Saturday, April 09, 2005

Warnings

4/9/05 Warnings

Yesterday, Ford stated that, due to higher health care and steel costs, it would earn $900 million less in 2005 than the company predicted a few months ago. In addition, it no longer expects to reach its profit goal for 2006. Meanwhile, USF (the old U.S. Freight) warned that it's earnings would be disappointing. Not surprisingly, the transportation index took it on the chin.

In studying this year's first quarter profit gains, one might consider how much of the results come from price increases for oil, natural gas, coal, steel, and other commodities.

Japan projected that unrealized losses in its forex holdings stand at $110 billion at 3/31/05. Korea incurred a $10 billion loss in its forex holdings in 2004. Meanwhile, foreign currency reserves held in developing countries rose by $670 billion over the period of 2003 and 2004.

In an effort to curb real estate speculation, a new law was passed in Shanghai "requiring home owners to pay off their mortgages before selling their properties."

The news on employment was not good this week. Sears filed a revised layoff announcement and will cut at least 500 workers at its headquarters and not 250 as originally stated. Gillette will close a Duracell plant in Lexington, NC and impact 280 workers. TRW will close its Fremont, Ohio brake rotor plant and put 270 people out of work. First Data's Telecheck subsidiary will reduce its Houston-area workforce by 380 jobs. Across the seas, MG Rover warned that its future was in question. Rover employs 6,000 workers.

Year-to-date, M3 has expanded by 3.6%, while bank credit has expanded at a 15.6% annualized rate. The CRB has risen 7.2% year-to-date, and the Goldman Sachs Commodity Index is up a healthy 18.9%.

Friday, April 08, 2005

Macro And Micro

4/8/05 Macro And Micro

Oil prices are expected to remain above $50 a barrel throughout 2005 and 2006, according to a forecast released Thursday by the statistical arm of the Energy Department.

OPEC March output was 29.89 million b/d, an increase of 440,000 b/d for the month.

Meanwhile, crude declined for the fifth consecutive day, and is approaching $53 per barrel.

According to Foreclosure.com, the number of foreclosed homes put up for sale rose 50% between February and March.

Dell is forecasting revenues of $57 billion this year and $80 billion in 3 to 4 years.

According to Lear Financial, "in China there's just o.1 grams of gold per capita. The India rate, by contrast, is 0.73, and the U.S., 1.41. It's only a matter of time until the rate in China begins to increase.

Pfizer pulled Bextra off the market and will place a warning label on Celebrex. I wonder when they'll place a note on products to tell consumers that drug manufacturing costs can be reduced by 40% or more in India.

U.S. February wholesale inventories increased 0.6%, while sales fell 0.4%, the biggest drop since April 2003.

Natural gas in storage unexpectedly rose by 10 billion cubic feet in the latest week. Analyst were anticipating a decline.

Yesterday, St. Louis Fed President Poole stated policy makers may be required to lift interest rates "more vigorously." That can lead to higher deficits and more dollars being printed.

Firefox has about 30 million users and presently 5.7% of the browser market. It's developer predicts Firefox will capture as much as 15% of the browser market in the next year.

According to the Kaiser Family Foundation, premiums for family coverage in employer-sponsored health care plans rose 59% between 2001 and 2004, compared with a 9.7% growth in consumer prices.

Once again, 30-year mortgages dipped below 6%.

According to Cambridge Consumer Credit Index, 59% of Americans plan to spend their tax refunds on everyday purchases or make bill payments, down from 68% in 2004. Interestingly, the percentage of Americans using credit cards to pay taxes jumped from 3% in 2004 to an estimated 11% this year.

Thursday, April 07, 2005

Trends For Employment And The Consumer

4/7/05 Trends For Employment And The Consumer

James Duderstadt, President of the University of Michigan and head of Michigan's Roadmap project, stated "Michigan's old manufacturing economy is dying, slowly but surely, putting at risk the welfare of millions of citizens in our state. Thus far, the state has been in denial, assuming our low-skill workforce would remain competitive and our factory-based manufacturing economy would be prosperous indefinitely."

