Saturday, February 26, 2005

Revisiting Reality

2/26/05 Revisiting Reality

I spoke too soon. Only yesterday I mentioned the ray of sunshine from the Conference Board's Help-Wanted Ad Index. Bam! Wouldn't you know it. My smile only lasted one day. U.S. employers nationwide initiated 2,564 mass layoffs in January, which accounted for 263,952 initial claims for unemployment. This was an increase from 1,614 mass layoffs in December 2004 resulting in 161,271 job cuts. Importantly, it represented an increase from the year-ago period of January 2004 with 2,428 mass layoffs and 239,454 lost jobs. Wall Street preferred to focus on the revised GDP number for the fourth quarter. Due to a statistical error, exports to Canada had been understated. That error had been well noted some two weeks ago. It's often said that bull markets ignore bad news, and freqently the tape paints a montage of stock prices that doesn't reflect reality.

This coming Tuesday there will be more bad news. That's when the February auto sales will be released. They will be punk for GM and Ford. What else is new? The new might be additional production cuts that will be forthcoming.

I'm so delighted that the election in Iraq went so swimmingly. How is it that this blood-splattered country has left about 1,500 U.S. soldiers dead since we invaded Iraq in March 2003? The number of wounded has escalated so rapidly that it's difficult to get a handle on whether it's 14,000, 15,000, or more wounded over the past 23 months.

There are other bombs outside of Iraq. In 2005, bank credit has exploded in the U.S. to the tune of $180 billion. Fortunately, the Fed's printing press has slowed down into the mid-single digits. Unfortunately, inflation has not been so kind, and this fact is reflected in the Goldman Sachs Commodity Index being up 13.7% in 2005. This index has been dwarfed by the 25% rise in ExxonMobil stock in the first seven weeks of 2005. This rise may help to explain in part the recent gain in the Dow and the S&P 500.

The auto industry in China may have hit a road bump; however, infrastructure demands are alive and well. The China Electricity Council stated "China's consumption of electricity this year may rise 12%."

According to Mark Lundeen, in 1925, the U.S. had only $3.96 billion in coins and paper dollars in circulation. Eighty years later, in 2005, there was a slight upward adjustment to $750.27 billion or 187 more dollars circulating this year than for every dollar in 1925. Let's add the change in population to the mix. In 1925 there were 116 million people in the U.S. and now there are 294 million. Simply put, in 1925, there was $34,000 per person in circulation and now there is $2,550,000 per person. That number grows daily, and so does each citizen's share of our exploding national debt. Should anyone care? Not when your home is making you rich and you can use the increasing equity for ATM purposes. That's called reality in real-time.

Friday, February 25, 2005

Housing

2/25/05 The news coming out of the housing industry simply blows me away. The CEO of Pulte Homes stated he believes his company will record 20% annual growth over the next three years. That's after knocking the cover off the ball for the past three years. It gets better. Coldwell Banker announced its 2004 sales of U.S. luxury homes valued at $1 million or more surged to an all-time high of $35.5 billion, surpassing its previous record of $23.3 billion set in 2003, a 52% increase in luxury sales. Coldwell Banker's CEO stated "the luxury real estate market continues to thrive. We expect the luxury home sales market to remain solid throughout 2005." Let's take a look at an example of today's market---below the $1 million luxury level. In San Francisco this week, not in a prime neighborhood, a 975 sq. ft. apartment was listed for sale at $649,000. The seller received two-dozen bids, and four were in excess of $850,000. In another example, a luxury home in a prime neighborhood is being offered at approximately $1,375 a sq. ft. As Coldwell Banker's CEO remarked, there is "high demand from baby boomers who have more disposable income than any other previous generation, and continued attractive interest rates."

I committed two very stupid mistakes. As I mentioned several times, while the dotcom stocks were in their frenzy period, I was buying housing stocks. No one wanted them. They were like watching paint dry for months and months and months. I did make three and four and in one case five times my investment. I sold way too soon. Despite the old saying "you can't get hurt
taking a profit," I feel stupid every day looking at the prices for Toll, Pulte, Beazer, and four others. The other mistake was misreading the long-term housing potential in the U.S. Easy credit, record low interest rates, baby boomer demand, and foreigners buying because the weak dollar made our real estate increasingly attractive---generated a housing boom. Despite studying everyday, it became increasingly difficult to find other stocks with better risk/reward and value than the housing stocks I had sold.

