11.09.09
Imperfect Information Undermines “Free-market” Economies
It’s no secret that a variety of interested parties exert influence over both economic policies and the general understanding (and reporting) of the effects of changes, just as they do in energy, health care, education, the financial sector, and/or anything else that the Congress or various federal agencies have a role in shaping. Misinformation can lead a seemingly honest, open debate far afield from reality, inhibiting the efficiency of the process while at the same time warping the outcome.
If you don’t understand fiduciary relationships, and you still think most corporate actions reflect the same sort of priorities that pertain when a truly small business is owned by a single person, or a couple, you’re missing a key factor. Shareholders, for instance, seldom have any significant influence on the pay (or bonuses) of officers engaged in potentially risky decisions at major corporations – auto manufacturers, for instance, or the financial institutions that crumbled on Wall Street as the financial crisis became obvious to virtually everybody at home and abroad near the end of the Bush administration, when we ended up dumping billions of dollars into banks without any obvious benefit (it certainly didn’t stimulate consumer lending, as both Bush and early Obama administration initiatives were intended to do.)
In fact, if you look closely, the problem of banks that are “too big to fail” is getting worse, not better, due to consolidation. But that’s not what they tell Congress or the media; the bankers speak instead of “economies of scale” to justify even further growth. Banks are tied to the model that’s ruled economic policy for decades: debt-fueled consumer spending.
Those who talk about concerns over finite resources, such as clean water, are scoffed at, and the countering rhetoric lumps them in with “climate alarmists” and “tree huggers” in such a way that genuine free market forces are not even close to determining the value of any natural resource that cannot be mined – with the curious exception that there are some cities who have privatized their formerly municipally controlled water systems, which does begin to result in a certain market value being placed on that particular resource. Of course, once a profit motive starts driving the price up, citizens in the U.S. and abroad often agitate to re-socialize their water supplies, in an era when “socializing” is used by some to imply everything that went wrong with every non-U.S. form of government.
Similarly there’s an obvious bias in the talk about income tax cuts – it generally originates from those who are well to do, and stirs the emotions of those who have much less, but more importantly if one looks closely at the data, there’s been a strong correlation in the past between those with wealth and those whose tax rates truly go down under most of the recent approaches. Would tax cuts stimulate the economy? Assuredly so – but in what way? 
A tax cut on income doesn’t have the same effect as, say, a tax cut (or tax credit/investment credit) for spending consistent with our national priorities, such as alternative energy sources, or research and education, etc. Such selective, targeted changes spur spending in specific areas — a very straightforward function of supply and demand, and the result is tangible — money flows to those areas, stimulating job growth and additional investment without any necessary growth of the government (growth which makes most of us justifiably cautious in the wake of the Bush administration’s under-reported increases.)
The reason that governments trying socialism, such as the USSR, to manage resources and markets for the good of the people have consistently floundered and failed is that they don’t — and can’t — have good enough centralized information to succeed making the rapid decisions necessary to control what is arguably the most intricate challenge of any “man-made” system, the decentralized activity of a vibrant, balanced economy. Markets are efficient at managing that information; but we’ve seen a dramatic example of why they cannot be expected to function for the good of the consumers when government fails to regulate those with the profit motives.
Consumers, too, need access to better information than they typically get under the current system, no matter if you’re considering tax-cuts, politics, the price of peanut butter, new home-buyer credits, or anything else. When misinformation is tolerated (or encouraged) it undermines the effectiveness of capitalism. Free markets rely on timely, accurate information – we need to consider new incentives for the reporting of “news” and information systems we base our choices on, or capitalism is absolutely doomed to implode.
10.29.09
CNN & Money.com aren’t qualified to assess “Cash for Clunkers”
You’d expect an author at this CNNMoney.com to understand the role of money in business. You’d expect an editor to send this back to re-write. Here was the basis of Peter Valdes-Dapena’s misguided assessment:
“…majority of sales would have taken place anyway at some time in the last half of 2009, according to Edmunds.com”
So? This isn’t news, and it misses the point of the Cash for Clunkers initiative.
