Commentary

Some of the information presented here is available for historical and archival purposes only and does not necessarily represent the current market environment.  Due to volatility within the markets mentioned, opinions are subject to change and the information presented here should not be used to make investment decisions. Past performance cannot guarantee future results. The views expressed are not the opinion of Royal Alliance Associates, Inc., and should not be construed directly or indirectly, as an offer to buy or sell any securities mentioned herein.

 

October 9th – The February 21 Wall Street Journal ran a front page article entitled, “Fears of Stagflation Return as Price Increases Gain Pace.”

The article said, “Inflation is rising. Yesterday in a recent month the Labor Department said consumer prices in the U.S. jumped 0.4% and are up 4.3% over the past 12 months, a 16 year high.” The article went on to say, “The Federal Reserve disclosed that its policy makers lowered their forecast for economic growth this year to between 1.3% and 2.0%, a half percent point below the level of their previous forecast in October.”

The article goes on to describe all of the usual suspects including the drag from the housing market and the “contagion effect” from the credit markets on the real economy.

Finally the article provides us with charts which supposedly support the “stagflation” claim.

Is stagflation really on the horizon? We do not think so.

As a matter of fact, much of the information in the charts, in our opinion, makes it an unlikely scenario. As an example,
the chart on inflation shows a “core rate” of 2.5% which is 0.5% over the target range set by the Fed, but significantly below an “inflationary rate.”

The chart on “corporate hardships” does not, we believe, make a case for an economy in dreadful straits. If anything, the chart shows the effect of the well-publicized slowdown in the economy --- a factor that in our opinion will dampen most if not all of the current up-tick in inflation.

Finally, little if any mention in the article was given to the actions of the Fed in lowering interest rates, the stimulus package passed by congress nor the growth in Asia, parts of South America, Eastern Europe and in Russia propelling the global revolution that effects all of the industrialized nations in the world.

In summary, we believe the U.S. economy will not experience classic stagflation, but is going through a slowdown which should reverse itself next year.

September 8th – In 2008 the greatest “supply-demand-pricing” worry seems to be the finite quantity of oil and the increasing inability to pay for it. Oil may be the focus at the moment, but we believe that food and liquids will be the major headlines within a generation.

Between 1798 and 1826 Thomas Robert Malthus wrote six updates of his famous treatise, “An Essay on the Principal of Population.” The premise was that as population grows, the amount of food available to each individual diminishes, with the greatest impact on the poorest segment of society.

Dr. Kenneth W. Harl of Tulane University estimates that the world population in 1800 when Malthus was writing was just under 1 billion. Two hundred years later the population of the world has grown to 6.7 billion, according to the U.S. Census Bureau. Small wonder, therefore that major food demonstrations are common in the poorer countries around the globe and few of the developed nations are without pockets of discontent.

While oil is the primary focus of price inflation, it is interesting to point out that New Zealand is the Saudi Arabia of milk, and is the world’s biggest dairy exporter. According to a May 8th article in The Wall Street Journal, “The global demand for milk is growing and a cooperative that markets most of the country’s milk has sought to raise $1 billion or more from outside investors to expand production.

“Unfortunately, New Zealand milk production remains dominated by millions of small farms. Small farms keep rural communities alive and, especially in developing countries, provide needed jobs. But there are problems with small farms, when it comes to reacting quickly to a rise in food needs. They tend to be less productive and less flexible than larger ones.”

New Zealand and their problems with expanding the milk supply are indicative of the problems confronting many farmers around the world as the call for their product increases at a rate that exceeds their ability to fulfill the demand.

In our opinion, the food problems facing the world today are only a precursor of the situation we might be looking at in a generation or two if the population of the world is not contained.

Some countries already recognize teh problam and have policies in place.  For instance China, with 1.3 billion people, is trying to limit to one the number of children allowed per couple in their urban areas. Unfortunately, this restriction does not apply to their rural areas where the extra hands determine the viability of the household unit --- nor does it apply to most of the emerging nations, including India (with 1.1 billion people).

The dilemma has two facets. On the one side, is the ability to limit population growth around the globe. On the other side, is the challenge facing the agricultural community to become more efficient and more flexible.

August 31st – Cost and availability are not the only factors in determining the optimum energy source. Compatibility with existing transportation infrastructure is also a prime consideration.

The current energy-transportation system “has been a hundred years and billions of dollars in the making,” says Rick Zalesky, vice president for biofuels and hydrogen at Chevron’s alternative-energy arm. “It would be a significant and expensive challenge to develop both new fuels and new infrastructure to enable their wide use which is why the ideal outcome of our research is to develop biomass-based transportation fuels that have chemical properties similar to those of gasoline and diesel.”

Although the energy producers have experimented with many alternative fuels, it is likely that the current efforts will have more longevity. Concerns about costs, depleting reserves, dependency on foreign nations and global warming have raised of the level of pressure on the energy giants to the point where an alternative to oil is much more than a preference.

