Monday, May 22, 2006

LAUGH, CRY OR VOMIT?

LAUGH, CRY, OR VOMIT?

A story about a couple’s inability to save money, despite a $165,000 annual income, only one teenage son, and living in a low-cost of living area (around Jacksonville, FL), is posted on USA Today.com.

“Spending Contributes to Couple’s Inability to Save”[i] is about a middle-aged couple that squander their money on a lavish mortgage, boat, motorcycle [want to bet it is a Harley –Davidson?] swimming pool and home renovations and then complain that they can’t save money. Oh, and they will not save money for their son to attend college.[ii]

One thing they're not worried about is the cost of [Son’s] college education. They've decided that college expenses shouldn't derail their retirement savings. We basically told him that he can work his way through college," [Mommy, who hopefully is menopausal or sterilized and cannot breed again] He can get loans, he can get a job. That's what makes the world go 'round."

AUTHOR’S NOTE: Your profligate unsustainable world, chick, not the Author’s and the world that should prosper in the 21st century. Also, the Author won’t mention the names of these whining bladder plugs in the article. Oh, and one more thing. The man who can’t manage his own finances makes $100,000 as a senior loan officer at a bank!]

SOME GOOD NEWS

This couple is going to a financial planner and that is the reason they are the subjects of a major media story. Without the fifteen minutes of fame (Would shame be better?) they would suffer their spendthrift ways along with most suburban America. Can they climb out of the debt that their gluttonous ways have created? Who knows? And some of the readers may be asking, who cares?

The couple is a good example of a bad example. The Author, having thrown a case of Ambrose Bierce upon them, hopes they can bring their finances in line. But if they cannot, well, there will surely be a reality show about such folks in ten to fifteen years, over consuming American suburbanites that must provide per-anal care to celebrity invalids such as Keith Richards and Barbara Striesand to win money to supplement their Social Security.

That last crack was a little below the belt. But it’s a cloudy day in Albuquerque.

THERE ARE NO RAINY DAYS IN THE DESERT OF THE REAL. STILL, WE CONSERVE AND SAVE FOR THEM!

[i] http://news.yahoo.com/s/usatoday/20060522/bs_
usatoday/spendingcontributestoinabilitytosave;_ylt=
Ar5SCPO2BET90z5LcMOHBLes0NUE;_
ylu=X3oDMTA3bGI2aDNqBHNlYwM3NDk-
[ii] Family values? These chazzers want to be “missionaries”. "Our plan is to sell the house, buy a big boat or catamaran (in the Caribbean) and do missionary work there," says {nurturing mother], 42. Perhaps there are some offshore banking interests in the Cayman Islands that could benefit from their stalwart counsel.

Thursday, May 18, 2006

FLASH...MAIN MARKET INDICATORS REVERSE TO NEGATIVE!!!

AND DID THEY GO NEGATIVE FAST

The main technical indicators the Author follows have turned negative. Just a couple of weeks ago the DJIA was approaching 12,000. Now it is aimed at 11,000. So as investors we must move from a making gains mode to a preserving gains mode.

Here are some thoughts:

Take some gains off the table. If you are up 50%, sell half of the position and tighten up your stops. Unless taxable gains are an issue, put a stop in at 10% below the position for half of the position. At a 20% drop, sell the remaining half.

If the stock comes back on a rally, you can always buy it back. Owning a stock is not like going to the high school prom or losing one’s virginity. Once it goes it is not gone forever. You can always buy it back when the price and the market looks good.

Buy some protective puts on stocks to participate in any gains that might accrue to individual stocks.

Start looking at strategies for a falling market. Buy naked puts, look at inverse funds.

Not much more to say. The Author has a lot on his plate, but will follow-up with further developments.

Just keep your powder dry and keep the ponies in the corral tonight.

IT’S ALWAYS THE REAL THING IN THE DESERT OF THE REAL!

A SIMPLE QUESTION. NO SIMPLE ANSWER.

Federico Minoli, states in his Desmoblg of May 16, 2006:

Everyone – really everyone - was in agreement that Ducati has a great name: a symbol of technology, modernity and youth. Their main question was: how come, with a name like Ducati, you aren’t selling more motorcycles?[i]

That is the central question facing Ducati management. What can they do to sell more motorcycles, and higher margin motorcycles?

DUCATI’S POSTS A PROFIT FOR FIRST QUARTER 2006

Ducati posted a profit of 1.5 million euros for the first quarter of 2006, reversing a loss of 2.6 million euros for the same quarter in 2005. This profit came despite lower revenues, 78.2 million euros in 1Q2006, down 4.5% from 81.9 million euros in 1Q2005.[ii]

Ducati states:

[Revenue Decline] … was due to a reduction in motorcycle sales, offset by a positive product mix, increased sales in accessories, as well as a positive exchange rate effect [AUTHOR’S NOTE: The U.S. Dollar has declined against the euro and the current dollar to euro exchange rate (5.18.2006) is .7799]. 7,337 units were sold in the period. Revenues from motorcycles for the period decreased 8.6% to Euro 60.2 million against the same period last year and accounted for 77.0% of total revenues. Motorcycle related products, including spare parts, accessories and apparel, amounted to Euro 16.9 million, up 9.9% on the first quarter of 2005.

MOTORCYCLE SALES FIGURES TELL AN INTERESTING STORY

Ducati Units
Motorcycle shipments: 1Q2006 1Q2005 % Change

North America 2.502 1.710 46.3% [AUTHOR'S NOTE: Sorry about the lack of formatting on these columns. No time right now to correct it.]
Main European market 2.845 4.997 (43.1%)
Japan 555 513 8.2%
Rest of World 1.435 1.745 (17.8%)

Total 7.337 8.965 (18.2%)

Motorcycle product mix: 1Q2006 1Q2005 % Change

Superbike 1.147 2.120 (45.9%)
Supersport 176 259 (32.0%)
Sport Naked 3.933 4.174 (5.8%)
Sport Touring 550 389 41.4%
Multistrada 666 2.023 (67.1%)
Sport Classic 865 0 n.a.

