Saturday, March 12, 2005

Two Strikes

3/12/05 Two Strikes

If you’re an Asian central bank and you are long billions of U.S. government bonds denominated in U.S. dollars, the hurt is not overbearing when only the dollar is declining in value. The banks have taken that first strike looking with the bat on their shoulder. However, over the past several weeks, the game has changed. Bond prices have declined as the yield on the 10-year Treasury rose from 4% to 4.54%. That’s strike two, and some of the banks have taken the bat off their shoulder, such as, South Korea. They have chosen to swing for diversity away from the U.S. dollar. Strike three is called when the foreign banks shun both our U.S. debt instruments and the dollar.

While U.S. bond and stock investors are fighting their respective markets, commodity investors are having a field day. The Goldman Sachs Commodities Index is up 20.4% year-to-date and the CRB is up 12.2% this year. Such increases can make the inflation rate build up a head of steam. This week, coffee prices rose to a 5-year high, and P&G announced a 12% increase for Folger’s.

At the beginning of the week, I mentioned the trade gap news being released on Friday. Once again, imports rose faster than exports. In January, oil prices slipped and they did not contribute to the near-record $58.3 billion trade gap for the month. That will not be the case for February’s numbers, which could exceed $59.5 billion. Why? Because excluding petroleum, the January U.S. trade gap grew 7.5% due to the increased imports of consumer goods. We have a most distressing situation in our country. While debt is growing faster than income, imports are expanding faster than exports. It’s no wonder the dollar is declining and bond yields are rising.

e. e. Cummings: "I'm living so far beyond my income that we may almost be said to be living apart."

Meanwhile, China’s exports continue to exceed their imports and India’s exports are expected to grow by 22% in the year that begins on April 1, 2005.

Japan Metal Daily reported that Nippon Steel will increase the price of steel by more than $96 a metric ton.

Our liquidity machine continues to crank it out. In the latest weekly figures, M3 rose $16 billion to a record $9.527 trillion. Bank credit increased by $5 billion to a record $6.975 trillion. Total commercial paper rose by $10.3 billion to $1.444 trillion, the highest level in over three years. Too many dollars and too much credit make for a deflating U.S. dollar and pave the way for higher inflation. Our federal indebtedness will not go away with smoke and mirrors. It will poison our economic stability.

Arthur Schopenhauer: "All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident."

With crude approaching $55 a barrel, many airlines increased their fares for the second consecutive week. The rise was $5 to $10 each way. Delta decided to take matters in their own hands. In addition to raising fares, they are removing pillows and food. That approach is hardly consumer friendly.

As mentioned previously, France issued 50-year bonds. On Tuesday, Telecom Italia issued the first 50-year corporate bond. The UK and Germany are expected to issue their 50-year bonds. Meanwhile, the average duration of U.S. government debt is 3 years. With bond yields on the rise, a short duration is a recipe for disaster.

Housing prices in California have risen to the point where only 18% of the state’s households could qualify to buy the state’s median priced home in January--- five percentage points lower than a year earlier. The January 2005 housing affordability rate was one percentage point below that of December 2004, according to the California Association of Realtors. In Contra Costa County only 10% of residents could afford a house in January, and in San Francisco, the percentage was even less. When it gets to zero, you’ll know the top was reached!

E. Wilson: “To sell something, tell a woman it's a bargain; tell a man it's deductible.”

Two Strikes

3/12/05 Two Strikes

If you’re an Asian central bank and you are long billions of U.S. government bonds denominated in U.S. dollars, the hurt is not overbearing when only the dollar is declining in value. The banks have taken that first strike looking with the bat on their shoulder. However, over the past several weeks, the game has changed. Bond prices have declined as the yield on the 10-year Treasury rose from 4% to 4.54%. That’s strike two, and some of the banks have taken the bat off their shoulder, such as, South Korea. They have chosen to swing for diversity away from the U.S. dollar. Strike three is called when the foreign banks shun both our U.S. debt instruments and the dollar.

While U.S. bond and stock investors are fighting their respective markets, commodity investors are having a field day. The Goldman Sachs Commodities Index is up 20.4% year-to-date and the CRB is up 12.2% this year. Such increases can make the inflation rate build up a head of steam. This week, coffee prices rose to a 5-year high, and P&G announced a 12% increase for Folger’s.

At the beginning of the week, I mentioned the trade gap news being released on Friday. Once again, imports rose faster than exports. In January, oil prices slipped and they did not contribute to the near-record $58.3 billion trade gap for the month. That will not be the case for February’s numbers, which could exceed $59.5 billion. Why? Because excluding petroleum, the January U.S. trade gap grew 7.5% due to the increased imports of consumer goods. We have a most distressing situation in our country. While debt is growing faster than income, imports are expanding faster than exports. It’s no wonder the dollar is declining and bond yields are rising.

e. e. Cummings: "I'm living so far beyond my income that we may almost be said to be living apart."

Meanwhile, China’s exports continue to exceed their imports and India’s exports are expected to grow by 22% in the year that begins on April 1, 2005.

Japan Metal Daily reported that Nippon Steel will increase the price of steel by more than $96 a metric ton.

Our liquidity machine continues to crank it out. In the latest weekly figures, M3 rose $16 billion to a record $9.527 trillion. Bank credit increased by $5 billion to a record $6.975 trillion. Total commercial paper rose by $10.3 billion to $1.444 trillion, the highest level in over three years. Too many dollars and too much credit make for a deflating U.S. dollar and pave the way for higher inflation. Our federal indebtedness will not go away with smoke and mirrors. It will poison our economic stability.

