Saturday, January 08, 2005

1/8/05 Distortions And Complacency

Perseverance does not guarantee accuracy. I was off the mark on my analysis of December non-farm payrolls. With the exception of two items, I had focused on all the essential components, but simply underestimated certain services. With respect to government hiring, I completely missed the boat. I figured it was a non-event due to the fact that state and local governments have severe budget constraints. I learned those constraints do not prevent hiring. Thus, the cancerous government growth continued with 36,000 government jobs created in December. I also missed the 17,000 jobs added in the wholesale trade. I thought that was a non-event. Then there was the underestimation of the professional and business jobs (41,000 added including 9,000 temp positions) and education and health services (47,000 added principally in health care and social assistance). I did all right with employment in financial activities, leisure and hospitality, and was slightly off with construction and manufacturing. There was one key area that I did get right--- wages rose slower than inflation. That spells on-going head winds for our consumer-based economy.

In March 2001, there were 17 million manufacturing jobs in the U.S. In December 2004, there were 14.4 million. In all of 2004, there was a 76,000 gain in manufacturing jobs. At that rate, it will take over 34 years to make up for the 2.6 million manufacturing jobs lost in less than 4 years. The unemployment rate for production workers in December 2004 was 7% versus 6.6% in December 2003.

Many Fed members stated they were concerned about excess liquidity. Maybe they should look in the mirror. For 2004, M3 increased by 7.1% to $9.45 trillion. Richard Russell stated “the Fed is out to prove that there don’t have to be stock market corrections, and there don’t have to be economic recessions. And above all, absolutely above all, there don’t have to be periods of deflation in the U.S. economy, not while the Federal Reserve can give money away.”

Paul Kasriel, Director of Economic Research at Northern Trust Company: “This is the real Social Security issue--- the possibility of not enough real goods and services being produced to guarantee a rise in per capita real income.”

Peter Eliades, editor of the newsletter Stockmarket Cycles, observed that the opening three days of trading in 2005 marked the worst start for the markets in nearly 80 years.

Getting back to the employment report, the BLS reported 8 million unemployed persons with those marginally attached to the labor force at 1.5 million, of which 442,000 were described as discouraged. Over the past year, those holding more than one job increased by 574,000 to 7.8 million. There are 4.5 million part-time workers. A total of 206,000 temporary help jobs were added in professional and business services or about 40% of the yearly increase in this category. With respect to the household survey, the civilian labor force declined 110,000 in December. Employment dropped by 137,000. Unemployment rose by 27,000. Those not in the labor force rose 328,000 to 76.4 million. When the news is bleak, the White House does not like to refer to the household employment survey. Therefore, no mention was made of it yesterday by Bush or Snow.

In about three weeks, Boeing will release its earnings for 2004. I suggest you keep an eye on their footnotes. The company is still carrying a $23.5 billion Air Force contract on their books rather than writing off about $300 million in deferred expenses that it incurred in order to bid on this contract. The write-off would reduce Boeing’s 2004 earnings by about 15%. Haresh Sapra, associate professor of accounting at the University of Chicago Graduate School of Business stated “Boeing is using very aggressive accounting…This contract is up for grabs tight now. Right now there is no contract so they cannot show it as an asset on their balance sheet. They should be passing the tanker expenses through their income statement, affecting their bottom line directly dollar-for-dollar.”

Ford has decided to build a new manufacturing plant in Nanjing.

The Cincinnati Public Schools’ board has approved a voluntary retirement plan that is expected to help the district shed 500 jobs and save up to $100 million over three years.

U.S. consumer credit fell for the first time in a year and by the largest dollar amount on record, according to the Federal Reserve. It fell by $8.7 billion or at a 5% annual rate in November. It should be noted, however, that consumer credit rose by $9.5 billion in October, revised upward from $7.7 billion.

Carl Steidtmann, Deloitte’s chief economist: “In this volatile environment, retailers should remain cautious by maintaining a tight grip on inventories, new store openings, and hiring. As the beneficial effects of tax reductions fade, the future direction of consumer spending will primarily depend on the future direction in home prices.”