The higher prices for energy are a two-edge sword. On the positive side, they provide the margins for energy alternatives which were not possible previously. “This time we think these high oil prices are here to stay which will add stability to the current investments oil companies are making,” says Ron Oster, a St. Louis-based analyst with Broadpoint Capital Inc.

But there is a negative side. According to a Wall Street Journal article on October 29, 2007, “Critics of corn-based ethanol, small amounts of which are blended into gasoline in certain regions, worry that because the corn supply is limited, soaring demand from refineries could lead to shortages that would drive-up prices of both food and fuel to unacceptable levels. Ethanol and biodiesel cannot be transported through pipelines that carry gasoline and diesel because they leach water and other contaminants that would render them unusable. In addition, ethanol and biodiesel get lower mileage per gallon than conventional gasoline and diesel.”

Potentially viable alternatives are on the horizon. ConocoPhillips has partnered with Tyson Foods Inc. to produce renewable diesel. ConocoPhillips has also partnered with Archer-Daniels-Midland Co. to research and commercialize means for developing renewable transportation fuels from biomass or farm waste.

The October 29th Wall Street article says, “Royal Dutch Shell, PLC has two separate joint ventures, one in Canada and one in Germany aimed at producing ethanol from non-corn sources. Marathon Oil has a joint venture with grain processor, Andersons Inc. and Exxon Mobile is favoring research on hydrogen-cell vehicles and other technologies.”

August 4th – History is repeating itself again.

Several decades ago, coal was not only the preferred energy source, it was practically the only one used by most consumers to heat their home. The typical home-owner had a coal bin in the cellar and the home was heated by constantly shoveling coal into the furnace.

Today China is bringing back memories of the days when coal was king.

“China is doing for coal what it once did for oil; pushing prices to new highs, adding more pressure to the creaking economy,” according to a Wall Street Journal article on February 12, 2008.

China has an abundance of coal and has exported the energy source for years. However, in 2007 its imports exceeded exports because of a confluence of factors, many of which will probably remain for the foreseeable future.

Predictably, the price of coal reacted, as seen on the chart shown below:

According to the W.S.J article, “For the world, which uses coal for about 40% of its electricity, the result is similar to what happened after China became a net importer of oil in 1993. But the Chinese factor is unfolding much faster this time with coal”

“China’s need for coal is rising as other factors around the world are putting severe strain on supply for the fossil fuel. Demand is rising quickly elsewhere. Japan, one of the world’s biggest importers, is burning even more coal since an earthquake damaged a nuclear reactor. Longer-term pressure comes from India, which mounted a major expansion of coal-fired electricity plants and Australia and Russia, two major exporters, are having difficulty with their delivery systems.”

The United States, with major coal reserves, is increasing its exports to Europe. This is a reversal of the trend which for years saw buyers across the Atlantic shunning the plentiful but “dirty” American energy source.

“There is a butterfly effect with issues inside China and other nations pushing up demand for the fuel and problems in a few coal-producing nations pushing up prices,” says Vic Svec, a senior executive at Peabody Energy Corp., the world’s largest private-sector coal producer. “Demand from Beijing can ripple back to Queensland, Australia or Gillette, Wyoming.”

In March 2008 Central Appalachian coal futures on the New York Mercantile Exchange for delivery in March stood at $78.25 per U.S. ton. That is double the price in January 2007.

Coal’s affect on global warming is a real concern, but the fact that coal is a relatively cheap energy source will probably keep its demand level relatively high for years to come.

July 8th - There are few discussions going on today that don’t reference oil in one way or another. Although the majority of the conversations center on the high cost of gasoline, a significant number focus on the question of --- why the cost is so high.

Much of the problem is the increasing demand for energy by the emerging nations of Asia, parts of Africa, parts of South America and the seeming inability of the developed nations to cut back on their consumption.

The surprising element in the energy shortage scenario is the fact that the oil exporters are unable to keep up with export demand. Current data from the U.S. Department of Energy show the amount of petroleum products shipped by the world’s top oil exporters fell 2.5% last year, despite a 57% increase in prices, a trend that appears to be holding true this year.

There are several reasons for the net export decline according to a May 29 Wall Street Journal Article:
“Soaring profits from high-price crude have fueled a boom in oil demand in Saudi Arabia and across the Middle East leaving less oil for export.
Aging fields and sluggish investments have caused exports to drop significantly in Mexico, Norway and most recently, Russia.
The Organization of Petroleum Exporting Countries cut production early last year and didn’t boost supplies again until last fall."

“In all,” according the energy Department figures, “net exports by the world’s top 15 suppliers, which amount for 45% of all production, fell by nearly a million barrels to 38.7 million barrels a day last year. The drop would have been steeper if not for heightened output in less-developed countries such as Angola and Libya, whose economies have yet to become big energy consumers.”

Although China and India’s increasing energy thirst gets most of the attention, the rising demand in the Middle East must share much of the blame. The Middle East region has six primary exporters: Saudi Arabia, United Arab Emirates, Iran, Kuwait, Iraq and Qatar. These six exporters “have curbed their output by 544,000 barrels a day, and increased their domestic demand by 318,000 barrels a day for a loss in net exports of 863,000 barrels a day,” according to the U.S. Energy Information Administration.