Total 7.337 8.965 (18.2%)

Overall, bike sales were down 18.2%. However, Ducati sold 46% more bikes this past quarter than in the same quarter 2005 in the United States. This increase coming despite the declining dollar (making euro denominated import products more expensive).

Consistent with the entire year of 2005, Superbike and Supersport sales are way down. Even Monster sales are down. And Multistrada sales plummeted 67.1%.

SO, BACK TO THE QUESTION…OR HOW DOES MR. BLANDINGS BUILD HIS DREAM HOUSE?

Desert of the Real Economic Analysis is primarily an investment, finance and economics blog. But motorcycles are one of the Author’s first loves. And just as Mark Twain wrote in “Life on the Mississippi” that he wanted more than anything to "be a pirate when he grew up”, the author pines to get into the motorcycle business.

But looking at Ducati financials, the left side of the Author’s brain, the one that does the investment analysis, asks “Why?” The Author owned Ducati stock briefly in 2001 and made a positive return. He would not buy it now. Stocks are stocks and motorcycles are motorcycles.

The 1948 comedy “Mr. Blandings Builds his Dream House”[iii] is one of the most delightfully funny films in the comedy cannon. It stars Cary Grant, Myrna Loy and Melvyn Douglas in a “comedy of errors” as the Blandings build their dream home in rural Connecticut. It is a quintessential “proof” for Murphy’s law, as nothing works as promised, everything must be done and redone, and costs exceed budget by Halliburtonian proportions.

Sounds much like a Ducati, doesn’t it?

Anyway, Mr. Blanding explains at the end of the film that “Some things [building the house] you do with your heart, not with your head.” Yep. Evidently so.

RIDE WITH YOUR HEAD AND FLY WITH YOUR HEART IN THE DESERT OF THE REAL!

[i] http://blog.ducati.com/.
[ii] http://www.ducati.com/company
/pr_eng_1981_0_1q06_150506_eng.pdf
[iii] http://www.imdb.com/title/tt0040613/#comment

Wednesday, May 17, 2006

THE MAN OF DUCATI TALKS

WELL, ACTUALLY HE BLOGS

Ducati is known as an “internet savvy” company. Their site is rich and interactive and Ducati saw the value of the Internet early in the commercial life of the web. In fact, Ducati uses the web to sell some of its limited edition motorcycles

The CEO of Ducati, Federico Minoli, has an on-line blog, Desmoblog, on the Ducati website. http://blog.ducati.com/. The general public, Italians, Europeans, Americans, and other planetary folk can post questions or replies on Mr. Minoli’s blog.

DUCATI AND ANOTHER ROUND OF FINANCING

Ducati just acquired an additional 80 million euros in a private offering. In support of this offering, Ducati senior management made the rounds of European banking capitals, London, Milan, Zurich, Geneva and Frankfort. (In the Desmoblog, Mr. Minoli shares some of the common questions and responses. The blog contents are reprinted below. The raise some interesting issues and the Author inserts a few comments.

After an unforgettable Sunday at the SBK race in Monza. I knew I was going to have too pay a high price for my enjoyment… and that is how it was: I had an incredibly long week travelling to Milan, London, Zurich, Geneva and Frankfurt presenting Ducati to all of the possible signatories for our 80 M Euro capital increase. It was a week spent talking about the future of Ducati with banks and analysts, investors and lawyers.

Looking for the positive light in the whole ordeal, it is interesting to take a close look at the opinions people have about Ducati when they are looking at us from the outside –and without the passion for the bikes or the brand.
Everyone – really everyone - was in agreement that Ducati has a great name: a symbol of technology, modernity and youth. Their main question was: how come, with a name like Ducati, you aren’t selling more motorcycles? The people with more knowledge about the company also asked: how come in recent years your income margin for motorcycle sales has gotten smaller? At this point, the bankers had all sorts of interpretations and suggestions for us. Here are some of the main ones and some of my responses:
- It costs too much to produce motorcycles in Italy – you al should make Ducati motorcycles in India. (No thanks – we really can’t imagine the “Reds of Bombay”)


- You spend too much on your technology. You should be more like Harley Davidson. (No thanks, have you all ever tried riding an Electraglide on the Mugello track?) [AUTHOR’S NOTE: Only Harley Davidson can succeed by making obsolescence a virtue. It is not a business model that is often repeatable.]

- You have too many different models. You should simplify the offer. (it’s true – we are working on it.)

- You sell more Monster 620s than 999s and this brings your margin down. (You are right – we will work to improve our top of the line bikes.)[AUTHOR’S NOTE: Tough issue. Ducati is an “aspirational” brand, and as such, must keep the first rung of the ladder pretty high. Still, the Monster is an amazingly successful motorcycle. If Ducati upscales the Monster and still loses Superbike sales, it will lose revenue. Keep the Monster 620 and maybe dump the Supersport? Ducatisti, what do you think?]

- You are growing too much in the United States and the decreasing value of the dollar is hard to digest. (True, very true.) [AUTHOR’S NOTE: Not much near-term help here, Stephen Roach, Chief Economist at Morgan Stanley sees another 15-20% decline in the dollar. http://www.investorsinsight.com/otb.aspx

- You buy brand name parts that are too expensive (Brembo, Showa, Ohlins, Termignoni) No one makes a product so rich with parts. [AUTHOR”S NOTE: And the stock parts still aren’t sufficient for many Ducatisti. They (and the Author) could buy two Ducatis for the component upgrades many owners make. This is an area where Ducati could take some lessons from Harley-Davidson. Harley Davidson dealers are very successful with the “drag”, the value and volume of HD factory upgrades they sell to HD buyers. Many Ducati owners go with non-OEM pieces.]

