Category: Markets, Business, and the Economy

This is a big, important news story that you probably haven’t been keeping tabs on unless you work in heavy industry, either making steel or making things out of steel.

Almost 2 years ago, the Bush Administration approved a hefty tariff on imported steel. This protectionist measure was designed to combat alleged “dumping” of cheap steel by foreign nations. This made American steel more competitive and foreign steel more expensive, at least within the United States.

Like many things, there were unintended consequences. American manufacturer’s costs were driven up because they no longer had access to “cheap” foreign steel. By contrast, overseas competitors were not subject to the American tariffs, allowing them to buy steel for 30% less than American companies could. It does not take a genius to see that foreign manufacturers would be able to make product much more cheaply with such steel. So, although hundreds of thousands of American steel workers’ jobs may have been protected by this measure, the millions of workers who made things out of that steel found their jobs endangered by uncompetitiveness.

As if this were not a serious enough consequence, the World Trade Organization found the tariff illegal. This opened the door for countries harmed by the tariff to impose punitive trade measures, including duties of 100% on some goods exported from the United States to the European Union. It would be polite to say this would not help the American manufacturing sector, which has already shed millions of jobs since 2000.

Repealing this tariff should have been a complete no-brainer. It should not even be an issue today. However, politics got involved. It seems that Bush needs votes from steel producing states to get re-elected. Here is where it gets even more complicated: he also needs votes from states where they make things out of steel.

Just today, the Bush Administration announced that they will do the right thing, abide by international trade law, and dump the anti-dumping tariffs. They will however, keep a “licensing system” designed to prevent “surges” in steel imports. This has already been described as “little more than a fig leaf” for the steel industry.

It will be interesting to see whether there is a new measure which will have the same net effect of the old tariff, or whether the Administration will let bad rules die.

… for buying IBM.

Or at least that’s how the saying goes.

Today, IBM announced a radical new sales initiative to actually give customers what they want! More specifically, “the company believes customers want to buy software that is already tailored to their industry, making it cheaper and easier to use.” That means there will be IBM products specifically designed and marketed for various types of businesses. After all, the needs of a Real Estate Management office are very different from the needs of a hospital. As the nice people at Ziff-Davis put it, “For example, many companies in the healthcare industry need to change their computing systems to adhere to privacy regulations, and financial firms need to address new guidelines to process securities transactions.”

There are to be 12 such industry specific divisions and “60 software products tailored to each industrial sector.” These would appear to include their Telecommunications Division and Life Sciences Division. Of course a lot of money is involved, and a lot of people will have their job descsriptions changed. At least they still have jobs.

If there was ever an era of one size fits all computing, it is long since over. There are precious few computer programs that “everybody” needs, like word processors and email clients. Frankly, it’s about time companies like IBM (and Microsoft for that matter) realized that not everybody needs the same things in business software.

What took them so long?

Over the last 20 years or so, Wal-Mart has grown from a kind of K-Mart for places too rural to have a K-Mart to the world’s largest retailer. This company, a Dow Jones Industrial Average component, is huge, with $238 Billion in stock, $246 Billion in revenues in the last year, almost $4.5 Billion in the bank, and 1.4 Million employees. And that figure doesn’t even include contractors.

If you go into a Wal-Mart, you will find yourself confronted with goods too cheap to pass up. Why, how can you afford not to shop at Wal-Mart? Where else can you find name brand products at prices this low? How on earth do they manage to make a profit?

Like all deals that sound too good to be true, this one has some ugly stuff under the surface. Stuff so ugly that some people are publicly calling for a boycott of Wal-Mart, and many others make it a practice to avoid the place whenever possible, even if that means paying a little more someplace else. Please consider some of the reasons why:

Wal-Mart reduces the number of small competitive businesses in the communities it serves over time. Smaller competitors, which means all competitors, live in fear of the juggernaut, and continually seek ways to stay afloat. It is hard to compete with a company with a wide array of products, low prices, and a seemingly limitless advertising budget. Don’t let your inner Darwin start talking about how if you can’t compete, you deserve to go out of business. Having a local economy run by one large employer is bad. Furthermore, the businesses that are closing up often can’t compete because they actually pay a living wage and charge a sum of money that allows the business to make a modest profit without pressuring suppliers for special deals. This brings us to my next two points.