Probably the biggest user in the region is Saudi Arabia, which according to government figures increased consumption nearly 23% since 2004 to 2.million barrels a day last year. The Saudi’s are diversifying “big-time,” and at its current growth rate could be using 4.6 million barrels a day by 2020. That is pretty significant from a country that supplies about 12% of the 86 million barrels a day that the world currently consumes.

June 30th – One of the great dilemmas of our time has been reversing the world view of smoking. When we talk about smoking, we address it not only as a social and health issue, but also as an economic issue.

It comes as no surprise to most that smoking has probably killed more people in the last century than the two World Wars. Nevertheless, the use of tobacco over in the last century has been growing, or is at least stable (on a global basis).

According to the World Health Organization (WHO), “Smoking is declining in the United States, Canada and some other developed countries after decades of increasingly effective attacks on tobacco use --- but in the developing world, there is a mushrooming scourge.”

There is an aggressive effort to foster the use of tobacco in emerging countries by multinational tobacco companies because there has been very little effort to discourage it. On the other hand, public opinion in the developed countries produces a very different tobacco company strategy. An example is Altria Group Inc’s plan to spin off Philip Morris International into a separate company.  In our opinion, the intent is to diminish its exposure to negative press in the U.S.

The international tobacco companies, including PMI, strongly deny they are targeting developing countries with growing populations and a growing acceptance of smoking by the expanding middle class.  Nevertheless, in many of these countries smoking is a sign of upward mobility. Regardless of the market, the tobacco companies are actively developing new products, such as “shorter cigarettes” to attract those who only have time for a short “smoke break.”

WHO estimates that 5.4 million people around the world die prematurely from diseases related to tobacco use on an annual basis. The agency estimates that the annual number will rise to 8.3 million tobacco-related deaths by 2030. Approximately 80% of those will be from the low income and less educated segments of society who are least equipped to deal with the social, health and financial consequences.

June 20th – When I was younger my father-in law, a distinguished doctor with a flair for philosophy, often recited the following truism:

    “At the devil’s booth are all things sold. Each ounce of dross costs its ounce of gold.”

Such is the case today in mainland China. This body of land which estimates its growth in GDP (Gross Domestic Product) for Q1, 2008 at 10%, has a “darker” side. The explosive economic growth of the country over the last several decades has spawned some serious problems. Environmental pollution has reached startling levels in most of its major industrial cities. Air pollution, which is primarily a product of sulfur and green-house gas emissions, can easily be seen by the naked eye.

According to the World Health Organization’s air quality standards, seventy percent (70%) of Chinese cities do not pass the test. According to an article by Matthews Asian on November 2, 2007, based on data from the World Health Organization, “Water pollution, caused by illegal dumping of untreated water or sewage, has left over half of the seven main rivers unfit for human consumption.

“China’s available per-capita water resource is a mere one-fourth of global standards, underscoring the scarcity of potable water. Land pollution and acid rain are leading to wasteland formation that is reducing the arable land available throughout the country.”

In late 2007, China began testing a program to cut the number of cars on the road daily by 50%. The plan is to alternate even and odd licensed autos to reduce pollution during the 2008 Beijing Olympics. This stop-gap measure is only one of many to insure that nothing detracts from the spectacle China plans as its debut into the very desirable world of developed nations.

China is not the only “environment-pollution” culprit. India, its neighbor to the south-west, and Russia have their own set of air and water quality issues, as have several other Asian and South American countries.

The destructive bi-product of this period of growth in China, India, Russia, Asia and South America is reminiscent of the Industrial Revolution in both the United States and the United Kingdom where water pollution and smog led to epidemics of typhoid and cholera.

It is noteworthy that as the environment deteriorates in many of these emerging nations, major steps are being taken to reduce and reverse the situation. For example in 1998 China established the state Environmental Protection Agency (SEPA) and its influence has accelerated as the environmental problems worsened. In its 11th Five Year Plan (2006-2010), environmental protection became its top priority.

The goal is to reduce the use of energy as a percent of GDP by 20%, and by 2020 increase the generation of energy from renewable sources by 10%.

There is little doubt in our mind that the emerging nations will eventually become “greener” places to live. However, anyone going to the Beijing Olympics this year might consider getting an okay from his physician regarding the quality of his pulmonary system.

June 6th – If you thought the people in the United States were the largest consumers of crude oil, you would be off target. As a matter of fact, the nation that claims the dubious distinction of being the largest consumer of oil on a per-person basis is not even one of the so-called industrialized nations. The award goes to Saudi Arabia.

Saudi Arabia recognizes that the great days for oil will not last forever.  They are doing what any educated entrepreneur would do. They are using their primary export product, oil, to diversify.  One manifestation of this diversification is massive investment in new buildings and infrastructure.  All this new construction is eating up an enormous amount of energy relative to the population of the country.