Kurt Richebacher, economist: “The big problem lies in the fact that with a usual leverage of 20-to1, even minimal rises I bond yields may endanger the capital of a yield-curve player. Another big risk looms in a widening of credit spreads. Given the unusually low level of yields, many players have shifted to higher-yielding junk bonds. One of the results has been a drastic narrowing of the yield spread. With a weakening economy, these spreads would certainly widen again.”

When will there be a spike in long-term interest rates? In my view, it will occur sooner rather than later, and its arrival will eradicate the current complacency evident in the credit markets. Such a tsunami will not kill 150,000 or more, it will simply wipe out trillions in assets. Thank goodness it’s only money.

Friday, January 07, 2005

1/7/05 Rising Costs, Raising Prices, Productivity, & Cost Management

Campbell Soup is the world’s largest soup manufacturer. Over the past year, the company has had to face rising costs for energy, steel, pop-top lids, microwaveable containers, and other raw materials. Campbell is raising most U.S. soup prices an average of 4.8% effective Feb. 28th. In an effort to fight inflation, the company is “pursuing a combination of productivity and pricing.” There is evidence that productivity is slowing in the U.S. That leaves price increases as the focal point for maintaining margins in 2005. Where does that leave hiring plans? Clearly, it is relegated to the back burner. Our so-called economic revival began in November 2001. It’s three years old. It’s old enough to go to school, and the blackboard shows that, between November 2001 and November 2003, the economy has added an average of 23,600 jobs a month. The labor participation rate is lower today than it was 12 months ago or 24 months ago or even 36 months ago. Do you think 2005 will be the second consecutive year that wage gains do not keep up with inflation? How much will wages have to gain to keep up with the price increases at companies like Campbell’s? With rising costs for benefits and slowing productivity, companies will try to minimize hiring. Don’t focus just on today’s hiring report. You have all year to see disappointing employment reports. The BLS is entering the “ready-to-serve” hiring slowdown period. It won’t make for happy faces.

According to the Hudson Employment Index, U.S. workers lost confidence in the job market in December. The index dropped 1.3 points to its annual low of 2004 at 103.6. Only 35%, a reduction of two points from November, anticipate that their firms will undergo staff additions. The percentage of U.S. workers who expect layoffs and those worried about losing their own jobs both increased a percentage point to 19% in December.

Tyson Foods has been facing unfavorable operating margins in their beef business. Live cattle prices have remained high and there has been a decrease in international sales. In order to lower costs, the company is suspending operations for 3 to 5 weeks at several plants and this decision will impact about 2,100 jobs. National Semiconductor announced it will cut about 6% of its workforce or roughly 550 factory jobs in the U.S., Europe, and Asia and about 100 others, including positions at its headquarters in Santa Clara, CA.

First-time claims for U.S. unemployment benefits increased by 43,000 to 364,000 last week, the highest since September. It was the biggest increase in three years. The four-week average of continuing claims increased by 13,500 to 2.77 million, a six-week high; however, U.S. continuing jobless claims rose by 61,000 to 2.84 million in the week ending December 25th, also the highest since September. It is well to remember that continuing claims do not include hundreds of thousands of workers who have exhausted their benefits, and they are counted as unemployed only if they are actively looking for work. With the average duration of unemployment about 20 weeks, it is no wonder that the number of discouraged workers remains at a high level. With close to 2 million workers unemployed for longer than six months and, without benefits, how can one expect to be encouraged? Between the unemployed, the under-employed, and the discouraged workers, the labor picture is much worse than that presented by the BLS.

The Monster Employment Index dipped in December from November’s record 117 to 113, and is slightly below the level reached in September and October and slightly above August’s 113. Monster tries to place a positive spin on their index; however, over the past nine months, the average monthly reading has been 110. In other words, for the past nine months the upward trend has been modest.

Yesterday saw a 5% jump in crude to $45.56 a barrel, heating oil rising 6.29 cents to $1.2813 a gallon, and natural gas increasing 3.7% to $6.049 per BTU. The fireworks did not end there. Rumors circulated that China’s CNOOC was considering a $13 billion bid for Unocal and that India’s ONGC was considering a $2 billion bid for Yukos assets.

Since the start of the New Year, gold has had a sharp decline. Yesterday, February gold dropped $5.70 to a 3-month low of $421.60. With gold breaking some technical support, it has placed the gold believers on the defensive. You know what they say--- no pain no gain.

