The Difference Between Airlines and Drug-Makers September 25, 2002January 24, 2017 CAESAR A lot of you have probably seen this passage (thanks to Vince DeHart for passing it on), and I am not suggesting that Shakespeare knew the perils of chemical and biological, let alone nuclear, warfare. Still, he was a pretty bright guy, and it’s worth considering whether his words have any application today. [Except that it turns out this is a bogus quote — see tomorrow’s column.] You may well conclude not; but they are still worth having as one point of reference: Beware the leader who bangs the drums of war in order to whip the citizenry into a patriotic fervour, for patriotism is indeed a double-edged sword. It both emboldens the blood, just as it narrows the mind… And when the drums of war have reached a fever pitch and the blood boils with hate and the mind has closed, the leader will have no need in seizing the rights of the citizenry. Rather, the citizenry, infused with fear and blinded with patriotism, will offer up all of their rights unto the leader, and gladly so. How do I know? For this is what I have done. And I am Caesar. – William Shakespeare PLEASE – NO CALLS BETWEEN 9 AND 11 TONIGHT It’s the two-hour season premiere of The West Wing! AIRLINE AND DRUG STOCKS I am venturing into deep waters when I presume to tell you which market sectors will do well and which won’t, so take this one with an even larger than usual grain of salt (i.e., sea salt or kosher salt, which are actually a lot better than the fine-grain stuff anyway). But I’ve been thinking about these two sectors, airlines and drugs. Their stocks are so low and I like to buy stuff no one else wants. But they are very different animals. I checked with a very smart airline analyst who told me that, yes, the big traditional carriers could all go bankrupt, and the shareholders be left with nothing. They would likely keep flying, and our frequent flyer miles might remain good on some basis, but the bondholders would emerge as the new owners of those airlines and their aircraft. The point is, these companies’ stocks really could go to zero. If I owned them, I doubt I’d sell, because the fear of losing the last few dollars would be less than the fear of selling, only to find some sort of massive government bail-out that sent the stocks soaring. But it’s looking grim. And the real problem is that this is a terrible business. Without price regulation, or the ability to collude, it is a business model doomed to failure, because the fixed costs are so high – the planes and payroll – and the variable costs are so low. What extra does it really cost to fly one more passenger cross country if the plane is going anyway? Thirty bucks for fuel and a meal? As a result, the tendency toward price competition is fierce. The temptation is great to sell a seat for $99 when the variable cost is only $30. That’s a $69 ‘profit.’ But it doesn’t begin to meet the payroll and the cost of the planes and ground equipment and so on. So it’s not profit at all. Only on routes where you have a virtual or complete monopoly can you price for real profitability. In the drug business, by contrast, the model IS monopoly. Yes, the fixed costs are very high (the cost of researching a drug and bringing it to market) and the variably costs are very low (the cost of actually making the pill) – just as with the airlines. But for a not trivial period of time, the duration of your patent, you are the only game in town. What’s more, the demographics look good. First, there are going to be a lot more seniors in the U.S. and probably around the world as time goes by, and they need more drugs than younger people. Second, as the world tends toward ever greater prosperity (let’s hope), and it becomes easier and easier to pay for basics like food, one thing people will want to buy with their extra discretionary income is health care. Yes, there’s a push on to cut costs on prescription drugs, and that may be one of the things depressing some of these stocks. But it seems to me one plausible long-term outcome is a win-win. Namely, if we ever do get serious prescription drug benefits for our senior citizens, at a cost of perhaps $60 billion a year, that will be $60 billion a year more (or some good fraction thereof) for the drug companies! So, yes, the deal might be that on THAT portion of their sales, the companies would have to agree to accept a low profit margin. But even a low profit margin on $60 billion in new sales isn’t a bad thing for investors. As I say, I’m way out of my depth here. But where I haven’t bought the super-low-priced traditional airline stocks (hey, I also missed Chrysler at $3 a share before it was rescued – could I be making the same mistake twice?) . . . I have been buying a couple of beaten-way-down speculative drug and bio-tech stocks that, perhaps promising at $20, seem even more promising here at $3. I’ve even bought a couple of the larger, less speculative ones. (Remember: free advice is what you pay for it.) A paradox of capitalism is that it rightly trumpets the benefits of competition, yet directs most of the spoils to the least price-competitive industries.