According to a December 12th article in The Wall Street Journal, “Saudi Arabia is on a building binge. In the works are new seaports, an extended railroad system, a series of new industrial cities and a score of refineries, power stations and smelters. Over the next dozen years, such Saudi investments are expected to cost $600 billion.”

The scope and direction of the development is not without its critics, even in Saudi Arabia, because much of the work uses so much energy. A prime example is their smelter project.

Each smelter will consume approximately 60,000 barrels of oil a day, since the Saudi’s are using oil to generate the electricity to run the plant. Yet the smelter will produce fewer than 10,000 jobs.

Some of the smelter-proponents are pushing for 10 smelters which would consume almost 7% of Saudi’s crude.

The Saudi’s use of crude is reflected in the chart which follows:

On the surface, the smelter project appears to have no merit. In reality, we believe, that within 15 years the smelter project will make the Saudi’s the “low-cost” producer of many products, the most obvious of which is aluminum.

May 21st – Going “green” often presents problems the average person on the street would never anticipate. A good example is the ramifications of the use of ethanol.

The incredible demand for ethanol has motivated U.S. farmers to plant more corn than at any time in the past since World War ll.  The obvious result is record crop yields.

The Department of Agriculture estimates that the fall harvests, “yielded 12 to 13 billion bushels of the grain, enough to fill 183,000 Olympic-sized pools.” Unfortunately, currently available storage capacity cannot handle it.

The corn farmer, therefore, typically has 3 options:

•  Immediately selling his grain

•  Paying elevators to store it

•  Storing it in silos

 
The latter two alternatives give the farmers the flexibility to try to “time the market” to their advantage.

Invariably, one man’s problem is another’s opportunity. Those in the storage business are sitting in the proverbial “catbird’s seat,” as are those who build the facilities and those who provide the storage equipment.

Since the year 2000, the Department of Agriculture has given farmers $485,000,000 in loans to build silos, yet, Roger Fray, executive vice president of the West Central Cooperative in Ralston, Iowa, says, “It is still a problem.” John Tuttle, District Manager for Brock Grain Systems a subsidiary of Berkshire Hathaway says, “We are running 24 hours a day because demand for silos is so high, yet month-long backlogs have developed.”

According to an August 10, 2007 Wall Street Journal article, “Farmers and grain elevators without sufficient storage capacity will place their grain in piles on the ground, covering them with tarps for added protection. However, temporary placement can lead to serious damage from heat, wind and humidity. Placing grain outside is like keeping food outside a refrigerator.”

May 8th – We continue to write about China because in our opinion their emergence as a world economic power will continue to have significance for US investors. 12 years ago, China’s economy ranked #8 behind Brazil and was less than one-third the size of Germany, according to a July 20, 2007 Los Angeles Times article.

Fast-forward to early 2008 and China replaces Germany as the third largest economy in the world. However, as might be expected in a super-growth economy like China’s, there are problems.

Shoddy and inconsistent manufacturing has damaged its worldwide reputation in a manner similar to that of Japan over 50 years ago. The air pollution in some of the cities in China is amongst the worst in the world and over 25% of its water courses “are severely polluted.”

In addition, China will shortly surpass the United States as the leading emitter of greenhouse gases, a dubious distinction.

On top of the social and environmental problems facing China, inflation is growing at an alarming rate.

Even some of the “good things” are creating problems. According to the Times article, “The United States, China’s largest trading partner, reported a $232.5-billion trade deficit with China in 2006, and 2007’s figure is expected to be higher.”

In response to some of theses issues, there has been calls for China to revalue its currency, the Yuan, which has risen about 7.5% against the U.S. dollar in the last two years. Experts suggest that the Yuan is currently undervalued by approximately 30%, giving Chinese exporters a significant advantage in global markets.

Problems aside, China is doing most things well as it adjusts to being the super-power it has become. A small but significant change came in August, 2007 when the Chinese State Administration of Foreign Exchange (SAFE) introduced a pilot program under which Chinese citizens can invest directly in Hong Kong-listed securities.

Until this program went into effect, Chinese citizens had been forbidden to invest in securities listed outside of the Chinese mainland.

April 23rd – When we traveled to Vietnam over a decade ago, we were surprised at their relatively “closed door” economic policies compared to other aggressively growing nations of Asia such as South Korea, China and India.

In Vietnam at that time, a foreign individual could not develop a business project with a Vietnamese individual. Agreements could only be made with the Vietnamese Government and the contract period could not go beyond 30 years. In addition, the outside party could not own more than 30% of the project.

Since the middle 1990’s, Vietnam has modified its foreign trade policies significantly. The Vietnamese Government essentially became tired of watching other Asian nations prosper while their equally industrious population remained a poor, agrarian society.

Unfortunately, that is not the entire story. Although their acceptance of “free trade” is now comparable to their Asian counterparts, they are still a minor league player.

According to a May 29, 2007 article in the Wall Street Journal, “Foreign investors and the Vietnamese government are trying to push this emerging economy up the learning curve, nudging it into higher-tech and higher-margin business-and winning commerce away from better-established countries.”