UTStarcom is a global leader in IP-based end-to-end networking solutions and international service and support. They sell wireline, wireless, optical and switching solutions on a world-wide basis; however, their main market is China. Yesterday, the company stated that their latest quarterly revenues from China operations were adversely impacted by an overall slowing of the Chinese economy, maturation of the PAS market, and decreased capital spending. In addition, both China Telecom and CHINA Netcom did not implement the anticipated increase in promotional spending at year-end that UTStarcom has benefited from historically. In sum, the company expects to report fourth quarter revenues in the range of $740 million to $745 million, versus initial guidance of $875 million to $885 million. Under GAAP, the company expects to report a loss per share of 40 to 45 cents. A closer look might be in order. Their China operations negatively impacted their gross margins but cash collections were in excess of $890 million in the fourth quarter as compared to revenues of $740-745 million. Their backlog at year-end is $1.2 billion and still higher than the $1.06 billion a year earlier. They anticipate that their first quarter revenues will be at least $770 million with gross margins improving to a minimum of 23%, resulting in GAAP earnings per share of 20 to 23 cents. I have never owned this stock but have been watching their results for four years. Several years ago it sold at $90 per share and last night was just under $20. If you believe in the long-term growth picture in China, then an investment in UTStarcom might be for you. A suggestion might be a starting point around $14 or $15 a share. This is a volatile stock and not for everyone.

On January 2nd, Pat Buchanan wrote an editorial on Iraq entitled “Why are U.S. forces still in Iraq?” and stated “President Bush needs to go on national television and tell us the unvarnished truth. For some of Bush’s countrymen, there is a sense of having been had, of having been made victim to one of the great bait-and-switches in the history of warfare.” Buchanan stated that none of the claims made before the start of the war was true. He asked “what is our mission now? When did it change? With 1,350 dead and nearly 10,000 wounded, why are we still at war with these people?… Why should Americans have to die for democracy in a nation that has never known it? Democracy in the Middle East is not vital to our national security…Exactly how much more blood and money is Bush willing to plunge into a war for democracy in Iraq, and at what point must he decide--- as LBJ and Nixon did in Vietnam--- that the cost to America is so great that we must get out and risk the awful consequences of a mistaken war that we never should have launched?”

Tobin’s Q is a ratio devised by Nobel Laureate in Economics James Tobin who hypothesized that the combined market value of all the companies on the stock market should be about equal to their replacement costs. The calculation is market value of assets divided by their replacement value. Therefore, the ratio of all the combined stock market valuations to all the combined replacement costs should be around 1. Today, Tobin’s Q is over 2. The only other times this has taken place were in 2000 and 1929.

A total of 157,000 non-farm payroll jobs were added in December? I haven’t had the opportunity to thoroughly review the numbers. Where did I go wrong? There were 144,000 service jobs added or slightly more than twice the gains I had envisioned. Manufacturing picked up 3,000 jobs, and I thought there would be a decline. Construction gained 7,000, and I had projected a decline. More on the numbers tomorrow. As for wages and hours and labor participation, I was on the money.

Thursday, January 06, 2005

1/6/05 Forecast For December Non-Farm Payrolls

In an effort to respond to the unusually large number of inquiries regarding tomorrow’s report, I am providing my forecast. It is quite different from the 178,000 job gains projected by others. Like always, the work is solely my own, and please do not think I have any special information. I do not. I envision a very positive increase for various services--- health, education, professional, business, and recreational. I envision disappointing payroll news for manufacturing, retail, transportation, and construction. The news will not be earth-shattering for average hourly and weekly hours worked, average hourly and weekly earnings, overtime, and labor participation as a whole. On balance, I do not project non-farm payrolls to exceed a +40,000 or to decline below a –10,000.
The dollar has risen for five consecutive days. I don’t believe the aforementioned will be good news for the dollar. On the other hand, the employment report may provide bond buyers with some reason to buy the 10-year Treasury bonds. Any rally to the 4.15% level should, in my view, be seen as a wonderful opportunity to be a seller. As for stocks, bulls will jump on the employment report (if my prognosis is right) and project that the Fed will now be on hold for near-term rate increases. Actually, a better reaction might be to place oneself in the shoes of the foreign currency, bond, and stock traders. Our economy is weakening. What does that mean for the dollar, our budget deficit, and our ability to rollover debt? Will the Fed try to add more liquidity to keep the economic fires alive? Will federal discretionary spending be accelerated?
Tomorrow we’ll see whether I have egg on my face. It’s certainly possible, but I am willing to risk my own funds on my own projection. That sets me apart from most others in financial circles.

