April 3, 2002

Inside Veritas -
Article 1 - Can't clone your best employees? profiling can be the next best option
Article 2 - Business News & Issues
Article 3 - What about North America's Border War?
Article 4 - Taxation and Finance - Additional 30 percent Depreciation Deduction
Article 5 - Local Existing "Prices" Soar
Association News Update
Economic Update - 4th quarter growth stronger than estimates
BS: Still about Nothing in particular

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Can’t clone your best employees? profiling can be the next best option
Have you ever wished you could clone a particular employee? Well, since the government indicates it won’t allow it (unless you’re head of a K-9 unit), we may have the next best answer at the April General Membership meeting.
Joining us that evening will be Dan Denawetz from Recon Management, a multi-group organizational development firm, that’s involved with the Genesee Skill Center and the Flint area Career Alliance, in a program to build a “success profile” of a business’ “best in job” employees, and assist in finding a prospective employees that match the profile.
Realizing that home building is leading the recent growth in the area, the Career Alliance wants to focus on the industry, and will cover costs for profile development testing. So, as a BAMF member, you have an exclusive opportunity.
The evening begins at 6:00 p.m. with a social hour sponsored by KSI Kitchens.

Business News & Issues

Prescription Drugs up 17%: Insurance impact?

Who said advertising doesn’t work? Lipitor, the anti-cholesterol drug that’s continuously flashing 30 second messages on your TV screen had a 22% rise in sales last year to $4.52 billion. And Zocor, its primary competitor for viewers and users, saw sales jump 24.1%, to $2.74 billion. $7.3 billion for cholesterol reducing drugs could make a Colombian drug lord go legit.
In all, spending on prescription drugs rose 17% last year, according to the National Institute for Health Care Management, up $22.5 billion to $154,000,000,000 (about the equivalent of this year’s projected federal deficit).
The “Institute” is a group that receives most of its funding from the health insurance industry. So, the study can be perceived as a warning that another round of substantial Health Insurance Premium increases is on the way.

Could Buick be the next nameplate out?

The average BMW owner is 42 years old, while the average Mercedes driver is 45.
And, the average Lincoln buyer is 51, while the average Cadillac owner’s 53 (despite nearly every NBA player driving an Escalade). There’s a trend in the luxury nameplate market giving cause for concern by American companies, but no brand has a bigger age problem than Buick. In fact, there’s a term in the industry for companies who consistently lose market share with younger drivers. It’s called the “Buick Problem,” and for its namesake company, it’s not getting any better (despite Tiger Woods). The average Buick buyer is 57 years old, and rising ... "Buick City?"

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What about North America’s Border War?

“War” broke out in North America last week after the United States hijacked a shipload of Canadian Soft Lumber. Ottawa called an emergency session of its security council, banned the Detroit Red Wings from crossing the border, then hijacked a shipload of American tomatoes.
The Americans, tired of such harassment, surrounded ABC News headquarters and cut off all power, preventing Canadian national leader Peter Jennings from spewing his venom across U.S. airwaves. But Jennings, equipped with a Nokia, got his message out by cell phone.
The European Union screamed foul, and brought U.S. “atrocities” against the Canadian to the U.N.
Finally, a fed up President G. W. Bush told Jennings he could leave the studio (only with a one way ticket back to Canada), but Jennings declined, calling on the civilized nations of the world to force the U.S. to back off.
Well, his call got a positive response from “non island dwelling” Europeans who, once again, tried to pressure the U.S.
Now, a really, really angry President Bush decided to hijack a European steel shipment to show his displeasure. And the world, aghast in fear, stood waiting for the next move.
This is getting about as ridiculous as it sounds. Canadians, Europeans and (U.S.) Americans bickering back and forth about trade policy as if they were middle eastern nations. And those who’ve been in the forefront of a record setting economic expansion (without inflation) should be nervous about the free trade administration that bends to special interests.
As the 29% duty on Canadian timber imposed by the administration takes effect, steel prices are already heading upward. And the steel tariffs won’t go into effect for 2 weeks. GET THIS! “Before tariffs lock out millions of tons of imported steel, domestic steelmakers say they’ve been forced to ration steel to their customers and boost prices because demand is outpacing supply. (Wall Street Jrnl; 3/27)”
So, here’s the U.S. consumer, keeping the economy out of recession for eleven years, who now will be hit with higher prices on imports of anything made with steel or timber, all at a time gasoline prices are skyrocketing. And most of it, not only isn’t necessary, it represents bad economic policy ... no, ridiculous economic policy.
(By the way, the “hijacking a tomato shipment” wasn’t made up. The Canadians put a huge tariff on U.S. tomato exports ... so, look for higher subsidies to tomato growers).
Maybe it’s time we listen to that South California philosopher who said to a national audience, "can't we all just get along?"