Fortunately, the Vietnamese have a lot going for them:

•  Low wages

•  Improving English-language skills

•  Technical proficiency

•  Strong work ethic

In recognition of these positives, Intel Corporation decided last year to build a $1billion semiconductor factory near Ho Chi Minh City in the southern part of Vietnam.  In our opinion, this may be a precursor of the development we will see in this county in the years to come.

As an aside, the government of Vietnam is controlled by the Communists in much the same way as the government of China is controlled by the Communist Party. However, like the government of China, their economic policy could not be more “open door.”

April 15th - Although India and China continue to grow their economies at an astounding pace, the image of a country is not only measured in economic terms.  Quite often the World's perception of a nation come from completely unrelated things.  As examples, both the hosting of the Olympic Games by China and the recent purchase of the Jaguar and LandRover car brands by Tata Motors of India do as much to shape perception of each nation as any economic success.

So just looking at the dynamic economic growth each country has enjoyed in the recent past can't answer the question “Why are China and India heading to the moon?”

According to the June 11, 2007 issue of the Los Angeles Times, “Although both countries deny they are engaged in a 21st rerun of the 1960 race to the moon between the United States and the then Soviet Union, their haste to launch (to the moon) suggests more than a casual interest in the other’s progress.”

The question takes on even more significance since a primary objective of each program is the same.

Chinese lunar program scientist, Ouyang Ziyuan said, “I am excited about the possibility that the moon might be a rich source of helium-3, a potential fuel for nuclear fusion reactors that is scarce on earth.”

Echoing this thinking, S. Krishnamurthy, a spokesman for the Indian Space Research Organization said, “The spin-offs for India’s nuclear program from potential lunar sources of helium-3 could be considerable.”

On the surface it is difficult to see the justification of this enormous expenditure for either China or India, especially at a time when each country has a significant segment of its population still living in abject poverty.  India, for example, is purported to be home to a quarter of the world’s poor.

Perhaps Manmohan Singh, India’s prime minister, put it realistically when he defended India’s position by saying, “The country must deal with the fundamental problems of development and at the same time aspire to operate on the frontiers of science. In the increasingly global world we live in, a base of scientific and technical knowledge has emerged as a critical determinant of the wealth and status of nations and it is that which drives us to programs of this type.”

April 7th- In 50 years or less water may become the commodity of contention as the population of the world increases and our use of water increases along with it. While the water problem may be a significant part of our future, it is not so in our present.

Currently, the commodity of controversy is oil, and Iran is one of the prime areas that gives the Energy Department sleepless nights.

Iran is one of the world’s biggest producers and exporter of petroleum and, according the Energy Information Administration, has the third largest proven reserves. Iran along with Pakistan and Afghanistan are also considered by many to be the hub of and training-ground for the Taliban and other terrorists. These people are Sunni. They also adhere to the strictest interpretation of Sharia Law in the Muslim world.

In a January 7 article in the Los Angeles Times, Kim Murphy wrote, “As Washington wages a very public battle against Iran’s Quest for nuclear power, it is quietly gaining ground on another energy front: the oil fields that are the Islamic Republic’s Lifeblood.

“Iran’s oil industry has raked in record amounts of cash during three years of high oil prices. But many analysts say a new U.S. campaign to dry up financing for oil and natural gas development poses a threat to the republic’s ability to continue exporting oil over the next two decades.

“The campaign comes at a moment of unique vulnerability for Iran’s oil industry which also faces challenges from rising domestic energy consumption, international isolation, a populist spending spree by President Mahmoud Ahmadinejad and trouble closing contracts with foreign oil companies – a recipe for disaster in a nation with one of the world’s largest reservoirs of oil.”

The U.S. has had sanctions in place since 1979 when the Iranian’s seized the American Embassy in Tehran. This has prevented United States based oil companies from operating in Iran. Although foreign companies such as Royal Dutch Shell, France’s Total and Italy’s Eni are operating there, Iran’s poor negotiating skills and paltry paybacks have limited output.

March 31st – China and the United States are currently engaged in an economic struggle, which by many economists’ calculation China will ultimately win. China has the will, and more importantly, the people (1.3 billion) to eventually become the next economic super-power. At some point in the future, it is possible that China’s economy will dwarf that of the United States. Already, our population is comparatively small, numbering just 300 million people.

The May 26-27, 2007 issue of The Wall Street Journal had some fascinating statistics on the growth of the Chinese economic giant:

•  U.S. exports to China have grown 240% since 2000. In that time, exports to Belgium, America’s second fastest-growing trading partner, grew 53%.

•  China has about 30 million cars and light trucks for 1.3 billion people. The U.S. has about 240 million cars for 300 million people. Imagine the potential!

•  China installed more than 90 giga-watts of coal-power capacity last year, the equivalent of about two large coal power plants a week.

•  China’s population will grow by eight million this year, the size of New York City or about 667,000 a month, the size of Memphis.

