Saturday, March 26, 2005

A Season For Change

3/26/05 A Season For Change

"Indiscriminate support of exports and foreign capital influx has created short-term economic problems, including excessive speculation in the property market and the economic decoupling of the fast-growing coastal areas with the rest of China," Guo Shuqing, director of the State Administration of Foreign Exchange (SAFE), said in an interview with China Daily. On Friday, Guo was named candidate chairman of the China Construction Bank Ltd. Guo observed "we should gradually reduce the preferential treatment to exports and seriously review our foreign investment policy...And trade surplus is not necessarily a good thing all the time...This kind of export growth is not sustainable...More than half of China's exports and overwhelming majority of high-tech manufacturing and trade are generated by foreign companies...China needs a strategy for more of a balanced development."

The dollar had its biggest weekly rise in 11 against both the euro and the yen. In a shortened trading week, the dollar index rose more than 2%. Do you think any of those short the dollar are getting nervous?

Bob Hoye: "Investors and traders should get prepared for a cyclical bear market in commodities."

Imported goods represent at least 36% of retail sales. How many apparel and textile jobs will be lost in 2005? More than 100,000?

At least 1,527 members of the U.S. military have died since the beginning of the Iraq war in March 2003.

The Challenger, Gray & Christmas layoff data indicate that job cut announcements have averaged twice the level that held through the mid-1990s.

Ralph Wanger: “Deciding on an investment philosophy is kind of like picking a spouse. Do you want someone who is volatile and romantic and emotional, or do you want someone who is steady and trustworthy and down to earth. If you want a successful investment career, you'd better bind yourself to a style you can live with.”

A new USA/CNN/Gallup survey found Bush's approval rating dropped 7 points to 45%, representing the lowest point since taking office in January 2001.

2-year Treasury yields stand at 3.85%, the highest level in over 3 1/2 years. The spread between 2-year and 30-year Treasury bonds is down to 99 basis points. So much for concerns with the risk of time.

Henry Ford: “Speculation is only a word covering the making of money out of the manipulation of prices, instead of supplying goods and services.”

In the week of March 14, M3 declined $11.8 billion to $9.49 trillion; however, bank credit jumped by $40.3 billion to an all-time high of $7.04 trillion.

The Center for Drug Evaluation and Research stated this week that it approved 474 generic drugs in 2004, up from 364 in 2003. The Center approved 29 non-generic drugs ("priority drugs") in 2004, up from only 14 in 2003.

Thor Industries makes Citation and Chateau recreational vehicles at its plant in the Susquehanna Valley, PA. The union and the company have been unable to agree on a new contract. The company wanted to reduce seniority benefits, increase employee contributions for health insurance benefits, and reduce the present $15 per hour pay but provide bonuses if production incentives were met. The union voted 89 to 4 to reject the proposed contract. Thor stated that, unless the contract was approved, they would close the plant by April 15. The company employs about 160 union and management personnel at the plant.

Wal-Mart Stores Inc. stated this morning it expects March sales at U.S. stores to be similar to or greater than the 4.1 percent rise recorded for February.

According to the National Retail Federation, Easter is the fourth-largest spending holiday in the U.S. Easter arrived early this year, and that fact aided this month’s results for Wal-Mart, and that would be true for other retailers, such as, Target.

Mark Twain: "If you pick up a starving dog and make him prosperous,
he will not bite you. This is the principal difference between a dog and a man.”

Friday, March 25, 2005

A Budding Star

3/25/05 A Budding Star

It is Good Friday and the markets are closed. As such, I will take the opportunity to discuss a private company. If I could make just one investment for the next ten years, it would be in Zyvex of Richardson, Texas, the first molecular nanotechnology company. Their vision “is to be the leading worldwide supplier of tools, products, and services that enable adaptable, affordable, and molecularly precise manufacturing.” Clearly, the company is the leading supplier of molecular nanotechnology tools. Zyvex was founded in 1997, and reported its first revenues in 2001, grossing only $150,000. Revenues grew to $1.2 million in 2002, $4.3 million in 2003, and $8.6 million in 2004. Management anticipates that the company will achieve a cash-flow break-even level by Q1 2006, and become bottom-line profitable by the end of 2006. With top-notch management, a growing customer base, and numerous key alliances with industry leaders, I believe Zyvex is a star in the making.

U.S. February home sales surged 9.4%, the second highest sales rate ever. However, the supply of homes jumped to a record 444,000, a 4.4 month supply at the February sales pace.

30-year mortgages are back up to 6%.

Around the globe, it appears that central banks are reducing the availability of credit.

