Jubak's Journal
Recent articles:
• In stocks, fear beats complacency, 2/27/2003
• How to build a portfolio on shaky ground, 2/25/2003
• 5 steps to help you follow the right trends, 2/21/2003
More...
| | Jubak's Journal
Readers share a cavalcade of economic pain
Is this a great time to invest, or are we at the edge of a global worker revolt? Response to my column on the struggle we may have ahead of us produced a torrent of thoughtful feedback. Here's a sampling.
By Jim Jubak
When I wrote my Feb. 14 column, Economic forecast: more pain than you thought, I have to admit I didnt foresee the wildfire it would spark among readers. My view that the economy faces a period of restructuring and slow growth even after the uncertainty of war passes, unleashed a barrage of charges and responses.
A number of readers accused me of endorsing massive unemployment, wage cuts and benefit reductions as acceptable solutions to a new wave of global competition and cost cutting. Others agreed with my assessment that the U.S. economy will be re-energized after a painful period of downsizing and restructurings. Still others felt I was too timid in describing the gut-wrenching changes the economy will need to undertake for a true transformation. And, lastly, there were those who thought I merely had given in to the doom-and-gloom crowd that is predicting a worldwide depression.
While the volume of letters was impressive, the most impressive aspect was the breadth, depth and conviction of the responses. The letters were so compelling that I decided to devote this Jubaks Journal to a sampling of the responses. I hope you enjoy the letters as much as I did, and I only regret we couldnt reprint all of them. Each contributor is identified by first name only:
Lisa: I agree with your retirement-debacle predictions. Im 45 and my husband is 52 -- although were solidly upper middle class, we have astonishingly few friends or relatives who are going into later middle age with anything like sufficient retirement savings. Many (incredibly) have nice six-figure incomes like ours -- and save virtually nothing.
I was surprised you didnt call out credit/mortgage/equity-loan overextension as a major overhang coming out of the boom. Consumer credit has declined slightly recently (finally!), but its still an enormous hole most households have to emerge from before they can even think about saving significantly for retirement.
Im also predicting a slow and painful deflation of the housing market. Price increases year over year cant be significantly above inflation/overall GDP growth forever. We have to get back in line eventually. That will be a perfect storm for those who have counted on housing appreciation as a salve to equity losses or a bailout (equity loan) or both. For many in my age and income demographic, that creates a potential triple whammy going into their pre-retirement years: joblessness, lots of debt and an upside-down mortgage.
Dave: For my part, having been RIF'd (Editors note: RIF refers to reduction in force, or layoff) in 2001 and out of work now for almost two years, I find this prospect of having the glory days behind us pretty depressing. And with the approaching end of my useful work life (in the employer's view -- I turn 64 in a few months) -- my personal prospects aren't yet grim, but they are dim.
So, while I don't yet personally admit to seeing jobs that will never come back -- even though I spent my career in the now near-defunct high-tech industry -- I have to agree with you that the low-cost producers always win, and that it's going to be necessary for us to be low-cost leaders if we want to re-emerge as the pre-eminent world economy, even at a cost of falling standards of living in the United States.
Richard: I have a follow-on thought. In every past crisis of this type the United States has been the larger nation challenged by a smaller up-and-comer (Germany, Japan, Korea). We've previously had the advantage of our relatively enormous domestic market to help us along during the restructuring period. This time the challengers are more than three times larger than us; they have the domestic market advantage. This is not a good prognosis.
Danny: So Mr. Greenspan believes this may be a normal slump, whereas "visionaries" of Silicon Valley, the same ones the country had been looking to for leadership in the last boom, are saying they have never in their careers (lets say 30 years) seen a downturn like this? Can we all as a society put two and two together and talk about it?
Steve: The creative destruction to become the low-cost global producer will get worse before it gets better. China is just getting into tech in a serious way. The aspect of this evolution will also involve a massive consolidation of production capacity. We are great at producing products and services, but any farmer can tell you that after a great year of prices in a crop, everyone plants it in the spring and many crops go unpicked.
Look at almost any industry and there is huge surplus capacity. From any major city you can probably get 20 prime-time flights to anywhere in the world. Is this needed? The airlines have their business plans based on a minimum of 5% growth forever. So what happens if true secular demand is minus 5%?
Peter: What we are experiencing now seems to me to be the flip side of the productivity miracle coin. Like in the 20s, when we suddenly had electricity, railways, assembly lines etc. that enhanced productivity, we now have had information technology over the last 15 years. In the implementation stages of the new technology, growth roars ahead. But as the technology matures and growth slows, companies suddenly discover that they can produce the same amount of output with less manpower. Unemployment climbs and the economy stalls until the technological changes have been fully utilized and we have found new ways of employing the idle.
Floyd: In your article, you mentioned the possibility of major restructuring of business. Outsourcing, as a business, is moving offshore. I expect that this will (include) administrative back-office functions (administration, accounting, call centers) as well as information technology -- including operations, maintenance and development.