Valdes-Dapena and/or his editor may think selling cars sooner rather than later is a valid reason to criticize the program, but as any businessman can tell you: success in business is about cash flow. Any retail operation needs to keep their stock turning over. At a time when the inventory was sitting idle on the lots this program provided a much needed infusion, enabling dealers to pay staff, utilities, creditors, and suppliers.
Did the Cash for Clunkers program solve the economic crisis? Of course not. The goal was to turn over inventory in one segment of the industry – to keep dealerships from failing in huge numbers just before the manufacturers started to recover, thereby saving some jobs and hopefully averting a situation that would spread and further exacerbate the economic downturn.
The article may fool a person with no entrepreneurial experience, but it reflects either a shallow grasp of money and business or a thinly-veiled attack on the government’s attempt to avert a breakdown in the delivery mechanism of an industry it was actively seeking to save – without proposing any alternative that might have been even marginally effective.
The public may think “Cash for Clunkers” was as simple as just selling cars, the author evidently wants to; the reality is much subtler. Edmunds didn’t surprise anybody (except maybe CNNMoney.com staff) with the news that one of the primary effects was to accelerate the decisions and purchases – that was the point.
10.27.09
Recent tax cuts increased the 2009 deficit
Bruce Bartlett was a domestic policy adviser to President Ronald Reagan, and conservative supply sider. He did a little simple math and uncovered that the cause of the deficit increase is revenue-related.
The increase cannot be blamed on spending – the Obama administration’s spending has been more conservative than was forecast – $28 billion less than was predicted. This math strongly suggests that more tax cuts, as some in the GOP are advocating, would actually further increase the deficit; tax cuts were unambiguously a major factor in the problematic revenue decline that underlies the deficit growth.
Mr. Bartlett, in a column dated October 24th, was responding to the theory that tax cuts were the best way to solve the deficit, as was advanced by Mort Zuckerman recently in a New York Daily News opinion piece.
Here’s an excerpt:
According to the Congressional Budget Office’s January 2009 estimate for fiscal year 2009, outlays were projected to be $3,543 billion and revenues were projected to be $2,357 billion, leaving a deficit of $1,186 billion. Keep in mind that these estimates were made before Obama took office, based on existing law and policy, and did not take into account any actions that Obama might implement.
Therefore, unless one thinks that McCain would have somehow or other raised taxes and cut spending (with a Democratic Congress), rather than enacting a stimulus of his own, then a deficit of $1.2 trillion was baked in the cake the day Obama took office. Any suggestion that McCain would have brought in a lower deficit is simply fanciful.
Now let’s fast forward to the end of fiscal year 2009, which ended on September 30. According to CBO, it ended with spending at $3,515 billion and revenues of $2,106 billion for a deficit of $1,409 billion.
To recap, the deficit came in $223 billion higher than projected, but spending was $28 billion [less] and revenues were $251 billion less than expected. Thus we can conclude that more than 100 percent of the increase in the deficit since January is accounted for by lower revenues. Not one penny is due to higher spending.
It turns out you have to go back to 1950 to find a year when federal revenues were lower as a share of GDP. So Bartlett, who is happy to say there is some basis for criticism of the Obama administration’s anti-recession tactics, points out that excessive spending isn’t the problem.
In fact, with much of the revenue that was not collected due to the tax cuts sitting more-or-less idle in savings accounts, and certainly not trickling down to stimulate job growth, or bank lending, etc., Bruce Bartlett concludes that:
The idea that Reagan-style tax cuts would have done anything is just nuts.
Bartlett’s article is a must-read for anybody involved in the U.S. economy – which should include every voter and pundit, not just those elected to Congress.
09.29.09
How the U.S. government spends your money
Billions of tax dollars are going for a US-Mexico border fence, but is it doing any good? Well, if you read the Christian Science Monitor article by Daniel Wood you’ll have more questions than answers.
In 2006 DHS awarded a “virtual fence” contract to Boeing for a stretch of the border in Arizona as part of President Bush’s “Secure Border Initiative.” The budget grew to nearly $1 billion just two years later. So far, no virtual fence; just a very real budget. DHS recently decided to extend its contract with Boeing for another year.