Finally, yesterday there was some good news out of the Conference Board on their Help-Wanted Advertising Index. It increased 3 points in January to 41, up from 38 one year ago. It was the first ray of sunshine in some time.

The Varroa mite has been attacking Honey bee larvae in their hives. Some beekeepers report that 50% or more of their cultivated hives have been destroyed. In California, where the 2004 estimated farm value of the almond crop was almost $2 billion, the shortage of bees is potentially catastrophic. Almond trees must have Honey bee pollination in order to bear its nut. The mites have developed a resistance to the present efforts to control their population. As it stands today, beekeepers are in a tough fight. Lee Heine, Chairman of the Board of the National Honey Board, stated "usually, a few winners can emerge in any agricultural shortfall situation. Right now there are absolutely no winners except, maybe for the mite itself."

France's unemployment rate rose to 10%, a 5-year high.

Yesterday, the Treasury auctioned $24 billion in 2-year notes. The response was muted and the yield was 3.498%.

UPS is closing its Dayton hub. A total of 1,400 jobs will be lost. Where is Pastor Parsley now?

The Commerce Dept (what commerce do they generate?) reported that, in January, there was a 5.3% drop in orders for transportation goods.

Australia's Treasury Secretary Ken Henry spoke to a meeting of Asian treasurers in Sydney yesterday. He fears the U.S is heading for a financial crash because of the record trade and budget deficits. He likened the enormous flows of money pouring into the U.S. to "worryingly reminiscent of Federal Reserve chairman Alan Greenspan's warning in 1996 of irrational exuberance in U.S. stocks." Henry stated one could not tell how long it would keep going, but it would burst eventually. From recent comments, Toll and Pulte and Coldwell Banker believe housing will remain strong for some time. Only the Shadow knows when the bubble will burst.

Thursday, February 24, 2005

In Response To A Request

This morning I received a request from Charles Kirk of the Kirk Report to create a permalink for my blog. As I mentioned to Charles, I never heard that word before he mentioned it. I am not technically proficient. I hope I have done this properly. The link should be as follows:
http://melduke.blogspot.com/atom.xml
If it was not done properly, I trust I will be informed.

permalinks

permalinks

permalinks

This morning I received a request from Charles Kirk of the Kirk Report to create a permalink for my blog. As I mentioned to Charles, I never heard that word before he mentioned it. I am not technically proficient. I hope I have done this properly. The link should be as follows:
http://melduke.blogspot.com/atom.xml
If it was not done properly, I trust I will be informed.
2/24/05 Don't Be A Putz

If wage gains trail inflation, then there is a problem. Yesterday, the BLS announced that real average weekly earnings from December 2004 to January 2005 fell by 0.2% after seasonal adjustment. From January 2004 to January 2005, after deflation by the CPI-W, average weekly earnings decreased by 0.7%. How can anyone be optimistic about inflationary trends when earnings for both full-time and part-time workers can't hold their own in our consumer-based economy. Do you really believe that one can ATM the home or depend on the carry trade well into the future. Are you a putz?

If you listen to the Wal-Mart bashers, you'd think the company is responsible for our trade deficit. Lee Scott, their CEO, spoke yesterday to a group of business leaders. He stated that 270 million shoppers entered their 3,500 plus stores last year. He related that the company acted as the bargaining agent for these families and that Wal-Mart saves its customers up to $100 billion a year. He stated "these savings are a lifeline for millions of middle and lower-income families who live from payday to payday. In effect, it gives them a raise every time they shop with us." Scott went on and related some other important facts. Last year, Wal-Mart collected $10.2 billion in state and local taxes, money that went back to communities for police, fire protection, and schools. In 2005, the company will create an estimated 100,000 new jobs in the U.S., up from 83,000 in 2004. Do you know any other company creating anywhere close to 100,000 jobs? Not many companies employ 100,000 people. Get this! Wal-Mart purchases goods from more than 68,000 U.S. suppliers and supports more than 3.5 million supplier jobs. In 2004, the company spent $137.5 billion with U.S. suppliers. Don't be a putz. Stop bashing Wal-Mart.