Wal-Mart places pricing pressure on its suppliers in a manner that is bad for the economy as a whole. By cutting special deals, sometimes on exclusive products, they effectively undercut certain dumping regulations. These special deals slash supplier profits. Sometimes, the only way for a supplier to make the deal work is to cut costs. Either the quality goes down or the payroll goes down, whether by cutting jobs or cutting wages. Sometimes the manufacturing has to be done overseas, somewhere that wages are so low that it is cost effective to ship the finished product halfway across the world. Even this is sometimes not enough, and financial trouble ensues for the provider. Wal-Mart does not particularly care; the contract to supply them is so lucrative on the surface that companies line up and bend over backwards to get or keep the deal. By the way, this is so far the second way Wal-Mart takes jobs out of the American economy and reduces wages for those jobs that remain.

Wal-Mart pays a poverty level wage to it’s employees — oops, “associates.” And these are the legal employees. This fact is well documented. Pay so low that full-time employees qualify for government assistance — that’s right, people who want to work, people who are working but getting paid so little they get food stamps. And then there are benefits, in the case of those lucky enough to qualify for them. When the paycheck doesn’t even go far enough to buy groceries, even at the Wal-Mart Supercenter, health insurance just seems like an unnecessary luxury. As if that weren’t enough, Wal-Mart is chronically plagued by claims that they discriminate against women, and that they do everything in their power to eliminate “troublemakers,” such as those rapscallions that get injured on the job. Furthermore, Wal-Mart does everything in its power to keep unions out. Whatever you may think of unions, they began to protect workers from abusive employment situations, and by many accounts this is such a situation. We are up to two ways Wal-Mart actively eliminates American jobs, and two ways it keeps working people in poverty.

It is even worse to do contract work for Wal-Mart. By now we have all heard about Federal raids that found illegal immigrants working long hard hours cleaning Wal-Mart stores at night. And of course Wal-Mart executives are shocked — just shocked I tell you — to discover that contractors who assured them would follow all applicable laws would hire illegal immigrants. The Feds aren’t buying that either, by the way. Wal-Mart should consider themselves lucky the various state Attorney Generals haven’t decided to rally around this issue. Forbes has an excellent article on this issue, and why it is more widespread than any of us like to admit. My favorite quotes are on the second page:

Whatever happens in the Wal-Mart case, the abuse of workers will continue until immigration law recognizes that cleaners need labor from abroad and makes the hiring of them legal. “I’ve got documentation for my workers, but now [U.S. Immigration & Customs Enforcement] says their Social Security numbers don’t match, and I have to fire them,” fumes the chief of a big Southeast cleaning contractor. “There are no other workers available. The situation is ludicrous.”

Now let me get this straight, millions of jobs have been lost in the American economy in the last 3 years, and we need to hire foreign labor? “There are no other workers available”? I think he means “no other workers willing to work in the middle of the night for sub-minimum wages and no benefits.”

It was surely no surprise that the Gross Domestic Product would not “grow” another 7.2 % this quarter. However, picking through the data, there are three things which should give pause to everyone concerning the economy.

First, WalMart and Target both announced that things are not going as well as expected. No, they are not losing money, just not making as much as some people expected. Specifically, they expect the Christmas shopping season to be somewhat less than robust. Now think about it: things are so tight that people are watching how much they spend at WalMart. It isn’t that people are doing more upscale shopping, because Target is seeing below projected sales at Mervyns and Marshall Field. And it isn’t just a problem at Target Corporation because Kohl’s is reporting pretty much the same. Indeed, retail sales in general were down and wholesale prices were up in October.

The second bit of bad news for the economic optimists to explain is the record personal bankruptcies in the 12 months ending September 30.

Remember, the White House would still like to sign legislation making it harder to declare personal bankruptcy. It will still be just fine for corporations to stuff their executives’ pockets with money, fire the lions share of the employees, and drastically reduce their debts through bankruptcy. That’s compassionate conservatism in action.

The final bit of bad news sounds like good news at first. It seems that the Federal Reserve is not considering raising interest rates anytime in the near future, despite admitting that “they can’t remain at 45-year lows indefinitely.” That sounds great, doesn’t it? It’s a huge relief for people with variable rate loans. It’s good news for people who own bonds too, because when rates go up, bond prices go down. However, rates are not going up because, in the words of Greenspan himself, “Uncertainty is not just an important feature of the monetary policy environment, it is the defining characteristic.”