Sony’s PSP went on sale with 1 million units and a back up of another 1 million units. The initial demand appears quite robust despite the product being non-transferable. If you have a movie on DVD, it won’t play on the Sony PSP. You need to buy another copy of the same DVD specifically for the Sony PSP.

Brilliance China Automotive Holdings warned about the slowing demand for autos in China in 2005. This is bad news for GM.

John Challenger stated that higher oil prices and rising interest rates may affect hiring plans due to added costs crimping corporate budgets. He stated “something has to give. For many employers the most cost-effective step is to put the brakes on hiring plans. Companies that go ahead with hiring plans are going to want the most bang for their buck which means adding workers who will make an immediate contribution to the bottom line.”

The final showing of “Wall Street Week” will be produced June 24. The series has been running for 35 years.

Federal revenue from corporate taxation has declined from 2.2% of GDP in 1998 to 1.6% today.

Andy Bechtolsheim, a co-founder of Sun Microsystems and one of the inventors of network computing, has returned to Sun. The stockholders should bear the fruits arising from his efforts.

Thursday, March 24, 2005

BP's Texas City Refinery

3/24/05 BP’s Texas City Refinery

With U.S. inventories of crude rising to their highest level since July 2002, it appeared that crude might have topped out for the time being. Stockpiles gained 4.1 million barrels to 309.3 million and the price of crude declined by over 4% during regular trading hours to $53.81 a barrel. Then an explosion occurred at 1:20 PM Houston time at BP’s Texas City refinery, the third largest in the U.S. with daily production of 11 million gallons of gasoline. (Last week gasoline supplies fell 4.1 million barrels to 217.3 million.) There are 14 known fatalities and 70 people were hurt. In late trading, gasoline futures rose 3 cents a gallon to $1.6075, an all-time high. Crude jumped back up to $56.62 a barrel.

Yesterday, the BLS reported that real average weekly earnings fell by 0.4% from January 2005 to February 2005 after seasonal adjustment and adjusting for the 0.4% increase in the CPI. After deflation by the CPI-W, average weekly earnings decreased by 0.8%. How long can the consumer continue to spend at the present rate with earnings continually trailing inflation and how long can our economy grow with a savings rate that is declining to almost nothing?

GM may phase out its Pontiac and Buick brands but it will rush the introduction of its new full-size SUVs. How large will the incentives be on those new SUV’s?

The dollar reached a 6-week high versus the yen and a 5-week high against the euro.

Kellogg will close its Keebler plant located in Macon and 400 employees will be cut from the payroll.

Two independent trustees overseeing Social Security and Medicare presented data that showed Medicare’s total unfunded liability at $65.4 trillion (that is not a misprint), almost six times that of Social Security’s. They stated that Medicare’s trust fund would be depleted in 2020 and Social Security’s trust fund in 2041. It’s obvious why the Administration is focusing on Social Security rather than Medicare---they don’t want to touch a problem where Medicare costs are growing faster than that of Social Security and where no one has developed a long-term solution.

According to the California Association of Realtors, the median price of an existing single-family detached home in California declined 2.9% in February from the prior month; however, year-over-year, the median price increased 20.4% to $471,620.

U.S. trade with Canada and Mexico amounted to $712.7 billion in 2004, according to the Commerce Department. Including oil, the U.S. buys 85% of the exports from both countries.

A new study by A.T. Kearney revealed that three-in-ten North American and European executives believe 20% or more of their company’s annual IT budget is wasted, and only 20% of the companies’ IT investment is allocated to IT innovation, a 30% decrease from 2000.

According to a new study by Yale economist Robert J. Shiller, workers who opt to invest in personal accounts outlined in Bush’s Social Security reform plan are likely to earn less to retire on than those who stay in the traditional system. His research finds that on the date of retirement, the personal accounts would have negative values 71% of the time. Shiller stated “to say that there is a money machine in the stock market, that it can be tapped to yield great wealth without significant risk if one uses life-cycle investment methods, is a big mistake.”

Yesterday, the Labor Department reported that February’s CPI rose 0.4%, more than forecast, and prices excluding food and energy rose 0.3%, the most since September. In its entirety, prices had their biggest increase since August 2002.

New orders for durable goods increased a smaller-than-expected 0.3 percent in February following a revised 1.1 percent decline in January, the Commerce Department reported today. Economists were expecting a 1 percent gain. Excluding transportation goods, durable-goods orders sank 0.2 percent. Shipments of durable goods dropped 1.6 percent in February, the largest decline in 18 months, after a 0.9 percent gain in January. Inventories increased 0.6 percent. Unfilled orders increased 0.6 percent. Orders for core capital goods fell 2.1 percent.