1/6/05 Nimble

Anyone who has been reading my daily reports is familiar with my efforts to provide timely updates on announced plant closings and layoffs. In addition, beginning today, I shall endeavor to provide information on announced price increases so we can keep an eye out for inflation. Some recent price increases are those by P&G, Hershey’s, Whirlpool, Starbucks, Dow Chemical, Air Products Polymer, and yesterday’s 17% price rise announced by Great Lakes Chemical.

While we are on the subject of pricing, it is well to note the holiday action plans taken at Wal-Mart. Black Friday, the day after Thanksgiving, proved to be disappointing for the company. On November 30th, new reduced pricing took effect. A week later there was a second round of price markdowns, and some were below cost. The net effect was to have a holiday season slightly above plan. Here we had a soon-to-be $300 billion sales outfit demonstrating an ability to be nimble. Investors might take note. Black Friday should have been a big day for Wal-Mart. It wasn’t. The first three trading days of January should be good days for investors due to the inflow of reinvestment funds. It is a seasonal pattern at the beginning of a New Year. If Wal-Mart can react like they did, so can the average investor. Expectations frequently exceed results.

Ron Griess of the Chart Store has done a fine job in outlining the first five days of the month and the January Effect. For his analysis, he selected the DJIA from 1886-2004. He showed the results for all “first five trading days” of each month and all 12 months for the “Monthly Effect.” The probabilities of the 12 month time period being positive when the first five trading days of a given month are positive range from 71.4% (May) to 63.6% (October). The probabilities for the 12 month time period being negative when the first five trading days of a given month are negative range from 51.2% (December) to 31.6% (March). If one were making a decision to buy on the first five trading days rule for any given month, May would be the first choice followed by January (71.1%). Ron further states that the first five trading days rule does not appear to provide good odds for making a sell decision based on negative results. However, one might consider buying against the rule in March with the odds of the 12-month results being positive at 68.4%. It should be noted, he opines, if one were making a decision to buy on the “monthly effect” rule for any given month, January would be the choice either using full 12 months results (77.9%) or ensuing 11 months results (70.1%). The monthly effect rule, he stated, does not appear to have good odds for making a sell decision based on negative results. January at 61.9% is above average, but falls off to 50% when the ensuing 11 months criteria is applied.

Challenger Gray & Christmas reported that U.S. corporations accelerated their job cuts in December, bringing the total number of announced job reductions to more than 1 million for the fourth straight year. Job cuts increased 4.3% in December to 109,045, the fourth month above 100,000. It’s the highest total since January 2004 and the first time in nearly three years that planned layoffs have exceeded 100,000 for four straight months.

If stock and house prices decline, will consumer spending be undercut? Will this winter’s first cold spell mixed with snow and ice undercut the nation’s heating oil supplies? If interest rates continue to rise, will consumer confidence be undercut?

As for truly cutting the deficit, I am tired of DC hand jobs on this subject. In fiscal 2004, there were 10,656 projects in the 13 appropriations bills, an increase of 13% over the prior year. Between 2002 and 2004, the total number of pork projects increased 28%. The federal government has an $800 billion discretionary budget. When the discretionary budget is reduced, maybe then the federal budget will be reduced. Don’t hold your breath. Better you cover your private parts.

Federated will close its under-performing Metrocenter mall store in north Phoenix. Tuesday, the store’s 130 employees were told of the planned closing.

William Shakespeare: “Nimble thought can jump both sea and land.”