Arthur Schopenhauer: "All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident."

With crude approaching $55 a barrel, many airlines increased their fares for the second consecutive week. The rise was $5 to $10 each way. Delta decided to take matters in their own hands. In addition to raising fares, they are removing pillows and food. That approach is hardly consumer friendly.

As mentioned previously, France issued 50-year bonds. On Tuesday, Telecom Italia issued the first 50-year corporate bond. The UK and Germany are expected to issue their 50-year bonds. Meanwhile, the average duration of U.S. government debt is 3 years. With bond yields on the rise, a short duration is a recipe for disaster.

Housing prices in California have risen to the point where only 18% of the state’s households could qualify to buy the state’s median priced home in January--- five percentage points lower than a year earlier. The January 2005 housing affordability rate was one percentage point below that of December 2004, according to the California Association of Realtors. In Contra Costa County only 10% of residents could afford a house in January, and in San Francisco, the percentage was even less. When it gets to zero, you’ll know the top was reached!

E. Wilson: “To sell something, tell a woman it's a bargain; tell a man it's deductible.”

Friday, March 11, 2005

Life-changing Trauma?

3/11/05 Life-changing Trauma?

In the state of California, a median single-family home costs $485,700. Nineteen of the 25 cities with the least affordable housing are in California. The median price for a home in the San Francisco Bay Area is $666,740, and it ranks as the least affordable place in the state. On the other hand, judging from comparable single-family home statistics, buying a house in the Midwest is not a life-changing trauma. Maybe conditions in California are about to change. The state Senate majority leader and the Governor have proposed easing a landmark California environmental law in order to increase house construction. If passed, the supply and demand for houses in California will be altered, and with it, prices too may be altered.

According to Claudio Borio and William White, economists at the Bank for International Settlements, "indicators of risk perception tend to be lowest closest to the peak of the boom."

Yesterday, we were treated to a retreat in the price for crude. There was a decline of about $1.25 a barrel. Today, the International Energy Agency upped its 2005 forecast for oil demand by 330,000 barrels per day to 84.3 million barrels per day. The Agency raised its forecast for China’s oil demand. It should be noted that China’s crude oil imports in the months of January and February dropped year-on-year by 13%.

Our Fed Governor is most concerned by our fiscal deficit. Yesterday, it was reported that our Federal government deficit in February rose to $113.9 billion, up from $96.7 billion in February 2004. So far in 2005, the deficit amounts to $223.4 billion, and that does not include the increased expenditures for Iraq and Afghanistan.

Late in the day yesterday, there was good news from Intel. They upped their forecast for quarterly revenues, and due to lower costs, margins can be expected to improve by about two percentage points.

The news from Linen ‘n Things was not so good. Due to a decline in same-store sales, the company expects a first quarter loss of 8 to 9 cents rather than a 6 to 8 cent profit.

In the first two months of this year, China reported an $11.1 billion trade surplus and also stated that inflation rose by 2.9%. During this period, trade with the U.S., China’s largest export market, rose 22% to $26.6 billion. It should be noted that China’s overall imports dropped 5% in February, the first decline in more than three years. That alone should provide a further clue to our growing trade account deficit. The figures will be released this morning.

Yesterday, the Labor Department reported weekly jobless claims rose 17,000 to 327,000 to their highest level since January 8. The 4-week average rose by 5,750 to 312,000, and the continuing jobless claims increased by 39,000 to 2.70 million.

Edward Chancellor: “Speculative bubbles are invariably associated with the rapid growth of credit. Credit inflates the value of assets, providing collateral for further borrowing and enabling people to spend more and save less. Credit creates an illusion of prosperity without its substance.”

Thursday, March 10, 2005

Champagne That's Been Defizzed

3/10/05 Champagne That’s Been Defizzed

At approximately 5:35PST on Tuesday, the Mt. St. Helens volcano exploded and ash burst 7 miles into the air. It was a clear evening and the many picture takers got a good view of the blast. Even with four scientific instruments within the crater, there was no advance warning and no seismologist is sure why the blast occurred. The biggest puzzle was the absence of a vent in the new lava dome, which is taller than a 55-story building. Hence, the question remains. Where did the ash and rocks come from without a vent? Ash was found on cars over 100 miles away. Still, seismologists insist the molten rock had lost most of its gas content. The description was “it’s sort of like champagne that’s been defizzed.” The USGS Geologist Jon Major insists the volcano poses no threat outside the immediate vicinity of its crater. How can they be so sure when they couldn’t predict Tuesday’s blast and thought everything was calm and normal?

How can you tell when the bond and stock markets have been defizzed? It’s not tough after the fact. Just look at a chart of the Nasdaq for the past five years. The idea is to avoid the cork from popping and letting the air out of your portfolio. It’s tough to predict. Bear markets don’t come along every day but tops to markets are much more frequent. Now that 10-year Treasury bonds yield 4.51% do you believe that 4% yields will not be with us any time soon? They were with us less than two months ago. Put another way, maybe the easy money has been made in bonds over the past several years, and possibly crumbs are left on the table. That’s not enough for a meal in my book.

The economy doesn’t like inflation. Yesterday, the CRB Index rose again and to the highest level since January 1981. Everyone is talking about oil, metals, wheat, soybeans, etc. All of a sudden, inflation worries even appear in the Fed Beige Book. Where has everyone been for the past 12 to 24 months? There have been signs that inflation was about to erupt. You didn’t need a seismologist’s instrument.