You had better think twice before believing $51 plus crude does not make a difference. Cars are a vital part of our economy. According to the annual California State Economic Impact Report, in 2004 California's franchised new car dealers generated 20% of all retail sales in the state. Total revenue from goods and services sold at California franchised dealerships was almost $96 billion in 2004 (more than the GDP in most countries) and total full and part-time employment stood at 149,523. Dealership payrolls were over $9.4 billion, and California dealers spent nearly $12 billion for goods and services from other businesses in the state. Franchised dealers in California paid or collected over $7 billion in federal, state, and local taxes on over $699 billion in taxable sales for 2004.

According to a new study by the Center on Budget and Policy Priorities, state and local governments could lose $214 billion over the next five years under the proposed Bush budget plan. Losses would be in federal grants for education, housing transportation, and other domestic programs plus forfeiting federal funds for veterans' health care, parks, research, and law enforcement.

Yesterday, France sold a 50-year bond. Greece is planning to issue a 30-year government bond. Britain is studying the possibility of issuing 40 and 50-year gilts. Meanwhile, the average duration of U.S. government debt is 3 years. The Fed Chairman has warned repeatedly that interest rates will rise in the U.S. If so, why is our treasury department not locking in these record low yields for 30 years? Why be a putz and fight the Fed?

According to the Financial Times, EADS is closing in on a $25 billion UK air tanker deal. Boeing has told our government that they are the only supplier capable of providing air tankers. I guess they never considered Airbus a competitor. When you underestimate the competition, then you are a putz.

Wednesday, February 23, 2005

2/23/05 Yesterday Was Not Just Another Day

It was more than just the Dow having its worst drop since May 19, 2003 or crude rising above $51 a barrel or gold, silver, and the CRB rising smartly to multi-week highs or consumer confidence falling or interest rates rising or the dollar dropping or large layoffs being announced or timid projections provided for this year's first quarter. It was a combination of all those developments in one single day, and the reaction in equities took place on large volume. You will be hearing and reading that stocks are oversold on a technical basis. So what. The idea is to keep your eye on the ball. Risks have been increasing for weeks. On strength, I continue to suggest cutting back on exposure and increasing liquid assets.

The CPI will be released this morning. It will not reflect that Rio Tinto increased iron ore prices by 72% due to "continuing growth in steel consumption, particularly in China." It will not reflect the recent price rise in soybeans due to dry weather in Brazil and Argentina, which together grow 45% of the world's soybeans. In 2004, prices for soybeans declined about 37% due to oversupply. That situation will be quite different this year. Despite the statements from the Fed, inflation is alive and well, and that fact is bad for stocks and bonds.

Lands' End will cut 375 jobs. Celestica will close its Mt. Pleasant, Iowa plant and 334 jobs will be lost. Acuity will cut 1,100 jobs in Lorain, Ohio. There's nothing Pastor Parsley can do about that.

The first quarter for Lowe's will be below current Wall Street estimates.

Net long exposure in gold and silver is on the rise. That is reflected in the latest weekly COMEX figures.

The Conference Board's February survey revealed that consumers' outlook for the next six months lost ground. Those anticipating business conditions to improve declined to 17.8% from 22% in January. Consumers were less optimistic about the availability of jobs and any improvement in the months ahead for their incomes.

On an annual basis, Wal-Mart spends more than $1 billion on electricity for air-conditioning and lighting for their stores. In Texas, the company has experimented with buying its own power by establishing an energy trading desk. It has been quite successful, and cost reductions have been achieved. This strategy may be expanded to Arkansas, Lousiana, and California.

Last week the Fed Chairman appeared before the House Financial Services Committee. There, he encountered Ron Paul of Texas. As Rep. Paul noted, the Chairman "utterly repudiated the arguments he made 40 years ago...If he was so wrong in the past, why should we listen to him now?...First, the Federal Reserve does not mimic a gold standard by any measure...Second, inflation is a much greater problem than the federal government admits...Third, Fed policies do indeed have adverse political ramifications...It's not enough to question the wisdom of Mr. Greenspan. Americans should question why we have a central bank at all, and whose interests it serves... Americans should not tolerate the manipulation of our economy and the inflation of our currency by an unaccountable institution."

Tuesday, February 22, 2005

2/22/05 Diversifying

Most money managers believe in a diversified portfolio. For several years I have written about the non-diversified global central bank currency holdings, which have used the U.S. dollar as its core dependency. Slowly but surely, diversification is on the move. South Korea, our ally, has the world's fourth largest forex holdings---after Japan, China, and Taiwan. The Bank of Korea announced it plans to diversify its reserves beyond dollar holdings. In addition, it should be noted that information from our treasury department lists Korean investors as the fifth-largest entity in our treasury bonds. Not surprisingly, our currency had its worst drop in more than four months. There will be many other central banks following in the footsteps of the Bank of Korea. You can expect many bad days for the dollar in the future. Our twin tower deficits cement that further decline.