Several sites now report that the Government Accountability Office (GAO) recently predicted that $6.5 billion will be needed to maintain the rest of the actual, though still incomplete, multi-billion dollar non-virtual fence over the next 20 years, addding:
“So far, it has been breached 3,363 times, requiring $1,300 for the average repair.”
Just so you don’t have to reach for your calculator, the math works out like this:
3,363 breaches x $1300 = $ 4,371,9000
But the kicker is there’s no way to prove if it’s actually making any real difference – well, beyond fattening the wallets of the folks awarded the contracts and costing tax-payers money, of course. So, we’ve spent about $2.5 billion so far on construction, we’re seeing several new breaches each day (on average), and CSM interviewed one woman, Dawn Garner, who says that 40 illegal immigrants a day cross her small ranch.
Sound bad? Don’t answer yet.
Ronald Reagan famously urged Gorbachev to tear down the Berlin Wall. There was a lesson there we’ve somehow forgotten about what the effects and effectiveness of walls really are.
Yasha Levine, writing at The Exiled, reports he’s interviewed a Border Patrol agent who asserts that it’s not just breaches – in some cases ramps are deployed on both sides and smuggler’s caravans drive right over! Levine has more bad news:
There is one thing we can be sure of:
the massive steel pylons have been a boon for Mexican scrap metal entrepreneurs, who are able to supplement their incomes by dragging off whole sections of the fence right under the nose of our beefed up Border Patrol.
And those we capture trying to make the crossing? We spend a bit of money to detain them, a bit to process them, a bit to send them back home again, and – you guessed it – start the cycle over. Because if there’s one other thing we can be sure of:
No matter which country they’re a citizen of, the folks who prefer the USA to Mexico aren’t likely to change their minds.
But DHS, born under former GOP President George Bush, sees no reason to change course, or deny money to Boeing or the other contractors. They’ve got a mandate for, “more effective use of personnel and technology” and “physical infrastructure enhancements to 
prevent unlawful border entry,” and so spend they will. But are we stopping the drugs and other smuggling? Honestly, nobody knows.
It’s past time to think about our priorities, particularly our spending/funding priorities and the role of the federal government. It grew larger than ever over the early part of the 21st Century, but failed to address the needs of our nation.
Instead politicians awarded lucrative contracts as political favors. It’s no wonder the trust for Congress has plummeted – the scrutiny has them scurrying for cover, and some of them are talking out of both sides of their mouths.
08.10.09
Aug 2009 Economic Recovery Reality Index up slightly to 16.03
Bolstered by a very 
slight improvement in the unemployment rate and average weekly earnings, since non-farm payrolls declined slightly, despite robust activity on Wall Street the Economic Recovery Reality Index (ERRI) crept up a modest 4.76 points over July 2009 to 16.03 as of August 7, 2009. Unemployment rates remained essentially unchanged among the major demographic divisions examined by the U.S. Bureau of Labor Statistics, and many experts still expect the overall rate to increase to 10%, in part because hiring necessarily lags other economic indicators.
Nonetheless, investors seem optimistic, some of the uncertainty surrounding the big 3 U.S. automakers has subsided, and stock markets reflect an increasing willingness to move funds back into equities over the past month. The ERRI is based in part on a weighted, hypothetical mid-cap oriented index fund (see below) which showed upward, yet uneven movement across the 10 sectors/industries being tracked. Solar technology and utilities lagged other sectors, which were led by investment in retail and cyclical consumer goods, with solid performance in basic materials and capital goods equities (construction, aerospace, etc.) Energy showed some investor confidence, while both financial and service sectors reflected substantive improvement in sentiment.
Average weekly earnings, which had fallen in June reflecting that wage earners continued to be under siege, showed a modest recovery during July by returning to the levels they had been at in May of this year. The increase in the number of “discouraged” workers is slowing – it has risen roughly 335,000 people over the past 12 months, but only 3000 were added to that number in the latest monthly figures, while the number of “involuntary part-time” workers declined slightly. (Discouraged workers are those not currently looking for work because they doubt jobs are available for them.) The bright spot in the figures may be Health Care, where employment continued to make gains – up about 20,000 jobs in July.
