a pair made in the US nowadays. In the recent past, this would have been impossible.

Another potential merger in the news is between American West and US Air. Big companies like Merrill have panned the merger but I do not know their motives. It seems perfectly logical to merge a western and eastern carrier, re-deploy assets, reduce redundancies and have a stronger surviving airline. The companies may not need the help of the merchant banks for a big recapitalization given that the financial structure of US Air has been altered during bankruptcy.

Merger mania should continue until the hoards of cash on companies balance sheets is reduced. Companies have the opportunity to increase profits at the stroke of a pen. They can buy back their own stock or buy out other companies.

The airlines industry is the obvious one with excess capacity. And yet, Delta, one of the weakest carriers, just beat expectations. DAL had another big loss, partly due to high oil prices, but, again, had a better quarter than was projected. There are too many newspapers, telephone companies and internet companies, to name a few industries. Consolidation has been happening for several years. In the internet area there are still a lot of start ups being created but even here big mergers have been the order of the day.

Merging to rationalize markets is an old story. Mergers are a part of the "gales of creative destruction". The story is often similar to the following: In a rural town there are two feed and seed stores; neither are making much money. Eventually one buys the other. The survivor does very well and expands to the next town. Sooner or later there are two competitors going head to head in several towns. Being survivors, these two play a good game of tit for tat and do not engage in destructive price wars. To grow the business, they each add farm machinery and hardware. Sooner or later, they take on "extra" costs. They may have long-term employees who make good wages, liberal return policies and even liberal donations to charity.

Under the circumstances, it is possible for an employee who really knows the feed and seed side of the business to talk a number of good customers into backing him in opening a new feed and seed store. In a good economy, it is possible that all three store do ok for a time. It is also a possibility that Home Depot or some other national chain will build next door and put one, two or all three out of business.

The point is that the economy is dynamic. There are times when companies grow and expand without much resistance. There are other times when the best way to "grow" is to buy a competitor. We are currently in a market where a relatively few "new" businesses such as cell phone providers and internet service companies are growing organically. Many businesses are not experiencing fast growth in reveunes but are successful in increasing operating margins and bottom line profits. We are also in a time where many businesses best opportunity to increase profits is to in effect shrink the total equity in the system by buying back their own shares or by buying out a competitor.

I have written often that the FON-NXTL merger is one that I believe makes good economic sense. It is a "win-win" deal. I believe airline mergers make sense because costs can be cut while resources can be allocated for their best use.

Data show that companies have unusually large cash balances. It makes good sense for these companies to increase dividends or to buy back shares. It makes sense for investors to buy shares in cash rich companies because the buying back of shares typically increases profit per share. The risk of buying a cash rich company is that it may buy a competitor at a rich price. In the current market this risk has not been high. For example, when GME bought its largest competitor, GME went up as the merger was calculated to be accretive to earnings by the end of the very first year!

Investors should over-weight stocks in their portfolios and they should under-weight bonds. Note that in many of the recent mergers, additional debt is being added and significant amounts of cash are being paid for shares. The indication is that companies are willing to borrow against assets to boost earnings. The risk factor for the companies debt goes up at the same time the earnings per share goes up--good for stocks but bad for bonds.

Buy stocks: the big bull boom bubble and finally bust are still ahead.

Wednesday, April 20, 2005


It is amazing that inflation fears are everywhere. The Fed Beige Book does not normally move the market but this time words about the strengthening of inflation worries has dropped stocks and bonds.

Is has been said that Generals and Brokers fight the last war. The big bull market that ended 1929 ended in a protracted deflationary spiral. The big bull market that ended in 1969 ended with a protracted inflationary spiral. We are currently in an inflationary down trend that started in 1980. Long term interest rates have fallen from 15% in 81 to 4.5% in 2005. Is the decline over? Is the next problem the same as the last one?

I believe the next big problem will be deflation not inflation. The forces at work are killing one old inflated industry after another. I just wrote about the dying circulation of news papers. Folks are still reading the news and responding to advertising. They simply do not need reams of newsprint to dispose. This is another example of the law of substitution at work. The CPI probably shows that the cost of the average newspaper went up from 41 cents to 43 cents last year. So what? How many people saved the 43 cents by reading online news? The price of internet service may have gone up but the number of people who added a new service, such as VoIP, is not captured except in the deflator measures of prices.

I can't remember the numbers but I recall reading that revenues at the baby bell phone companies will be down significantly this year. Newspaper circulations are dying. Electronics are reducing auto fuel consumption. Consumer interest costs are not tax deductible. Productivity is reducing the cost of product after product. Office, retail and mall space is going begging. Will baby boomers who have not saved adequately for retirement suspend spending while playing catch-up?