The dollar has been declining for over two years. The decline has cost Japan a bundle. Yesterday, Japan’s Prime Minister Junichiro Koizumi stated his country “in general” needs to consider diversifying the investment of its foreign reserves. He didn’t make that remark for his health. It was a soft kick to the groin area. Diversification will take place. It’s already happening at other central banks. The trend is in the early stages. The lower dollar will bring forth higher oil prices, reduced consumer buying power, and a lower standard of living for Americans. The Fed cannot get us out of this morass by simply printing money. The dollar has been defizzed.

Forbes ranked Forest Laboratories as the best managed company in the Drug and Biotechnology industry for 2004. The company is 50 years old and employs 5,000 people on a global scale. Forest Labs has grown organically, and continues to do so with the exceptional talent of 700 scientists and researchers and a salesforce of 2,800. Over the years, I have added to my stock position. Now is one of those times. The company’s fiscal year will end this month. Annual revenues exceed $3 billion and pre-tax income is approaching $1 billion. With a market cap of $14 billion, the stock is selling for a p/e of roughly 15 on the year that begins next month. The company is about one-half through its plan to repurchase 30 million shares of stock. The 52-week range is approximately 36 to 77. Forest is well positioned with new treatments for ischemic stroke, pain, and asthma in addition to their established antidepressant, Alzheimer’s, hypertension, and anxiety products. In sum, the company’s strengths can be found in the central nervous system, cardiovascular, respiratory, and endocrinology areas. At $41 this stock is not for everyone. It should be viewed as a long-term investment only. However, I believe it offers unusual potential for those wanting to participate in the ethical pharmaceutical industry.

Lucent plans to close a research and development site in Westford, Mass. and move its 40 jobs to India. The company will close a Landover, MD. plant that also works on the PacketStar PSAX device, which is used to bundle voice, data, and video for transmission, and lay off 110 workers. The work done at the two sites will be sent to Lucent’s Bangalore, India facility. Since 2002, Lucent has shaved about $1 billion in general and administrative expenses. In my view, the market for Lucent shares does not reflect its potential.

Wednesday, March 09, 2005

You Be The Judge

3/9/05 You Be The Judge

Yesterday, Fed Governor Bernanke stated he was optimistic that core PCE inflation would stay in his “comfort zone” of 1 to 2% this year. William Poole, Fed Bank of St. Louis President, stated that inflation expectations were well contained. Meanwhile, yesterday the CRB Index rose for the eighth straight day and surged to a new 24-year high. March’s gains were on top of the 7.1% rise in February, the most in any month since August 1983. Commodity prices are up 15% this year. Crude is near $55 a barrel. Gold topped $440 an ounce. Copper reached a 16-year high. Aluminum, nickel, zinc, lead, and tin joined in the rise yesterday. Many believe the increase in commodity prices will be with us for some time. Lehman Bros. stated crude will average $43.25 a barrel this year before rising to $46 in 2008. The U.S Energy Department stated yesterday that crude prices are likely to remain in the high to mid-40’s through 2005 and 2006. Meanwhile, mergers are taking place in the metals field. Melbourne-based BHP Billton, the owner of the world’s largest copper mine, offered to buy WMC Resources Ltd. for $7.3 billion. Noranda announced an agreement to acquire Falconbridge and exchange 1.77 of its shares for each Falconbridge, a large nickel producer.

With commodity prices reaching new multi-decade highs, it is not surprising that the dollar is trading at a two-month low against the euro, and it comes as no surprise that longer-term U.S. Treasury yields are beginning to rise. In early morning trading today, the yield on 10-year Treasury bonds rose to a high of 4.45%, the highest yield since last August. Today and tomorrow there will be auctions of 5-year and 10-year Treasuries. It would be wise to make note of the reception for these issues. Will the bidding indicate any lost confidence on the part of Asian central banks in our dollar? We should remember that the U.S. must attract $2 billion a day in capital to cover its current account deficit.

There appears to be a disconnect with the consumer. The Federal Reserve announced that consumer debt rose at an annual rate of 6.6% in January, the fastest pace in three months. In December, borrowing increased by $8.7 billion and in January the increase was $11.5 billion. At the same time, the IBD/TIPP Economic Optimism Index fell to a nine-month low of 53 in March. The six-month outlook declined t0 48.6, a 24-month low, and confidence in Federal Economic Policies dropped to 48.6. Raghavan Mayur, president of TIPP, observed that “Americans’ concerns about the general economy have yet to spill over into their own personal finances.” It’s only a matter of time until the rising consumer debt load capsizes our economic vessel, which appears less globally seaworthy each and every day. The Economic Optimism Index’s March decline was marked by 18 of 21 demographic groups falling.

Presently, 47.7 million Americans who are retired, disabled, orphaned, or widowed, are on Social Security or roughly one-sixth of our population.

Alcoa announced cutting 20% of their salaried staff in its Quad Cities facility. Connors Bros. merged with Bumble Bee Seafood in March 2004. A year later, they are closing a sardine-canning factory in Bath, Maine, and 50 employees will lose their jobs. Fifty-five years ago there were 46 canneries in the state. Now there will be just one. Yakima Resources will close its sawmill and plywood plant in Yakima and lay off 118 workers. Great Batch Technologies will close its Carson City, Nevada pacemaker battery plant and move the operations to Tijuana, Mexico. The move will affect about 125 employees.

SAP agreed to acquire Retek for $496 million; however, the bid was topped by Oracle’s $525 million offer.