Pledging Allegiance To AOL (Because They Won't Let You Cancel) September 24, 2002February 21, 2017 ONE WAY TO KEEP YOUR CUSTOMERS Joe Cherner: ‘I have a story for you. You won’t believe it, but I swear it’s true. AOL is available in France. Lots of advertising. Lots of free disks … everywhere. If you want to cancel, however, you must call a non-toll-free number. After waiting (and paying), you are then told that there are too many calls in the queue and you should call back. The only problem is that you ALWAYS get this message during the hours that they allow cancellations. The only time the number gets through to someone is after cancellation hours are over. I know you think it’s just me, but I swear everyone knows about it. It’s an ongoing joke in France.’ ☞ You’ve got to think outside the box. The way to solve this is to cancel your credit card. DOLLAR COST AVERAGING VS. BUYING DOWN DOWN DOWN Neil Allen: ‘In this plummeting bear of a market, am I to be faulted if I can no longer stomach the hopefully deferred pleasure of monthly dollar-cost averaging? In other words, for someone of modest means, can ‘staying invested’ mean just ‘not cashing out’ rather than continuing to put in? I am maintaining the equity holdings I already have and am still committed through my 403(b), but I just stopped my monthly after-tax automatic investment contributions to various mutual funds because I could no longer watch my money shrinking. Am I setting myself up for hair-tearing regret once the bull revives?‘ ☞ Yes. Eventually, you are. (Well, maybe not hair-tearing regret, but still.) Not to say any of this is easy or that I don’t feel for you. But look what you’re saying. When shares were crazy expensive, you had no qualms about buying them. Now that they’re much cheaper, you’re not interested. Of course, it’s absolutely possible – as I’ve been warning here for quite a long time – that we could see the Dow at 4000, or some awful price like that. But if you expect that, why would you hold what you already have? There’s just no way to know what will happen. Certainly, you could give yourself a breather on buying more shares – but when would you resume buying? When shares got expensive again? I hope what you’d do, with this breather, is accumulate savings you would put in the market if it fell significantly further. But when you play that game, you’re trying to ‘time the market’ (guess when it’s headed up and when it’s headed down) which is notoriously difficult. The only other point I’d make is to ask whether you have paid off your credit card balances, own your car free and clear, and have a substantial emergency fund. If not, that would be a reason to take a breather while you fix those things. But I wish you had done it when prices were higher. AUTUMN CAME ON TIME? Tom Schaefer: ‘You write, ‘Wasn’t it supposed to start September 21? Has the Earth wobbled?’ Hate to break the news, but the earth does ‘wobble.’ Not wobble exactly, but we are closest to sun in January and furthest from the sun in July. As Kepler figured out, being closer to the sun means we travel faster – higher angular velocity. As a result, the trip from the first day of autumn to the first day of spring is always a few days shorter than the trip from the first day of spring to the first day of autumn. Bottom line, our summer in the northern hemisphere is a few days longer than the southern hemisphere summer. Check it out, count the days on a calendar. That’s why you had to wait to 9/23 for the equinox.’ ☞ We’re closest to the sun in January and furthest in July. I thought the sun was HOT. I think I have to go back to junior high school and pay more attention to this stuff. PLEDGE, SWEAR AND AFFIRM Scott Nicol writes: As a new American, I have recently read a lot about the history and government of the US, including the constitution (all of it – not just a summary of the amendments). The phrase “oath or affirmation” appears 3 times in the constitution. ‘Oath’ or ‘affirmation’ never appear by themselves. What is the difference between an oath and an affirmation? Both are sworn pledges, but an oath is made ‘with God as my witness.’ and an affirmation is made ‘under penalty of perjury.’ In simpler terms, an oath can be taken by one who believes in God, an affirmation can be taken by anybody. One of the ‘oath or affirmation’ clauses is: Article 2, Section 1, Clause 8: Before he enter on the Execution of his Office, he shall take the following Oath or Affirmation:–“I do solemnly swear (or affirm) that I will faithfully execute the Office of President of the United States, and will to the best of my Ability, preserve, protect and defend the Constitution of the United States.” This is, of course, the oath (or affirmation!) of office for the office of the president. You may recall that presidents on inauguration day add “so help me God” – that is tradition, not law. To make things a bit more clear: Article 6, Clause 3: The Senators and Representatives before mentioned, and the Members of the several State Legislatures, and all executive and judicial Officers, both of the United States and of the several States, shall be bound by Oath or Affirmation, to support this Constitution; but no religious Test shall ever be required as a Qualification to any Office or public Trust under the United States. In short, this means all federal and state representatives, cabinet members, and judges must take an oath or affirmation, and religious belief (or lack thereof) is not a qualification for office. Given the Pledge of Allegiance, as written in law, it is possible that you can have a high official who can take office but cannot in good conscience recite the Pledge of Allegiance. That is irrational.