The market has "believed" for two years that long-term interest rates must go up. EBAY has put back into circulation billions of items that might have been hauled off to dumps or languished in basements and attics. Why do interest rates need to go up if consumers can recycle used goods as a fraction of the cost of new goods?

The economy should be strong for the next few years. There is no need for interest rates to go up enough to choke off the expansion. After a good strong non-inflationary expansion, interest rates may hit the lows of the 30's.

Los Angeles Business Journal Online

Now is not the time to buy printing ink stocks if the news from the L.A.Times is indicative of the current trend. Newspapers are losing circulation to online sources. The Times suggest that the company is simply dropping unprofitable circulation. Papers have been dropping unprofitable circulation at a more rapid pace in the past few years.

I spoke to a real estate agent a couple of days ago. I asked him about the advertising he does to sell a house. He said he markets homes over the internet but he runs one ad in the local paper to keep the seller happy! This is a telling story. I wonder how many ads are being run in newspapers, not because they are effective but because "this is the way it is done"?

A friend of mine is attending the World Poker Tour Tournament in Las Vegas. He contacted the Greensboro News before going and has arranged to post a series of stories about the tournament. His purpose? To get a press pass! He hopes to hobnob with Doyle Brunson and the other champion players. Greensboro is one of the first papers to actively seek out "blogging" stories. Greensboro plans to offer more articles for a lower price.

The news media is dead; long live the news media!

John Battelle's Searchblog GOOGLE $250?

John Battelle's Searchblog

John reports that Safa Rashtchy a noted analyst from Piper Jaffrey, has initiated Google as an Outperform with a price target of $250.

Rashtchy offers a long-term forecast $22 Billion in revenues by 2010! Google is number one in search with a commanding 50% global market share and Google has show an ability to leverage off of search to offer other popular services. I believe the 50% share will erode over-time but I believe it is a "sticky" share.

Those of us who have signed on for AdWords and AdSense programs are not likely to be easily moved. Those who sign up for free Gmail and Blog sites are equally planted. Maps, books, movies, indeed virtually all digital media are being cataloged by Google. The bottom line is that Google's business model works. Google is making money while offering an ever expanding array of "free" services. Some are afraid that the next new software will prove to be superior to Google. I see Google as leading the pack for years to come.

Random Roger's Big Picture: Reader Question

Random Roger's Big Picture: Reader Question

One of Rogers readers asked a few questions about short-term trading. I posted the following comment on Rogers site.

From deep in memory, John Train's first book was called The Money Masters and it was in this book that he reported that he could not find a single rich person who made his money through successful short term trading.

Obviously, there are market makers who do well by earning a eighth or so off of hundreds of transactions per day. Also there are many stories similar to the guy that bought his BMW in one day off of a good QQQQ option trade. But I have been to Las Vegas with folks who claimed to win every trip!

Who do you know that has gotten wealthy calling short-term trades? I know at least 200 millionaires and none of them "trade" stocks. The odds of winning the lottery are probably better. Playing can be fun but the guys I know who quit their jobs to trade full time are back at work. Even with luck, the taxes eat you alive. The spreads are the real killers.

A quarter-point spread once a day will take 50% of your portfolio away!

Continental Airlines--American Airlines--America West Airlines

Airline earnings are coming in better than projected. CAL lost $2.89 per share but the First Call forecast was for $3.10. This is a significant "beat" that would cause excitement if it were a positive $3.10 versus a positive $2.89.

AMR is up this morning on an equally good report. America West, which also had a good report, is trading down on the report that it is well into discussions to merge with bankrupted USAir. Merrill Lynch is reported to have issued a negative report on the advisability of merging with the bankrupted carrier.

The second half of a business recovery is often called the expansion phase. During the expansion phase, business travel is typically very strong. Business travel is typically the high margin business. I project an expansion phase of three to five years. The cumulative profits for the surviving airlines during the expansion should be substantial.


The market is doing fine. Our top performing stocks today include Corning (GLW), GOOG, YHOO, AMR, SCST and RNWK. Among the stocks taking it on the chin today are the consumer discretionary stocks. The cycle is playing out "by the book".

The "big trouble" ahead is in regard to expensing options. The public will not understand that the real before tax earnings are the same whether companies expense options or not. I invite my accountant friends to chime in here but I believe it is actually likely that after tax profits may be higher after options are expensed.

It is difficult to appreciate that a ball player should make 15 million a year and equally difficult to appreciate that the Yahoo Chairman deserved a $200 plus million bonus last year. I don't want to try to argue the point but I believe it is good that options are going to be expensed--the transition is there to give the market a little indigestion.

