DISCLAIMER: THE FOLLOWING "Taking a Load Off at 50,000 Feet" CONTAINS STRONG OPINIONS WHICH ARE NOT A REFLECTION OF THE OPINIONS OF FOX NEWS AND SHOULD NOT BE RELIED UPON AS INVESTMENT ADVICE WHEN MAKING PERSONAL INVESTMENT DECISIONS. IT IS FOX NEWS' POLICY THAT CONTRIBUTORS DISCLOSE POSITIONS THEY HOLD IN STOCKS THEY DISCUSS, THOUGH POSITIONS MAY CHANGE. READERS OF "Taking a Load Off at 50,000 Feet" MUST TAKE RESPONSIBILITY FOR THEIR OWN INVESTMENT DECISIONS.
As the UPS driver pulls up to my home every day with cases and cases of wine from my glorious wine-hunting adventure in Napa Valley, I’m reminded how important it is for investors to periodically remove ourselves from the information and news grind.
The cumulative effect of 24/7 news and trading info tends to take our emotions to one extreme or another — either Pollyannaish optimism and fear of losing big profits if we don’t buy something now, or hysterical fear of the imminent collapse of the world as we know it.
Unplugging from the info matrix allows you to at least sort out your fears — and boy, do we have a bumper crop right now: Fear of inflation (search) and rising interest rates (search). Fear of oil shortages. Fear of terrorism. Fear of Chinese growth and fear of Chinese slowdowns. Fear of deficits and fear of too much debt at the federal and household levels.
Have I missed something deathly fearful?
Listen, good decisions are never made in a state of greed or fear. Even my arch nemesis on Fox News, Ben Stein, agrees with me on this score. And to Ben’s credit, even HE now finds the level of fear in the hearts of investors at the hysterical point — something he pointed out in an op-ed piece over the weekend.
So, as a tribute to my new friend in the anti-hysteria camp, I offer the only antidote I know to hysterical fear: A trip to my cloud hovering 50,000-feet above the Earth.
Hey, You, Get Off of My Cloud!
A nice glass of Cabernet and a few days off is all it takes to visit another cloud I call “reality.” But I can only really visit this perch of tranquility and equilibrium after an extended absence from the news/trading/technical analysis matrix.
Anyway, here’s how the world looks from a dispassionate view from space:
• 9/11 did change the Western view about terrorism — deal with it. We have been furiously pricing terrorism into stocks and bonds for the last few years and I think this process is almost complete. Does a bomb blast in Baghdad have a bloody thing to do with the earnings power of our favorite LCD component makers? No.
And low and behold, as our fearless leaders talk about a pending attack in the U.S., stocks go up. That’s an indication that terrorism is now, finally, priced into stocks appropriately.
• Aging tech stocks are turning into ballast-like stocks that will be paying much higher dividends. Take Mr. Softie, for example. If you look at Microsoft (search) without prejudice or envy, you see a 6-10 percent a year growing company worth about $30-32 per share that will start to ramp up greatly with a 5 percent dividend. (It’s coming.) The old leaders of the tech world are turning into the dividend plays of the new industrial world we live in — get over it.
• The Internet is real: The transformation in the sales of commodity and easily shipped items like travel, books, CDs and DVDs and the creation of real-time markets over at eBay and AutoByTel worked. Consumer behavior has been changed — forever. If you sell or make something where the value added is hard to differentiate, the Internet will squash you like a cicada.
• Performance-based advertising via search words worked, too. I remember the first time I heard the Google pitch for Adwords — I didn’t really get it. It was not until I saw business after business grow 40 percent, 60 percent or 100 percent a year and more, simply from being placed in the top three Adwords and searches for their specialty, did I appreciate the paid search business. It has forever changed TV and magazine advertising as much as Monster and eBay changed the classified ad departments at newspapers. Mass broadband adoption only makes this secular change happen faster.
All this points to another reality: There is a much higher rate of productivity embedded in most businesses today. We now are seeing secular— not just cyclical — fixed-cost reduction in the business processes of most American businesses. We are seeing new highly leveraged business models where 20 percent rises in revenue are coming out the back end as 40 percent earnings improvements.
And it’s not just tech companies — not by a long shot. Retailers, wholesalers, manufacturers and distributors all have permanently carved out fixed costs from their systems and replaced them with variable costs. This argues for higher overall P/E ratios for stocks.
It’s Not Out-Sourcing, it’s Best-Sourcing
• Forget out-sourcing, think about “best-sourcing.” The current blather from the Lou Dobbses of the world is inane because the debate is over. American, French, Japanese and other G-7-based business are “best sourcing” for services and production because that is what business management is all about. They match financial and intellectual assets together with the best sources available for production and/or manufacture to deliver a product or service with a defendable advantage at a profit-making price.
We’ve practiced best-sourcing for years in America. No one complained when a Yankee manufacturing plant moved to Alabama because land and labor was one-third of the cost. In a truly connected and world economy, best-sourcing has just morphed to global best-sourcing. If a global alternative was viable 40 years ago, we would have been best sourcing globally for 40 years.
The fact is global best-sourcing has just now become viable to most industries, and the natural selection process is under way. It’s not un-American — the only thing un-American going on is trying to legislate job protection for jobs “lost” to best sourcing.
FYI: Running an insular economy without best-sourcing is called socialism.
These Are the Good Old Days
• Times are good. We have fewer people in poverty and more owning their own homes than at any time in the postwar era. Lifespans are longer, infant death rates have dropped and death rates from heart disease are down in this country.
Whether you agree or disagree with Bush or Kerry or Bloomberg, it is impossible to view the foreseeable economic future from 50,000 feet and NOT see slow-but-sure improvement in every metric that counts:
• Job creation
• Real personal income
• Corporate margins and retained earnings
• Cash flow and capital investment
We have too many uninsured Americans. But at least we don’t have health plans that are so hopelessly rationed and backed up (like Canada, France and Germany) that they are the equivalent of being uninsured. What good is health “insurance” if there is no one or no machine available to treat you?
• One billion Chinese, Russians, Indians and Brazilians wake up every morning wanting to work hard, get rich, send their kids to school and live the American dream of private home and business ownership. They represent a 1,000 percent+ larger market for our transportable goods and services than existed just 15 years ago.
And we still have barely scratched the surface of their demand.
As the fear of runaway interest rates, inflation rates and the fear of feeling good starts to leave the hearts and minds of investors, they will come to the conclusion that things are better than most see today. Whatever the terrorists bring or don’t bring to this country will not amount to a hill of beans in the very, very big picture.
At 50,000 feet I am calm and tranquil. As I look down and see the day-to-day pastiche of economic and geopolitical dramas unfold, one thread is unambiguous: It’s going to take a helluva lot more than a relative thimbleful of Islamic terrorists to change the economic course of history for the vast majority of human beings that inhabit this earth.
Oops, gotta get off of my cloud. There’s the UPS driver at the door... with more vino.