- You focus your expenses on racing and have huge bills to pay to keep up participation in the MotoGP. Superbike and AMA. (They are wrong – the total upkeep cost for Ducati Corse is 1-2% of our total turnover thanks to the support from our main sponsors.)

The questions got a bit more interesting – and the discussion a bit more lively – when we met with bankers that were also a Ducatisti (a total of around 6 in the 50 meetings we had over the course of the week). In these meetings, the questions and comments were mainly focused on the product, such as:

- The Multistrada is the best bike that I have ever ridden – but - why don’t you change the front?
- When the Hypermotard gets here, I want one.
- Why don’t you make a single cylinder entrance level motorcycle?
- Don’t even think about making the error to change the design of the Monster.
- I want a SportClassic – two seater.

And on and on. Luckily it is all over. The refinancing is guaranteed and we can now calmly look towards the future. And then there was the disappointment after Sunday’s race. Well – let’s hope for more in the week to come!


KENNY BOY, WHY DIDN’T Y’ALL SPEAK UP WHEN YOU HAD THE CHANCE?

Such interaction is welcome and refreshing. Can you imagine if in the late 1990s Ken Lay of Enron had gone online with investors, workers, and utility regulators and explained its operations, financial arrangements and business model?

Statements from corporate management must be viewed skeptically, but the observations of the European investment bankers and Mr. Minoli’s responses sound credible.

LISTEN WITH AN OPEN HEART, EVALUATE WITH AN OPEN MIND, AND SPEAK WITH AN OPEN SOUL IN THE DESERT OF THE REAL! IT’S EASIER, AND USUALLY AS PROFITABLE, AS LYING.

Tuesday, May 16, 2006

READ THIS BEFORE YOU RIDE

IT’S SQUID[i] AND OMMLET(TM) [ii] SEASON

While riding motorcycles is one the most fun one can have on earth, it is an activity of moderate danger. Statistics show that your risk of injury on a motorcycle can be 14-16 times higher on a motorcycle than driving a car. There are a host of reasons. They can be minimized, but not eliminated.

Smart riders wear protective gear, make sure their bike is in good working order, ride within their limits, work on their skills, and do not endanger themselves or others riding in traffic. Racing activity is for the race track.

BUT WE”VE ALL SEEN THEM…

All of us have seen the SQUIDs. Idiots, often in tank tops and flip-flops, pulling wheelies in rush-hour traffic. A good proportion of these SQUIDS are kids that have the undeveloped brains of testosterone fueled adolescents. Society makes allowances and provisions for their inexperience, unthinking bravado, and poor judgement. But the physics of motorcycles make no allowances.

The sport motorcycle of today has power and capabilities that are amazing. Most can exceed 260 kph. Many 300 kph. They are rocket ships on two wheels. And they are within the financial reach of most kids or their doting parents.

The article below is reprinted from the Sacramento Bee newspaper. The Author does not necessarily agree with all points in the article, but he cannot overestimate the need for safety and sanity, especially when dealing with young, old, inexperienced, inebriated, or still stupid motorcyclists.


Police prepare for 'squid season'

Spring brings out motorcycle riders — some over their heads after buying their first bikes.
By Jim Guy / The Fresno Bee

(Updated Saturday, May 13, 2006, 5:13 AM)
The license plate frame on the crashed sport bike says, "Cops hate me 'cause I'm faster."
Fresno police Sgt. Gary Beer keeps a photograph of the twisted Yamaha R6 involved in the fatal crash on Friant Road as a vivid example of how quickly things can go wrong for motorcycle riders who don't keep their throttle hands in check.

As the weather warms and brings out riders who might be tempted to race or do stunts, Beer and other members of the department's Traffic Safety Unit say they will be watching. Police and many experienced riders warn that the temptation to copy moves seen on Internet videos and in some magazines can be lethal for an inexperienced rider on a high-powered sport bike.
The National Highway Traffic Safety Administration says speed is a factor in more that 40% of all motorcycle fatalities; among riders younger than 30, it is a factor in 60%.

"A lot of kids riding sport bikes are over their heads," says Brian Hance, a detective with the department's Collision Reconstruction Unit. "Ninety-nine dollars down and $99 a month, and you can ride a rocket."

What some motorcyclists call "squid season" (most say "squid" is short for "squirrelly kid") has already kicked off. Last month in Tulare County, 19-year-old Stephen Lira suffered major injuries when he attempted a wheelie on Highway 99. Several weeks ago, Beer was tied up at a DUI checkpoint when Fresno police's Skywatch helicopter spotted two motorcyclists riding wheelies down Blackstone Avenue. Because most of the city's traffic officers were busy with the DUI enforcement, no officers were able to respond in time.

Racers and stunt cyclists doing wheelies, "stoppies," (using the front brake to lift the rear wheel high in the air), or "burnouts" (revving the engine while the back tire makes a cloud of smoke) may not be so lucky in coming weeks.

Capt. Andy Hall, head of the traffic unit, said plainclothes officers driving unmarked cars will be at the forefront of the effort, trying to keep riders safe.
"This summer, we'll see some deaths," Hall says. "You will see us working it really hard. … You show off and you will get arrested for racing."

Officers in the unit can tick off example after example of motorcyclists killed while riding beyond their limits. The deaths aren't limited to younger riders of high-horsepower Japanese motorcycles. A recent study by the NHTSA found that over-50 riders on cruisers such as Harley-Davidsons and Yamaha Roadstars were also at risk of being killed. Still, sport-bike accidents often happen at a higher speed or in a more spectacular manner.
Fresno County sheriff's deputy Aaron Kilner became posthumously famous in 2003 for infiltrating Peace Fresno, and as a result appeared in Michael Moore's "Fahrenheit 911."

