Welcome to the Blue Money Report

There will be pitfalls galore for the investor. Currently, the pieces are falling into place that will challenge anyone who ventures down this so-called road. This still young earning season has brought many companies to the front of the news not because they remain profitable or have beat estimates but because of what they said. Far too many of these company's outlooks are suggesting that future earning may not reflect past results. That's unfortunate. Those past results were that great and now they aren't even good enough for comparison.

The question that needs to be asked at what looks to be a turning point should be: "are large capitalization companies the ones that will lead us to sustainable recovery?" The answer seems to be yes. Despite new low and very attractive valuations (the 2003 S&P 500 operating profit is now projected have a p/e multiple of 20 down significantly from a high of 28 in 2000), liquidity (the amount of shares available to trade), and the possibility that should the economy actually falter in 2004, large cpas would do better than their small cap brethren.

But suppose we don't actually falter. Suppose we simply flat line with slow steady growth without spectacular newsworthy moves, who will benefit then? The flip side of the coin suggests that large caps, even with the above mentioned reasons to take a look at, will find those qualities will immaterial in the current type of recovery. If the dollar slips further, this will be advantageous for the big companies whose globalization often has little to do with the value of the dollar alone. This recovery needs to be global although and that means that it has got to be done in tandem. No longer can the United States expect to grow without the cooperation of the economies of the countries it does business in or with. And that type of all inclusive recovery scenario looks iffy at best.

Another problem facing these large companies is the financial condition or better disposition of their customer. Large customers for these companies are having a difficult time raising capital to spend. This lack of spending will be sorely missed. The federal government continues to buy big but the state and local governments have had to refinance a depleted budget leaving nothing in petty cash for equipment or services.

Another large group appears as leveraged as they have been in years. Unfortunately this group might be unable to provide an adequate source of earnings for these big names. I am speaking of course about the two thirds of the economy devoted to consumers.

The graph to the right of small caps and micro caps performance versus the S&P 500 index on large caps. If large caps under performed small caps over the past year, could they be poised to regain their luster?

Anything is possible I suppose but like I said before, I'm skeptical of what I have been hearing lately. Large caps are not able to grow without further reduction of costs. At the current stage in this recovery, cost cutting has starved the beast down to bare bones. Without any other opportunity except the old fashioned way through growth built around increasing sales and revenue, many of these large companies are facing rougher times ahead instead of better.

Small caps have always had liquidity problems, also by comparison but that could be advantageous. As long as investors take a shining on this sector, inflows of fresh cash are nothing but beneficial. Should that reverse, which is less likely as the Dow gets discounted for its weight alone, the drop could be happen more quickly. Even without liquidity, the shear number of companies to choose from tends to spread the risk without sacrificing the growth. The S&P 600 index of small cap companies has a total market cap of just over that of Microsoft has done extremely well and the even broader measure of this small universe, the Russell 2000 index has seen gains of over 38%.

Customers could also be problematic for this group but not as much as you would expect. Without dependency on export sales and able to concentrate on the domestic customer, these companies will continue to benefit by growth no matter what speed the recovery settles on. Larger caps, outsourcing a good deal of their smaller needs as a method of internal cost cutting will also help this group. We should also point out that many of these companies have improved balance sheets as a result of the past year. That can only help their credit rating. Improvements in these areas allow some of these breeding grounds for new and innovative technologies to borrow enough capital to continue to develop and grow. 2004 looks very promising indeed for this group if our expectations don't outpace reality as this market needs to take small steps for quite awhile longer.

Today's Commentary: 10.21.03
Digitus Impudicus
With the exception of those that are unemployed because their industries that have left the country or folded up for good, the economic recovery seems to be ready to begin. And because of this, we should be exuding optimism not impudence. But it is difficult when so little of this turnaround is monumental. In fact, if you look really hard, you might just begin to see it. Maybe.

Is it possible that inventories are so low that manufacturing will need to hire just to keep pace? No. One thing that has been a constant as each week's unemployment numbers are released is the increase in productivity. If manufacturing believes that they can squeeze one more efficient unit from those they still carry on the workforce, they will. Using temporary workers has been the reason they have been able to accomplish this.

