August 2006 Archives

I am impressed with Yahoo's new dynamic charts, which can be found here: http://finance.yahoo.com/charts#.

I find it similar to but better than Google's charts. Go ahead, give it a try.

In this weekend's Barron's magazine, Jay Palmer wrote an article Beyond the Battery Mess (subscription required) about Dell Inc. (DELL).

Given your huge recall of Sony batteries in laptops, do you agree that cost cutting also affected your quality?

Rollins: Not at all. The batteries were a quality problem not at Dell but at our supplier. Sony (SNE) makes the battery cells and we assemble the battery packs to Sony specifications. We made a larger recall than we probably had to, because of our commitment to restore faith and confidence in the company. A point you might want to consider is that we used only 18% of Sony's battery output for the period. Where did the rest go? [Two days after the interview, Apple Computer (AAPL) recalled 1.8 million Sony batteries. Sony said it doesn't expect further recalls.]

...

Your R&D people have shown me a slew of possible desktop PC concepts, including some shoebox-size units that could sit under a monitor. Will these come to be?

Rollins: We are working on them, and they might or might not happen. The point you must remember is that 80% of our business is corporate, and corporations don't buy on design.

I found Rollins remarks concerning batteries interesting. He is certainly challenging the rest of the manufacturers and Sony to fess up. And I found his remarks concerning design interesting as well. While I am not big on what a computer looks like, many are. And while many in the corporate world do not care about the computing box, I cannot help but wonder if that will change. Will corporations be willing to spend a slight premium on personal computers to have their offices looking a little more organized, efficient and appealing? Corporations already spend a considerable amount on office furnishings.

Rahul Sood, who is the president of and chief technology officer for VoodooPC, wrote a terrific blog article Where there's Smoke there's Fire....

Getting to the point of this article, I believe that Dell lost its way a long time ago. I remember Kevin Rollins was once quoted as saying the Apple IPOD was a “fad”. You know you’re in trouble (or at least I did) when the CEO of one of the largest PC company's on earth didn’t understand the real strategy behind the IPOD; yet there were some of us who saw the light. I couldn't believe the CEO of one of the leading PC companies couldn't see the pending revolution behind something as iconic as the IPOD...! Like WTF?

After reading Sood's comments, I wonder if Rollins is, once again, too dismissive of a fad? I encourage you to read both articles and come to your own conclusions.

As for me, I am generally avoiding, though not completely, technology. As I have written numerous times, I am generally cautious about the economy, especially in light of the weak housing data. So for the time being, I am more than content to stay on the sidelines and watch how this situation plays out.

In my earlier article Housing On Borrowed Time?, I mentioned an excellent Barron's article that discussed problems with housing and mortgages. In today's Wall Street Journal, James R. Hagerty and Michael Corkery wrote an excellent Page One feature article After the Boom: Housing Slump Proves Painful For Some Owners and Builders (subscription required) that again emphasizes problems in the housing market.

But mortgage rates began rising and surging inventories of homes for sale finally caught up with demand. Though economists had been predicting a slowdown in housing for years, many homeowners and builders were surprised by how fast the market changed. "It's just like somebody flipped a switch," says Lynn Gardner, a real-estate auctioneer who works in Northern Virginia.

"It would be difficult to characterize the position of home builders as other than in a hard landing," says Robert Toll, chief executive of luxury home builder Toll Brothers Inc., which reported yesterday that net income fell 19% in the third quarter ended July 31.

In his 40 years as a home builder, Mr. Toll says, he has never seen a slump unfold like the current one. "I've never seen a downturn in housing without a downturn in employment or... some macroeconomic nasty condition that took housing down along with other elements of the economy," he says. "This time, you've got low unemployment, you've got job creation, you've got a stable stock market and relatively low interest rates."

Because the housing industry provided a tremendous amount of employment and growth and because many homeowners used their increased equity in their homes to finance their lifestyles, I fear now that prices have softened that the general economy might soften too.

The Wall Street Journal has five other articles that compliment the theme of a slowing market:

1. Toll Cuts Outlook as Profit Drops, Seeing No Sign of Market Bottom
2. Home Builders Sour on Condos, But Apartment Interest Is Strong
3. Lowe's Net Rises, but Outlook Is Cut
4. Consumers Curb Upscale Buying As Gasoline Prices, Housing Bite
5. Homeowners Start to Feel The Pain of Rising Rates

All articles require a subscription to the Wall Street Journal. The seven articles, including the article from Barron's referenced earlier, paint a strong picture of weakness in the housing sector. Moreover, there is some evidence as expressed by Lowe's and other retailers that higher energy costs together with higher interest rates are affecting the consumer. Two key questions that remains are, how much longer will the housing correction last and how severe will it be?