Maybe bad things aren’t happening, but good things aren’t happening either.

Of course it is a coincidence that today it was announced that 43000 Reservists are being called up and there are 43000 fewer first time unemployment claims this week than last week. Please notice that this chart makes an monumental bit of statistical propaganda: the horizontal base does not start at zero, making it appear that there are almost no newly unemployed people this week. Of course there are 384000 people who know better.

Of course, I could bore you to tears with anecdotal reports of the unemployed, the underemployed, the hard luck stories of people who really want to work if only The System would give them a chance. Go ahead, it’s okay to cry.

And remember, this is in a recovering economy.

The hard cold facts remain as follows:

Unemployment is not getting better, puzzling economists. Fair disclosure, things are worse in Europe. That doesn’t really change the fact that some economists are no longer buying the idea that employment is a lagging indicator, productivity gains are taking up the slack, and surely the “now hiring” signs will go up everywhere any minute now.

Actual employment figures are quite dismal in certain places and among certain demographics. Unemployment figures measure the percentage of people looking for work, but do not include people who have given up on finding a job, or who decide to become (semi-employed) contractors. First Time Jobless Claims represent the number of poeple who walk into the local unemployment office each week and sadly proclaim that they have just lost their job, but do not include most former part-timers and many upper income unemployeds who just don’t feel the meager payout is going to make a difference. By contrast, Employment figures represent the percentage of people actually holding down a job. Or two or three. There is little room for fluff in this number.

Charity giving is down while need of charity is increasing. Be ready to hear this drum beating throughout the holiday season. That’s only because it’s true.

Almost 3 million manufacturing jobs have vanished. Many have gone to countries with lower wages, no benefits, little regulation, and no need to consider pollution. The nicest thing that can possibly be said about this trend is that the pittance of a wage they are given is still more than they would make in most of the locally originating jobs. I do not know whether there are figures to support or dispute the idea that such job export might reduce the number of illegal aliens that come to the United States.

Almost any other job that does not require laying hands on a physical object in the United States is following. You’ve heard about outsourcing computer programming and customer support to such nations as India, haven’t you? Many high tech jobs and financial industry jobs with American companies are moving overseas to take advantage of lower cost labor.

Unemployment, particularly long term unemployment, is no longer unusual in the middle and upper classes. Long term unemployment isn’t just for drifters, losers, and people with “problems” like mental health issues or broken down cars or unreliable babysitters anymore. It can happen to degreed professionals, people with computer skills, people who thought their specialized training was job security incarnate.

Heck, even jobs that require being in the States are being done by legal and illegal aliens where posible. Remember that things are worse in Europe? That’s part of the reason Wal-Mart’s contractors were able to snap up European illegal immigrants to clean the stores after hours. Then of course there are the nice people who don’t speak English that you may have seen mowing lawns or doing other menial jobs you personally would have to be starving to take. Richard D. Lamm, former Governor of Colorado, seems to have summed it up nicely when he says “Illegal immigrants compete for the jobs our own poor need to start to move up the economic ladder.” Later he adds: “We are told that illegal immigration is ”cheap labor,” but it is not ”cheap labor,” it is subsidized labor.  The National Academy of Sciences has found that there is a significant fiscal drain on U.S. taxpayers for each adult immigrant without a high school education.  Illegal immigration is something that benefits a few employers, but the rest of us subsidize that labor through the school system, the health-care system, the courts and in other ways that this form of labor imposes.”

The only sector of the American economy that seems to be growing is the “services” sector. This sector includes architects and other service providing professionals. However, it also includes every job that involves such phrases as “Would you like fries with that?” or “Paper or Plastic?” or “Can you read me the model number and serial number please?”

Wages are not going up, and Americans in general report that “Things are tough all over.” People don’t want to complain when they are actually working, but things are getting tight. The lucky people with jobs do not have extra money lying around for anything that is not absolutely necessary. Retailers should feel this trend pinch them very soon. Read it and weep: “According to the poll of nearly 1,000 consumers nationwide, almost 58% said they would spend less than they did last year and 50% said the cutbacks are due to current economic conditions. More than 18% said they’re spending less because they’re earning less — a 4% increase over last year. Over 66% said they’re spending less because they are carrying too much debt, down from 70% last year.”

