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Do as I Say, Not as I DO

Dallas Fed president Robert McTeer met with the editors and writers of the Dallas Morning News last week and the interview ran over the weekend, Where's the rebound? McTeer's tone has definitely changed over the last year. While still a big proponent of the New Economy, he has "been humbled a little bit." McTeer continues to ask consumers to pull the economy out the current slowdown. Now, instead of buying an SUV, McTeer is asking customers to "use their cell phones more and upgrade" to help out the beleaguered telecom sector. Obviously, he is asking for tax rebate checks to be spent to help the economy. This might be a good time to start buying handset makers. After all a couple months ago McTeer asked everyone to "hold hands and buy an SUV" and it looks like everyone is. Most notable quote from McTeer is truly irresponsible. "They've [consumers] been doing something that's probably irrational from the point of view of the individual consumer because they all need to be saving more: saving for retirement, saving for college and all that. But we'd be in bad trouble if they started doing that rational thing all of a sudden. We're happy that they're spending. We wish that they didn't have to run up a lot of debt to do it. But it's not something we're terribly worried about right now because their assets are high." McTeer, however, is not heeding is own advice. Instead, he plans on being more rational and pay credit card bills, but you better not. You better load up on debt. Also notable, McTeer expects unemployment will rise above 5%, even if the economy starts picking up.

These assets are largely houses, and the increase in debt has been driven by this asset growth. The only problem is the asset values are highly volatile, while the debt is fixed. Also adding to the problem is the release that FHA loan delinquencies rose again in the second quarter to another record. Delinquencies rose 79 basis points to 10.79% from the first quarter. Other loans are also recording higher delinquencies. Loans backed by the Veteran's Administration rose 41 basis points to 7.63%, while the total pool of home loans in the country rose 26 basis points to 4.63%.

This morning, productivity growth was revised down to 2.1% from 2.7%. We have long argued that the increase in productivity has been due to cyclical forces and convenient accounting rather than a secular change due to technology. A report out of the International Labor Organization, an U.N. agency, found that U.S. workers have added 36 hours to their work year since 1990. American workers now work on average 1,979 hours, most hours worked in the world. Americans overtook Japanese workers during the 1990s and have steadily pulled away since. If anyone is thinking of relocating these statistics might help your decision. Americans work 137 hours more per year than Japanese workers, 260 hours more than the British and 499 more hours than German workers.

Could longer hours be one of the reasons for the higher productivity? According to the Bureau of Labor, the average workweek has remained relatively steady at 34.5 hours. As the U.S. economy has moved to a service based economy with more workers getting paid a salary rather than by the hour, Americans are working more without the incremental pay. Add in employee stock option plans and the calculation gets even dirtier. As the economy continues to slow and any eventual recovery will be much more "traditional" than the previous couple of years, the "new era" of productivity growth will disappear just has it has in the past. The ramifications of this are huge. Productivity growth was heralded as the way the economy could grow faster than 2% to 3% without inducing inflation. Politicians hope for faster economic growth for either more spending or tax-cuts. Recent reports now indicate that the budget surplus is in severe jeopardy, and we have not even had one quarter of negative growth.

The Conference Board announced that July's Help-Wanted Advertising Index was flat with June's reading of 58. Last July the reading was 82. The weakness is widespread according to Ken Goldstein, economist with the Confrence Board, "All major areas of the country, most of them with distinctly different industrial demographics, appear to be reacting in lock-step to changes in the macro-economy. This is not a typical recession pattern and suggest the profit squeeze is hitting every sector in the economy." Goldstein is not overly optimistic on the near-term, "it might not get much better real soon, but it's probably not going to get much worse."

A paper written by former Treasury Secretary Lawrence Summers and Bradford DeLong, an economist at the University of California at Berkeley, questions the ability of technology to propel profits. While "the future of the technology is bright; the future of the profit margins of business - save for those few that truly are able to use economies of scale to create mammoth cost advantages - is dim." The effect of stock prices will mean "customers will gain, and shareholders will lose."

Everyone is hoping that wireless handsets will get a boost once 3G get unveiled. This would in turn help the semiconductor companies and the equipment companies. However the likelihood of 3G getting off the ground is getting dimmer. DoCoMo announced that it plans to go ahead with its rollout in October, even as it acknowledged it might alienate customers as the network and handsets have been prone to criticism due to dropped connections and software bugs. Tadashi Onodera, president of KDDI, a competitor to DoCoMo, said "I am not sure whether there will be enough demand for HDR [KDDI's standard] at the prices at which it can be offered." DoCoMo has said that the 3G handsets will cost up to twice as much as existing high-end phones, $300-$500, and basic service could cost up to $125 with additional charges per call and per data packet. 3G service in the U.K. is being put on hold as British Telecom said the technology will not be ready until 2003, instead of mid-2002. Vodafone has also cut investment in building out its network on concerns that handsets will not be available in time. Also, Sonera Oyj, Finland's largest phone company, scrapped its joint venture to build a faster wireless network in Norway.

Yesterday, Ericsson fired another shot at the telecom industry by saying they "have yet to see signs of improvement." Ericsson added "Now uncertainty has increased even further, particularly in the the U.S. and Western Europe, regardless of the duration and severity of the current unfavorable market environment." The statement didn’t phase some investors as Henry Asher, president of the North Star Group, reasons, "There will be a pickup at some point…The fact that they (Ericsson) can't see it doesn't concern me that much, because they couldn't see the downturn and it was there." Sounds like complacency still reigns. Today, Merrill Lynch added insult to the injury by slashing estimates for handset sales to 390 million, or a 5% decline from last year. This will be the first decline ever for the mobile handsets. Merrill also lowered its forecast for 2002 sales to 410 million, Merrill's previous estimate was for 450 million phones next year. However, because of the significant number of phone in inventory, the number shipped will only be 360 million.

Merrill lowered its advertising spending forecast for this year and next year. For 2001, Merrill now sees a decline of 2.6% compared to its previous estimate of a -0.7% decline. Merrill does see a rebound next year with ad spending increasing 1.7%, far less than the previous estimate of a strong 5.1% rebound.

The Dallas Morning News used the Labor Day weekend to put a human face on the layoff statistics. The most telling item was reading between the lines and seeing how perceptions change. People that still have a job are fearful and are firing the maids and lawn care services. Cell phones and cable services have been canceled and entertainment has been reduced to Blockbuster. One telecom worker that found work after only two months said "I no longer believe in having three months of emergency savings. I believe in having one year, minimum. This is apart from 401(k)s, IRAs, etc…" This is quite a change from just a couple years ago when some advisors were advocating just using unused credit card balances as emergency funds.

Foreign automakers continue to outmaneuver the Big Three. Here is a listing of how the carmakers did in August. While sales have slowed, the Big Three are clearly losing the battle.

August auto sales:

GM: -7.6%
Chrysler: -24%
Ford: -8.4%
Toyota: +7.2%, Lexus: +12.2%
Honda: -0.4
Acura: +23.7%, second best month ever.
Hyundai: +46%
Volkswagen: +13%, best Aug since 1978.
Audi: +1.8%
Mazda: +1.3%
Mitsubishi: +2.8%, best August ever.
Kia: 41%, best sales month ever.
Mercedes-Benz: +0.8%, best August ever
Porsche: -6%, Expect 10% for the year.
Jaguar: +5%,
Saab: 12%, best August since 1987.
Volvo: +18.6, best August ever.

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