•  China has one of the highest personal-household saving rates in the world, at about 50% (the rate is less than 1% in the U.S.). 

•  China could overtake the U.S. as the lead greenhouse-gas-emissions polluter by November 2007.

•  The U.S. was the largest internet market in the world last year, with 182 million users. China, which was second with 134 million, is expected to surpass the U.S. by 2010.

According to Henry Paulson, US Treasury Secretary, "There is a growing skepticism in each country about the others intentions. Unfortunately, in America this is manifesting itself as anti-China sentiment as China becomes a symbol of the real and imagined downside of global competition."

But according to WU YI, Chinese Vice-Premier, "We should not easily blame the other side for our own domestic problems."

In our opinion, our relationship with China in the coming decades will have a greater impact on our economy than just about any other outside force.

March 10th – According to a September 2006 Los Angeles Times article, "The international travel business is thriving everywhere – except in the United States whose share of global tourism is plummeting along with America’s image around the world.

"The nation’s tourism industry says hostility toward the U.S. role in Iraq has kept foreigners out of the United States in droves, and security restrictions designed to keep the United States safe from terrorists are unnecessarily restrictive and stoking anti-Americanism worldwide.

Unfortunately, the condition has not improved with time. While the Anti-American sentiment may have subsided somewhat, other issues have surfaced.

In an article dated May 10, 2007 in the German DW-World.DE Deutche Welle, "Many European tourists see traveling to the U.S. as more of a hassle than its worth. They worry about visa and paperwork issues, fingerprinting, long lines at airports and unfriendly immigration officials."

"There’s a perception out there that it’s tough to get into the United States at the moment. So people tend to look at what are the other options. There are plenty of attractive destinations around the world," said Geoffrey Lipman, assistant secretary general of the United Nation’s World Tourism Organization, based in Madrid Spain.

Travel and tourism play a significant part in the United States economy. According to the World Travel and Tourism Council (WTTC), the broadly defined travel and tourism industry contribute approximately 11% of the U.S. Gross Domestic Product (GDP).

As we have seen so often in history, little is static. The weakening U.S. dollar has created a condition in 2008 where the United States is almost literally "on sale." The strong Yen and the even stronger Euro have created bargains in the U.S. that range from food and apparel to commodities and corporations.

In our opinion, the data on the charts shown above will be in the process of changing. The United States is increasingly becoming a "must visit" country and destinations in Europe and Japan are now considered comparatively expensive.

March 3rd – One component of the economic expansion taking place in developing countries is the explosion of domestic technological innovation and consumption. Until relatively recently, the United States and Europe were the main developers and innovators in technology. That condition is in the process of changing.

In 2006 China surpassed the United States as the world’s leading exporter of electronics. But there is more to the story.

According to Matthews International Capital Management, in their Issue 1-2006, "There is a growing domestic consumer demand for all products, especially technology, and it is a key driver of the wave of technology developments in Asia."

"Asian consumers are eager to adopt new technologies - with all of their bells and whistles. China has the world’s largest number of mobile phone subscribers and Chinese Internet users have grown from just one million in 1998 to 111 million at the end of last year."

"And China is not the only innovator in Asia. In Japan, people use third-generation or "3G" mobile gadgets to exchange emails, trade stocks, pay for purchases and download entertainment on the go. South Korea had the highest broadband penetration in the world at the end of 2005, and young people gather in "PC bangs" for online gaming tournaments, the national and often the addictive pastime."

In our opinion, as growth in Asia and other developing economies leads to an increasing middle class, local innovation and consumption will continue to play an expanded roll in the future.

February 20th – In the global economy, there are only 2 groups of countries to consider when it comes to the subject of population:

    Group 1

* China     1.3 billion people
* India      1.0 billion people

    Group 2

*  The rest of the world

In spite of their immense populations and the “built-in” market that they provide, the economic success of these emerging behemoths and their trading partners will be largely determined by the strategies each partner uses.

According to an article in the April 28th, 2007 issue of The Wall Street Journal, “Many companies claim to have successful strategies in China and India-but few really know how to leverage the complimentary strengths of these country’s economies. Companies that don’t take a vigorous approach to China and India will face threats to their very existence in coming years.”

In the opinion of many successful international businessmen, each of the two markets is too big and complex for an all-or-nothing approach. A company wishing to enter one of these markets is probably better off identifying a starting point where there is a strong chance of success. The next step is to build off of that base.

Regardless of the approach, if a company truly wants to be an international player, in our opinion it must be in both the Indian and Chinese markets.

February 15th – As any student of history will tell you, there has never been a time in this country’s past when Americans were free from concerns about the economy. Some concerns were significant, others turned out to be inconsequential --- but the worry was always there.

Volatility has been the hallmark of 2008 so far. We’ve put together some thoughts on the facts and issues that we think are worth considering in light of the turmoil in the marketplace. Housing and credit have dominated news headlines, but we’d like to step back and look at the "big picture".