Many among our “working class” are underemployed. They are struggling to make ends meet. They are taking part time jobs that they hope will put then higher on the list for eventual full time jobs. They are taking two and three part time jobs to survive. This means, by the way, that they are doing without benifits: no health insurance, no retirement plan, no unemployment benefits when they get downsized.

The United States Military plays a perverse role in unemployment. Anybody who has ever lived in a city that had a military base close knows base closures can have an absolutely horrifying effect on the local economy. Now keep in mind that “[The] United States [is] approach[ing] 2005, when “the mother of all base closures,” is planned, said Brian N. Hamel, president and chief executive officer of the Loring Development Authority. In 2005, more closings are expected to occur at one time than in all previous rounds combined.” But wait, there’s more! Do you remember all those reservists that got called up over Iraq and the “War on Terror”? Well, those people left behind jobs too — jobs that had to be done by somebody. Those jobs are now being handled by co-workers putting in overtime, or by temporary workers. Either way, the unemployment rate is artifically lowered by every reservist who was asked to serve his country. Some of them were among the 6000 that just came home on the Nimitz. More are being called up as we speak.

In short, it is a bit premature for the Democratic contenders to stop harping on Bush’s economic policies.

Maybe you missed the latest mutual fund scandal. This one could still cost you money, even if you don’t own the funds in question.

Putnam Investments, a division of insurance company Marsh & McLennan, runs a bunch of mutual funds. At the last date of record, they had about $272 Billion in assets, spread across 12 million customers, about 700 of which were “institutional investors” — large accounts such as states and pension funds. As you will see, these figures are apt to drop rapidly. Keep in mind that the mutual fund industry as a whole is about $7 Trillion, and that 95-100 million Americans have money in mutual funds. This fund family is something like 3% of the industry.

As CNBC so politely puts it, “Putnam is facing a probe into improper mutual fund trading and losing some clients.” Two managers are accused of civil fraud, and that’s before the U.S. Attorney sent subpeonas. The SEC and Massachusetts are surely only the first to get in on this action; sabre-rattling between SEC Chairman William Donaldson and New York Attorney General Eliott Spitzer has already commenced.

The crux of the matter is something called “market timing.” By this we do not mean waiting for a stock to hit the “right price” before buying or selling — something totally legal that almost all stock owners do. Some people say the benign label of “market timing” whitewashes what it really is: fraud; stealing from the customer.

There have been a number of illegal and unethical “market timing” schemes used. One involves buying or selling after market hours, after some bit of important news has been released perhaps, at the closing price. Example: XYZ Corporation announces blowout earnings after the market is closed; Unethical Fund Manager Dewey Cheatum colludes with another fund to buy at the closing price (when nobody knew the news) so he can sell it in the morning for a few dollars profit per share. In a variation of this scheme, a manager uses international stocks — which trade at different hours than American stocks. Yet another “market timing” scheme involves detecting brief inconsistencies between where another fund is trading and its NAV (Net Asset Value, what it is worth), then exploiting this difference with rapid trades (scroll down) in and out of the fund.

Several Putnam employees are accused of illegal market timing, and more charges are likely to come down soon. This problem apparently was investigated internally as early as 1996, and little was done save to issue official policies declaring it a no-no. The trades in question are from 1998 and 2000, a period of time when the funds in question underperformed. Wouldn’t you be upset if your fund was losing money and yet the managers of the fund were pocketing $700,000 from personal trades? Wouldn’t you think they should put their money right next to yours and execute the best deals for the fund they are paid to run?

Some large investors think so. And they are speaking with their wallets. Massachusetts wants to pull $1.7 Billion. Rhode Island, $651 Million. Iowa, $594 Million. Connecticut, $277 Million. Well over a Billion from such sources as The Pennsylvania Public School Employees’ Retirement System, The New York State Teachers’ Retirement System, The Vermont State Teachers’ Retirement System and others. An even longer list of behemoth investors are “monitoring developments.” It could add up to some real money!

Frankly, the markets could get a bit bumpy. I seriously doubt Putnam has $4-5 Billion in cash sitting around to send to these big investors. That means they are going to have to sell stuff, and to sell that much is going to drive some prices down. That’s why this could cost you money if you own any stocks or stock-holding mutual funds. A savvy investor might make some quick money if he could take a billion or so worth of a top holding off Putnam’s hands.