Less than two weeks ago, I mentioned that Great Lakes Chemical offered, in my view, good long-range potential. I was wrong. It offered short-term potential. Specialty chemicals group Crompton Corp. (CK) said it has an agreement to buy Great Lakes Chemical Corp. (GLK) in a stock-based deal valued at $1.8 billion. Terms set Great Lakes shareholders to receive 2.2232 shares of Crompton for each share of Great Lakes they hold, a 10.1% premium to the Tuesday close. Combined, the companies had 2004 revenues of more than $4.1 billion. The deal price includes $250 million of Great Lakes net debt and minority interest. The new company will be owned 51 percent by Crompton shareholders.

Worldwide prescription drug industry sales grew 7% in 2004 to $550 billion, their slowest rate of growth since 1998. In 2003, sales grew 10%. Meanwhile, China was the fastest-growing market, up 28% to $9.5 billion.

With rising bond yields, rising commodity prices, rising consumer debt levels, rising current account deficits, and rising values for many foreign currencies, investors might do well to acknowledge the rising risks for their equity and debt portfolios.

Charles Tremper: "The first step in the risk management process is to acknowledge the reality of risk. Denial is a common tactic that substitutes deliberate ignorance for thoughtful planning."

You Be The Judge

3/9/05 You Be The Judge

Yesterday, Fed Governor Bernanke stated he was optimistic that core PCE inflation would stay in his “comfort zone” of 1 to 2% this year. William Poole, Fed Bank of St. Louis President, stated that inflation expectations were well contained. Meanwhile, yesterday the CRB Index rose for the eighth straight day and surged to a new 24-year high. March’s gains were on top of the 7.1% rise in February, the most in any month since August 1983. Commodity prices are up 15% this year. Crude is near $55 a barrel. Gold topped $440 an ounce. Copper reached a 16-year high. Aluminum, nickel, zinc, lead, and tin joined in the rise yesterday. Many believe the increase in commodity prices will be with us for some time. Lehman Bros. stated crude will average $43.25 a barrel this year before rising to $46 in 2008. The U.S Energy Department stated yesterday that crude prices are likely to remain in the high to mid-40’s through 2005 and 2006. Meanwhile, mergers are taking place in the metals field. Melbourne-based BHP Billton, the owner of the world’s largest copper mine, offered to buy WMC Resources Ltd. for $7.3 billion. Noranda announced an agreement to acquire Falconbridge and exchange 1.77 of its shares for each Falconbridge, a large nickel producer.

With commodity prices reaching new multi-decade highs, it is not surprising that the dollar is trading at a two-month low against the euro, and it comes as no surprise that longer-term U.S. Treasury yields are beginning to rise. In early morning trading today, the yield on 10-year Treasury bonds rose to a high of 4.45%, the highest yield since last August. Today and tomorrow there will be auctions of 5-year and 10-year Treasuries. It would be wise to make note of the reception for these issues. Will the bidding indicate any lost confidence on the part of Asian central banks in our dollar? We should remember that the U.S. must attract $2 billion a day in capital to cover its current account deficit.

There appears to be a disconnect with the consumer. The Federal Reserve announced that consumer debt rose at an annual rate of 6.6% in January, the fastest pace in three months. In December, borrowing increased by $8.7 billion and in January the increase was $11.5 billion. At the same time, the IBD/TIPP Economic Optimism Index fell to a nine-month low of 53 in March. The six-month outlook declined t0 48.6, a 24-month low, and confidence in Federal Economic Policies dropped to 48.6. Raghavan Mayur, president of TIPP, observed that “Americans’ concerns about the general economy have yet to spill over into their own personal finances.” It’s only a matter of time until the rising consumer debt load capsizes our economic vessel, which appears less globally seaworthy each and every day. The Economic Optimism Index’s March decline was marked by 18 of 21 demographic groups falling.

Presently, 47.7 million Americans who are retired, disabled, orphaned, or widowed, are on Social Security or roughly one-sixth of our population.

Alcoa announced cutting 20% of their salaried staff in its Quad Cities facility. Connors Bros. merged with Bumble Bee Seafood in March 2004. A year later, they are closing a sardine-canning factory in Bath, Maine, and 50 employees will lose their jobs. Fifty-five years ago there were 46 canneries in the state. Now there will be just one. Yakima Resources will close its sawmill and plywood plant in Yakima and lay off 118 workers. Great Batch Technologies will close its Carson City, Nevada pacemaker battery plant and move the operations to Tijuana, Mexico. The move will affect about 125 employees.

SAP agreed to acquire Retek for $496 million; however, the bid was topped by Oracle’s $525 million offer.

Less than two weeks ago, I mentioned that Great Lakes Chemical offered, in my view, good long-range potential. I was wrong. It offered short-term potential. Specialty chemicals group Crompton Corp. (CK) said it has an agreement to buy Great Lakes Chemical Corp. (GLK) in a stock-based deal valued at $1.8 billion. Terms set Great Lakes shareholders to receive 2.2232 shares of Crompton for each share of Great Lakes they hold, a 10.1% premium to the Tuesday close. Combined, the companies had 2004 revenues of more than $4.1 billion. The deal price includes $250 million of Great Lakes net debt and minority interest. The new company will be owned 51 percent by Crompton shareholders.

Worldwide prescription drug industry sales grew 7% in 2004 to $550 billion, their slowest rate of growth since 1998. In 2003, sales grew 10%. Meanwhile, China was the fastest-growing market, up 28% to $9.5 billion.

With rising bond yields, rising commodity prices, rising consumer debt levels, rising current account deficits, and rising values for many foreign currencies, investors might do well to acknowledge the rising risks for their equity and debt portfolios.

Charles Tremper: "The first step in the risk management process is to acknowledge the reality of risk. Denial is a common tactic that substitutes deliberate ignorance for thoughtful planning."