Barry

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Taxation and Finance ---- Additional 30 percent Depreciation Deduction

The Job Creation and Worker Assistance Act of ‘02, signed by the President on March 9, 2002, provides for a "bonus" 30 percent first-year depreciation as one of its major tax relief provisions. This tax break will affect most U.S. businesses, some more than others depending upon both how "asset intensive" their operations are and how carefully they craft their asset-purchasing tax strategy over the next four years.
The 30 percent bonus depreciation provision has been billed as a "business incentive" provision since it is designed to encourage businesses to invest in their future and in the economy by encouraging the purchase of depreciable assets. However, because of its retroactive effective date, it is also a "reward" that is given to businesses that have purchased assets since September 11, 2001, and put them "in service" in the business within the 2001 tax year. As soon as these businesses either file their original 2001 tax returns or file an amended 2001 tax return claiming the benefits of the new law, lower tax liability or an immediate tax refund for 2001 will result.
Some details:
The new law allows an additional first-year depreciation deduction equal to 30 percent of the adjusted basis of qualified property. The additional first-year depreciation is allowed for both regular tax and alternative minimum tax (AMT) purposes for the tax year in which the property is placed in service.
Most assets that are purchased new will qualify for the additional first-year depreciation. Used property does not qualify. Technically, the property generally must have a 20-year or less "recovery period" (thereby excluding long-lasting property such as buildings). Certain other special property, such as water utility property, leasehold improvements and special computer software, also can qualify.
Timing is key to reaping the benefits of the new law. The original use of the property must begin after September 10, 2001 and the property generally must be placed in service before January 1, 2005. Furthermore, the property must have been purchased after September 10, 2001 and before September 11, 2004 (provided no binding written contract for the acquisition was in effect before September 11, 2001).
This new 30 percent additional depreciation deduction is in addition to the small business expensing election (which, in 2001 and 2002, is $24,000).
Example: Assume that on June 1, ‘02, you acquire and place in service property costing $64,000 that qualifies for the expensing election. You can elect the $24,000 deduction and are allowed an additional first-year depreciation deduction of $12,000, based on 30% of $40,000. The remaining adjusted basis of $28,000 is depreciated in ‘02 and later years under the current depreciation rules.
Please consult you tax advisor to learn how these new rules apply more directly to your business, or helping you to assess whether you are entitled to claim a tax refund on assets that you have already purchased.

R, P & T

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Local Existing “Prices” Soar

The page #1 headline in the March 20 issue told that Michigan’s appreciation rates, not only are no longer tops in the nation, but have fallen below the U.S. average for the last 6 quarters. Well, with those data in mind, some might find it surprising that median prices for last year’s 4th quarter were up, well above the U.S. average, in virtually all metropolitan areas within the state. But that’s exactly what the price data in NAHB’s Housing Opportunity Index (HOI) shows and, if you’ve been reading Veritas, you shouldn’t be surprised.
The median price segment of NAHB’s Housing Opportunity Index (HOI) for the the 4th quarter of last year showed the Flint area price jumped 9.5% over the previous 12 months, to $115,000, while the Metropolitan “Detroit” area’s prices jumped 13.5%, to $160,000. During the same period, the national median price was up just 6.2%, from $139,300 to $148,000.
To put that in perspective, the home value data in the Office of Federal Housing Enterprise Oversight’s “House Price Index” shows “Flint” was up 4.96% and Detroit’s gain was 4.82%, while the U.S. average was up 6.92%.
What we’ve found in the past several years is that the relationship between home sales’ prices and real changes in property values is about the equivalent to the relationship between Federal Reserve action and Mortgage Rates: In other words, little to none.
In the late ‘90s, when local property was experiencing some of the strongest appreciation rates in the nation, median prices barely moved. Then, last year, when local growth in home values slipped to the bottom 1/3 of all property in the nation, median prices soared.
In the period that ran from late ‘99 to last spring, Flint area home values had increased by more than 7%. However, the median price in ‘01’s first quarter was $100,000, the exact median price of ‘99’s fourth quarter.
These seemingly conflicting data do not, in reality, conflict, because they’re measures of two distinctly different items: One compares the prices of property sold during a period with the prices of property sold in previous periods; The other compares sold properties with their previous transactions, to see how individual homes in a particular area have appreciated.
In good economic times (like the ‘90s) with jobs being plentiful and consumer optimism high, a large number of 1st time buyers enter the market, and sales of lower priced homes have a tendency to rise, and make up a larger share of the market. But when the economy softens, the reverse affect often comes into play, as the market shifts to financially secure buyers purchasing higher priced homes. So, as we’ve been noting for years, median (and average) prices distort real home values.
Our analysis of data from the Flint Area Association of Realtors suggests that local home sales off by 218 units last year, and 83% of that decline was in Flint, where the average price was $57,100. Last year, Flint sales made up 24.2% of the market; in 2000 it was 26.7%, so it’s hardly a surprise that the midpoint of Genesee County home sales rose so large a number.
As is evident in the graph above, the Metro Detroit area was in a similar situation as its median price climbed by $19,000 (more than the three previous years combined).