Wednesday, January 05, 2005

1/5/05 Never Risk What You Can’t Afford To Lose

Percentages are not guarantees, and that’s true even if the odds are historically 75% or 80% in your favor. That was witnessed over the last seven trading days as losses erased substantial gains from the past month. Yesterday, the Dow and the S&P 500 reached their lowest levels since the second week of December and the Nasdaq fell to its lowest close since November 30. Many reasons can be provided for the market retreat. Some might believe that the recent rally in the dollar could hinder export growth and thus add to our trade deficit. Others might believe yesterday’s $1.79 rise in crude to $43.91 a barrel could signal a new bull stage that could ring the inflation alarm. Others have noted that profit taking is on the rise. Others point to the results for GM and Ford. Toyota’s sales in December rose 18% while GM’s declined by 6.8% and Ford’s by 3.6%. In fact, GM’s market-share loss in 2004 more than wiped out its gains in 2001 and 2002. The combined share for Detroit’s automakers fell to its lowest point in at least 60 years, down to 61.5%. In 1994, their share was 73%. Others point to Bush’s plan for revamping Social Security and its impact on the budget deficit. Benefits for retirees would be calculated using inflation rates reflecting increases in consumer prices rather than wage rate increases over a worker’s 35 highest-paid years adjusted for standards of living near retirement age. Workers could divert 4 percentage points of their 6.2 percentage points in payroll taxes to private accounts up to an annual contribution of roughly $1,300. The worker’s remaining 2.2 percentage points in taxes would remain going into the social security system. Other market participants were distressed by the release of the December 14th FOMC meeting minutes in which some Fed members were more worried about inflation than originally thought due to the drop in the dollar, higher energy costs, and the possibility of slower productivity growth. All of these concerns could lead to future rate hikes in order to stem the pick up in inflation, which could become a risk to stable growth.

These FOMC notes illustrated some important observations. Fed members stated that “the economy was seen as likely to expand at a moderate pace, supported by accommodative monetary policy and financial conditions.” As an offset, “business investment was expected to decline a bit early next year in light of the expiration of the partial-expensing provision at the end of 2004… and recent indications of a softening in high-tech spending in the United States and elsewhere. The possible downshift in the pace of high-tech spending also raised the possibility of an erosion of profit margins that could result from a slackening in the pace of technology-led productivity growth and the associated increase in cost pressures.” At the same time, “on net, they saw the risks to stable underlying inflation as still balanced… participants generally expected that inflation would remain low in the foreseeable future.” I might mention the recent 7.9% drop in aluminum prices and the 7.6% decline in copper prices.

I would like to focus on two items mentioned in these FOMC notes. One is the recent flattening of the yield curve. The 10-year/2-year yield differential is down to 1.10 percentage points. Some Fed members remarked that “the flattening of the slope of the yield curve might signal that expectations of longer-term growth had been marked down.” The other point is what I consider a key element of the kernel of concern, and I have expressed it over and over again. “Some participants believed that the prolonged period of policy accommodation had generated a significant degree of liquidity that might be contributing to signs of potentially excessive risk-taking in financial markets evidenced by quite narrow credit spreads, a pick up in initial public offerings, an upturn in mergers and acquisition activity, and anecdotal reports that speculative demands were becoming apparent in the markets for single-family homes ad condominiums.” In my view, this excessive risk-taking coupled with excessive consumer and federal spending, the twin tower deficits, the low savings rate, and inflation outpacing wage gains are major roadblocks to our financial stability. Additionally, I am further disturbed by the notion that some FOMC members believe rising stock and home prices should provide an underpinning for consumption.

If you are looking for a worry-free economic scenario, it would be wise not to invest in the markets. It’s not just that the “market climbs a wall of worry.” Warning systems are not perfect. Timing risks are a challenge for any investor. It’s important to limit your losses. There will be losses. It’s not personal. It’s not a matter of pride or self-respect. Losses should be viewed as learning experiences. Don’t make the mistake twice.

There are many challenges in this New Year. For many, it’s not pleasant coming to work. There are hidden risks. Yesterday, “for strategic and economic reasons” Occidental Petroleum stated it will close its Armand Hammer plant in Lower Pottsgrove, PA “effective immediately.” The closing will put as many as 220 employees out of work. Management mentioned “this operation was unable to offset the harsh reality of a nearly 60-year-old facility using old technology to compete in a mature business in an increasingly global market.” OxyChem is completely abandoning the business of producing poly-vinyl resin, which is the plant’s main product. The Opelika plant in Tuscaloosa, AL closed its doors and 250 people are out of work.

As 2003 came to a close, I envisioned that the declining dollar and the twin-tower deficits would be the central economic themes for the coming 12 months. I suggested that dollar holdings be held to an absolute minimum. As 2004 came to a close, I envisioned that rising interest rates would be the central theme for the coming 12 months. As such, I have suggested several times that all debt instruments (excluding 3-month bills and convertible bonds) be removed from all portfolios.