As of the week ending March 12, the number of people collecting unemployment benefits rose by 31,000 to 2.7 million.

Employees hired after Jan. 1 won't be eligible for retiree health benefits, nor can they participate in the firm's regular pension plan, Motorola disclosed in a recent report to federal securities regulators.

According to a new government report, because of higher payments to doctors, Medicare may increase seniors’ health insurance premiums by 12% next year.

Wednesday, March 23, 2005

Lost Integrity

3/23/05 Lost Integrity

There were many stories yesterday. The BLS reported that, in the past year, the PPI rose 4.7%, the core PPI increased 2.8%, the fastest advance in more than 9 years, and the finished consumer foods index climbed 4.9%. For the 12 months ended February 2005, prices for intermediate goods increased 8.4%, and the crude goods index rose 8.1%. By contrast, subsequent to a 0.6% gain in January, the index for capital equipment decreased 0.2% in February. Prices for materials for durable manufacturing moved up 0.9% in February, compared with a 1.8% gain in the preceding month. The index for materials for nondurable manufacturing rose 0.2% in February, after climbing 0.6% in the prior month. Additionally, the PPI for crude materials for further processing declined 1.6% in February, following a 2% fall in January, and the crude foodstuffs and feedstuffs index declined 3.2% in February, after advancing 1.9% in January. Interestingly, the U.S. economy is dominated by service industries. The BLS reported that among service industries in February, prices received by commercial bankers, lawyers, savings institutions, cellular and other wireless carriers, and courier services turned down in February following increases in the preceding month. Prices received by real estate agents and brokers were unchanged, after advancing in January.

I have provided a highlight of the BLS report. What do all these statistics show us? They show me that the Fed is comprised of either very stupid people or people who go around the country telling lies. Up until yesterday, Fed Governors took turns expounding on how inflation was well contained. All you had to do was look at the CRB or the Goldman Sachs Commodity Index to see that many commodities were making all-time highs, and not just crude oil. Yesterday, out of the blue, the FOMC changed their tune and stated “though longer-term inflation expectations remain well contained, pressures on inflation have picked up in recent months and pricing power is more evident. The rise in energy prices, however, has not notably fed through to core consumer prices.” Obviously, the FOMC members don’t drive or fly. If one had any doubts or reservations, yesterday cemented the loss of integrity at the FOMC.

The fallout from the FOMC meeting was not pretty. The Dow closed down 94 points and below the 10,500 level. The Nasdaq dropped 18 points and closed below 2000. The S&P declined over 1%. Most importantly, 10-year Treasury bond yields jumped to 4.65%, the highest level since July 28, 2004. Of course, this means mortgage rates will climb dramatically this week.

While the FOMC expressed a concern with inflation, the CRB declined and crude dropped about $2 a barrel and is approaching $55 a barrel. Platinum, silver, heating oil, and copper also declined. As a generalization, I believe we have experienced the worst of inflation. As such, as I have previously mentioned, I would cut back on commodity holdings--- especially energy, copper, and aluminum stocks. Below $6.40 for silver and below $406 for gold, I would look to add to those holdings. Why? It’s something I read in a piece by Roach of Morgan Stanley. He quoted China’s Premier Wen Jiabao. The latter stated “I cannot sleep well at night with this issue of the RMB (the yuan).” That spoke volumes to me. There is an old saying on Wall Street “to sell to the sleeping point.” Jiabao’s remark tells me that China will soon revalue its currency and widen the range on the peg versus the dollar or peg the currency to a basket of currencies. The latter makes more sense to me but I am not the one to make the decision.

Despite the problem of rising inventories, the BLS reported that passenger car prices decreased 0.9% in February, the most since July, following an increase of 1.2%. Costs of light trucks dropped 2.8%, the biggest decline since a 4% slump in April 2003.

It should be noted that there is one reason inflation is not higher. The largest percentage of business costs rest with expenses for labor. For several years, the increase in labor costs has trailed the rate of inflation.

Richard Wills, CEO of Tektronix: “We have to continue to add more value to our products so that we can have the same price scenario that we have today.”

The Society for Human Resource Management (SHRM) and the School of Management and Labor Relations at Rutgers University combine to provide the SHRM/Rutgers LINE that identifies early economic trends and growth in the national job market by surveying HR professionals at manufacturing firms. According to new numbers from the Leading Indicator of National Employment (LINE), an increased number of new vacant positions exist in the manufacturing sector. While there was a dip in employment numbers from February to March, the outlook remains positive because of an increase in vacant positions and the hiring outlook for April appears strong in the manufacturing sector.