U.S. government unemployment figures are estimates based on a monthly survey of households. All persons who are without jobs and are actively seeking and available to work are counted among the unemployed, including those on temporary layoff are included (even if they do not actively seek alternative work.)
Note: The particular selections comprising the security/equity component of the ERRI (data below) were selected to track various sectors, not out-perform the broader U.S. equity markets. These are not investment recommendations, and should not be construed as such. The ERRI fund is an entirely hypothetical construct, and while the author and/or persons connected to the research and/or this website may at times hold positions in these securities, particularly via any one of a number of mutual funds, no representation is made as to the suitability of any given equity, sector, on investment strategy for the reader.
Further, while the hypothetical index fund component shows apparent growth of 23% when calculated simply against an initial cost-basis of $10,000 and an August 7 valuation of $12,298.41 it should be noted that the weighting of various sectors means the effective impact is approximately tantamount to only a 17.6% change, which is not evident in the raw data below. The ERRI fund calculation represents only investor sentiment to the extent stock market behaviors reflect this mostly professional group; domestic (and global) economic recovery depend heavily on wages and employment, as well as difficult-to-quantify public sentiment.
Data on the equities is presented “as though” an investment had been made in an “index fund” for the ease of comparison and understanding, but no such fund exists nor did any investment take place. Equity investments are volatile, particularly when not carefully diversified and monitored; the ERRI would have shown even less improvement had closing prices from even a day sooner been utilized in the calculations (since that would have reduced the “ERRI fund” improvement.) The third column in the table below represents the percentage change in the individual equity prices as of the close of the NYSE on 7 August 2009.
| symbol | 7 Aug 09 close |
% +/- |
index value |
Sector | Industry |
| EMN | $ 52.73 |
+43.09 |
1,423.71 |
Basic Materials | Chem. (Plastic & Rubber) |
| HON | $ 36.38 |
+16.68 | 582.08 | Capital Goods | Aerospace & Defense |
| CAT | $ 47.78 |
+49.64 | 716.70 | Capital Goods | Constr. & Agric Machinery |
| FDML | $ 14.98 |
+54.91 | 1,542.94 | Consumer Cyclical | Auto & Truck Parts |
| HQS | $ 9.09 |
+8.60 | 1,081.71 | NonCyclic Consumer | Fish / Livestock |
| BBEP | $ 8.73 | +19.26 | 593.64 | Energy | Oil & Gas (Integrated) |
| PZE | $ 7.02 |
+17.39 | 582.66 | Energy | Oil & Gas (Integrated) |
| AIB | $ 5.88 | +28.38 | 423.36 | Financial | Money Center Banking |
| CMA | $ 27.61 | +26.42 | 414.15 | Financial | Regional Bank |
| FITB | $ 9.71 | +37.54 | 456.37 | Financial | Regional Bank |
| CCI | $ 28.11 | +15.87 | 562.20 | Services | Communications Srvcs |
| JWN | $ 30.30 | +50.67 | 727.20 | Services | Retail (Apparel) |
| FSLR | $146.47 | +3.48 | 1,025.29 | Solar Technology | Semiconductors |
| RIMM | $ 77.09 | +16.49 | 539.63 | Technology | Comm. Equipment |
| PLXS | $ 26.58 | +23.11 | 611.34 | Technology | Electronic Instr & Controls |
| POM | $ 13.91 | +2.73 | 1,015.43 | Utilities | Electric |
Disclaimer: Readers are advised that the ideas, materials, and opinions contained herein should be used solely for informational purposes. The author does not purport to tell or suggest investment securities that should be bought or sold. Investors should always conduct their own research and due diligence and obtain professional advice before making any investment decision. Neither the author nor realitytax shall be be liable for any loss or damage caused by a reader’s reliance on information obtained in any posts, newsletters, special reports, email correspondence, or comments on the web site. The author is not a registered investment advisor or broker/dealer. The information contained herein does not constitute a representation by the publisher or a solicitation for the purchase (or sale) of securities. Opinions and analyses are based on sources believed to be reliable and are written in good faith, but no representation or warranty is made as to their accuracy or completeness, and we are not liable for errors or omissions. All such information should be independently verified with the companies mentioned. The author(s) receives no compensation of any kind from any companies that may be mentioned on this web site. Any opinions expressed are subject to change without notice. Owners, employees and writers may hold positions in the securities that are discussed; the intent is neither to suggest investment choices/strategies nor to influence market conditions, but rather to divulge methodology for inclusion of equities and sectors in the Economic Recovery Reality Index [ERRI]
Digg this article!