False Alarm: It’s OK to Drink Pepsi September 23, 2002February 21, 2017 Sorry Friday wasn’t posted until Saturday. Next you know, they’ll be starting autumn a day or two late as well. (How did that happen? Wasn’t it supposed to start September 21? Has the Earth wobbled? Will Halloween be November 1 this year?) Anyway . . . Edward: ‘Pepsi has a new patriotic can coming out with pictures of the Empire State Building and the Pledge of Allegiance on them. But Pepsi forgot two little words on the pledge, ‘Under God.’ Pepsi said they did not want to offend anyone. If this is true then we do not want to offend anyone at the Pepsi corporate office. If we do not buy any Pepsi product then they will not receive any of our monies. Our money after all does have the words ‘Under God’ on it. Please pass this word to everyone you know.’ ☞ In the first place, Pepsi is not doing this – it’s apparently one of those urban legends that just cycles round and round the Internet. Click here. But the message obviously touches a nerve. I totally respect Edward’s right to feel as he does and boycott Pepsi; but I see it differently. The Pledge of Allegiance worked just fine from 1892 to 1954. That’s when, during the McCarthy era, “under God” was added. Now that an appellate court has ruled this addition unconstitutional – which the Supreme Court may or may not overturn – attention has been focused on the issue of whether, to affirm one’s patriotism, one should be required to affirm one’s belief in God. I think the great thing about this country is that faith is voluntary. That makes faith all the more meaningful, because it is chosen, not imposed. To take a less highly charged example . . . I would never burn the flag or show it any other disrespect. But I profoundly oppose the flag-burning amendment that, thankfully, seems to have stalled. Why? Because the whole POINT of this wonderful, wonderful country is that you CAN peacefully dissent without fear the government will come and take you away, as it would have in, say, the Soviet Union. The reason not to burn the flag should be that we cherish what it stands for – not that we fear a $500 fine or a month in jail, or that the government compels us to respect it. What if the official pledge were: “I pledge allegiance to the flag of the United States of America, and to the republic, for which it stands – one nation, indivisible, with liberty and justice for all who believe in God or are at least willing to pledge that they do.” I think it works better as it was from 1892-1954: “I pledge allegiance to the flag of the United States of America, and to the republic, for which it stands – one nation, indivisible, with liberty and justice for all.’ Not bad. Tomorrow (which may fall on Wednesday this week): The Difference Between Airline Stocks and Drug Stocks
Patrick Buys a New Motorcar September 21, 2002February 21, 2017 Patrick Cox: ‘Hello. I’ve got a long story, which wouldn’t be very interesting to anyone but you and maybe my wife (she might be just pretending, though). I’ve been reading your investment guide (and most of your other books for that matter) for approximately my entire adult life (10+ years). You may see the influence you’ve had on my writing (all these parenthetical comments). Anyway, I recently landed a new job that increased my pay by 30% – and all but eliminated my health insurance premiums. So, relative to my old job, I was suddenly swimming in money. ‘Or rather, that’s what it felt like. I began searching for that great American indicator of middle-class club membership, the second car. Now, I’m an Alaskan, and it seemed pretty obvious to me that only a 4-wheel drive vehicle would do the trick. And I also decided that I really didn’t need a second passenger car since I didn’t even own a single van or pickup or SUV. ‘But dang. Kia has a 10-year warranty on their new cars. And they are inexpensive compared to other new cars. So before I knew it, I was taking the long route home and circling the Kia lot like some new-car-odor snorting vulture. Yes it was bad. It got to where I even got OUT of my car and actually spoke with a SALESMAN. ‘A trick of fate more than a prick of economic consciousness kept me from going in over my head. They flat out didn’t have any 2002 models. Every last one of them had gone the way of the proverbial hotcakes with Kia’s cashback rebates and 0% interest. They had some 2003 models with tiny incentives. They had some 2000 and 2001 former rental units with vastly reduced warranties (slashed in half, actually). But they didn’t have the 2002 Kia Spectra GSX that I had built and rebuilt on http://www.kia.com/. ‘So, in a fit of economic haste (the kind that burns holes in pockets), I rolled over to the GMC dealership next door. Man. They had some cool and interesting cars over there. But WHOA. Those prices cooled my pockets quick. Twenty-seven thousand dollars for a Rendevous? Ouch. But then I got flagged down by another salesman. Maybe I’m not