Update

The Wall Street Journal provided another article on housing Existing-Home Sales Dropped 4.1% In July to Lowest Level Since 2004 (subscription required).

Sales of previously owned homes fell in July to the lowest level in 2 1/2 years and the inventory of unsold homes climbed to a new record high, fresh signs that the housing market has lost steam.

Home resales fell to a 6.33 million annual rate, a 4.1% decline from June's revised 6.60 million annual pace, the National Association of Realtors said Wednesday. June resales were originally seen at 6.62 million.

...

The inventory of unsold homes rose 3.2% to a record 3.856 million, a 7.3- month supply at the July sales rate, the highest since April 1993. The past year has seen the sharpest increase in inventories on record, Mr. Lereah said.

To help put this information in perspective, I strongly encourage you to read Doug Kass's article Factors Aligning Against the Boom Cycle (freely available from TheStreet.com website).

Lon Witter, founding partner at Witter & Westlake Investments in Louisville, KY, wrote an excellent Barron's article The No-Money-Down Disaster (subscription required).

The cost and risk of adjustable-rate financing can be devastating. Consider a typical $250,000 three-year adjustable-rate mortgage with a 2% rate-hike cap. If the monthly payment now is $1,123, after the first adjustment, the monthly payment is $1,419. After the second adjustment, the monthly payment is $1,748, a $625-per-month increase. That's $7,500 more per year just to maintain the same mortgage. If you think high gas prices are biting the consumer, consider the cost of mortgage adjustments.

Some more numbers:

• 32.6% of new mortgages and home-equity loans in 2005 were interest only, up from 0.6% in 2000
• 43% of first-time home buyers in 2005 put no money down
• 15.2% of 2005 buyers owe at least 10% more than their home is worth
• 10% of all home owners with mortgages have no equity in their homes
• $2.7 trillion dollars in loans will adjust to higher rates in 2006 and 2007.

These numbers sound preposterous, but the reasoning behind them is worse. Lenders have encouraged people to use the appreciation in value of their houses as collateral for an unaffordable loan, an idea similar to the junk bonds being pushed in the late 1980s. The concept was to use the company you were taking over as collateral for the loan you needed to take over the company in the first place. The implosion of that idea caused the 1989 mini-crash.

While the source of the statistics was not provided in the article, if we assume the numbers are correct, then those statistics should certainly give us pause. Doug Kass has been beating the drum on housing for quite some time as well. Like both Witter and Kass, I am cautious of the markets because of negative effects that housing might have.

My friend Dave and I went for a long bike ride on Saturday. I started from Edworthy Park and met him at the weir. From there, we proceeded east along Western Headworks Canal to Lake Chestermere. The complete round trip was 94 kilometers (58 miles) and took about six hours, with some stops along the way. The weather was better than expected. The forecasted high temperature was only 22C (72F) but it actually rose to 27C (81F).

Although bike ride was enjoyable from an exercise point of view, I would not recommend it to others because there is not much to see along the bike path. Riding along from Edworthy Park to the weir is fun and interesting because there are many people along the path and it follows along the scenic Bow River. However, once we passed the weir and went across Deerfoot Trail, the scenery was not interesting. We followed the path along the irrigation canal through the industrial part of the city and then into the countryside. The path itself is very good. Because it is a long ride to Lake Chestermere, there were not many people riding along the path. For those that want an excellent path for exercise, it is great because it is a flat, wide and paved. And for those who want to enjoy the scenery while biking, there are better paths.

Once we arrived at Lake Chestermere, Dave rested while I explored a bit. There is not much near where the canal enters the lake. It is just an opportunity to rest before turning around and heading back to the city.

A great resource for those who enjoy biking is the Calgary Pathway and Bikeway Map - 2006. The map can be purchased online for two dollars. If this link is broken in future years, try going to the City of Calgary website and then finding the online store. From there, search for paper maps. For the pathway and bike map, according to the website, you can contact Guy Beavers by email or by phone at 403.537.7560.