Fresno police Sgt. Gary Beer keeps this photo as a reminder of how quickly things go wrong.
Special To The Bee

Members of the group saw his photograph in The Bee after he crashed his Yamaha R6 into a car. Investigators said Kilner had just left a local motorcycle shop and was wearing a borrowed helmet when the collision occurred. His rear tire skidded for 300 feet, Hance says.
Hance recalls a rider on a 186-mph-capable Suzuki Hayabusa who popped up the front wheel of his bike at Ninth Street and Ashlan avenue in 2003, then ran into a car, throwing off and killing his female passenger.

He has a photo of a crash last July involving Dallas Mossey, 31, who was riding a stolen Honda CBR600. Mossey lifted the front wheel and then landed it at a bad angle. The resulting wobble caused Mossey to crash, his body coming to rest beneath a cross outside a church at Crystal and Shields avenues.

California law allows anyone who is at least 151/2 years old and passes a written test to obtain a motorcycle permit, as long as they do not ride on the freeway, carry a passenger or ride at night. That doesn't sit well with everyone.

"I think it's insane," says Beer, who rides a Harley-Davidson and is a former motorcycle officer. Hall, also a rider, says parents often don't see the whole picture when they buy their child a high-powered sport bike.

"The kids might ride them conservatively around their parents, but once out of their parents' sight, it's easy to go wild," Hall says. "Most people get in an accident in the first six months after buying a motorcycle. Most likely, they are not taking in enough input. When I'm on my bike, I'm watching everything — the wheels of cars, the eyes of drivers."

Hall enjoys riding mountain fire trails with his 16-year-old son.
"I allow my son to ride, but not without me," he says.

Joseph Conterno, sales manager for Honda-Suzuki of Madera, also has reservations about a first-time rider getting on a motorcycle such as the Suzuki GSXR600 that's sold under the slogan "Own The Racetrack," a lightweight motorcycle that's capable of 160 mph.

"I'm a little different," Conterno said. "With some kids, they think that they have been riding a dirtbike for five or six years and now they think they can ride a GSXR600. I don't want that phone call the next day."
He tries to sell first-time riders a more manageable motorcycle.

Experienced riders in Fresno's Quarter Mile Club say their group avoids "squids," too. A few years ago, the group was often the focus of law enforcement efforts cracking down on speeding and street racing, members say. Dan Moore, 37, president of the club, remembers the time a police helicopter hovered overhead during a club run.
Now, the group avoids racing anywhere other than sanctioned tracks and takes a closer look at who can join.

"We make sure you have full insurance coverage, we make sure you aren't a 'squid' and we have a probation period," says Moore. Before, "We were taking everyone who had a bike with a fairing. We paid for it by bringing in people that weren't safe."

Blaine Shirkey, 38, vice president of the Quarter Mile Club, says he had a good friend who was set on buying a 1000cc Yamaha R1, one of the fastest motorcycles built, as a first motorcycle.
Shirkey, who like Moore rides an even faster Hayabusa, told the friend, Brent Wallace, 27, that he wouldn't help him learn to ride it. Wallace ended up buying an equally fast Suzuki GSXR 1000 anyway. He was killed in 2001 when he collided head-on with a car and then was struck by a pickup on Highway 168 near Sample Road. He had owned the bike for four days, Shirkey says.

Motorcycles have evolved so quickly in the past few years, becoming lighter and more powerful, that some members question licensing regulations.

Like police officers Hall and Beer, Quarter Mile Club sergeant-at-arms Eric Arcia says beginning riders should take a course from the Motorcycle Safety Foundation.
Arcia, 35, also says it might be time to go to a tiered licensing system that would restrict first-time riders to less powerful motorcycles.

Says Moore: "The rules for allowing a 151/2-year-old [to ride] were made when 600s had 35-40 horsepower. Now, they are pushing 100.

"The margin for error has been greatly reduced from even 10 years ago. When you make a mistake, everything is compounded.
"There are no air bags, no seat belts and all the equipment in the world is only good for a slide."

http://www.fresnobee.com/local/story/12178772p-12922750c.html

One thing to note is that California has a mandatory helmet law. Most states do not.

RIDE FOR THE RIDE, DRESS FOR THE SLIDE IN THE DESERT OF THE REAL!

[i] SQUID. Inexperienced/stupid sportbiker riding in an unsafe and stupid manner. Short for “Squirrelly” or “Squashed Kid”
[ii]OMMLET(TM)“Old Male Motorcyclists Lacking Experience and Training”. Midlife crisis types that last rode a Cushman scooter in 1963. Every third purchaser of a Harley-Davidson motorcyclist. The Author’s apologies to safe and responsible Harley riding men and women that take the Motorcycle Safety Courses and wear protective gear. (See, the Author can speak highly of Harley Riders in certain scenarios). The Author claims ownership and authorship of OMMLET(TM).

Friday, May 12, 2006

May 2006 Desert of the the Real Newsletter

AUTHOR'S NOTE: THIS WILL BE EMAILED TO EVERYONE ON THE NEWSLETTER LIST THIS WEEKEND


Welcome to the Desert of the Real—
Real Investment Returns in a Dry Season
May 2006 Copyright Robert C. Feightner


Welcome to the Desert of the Real.[i] (Author’s Note: This Desert of the Real Newsletter will mark the return of the newsletter. And the velocity of the Author’s blog posts is increasing. The Author will attempt to keep up a reasonable pace. The Author is still looking for entrepreneurial opportunities in the motorcycle business, but the right move is still illusive.)