You Be The Judge

3/9/05 You Be The Judge

Yesterday, Fed Governor Bernanke stated he was optimistic that core PCE inflation would stay in his “comfort zone” of 1 to 2% this year. William Poole, Fed Bank of St. Louis President, stated that inflation expectations were well contained. Meanwhile, yesterday the CRB Index rose for the eighth straight day and surged to a new 24-year high. March’s gains were on top of the 7.1% rise in February, the most in any month since August 1983. Commodity prices are up 15% this year. Crude is near $55 a barrel. Gold topped $440 an ounce. Copper reached a 16-year high. Aluminum, nickel, zinc, lead, and tin joined in the rise yesterday. Many believe the increase in commodity prices will be with us for some time. Lehman Bros. stated crude will average $43.25 a barrel this year before rising to $46 in 2008. The U.S Energy Department stated yesterday that crude prices are likely to remain in the high to mid-40’s through 2005 and 2006. Meanwhile, mergers are taking place in the metals field. Melbourne-based BHP Billton, the owner of the world’s largest copper mine, offered to buy WMC Resources Ltd. for $7.3 billion. Noranda announced an agreement to acquire Falconbridge and exchange 1.77 of its shares for each Falconbridge, a large nickel producer.

With commodity prices reaching new multi-decade highs, it is not surprising that the dollar is trading at a two-month low against the euro, and it comes as no surprise that longer-term U.S. Treasury yields are beginning to rise. In early morning trading today, the yield on 10-year Treasury bonds rose to a high of 4.45%, the highest yield since last August. Today and tomorrow there will be auctions of 5-year and 10-year Treasuries. It would be wise to make note of the reception for these issues. Will the bidding indicate any lost confidence on the part of Asian central banks in our dollar? We should remember that the U.S. must attract $2 billion a day in capital to cover its current account deficit.

There appears to be a disconnect with the consumer. The Federal Reserve announced that consumer debt rose at an annual rate of 6.6% in January, the fastest pace in three months. In December, borrowing increased by $8.7 billion and in January the increase was $11.5 billion. At the same time, the IBD/TIPP Economic Optimism Index fell to a nine-month low of 53 in March. The six-month outlook declined t0 48.6, a 24-month low, and confidence in Federal Economic Policies dropped to 48.6. Raghavan Mayur, president of TIPP, observed that “Americans’ concerns about the general economy have yet to spill over into their own personal finances.” It’s only a matter of time until the rising consumer debt load capsizes our economic vessel, which appears less globally seaworthy each and every day. The Economic Optimism Index’s March decline was marked by 18 of 21 demographic groups falling.

Presently, 47.7 million Americans who are retired, disabled, orphaned, or widowed, are on Social Security or roughly one-sixth of our population.

Alcoa announced cutting 20% of their salaried staff in its Quad Cities facility. Connors Bros. merged with Bumble Bee Seafood in March 2004. A year later, they are closing a sardine-canning factory in Bath, Maine, and 50 employees will lose their jobs. Fifty-five years ago there were 46 canneries in the state. Now there will be just one. Yakima Resources will close its sawmill and plywood plant in Yakima and lay off 118 workers. Great Batch Technologies will close its Carson City, Nevada pacemaker battery plant and move the operations to Tijuana, Mexico. The move will affect about 125 employees.

SAP agreed to acquire Retek for $496 million; however, the bid was topped by Oracle’s $525 million offer.

Less than two weeks ago, I mentioned that Great Lakes Chemical offered, in my view, good long-range potential. I was wrong. It offered short-term potential. Specialty chemicals group Crompton Corp. (CK) said it has an agreement to buy Great Lakes Chemical Corp. (GLK) in a stock-based deal valued at $1.8 billion. Terms set Great Lakes shareholders to receive 2.2232 shares of Crompton for each share of Great Lakes they hold, a 10.1% premium to the Tuesday close. Combined, the companies had 2004 revenues of more than $4.1 billion. The deal price includes $250 million of Great Lakes net debt and minority interest. The new company will be owned 51 percent by Crompton shareholders.

Worldwide prescription drug industry sales grew 7% in 2004 to $550 billion, their slowest rate of growth since 1998. In 2003, sales grew 10%. Meanwhile, China was the fastest-growing market, up 28% to $9.5 billion.

With rising bond yields, rising commodity prices, rising consumer debt levels, rising current account deficits, and rising values for many foreign currencies, investors might do well to acknowledge the rising risks for their equity and debt portfolios.

Charles Tremper: "The first step in the risk management process is to acknowledge the reality of risk. Denial is a common tactic that substitutes deliberate ignorance for thoughtful planning."

Tuesday, March 08, 2005

The CRB

3/8/05 The CRB

On February 3, 1934 the CRB Futures Market Service made its debut. A futures contract on the CRB Futures Price Index was introduced in 1986.

The CRB Index was originally designed to provide a dynamic representation of broad trends in commodity prices and was more reflective of the overall price of exchange-traded commodities than was the Spot Commodity Index, then compiled by the Bureau of Labor Statistics. Although the BLS index was interesting, it covered only cash transactions and was not as timely as the one compiled by the Commodity Research Bureau. Eventually the government stopped working on their commodity index and turned it over to CRB to calculate.

In order to maintain the usefulness of the CRB Futures Price Index it has been periodically adjusted to reflect changes in market structure and activity. There have been nine modifications to the Index calculation and component commodities since its inception in 1956, the last change occurring in 1995.