Bridgewater Associates: "44% of all corporate profits in the U.S. come from the financial sector compared with only 10% from the manufacturing sector." In actuality, the 44% is understated. It does not include the profits from GM's and GE's financial sectors, for example.

What is the fastest growing part of our economy? The answer is interest-rate derivatives. Do you think a great many employees are required to trade these derivatives? Additionally, how much employment creation is required for insurance, consumer credit, mortgage financing, or even second-lien loans? You get the picture. Certainly, there are new monthly employees needed in the field of health care and possibly education and construction, but financial professionals are the bread and butter sector for employment growth. They represent the growing core of our service payroll expansion. Should interest rates increase by even 100 basis points, this sector would feel the impact, and so would consumption.

According to S&P's LCD, companies raised $12 billion in second-lien loans in 2004. Through the first quarter of 2005, $5 billion of second-lien loans have been placed.

With rising health care costs and stock and bond markets not providing positive returns so far in 2005, one should not be surprised to see the underfunding of U.S. pension plans rise to record levels this year.

ACT Research reported that orders for heavy-duty trucks in the U.S., Canada, and Mexico were down 25% in March 2005 from year-ago levels. It was the first year-on-year decline since May 2003.

With two months completed in Wal-Mart's April quarter, the company now estimates earnings will come in around the low end of their previous estimate of 56 cents to 58 cents per share. The company stated "given the shift in Easter and the unseasonable weather, we now estimate comparable sales in the U.S. for the April period to be in the 0 to 2 percent range. For the retail quarter, we expect comparable sales to be at the low end of our previous guidance of 3 to 5 percent." For the nine weeks ended 4/1/05, the major change was at SAM's CLUB where same-store sales rose 2.9% compared with 8.1% in the same 9-week period ended 4/2/04.

In the latest week, crude supplies rose by 2.4 million barrels, U.S. gas inventories fell by 2.1 million barrels, and distillate supplies rose by 0.7 million barrels. The crude build was less than Platts was expecting and the gas drawdown was bigger than expected.

Magnetic Specialty of Marietta, Ohion is closing its doors and 110 employees will lose their jobs. Lennox Hearth Products is closing its Burlington, WA plant and moving manufacturing to Mexico. About 70 employees will lose their jobs.

Forest Labs expects its fiscal March 2005 fourth quarter to be lower than the company's previous guidance. They stated "although prescription demand and ex-factory sales have heretofore been relatively consistent on an annual basis, subject to normal quarterly variation, it appears that wholesalers have reduced inventories for both of the company's key products to significantly lower levels during the quarter ended March 31, 2005." Importantly, Lexapro continued to increase its prescription market share during the quarter; however, sales in this quarter of Lexapro approximated $400 million, down from $427 million in the third quarter. The big change was wholesalers carrying inventory of 15 days rather than 21 days. In addition, Namenda's total prescription volume increased in the quarter, but its sales were $93 million, down from $100 million in the prior quarter. The decline was also due to lower wholesaler and chain inventories.

Federated Department Stores expects flat same-store sales for April and JC Penney expects them to be flat to slightly up. Target expects its earnings for the April quarter to meet or exceed expectations.

May crude is trading around $56.69 a barrel.

In the week ending March 26, the number of people receiving unemployment checks rose by 90,000 to 2.69 million; however, the 4-week average of continuing claims dipped by 2,000 to 2.65 million.

Wednesday, April 06, 2005

Declining I Feel Good

4/6/05 Declining I Feel Good

According to the latest findings of the Experian-Gallup Credit Index, consumers are feeling less positive about the future, while 63% expect to receive a federal tax refund. Last year, 66% actually received a refund, and 19% paid additional taxes. Currently, the Personal Credit Index is at 82, a sharp drop from last month's score of 100. The decline is due mostly to lower optimism about consumers' future credit situation.