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Beyond Seinfeld: It’s still about "Nothing" in particular

Divine Mission: “Greens” & Churches Join Hands

While most of the American media’s religious attention was focused on Islamic extremists and Priests’ affinity for youth, the Wall Street Journal discovered another example of religion’s “dark side,” writing that “environmental organizations are looking to the Almighty for help.” In a March 26th feature, it told how “greens have begun working in a novel and sometimes uneasy alliance with the nation’s major churches, which have launched ‘grassroots’ campaigns from the pulpits in 21 states.”
The article, says that “leaders of Catholics, Protestants, Jews and Evangelical Christian had joined (the Sierra Club) as the National Religious Partnership for the Environment, working behind the scenes to help denominations stake out positions corresponding with those of environmental groups.” Now we find that National Council of Churches has joined with the Sierra Club to build public sentiment against drilling for oil in Alaska, co-sponsoring TV ads.
The alliance should come as no surprise in Southeast Michigan. For years we’ve seen a number of “anti-sprawl” rallies sponsored, and even hosted by churches and church groups. Of course, we found that somewhat understandable, but a stand against energy self sufficiency is harder to fathom.

"Playboy" seeks "Women of Enron?"

From churches to “Playboy,” we couldn’t ignore this one. As many women in the Houston area lost their jobs in the Enron scandal, along came Prodigal Daughter Christie Heffner as the proverbial “White Knight.” As CNN put it, “Playboy is hoping to entice some women who lost their shirts in the Enron scandal to reveal a bit more.”
The magazine has decided to put together a “Women of Enron” pictorial, with all that implies. “This is an opportunity for them to do something fun in the midst of the turmoil that’s going on in their lives,” said a “Playboy” spokesperson.
If a “Women of Enron” pictorial doesn’t catch you, just wait. For those who like the financial type, look for the “Women of Arthur Andersen” section, coming in the Fall issue of Housing Quarterly. Prefer the “Women of Kmart?” Better try November’s “Michigan Builder.”

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Association News and Events

The association’s “Habitat” home has moved. Habitat for Humanity recently purchased a lot on Nichols, off Saginaw and just north of the Grand Blanc Township hall, for the home the Builders Association will build (and put in the Fall Parade of Homes). As we’ve noted in previous publications, members have been pledging support in labor, materials and cash, since the project was announced in January.
Despite the delay in securing the lot, we’re still expecting to begin construction in May, so be sure to attend the April 17th meeting where details will be presented, and see how you can still get involved.

We lost one Parade entry, so the event is now set for 42 homes, same as last spring, when it opens on Mothers’ Day weekend. Furthermore, Housing Quarterly magazine will be in the mail the previous weekend, and is set at 96 pages (we did have to extend the number of full color pages to accommodate requests from members). So, look for your copy in the mail in the week leading up to the parade.

And, regarding that MAIL!
Normally members in Genesee County receive their newsletter within three days of its mailing. However, the two most recent issues of Veritas seemed to run into serious problems, which caused some members to receive the March 5th issue as late as April Fools, and the March 20th issue may not have been delivered even this week (we got ours on March 30th).
One member called to say he received both issues on March 25th. We’ve been assured the post office will get to the proverbial bottom of the problem and we hope this hasn’t caused any serious inconvenience.