John Leguizamo: “Latinos for Republicans--- it’s like roaches for Raid.”

U.S. weekly mortgage applications dropped 10.6% last week. Applications for purchase loans declined 13.7% while refinancing loans dropped 5.7%.

Tuesday, January 04, 2005

1/4/05 The Balancing Act

The first day of trading got off to a rocky start. The NASDAQ, the S&P 500, the Dow, the Russell, the small-cap S&P 600, gold, crude, natural gas, and heating oil all declined in price. However, there is reason to believe that hope is on the way. The second trading day of the year has been up about 75% of the time over the past 5 ½ decades.

When reading financial data, there is much from which to choose. Let’s look at the ISM Manufacturing Index for December. There was plenty to make one smile. The index rose, the order backlog gained, new orders jumped, and inventories expanded; however, and there usually is an however, the employment component fell 5 points to its lowest level since late 2003. It’s a balancing act.

September and October construction spending were revised upward. That’s the good news. However, November’s numbers fell 0.4%, but the total annualized outlays did slightly exceed $1 trillion; however, it was the first drop in 10 months and the worst since February 2003. Private construction declined 0.6%, the worst in almost four years. Residential and non-residential building also declined. Nevertheless, commercial construction did improve by 0.4% and, not surprisingly, government construction spending rose also. Thank goodness for the government.

We can depend on Wal-Mart. Sales for the past weekend exceeded plan, and the average ticket price drove comp sales for the last week. The company was so encouraged that they now expect December comp sales to increase 3%. As I have mentioned previously, the star performers were gift cards and food revenues. In the week ending December 31, card redemptions were running way ahead of the prior year. However, the after-Christmas period is one with higher markdowns, and that could impede profit margins. As gift cards become a larger percentage of holiday sales, the week after Christmas could become more important than the week after Thanksgiving. That may alter hiring plans for the holidays as well as the timing of price reductions.

As I have mentioned so often, Walgreen’s has been the most consistent grower for the past 30 years of all the companies listed on the NY Stock Exchange. It is one of the great companies. Yesterday, they announced its largest quarterly earnings in the last 16 quarters and another record quarter for both sales and earnings for their first quarter of fiscal 2005. Prescription sales in comp stores rose 11.3% in the quarter and their gross profit margins rose 101 basis points versus the year-ago quarter to 27.38 as a percent of sales. Meanwhile, Rite Aid’s December same-store sales declined 2.7%.

Economist Allen W. Smith described the Social Security trust fund. “The trust fund holds no marketable Treasury bonds, and the special issue IOUs it holds are nothing more than accounting entries showing that the government has ‘borrowed’ and spent every dollar of the $1.5 trillion surplus generated by the 1983 payroll tax increase, leaving the fund with no real assets.” Who do you think recommended that 1983 payroll tax increase? None other than Fed chairman Greenspan. What an irrational recommendation!

Diane Rowland, executive director of the Kaiser Commission on Medicaid and the Uninsured, a non-partisan health research group: “Medicaid is the health safety net, and when people start falling, there is nowhere to fall except crashing to the ground if Medicaid isn’t there.” State Medicaid spending is expected to jump almost 12% in 2005. People more than 65 years old make up just 25% of Medicaid beneficiaries, but the elderly account for 70% of the program’s costs. Much of that is nursing home care, and it consumes 17% of Medicaid dollars. Medicaid pays almost half of nursing home costs in this country. James Fossett, a senior fellow at the Nelson A. Rockefeller Institute of Government in Albany, NY, stated “Medicaid has become a 900-pound gorilla on states’ backs.”

The latest eSpending Report revealed that online shoppers in the U.S. spent $23.2 billion during the 2004 holiday season, excluding travel, and this represented a 25% increase from the prior year’s results. For the past three years I have described the growth in online shopping. It is having a profound impact on retailing. Stores have closing hours but the Internet does not. For many companies, eSpending exceeds catalogue revenues. Wal-Mart and Target benefited greatly from online sales. Without the growth in online and gift card sales, this holiday season would have been disappointing for both companies.