the vulture after all. Maybe I’m a vulture in shark infested water. [Which would make Patrick one lost, wet vulture, but this is his story, not mine and I think he is telling it very well. – A.T.] ‘Well, I couldn’t please this guy until I test drove something, so I let him talk me into a used Nissan Pathfinder, factory black 4×4, most of the unnecessities. Worse yet, I recognized him from the University theater department and a local TV commercial. You don’t want to have too many points in common with a salesman. He had already noticed my all black clothing and pointed me to a factory black rig. ‘And it was pretty nice. It wasn’t like that $14,000 GMC Safari minivan. Oh, I didn’t mention that one? Yeah – 1998, 36,000 miles, lots and lots of great electronics. I went to that one early on in my economic euphoria. Again, a trick of fate: the check engine light stared at me from the dash board. I took that as, well, a warning sign. I walked. ‘But I digress. This Nissan Pathfinder was superb. The salesman DID have a background in common with me. We had both attended and resided at the local university for way too long! Isn’t that quaint? So we exchanged phone numbers, and I got out of there because his boss wanted to go home and leaned on the two of us too hard (sincere salesman voice: ‘Bottom line… what can I do to get you into that car… today.’) Me and the salesman are like buddies, and his boss is like a grim Amway distributor. So I leave with Nissan Pathfinder on the brain. ‘And I do my Internet search on Nissan Pathfinders and I find that they don’t match my needs. An unpleasantry, since I kind of liked the factory black. And out from under the buddying and bullying I discover my economic backbone. I decided to look at this need, this financial venture through the lenses of The Only Investment Guide I Have Ever Needed. [Oh, will you please stop plugging that old book! – A.T.] Namely: 1) Although I have a newer, higher paying job, I had not yet received a single paycheck therefrom. 2) My wife, recently graduated from college, is not yet employed and isn’t totally sure she wants to be. Our need for a second car was not immediate. 3) I work as the Assistant Solid Waste Manager of a municipal landfill. Every car on the road, One Day, will have it’s final resting place therein. 4) Sometime before that One Day, these cars will depreciate in value to about $1200 (if it runs in Alaska, that’s about what it’s worth). 5) This is not a linear depreciation. Newer cars lose their value much faster than cars that are broken in a bit. 6) Why should I saddle myself with $10,000 or $20,000 of depreciation? ‘So I pulled WAY back. I ended the search right there on the spot. When my buddy from the GM dealer called back to see if I was still interested . . . I wasn’t. I decided that I could wait. If I had to buy a vehicle suddenly two months from now, and that made me purchase a vehicle that was slightly less of a good deal than I could find in advance, I could always be happy that I had denied State Farm of two months of insurance payments, and the bank two months of car payments. ‘What’s that? Oh yes. I did get a car today. After giving up all desire for a car, after deciding to search and research no more, I found it. Across from the lunchtime buffet pizza joint is a little mom and pop garage. And parked in front was a little cherry car. Well, kind of a dusty tomato, really. A little red 1990 Subaru Justy GL 4WD. With 86,000 miles on it, but a new engine under the hood. It’s got 4 doors and it gets 35 miles to the gallon. How much would YOU expect to pay for a new engine in an intact 4-door hatchback with 4-wheel drive and 35 miles to the gallon? ‘Twenty-nine hundred dollars. Next month it will be completely paid off, courtesy of the Alaska Permanent Fund Dividend checks paid each October to every breathing resident of Alaska. Now THIS car fits my financial goals. Thank you for helping me define those goals, and inspiring me to attain them. I’m now driving a dusty-tomato-looking 3-banger, a car that is probably the opposite of a status symbol. I’m living within my means, helping to save our precious resources, getting much closer to being debt-free, and sleeping easier. All that AND a 4-wheel-drive vehicle with a new engine. Thanks for the car.’ ☞ I try to avoid posting testimonials here – what could be tackier? – and I certainly would never take credit for the basic notions in my book. Ben Franklin and Aesop had them centuries before I passed them along (and you should have seen the clunkers they drove). But it’s always wonderful to hear from someone who has bought into these basics and discovered the joy of living beneath his/her means. Patrick wrote this so well, I couldn’t resist. (Just before you all pick up stakes and head for Alaska and that annual dividend check – Alaska has no income tax and actually pays you – I would remind you that today is September 21. Winter in Alaska begins Monday. Plus, they have bears.)