Economic Update: 4th quarter growth stronger than estimates

There’s been little noticeable change in economic direction over the past 2 weeks. And, perhaps most important, the change in Federal Reserve bias to “neutral” has had little impact on bond yields which have remained in the 5.3% to 5.4% range for since.
If there was a “highlight,” its the report on Consumer Confidence, which showed that sentiment “exploded” in March to its highest level since the month before 9/11. The Conference Board’s confidence index registered at 110.2, up dramatically (16%) from 95 in February.
The Conference Board’s report was followed by a University of Michigan survey corroborating the previous findings. U-M revised its March index upward, finding confidence at its highest level in 15 months.
The rise in confidence can be expected to trigger another surge in consumer spending that will keep the economy on an upward track for the year.
If there was another highlight it came with the final revision of 4th quarter growth, showing that the economy grew more than previously indicated, and pretty much proving that it was never in recession.
The Commerce Department said Gross Domestic Product grew at a rate of 1.7% in the quarter, up from previous estimates of 0.3% and 1.4%. The 4th quarter rate was just short of 2000’s fourth quarter, making it the second strongest quarter in 18 months.
As would be expected, consumer spending really took off during the period, jumping 6.1 percent to $6.5 trillion, or 70% of the total $9.3 trillion, significantly more that the two-thirds it’s normally responsible for.
All of that consumer spending reduced inventories dramatically. In fact, inventory reduction took 2.2 points off the GDP numbers but, as has been suggested for the past several months, set the stage for an upswing in manufacturing in ‘02, to replace the inventory depletion.

‘02 Consumer Spending
Continuing its 4th quarter momentum, personal spending was up 0.6% in February, after rising 0.5% the previous month, identical to the respective monthly increases in personal income. The personal income gain was the strongest since December 2000.
Perhaps the most interesting data in the spending and income report was the savings rate. At 2% of income, with the exception of August and September, it was the highest level of savings since November ‘99.

Manufacturing Rebounding
The nation’s manufacturing sector grew for the second consecutive month in March according to the monthly index of the Institute of Supply Management. Its key gauge of activity rose from 54.7 in February to 55.6 (any reading over represents growth).
The Institute’s report was welcome news for a sector that was in decline for 18 consecutive months prior to February, and provides the latest sign that the economy’s renewed strength covers the whole spectrum.
With consumer spending showing no signs of letting up, and the manufacturing recovery on the way, look for analysts to upgrade their 2002 forecasts any day now.

Consumer Prices
Despite soaring confidence and spending, along with depleted inventories, inflation remained a distant (if any) threat, as consumer prices rose a modest 0.2% in February, the same as January. However, the core rate, minus energy and food, was up 0.3%.
Of course, this all came down prior to the recent rise in gasoline prices, which are responding to spring, and Mid-east unrest.

Housing Industry Update

Headline said: “Existing Home Sales Slid 2.8%”

And, the same article opened; “The home-buying market softened slightly in February.” Softened? Well, if homes selling at their second highest monthly rate in history is “softening,” we guess so. But, on the heels of a year of record home sales last year, homes are selling at a rate slightly under 6 million annual sales, and 13.6% above 2001’s record.
Last week the National Association of Realtors said existing single family homes sold at an annual rate of 5.88 million units in February, which technically was 2.8% below January’s new monthly record pace of 6.05 million. However, it clearly showed that the housing market continues at the record pace that’s been evident, at least from our perspective, since last summer.
The national median price for the month was $150,000, up 8.2 percent over the previous twelve months. NAR Chief Economist David Lereah said the high price resulted from historically “lean inventories.”

But headlines said "New Home Sales Up"

And, they were up 5.3% from January, which is also true, but the 875,000 unit rate was lower than any year end sales number since ‘97. Still, February’s sales activity was strong from a historical perspective, and represents what the National Association of Home Builders calls a healthy and sustainable level.” In fact, NAHB further said it forecasts that “total new home sales in ‘02 should nearly equal ‘01’s record setting sales of 906,000 units.
February’s sales were 8.8% below February ‘01.

Timber Tariff Imposed in "Commerce" Ruling

The U.S. Commerce Department marked the beginning of spring the same way it celebrated Halloween by imposing, in a “final ruling” the duty on Canadian Softwood lumber it had announced on Oct. 31. In what the NAHB condemned as “bad trade and economic policy that will harm housing by acting as a new hidden tax on American home buyers, renters and consumers,” Commerce followed through on its stated plans to protect the nation’s biggest timber companies.
NAHB further pointed out that if the “entire 29% duties are reflected in prices, this will add nearly $1,500 to the cost of building a typical new home. It also pointed out that industries using Canadian timber employ 7 million, a 30:1 ratio over lumber over lumber producing workers.

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