The CIO Magazine Tech Poll results for December report a sharp fall in IT spending projections to growth of 6.7% over the next 12 months, compared to November’s reading of 8.4%. It was the second lowest level in 2004. Importantly, CIOs report that IT budgets increased by an average of 6.6% over the last 12 months, down from 9.1% last month.

U.K.’s $1.9 trillion economy is projected to grow 2.6% this year, down from 3% in 2004. Their economy has expanded for 49 consecutive quarters; however, the recent three-month decline in house prices is taking a toll on growth. Deutsche Bank predicted a price slide of as much as 15% in 2005.

Less than 2.5% of the world’s water is fresh, and the lack of fresh drinking water is the main problem facing the survivors of the quake and the tsunami. Without fresh drinking water, the death toll could rise dramatically.

Yesterday, after struggling with empty beds and financial problems, Houston’s Bellaire Medical Center filed for Chapter 11 bankruptcy protection. The hospital is expected to close. It is licensed to operate 349 beds, and has more than 300 full-time employees and 350 staff physicians.

I would like to take a moment to discuss a currency strategy. I am becoming increasingly uncomfortable with the economic prospects for the euro countries, and particularly, Germany. As such. let me offer the following for your consideration. We have some pretty fancy profits in our long euro/short dollar position. It may be a good time to unwind that hedge. In addition, you might consider adding a long yen/short euro position.

Karl Rove: “9/11 is one of the great unifying moments, whether we like it or not, for America.”

Baghdad governor is assassinated.

Brazil experienced a record trade surplus in 2004 thanks to iron ore, sugar, and some other commodities. The surplus might narrow in 2005; however, Brazil’s financial picture seems to be headed in the right direction.

Bloomberg reported that the average estimate for 62 economists for November factory orders is an increase of 1% due to demand for commercial aircraft and capital goods. This should provide a firmer tone for this morning’s opening of trading.

Monday, January 03, 2005

1/3/05 Bifurcation

From a definition standpoint, bifurcation is the act of splitting into two branches. For our example, those two branches are chaos and order. If given a choice, we’ll all take the order branch. So let’s go with the order, and that is represented by the forecasts from a Wall Street Journal survey of 56 economists. Their consensus for 2005 is GDP growth of 3.6%, an unemployment rate of 5.1%, stable and/or falling oil prices, consumer prices rising 2.5%, the federal-funds rate rising to 3% by June and 3.5% from December, and only an 11% chance of a recession. Most stock market pundits call for a strong single-digit advance in the Dow and the S&P 500. There will be some ebb and flow in pricing structures. Blockbuster omits late fees; Delta Airlines reduces ticket-change fees, removes restrictions on Saturday-night stays, and prices from first-class to last-minute tickets; and a lower-priced iMac is introduced. On the other hand, GM and Chrysler have three price increases on many 2005 models while cutting production schedules and/or planning temporary plant shutdowns in order to balance inventory levels. January trading begins with gains in stocks and the U.S. dollar accompanied by warmer weather bringing us declining heating oil prices. Life is orderly in the world of finance. Only some questions remain unanswered, such as, the consumer’s spending plans for a new auto, appliance, and/or house as well as capital expenditure expectations for small and large businesses.

On the other branch we have chaos. That could result from many possibilities. Are there satisfactory returns in continuing to own capital assets, such as, stocks, bonds, and houses? What is the potential fallout from debt acceleration on the part of the consumer? What immediate impact could result from greenhouse gases causing world temperatures to rise and the arctic ice cap to melt? Will foreign countries place their financial trust in our currency and in our ability to rollover our indebtedness? Will our twin tower deficits topple our economic stability? What are the chances of further geopolitical shocks?

Maybe we should come to this conclusion. Why should we worry? Everything will turn out just fine. Ground Hog Day is around the corner. That’s a comforting part of the world of order.