Casual Friday September 20, 2002March 25, 2012 I will try to put up a column by midnight . . . how’s that for taking one’s responsibilities casually?
An Anchovy Pizza with Dick Davis #34, Hold the Fed September 19, 2002February 21, 2017 SATIRE Stephen Gilbert: ‘Your reader’s response to the Borowitz Report quote shows how acceptance of the increasingly incredible behavior of our ‘leaders’ makes satire a risky business. I wonder what you’d have to say about Bush/Cheney for it to be clearly untrue.’ Dan Albro: ‘I wasn’t upset with your inclusion of the Borowitz report article about how the administration is blowing off Hussein’s acceptance of UN weapons inspectors until the next day when I opened the newspaper and discovered that everything it said was true.’ WASHINGTON POST ARCHIVES – FREE FOR TWO WEEKS BACK Gary Brown: ‘If you use the ‘search’ box on the Washington Post main page, instead of the ‘archives’ link, you can find the past two weeks worth of articles free. Here’s the link to the article you mentioned yesterday.’ ☞ You’re absolutely right, of course. It did seem odd they’d be so Draconian. Thanks. TRULY THE WORST IDEA OF THE MONTH Ron Paul, Republican Congressman from Texas, in the House of Representatives, September 10, 2002: ‘Mr. Speaker, I rise to introduce legislation to restore financial stability to America’s economy by abolishing the Federal Reserve . . . Abolishing the Federal Reserve will allow Congress to reassert its constitutional authority over monetary policy.’ ☞ Just what we need. FROM A MAN WHO NEVER ATE PIZZA Chip Ellis: ‘Fresh anchovies are not salty and they are delicious!’ FROM A MAN PACKED TIGHT IN A CAN Jay Glynn: ‘Anchovies come from Sardinia. Everyone knows that.’ ☞ Sure. But where does Sardinia come from? AND NOW! DICK DAVIS #34 Item 34: A Critique Of CNBC Many of you spend time watching CNBC. It has almost become a national pastime. It appears on the computer screens of stockbrokers so the customer won’t know more than the salesman. Because it’s a financial news show, the emphasis is on immediacy, the breaking story, the very latest news and opinion. The focus is short-term, which makes it an indispensable tool for the trader. But it is the long-term approach that serves us best as investors. This sets up a conflict of interest. Holding on to stocks for the long term may be difficult emotionally when exposed to a continuous barrage of news and opinion. Ask any broker how many times agitated customers call to sell solid, long-term positions after hearing unsettling news on television, news that can cause a sudden, dramatic move, with the stock symbol painting the tape, but news that is likely to end up no more than a blip on a long term chart. Television’s obsession with analyzing and dissecting the mostly meaningless news minutia of the day hampers our ability to see the big picture. Its up-close focus is incompatible with the broad perspective needed by the long-term investor. How do we as viewers deal with the fact that CNBC’s non-stop, fast-paced, play-by-play format with engaging on-air personalities, energizing music and slick graphics produces an entertaining, financial variety show that makes for good television but does not make for good investing? We deal with this by being aware of what matters and what doesn’t matter. Although they are rarely mentioned in CNBC’s breathless, Walter Winchell, ‘tout TV’ type format, it is important that we put news and opinions within the context of the long term, over-riding directional influences on the market. Influences such as the likelihood that deeply entrenched trends in stocks or the over-all market are likely to persist; influences such as the likelihood that the market will travel deliberately down the path it must take to satisfy its internal needs. These needs might include correcting previous excesses or correcting current valuations or anticipating a stronger or weaker than expected economy, needs that take time to play out. During that time, the ‘news’ may or may not conflict with the market’s agenda but the latter will prevail. An awareness of these long term influences enables us to put in better perspective the news that XYZ company reported quarterly earnings one penny more than expected. Yes, CNBC does lots of good things. It helps investors by teaching, by informing and by entertaining with extremely capable, articulate and personable reporters. My own view, however, is that the long term investor interested only in making money, and I repeat, interested only in making money, would make more of it by sticking to a strategy of buying quality, seasoned, industry-leader type stocks or top rated mutual funds or index funds – all at reasonable prices and then keeping his television set at a distance and using his broker sparingly. Such self-imposed isolation would avoid all kinds of emotional wear and tear and remove a major risk of being sidetracked from achieving long-term goals. Investors using a broker would give instructions not to call except when pre-determined price levels were reached (both on the upside and downside) or when news occurred that the broker felt represented basic change with long term significance. Being informed by mail would be preferable since it gives the dust a chance to settle and since only time puts news in perspective. Of course, none of this advice is practical. It’s not going to happen. The investor will always want to know what’s going on with his money. He is not going to recuse himself from his TV or his broker or the Internet, nor should he – since these are all aspects of investing that make the pursuit of profit more pleasurable. And, for many investors, brokers play a key role. We need them; the best ones are invaluable. So the way to deal with the never-ending deluge of investment information is to try and scotch guard your emotions and observe with detachment. Develop your ability to separate the wheat from the chaff, to tune out the static and increase your filtering skills.