According to the latest Washington Post-ABC News Consumer Comfort survey of 1,000 randomly selected adults, consumer confidence dropped for the second week in a row. The overall index now stands at -17, down 4 points from last week and 10 points in the past month. The last time the index hit -17 was in the summer of 2004.

President Bush speaking on Social Security: "A lot of people in America think there's a trust. But that's not the way it works. There is no trust fund- just IOUs." The real question is whether there is trust in our leaders. Do the leaders substitute IOUs for trust?

Yesterday, the U.S. Commerce Department stated it wanted to reinstate the 7.5% cap on market share for certain Chinese textile imports. China called this U.S. textile protection "unfair." Since January 2001, 381,300 textile and apparel jobs have been lost in the U.S.

According to Gail Fossler, chief economist of The Conference Board, a reduction in U.S. consumption, increased savings, and the adoption of flexible exchange rates in Asia would trigger global instability. I totally disagree with Ms. Fossler. Our country requires less consumption and more savings and global commerce requires flexible exchange rates.

Yesterday, GM announced it would offer an additional $1,000 off all its vehicles.

Ford aims to cut 1,000 white-collar jobs. United Airlines is closing its Kent, WA reservations call center and eliminating 400 jobs.

Crude dipped to $55.78 a barrel.

U.S. chain store sales in the fifth week of March declined 0.7% compared with February's numbers.

Challenger, Gray & Christmas stated that 1st quarter job-cut announcements were up 9.2% year-over-year, and are on track to exceed 1 million for the fifth year in a row. However, planned job reductions fell by 20% in March to 86,396.

In the week ended March 1, mortgage applications activity fell 4.4% compared with the prior week.

MCI decided to accept Verizon's offer because there was more certainty of the deal closing.

In the 1st quarter, Boeing delivered 70 planes, six fewer than the year ago period but the stock traded at its highest price in nearly 4 years. For 2005, the company has estimated it will deliver 320 planes. Good luck.

Malaysia's February trade surplus rose 21.4% year-on-year to $1.87 billion, but fell 6.2% from January. February marked the 88th consecutive monthly trade surplus.

Siebel's 1st quarter results will fall short of estimates due to disappointing license revenue.

Research In Motion's 1st quarter revenue fell short of estimates.

IBM will expense stock options.

Since making a high 4 weeks ago, Mexico's stock market has dropped 13%.

Pfizer, as expected, stated it will cut $4 billion in costs by 2008. Many detail personnel will be dropped from the payroll. Doctors have complained of too many Pfizer sales persons knocking on their office doors. The company stated earnings for 2005 would decline to $2 per share from the prior year's $2.13 but that 2006 would return to double-digit growth. Maybe so, but Zoloft (sales of $3.36 billion), their #3 drug, goes off patent in 2006, and then Norvasc, their #2 drug, off patent in 2007. Realistically, a new trend is forming where big pharma will offer a generic alternative prior to a major drug going off patent. It will be interesting to see how their generic costs compare with generic manufacturers in India.

Tuesday, April 05, 2005

Rising And Falling

4/5/05 Rising And Falling

Since 1970, the Goldman Sachs Commodity Index has delivered total annualized returns of 13.9%. It has risen 26.2% year-to-date or almost 100% higher than the returns over the past three and one-half decades.

From May 1, the EU has proposed an extra 15% duty on U.S. paper, farm goods, textiles, and machinery.

The EIA said that the retail price for gasoline hit another record at $2.22 a gallon. It's up 44 cents from a year ago or $10 a week for those driving 12,000 miles per year.

According to Autodata Corp, for the fifth consecutive month, incentives offered by U.S. automakers continued to decline in March, while those offered by Asia competitors continued to rise.