Sunday, January 02, 2005

1/2/05 Rules Of The Road

How many readers listen to the daily weather report? How many weather forecasters predict a hurricane, a volcano eruption, an earthquake, or a tsunami? When you get into your car, presumably you watch the speed limit and look for warning signs, such as, a deer crossing. Do you think your car’s GPS system warns of a deer crossing the road? You can’t simply put your car speed on auto pilot, so to speak, and pick up a book and begin reading. You need to watch the road. You need to drive responsibly. Beginning Monday, trading will begin in this New Year. It will also be the start of the January effect. Remember that the five trading days between December 26 and December 31 saw the Dow up about 80% of the time? As we experienced, there is that other 20% of the time. Over the past 21 years, the average annual gain for the NASDAQ composite in the month of January has been 3.7%, and this index has risen 68% of the time in the month of January. Over the last 76 years, the SPX has experienced an average annual gain of 1.5% in the month of January, and it has risen 65% of the time in the month of January. Does that mean we should put our portfolios on auto pilot in the month of January? There is an adage that, as the month of January goes, so will the results for the market go for the entire year. Frequently, that has been the case. Why is January normally such a positive month for investment returns? There are billions of dollars that are invested in the beginning of the year, and secondly, it is human nature to begin the year on a positive note. Investors are optimistic in January. Come April, those same forecasts often appear too optimistic, and then the markets go into a decline for the next six months. Then, we head into November, and the rosy outlook for the coming year enters the picture. If this formula were always the case, then even mutual fund managers would find a way to beat the market averages. When it’s all said and done, only you have the responsibility for your portfolio. It’s a decision of your own choosing. To make the job even harder, you need to watch for geopolitical and geophysical disturbances, and this could even include the permafrost melting in Alaska. Think at least a season or two ahead. For example, if the earth is warming, what impact could that have on the air conditioning season in the height of the summer? What does it mean for power use? What impact could it mean for electric rates and/or blackouts? The picture gets a little complicated. It requires thinking and planning.

The Bush 5-year budget plan will be forthcoming in February. You can believe what is told to you or you could even think rationally and question the pile of manure being presented. There are two sides to the budget--- receipts and expenditures. Annual receipts are lower than when Bush came into office in January 2001. Every budget he submitted over-estimated the yearly receipts, and each budget under-estimated the yearly expenditures, and that doesn’t include expenditures for war. Keep your eye on supplemental appropriations. The latter are not included in the budget deficits. Why does this budgetary bombastic foolery matter? Even if the American public doesn’t care, it does matter to the world’s central bankers. They keep the lights on in Washington DC---- unfortunately. They fund our bulging annual Bush administration deficits. It’s not just the Fed printing too many dollars. The Fed is also acting as custodian for foreign holdings of U.S. securities, such as, agencies. These custodian holdings have risen in size by 25% in 2004, and have accumulated to over $1.3 trillion. Why do I bring up this matter? Because it matters. The custodian holdings are not included in M3. The government has a peculiar way with slight of hand. We also see it in the employment numbers with double counting, such as, one individual holding two jobs and that individual being counted as two employees.

Do not fret. There is a way to take advantage of this manure pile. Go with the flow in the Kyoto Protocol targets that take effect Feb. 16. It sets mandatory targets for industrial nations to reduce emissions by 2012. How do you profit by carbon dioxide, methane, or other greenhouse gases? You might consider the purchase of certified emission reductions. These credits are selling on the new European carbon market for about $10. That’s right. You can tell your friends that you are as happy as a pig in shit. As the earth warms, those credits might be worth more as we get closer to 2012.

Have ever heard of the dogs of the Dow? That’s another investment vehicle. Sometimes it works. Sometimes it doesn’t. GM would be such a candidate for 2005. Before you buy GM, please note that it took only 14 years for Toyota to go from selling 1 million cars in the U.S. to 2 million in 2004. In 2005, Toyota expects its U.S. sales to increase to 2.15 million units. Meanwhile, GM and Ford cut their North American production 5.6% in the second half of 2004 in order to reduce inventory levels, and they remain bloated. They have trimmed their combined output in North America for the first quarter of 2005 by more than 7%. Chrysler will temporarily idle six plants next week in Michigan, New Jersey, Missouri, Canada, and Mexico to reduce overstocked models. GM is expected to sell 8.5 million cars and trucks this year. Toyota’s President Cho stated Toyota plans to increase global sales to 9 million within eight years. Whose lunch do you think Toyota will be eating over the next eight years? Maybe the dogs of the Dow has more than one meaning.

We will be discussing more rules of the road. Hopefully, there’s something for everyone. Till next time, I’m off on my pursuit of profitable Clean Development Mechanisms (CDMs), such as, the pig manure pits near Santiago, Chile.