Remember that the time to buy is when there are lots of things to worry over. Of the all time great investors, Jesse Livermore was one of the ones who knew to buy against the grain. The irony is that he strictly practiced the concept of letting winners run and cutting losers short. Still he got into a lot of trouble with his friends and followers when he made money during times when they had lost. The most notable time of all was in 1929. Right at the start of the crash, he turned bearish, sold his stocks and sold stocks short. He made a lot of money off the crash but was despised by former friends.

It can be hard to go against the grain. Many recent stock market newsletters are very negative. I can't say that the worst of this market is over but I have been through these tough markets many times and it seems that this market is not likely to crash from here but that it could soar like an eagle. It may need time to mature but when it takes off it will be a beautiful sight. Understanding that reported earnings declines in June will be paper entries should help you hold on if the bronc tries to buck you off.

Furniture Business--North Carolinas Bread and Butter

North Carolina has long been the furniture manufacturing capital of the world. Recent years have been tough for most labor intensive manufacturing businesses in the states. Yesterday, I received my semi-annual report from the High Point Home Furnishings Market. (This long standing market place is being threatened by a new market in Las Vegas. The apparent theory is that buyers would rather party in the after hours in Vegas. The High Point Market is a serious market but certainly a part of the sales promotion is to wine and dine the big buyers. In my opinion, the major market will remain in High Point.)

It is interesting that some of the top selling pieces this year are very expensive "home made" products. Ironically, some of the very best "home made" products were only designed here. Those furnishing their dream home are apt to spend more on furnishings. In case you missed it, the home business has been in a super strong cycle for ten years or more. Millions of Americans having built a large equity in their first home have now "moved-up" to their dream home. Millions of others have purchased second homes and most of these are not the rustic cabins or beach cottages of days gone by. Buyers who feel threaten by the ups and downs of stocks are comforted by seeing the gradual climb in market values of homes. The last few years the gradual climb has steepened.

The above is not written to suggest that the furniture business has not been "leaning" itself down--lowering production cost, reducing over-time pay, substituting capital for labor and over-turning every stone to increase productivity. In today's Winston-Salem Journal it was reported that Canac Kitchens, a wholly owned subsidiary of Kohler Co, is building a new factory in Statesville NC. The company plans to hire 400 employees over 3 years. The Governor of NC has released a $250,000 grant to attract the business to NC. The company is based in Wisconsin and it is the largest supplier of frame-less cabinets in North America.

The $250,000 invested by the state is a drop in the bucket compared with the money spent to woo Dell Computer to the middle of furniture country. The investment by Kohler of $20,000,000 is about one tenth of the investment by Dell but still an important deal for NC.

Cabinetry is a fragmented business. Cabinets are typically lower cost products than stand alone furniture with more hidden components made of cheaper materials. The margins are tighter and the cabinets are often made in the same region of the country where they are used. In other words, shipping cost must be significant enough relative to production costs to encourage regional manufacturing. However, it is also true that like stand alone furniture, more and more of the mill work is being done in developing countries or by computer programed machines that allow more flexibility of manufacturing, higher productivity and longer distribution lines. Some American manufacturers are converting at least part of their business to becoming assembly plants with parts being shipped in from far and wide.

As an investor, I have mixed feelings about investing in furniture stocks at the current time. The manufacturing economy is recovering, consumers are buying homes and consumers are flush with liquidity. Taxpayers have just been hit with the most alternative minimum taxes ever but capital gains tax rates are already set to go down again in the next couple of years. The demand side should remain fairly strong for the next several years. The problem I have is in capacity. Whenever an industry starts adding capacity, the beginning of the end is at hand. One could say that the housing industry added capacity 10 years ago and continues to add capacity but the demand is absorbing the new capacity. This would be true, but the demand for real estate is basically an investment demand whereas the demand for furniture is more of a discretionary item.

Obviously, the cabinet business mentioned is tied strongly to the construction of homes. But extra capacity could reduce margins even in a period of strong demand. Regardless of what happened in the past ten years, the housing business is a cyclical business. America has enjoyed the benefits of immigration and our baby boomers and echo boomers have taken advantage of liberalization of financing laws. There are still millions of Americans who can afford a second home who have chosen not to buy one.

My wife and I are planning to work hard this winter via the internet. We have our first home for sale and we plan to do our work this winter from a rental unit in the deep south. We see no point in buying a winter home when there are so many available for rent at reasonable rates. A recent study showed that in some markets the rental costs are now only 47% of the costs of ownership. The owners renting at such spreads must be banking on future capital gains. If the capital gains of these markets slow, the housing boom will stop dead in its tracks.

I believe in buying the "big" US companies in the current market. Furniture is fragmented and subject to foreign competition more than the "big" companies. I am a Bull on the market. I simply have not gotten excited about any particular furniture company. If you have one to suggest, I would be happy to hear from you.