08.04.09
Let’s talk about euthanasia and abortion?
Abortion is a time-tested “wedge” issue, in the finest tradition of Karl Rove’s masterful divisive politics, and it’s arguably being used that way again right now in the health-care insurance reform debate.
Most of us have good enough insurance, and we all get to make the choice to keep our current system. This isn’t about the majority, this is about the 1 in 6 Americans who aren’t covered. 1 in 6 – that’s not quite 50 million Americans.
Now, nobody’s proposed socialized medicine – if they had the doctors wouldn’t be mostly in favor of reform. But it’s a tested sound bite that shaves off a few votes. Did you know they need more billing clerks at Duke Medical Center than they have nurses? Does that get through to the opponents of reform at all? No, apparently they’re happier with it spun by lobbyists and CEOs than sticking with reality.
So, too, with abortion. It’s being dragged into the debate for the express purpose of derailing the whole package – undermining an honest debate about our values, and shaving off a few votes here and there. It’s classic Rove/GOP/special interest “divide and conquer” in the face of Obama’s attempts to make real improvements.
They hope we’ll ignore that the leading cause of personal bankruptcy filings is medical expenses. Never mind that the number of uninsured Americans grows by over 10,000 people each and every day. No, no, don’t fret about your neighbors who aren’t as well off as you, that’s not your problem – just keeping listening to the $pecial interests as they spend millions of dollars per day, raised by bureaucrats at companies who decide your premiums and what they’ll cover or not cover, all to influence congress and public opinion. The bureaucrats who control our access to health care right now live rich, lavish lifestyles with no incentive to change the system, let alone to cover those who need it most.
More than half of personal bankruptcy filings are triggered by medical costs. Really.
Do you think this is about somebody else? Do you think everybody you know is really covered? Do you mind that most of the raises in the last three decades for low and middle-income earners have gone right into the pockets of health insurance profiteers, because premiums have been rising at triple the rate of inflation?
Lots of money – special interest money – is being thrown at this debate, and it’s up to us to keep the truth out there, because when people hear things like abortion, socialized medicine, or alleged euthanasia for senior citizens, many have a visceral reaction and stop thinking, let alone listening.
Are you still thinking?
07.31.09
Why is HQ Sustainable Maritime in the ERRI fund?
HQ Sustainable Maritime Industries, Inc. (HQS), is an integrated “aquatic product” producer, processor and farmer of toxin-free tilapia with operations in China, other aquatic products and marine bio and health-care products sold principally to customers in North America, Europe and Asia. HQS facilities are certified according to the Hazard Analysis Critical Control Points (HACCP) standards and assigned a European Union (EU) code required for exporting aquatic products to the EU. HQS is also certified in accordance with the Aquaculture Certification Counsel, Inc. (ACC) standards. The Company owns a “nutraceuticals” and health products company, producing and selling products subject to certification(s) by the China Ministry of Health.
HQS shares plummeted from about $16/share in late July of 2008 to just over $3 by the end of October 2008 as the effects of the lack of accountability and transparency on Wall Street precipitated the spread of the well-documented credit and liquidity crisis outside the mortgage and banking sectors, and share prices dipped again a bit in March when much of the market struggled. Investor sentiment is typically positive when the 50-day moving average is rising, especially if it’s also above the 200-day moving average. HQS 200-day numbers trended down since August 2008 until late may, shortly after the more volatile 50-day average had “crossed above.” The 50-day, now showing signs of life, had dipped below the 200-day in early September of 2008. Other technical indicators complete a “mixed” outlook (arguably neutral or slightly better) but small ventures such as HQS face immense challenges to growth and success as the echoes of the credit crisis have spread to the world markets.