The talk among the industry leaders is more spin than reality. Plans to hire have been spoken about at length over the past months but little in the way of actual hiring has taken place. This is a cause of great concern since most of this chatter is coming from smaller companies where presumably the recovery should have begun in earnest. Many of these were the first to layoff workers as their big brethren customers sat back on their stockpiles until they dwindled to near zero.

Those stockpiles, which are based on an inventory-to-sales ratio have reached the breaking point. Sudden demand, another illusion hoped for but unlikely, would cripple suppliers who would be unable to increase production to match this ghostly demand. As long as these inventories remain low and companies remain unwilling to extend those inventories, chasing sales that haven't materialized with product that hasn't been made make any subsequent recovery also illusory.

There are those who believe that we were well on our way to recovery before our President dragged the country into war. That derailment, which many are beginning to point to as the beginning of the recovery since paused, is still an effectual drag. Looming deficits coupled with extensive and accommodative monetary policy will help the GDP in the here and now while crippling the future of sustained growth. Unfortunately, many businesses need to forecast growth beyond the upcoming quarter. Many are unwilling to do that understanding the long term destructive nature of current policies. You will, I promise, tire of hearing the words: cautious optimism.

For the last week or so, I have commented about the worker's place in this recovery. I discussed the powerlessness of the average worker, those that are still employed. The economy thinks that enough of you are working to make a difference. Then there was the commentary modeled after a pitching strategy designed to keep the average worker off balance. Now I suppose it is time to make some relevant suggestions on how this can be fixed.

Unravel the accommodative money policy. It was this type of free wheeling lending that got us into this position in the first place. Interest rate manipulation followed by reigning in of capital in the attempt to control runaway businesses brought most of this economy to its collective knees. Although the Fed has made it clear that it wants businesses to borrow to grow, those very businesses are inclined to wonder if, just when things get rolling again, will these top bankers decide to pull the plug... again.

Meaningful tax reform should not begin or have begun with the top tier income tax payer. This was the wrong place to encourage accommodative business growth. Often referred to as a Gordian Knot, the system that taxes corporate profits is so complex that it becomes a drag on the very profits that spur growth in any meaningful way. Increasing subsidies is not tax reform and does more damage to potential job development and our place in the world economic recovery than any one single policy.

Meaningful tax reform would have been time better spent. In numerous studies released last year, one in particular from the National Election Survey have pointed to the belief among the average tax payer that tax cuts are beneficial to everyone, upper, middle and lower. This anomaly in the public's mind inparticular among lesser income brackets that was capitalized on in a big way, and still is. When one tax cut proved temporary, the White House pushed through a second cut. Now that those are in place and deficits are looming in the present, near and far future, making those tax cuts permanent is the next logical choice according to the administration.

Tax reform is less about spin and more about the factual information needed to make the public understand how these policies will affect them. If taxpayers understood that payroll taxes were the crippling bite in their personal economic recovery, they would have pushed for changes there first. The belief that taxes for Social Security and Medicare were the real problem allowed inconsequential cuts in dividend taxation and the estate tax to be the foundation for further cuts in services most often used by lower income tax payers. The inability to see the effect (diminished services) of the cause (upper bracket relief) has allowed this to continue with wider support than otherwise would have happened.

As we drift into the upcoming election year, the policy of what was done was good for the country will be at the heart of every stop on the campaign trail. The message that inequality will eventually amount to a better economy is not only the result of good spin but poorly articulated information.

Gary Schilling, a noted economist believes that we are still in recession rich territory. His belief that this will take place sometime early in the upcoming year will place some pressure on these spinmasters to show that what they were telling us wasn't just another version of Digitus Impudicus.

Part One: The economy cannot fully recover without job creation. Job creation cannot come from protectionism, a belief that is growing in popularity.

Part Two: The burden of local taxes, health and welfare, and the wages that won't increase all play a roll in the recovery that won't fully develop.