ARE YOU QUICKER AND SLICKER THAN THE PACK?
CAN YOU TURN YOUR NOSE INTO THE STAMPEDE AND AVOID RUNNING OFF THE CLIFF? (YOU NEVER KNOW WHEN YOU WILL GET THE CHANCE.)

A sign that the Author has been drinking in the financial genius of GMO principal Jeremy Grantham is when the headlines get truly bizarre. Mr. Grantham is not a bizarre dude. He is an accessible genius. Rather, the brilliance of Mr. Grantham’s insights requires that the Author grab the readers by the lapels and share Grantham’s insights.

The April 2006 “Letters for the Investment Committee VII”[ii] by Jeremy Grantham is entitled “Risk and the Passage of Time: The Extreme Importance of a Long Time Horizon”. But don’t let the statement about the “extreme importance of a long time horizon” move you off a momentum based, relative strength investment approach. First, few investors have enough time on earth to hold investments through Secular Bull and Bear cycles that typically average 16-18 years per cycle. Also, you need all of your capital at the beginning of the time period for the compounding effect. The time period Mr. Grantham refers to is more akin to geologic time, not investor lifetime. Only the idle rich, who are rich because their grandparents were rich, can put these time horizons on their indolent sides.

MOST YEARS ARE OK YEARS FOR THE AMERICAN ECONOMY

The economy grows at about 3.5% per clip per year. And two-thirds of one-year periods in the economy were within 1%, plus or minus[iii]. By this measure, the American economy chugs along. Also, as Grantham points out, the “fair value”[iv] of the S & P 500 spends most of its time within a range of 1%, plus or minus, of fair value. Just like the turtles, snails and tectonic plates. But then it gets interesting. Really interesting.

The actual S&P 500 spends 2/3’s of its time within 19%, plus or minus, of its fair value. This means that the S & P 500 is 19 times more volatile than its underlying value. Why is the S&P 500, and other equity indexes, so volatile? And what does this mean for the momentum based, relative strength investor?

STAY WITH THE HERD, STAY IN YOUR JOB

Grantham ascribes this short-term volatility (and inefficiency) to portfolio manager “career risk” and the across-the-board tendency of most analysts to extrapolate future growth (or future losses) from the same, and usually incorrect, estimates. Long sentence. Lots to look at.

Lord Keynes’s frequently quoted investment management career advice is “never be wrong alone.” If your accounts lost money (or earned) money in general parity with the industry average, you keep your job. But if everyone else made money and you pursued a different, losing, strategy, pray for severance pay. This human tendency to want to stay employed encourages groupthink generally correlated activity, and occasional willful ignorance.[v]

If the consensus estimates for ABC stock says earning will grow by 8%, you are unlikely to forecast 4% or 12%. Stick with an 8% estimate (don’t stick your neck out) and not much bad will happen. Maybe to your clients or to ABC stock. But not to you.

SO WHY THE VOLATILITY IF EVERYONE IS SINGING OFF OF THE SAME SHEET MUSIC?

If everyone is extrapolating (projecting future stock price movements) from the same estimates, you can guess what happens. Analysts will recommend buying or selling the same stocks at or about the same prices. But in comes price means regression, along comes a Secular Bull or Bear market, and these consensus estimates become consistently wrong. Why and how does it happen?

Two reasons:
Overvalued earning estimates will be multiplied by historically high price/earnings ratios. This will estimate a price for the stock that far exceeds its objective value.
Undervalued earning estimates will be multiplied by historically low price/earnings ratios. This will result in estimates that are below a stock’s objective value.

This effect, combined with the Secular Bull and Bear markets, drives prices insanely high or ridiculously low. It is a reason that markets typically overcorrect.

CRANK UP THE “WABAC”[vi] MACHINE

It is May 1982 and we have just discovered MTV. England has taken back the Falkland Islands from the Argentines. Bill Gates is reading about the lives and business tactics of John D. Rockefeller and J.P Morgan. Our analyst has just started as a stock analyst at R.K. Maroon Investments, LTD. He follows ACME, Inc., storied purveyor of anvils, rocket engines, and portable holes to cartoon characters. The current price/earning ratio of ACME, Inc. is 8. And a P/E of 8 is the average S&P P/E in 1982. The stock market is at an historical low. It is at the end of the Secular Bear Market and poised for the Secular Bull Market that ended in 2000.

ACME, like many companies, has struggled of late. Its revenue growth and earnings growth have been weak. The consensus estimates for ACME’s earnings in 1983 is $3 per share. The stock currently trades at $24 per share ($3 per share forward earnings * ACME P/E ratio of 8=$24). So it appears fairly valued. But it is not.

Historically, ACME has grown earnings at 9%. Using this historical 9% growth rate would give us an earnings estimate of $3.50, not $3.00. So if we used $3.50 as the earnings estimate instead of the consensus estimate of $3.00, ($3.50 per share forward earnings * ACME P/E ratio of 8=$28). So if we use a longer-term earnings growth estimate for ACME, we would determine that ACME is 16% undervalued. ACME now looks like a buy.

OUR SECOND MISTAKE

Rather than spend time researching Secular Bull and Bear Markets, our new analyst spends most of his time listening to Flock of Seagulls cassette tapes on his brand new Sony Walkman machine. If he had considered that fact that the stock market was at an historic low, he might have determined that a Secular Bull Market was just beginning. Remember, ACME’s P/E ratio, like the S&P average is at an historically low level of 8. The historical average P/E ratio of ACME and the S&P is 16. Let’s refigure this.