In that regard, this commentary will focus on what is in our opinion the economic story of this decade - the evolving relationship of the United States to the emerging nations of the world:

•  "The rest of the world will actually keep the U.S. afloat during this period when the U.S. is slowing down for internal reasons." --- Fred Bergsten, Peterson Institute for International Economics.

•  Many experts believe that the emerging-market economies will "decouple" (separate away) from the U.S. The reality is that in January 2008 the emerging-market stocks fell approximately 15%, an amount somewhat greater than the U.S. stock market as measured by the S&P 500 Index. 

•  According to an article in the January 26, 2008 Wall Street Journal, "The decoupling thesis rests on the premise that emerging markets can weather the decline in U.S. demand for exports thanks to their own rising, domestic consumer spending. The U.S. accounts for about 20% of all global imports. 

While there are signs Asia is becoming less dependent on the U.S., Asia relies on exports more than ever. The U.S. share of total exports from Asia declined to around 17% in the first half of 2007, from 24% in 2000. Excluding Japan, Asian exports accounted for 55% of regional GDP in 2007, up from 40% in 2001."

The Wall Street Journal Article went on to say, "Critics of the de-coupling thesis argue that emerging markets cannot match U.S. consumption, which reached 72% of U.S. GDP last year."

•  "U.S. consumers bought $9.5 trillion of goods and services last year, far more than Canada’s $1 trillion or India’s $650 billion," according to Stephen Roach, chairman of Morgan Stanley in Asia.

Other points worth considering:

•  China will probably overtake Germany as the world’s third-largest economy this year, behind the United States and Japan.

•  Approximately 58% of Americans believe globalization has had a negative effect for the U.S. economy, according to a WSJ/NBC poll taken in December, compared with 48% who felt that way 10 years ago.

•  Analysts at Citigroup believe that a recession in the U.S. could cause losses in the Latin American stock market of approximately 25%. On the other hand, they believe that if a U.S. recession is avoided, Latin America could see gains of a similar amount.

•  India’s middle class is expected to increase from 5% of the population to more than 40% by 2025, creating the world’s fifth-largest consumer market, according to McKinsey Global Institute.

•  Grain, meat, oil, coal and steel are the five main food and industrial commodities. According to the Earth Policy Institute, Chinese consumption has outstripped the U.S. in all but oil.

February 8th – Its interesting to note that in the midst of a general slow-down in residential real estate sales, raw land still has appeal to some.

"It’s The Only Thing That Lasts" --- and --- "For Some Rich Americans, Accumulating Land Is Like Collecting Art and Autos."

These were headlines of a front-page article in the April 25, 2007 issue of the Wall Street Journal.

"Its like rare art" says Jim Taylor, president of Hall and Hall, a Billings, Montana real-estate firm. He has worked with Ted Turner, among other land buyers. Montana has no monopoly on real-estate acquirers.

In West Texas, Jim Bezos, the founder of Amazon, has accumulated so much land in the last few years (about 300,000 acres) that he’s now at #23 on the Land Report List of the nation’s top 100 land-owners.

The desire to accumulate land is the result of several factors. They include spending by the aging baby boomers from money accumulated during the last decade, people buying spreads that offer hunting and fishing, and a number of wealthy 50- and 60-year olds who are becoming arms-length gentlemen ranchers.

Ted Turner, the largest private landholder in America, accumulated his land over the last 30 years. His holdings include 15 ranches in seven western states for a total of about 2.0 million acres. The chart below is a list of the top land-owning families and individuals in the U.S.

February 4th – The European Union was formed 50 years ago in 1957. Six nations originally participated. Today, the EU, as it is commonly called, has 27 members. Its economy is roughly equal in size to the U.S., and its population of 486.6 million dwarfs the 298.4 million people living here.

Like the United States, the EU is connected by a common currency. (There are a few exceptions, most notably Britain, which has retained the pound.) Also, there is a litany of rules, regulations and criteria for membership. But once a member, people can travel from one country to another within the EU without showing their passports. Unlike the United States, the cultures, languages and demographics of the constituents remain quite diverse.

Although EU membership continues to grow, there are still problems. "The EU is viewed by many as an aloof, bureaucratic oddity that prattles on in a maze of buildings at its headquarters in Brussels," according to a Los Angeles Times article on March 25, 2007. "Its members are still bickering over a constitution, and though it has many lofty treaties, the EU is often powerless to force countries to follow its mandates."

In addition, there is little willingness on the part of the Western European constituents in the EU to share their wealth with countries that have joined the Union more recently. In spite of progress, there is still a discernible objection on the part of several of the countries to give up the characteristics that make them unique.

The EU has not yet realized its potential to become a full-fledged "super-power". Although several of the countries which make up the EU (Germany and France) could be considered major global powers on their own, the EU as a whole has not yet reached the power or influence that would make it part of a group that includes the US, Russia, and China.

This is due in part to several factors. The EU lacks a single, unified army, as an example. Its overall economy has been sluggish for years and many of the Union’s original prime objectives have not been realized.