With just over $100 million in market capitalization (a Small-Cap stock) HQS valuation tumbled during the latter months of 2008, tracking the broader markets. HQS is used within the ERRI fund to benchmark non-cyclic consumer activity, particularly food, and comprised 10.11% of the valuation at fund inception. The market recovery can’t be measured solely by tracking large companies engaged in retail clothing, the financial sector, and/or utilities; small companies face a very competitive landscape as they seek resources to expand. HQS has scheduled the release of its 2009 second quarter results for after the close of the market on August 10, 2009.
It is interesting to note that institutions own a significant portion of the outstanding shares in HQS, approaching double the average for the fish/livestock industry.
Tilapia consumption in America has reportedly been growing at over 35% a year for the past 8 years.
In addition to headquarters in Seattle, HQS has operational offices in Wenchang on the island of Hainan, in China’s South Sea. (Hainan is the largest Special Economic Zone laid out by Chinese leader Deng Xiaoping in the late 1980s.) The nutraceuticals produced are used to enrich feed used by HQS’ cooperative aquaculture operations. The successful negotiations with the Chinese government underscore the value HQS sees in Asian markets in general, and China in particular. With the increasing pressure from the Chinese on American fiscal and monetary policy it seemed prudent to include both HQS and Research in Motion in the ERRI fund, making nearly 15% of the fund total “responsive” to business with the People’s Republic.
Disclaimer: Readers are advised that the ideas, materials, and opinions contained herein should be used solely for informational purposes. The author does not purport to tell or suggest investment securities that should be bought or sold. Investors should always conduct their own research and due diligence and obtain professional advice before making any investment decision. Neither the author nor realitytax shall be be liable for any loss or damage caused by a reader’s reliance on information obtained in any posts, newsletters, special reports, email correspondence, or comments on the web site. The author is not a registered investment advisor or broker/dealer. The information contained herein does not constitute a representation by the publisher or a solicitation for the purchase (or sale) of securities. Opinions and analyses are based on sources believed to be reliable and are written in good faith, but no representation or warranty is made as to their accuracy or completeness, and we are not liable for errors or omissions. All such information should be independently verified with the companies mentioned. The author(s) receives no compensation of any kind from any companies that may be mentioned on this web site. Any opinions expressed are subject to change without notice. Owners, employees and writers may hold positions in the securities that are discussed; the intent is neither to suggest investment choices/strategies nor to influence market conditions, but rather to divulge methodology for inclusion of equities and sectors in the Economic Recovery Reality Index [ERRI]
07.30.09
Why is First Solar included in the ERRI fund?
Tempe, Arizona based First Solar, Inc. (FSLR) designs and manufactures solar modules using a thin film semiconductor technology. The 2′ x 4′ (60cm x 120 cm) modules employ a thin layer of cadmium telluride semiconductor material to convert sunlight into an average rated power of approximately 73 watts (a single-junction polycrystalline thin film structure that uses cadmium telluride as the absorption layer and cadmium sulfide as the window.) First Solar provides a variety of integrated services to its customers: solar power system design, procurement of permits and balance of system components, construction management, monitoring and maintenance.
Beginning in 2009, First Solar is expanding its focus from sustainable commercial solutions into the Residential Market. In a forward-looking, eco-sensitive “cradle to grave” model, First Solar finances and manages the collection & recycling of Photo-voltaic First Solar Modules.
FSLR shares fell from a little over $300 in late July of 2008 to just over $85 in November of that year as the reality of the credit and mortgage crisis had sunk in, and share prices were again low in March when much of the market struggled. Investor sentiment is typically positive when the 50-day moving average is rising, especially if it’s also above the 200-day moving average. With that in mind, the 200-day numbers have trended down since October 2008, when the more volatile 50-day average had “crossed below.” The 50-day emerged above the 200-day in late May. Other technical indicators, such as the Chart pattern, complete a “mixed” outlook (arguably neutral or slightly better) as you might expect for a company reliant on the still-reeling building industry. Earnings for the 2nd Quarter are due out today.
