Friday, August 27, 2004

8/28/04 Taking A Page From Knut WicksellBeing a bit older, my memory can jump back to the late 1800s to the time of Swedish economist Knut Wicksell. You don’t hear his name very often, but over the last three years, our nation has been “Wickselled” by the Fed. This economist was quite brilliant and stated that “any theory of money worthy of the name must be able to show how and why the monetary or pecuniary demand for goods exceeds or falls short of the supply of goods in given conditions.” This was part of his theory called the “cumulative process” of inflation. Importantly, Wicksell made investment independent of savings, and in that way, aggregate demand could rise above or below the aggregate supply. He noted that increases in the supply of money would lead to price rises. We should pay attention to Wicksell’s description of credit money. He said there were two interest rates- the “natural” rate and the “money” rate. The former is the return on capital and the latter is the loan rate. Wicksell wrote that finance frees investment from savings. The “cumulative process” describes the finance demand for money set by the difference between the money and natural rates of interest. If the natural rate is greater than the money rate, the marginal product of capital is greater than its cost. As such, it will spur borrowings in order to invest in capital. In short, the money supply increases. As long as the natural rate of interest remains above the money rate of interest, the demand for loans will continue to accumulate, but the savings does not really catch up. As the money supply expands, prices rise. How does this spiral end? The loan rate is raised to equate the natural rate. In addition, as inflation increases, the attractiveness of new capital investment diminishes. Does any of the above have a familiar ring? The Fed did nothing more than take a page from Wicksell’s theories. In so doing, and not fully comprehending the dangerous consequences of the credit spiral, they were and are playing with fire. As some examples, year to date, M3 and Bank Credit have expanded at over an 8% annual rate; real estate loans at a 14% annual rate; and total commercial paper at a 10% annual rate.The Commerce Dept stated after-tax profits fell 1.2% in the April-June quarter compared with the first quarter. It was the weakest quarter since 2003’s March quarter.Jaguar will cut production due to slack demand.Private aircraft maker Mavericks Jet is, according to Business Standard, exploring a facility in India with an investment of over $1 billion in 3 years.Asian Development Bank’s chief economist stated that, if the price of oil stays above $40 until the end of 2005, the combined GDP for Asia excluding Japan in 2005 would be around 0.8% lower than it would otherwise.According to Delhi’s Times News network, 60% of developing Asia’s population of 1.9 billion live on less than $2 a day.A total of 830 natural gas wells were completed in Texas in July- the highest number of completions in 2004 and a 30-year high, according to the Texas Railroad Commission.Year-to-date, Fed Foreign custody holdings of Treasury and Agency Debt are up almost 30% on an annualized basis.I would like to thank Stephen Roach for bringing the following to my attention: as of year-end 2003, BIS data reveal dollar-denominated assets made up about 70% of the world's total holdings of foreign exchange reserve compared with our nation's 30% share of the world's GDP. Could this disequilibrium be a reminder of a somewhat similar situation contributing to October 1987's crash?
8/27/04 The Message Is Clear

If, as Bush maintains, we have turned the corner, then we have been greeted by increased poverty and decreased opportunity. This is failed leadership. It is not surprising that, according to the Community Service Society of N.Y. third annual survey, a third of voting age citizens in N.Y.C. live below twice the poverty level. The survey shows the main concerns, by a wide margin, are jobs and the economy.
Nine out of ten say their family finances have not improved over last year and 36% say they are even worse off.
For the first time in over a decade the number of poor in the U.S. increased for three years in a row. For the second year in a row the average income did not rise. Since Bush took office, the number of Americans without health insurance has increased by 5 million.
Since invading Iraq, 969 U.S. troops have died and 6,690 service members have been injured.
In a WSJ/NBC poll, 52% disapprove of Bush's handling of the economy and 51% state he needs to change his approach on Iraq.
General Eberhart, head of NORTHCOM and NORAD, stated "I believe it's just a matter of time until the terrorists try to use a ....maritime attack against us." He sees North Korea as posing the greatest threat to the U.S.
Next month Interstate Bakeries will close its Monroe, LA plant and 50 people will lose their jobs. In October, the company will close its Buffalo,N.Y. plant and there will be a loss of 200 jobs. Cirrus Logic is laying off 7% of its workforce. In Kingston, NC Unifi is buying a textile plant from Koch Industries. The new owner told hundreds of workers they must take a 20% pay cut if they want to keep their jobs. Novellus Systems sees some shipment delays due to some customer cautiousness.
Today, Greenspan will give a speech and tell the world everything is coming up roses. The U.S. second quarter GDP growth was revised downwward from 3% to 2.8%. Ex food and energy, the Consumer Price Consumption Expenditure Index rose at a 1.7% annual rate. In the meantime, in the latest report, consumer spending is slowing in Japan and their unemployment rate is rising.
The 10 year Treasury notes continue to hold its gains. With a yield of 4.21%, the market is telling us that GDP growth is going nowhere fast. That will continue to limit gains for equities. Those fighting that picture have faired poorly and will again do so in coming months.