The sharp decline in the dollar was accompanied by a further rise in crude oil to $49.35 a barrel, and this ensures another price increase at the pump. Cold weather was given as the primary reason for the rise. It is well to remember that currently oil purchases are made in dollars. Every time the dollar drops, as it did today, the producer of oil sees the value of the cash receipts diminish. A rise in the price of oil helps to offset the drop in the dollar.

Winn-Dixie Stores filed for Chapter 11 bankruptcy. The company has 920 stores. By comparison, Whole Foods Markets will open its new corporate headquarters in Austin on March 3 as well as a landmark 80,000 square foot store in Austin. After 25 years, the company is still growing smartly and soon there will be 200 stores. Of course, the stock at $100 or so per share does reflect that growth. Shopping in their landmark store will not be cheap, but it may prove cheaper than buying the stock at these levels.

Not many companies lift their yearly profit guidance from 30 to 40%. That's not a stretch with the net profit in the six months ended December 31 up 73% on revenue growth of 37%. The company is Billabong International, the Australian surfware and apparel outfit. With annual profits closing in on $120 million, sales will begin to approach $1 billion. The stock had a good rise on the news, but the future looks bright. As long as there are ocean waves, there probably will be surfers with Billabong wear.

Talking about water, for over 25 years, I have had place in my portfolio for companies serving the water industry. As a commodity, I continue to feel it is the most underpriced global must-have item. That brings me to Great Lakes Chemical (GLK). In 1993 and 1994 the stock sold over 70. In 1996 it appraoched 70. Between 2002 and the present, the stock has been trading in a range of roughly 20 to 30 and now is close to the mid-point of the range. The company makes specialty chemical solutions that treat and purify water, waterless fire protection systems, cleaning products, and various pest control and flame retardant items. At some point, converting salt water to purified drinking water will become a necessity for the world's growing population. There just isn't enough water to go around. GLK has recently had some managerial changes and it has been beset by rising commodity costs. It was only recently that the company announced various product price increases. The stock has not been in my portfolio for about 8 years, but a closer look may be in order. They should start to do better and their $1.6 billion in sales should grow in 2005. This should be viewed as a 2 to 3 year holding for a patient investor. If you watch the paint dry, GLK is not for you. It's more likely to catch Buffett's eye. He was a stockholder some years back.

Monday, February 21, 2005

2/21/05 Finishing Touches

Just because acquiring another company creates larger market share, doesn't mean the combined company will become a fiercer competitor. Dell was delighted after HP acquired Compaq. Up until now, Teva has been the number one generics manufacturer. Novartis announced buying Hexal AG and Eon Labs for $8.3 billion in cash. Novartis entered the generics business in 1996 by purchasing Sandoz. The latter's generic division was its slowest grower last year. With today's announcement, Novartis will become the world's largest generics manufacturer, and will best Teva in market share. I'm sure Teva is delighted with the Novartis purchase. In less than 5 years, generics will become a $100 billion a year business. The best will continue to grow market share. Teva will, in my opinion, outperform Novartis in years to come.

In a recent survey commisssioned by Visa of 800 consumers earning at least $125,000 in annual household income (placing them in the top 7% of all Americans), 72% of the high-income earners stated they clip coupons, compared with the national average of 65%, and 66% said they shop at discount stores, compared with 47% of consumers on average.

Comptroller General David Walker of the GAO discussing Social Security: "The left hand owes the right hand, and that has legal, political, and moral significance. But it doesn't have any economic significance whatsoever. There are no stocks or bonds or real estate in the trust fund. It has nothing down...The trust fund gives a very false sense of security about where we are and how much time we have." A court of law might disagree with Walker. The U.S has $1.6 trillion in obligations to Social Security, and they will be funded and paid. Those monies were taken from taxpayers and their employers. Either that, or the U.S. will be in default on its debt.

Did you see the latest Univ. of Michigan consumer satisfaction index? It showed the first year-to-year drop in satisfaction with e-retail, such as, with Amazon, eBay, and Charles Schwab. We need to monitor this situation.