Although the EU is still a "work in progress", in our opinion it will only continue to strengthen. As globalization continues to shape economies and political structures, we believe the EU will eventually become the "super-power" its original designers envisioned.

January 25th – Free trade has been considered the "Holy Grail" of globalization for decades by many economists.

Now one of the staunchest supporters of the concept is having a change of heart. According to a Wall Street Journal article on March 28th, 2007 Alan S. Binder is changing his stance.

"For decades, Alan S. Binder- Princeton University economist, former Federal Reserve Board vice chairman and perennial adviser to Democratic presidential candidates – argued along with most economists, that free trade enriches the U.S. and its trading partners, despite the harm it does to some workers."

"Like 99% of economists since the days of Adam Smith, I am a free trader down to my toes," he wrote back in 2001.

Mr. Binder is still an opponent of trade barriers and tariffs. However, he perceives a new threat, communication technology that allows worldwide services from anywhere in the world. According to the Wall Street Journal article, "Binder believes that communications technology will put as many as 40 million American jobs at risk of being shipped out of the country in the next decade or two. That is more than double the total of workers employed in manufacturing today."

In our opinion, Mr. Binder’s logic is hard to refute. Anyone who has called the customer service department of a multi-billion dollar corporation is as likely to be talking to someone from Ireland, India, the Philippines or New Zealand as they are someone in the U.S. As English becomes more widely spoken globally, many corporations will elect to use cheaper labor from around the word to fill the jobs needed in occupations that do not require one to be domiciled in this country.

Job insecurity has been growing over the last several years. We believe its growth curve will get steeper over the next decade.

January 16th – When the subject of investing in the real estate market comes up, the average amateur investor may feel that now is a good time to avoid it altogether.

Well-publicized problems in residential housing in particular have added to this sentiment. There is no question that softness in the home and condo market in most parts of the United States exists. That same softness began to filter into the rental market towards the end of the first quarter of 2007.

However, like most segments of the economy, the real estate sector has many parts. The story appears to be different in the commercial office market. As an example, in several interviews on CNBC in March and April 2007, Ken Heebner, a real estate expert, voiced nothing but excitement about office REIT’s.

Another fan of the commercial office market is Sam Zell. In a Wall Street Journal interview published November 22, 2006, Zell was asked if he expected the flood of capital into real estate to continue. His answer left nothing to the imagination:

"This is the greatest period of monetization in the history of the world. That huge amount that is floating around is not something that would be absorbed in six weeks. I think it will take more like six years."

Zell went on to say, "The commercial office market is doing terrific. If I were betting, I’d say (expect) 6% to 7% growth in revenue over the next 24 months."

In 2007, Zell accepted an offer from the Blackstone Group for his Equity Office Properties Trust, a real-estate investment trust that for years was the largest landlord of office properties in the United States.

In our opinion, there will continue to be opportunities in certain parts of the national and global real estate market, in spite of the slow-down in residential real estate.

January 7th – In 2007, the slow down in the housing market caused many homeowners to stop and reconsider the place that the family home holds in their overall financial picture. As the housing market cools, is it likely that your home is as great an investment as you think it is? Consider the information in the two charts shown below:

In the chart entitled, "The Costs of Home Ownership Over 30 Years (1977-2007)", the typical home actually lost money over the 30 year period when the costs associated with maintaining the home are subtracted from the home’s appreciation.

The second chart, "30 Years of Home-Price Increases" points out the difference in appreciation over this same time period based on the area in which you live.

For many of us, the data in these two charts comes as a surprise. Why? Because according to an article in the Wall Street Journal dated 3-12-07, "when most homeowners figure the return on their home, they don’t do much more than subtract the price they paid from the price they received."

One of the implications of these charts is that purchasing a home may not be the best place to build a "nest-egg" that will fund your retirement.

In the last several years new problems with people’s perception of home ownership has surfaced.

The typical person’s home is probably his biggest asset, an asset that has all-to-often become a ATM where equity is used to pay for everything from autos, exotic vacations and second homes.

In practical terms, if you use the equity in your home to buy other things now, the money will not be there when you retire.

Another consideration that makes the family home a less than ideal savings vehicle lies in this contradiction: If you sell your home to release the equity for use in retirement, where will you live?

There are a couple of retirement solutions for those homeowners who do have reasonable equity:

•  They can sell their home and move to a less expensive housing market.
•  They can take out a reverse mortgage.

Unfortunately, most people do not have sufficient equity in their home to use either of these alternatives. Even if they did have sufficient equity to use one of these alternatives, these choices are not palatable to most people preparing to retire.

The solution is not easy. The solution in our opinion is to stop thinking of your home as a retirement fund. It is not an investment.

Your home is no more than a purchase to improve your quality of life that usually does not depreciate over time.

In our opinion, the best way to fund your retirement continues to bet maximizing things like your 401k, IRA, SEP or other retirement and/or non-retirement funds.

The preceding are our most recent opinions on the stock market, the economy and other related financial topics.  You can read our previous postings, which have been archived since inception, by clicking here.