Yesterday, the CRB closed at its highest level since 1981. It has risen 8.9% in 2005 to the present $301 level. In October 2001, the most recent low of approximately $183 was reached. It is important to note that the CRB is comprised of 17 component commodities with equal weighting. Naturally, most consumers are focused on the price of gas at their local station. In fact, the price of gasoline jumped 7.1 cents a gallon in the past week to a nationwide average of $2 a gallon. It was the biggest weekly gain since May. Additional prices rises are expected at the pump in the near term. Adjusted for inflation, gasoline would have to hit $2.973 a gallon to set a record.

Ron Paul: “The only question is whether history will properly reflect the destructive nature of Mr. Greenspan’s tenure.”

M3, a relatively broad definition of money supply, rose at an annual 6.6 percent in January, its fastest rate for more than a year and above the 4.5 percent level that the ECB considers non-inflationary.

When a government employee proclaims that the inflation rate is modest, please remember the rise in the CRB Index. In terms of U.S. citizens, currently we have two strikes against us. The decline in the dollar has reduced our purchasing power and the rise in inflation has placed a tax on our purchasing power. Our standard of living is declining in real time. On Friday, we will be provided with further reinforcement. January’s trade deficit will be released. It will be around $57 billion or $684 billion on an annualized basis or roughly 6% of our GDP. Government employees will tell us there is little reason for concern. Of course, most never had the responsibility of meeting a payroll and most never had to worry about a roof over their heads or putting food on the table. In fact, most have never walked along Main Street, and they only bleed revised economic governmental statistics.

David Lerach, economist for the NAR: “Real estate is no longer just a place to live. It’s a viable alternative to stocks and bonds.”

Physician leaders in hospitals, large group practices and academic health centers are deeply concerned about ethical violations and unethical business practices impacting
U.S. health care, according to results of a newly published survey conducted by the American College of Physician Executives (ACPE). The survey found high percentages of physician leaders are either "very concerned" or “moderately concerned” about:

- Physicians refusing to accept calls on patients who don't have
insurance (79%)

- Influence exerted by medical device manufacturers (79%)

- Over-treating patients to boost income (78%)

- Influence by pharmaceutical companies (76%)

- Board members with conflicts of interest (66%)

- Non-physician executive leaders with conflicts of interest (66%)

One of the most startling findings: nearly 54 percent of the survey
respondents said there was a health care organization in their community that
they believed to be involved in unethical business practices.

From Black Hawk, Sauk: “How smooth must be the language of the whites, when they can make right look wrong, and wrong like right.”

Monday, March 07, 2005

fairy tales

3/7/05 Fairy Tales

After I wrote about the February payroll report on Saturday, something gnawed at me. The figures didn’t feel right. I must have done a poor job of analysis and missed something. It was a big miss, and had I looked carefully on the BLS website, I might not have felt like such a putz. Once every year the BLS performs “benchmark revisions.” An average revision is about 0.2% or in the case of today’s employment approximately 203,000. According to the BLS, they took 11/12ths of that number into the February payroll increase of 262,000. That leaves a net gain for February of 59,000. I would suggest that is most disappointing and cause for concern.

John P. Hussman, Ph.D: “It is usually a danger signal when investors extrapolate good economic news by pricing stocks to reflect ‘new era’ valuations. It’s even worse to accept ‘new ear’ stock valuations when the economic news isn’t that good to begin with…Investors really learned nothing from the 2000-2003 market decline…The memory of losses has faded enough for investors to once again take leave of their critical faculties. Suffice it to say that the historical record provides very few bases on which investors should expect the current market environment to end well.”

Bergen Evans: “We may be through with the past, but the past aint through with us.”

Today's Bloomberg Eurozone Retail Purchasing Managers' Index (PMI), a
monthly survey indicating economic conditions in the Eurozone retail sector
one month ahead of government figures, indicates that month-on-month sales at
Eurozone retailers continued to fall in February and that profits fell.
A further fall in Eurozone retailers' profit margins (gross margin) was
indicated by the survey in February (42.5). Firms reported having to offer
discounts and other promotions in an attempt to revive flagging sales,
undermining their margins in the process. Increased purchase prices were also
reported to have squeezed margins. Average purchase prices in the sector rose
at the sharpest rate for seven months in February (55.7), driven up by rising
raw material prices at suppliers and higher transport costs.
Remaining below the no-change mark of 50.0 for the second month running
in February (and for the sixth time in the past seven months), at 47.3 the
seasonally adjusted Bloomberg Eurozone Retail PMI signaled the sharpest pace
of contraction in monthly Eurozone retail sales since May 2004.
February's drop in sales was also more marked than the average rate of
decline for 2004 as a whole (48.9). Weak demand and low consumer confidence
(linked to depressed economic conditions) hampered sales in February. Some
retailers also mentioned the negative effect of especially poor weather
conditions that kept customers away from the shops.
All three of the principal Eurozone economies that make up the aggregate
figure - Germany, France and Italy - registered declining like- for-like
retail sales in February. Germany, France and Italy represent approximately
75% of total Eurozone retail sales.

Capital One signed a definitive agreement to acquire Hibernia in a stock and cash transaction valued at approximately $5.3 billion. The combined company will be one of the top 10 largest consumer lenders and one of the top 20 in terms of total deposits in the U.S.

BAE Systems will acquire United Defense Industries, maker of the Bradley Fighting Vehicle, for $3.97 billion.