Pfizer will hold a meeting with security analysts on April 5th. Management will discuss cost-cutting strategies as well as recent developments in their pill to halt smoking, an inhaled insulin system, and a cholesterol drug. Meanwhile, yesterday, the company announced its plans to end production at its plant 25 miles southwest of Grand Rapids, Mich. The facility has 328 employees.

Covergys Corp. will close a call center in Fort Pierce, Florida and layoff 200 employees. UBE, a unit of UBE Machinery Corp. Ltd. of Japan, plans to close its plant in Mason, Ohio and layoff all 310 workers. This plant has experienced long labor disputes. It produces aluminum wheels for the auto industry.

German business confidence fell to an 18-month low in March.

Higher interest rates helped reduce volumes of mortgage applications by 9.5 percent in the week ended March 18 compared to the prior week, the Mortgage Bankers Association said. On a seasonally adjusted basis, applications to purchase homes dropped by 3.5 percent, while refinancings fell 16.5 percent. Compared to this time last year, refinancing applications are running more than 60 percent lower, MBA senior director Michael Fratantoni said.

Tuesday, March 22, 2005

Rising Interest Rates

3/22/05 Rising Interest Rates

As interest rates rise, dollar-denominated bonds lose value. The latter compounds the loss for those holding U.S. dollars over the past two plus years. It will be most interesting to view the reaction of the bond market today after the release of the PP and tomorrow after the CPI numbers are provided. It is well to remember that this is a holiday-shortened week with the bond market closing early Thursday and remaining closed the day after in observance of Good Friday. Meanwhile, interest rates on 3-month Treasury bills rose in Monday’s auction to a discount rate of 2.80%, the highest level in 3 ½ years.

German Proverb: “He who borrows sells his freedom.”

Over the weekend, I suggested taking some money off the table in commodities. Yesterday, gold dropped $8 an once. The next shoe to drop maybe the price of oil. The headline stories surround record gas prices of $2.10 a gallon at the pump. For many in California, the price is closer to $3 a gallon.

Some months back, China’s central bank raised interest rates. On Monday, Hong Kong’s prime rate was raised to 5.25%, up from 5%. This is significant. Over the first six interest rate increases announced by the Fed, Hong Kong rates remained unchanged. Both China’s and Hong Kong’s currencies have a fixed peg to our dollar.

William J.H. Boetcker: “You cannot establish security on borrowed money.”

Harley-Davidson’s market cap exceeds that of GM’s by $1 billion.

Oracle beat out SAP for Retek with the final price of $11.25 a share.

French consumer spending fell 1% in February, the largest decline in 7 months.

In February, insiders sold $70 of stock for each $1 purchased. That should serve as a warning call.

Another warning call is the growing sub-prime mortgage market that has tripled in size over the last 24 months. According to SourceMedia, sub-prime mortgage originations increased 56% in 2004 to $607 billion.

Northwest Airlines is grounding another 24 jets and cutting hundreds of jobs. Tenneco is laying off 128 employees in South Carolina. Elk Brand Manufacturing is closing its Cadiz, KY facility and laying off 89 workers. Alcoa just announced the layoff of 2,000 employees.

Lower than expected sales in both North America and Europe are the reason Electronic Arts expects to miss previously announced revenue and profit targets for its fiscal 2005 year that ends this month.

GE Capital has withdrawn a $2 billion loan facility for GM and its suppliers. However, the good news is that GM states it has $23 billion of cash and liquid securities in its industrial unit and another $9 billion remaining under its bank loan facilities. GM Acceptance has another $24 billion of cash and $64 billion of committed credit lines. On the other hand, the company has a total of $301 billion of secured and unsecured debt outstanding.

HP announced an interesting move yesterday with the acquisition of Snapfish. Based in San Francisco, Snapfish provides online photo service and claims to have more than 13 million registered members and is growing at a rate of more than 500,000 members per month. The company competes with Kodak’s Ofoto service.

Lennar, the homebuilder, raised its full-year earnings estimate to $7.15 per share, up from $6.90 previously stated. At $54.87, there don’t seem to be a great many believers in the company’s picture.

Monday, March 21, 2005

It Can Happen

3/21/05 It Can Happen

Yesterday was Palm Sunday. For most of the world's locations, the day started and ended in a normal fashion. Of course, there are usually exceptions, and Japan experienced a 7.0 earthquake. San Francisco was treated with a visit by Dick Cheney, and this alone might have explained an unheard of occurrence. South San Francisco was greeted with a "probable tornado." A twister by the Bay at 3:40pm. At least 40 buildings were damaged but no one was seriously hurt. It touched down an estimated six times accompanied by 3 miles of wild swirling winds. South San Francisco Battalion Chief Tom Azzopardi stated "it is something. Here we are paying Bay Area prices for Kansas weather." A meteorologist with the National Weather Service in Monterey explained the happening was caused by "an unstable atmosphere combined with upper level energy." Funnel clouds occur about once or twice a year in San Francisco. No one I spoke with can remember ever seeing a tornado in this city by the bay. The unheard of can happen---especially when the atmosphere is unstable. Do you think the economic atmosphere is unstable in the U.S.? If not, then you have no worries.