Maybe They Should Hire the Scientists from the Tobacco Institute September 18, 2002January 24, 2017 THE CHENEY QUOTES Bill Marris: ‘On today’s column, you know those quotes from Dick Cheney are not real, right? I am afraid people will go to your site, read them, and not click on the link to find out that they are part of a satiric article. I am a reasonably intelligent person, and the only reason I clicked on the link was because I wanted to see where that quote came from, because I just couldn’t believe it was real.’ ☞ Sorry. It never occurred to me that anyone could believe it was real. But that may be because I’m familiar with the Borowitz Report, which I have quoted here before. Other recent breaking items from the same source (they are not real, either): SADDAM DEFENDS PURCHASE OF ALUMINUM TUBES Says They Are For His Aluminum Tube Collection KATIE COURIC DEMANDS THAT ‘TODAY’ START AT NOON Would Allow Host to Sleep Late, Go to Gym U.S. ATTEMPTS TO LURE OSAMA WITH AD IN PERSONALS Evildoer Has Not Had a Date in Months, CIA Believes David Smith: ‘What exactly was the purpose of adding the Borowitz report nonsense to your page today? The Administration has acted brilliantly in bringing world pressure to bear on Iraq. I think the Bush Administration deserves immense credit.’ RESISTANCE Dana D. Dlott: ‘What I have never understood is this business of ‘resistance’ when the Dow gets near benchmarks. Newspapers say the Dow was approaching 9000 but then it encountered resistance and slipped back to 8900. Most trading is not buying the Dow so how can this happen? Do traders say to themselves, I would sure like to grab some GE at $27, It’s a bargain, but if I do that the Dow will break 9000, so never mind?‘ ☞ I think when people feel the overall market is high and likely to drop back, they hold off buying individual issues. At least some people do. But it’s true that a lot of this talk of resistance may simply be ascribing ‘motives’ to what are in fact largely random short-term movements of the market. DIDN’T YOU LEAVE ‘ERIN BROCKOVICH’ ROOTING FOR PG&E? Excerpted from THE WASHINGTON POST Sept. 17 – The Bush administration has begun a broad restructuring of the scientific advisory committees that guide federal policy . . . In the past few weeks, the Department of Health and Human Services has retired two expert committees before their work was complete. One . . . which was rethinking federal protections for human research subjects, had drawn the ire of administration supporters on the religious right, according to government sources. [Another] committee, which had been assessing the effects of environmental chemicals on human health, has been told that nearly all of its members will be replaced – in several instances by people with links to the industries that make those chemicals. One new member is a California scientist who helped defend Pacific Gas and Electric against the real-life Erin Brockovich. I would link you to the complete archive, but the Post seems now to be charging even for yesterday’s content.
