Editor’s note: William Dunk, an international business consultant based in Chapel Hill with William Dunk Partners is widely known for his review of corporate annual reports. This is part two of his analysis regarding CEOs are saying.

(For Part One, see: www.localtechwire.com/article.cfm?u=11867 ).
_______________________________________________________________________________________Not every chief executive is smoking pot or otherwise blown away.

Lee Scott of Wal-Mart knows he has a few troubles: “Even though our financial results were solid, I would characterize the year as good overall.”

And Warren Buffett, whose growth in book value per share since 1999 has generally been below his average gain of 21.9 percent from 1965-2004, realizes that Berkshire Hathaway is not all that it was: “I didn’t do that job very well last year. My hope was to make several multi-billion dollar acquisitions that would add new and significant streams of earnings to the many we already have. But I struck out. Additionally, I found very few attractive securities to buy. Berkshire therefore ended the year with $43 billion of cash equivalents, not a happy position.”

The trouble with Berkshire and Wal-Mart is that they’re so big they have become proxy cards for the American economy, and that economy is in trouble.

Foreign Currencies

Berkshire owned about $21.4 billion of foreign exchange contracts at yearend, spread among 12 currencies. Buffett, you will understand, has traditionally been a buyer of America and certainly not a foreign currency speculator or an amateur George Soros. But the evidence grows that our trade policies will put unremitting pressure on the dollar for many years to come so since 2002 we’ve heeded that warning in our investment course. (As W. C. Fields once said when asked for a handout: “Sorry, son, my money’s tied up in currency.”)
Buffett’s currency buying, of course, brings us back to the warning that things have never been so risky, and that America’s trade imbalance is running down our economy. This has lots of implications for investment beyond Berkshire’s currency excursions.

Mis-Allocation of Capital

There’s a lot of money sloshing around in the world’s financial markets. You only have to look at some of the ridiculous mansions, virtual dormitories, going up in your neighborhood to understand that the nouveau riche have never been so nouveau. In business, this pot full of cash is leading to some bad business decisions. On July 11, a Wall Street Journal headline (p. C1) screamed, “Cash-Rich Firms Feel Pressure to Spend.” We suspect that even Warren Buffett may wind up putting some of his $43 billion down some black holes.

It’s not just Mr. Buffett who’s having a hard time disposing of his money. The surfeit of unregulated hedge funds has resulted in a bunch of money chasing too few investment opportunities. Their performance has gotten in trouble. Running responsible reformist Bill Donaldson out of the SEC and Washington will surely exacerbate the scams cropping up in the hedge world.

Corporate America probably isn’t any wiser. It’s not at all clear that major companies are putting their money in the right places. We’ve already mentioned under-investment by the petroleum majors. But even a P& G arouses some questions.

It is going for mega brands in mega markets. It now has put its horsepower behind 16 billion-dollar brands, and it has 10 more behind them ranging from $500 million to almost a billion in sales. It wants to focus on big brands in big countries, and it is particularly watching 10 lead countries. We cannot tell which countries, because, even with Sarbanes Oxley, P & G 2004 is not as transparent as it might be about its considerable foreign sales.

On the one hand, it is a virtue for the king of branding to focus on building humongous brands in the world’s jumbo markets. Branding is what it knows how to do, which is ironic, since the Proctor and Gamble people in Cincinnati are a somewhat anonymous bunch of faceless people crafting high image products.

However, we spelled out in “In Search of Governing Ideas” (www.globalprovince.com/letters/11-3-04.htm ) that the developed nations of the world are lagging, and the real growth is coming from the emerging, “off-the-map” countries. As C. K. Prahalad has pointed out, there’s a whole lot of growth and margin to be had in the less visible markets we are inclined to ignore (www.conference-board.org/articles/atb_article.com ). Will the big countries implode along with P & G’s brands? Are all our products becoming unwieldy SUVs just when the world is ready for agile hybrids? Perhaps one needs to devise more small brands for small countries.

Why are corporate leaders feeling so rosy when Volcker finds reasons to quake? Why are corporate leaders making risky investment decisions (particularly oversized, overpriced acquisitions) or putting money in the wrong places?

It has been noted that our business chieftains are very richly compensated, no matter how their companies perform. Imitating their overpaid investment bankers, they have become fatter and fatter cats. Perhaps this puts them in another solar system distant from the reality of customers and consumers worldwide whose circumstances are considerably more straitened. In any event, there is some evidence that chief executives are currently very much out of touch with their marketplaces.

Investment Conclusion

You might get the feeling that s there’s too much money sloshing around, with lots of overspending for the wrong things. And you would be correct. Of course we can see that in Iraq which is consuming dollars we can ill afford to throw away. But, from the 2004 reports, we also smell a lot of money in the private sector that is burning a hole in executive pockets and being dribbled away in pursuit of imaginary ROIs.

We will be issuing a new Investment Outlook (check back here: www.globalprovince.com/investmentoutlook.htm) in coming weeks .)

Given the over-confidence of too many CEOs, we will be suggesting that one go well off the beaten path to find new investments. In an unstable world, most mainstream companies in big economies are overpriced. We think you, just like Mr. Buffett, are faced with over-valued companies and several major economies that are not on a good footing. Since you cannot safely invest in the present, you should probably think long term, trying to put your money into the future, if you can figure out what that is. Think distant.
________________________________________________________________________________________

For more insight from William Dunk, see his firm’s web site “News from the Global Province” (www.globalprovince.com). It is a marketplace of business ideas…a site for investors, business executives, journalists, and elitists everywhere. Browse this week’s additions to the site below. To learn more about William Dunk Partners, see www.globalprovince.com/williamdunkpartners.htm .