ACME CONSENSUS ESTIMATE FOR 1983: $24 ($3 forward earnings * P/E 8)
BETTER 1983 ESTIMATE FOR ACME USING HISTORICAL AVERAGES: $56 ($3.5 forward earnings * P/E 16)

By only using recent history and estimates as his guide, he missed the fact that ACME, as well as other S&P 500 stocks, is undervalued. And guess what mistakes he will make when he prepare his 2001 estimates for ACME. At the peak of the Secular Bull Market, when prices are poised to revert to the mean valuation, he will use overly generous earnings estimates and historically high P/E ratios. Lose-Lose. But he will keep his jobs because nearly his entire cohort is similarly in error.

CAVEAT.

The Author is not using this newsletter as a promotion for fundamental investing or value investing styles (But if you use these styles, this is important advice.) Instead, he is using these examples to demonstrate how the short-term nature of market analysis, along with the tendency of analysts to run with the herd, create short-term volatility and inefficiency.

As momentum and relative strength investors, we use this short-term volatility to magnify our gains and avoid losses. If it is gong up, buy it and ride it up. When the market overcorrects to the downside, we keep our gains by bailing out early. Our methodology works not because we are quicker and slicker, but because we listen to what the market is telling us and move accordingly.

Welcome to the Desert of the Real!

IMPORANT DISCLAIMER: This newsletter is offered for informational purposes only. Sources of information provided are believed to be reliable, but are not guaranteed to be complete or without error. Opinions and suggestions are provided with the understanding that readers acting on information contained herein assume all risks involved. The Author may or may not buy or sell securities discussed in this newsletter.

[i] The title of this Newsletter, “Welcome to the Desert of the Real”, comes from the 1998 film “The Matrix”. The world in the Matrix is a Simulacrum, a computer–generated illusion. It only “looks” and “feels” like the late 20th century. Instead, human beings are enslaved in tanks of fluid, wired to the Matrix. Also, readers steeped in post-structuralist philosophy may recognize the title as a paraphrase of a quote in Jean Baudrilliard’s 1981 book, “Simulacra and Simulacrum”.

One the subject of cinema, the Author reviewed the film “Lonesome Jim” for the Ligonier, Indiana newspaper Advance-Leader. “Lonesome Jim” was shot in and around Ligonier and was written by an area native. A copy of the review is posted at: http://desertoftherealecononomicanalysis.blogspot.com/2006/05/
review-of-film-lonesome-jim.html
[ii] http://www.gmo.com/. Registration is required, but it is free.
[iii] “Letter to the Investment Committee Part VII”, p. 1-2.
[iv] http://www.investopedia.com/terms/f/fairvalue.asp ”The "fair value" quoted on TV refers to the relationship between the futures contract on a market index and the actual value of the index. If the futures are above fair value then traders are betting the market index will go higher, the opposite is true if futures are below fair value.”
[v] "It is difficult to get a man to understand something when his salary depends on his not understanding it." Upton Sinclair.
[vi] The “WABAC” machine was a time machine used by Mr. Peabody, a professorial dog, and his boy, Sherman, on the Bullwinkle and Rocky cartoon show. The Author has frequently commented that one does not need an investment advisor (or even a strategy) to get rich, just a time machine. Shoot yourself back in time and buy 1000 shares of IBM, Microsoft or Genentech. Return to the present rich.

Another dream strategy recommended by one of my investment mentors is to get a copy of the Wall Street Journal from 10 years in the future. This strategy has merit, but the Author, in homage to numerous Twilight Zone episodes, would likely get one from a day after a Stock Market holiday, an edition of the paper where there would be no prices quoted.

Tuesday, May 09, 2006

SHINE ON YOU CRAZY METALS!

GOLD AT 25-YEAR HIGH, SILVER AT $14 PER OUNCE

Gold is considered by many to be the ultimate default currency. In times of war, hyperinflation, or other major disruption, gold prices soar. When times get tough, when oil prices vault, many retreat to the safety of gold. In January of 1980, gold hit $870 per ounce. Also in January of 1980, the DJIA fell from 875 to as low as 820.

In September of 1980, gold reached as high as 730 before slipping to $700. And gold, which has been as low as $250 in September of 1999, is within a hair’s circumference of $700[i].

TRAIN KEEPS A ROLLIN’

Is gold too high? Will gold keep rising? The Author does not know. Remember, he is a relative strength, momentum based investor. His charts tell him that gold will lose technical support at $605 per ounce. That is a long way to fall, so protect your gains if you have them. Put in stops to protect some of your gains at percentage gains you are comfortable with.

FOR EXAMPLE

Let’s say we bought gold at $605 per ounce.[ii] Gold will lose technical support at $605, so if we allow our gold holding to fall to technical support at $605, we break even. And nobody wants to do that. Nobody ever lost money (sleep perhaps, but not money) by taking gains.

Right now, with gold over $690 per ounce, we have a gain of about 14%. So we want to protect most of that gain. One tactic is to put a stop loss order at $675. That locks in an 11% return. You could protect your entire portfolio, or protect only half of it with a stop-loss order to sell only half of your gold holdings.

If gold does fall to $675 and you take an 11% gain on half of your gold holdings, you can put in a lower stop loss order on the remaining gold. If it rallies, you participate in the gains. If not, you have downside protection.

YOU NEED INVESTMENTS THAT ARE GOING UP IN YOUR PORTFOLIO

Is it too late to get into gold investments? Again, who knows? Gold is in a fast trend upward and trends tend to continue, until they no longer continue. Double speak, gibberish? Smarmy remarks? No, just all the Author can say about future gold price directions. We don’t predict in the Desert of the Real. We let the market tell us what to buy, when to buy, and when to sell. There are those geniuses that can sometimes correctly predict market directions. We cannot and don’t pretend to. We follow our charts and our methodology, make gains, avoid losses, and we beat the snot out of the indexers and the portfolio pie chart people.

But since gold is moving higher and has relative strength against the overall market, there is ample reason to buy, or keep buying, gold. When it falls, we will sell it and look for the next investment.

