NBC received strong ratings for its Olympic primetime coverage, even beating “American Idol.”  It’s obviously generating revenue through ad sales, but also forgoing some ad slots to promote its own network in hopes for generating a boost post Olympics.  NBC heavily promoted two of its new shows, “Parenthood” and “The Marriage Ref,” throughout the Olympics.

The lost ad sales result in short-term losses, but based on the quality of the new shows, should result in higher long-term profits.  It’s a smart move.  After NBC’s “Jay Leno Show” debacle put it in 4^th place by a landslide, NBC needs a boost.  I watch some NBC shows on Thursday’s (particularly “30 Rock”) but “Law & Order” is the only other NBC show I can name.  In fact, I assume NBC airs “Law & Order” for 3 hours every night beside Thursday.

The Olympics demonstrate two interesting points.  The first is how important having one hit can be to a network.  The one hit becomes appointment viewing, driving viewers and increasing interest in the rest of the network’s shows.  The second point is the value of sports or special programming.  While the rights fees for an event like the Olympics are high and can result in a loss on the specific event, by exposing viewers to a network that they would otherwise not watch, fortunes can be turned. 

The show “Parenthood” looks interesting.  I may check it out.  That’s a credit to the Olympics, because I would have otherwise never heard of the show.  In a few years, if NBC is back at the top, the Olympics should get some credit.

Delta, like many carriers, now charges to check bags ($20).  My wife’s wedding dress, which we were bringing for her friend, was too big to carry-on so we had to pay the fee.  In the past, we would have checked our other two bags for convenience since we had to wait at baggage claim regardless.  But we didn’t want to pay another fee and decided to carry-on our two rollers.

Investors don’t like to sell positions at a loss.  It’s depressing and is essentially admitting a mistake.  However, whether you are holding a security at a loss or gain is largely irrelevant, ignoring the tax consequences.  What’s important when evaluating a security is whether you believe it’s currently undervalued and how that valuation compares to your other options.

However, the economy is not out of the woods and growth over the near term will most likely be uneven and slow.  Economists segregate the economy into three sectors: the consumer (C), industry (I) and the government (G).*  Consumer spending represents roughly 2/3 of economic activity while government and corporate/industrial spending comprises the remaining 1/3 of the economy.  As discussed below, expanding spending by the government and stable corporate spending will not be sufficient to offset weak consumer expenditures. 

Corporate America has shown itself to be extremely resilient during this recession.  While overall spending by the private sector decreased, most private companies are operating profitably. 

The government has expanded its spending rapidly to prevent the economy from spiraling into a deeper recession.  The most obvious example of this spending was the stimulus bill passed earlier in the year (the other spending policies enacted since the recession began are far too varied to enumerate). In aggregate, government spending expanded at a rate of 6.7% during the second quarter of this year.    

Consumer spending remains depressed and the prospects for the near to mid-term are not good.  The most obvious reason that consumer spending will remain weak is unemployment.  September's jobs report indicated that the headline unemployment rate is now 9.8%.  This rate rises dramatically to 17% including part-time workers looking for full-time jobs.  The unemployed and those with part-time jobs do not spend since the benefits they receive are not equivalent to full-time salaries and they are rightfully concerned they will not be able to find a full-time job immediately. 

Consumer spending is also restrained by current government spending.  Rational individuals see the Federal and State Governments increased borrowing as future societal liabilities and thus curtail their current spending.  Finally, the housing market, though it has stabilized, will not spur any large spending by the consumer since home values will not increase at the rate they did earlier in the decade for at least another generation.   

Regardless of our somewhat pessimistic view concerning the economy, we still view common stocks as an attractive asset class.  Over the past two years, public companies have slashed expenses to remain profitable.  Corporate balance sheets (excluding financials) are also amazingly strong with record high levels of cash compared to corresponding assets and liabilities.  The recent wave of corporate acquisitions suggests that John Maynard Keynes's "animal spirits" are alive and that companies are laying the groundwork for future growth.  While the near-term growth in revenues will be slow, the underlying cash flows that companies are producing are attractive. 

The majority of our recent common stock purchases reflect our expectation for a muted rebound.  Companies such as Brown-Forman, Procter & Gamble and Sysco will not produce eye-popping double digit revenue growth.  However, they do provide sustainable cash flows relative to their prices that should hold up well in a struggling economy. 

Corporate America has shown itself to be extremely resilient during this recession.  While overall spending by the private sector decreased, most private companies are operating profitably. 

The government has expanded its spending rapidly to prevent the economy from spiraling into a deeper recession.  The most obvious example of this spending was the stimulus bill passed earlier in the year (the other spending policies enacted since the recession began are far too varied to enumerate). In aggregate, government spending expanded at a rate of 6.7% during the second quarter of this year.    

Consumer spending remains depressed and the prospects for the near to mid-term are not good.  The most obvious reason that consumer spending will remain weak is unemployment.  September's jobs report indicated that the headline unemployment rate is now 9.8%.  This rate rises dramatically to 17% including part-time workers looking for full-time jobs.  The unemployed and those with part-time jobs do not spend since the benefits they receive are not equivalent to full-time salaries and they are rightfully concerned they will not be able to find a full-time job immediately. 

Consumer spending is also restrained by current government spending.  Rational individuals see the Federal and State Governments increased borrowing as future societal liabilities and thus curtail their current spending.  Finally, the housing market, though it has stabilized, will not spur any large spending by the consumer since home values will not increase at the rate they did earlier in the decade for at least another generation.   

Regardless of our somewhat pessimistic view concerning the economy, we still view common stocks as an attractive asset class.  Over the past two years, public companies have slashed expenses to remain profitable.  Corporate balance sheets (excluding financials) are also amazingly strong with record high levels of cash compared to corresponding assets and liabilities.  The recent wave of corporate acquisitions suggests that John Maynard Keynes's "animal spirits" are alive and that companies are laying the groundwork for future growth.  While the near-term growth in revenues will be slow, the underlying cash flows that companies are producing are attractive. 