They are fairies; he that speaks to them shall die.
I'll wink and couch; no man their works must eye.
- William Shakespeare, The Merry Wives of Windsor (Falstaff at V, v)


Boeing announced today that its Board of Directors asked for and received the resignation of President and CEO Harry Stonecipher on Sunday, March 6. Concurrently, the Board has appointed CFO James A. Bell, 56, as president and CEO on an interim
basis, with Board Chairman Lew Platt assuming an expanded role in his capacity
as non-executive chairman. Stonecipher will also leave the company's Board;
all changes are effective immediately.
The Board actions were taken following an investigation by internal and
external legal counsel of the facts and circumstances surrounding a personal
relationship between Stonecipher and a female executive of the company who did
not report directly to him. The Board determined that his actions were
inconsistent with Boeing's Code of Conduct.
"The Board concluded that the facts reflected poorly on Harry's judgment
and would impair his ability to lead the company," said Platt.
It’s difficult to carry on a relationship unless two people are in direct contact with one another. Maybe this is a case where fairy tales do come true.

fairy tales

3/7/05 Fairy Tales

After I wrote about the February payroll report on Saturday, something gnawed at me. The figures didn’t feel right. I must have done a poor job of analysis and missed something. It was a big miss, and had I looked carefully on the BLS website, I might not have felt like such a putz. Once every year the BLS performs “benchmark revisions.” An average revision is about 0.2% or in the case of today’s employment approximately 203,000. According to the BLS, they took 11/12ths of that number into the February payroll increase of 262,000. That leaves a net gain for February of 59,000. I would suggest that is most disappointing and cause for concern.

John P. Hussman, Ph.D: “It is usually a danger signal when investors extrapolate good economic news by pricing stocks to reflect ‘new era’ valuations. It’s even worse to accept ‘new ear’ stock valuations when the economic news isn’t that good to begin with…Investors really learned nothing from the 2000-2003 market decline…The memory of losses has faded enough for investors to once again take leave of their critical faculties. Suffice it to say that the historical record provides very few bases on which investors should expect the current market environment to end well.”

Bergen Evans: “We may be through with the past, but the past aint through with us.”

Today's Bloomberg Eurozone Retail Purchasing Managers' Index (PMI), a
monthly survey indicating economic conditions in the Eurozone retail sector
one month ahead of government figures, indicates that month-on-month sales at
Eurozone retailers continued to fall in February and that profits fell.
A further fall in Eurozone retailers' profit margins (gross margin) was
indicated by the survey in February (42.5). Firms reported having to offer
discounts and other promotions in an attempt to revive flagging sales,
undermining their margins in the process. Increased purchase prices were also
reported to have squeezed margins. Average purchase prices in the sector rose
at the sharpest rate for seven months in February (55.7), driven up by rising
raw material prices at suppliers and higher transport costs.
Remaining below the no-change mark of 50.0 for the second month running
in February (and for the sixth time in the past seven months), at 47.3 the
seasonally adjusted Bloomberg Eurozone Retail PMI signaled the sharpest pace
of contraction in monthly Eurozone retail sales since May 2004.
February's drop in sales was also more marked than the average rate of
decline for 2004 as a whole (48.9). Weak demand and low consumer confidence
(linked to depressed economic conditions) hampered sales in February. Some
retailers also mentioned the negative effect of especially poor weather
conditions that kept customers away from the shops.
All three of the principal Eurozone economies that make up the aggregate
figure - Germany, France and Italy - registered declining like- for-like
retail sales in February. Germany, France and Italy represent approximately
75% of total Eurozone retail sales.

Capital One signed a definitive agreement to acquire Hibernia in a stock and cash transaction valued at approximately $5.3 billion. The combined company will be one of the top 10 largest consumer lenders and one of the top 20 in terms of total deposits in the U.S.

BAE Systems will acquire United Defense Industries, maker of the Bradley Fighting Vehicle, for $3.97 billion.

They are fairies; he that speaks to them shall die.
I'll wink and couch; no man their works must eye.
- William Shakespeare, The Merry Wives of Windsor (Falstaff at V, v)


Boeing announced today that its Board of Directors asked for and received the resignation of President and CEO Harry Stonecipher on Sunday, March 6. Concurrently, the Board has appointed CFO James A. Bell, 56, as president and CEO on an interim
basis, with Board Chairman Lew Platt assuming an expanded role in his capacity
as non-executive chairman. Stonecipher will also leave the company's Board;
all changes are effective immediately.
The Board actions were taken following an investigation by internal and
external legal counsel of the facts and circumstances surrounding a personal
relationship between Stonecipher and a female executive of the company who did
not report directly to him. The Board determined that his actions were
inconsistent with Boeing's Code of Conduct.
"The Board concluded that the facts reflected poorly on Harry's judgment
and would impair his ability to lead the company," said Platt.
It’s difficult to carry on a relationship unless two people are in direct contact with one another. Maybe this is a case where fairy tales do come true.

Fairy Tales

3/7/05 Fairy Tales

After I wrote about the February payroll report on Saturday, something gnawed at me. The figures didn’t feel right. I must have done a poor job of analysis and missed something. It was a big miss, and had I looked carefully on the BLS website, I might not have felt like such a putz. Once every year the BLS performs “benchmark revisions.” An average revision is about 0.2% or in the case of today’s employment approximately 203,000. According to the BLS, they took 11/12ths of that number into the February payroll increase of 262,000. That leaves a net gain for February of 59,000. I would suggest that is most disappointing and cause for concern.

John P. Hussman, Ph.D: “It is usually a danger signal when investors extrapolate good economic news by pricing stocks to reflect ‘new era’ valuations. It’s even worse to accept ‘new ear’ stock valuations when the economic news isn’t that good to begin with…Investors really learned nothing from the 2000-2003 market decline…The memory of losses has faded enough for investors to once again take leave of their critical faculties. Suffice it to say that the historical record provides very few bases on which investors should expect the current market environment to end well.”