IMPORANT DISCLAIMER: This post is offered for informational purposes only. Sources of information provided are believed to be reliable, but are not guaranteed to be complete or without error. Opinions and suggestions are provided with the understanding that readers acting on information contained herein assume all risks involved. The Author may or may not buy or sell securities discussed in this blog.

WE CANNOT OUTSMART THE MARKET IN THE DESERT OF THE REAL. WE JUST LISTEN TO WHAT IT IS TELLING US AND STAY ON FOR THE USUALLY PROFITABLE RIDE!

[i] “$700 Gold: Want in, Think Twice”, http://money.cnn.com/2006/05/09/pf/gold_investing/index.htm?source=yahoo_quote
[ii] The Author owns gold in IAU, an exchange traded fund. Each share of IAU represents 1/10 of an ounce of gold.

Tuesday, May 02, 2006

FREE MARKETS ARE NOT PRO-BUSINESS

READ THAT AGAIN: FREE MARKETS ARE NOT PRO-BUSINESS[i]

Heresy? Blasphemy? No, reality.

A central irony of a free-market economy is that everyone is in favor of competition, but nobody wants to have to compete. Free markets are pro-efficiency, not pro-business. Sometimes, and only sometimes, the government can do something better and cheaper.

Lawrence Lessig is a law professor, intellectual property expert and technology maven. In a post entitled “Crushing Competition” in Wired Magazine, May 2006[ii], Lessig addresses the corrupting influence of crony capitalism. He begins with some seemingly outrageous examples:

Imagine if tire manufacturers lobbied against filling potholes so they could sell more tires. Or if private emergency services got local agencies to cut funding for fire departments so people would end up calling private services first. And what if private schools pushed to reduce public school money so more families would flee the public system? Or what if taxicab companies managed to get a rail line placed just far enough from an airport to make public transportation prohibitively inconvenient?[iii]

Seem unbelievable. Let the author add one of his own. California imprisons more of its citizens than nearly every country on earth. California’s electorate, manipulated by politicans intent on keeping their jobs, has enacted harsh, long sentencing laws. The most well-know is the “Three Strikes” law. Three felonies and a schmuck draws a life sentence. Most agree that its arbitrary effect is harsh in more than a few cases and many would like the law repealed, or at least ameliorated. But not one bunch, the California prison guards union.

The California prison guard (euphemistically called “Corrections Officers”, as if they could “correct” or “fix” anything) union lobbied actively against changes to the “Three Strikes” law. Why, to keep their members in jobs.

Most people would laugh these screws out of the hearing room. But not politicians, who greedily suck down the contributions of these self-serving groups.

ONE WOMAN’S SPECIAL INTEREST IS ANOTHER WOMAN’S “COMMUNITY SERVICE” GROUP

Lessig’s article described a 2005 experiment in California. It launched a pilot program for people to file simple returns. California could do this because it already has the payroll tax information for most workers. For people electing these simple returns, California sent these people prepared returns that the only need sign and return. The program was successful and 95% of the people that filed the simple returns would do so again.

It was an effective program. The taxpayers saved time and effort and the returns were accurate. What’s not to like?

ENTER THE “SPURNED”

Most of the readers by now have figured out that the California tax preparation lobby began pressuring California lawmakers to drop the program. Okay, that is to be expected. But according to Lessig, the efforts are working:

But what is surprising is that their "arguments" are having an effect. In February, the California Republican caucus released a report highlighting its "concerns" about the program - for example, that an effort to make taxes more efficient "violates the proper role of government." Soon thereafter, a Republican state senator introduced a bill to stop the ReadyReturn program.

Here it is, the party that hawks itself as anti-government, claiming that a tremendously efficient government program that saves the government expense and the citizens money and effort is a “violat[ion] [of] the proper role of government”. This comical canard is a lie that even Attorney General Alberto Gonzalez could be envious of.

IF IT PLAYS IN SACREMENTO, THE PIGS OF K-STREET WILL COME TO THE WASHINGTON TROUGH

The Lessig article goes on to state that a funding bill passed by the U.S Senate prohibits the IRS from developing its own ”income tax electronic filing or preperation products or services.” And ironically, with the improvements to the IRS computer system, the IRS can now match up 1099s with all individual filers. So the IRS is damn close, if not already able, to send individuals preprepared tax returns that individuals could sign and return or click and e-file.

VULTURES FEED FROM CARCASES OF THE FAILED, NOT INEFFICIENCIES PROMOTED BY THE POWERFUL, IN THE DESERT OF THE REAL!

[i] http://www.wired.com/wired/archive/14.05/posts.html?pg=7
[ii] Wired, May 2006, p. 104.
[iii] http://www.wired.com/wired/archive/14.05/posts.html?pg=7

Monday, May 01, 2006

REVIEW OF FILM "LONESOME JIM"

As it says in the blog header, cinema is a favored medium in THE DESERT OF THE REAL.

In 2005, a film entitled "Lonesome Jim" was filmed in and around the Author's hometown, Ligonier, Indiana. The film is in limited release and the Author saw the film. And he has been given the opportunity by Bob "C. Dobbs" Buttgen, editor of the Pulitizer-Prize winning weekly newspaper, the Advance-Leader, to write a review of the film for the newspaper.

The review has not yet been published, nor screened for compliance with the Advance-Leader's high standards. But, subject to copyright protection that may be waived or thrown away, here is the review.

Lonesome Jim
Reviewed by Rob Feightner

Home is where they may not leave the light on for you, but they will leave the backdoor key under a rock in the yard. But enter carefully because they have moved the furniture. And put in a sunken living room.