And yet in the midst of all this, there are those who say not to drop these guys like a hot potato. When would be a better time? When all the institutions have gotten out, having forced the managers to sell absolutely everything at stupidly low prices and driving the value of all Putnam’s holdings down? When the NAV is so low that Joe Average can’t afford to sell his worthless holdings?

As if all this isn’t bad enough, remember that Putnam isn’t the only fund family whose managers stand accused of making trades that line their wallets and leave investors holding the bag.

No, that’s not the Richter Scale rating of the latest earthquake in Farawayistan. That’s the annualized rate of growth that the United States’ economy allegedly had in the third quarter. It happens to be the biggest surge in the Gross Domestic Product since the Reagan Administration.

But if the economy is growing that fast, where are the blowout profits from Wall Street? If we really spend 15% more on computers and software last quarter than the previous quarter, why didn’t all the computer and software companies announce a spectacular quarter?

Where are the expanding small businesses? Shouldn’t they be hiring? Are we really to believe that there was so much overcapacity that they don’t need to be buying office supplies and building bigger facilities?

And what about the consumer? They are refinancing the house like crazy, but that can’t last forever; will they be buried in debt when interest rates inevitably rise again? And if we really bought almost 27% more cars than in the previous quarter, what are we doing with all the used cars? Why aren’t the car makers posting, say, 15-20% greater profits? Supposedly those $400 child tax credit checks made a big difference. Even if it did, that won’t happen again this quarter.

As I write, the Dow and NASDAQ are up half a percent, and the S&P 500 is pretty much flat. I do not believe the markets anticipated such a high GDP number. Just yesterday the FOMC said there would be no change in interest rates in the foreseeable future, and I have every reason to think Greenspan had this figure handy. Therefore, the markets are not anticipating that the higher GDP will immediately cause interest rates to rise. That leaves the possibility that Wall Street does not think this is real. Or rather, investors do not think that the fortunes of publicly traded companies will be beneficially effected. Let me get this straight, the economy is great but business is not improving?

Where is the money going? Some of it went overseas in the form of a reduced trade deficit and reduced exchange rate for the dollar. That doesn’t really help Joe Average, who will now have to pay more for everything imported. Some of the growth represents “inventory drop,” or the sale of stuff that has been sitting in the warehouse for a while. The people and suppliers who made this stockpile possible were paid some time ago.

The fact that the number of jobs out there is still declining should make us question this high GDP number. Clearly one trend or the other is not sustainable.

This is one of those days in the markets when you can’t tell the players without a scorecard.

* Bank of America buys FleetBoston for $47 Billion, in a deal which might result in you receiving more financially oriented junk mail. If you honestly believe this deal will pass regulatory scrutiny and come to pass, you stand to make about $5 per share by buying now, at about $39.50 per share, and waiting until the deal finally closes to be paid $45 worth of B of A stock. This spread indicates that the experts do not think it will come to pass, at least not in a timely manner: they could make more money elsewhere.

* Anthem is buying WellPoint for a mere $16 Billion and creating the nation’s largest HMO and covering 26 million people. Oh yeah, and Anthem was able to make a cool profit of $196 Million last quarter. WellPoint announced $176 Million in earnings last quarter. This represents overcharged customers. If you think this will make healthcare cheaper or bring medical care to underserved areas, I have a bridge in New York City I’d like to sell you.

* Not enough medical mergers you say? Then how about United Health buying Mid-Atlantic Medical for $3 Billion? Oh yeah, and United Health reported $476 Million in earnings in just 3 months — almost a half billion dollars. Hurry up, I may not be able to hold that bridge any longer without your deposit.

* For you tech lovers, don’t forget Symantec buying ON Technology for $100 Million in cool cash. Nothing brings security to a nearly monopolistic operating system like a nearly monopolistic computer security vendor. I do not begrudge Symantec their $83 Million profit; nobody is striking or mounting political campaigns on the high cost of computer security software.

* Finally, for that international flair, InterActive would like to buy the French company Anyway.com for a mere $62 Million. And here I had been told the French were very must against Anglicized names.

These are, of course, just the big deals. The ones that people are paying attention to. If it weren’t for these, you might hear about one or two smaller deals that simply aren’t perceived as being that important.