Bergen Evans: “We may be through with the past, but the past aint through with us.”

Today's Bloomberg Eurozone Retail Purchasing Managers' Index (PMI), a
monthly survey indicating economic conditions in the Eurozone retail sector
one month ahead of government figures, indicates that month-on-month sales at
Eurozone retailers continued to fall in February and that profits fell.
A further fall in Eurozone retailers' profit margins (gross margin) was
indicated by the survey in February (42.5). Firms reported having to offer
discounts and other promotions in an attempt to revive flagging sales,
undermining their margins in the process. Increased purchase prices were also
reported to have squeezed margins. Average purchase prices in the sector rose
at the sharpest rate for seven months in February (55.7), driven up by rising
raw material prices at suppliers and higher transport costs.
Remaining below the no-change mark of 50.0 for the second month running
in February (and for the sixth time in the past seven months), at 47.3 the
seasonally adjusted Bloomberg Eurozone Retail PMI signaled the sharpest pace
of contraction in monthly Eurozone retail sales since May 2004.
February's drop in sales was also more marked than the average rate of
decline for 2004 as a whole (48.9). Weak demand and low consumer confidence
(linked to depressed economic conditions) hampered sales in February. Some
retailers also mentioned the negative effect of especially poor weather
conditions that kept customers away from the shops.
All three of the principal Eurozone economies that make up the aggregate
figure - Germany, France and Italy - registered declining like- for-like
retail sales in February. Germany, France and Italy represent approximately
75% of total Eurozone retail sales.

Capital One signed a definitive agreement to acquire Hibernia in a stock and cash transaction valued at approximately $5.3 billion. The combined company will be one of the top 10 largest consumer lenders and one of the top 20 in terms of total deposits in the U.S.

BAE Systems will acquire United Defense Industries, maker of the Bradley Fighting Vehicle, for $3.97 billion.

They are fairies; he that speaks to them shall die.
I'll wink and couch; no man their works must eye.
- William Shakespeare, The Merry Wives of Windsor (Falstaff at V, v)


Boeing announced today that its Board of Directors asked for and received the resignation of President and CEO Harry Stonecipher on Sunday, March 6. Concurrently, the Board has appointed CFO James A. Bell, 56, as president and CEO on an interim
basis, with Board Chairman Lew Platt assuming an expanded role in his capacity
as non-executive chairman. Stonecipher will also leave the company's Board;
all changes are effective immediately.
The Board actions were taken following an investigation by internal and
external legal counsel of the facts and circumstances surrounding a personal
relationship between Stonecipher and a female executive of the company who did
not report directly to him. The Board determined that his actions were
inconsistent with Boeing's Code of Conduct.
"The Board concluded that the facts reflected poorly on Harry's judgment
and would impair his ability to lead the company," said Platt.
It’s difficult to carry on a relationship unless two people are in direct contact with one another. Maybe this is a case where fairy tales do come true.

Sunday, March 06, 2005

Warren Buffett's Letter To Berkshire Shareholders

3/6/05 Buffett’s Letter To Shareholders

Thousands of people wait every March to read Warren Buffett’s letter to Berkshire Hathaway shareholders. In 2004, Buffett believes he “struck out” because Berkshire’s net worth increased by 10.5%, short of the 10.9% return posted by the S&P 500 stock index. He observed “unless we achieve gains in per-share intrinsic value in the future that outdo the S&P, Charlie and I will be adding nothing to what you can accomplish on your own.” Additionally, he “found very few attractive securities to buy” and he was unable to “make several multi-billion dollar acquisitions that would add new and significant streams of earnings to the many we already have.” Berkshire ended its fiscal year with $21.4 billion in foreign exchange contracts in 12 currencies and $43.4 billion of cash, up 21% from the prior year end’s $36 billion. Describing the cash hoard, he stated it is “not a happy position.” I am quite confident that most any money manager would like to have that cash cushion.

George Burns: “Everything that goes up must come down. But there comes a time when not everything that’s down can come up.”

The letter discussed the United States becoming a “Sharecropper’s Society” rather than an “Ownership Society.” He was referring to our trade policies and our current account deficit. Specifically, me mentioned “as time passes, and as claims against us grow, we own less and less of what we produce. In effect, the rest of the world enjoys an ever-growing royalty on American output. Here, we are like a family that consistently overspends its income. As time passes, the family finds that it is working more and more for the ‘finance company’ and less for itself. There are deep-rooted structural problems that will cause America to continue to run a huge current-account deficit unless trade policies either change materially or the dollar declines by a degree that could prove unsettling to financial markets.”

As I have mentioned so often, increasing our savings and buying less foreign goods would go some ways to lessening the trade deficit with the rest of the world. Without less consumption and more savings, it will further cement, as Buffett described, “this force-feeding of American wealth to the rest of the world…proceeding at the rate of $1.8 billion daily, an increase of 20% since I wrote you last year.”

There was one comment I found particularly noteworthy. Buffett described his currency hedge, and stated if he were wrong in his assessment of the dollar, “our mistake will be very public. The irony is that if we chose the opposite course, leaving all of Berkshire’s assets in dollars even as they declined significantly in value, no one would notice our mistake.” Almost no one! When reading your year-end reports from your mutual and/or hedge funds, it might be wise to see whether the assets are all dollar-denominated. If so, your money manager has a pea brain. That could never be said of Buffett.

George Burns: “Too bad the only people who know how to run the country are busy driving cabs and cutting hair.”