Lonesome Jim stars Casey Affleck as Jim Roush, a dog walker, writer, and Applebee’s worker that failed in New York and trudges back to his dysfunctional family in his dreary hometown. His brother is suicidal, his father (Seymour Cassel) distant, and his mother (Mary Kay Place) an overly doting Kool Aid mom for whomever gets dragged in.

The opening of the film takes the viewer, Jim, and Tim (Jim’s dead-end brother played by Kevin Corrigan) down a corridor of dread. Under the skilled and deft direction of Steve Buscemi, the opening sequences are grainy, claustrophobic and unsteady. Jim is going to the elephant graveyard and finds he must wait in line to lie down and die. But there is hope. And lots of black humor. And some excellent dialogue and acting amongst the supporting cast.

BACK HOME AGAIN, IN INDIANA

Jim’s hometown is “Cromwell”, Indiana. Cromwell is the fictional name of Goshen, Indiana, the screenwriter, James Strouse’s, hometown. Plainness, low-sun grayness, and intersections blocked by freight trains envelope the town. Some local readers of this Review will recognize the “fail to launch” feeling of this small factory town

Jim’s first night out is at three local beer joints, Riki’s I, II and III. The third dive is the charm where he improbably hooks up with Anika, a nurse at the local hospital. They have a couple of whisky shots and a very quick “evening” together. But then it is back to banality, and a promotion to factory work, for Jim.

Jim, at the request of his mother and the demand of his father, takes a job at the family business. Jim must fill in for his brother Tim, who wrecked his car in a failed suicide attempt. At work Jim reunites with his Uncle “Evil” who uses the family business as a front to sell drugs.

“Evil” is a cartoonish lout expertly played by veteran character actor Mark Boone Junior. Evil, who rides a moped and dates hookers “because they are cheaper”, soon ensnares Jim in his drug business and what will become some of the loose plot of this mostly character driven movie.

THE KIDS ARE ALRIGHT

When Jim’s brother Tim crashes his car and is left comatose, Jim takes over as coach of Tim’s girls basketball team. The team is even more inept than Jim or Tim, having failed to score any points all season. But it is the kids that boost Jim’s climb back from up catatonia.

The screenwriter’s nieces, Rachel and Sarah Strouse, play Jim’s nieces and basketball team members. Jack Rovello plays Ben, Anika’s son, and Jim’s pal and emergent surrogate father. The young actors deliver good performances. Not too precious, not too precocious, and generally played to perfection.

And it is within and throughout these shifting family dynamics that Jim restages. A man-child to a cloying mother, another shiftless son to a stern father, a dupe to a low-life uncle, it is only by looking out through younger eyes that Jim’s depression begins to break. And he reconnects with his family.

SOME GOOD LAUGHS AND SOME STRETCHED CHARACTERS

Some of the humor is subtle, some endearing and some laugh out loud. But the film is not for the Dumber and Dumbest demographic. The film, like Jim’s lugubrious character, slowly warms from absolute zero. Jim’s mother (Mary Kay Place) is played as oblivious treacle. Liv Tyler’s inflectionless “freshness” is greatly miscast as Anika. The character of Anika, who is described by her son Ben as a “whisky woman”, lacks the wear and tear that would accrue to a bar stalking single mom in a Midwestern industrial town.

OUTSIDE OF THE THREE WALLS, LOOKING BACK THROUGH THE FOURTH WALL[i]

The Reviewer would be remiss if he did not address the setting and props of the film. The film is shot in Goshen, Ligonier and Cromwell, Indiana. The Cromwell recreation center gym was the Reviewer’s junior high school gym. Most scenes will be recognizable by viewers in the Advance-Leader circulation area.

Many film critics found the film’s setting as depressive as Jim’s character. Or more so. One reviewer stated that every local chamber of commerce in Indiana should disavow the film because of its bleak portrayal of rural Indiana. Another called “Cromwell” the intersection of “Nowheresville” and “Stuck for Life”.

In some sense, the “Three Walls” of the film, the limiting confines of rural “Cromwell”, stepped out of the “Fourth Wall” and engaged the Reviewer directly. The Reviewer was born and schooled in “Cromwell” (Ligonier). But since leaving “Cromwell”, the Reviewer has experienced life, career, and unique cultures in ways not possible if he had remained in that small town and within those Three Walls. This is not to denigrate nor miscast that small town, nor any small town. It is more to acknowledge, as Jim Roush might, that homes are anywhere in the world where you can walk in late at night and raid the refrigerator. They change with the zip codes, but they remain, with all features and faults, forever someone’s.

Lonesome Jim was seen by the Reviewer at the Century Theaters Downtown in Albuquerque, New Mexico. It is rated R for strong language, sexual content, drug content and partial nudity.

Rob Feightner
desertoftherealeconomics@hotmail.com
http://desertoftherealecononomicanalysis.blogspot.com


[i] http://en.wikipedia.org/wiki/The_fourth_wall. The Fourth Wall is a theatrical term for the dramatic separation between the actors on stage (who act between the ”Three Walls”, the back and side walls of the stage) and the audience. Actors rarely “break” the Fourth Wall, or step out of the stage action and directly address the audience. But when done effectively, it is engaging and asks the audience to employ a high degree of critical thought and engagement. A good example is the 1938 Pulitzer Prize winning play “Our Town”. In “Our Town”, a character called the Stage Manager frequently speaks directly to the audience about the characters and the fictional town of Grover’s Corners, New Hampshire.

Actors can also step out of the “Three Walls”. In the Mel Brooks comedy homage to the Western, “Blazing Saddles”, the actors engage in an old-West Style Chase across the Hollywood studio lot. Similarly, in “Pee Wee’s Big Adventure”, studio cops chase bicycle mounted Pee Wee through several films shooting on adjacent sets and across the studio lot.

ALL CAN BE VIEWED THROUGH THE LENS OF THE DESERT OF THE REAL!