The majority of our recent common stock purchases reflect our expectation for a muted rebound.  Companies such as Brown-Forman, Procter & Gamble and Sysco will not produce eye-popping double digit revenue growth.  However, they do provide sustainable cash flows relative to their prices that should hold up well in a struggling economy.

The SEC requires public companies to report financial results at least quarterly and whenever any major event occurs that would have a material impact on the company’s stock price.  All results are reported accorded to Generally Accepted Accounting Principles (GAAP) as promulgated by the Fair Accounting Standards Board (FASB).  The regulations and standards are extremely exacting covering the vast majority of iterations that could arise regarding what to report and how to report it.  Given the specificity of the rules, one would expect that there would be little differences regarding the quality of financial reporting between companies, especially those in the same industries.  However, this expectation does not come to pass.

The qualitative differences between corporate disclosures in financial reports are wide.  Too many companies report the bare minimum as required and withhold vital data claiming they do not want to release the information for competitive reasons.  For example, Palm, the smartphone maker and pioneer in the handheld device space, introduced a new phone, the Palm Pre, in June.  In its recent earnings release, the company stated that it had sold 823,000 smartphones during the prior quarter.  However, when pressed on a conference call, management clarified that those sales were not all Pres, but included earlier generation phones.  An argument could be made the company did not want Apple (iPhone) or Research in Motion (Blackberry) to know the exact sales of its new phone, but industry and Wall Street know that the Pre is a very distant competitor to the dominant phone manufacturers given all the releases from competitors and the wireless companies themselves.  Vague reporting also plagues areas such as proprietary pharmaceutical companies where companies are guaranteed monopoly production according to FDA regulation and patent protection.  For instance, Alexion pharmaceutical makes a drug to treat an extremely rare blood disease called PNH.  While it releases total revenue figures, the company refuses to disclose how many patients are taking the drug in its major markets in North America and Europe. 

As usual, conflicted incentives cause these holes in reporting.  Managements often obscure useful information as they fear the release will not reflect well on that company's underlying strength and future prospects.  Information is withheld to prop-up the company's stock price long enough for management to sell its options and personally enrich themselves at the expense of their shareholders.  We have found through experience that the accuracy and degree of disclosure speaks volumes about the quality of corporate management and is a vital component of our decision-making process.     

The first stumbling block is whether the countries can agree on what needs to be done to promote economic growth.  The G7 subset of the G20 focused on financial regulation to prevent future collapses—banker’s pay, capital requirements and ways to wind down large bankrupt financial companies. 

The remaining G20 countries have different concerns, mainly removing trade barriers, especially in agriculture.  Developing countries have a comparative advantage in agriculture, i.e. they can produce food more efficiently than microchips, and want to trade on this advantage.  This is hindered by developed countries’ trade restrictions.  This topic was not a point of emphasis at the summit.

In fact, the US has talked about promoting free trade, but actions speak louder than words.  President Obama instituted large tariffs on imports of Chinese automobiles and tires.  China threatened to retaliate with tariffs on US chicken.  This is not the cooperation needed to govern the economy.

And while the G20 (G7) could agree on talking points, details were missing.  Changing the pay structure at financial companies to discourage risky behavior would improve conditions.  Banker’s can get paid large bonuses instantly for selling product, e.g. mortgage-backed securities, that pay off years later.  In other words, when the product turns out to be worthless the seller has already cashed in.  Altering the scenario is good in theory but difficult in practice.  The G7 countries could not agree on a method.  French President Nicolas Sarkozy wants to cap pay as a percent of revenue or assets.  Britain and the US want to allow clawbacks if the banks do not have sufficient capital.  No rules were set at the summit.  And some wonder what good they would do anyway—as soon as a rule is in place banks will unleash an army of accountants to figure out a work around.

President Obama also spoke to ending trade imbalances which create a world economy in which some countries’ spending (the US) fuel other countries exporting (everyone else).  This makes the world’s economy too dependent on the American consumer’s willingness to spend.  How this is altered is unclear: can the US demand other countries increase their deficits to fuel spending?

Cooperation will only go so far.  In the past, countries actually reduced regulation to attract financial companies.  It’s easy to imagine a scenario where this returns if capital requirements are increased and banker’s pay is curbed.  Let’s say in a few years Austria is having a tough time.  If you’re Austria’s president, why not call UBS or Deutsche Bank and tell them your capital requirements are low and you attach no strings to banker’s pay?  Pretty soon you’re a financial hub, mansions and restaurants are built for your millionaire bankers, and your economy is humming again.  You may pay later, but as president you survive one more election.  And as with the tire trade dispute noted above, countries will retaliate.  Before you know it, there’s a race to deregulate just as there was before the financial crisis.

The bottom line is President Obama, President Sarkozy and all world leaders were elected by their citizens so they will look out for them first and foremost.  The G20 can call itself “the world’s main economic governing council” but it will have 20 different agendas, which will make governing difficult.

These increases in premiums are completely divergent from price levels for other goods and services throughout the economy.  During the same 3-year period, the Consumer Price Index has increased by a very mild 5.8%.  While medical knowledge increases and novel treatments and pharmaceuticals have been developed over the preceding three years, these quantitative advances have occurred at the margin.  Anecdotally, service levels within our plan have decreased since wait times - both to schedule appointments and during visits - have increased substantially. 

As a business owner and healthcare consumer, it is very difficult to pay ever-increasing premiums without receiving any added value.  Regardless of the outcome of the debate in Washington, our company plan will change so that we are not paying 60% more for less reliable service three years from now.