Thursday, August 26, 2004

8/26/04 Follow The Facts

U.S. new home sales declined 6.4% in July.

The latest weekly jobless claims rose by 10,000 to 343,000. The number of people collecting state unemployment checks rose by 5,000 to 2.897 million in the week ending August 14.

The good news yesterday was that crude closed down to $43.47 per barrel. One should remember that, in 1979, a gallon of gas cost $3.78 in 2004 dollars. On a relative basis, gas is a good value at $2 per gallon. Unless China's thirst for oil lessens, pressure will remain on the world's oil supply.

Including state and federal subsidies, it costs $2.24 to produce a gallon of ethanol compared with 63 cents for gasoline.

Analysts just don't get it. Boeing rose to a new yearly high based on a $4 billion order for 18 777s from Singapore Airlines. The market ignored the bigger news. The airline decided against placing an order for the 7E7. Why? The economics for the new plane were not sufficiently compelling. Boeing was banking on Singapore Airlines to provide the second biggest order for the 7E7 behind the All Nippon deal for 50 planes. The 7E7 is Boeing's future.

LaCrosse Footwear is laying off 70 workers and closing its Claremont, NH plant.

Square D is closing its Oxford, Ohio plant and laying off 242 hourly and salaried employees.

Harry Truman: "I want a one-armed economist so that the guy could never make a statement and then say 'on the other hand.'"

GM has asked the supplier of the Hummer H2 to cut production because sales have slowed.

The IMF raised the forecast for GDP growth for China in 2004 from 8.5% to 9% and stated it is not certain that China can achieve a soft landing.

Bob Beckham: "I put the Financial Times on the floor and called my dog William over to pee on it. Wherever there was a mark I could do some trading."

India's gold imports, accroding to commerce industry data, rose 30.7% in the April-June quarter this year compared with the prior year's period.

Kerry won the endorsement of 10 Nobel Prize-winning economists.

There are 78 ethanol plants in 19 states. Approximately 10% of all the corn grown in the U.S. goes into ethanol while 70% is fed to cattle. ADM controls 60% of the ethanol market. According to the Cato Institute, every dollar in profits earned by ADM from ethanol costs taxpayers $30. Since 1980, ADM has received over $10 billion in subsidies. Ethanol is protected by a 54 cent per gallon foreign trade tariff. It should be noted that, of all the major crops, corn creates the most soil erosion and demands huge amounts of herbicides, insecticides, and chemical fertilizers. According to studies at Cornell University, without factoring in costs to ship ethanol to blending sites, it costs 29% more energy to produce ethanol than you get from burning it. Ethanol causes air pollution by releasing significant amounts of hydrocarbons and nitrogen oxides.

Wednesday, August 25, 2004

8/25/04 Capital Equipment Purchases Are On Borrowed Time

There are only four months remaining for large companies to write off 50% of qualified capital equipment orders. After Dec. 31, the tax incentive ends. You have witnessed what happens to consumer spending after the child tax credit impact ended. The same will take place with business equipment purchases. In the meantime, orders for core capital goods increased 0.6% in July after gaining 1.4% in June. Computers, autos, and defense goods declined while transportation goods, such as, aircraft gained 5.6%. Bookings for commercial aircraft increased 100%. A year ago, Boeing's orders for commercial aircraft were at a standstill.

The California Association of Realtors stated the median price of an existing home in California in July increased 21.4% compared to the same period one year ago. Greenspan stated more data was needed to declare a housing bubble. Obviously, he and his wife are not out house hunting.

Mortgage applications volume was down 6.3% last week. The National Association of Realtors stated sales of previously owned homes declined 2.9% in July from June's record-high pace.

U.S. bombs damaged part of the walls in the Ali Shrine complex. George Will predicted the Baath's planning of a big October offensive, possibly in the al-Anbar Province.

Due to a very early spring and warm summer, Stony Hill Winery in the Napa Valley started its crush on August 11, the earliest in their 52-year history.

Toyota's main Chinese partner posted a decline of 79% in second quarter profit due to sliding car prices and higher raw material costs.

According to the National Women's Business Council, 15.6 million women owned or co-owned businesses in 2002.

Speaking of the new overtime rules, Sen. Tom Harkin stated "plain and simple, this is a rip-off of the American worker."