I thought I would share with you a little research I put together that seems to indicate that significant restructuring is taking place in this portion of the marketplace. The companies I found (Aggregated Data, Cognizant Technology Solutions (CTSH, news, msgs), Wipro (WIT, news, msgs), Infosys Technologies (INFY, news, msgs), Satyam Computer Services (SAY, news, msgs) and HCL Infosystems), in the aggregate, grew at phenomenal rates AND increased their margins while doing so. Specifically, in the two most recent years (for which there is data available for all the companies in the sample), revenue increased 86%, and margins improved by 44%. Their growth came within an outsourcing market overall that I believe was generally flat during the same period of time. Certainly, IBM (IBM, news, msgs), Electronic Data Systems (EDS, news, msgs) and Computer Sciences (CSC, news, msgs) didnt demonstrate anything remotely close to this growth in their outsourcing businesses.
Greg: Although it is the favorite thing of the financial press to shoot with off-the-cuff remarks about how there is a fundamental shift in the airline industry, I, for one, think you need to do some more research. JetBlue Airways is mentioned frequently as a great example of an airline "making it" because of their low-cost structure. But I think a little more research by you would show that JetBlue has a sweetheart deal from Airbus on their leases. Additionally JetBlue is a new company, and their employees cannot ask for higher wages because no one has worked there longer than four years. Talk to us in three years about how JetBlue is doing such a great job.
Terry: I am no Commie or Socialist (mortgage banker for the last 26 years). However, I am getting weary of hearing about the need for cost lowering when executive pay climbs and climbs, and the rest of us are stuck with high-cost or non-existent health benefits, less wealth, "productivity-based" pay plans, etc. I think greed has just about run its course, and it is possible a massive global worker revolt could spontaneously arise. Haymarket Square, here we come.
Chuck: Interesting points, but how does the cost of executive pay factor into overall company costs such as retirement, etc. Case in point -- Enron was reported to have increased salaries on the top execs over 10 times in the course of 3 years. And we are not talking small base salaries here. Your conclusion seems even more troubling -- that jettisoning a whole class of retired boomers is more tolerable than allowing the U.S. to not compete with China. Are you saying that we must cut our overall standard of living to be equal to those nations with whom we need to be competitive? Is that what the great experiment in this country is all about -- a disappearing middle class so that profits can be maintained by the exclusive ranks of the executives of large corporations? We might win the battle on profits, but what kind of country will this be for the majority of its citizens who will work for lower wages only to be discarded at the end of their useful service? Your observations are correct, but your conclusion is ridiculous unless you feel the majority of Americans with no jobs and no retirement are going to simply go away. Massive political unrest based upon starving populations sure plays hell with business.
Harrison: I believe the only reason we will not see a depression is because of the reforms that have taken place since the Great Depression. There has been an upheaval, the Internet revolution really is taking place, but like in any business, profits arent immediate as was widely expected. Just like when autos became prevalent, electricity became widespread and everybody had a radio, the Internet has changed not only our economy but our lives. This massive upheaval will take time to digest; some companies will go out of business, some companies will thrive and many more will either be born or bloom.
This is the best time to be an investor. If, of course, you can keep your job. However, until I can find companies with solid footing that can grow and become 800-pound gorillas (a horrible and overused term), I will continue to collect my 9% dividend from cigarette companies (the best deal around), invest in other well-capitalized companies that have rising stock prices, and divert some money into swing trades. On a more serious note, the earth is expected burn up and die in 700 million or 800 million years.
New developments on past columns
3 food stocks face a leaner, meaner world
Pork prices. That continues to be the story at Smithfield Foods (SFD, news, msgs). On Feb. 25, the company reported earnings of 5 cents a share for the quarter that ended in January. That was a penny above Wall Street projections but a huge 90% below the 48 cents a share earned in the same quarter a year ago. Continued low prices due to an oversupply of pigs on the market produced an earnings collapse, as expected. Smithfields hog production group showed a loss of $64 million for the quarter to profit of $31 million a year ago. Profit per pig dropped nearly $31 as higher feed costs added to the woes created by lower live hog prices. But the stock still climbed on this news as the company projected a 4% to 5% decline in hog production for the coming year and a resulting climb in hog prices. Beyond this cyclical story, the company continued to make good progress on its conversion from a producer of meat to a seller of branded processed meat products. (I added this stock to Jubaks Picks because the company is one of those in the food industry moving to raise profit margins by adding more ready-to-eat products to its business line. For more on this trend, see my Sept. 24 column, "3 food stocks face a leaner, meaner world.") Pre-cooked bacon sales, for example, climbed 25%, and the newly formed deli unit reported volume growth of nearly 20% in its first nine months of operations. As of Feb. 28, Im keeping my target price of $24 a share by June 2003. (Full disclosure: I own shares of Smithfield Foods.)
Editor's Note: A new Jubaks Journal is posted every Tuesday, Wednesday and Friday. The Wednesday edition stems from Jim's appearance on CNBCs Business Center most Wednesday nights at approximately 5:45 p.m. ET. Selected CNBC stories can be found in the TV Reports index.
At the time of publication, Jim Jubak owned or controlled shares in the following equities mentioned in this column: Smithfield Foods. He does not own short positions in any stock mentioned in this column.
|
