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The Blue Money Report
"...contributors will only give money to challengers when they have a realistic chance of winning, and incumbents only spend a lot when they have a chance of losing"
~ Steven Levitt

Welcome to the Blue Money Report

Today's Commentary: 09.03.03
Could be a Joke
The joke goes something like this:
A young man comes into a considerable amount of cash. He takes his new found wealth and heads to a high end car dealership. There he purchases a brand new Maserati in vibrant "stop me" red. At one of the first red lights he encounters, an old man on a Moped pulls up next to him.

The old man looks at the car with envy. "Sure is a nice car", he tells the young man. The driver beams with pride, his purchase clearly getting the results he sought.

"Can I take a look inside?", he asks. The young man says sure and the man leans over and peers at the interior. The old man is clearly impressed and asks him if it is fast. He replies that it is extremely fast suggesting he can reach 160 m.p.h. in a matter of seconds. The old man replies that it is too fast for him. The driver of the Maserati decides to show him just how fast it really is.

When the light changes, the young man floors it, accelerating quickly reaching a speed of 120 m.p.h. Looking in his rear view mirror he sees the old man still at the stop light, a mere speck in the reflection. As he continues to look he notices the speck getting closer. Like a rocket, the old man on the Moped speeds past the sports car.

The young man increases his acceleration as he passes the old man and once again he becomes a speck in his mirror. As he watches in amazement, the man begins to gain ground again. Suddenly the man crashes into the rear end of the car. The young man brought his car to a gentle stop and gets out. He runs to the old man to check on his condition.

Laying on the side of the road, the old man told the Maserati driver that he was okay. "But", he asked, "would you mind unhitching my suspenders from your side mirror?".

In the first eight months of this year, shooting off the dealer showroom like a Maserati, certain parts of the equity markets, the most volatile and risk laden issues have taken the rest of exchanges by the suspenders for the ride of their recent lives. Can it last? Better yet, should it have started at all?

Folks always trot out the future of tech purchases as one of the various barometers used by investors to determine capital spending in the upcoming year, quarter or month. Popular thinking has several reasons to believe what these industry analysts are saying. Computers grow old and need to be replaced. Software and licensing expires and need to be updated. Semiconductors need to be faster. Information needs to be processed. Otherwise, the thinking goes, the economy will stop and business will grind to a halt. All true but not a reason to bet the farm that the company CFO is going to free up more cash to get the economy going at the risk of his company's bottom line.

But before we go too far in the effort to give the CFO or even the CIO any credit, lets look at what the semiconductor industry projects. In a spat of optimism, the Semiconductor Industry Association's president George Scalise believes that the recent chip sales increases of 10.5% for July will translate into 16% over the next twelve months. This is not farfetched for an estimate but should be understood for what it really means.

Kids returning to school buy PCs, cellphones, DVDs and other devices that compute with those chips. Many of the above sectoirs I just mentioned make up almost 20% of the total market. Throw in the Asian production and those numbers of sure fire growth get even slimmer. Companies have not, as many would like, lined up to make their purchases just yet. Why should they. Company inventories are at the level of critical but it has existed like that for so long that it has become standard operational procedure.

Information processing is backlogged by almost 45%. You need people to process the data but there is no rush to hire them. The processor is moving overseas as knowledge work continues to make its exodus for cheaper lands abroad. This has skewed the white collar unemployment figures as less workers and favorable overtime regulations has found industries with a glut of managers running smaller, more efficient and as the President likes to stump, more productive workers. One third of the labor force is white collar. That said, they trend lower in the unemployment figures per worker that the total number. The rest of this group is made up of the 7.6% of the non-white collar worker. Numbers suggest that 80,000 folks were sent to those unemployment lines last week and that, believe it or not, is being transcribed as good news.

When half of the GDP number is solidly on the side of military spending; when each economic number released seems to be good news compared to past bad news; when profits continue to be a result of lower workforces, higher productivity among those remaining and inventories that are ill-prepared for sudden spending, this signifies a rigid rebound as opposed to the swift footed recovery required to really get things going.

Take for example today's trading numbers. The first day of September and all of the warnings about a ninth month sell-off were thrown aside in a fit of ebullience. That fit came as the buyers rode stocks up. Not just some, but 82% of the purchases on the first trading day of September were done in stocks that were already trading on the upside. This is buying not on value, not on speculation, but instead in a sort of lock-step manner that is incredibly treacherous.

Far too many of the talking heads that are running across television screens and over any medium possible are sounding as if all is well. Buy, buy, buy is the recently resurrected mantra and cheerleader mentality in the face of disclosure that appears to me to be nothing more than an end around. These brokerage houses may not have a stake in the stocks they tout but they do have an interest in the actual purchase. These are the folks in the Maserati I mentioned earlier.

If you aren't careful, you will be the one with your suspenders caught on the rear view mirror. Moving fast and stopping suddenly.