Mark Zandi, chief economist for, stated "in this environment, when the numbers don't come in as strong as expected, businesses pull back."

Mark Twain: "In the beginning of a change, the Patriot is a scarce man- brave, hated, and scorned. When his cause succeeds however, the timid join him. For then, it costs nothing to be a Patriot."

Tuesday, August 24, 2004

8/24/04 Signs Of Diminished Inflation

Sanderson Farms reported that the price for boneless chicken breast during the quarter peaked at $2.56 a poundbut has since dropped significantly to $1.75 per pound. Meanwhile, oil declined to below $46 per barrel.

First Energy to cut 205 employees at their Ohio plant. Interstate Bakeries to close its Long Island, N.Y. bakery and cut 200 workers.

According to the BLS, the number of American workers in furniture and related products dropped 14% from 674,900 in January 2000 to 581,700 in July 2004.

The BLS is doing yet another study on the 9.5 million self-employed Americans. At first glance, it appears, that as a generalization, income for the self-employed has been on a yearly decline and that has been accompanied by reduced annual workloads.

Target sees August sales in range from flat to plus 2%. That mirrors what Wal-Mart stated.

Tom Nardoni of the Labor Dept's Division of Labor Statistics stated "I can't tell you. We just don't know why there's a difference between the surveys (payroll and household)."

Monday, August 23, 2004

8/23/04 The Paycheck-To-Paycheck Consumer And Investor Optimism

Slightly less than a months ago, Wal-Mart expressed confidence that their August comp sales would rise by 2 to 4%. That forecast was made knowing that the prior August comp sales were up 6.9%, that there would be less discounted merchandise to sell, that the Labor Day weekend fell one week later, and that there would not be child-credit checks available. Today, the company reduced the forecast to a range from no change to plus 2%. The reason provided was Hurricane Charley which forced the closure of 75 stores and impacted a total of 200 stores. Importantly, Wal-Mart stated that back-to-school sales were tracking below plan. This is highly significant. Operations at Wal-Mart's 3,600 U.S. locations tell you more about consumer spending than any other information available. It is a mirror of Main Street spending. In addition, other than the pre-Christmas holiday season, this back-to-school period is the most important contributor to a retailer's annual sales. In sum, the consumer is cutting back again in August. The Fed may miss this point, the Administration may gloss over it, but an investor had better take notice. If you do not adjust your portfolio accordingly, there will be non-pleasantries eating away at your positions.

According to the UBS Index of Investor Optimism, less confidence was expressed by investors in August about the economy and their personal investments. The overall Index declined 11 points to 77 from July's 88. Only 43% expressed optimism on unemployment, down 6% points from July, and now 46% are optimistic about the stock market, down 3% points from July and 4% points from one year ago.

Sunday, August 22, 2004

8/22/04 Screams From The Graveyard

On Friday, market participants turned to the media for their news. They relied on headlines to trade oil, stocks, and bonds. They will never learn, and their P&L will rightly suffer the consequences. Either do your own work or expect to be carried out on a stretcher. The news about the mosque turnover was wrong. It wasn't even the main event. No major news bureau has carried the story about the graveyard. The Administration made a very serious error in judgment in their repeated bombing of Najaf's sacred cementary. Many Iranian loved ones are buried there. This is the story that holds significant after shocks. As for the mosque, Al-Jazeerah stated that a Muqtada spokesperson related that, even after the handover, their army of fighters would continue to guard the shrine. It's too late for guarding the graveyard. We will hear the screams.

Southwest of Basra guerillas bombed and set fire to an oil pipeline, one that had been shut down as a precautionary measure. In the meantime, the Snowman stated "the energy experts that I've talked to all indicate current prices are abnormally high, something of a bubble, and they ought to reced as the uncertainties get clarified." I figure his "experts" are short oil and are getting clocked. When you rely on the Snowman's info for wealth creation, things have truly deteriorated. He couldn't even run a railroad.

Lehman Bros. reduced its forecast for U.S. GDP in 2005 from 3.7% to 3.3% due to the slowing of consumer spending and job creation.

John Edwards on the new overtime rules: "Why would anyone want to take overtime pay away from as many as 6 million Americans at a time when they need it the most? And why would anyone support the new rule which could mean a pay cut for millions of Americans who have already seen their real wages drop again this year? If you work hard, then you should be rewarded with that effort." The answer, John, to your questions is simple. Bush's base is fighting wealth distribution, and the Administration has tried to sell the American people on the notion that the tax cuts have promoted wealth creation. You can't create wealth with lower paying jobs and wages and benefits trailing a muted inflation rate for almost four years.