With $14.6 billion in market capitalization (a Mid-Cap stock) First Solar valuation tumbled during the latter months of 2008, tracking the broader markets as global reverberations of what started out as a problem in the U.S mortgage lending industry spread throughout the world stock markets. FSLR is used within the ERRI fund to represent alternative energy. The market recovery can’t be measured solely by tracking retail clothing, the financial sector, and old-style energy companies/utilities; mid-cap companies in the alternative energy business face a competitive landscape as their customers weather the credit crunch, but clearly there is growing sentiment in favor of wind and solar power generation.
Despite a glut in the supply of solar panels world-wide, First Solar recently announced a venture to build France’s largest solar panel manufacturing plant, with an initial annual capacity of more than 100MWp. This new venture will support the recently announced goal of the French government to become a leader in sustainable energy technologies. The plant is projected to employ over 300 people during the second half of 2011. FSLR valuation will reflect investor confidence in solar and alternative energy production versus reliance on fossil-fuel/carbon-based sources, given the current U.S. administrations focus on “greening” up the economy and the energy sector.
Disclaimer: Readers are advised that the ideas, materials, and opinions contained herein should be used solely for informational purposes. The author does not purport to tell or suggest investment securities that should be bought or sold. Investors should always conduct their own research and due diligence and obtain professional advice before making any investment decision. Neither the author nor realitytax shall be be liable for any loss or damage caused by a reader’s reliance on information obtained in any posts, newsletters, special reports, email correspondence, or comments on the web site. The author is not a registered investment advisor or broker/dealer. The information contained herein does not constitute a representation by the publisher or a solicitation for the purchase (or sale) of securities. Opinions and analyses are based on sources believed to be reliable and are written in good faith, but no representation or warranty is made as to their accuracy or completeness, and we are not liable for errors or omissions. All such information should be independently verified with the companies mentioned. The author(s) receives no compensation of any kind from any companies that may be mentioned on this web site. Any opinions expressed are subject to change without notice. Owners, employees and writers may hold positions in the securities that are discussed; the intent is neither to suggest investment choices/strategies nor to influence market conditions, but rather to divulge methodology for inclusion of equities and sectors in the Economic Recovery Reality Index [ERRI]
Why is Honeywell included in the ERRI fund?
Honeywell International Inc. (HON) is a diversified technology and manufacturing company, serving customers globally with aerospace products and services, control, sensing and security technologies for buildings and aircraft, turbochargers, automotive products, electronic and advanced materials, specialty chemicals and process technology for refining, and “products and solutions” for homes, business and transportation. Hence, in addition to aerospace and defense, Honeywell also works with automation and control solutions, specialty materials, and transportation systems used in many industries.
In July 2008, B/E Aerospace, Inc. announced that it has completed the acquisition of Honeywell’s Consumables Solutions distribution business (HCS) within the Aerospace segment. During the year ended December 31, 2008, the Company completed the acquisition of Safety Products Holding, Inc. (Norcross) and Metrologic Instruments, Inc.
HON was trading just over $23/share when much of the market struggled in early March, less than half the over $52 price the stock commanded in late July of 2008 before the reality of the credit and mortgage crisis had sunk in. Investor sentiment is typically positive when the 50-day moving average is rising, especially if it’s also above the 200-day moving average. With that in mind, the 200-day numbers have just begun to ease upward, while the relatively flatter 50-day average had “crossed above” during June. Other technical indicators, such as the Chart pattern, complete a “mixed” outlook (arguably neutral) as you might expect for a company reliant in part on defense spending.
With $25.6 billion in market capitalization (a Mid-Cap stock) Honeywell valuation tumbled, tracking the broader markets as global reverberations of what started out as a problem in the U.S mortgage lending industry spread throughout the world stock markets. HON is used within the ERRI fund (along with Caterpillar) to track capital goods. 