Dick Davis #33: The Market Has Its Own Agenda September 17, 2002February 21, 2017 BREAKING NEWS From the Borowitz Report: September 17, 2002 Breaking News IRAQ AGREES TO WEAPONS INSPECTIONS; CHENEY BEGS THEM TO RECONSIDER Don’t Make Any Hasty Decisions, Vice President Urges Saddam Just minutes after the government of Iraq agreed to the unconditional return of U.N. weapons inspectors, Vice President Dick Cheney urged the Iraqis to reconsider their decision. Mr. Cheney added that accepting weapons inspectors back into their country was a ‘big decision’ and encouraged the Iraqis to ‘sleep on it.’ ANCHOVIES Chris Williams: ‘Only brine shrimp can live in the Great Salt Lake. It’s too salty for anything else. The entire lake region, including the nerve gas storage facilities to the south and the Air Force bombing range to the west, was once under a huge inland sea many thousands of years ago. It became separated from the ocean and largely dried up, leaving the salt behind. The deserts to the south and west are salt, not sand. BTW, that water you saw is at 4200 feet above sea level.’ DICK DAVIS #33 Item 33: The Market Has Its Own Agenda Because the media fosters the myth that whatever happens to a stock or the market on a particular day is linked to news, there is the perception that the market follows the news. Actually, it’s the other way around. The market is the leader and the news follows. There is always good and bad news on a stock. Let’s imagine the good news is listed in Column A and the bad news in Column B. If the stock goes up, we use Column A to explain the move; if it goes down, we go to Column B. In 1987, there was no ‘trigger’ news, none, to explain the market’s 22% collapse on one day, October 19. But there was no shortage of negative stories cited after the fact. The obvious exception to the irrelevance of news is when the news is a surprise, in which case it can trigger an immediate, if not lasting, response. So if it’s not ‘news’, what are the overriding forces that influence the market’s behavior? It’s my view that the market has its own needs and that whatever course it must take to satisfy those needs, it will take. Following a bull market, for example, its primary need is to allow enough time to pass to heal the valuation excesses of the previous cycle. Or it may need enough time to pass to allow earnings to catch up to unreasonably high prices. Or it may need enough time to restore the confidence level of investors. In the present market environment, for example, the combination of a bear market, a recession and September 11 has created a deep wound that is likely to take more time to heal. The market’s malaise has caused us to go from a ‘buy on weakness’ to a ‘sell on the rally’ mentality. It is only the prolonged reinforcement that comes from seeing the market go up, hold its gain, and then go up some more – from seeing that ‘buying on dips’ works, and then works again and again, that will restore investor confidence. Or the market may simply have a need to be true to its perverse nature by doing whatever it has to do to make the majority of people wrong. In any event, the market will play out its role, independent of the news, analysis and speculation swirling around it. Yes, news of earnings, the economy, interest rates and inflation are major long-term influences but, in terms of priority, the market will satisfy its own needs first. It will not be deterred from its own agenda.
A Further Point About Points September 16, 2002February 21, 2017 Juan: ‘I think that it is OK to pay points when you take out a mortgage if you finance them (i.e., they become part of the mortgage). This way, you put the cash you would have paid for points to use in another investment at the same time as you get to enjoy the lower interest rate you got for paying the extra points.’ ☞ I disagree, at least for most people. Here’s the thing: the only difference financing the points (or other closing costs of your mortgage) makes is that you now are paying them plus interest. Let’s say, after-tax, the effective interest rate on your mortgage is 4%. By adding the $6,000 in points (say) to the principal amount of your mortgage, you are just borrowing that much more ($306,000, say, instead of $300,000). So for someone who can easily make more than 4% on his money after tax, you’re right: financing the points makes sense, and can make paying extra points in order to secure a lower interest rate marginally more attractive (but only marginally). For someone who will make less than 4% after tax on their money, financing the points actually raises their cost. (And, of course, for someone who makes exactly 4%, financing the points is a wash.) Well, you may ask, how is it possible for anyone to make less than 4% after tax on his money? And I would suggest that in a bank you will make less, in short-ish-term bonds you will make less. And if you go for the stock market or long-term bonds, there is the chance (if interest rates rise) you will make much less. In short, I’m not sure that financing the points really does make them appreciably less costly for most people (and could actually make them more costly). Which brings us back to the straight calculation: Will the cost of the points be justified by the lower annual interest rate? And that, I think we agree, depends on the factors I cited. Sometimes the points will be justified, sometimes they won’t. Whether to finance them or not is a separate, less important question. It simply depends on whether you will earn more on that money than it costs you to borrow it. QUESTION FOR YOU I was just in Salt Lake and learned that it is ten times saltier than the ocean. Is this where anchovies come from?
Good News, Macro and Micro September 13, 2002February 21, 2017 It’s always good to be upbeat on Friday the 13th. MACRO Good. So the weapons inspectors will go back in and we will not invade Iraq. Or, worst case, we’ll go in with the backing of the United Nations. This is a big improvement. MICRO There was this poor, abandoned baby boy named Sasha, who deserved to be happy like any other baby boy, but seemed to have no chance. But then . . . well, it’s the ‘My Turn’ column in Newsweek. Click here. Have a great weekend.