Mergers, like many other things on Wall Street, make a lot of money for some people — mostly bankers and lawyers — on Wall Street. But they are not always good, and even when they are good, they are not good for everyone. MCI-Worldcom, Cendant, Travellers-Citibank, and AOL-TimeWarner come to mind.

This is a game you don’t want to play without an exit plan.

As of this writing, Southern California is in the midst of a Grocery Workers’ Union Strike. Von’s, Ralph’s, and Albertsons are all affected. Managers and scab workers are attempting to keep the doors open. Specialty grocers and other competitors are experiencing a small windfall, as shoppers choose to patronize the fully stocked stores with no picket lines out front. The strike is not isolated to California, but has spread to workers in West Virginia, Ohio, and Kentucky. Votes are being held in other states, such as Indiana and Missouri. Nevada workers are choosing to stay at work. The strike is already having an economic impact on the companies involved.

The biggest single issue in all these strikes is Health Care Insurance, specifically what percentage of the cost should fall to the employee. Some of you probably know my opinion of insurance, and health insurance in particular: it drives up costs. Health insurance is doubly inflationary because it adds at least 2 middlemen. Yet it has become a necessary evil.

The Grocers and their unions are not the only ones struggling with this issue, either. There is also a Transportation Union strike in Southern California. There has been an attempted “sick out” of Los Angeles area law enforcement officers. Clinic workers and steel workers in Duluth are considering a strike over the same issue. Even states are having to address this issue. When people from all over the country from various walks of life agree something is a problem, from California to Minnesota to West Virginia, you may be assured that it is a problem.

Nor is this a problem isolated to large businesses. Small businesses and the self-employed are even harder hit by rising healthcare insurance costs. These people — the true backbone of lasting growth in the American economy — are being forced to consider drastically cutting or even eliminating benefits. Or closing up shop and getting a “real job” that provides benefits.

There have been many proposed solutions to the interrelated problems of rising healthcare costs, rising insurance costs, rising out-of-pocket costs, the 43 million Americans with no health coverage whatsoever. They range from expanding government programs that provide health coverage to children to adopting a single payer system. A few believe healthcare costs can be reigned in by streamlining the system and demanding efficiency. Some believe that simply offering choices — telling employees that if they want the best care money can buy it is as simple as paying for it — market forces will drive down the cost of care. This seems like exactly what companies like Kroger and Safeway are trying to do, without success. Some even believe that capping the amount of money malpractice insurers have to pay will be the magic bullet that sets everything right by stabilizing the doctors’ cost of doing business.

While many consider the lack of insurance to be the biggest problem, I tend to see insurance itself as the biggest problem. I therefore think that one of two extremes is the solution: either provide basic and necessary healthcare services as a single payer system, where consumers are free to purchase additional coverage; or eliminate employer provided health insurance altogether.

That sounds radical, doesn’t it?

It would be accompanied by rules saying that insurance companies had to treat all insureds in a given area as a single group, and maybe replacing the corporate health insurance tax break with an individual tax break — the line already exists on the 1040. Wage scales would also have to be initially adjusted upward substantially to account for the shift in responsibility. Let’s do the thought experiment and think about what might happen.

Unless you have made COBRA payments or purchased an individual policy, you probably have only the haziest idea what health insurance costs. That’s because most people have coverage partially subsidized by their employers, who in turn have it partially subsidized by a tax break. So sure, a lot of people would drop coverage when confronted with what policies actually cost. However, insurance companies would very quickly get wise to the idea that they have to do something to keep policies quickly or watch their revenues be decimated. Low cost major medical policies would be all the rage in short order, covering medical emergencies of all types but not necessarily every runny nose.

The people who work in your doctor’s office would no longer have to deal with insurance companies every minute of the day, and could concentrate on their primary customer: you! The reduced paperwork means your doctor might actually make more money while reducing the cost of an office visit. This benefits even those with no insurance at all. Hospitals would still have to deal with insurance companies, or course.

Corporate America would even benefit, because no money would be sucked off to ever-increasing health insurance premiums. They would still have to raise incomes, but they still stand to profit on this “outsourcing” of responsibility. Wall Street will love the initial profit increases, and the reduction of uncertainty.

It will never happen, but it was an interesting thought experiment.