Ms. Wolk: In our view, the biggest focus for the next several years will be consumer privacy online. The best online retailers will be asked to do more to protect consumer privacy and to be more open about how they share data about consumers on their sites. Already the FTC is looking into privacy concerns regarding a common practice among online retailers called lead generation. Many online vendors have relied on affiliate advertising networks to drive traffic to their sites. Sometimes these networks displayed content or ads on other third-party Websites to generate leads and other times they used incentives or prizes to attract consumers, a practice that could greatly diminish the value of the lead to the online retailer.

TWST: One of the main concerns of investors with health care, especially with the election next year, is the political environment.

Mr. Marti: Yes, absolutely. Through the Medicare and  Medicaid programs, the government pays for ~50% of healthcare expenditures in the US. So the political parties in Washington do have an influence on how healthcare spending is allocated. Democrats tend to be a little bit more focused toward a more socialized healthcare program, whereas the Republicans tend to shape healthcare policy decisions with a free market system in mind. So with the elections coming up, health care is going to be a very prominent focus. Health care is always a key agenda item for the elections and creates a lot of media headlines. Any time there is a change in the oval office leadership, there is uncertainty regarding policy change. For now, what is important to keep in mind is that regardless of who is elected, any new changes would not occur until 2010 at the earliest and, in fact, even Hillary Clinton, who is currently a front-runner of the Democratic Party, has said that any major changes, such as universal health care, would not occur until at least her second term. And so I think it is going to be many years before any real significant changes are made on the healthcare front, if any, but it is certainly something to keep on the radar screen.

TWST: Does this convergence of retailing and social  networking work or does it become offensive to the people who want social networking?

Mr. Golding: I think it works wonderfully. I think it works best when you take retail sites that people are emotionally involved with and then add social networking on to it. eBay is obviously the best example of that. In addition, Amazon with their various wish lists and lists features, as well as the recent addition of discussion forums, has made a significant impact on how much time people spend on Amazon. It is the same as with a bricks and mortar retailer, like a Barnes & Noble (BKS), the more time you spend on the premises, the more likely you are to give them revenue one way or another. I think that the other way, trying to make social networking Sites more retailing, is fraught with many more difficulties, and I think that ad sales will continue to be the primary revenue source on a purely social networking side.

Mr. Arment: Wall Street is worried that if there is a draw-down in Iraq, ammunition sales will be hit. That is not the case. Post 9/11, we have changed all the training requirements and 90% of the ammunition that gets consumed in the small caliber category is for training. Those training requirements are very unlikely to change any time soon.

 TWST: Do you have an overall investment philosophy for equities?

Mr. Miller: We look for companies with great products and services. We focus on strong balance sheets. And we look for great management who not only have great vision but also have the ability to deliver on their long-term plans. Basically, we buy stocks as if we’re buying the entire company and our ideal holding period is forever. That, unfortunately, doesn’t happen as often as we’d like, so we look at a horizon of at least three to five years. We are somewhat value oriented, but many of our most successful stock picks have performed like growth stocks and yet maintained the value characteristics over our holding period.

TWST: What’s driving it[the demand for commercial aircrafts]? Is it just the need to replace aircraft?

Mr. Groh: It is a mix of business, but it is being driven more by growth markets. Higher fuel costs have compressed the economic life of an aircraft, so carriers have started to replace inefficient models. But most of the demand is coming from growth markets, places like India, China and the Middle East. Thus far you haven’t seen a lot of participation from the domestic carriers or more mature markets. I think of the market for new aircraft in two segments. The first is mature travel markets like North America, where most demand is driven by replacement. That’s highly cyclical. And the second is growth markets like India, China, etc., where purchase decisions are being driven by the need to expand the travel infrastructure.

TWST: Are there barriers to entry here or is it a free for all?

Mr. Mook: It’s still a bit of a free for all. Certainly expertise is necessary in the application area. You have to know what you’re designing the application for and be able to code it, and there are intricacies involved with hosting and maintaining the software. It is a lower-cost entry, though, so that does make it easier for competitors to enter the market. That and low customer switching costs actually keep the software companies on their toes. It means they need to continue to innovate and provide good service.

TWST: It sounds like a successful model. What’s the risk in the space?

Mr. Mook: At the end of the day, the software needs to do what it says it is going to do, because with low switching costs for customers, the software vendor is more easily held accountable. Also, as a software buyer .. there’s complexities for buyers. Do I choose the small best-of-breed provider that has a great application or do I go with the more established vendor that has a broader vision, but may not be the best in the individual application areas? You don’t just go out and buy Oracle (ORCL) – now you’ve got to figure out how to invest in this space.

Mr. Shanker: We’re fairly leery of the personal lines market, particularly the
auto market. Names that we have sell recommendations on are Progressive and
Safeco (SAF). Principally speaking, we see competition as being quite strong,
and yet the pricing war has only begun to have its initial effects. We should
see higher competition going forward.
At the same time, expenses are much higher for the industry and you need to
advertise and pay brokers a lot. There isn’t really room to cut the margins of
these businesses, which have gotten leaner over the years as well. We’ve seen
companies like Progressive and Safeco fire heavy capital return packages over to
their shareholders. That possible catalyst has already happened and is likely
near its end in terms of its ability to help these stocks out. The stocks are
too expensive. We continue to look for soft top lines, higher expenses as the
result of increased advertising as well as increased broker compensation,
overall margin deterioration and a lack of ability to increase what has already
been offered to shareholders in the form of a capital return.

TWST: As you look at the business, where do we stand in the cycle? Is that not
important?

Mr. Landry: It’s extremely important. The problem is it’s not easily figured
out. If it were, the industry wouldn’t be saddled with all the extra inventory.
That said, it’s helpful to take a look where the industry’s been in terms of
supply and demand to get a view of what it’s up against.
It looks to us like the country as a whole is currently saddled with at least a
1 million-unit oversupply of housing units.
How do we arrive at that estimate? There are several avenues, the simplest of
which is to look at the housing vacancy survey put out quarterly by the Census
Bureau. Currently there are about 2.2 million vacant owned houses for sale, or
2.8% of total owned units. That’s an all-time high. We have never seen anything
like it before, neither on an absolute nor a percentage basis. Looking back a
couple of decades, the series has averaged a vacancy rate of about 1.5%-1.65%.
If you assume that’s equilibrium and do the simple math, you get somewhere
between a 900,000 and 1 million-unit oversupply. This doesn’t include homes for
sale that are currently occupied, so it may be conservative. Let’s assume,
though it’s accurate.
Going forward, household formation is the primary driver of housing demand over
the long term. Interest rates and, to a lesser extent, job formation are much
more powerful factors over the short to medium term, but both are more difficult
to forecast. Simply stated, it’s tough to build more houses than households that
are formed and expect to stay in equilibrium. So if you look at the demand side,
there are several demographers forecasting that somewhere between 1.3 and 1.6
million households will be formed annually over the next decade. This is an
increase from the prior 10 years due to the fact that echo boomers will be
entering prime headship age and strong immigration. Add to that an estimate for
net removals (through disasters like fire, hurricanes as well as dilapidation
and teardowns) plus demand for second homes, and you get total housing demand of
somewhere between 1.7 and 2.2 million units annually.
Starts peaked at almost 2.1 million in 2005, fell to about 1.8 million in 2006
and probably will be down another 20% to 30% this year. So if demand is at the
high end of that 1.7 to 2.2 million range, and current production is somewhere
around 1.5 million, you can see that oversupply should be soaked up in a
relatively short period. If demand is on the lower end of that scale, and
production rates stay where they are, it’s going to be a squishy market for
quite some time.