The market recovery can’t be measured solely by tracking retail clothing, utilities, and the financial sector; mid-cap companies in the defense/aerospace arena will face a competitive landscape as their customers weather the credit crunch. While they do sell “portable” generators and FRAM® Tough Guard® Air Filters targeting the consumer market, the aerospace, automation and control solutions, specialty materials, and transportation segments of Honeywell’s business take off in reaction to a number of factors not by any means tied to consumer sentiment.
Disclaimer: Readers are advised that the ideas, materials, and opinions contained herein should be used solely for informational purposes. The author does not purport to tell or suggest investment securities that should be bought or sold. Investors should always conduct their own research and due diligence and obtain professional advice before making any investment decision. Neither the author nor realitytax shall be be liable for any loss or damage caused by a reader’s reliance on information obtained in any posts, newsletters, special reports, email correspondence, or comments on the web site. The author is not a registered investment advisor or broker/dealer. The information contained herein does not constitute a representation by the publisher or a solicitation for the purchase (or sale) of securities. Opinions and analyses are based on sources believed to be reliable and are written in good faith, but no representation or warranty is made as to their accuracy or completeness, and we are not liable for errors or omissions. All such information should be independently verified with the companies mentioned. The author(s) receives no compensation of any kind from any companies that may be mentioned on this web site. Any opinions expressed are subject to change without notice. Owners, employees and writers may hold positions in the securities that are discussed; the intent is neither to suggest investment choices/strategies nor to influence market conditions, but rather to divulge methodology for inclusion of equities and sectors in the Economic Recovery Reality Index [ERRI]
Why is Federal-Mogul Corp in the ERRI?
Founded in Detroit in 1899, Federal-Mogul Corporation (FDML) supplies a range of components, accessories and systems to the automotive, small engine, off-road, heavy-duty, marine, railroad, agricultural, aerospace, energy and transport markets world-wide, including both original equipment manufacturers (OEM) and aftermarkets. It deals in power-trains, vehicle Safety and Protection, Global aftermarkets, and Automotive Products.
In February 2008, the company acquired Federal-Mogul Bearings India Limited. In August 2008, the company acquired a 51% interest in another Indian company, Perfect Circle. The company’s strong second quarter earnings and reports on July 30, 2009 that they had reduced headcount By 22% as compared with a year ago fueled an equity rally which had started earlier in the month.
FDML was trading under $3/share when much of the market struggled in early March, considerably down from the over $17 price the stock commanded in late August of 2008 before the reality of the credit and mortgage crisis had spread to the broad markets. FDML reacted vigorously in the intervening year, as evidenced by the 22% headcount reduction, and 2nd quarter sales are up. Stock price trends reflect “collective opinion” within the investment community. Investor sentiment is typically positive when the 50-day moving average is rising, especially if it’s also above the 200-day moving average. With that in mind, the 200-day numbers had just begun an upswing prior to the earnings report, while the 50-day average “crossed above” during May. Other technical indicators, such as the Chart pattern, complete a “mixed” outlook – as is true for much of the economy. Here, then, is an equity tied to the recovery of the automotive sector domestically and abroad – the 22% workforce cut is indicative of why the mortgage and banking sectors have such broad influence on the economy.
With $1.4 billion in market capitalization, FDML, a Mid-Cap stock, represents the global reverberations of what started out as a problem in the U.S mortgage lending industry, particularly auto and truck parts which wanted distancing from the extraordinary efforts with regard to GM & Chrysler within the ERRI. FDML is the ERRI bellwether for cyclical consumer goods in the ERRI fund, with cyclical goods comprising 10.11% of the entire fund. Sometimes likened to Honeywell, which is also in the fund, and to similarly capitalized TRW which is having a banner year by investor’s reckonings, FDML responds to the consumer side of the economic equation (consideration was given to balancing it with Hanes Brands in that regard.) Federal-Mogul reflects the broad, overall automotive industry, not just the “big 3″ automakers in the U.S.
For reference, among the FDML brands are:
ANCO® wipers, iconic Champion® spark plugs and wipers, Wagner® lighting and brake products, Fel-Pro® gaskets, Nural® pistons, Goetze® piston rings, Ferodo® brake pads, National® wheel-end components, Glyco® bearings, Payen® gaskets and Moog® chassis products.
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