The dollar rose to a two-week high against the euro after Hong Kong Monetary Authority Chief Executive Joseph Yam suggested Asian central banks shouldn't rush to boost euro holdings at the expense of the U.S. currency. Mr. Yam has no worries.

GM has worries. The WSJ reports the company will cut salaried staff. That's like a funnel cloud. You don't think there will be more plant closings and more layoffs and fighting with the unions over health care costs?

Barry Diller's IAC/Interactive is near agreement to acquire Ask Jeeves for $1.9 billion. In addition, they are launching a web service called

Warren Buffett: "I'd be a bum on a street with a tin cup if the markets were efficient."

The Fed will give you a nice sleeping pill this week. While raising rates for the seventh straight time, they will tell you inflation is well contained, that there is remaining slack in the economy, and GDP growth can expected to grow between 3.5% and 4% in 2005. In reality, inflation is increasing at rates not seen over the last two years while twin tower deficits rise to record levels. Does this make for an unstable economic atmosphere?

Sunday, March 20, 2005


3/20/05 Inflation

According to the BLS, overall import prices jumped for the second consecutive month in February, led again by rising petroleum prices. After declining 16.8 percent over the final two months of 2004, petroleum prices have resumed a nearly two-year upward trend, rising 3.9 percent in February and 3.4 percent in January.Import petroleum prices were up 29.6 percent for the year ended in February.In addition, nonpetroleum import prices increased for the fourth consecutivemonth, rising 0.2 percent in February after increasing 1.6 percent over thethree previous months. Over the past year, prices of nonpetroleum imports rose 2.9 percent, while overall import prices advanced 6.1 percent. Higher prices for foods, feeds, and beverages; for consumer goods; and for nonpetroleum industrial supplies and materials contributed to theFebruary increase in nonpetroleum prices. The price index for foods, feeds,and beverages advanced 1.3 percent in February and 7.3 percent over the past 12 months. Consumer goods prices rose for the fifth consecutive month, rising 0.2 percent in February after increasing 0.5 percent in January. Prices for nonpetroleum industrial supplies and materials rose 0.3 percent for the second consecutive month. The increases continued the upward trend for the index over the past two years, albeit at a slower rate than that recorded over most of that period. The index advanced 11.3 percent for theyear ended in February. In contrast, the price indexes for capital goods and for automotivevehicles were both unchanged in February. Capital goods prices had been up in each of the previous three months, rising 0.8 percent over that period, the largest three-month change in almost ten years. Despite those increases, capital goods prices decreased 0.6 percent over the past 12 months. Automotive vehicle prices rose 1.5 percent over the same period.

Edith Sitwell: "The public will believe anything, so long as it is not founded on truth."

In yesterday's radio address to the nation, Bush stated "on this day two years ago, we launched Operation Iraqi Freedom to disarm a brutal regime, free its people, and defend the world from a grave danger." The gravest danger for a democracy is for its leader to depart from the truth. Bush never mentioned WMD. Edith Sitwell knew of what she was speaking.

Joseph Goebbels: "If you tell a lie big enough and keep repeating it, people will eventually come to believe it."

This week's focus will be on the Fed raising rates and on the language following its meeting. One might consider slight of hand artistry. The real news is the contraction in money supply rate of change and its impact on the dollar and the economy in the months to come.

Michigan Sugar Co, a cooperative owned by 1,300 growers, is Saginaw County's (Michigan) 20th top employer. Soon, their sugar processing plant will cease operations and the company will layoff 65 full-time employees and another 100 seasonal workers. Under the new sugar legislation, room is being made for imports. Domestic producers are no longer able to run at full capacity because overall domestic demand is not large enough to accomodate maximum production in the U.S. as well as the supply from foreign sources. There will be more sugar plants closing in the future and more layoffs. Local communities will feel the pain. I know from experience that payments to employees and growers turn over 7 times. Aaddionally, in the case of Michigan Sugar, their $278,000 in tax payments to Saginaw County paid the salary for five county employees. The company stated it pumps nearly $300 million in direct economic activity in the communities in which it operates.

Demosthenes: "There is one safeguard known generally to the wise, which is an advantage and security to all, but especially to democracies as against despots. What is it? Distrust."