Unocal has proven reserves of 675 million barrels of crude oil in the Gulf of Mexico, Asia, Africa and Latin America. The company also has large gas fields in Asia, strategically located to serve growing markets in China and Japan. Presently, it is cheaper to buy reserves than to explore for new reserves. In addition, it should be pointed out that 62% of Unocal's output is gas compared with 28% for ChevronTexaco.

With oil at roughly $57 a barrel and silver trading close to $7, the ratio of oil to silver exceeds 8 to 1, an historically high relationship.

The dollar is trading at a 5 1/2 month high to the yen.

The Australian Financial Review stated that BHP Billtn is seeking to increase its iron ore prices by 100%.

Morgan Stanley is seeking to spin off the Discover Card.

With the quarterly reports coming out, it will be interesting to see what impact the record price of crude has had on the airlines, cruise ship companies, truckers, package deliverers, farmers, and petrochemical firms.

Germany's GDP growth rate for 2005 is forecast at 0.8% and its budget deficit is anticipated to approximate 3.3% of GDP. Once again, it will exceed the 3% limit set for the euro countires.

Norway is the world's third largest oil exporter. Their oil minister hopes oil prices will decline a little.

Since last week, three tech companies, Microsemi, Celestica, and Amtel, have announced Colorado layoffs totaling roughly 1,000 employees. The Fort Collins area has been particularly hard hit by the layoffs.

According to the National Council of Textile Organizations, exports by China of apparel products to the U.S. in January and February rose 486% from the same period in 2004. During the same two months this year, 14 textile plants in the U.S. closed.

China's Xinhua News Agency reported that more than 100 cities have inadequate water supplies. A recent survey found that only 47% of water in major rivers is drinkable, while half of all lakes are heavily polluted. In addition, 35% of ground water is undrinkable due to pollution. All the cheap goods and all the cheap labor won't solve China's water problem. Massive water treatment projects will be needed. Without adequate water supplies, China's future as an economic power will be limited.

Mexico is the no. 2 supplier of crude to the U.S. Mexican officials warn that their country might need to import oil in as little as 10 years. Mexico's oil-related revenue currently covers about
one-third of federal spending. Pemex does not have the money or the technology for massive deepwater projects.

Omar Bradley: "Ours is a world of nuclear giants and ethical infants. If we continue to develop our technology without wisdom or prudence, our servant may prove to be our executioner."

What impact will rising interest rates, rising material costs, and rising energy prices have on corporate profit margins, cash flow, and the rate at which earnings are capitalized? What will be the impact on capital expenditures and hiring?

The world consumes 84 million barrels of oil each day. At $57 a barrel, the yearly cost approximates one and three-quarters trillion dollars! Given the cash flow in all the corners of the globe, that expenditure level is, in my view, unsustainable.

Pernod, Fortune Brands in talks to buy Allied Domecq.

In a recent survey conducted by the Employee Benefit Research Institute, a majority of respondents stated they're behind in their retirement savings, yet confident that they'll reach their savings goal by retirement, even if they haven't done a had-core estimate of how much they'll need (over 50% stated they had not.)

Umberto Eco: "What we honor as prudence in our elders is simply panic in action."

Monday, April 04, 2005

The Late Innings

4/4/05 The Late Innings

The Major League Baseball season has just begun, but in the game of investment risk, we are in the late innings. Not all ball fields have night lights--especially in the developing countries. As such, in some corners of the world, the game can be called on account of darkness.

China's State Council: "``Excessive growth in housing prices has directly undermined the ability of city residents to improve their living standards, affected financial and social stability, and even influenced the health of the national economy.”

Jim Williams: "China is using 55% of the world's cement."

The EU cut its 2005 growth forecast for the euro zone to 1.6% to 2.1%.

According to Marco Van Akkeren, economist at PMI Mortgage Insurance, a one percentage point increase in interest rates reduces housing affordability by 10%. In addition, in recent years, Akkeren points out that home price gains have far outstripped increases in personal income. In view of the aforementioned, he cautions that, in the next two years, there is a 48% chance of falling house prices in the San-Francisco-Oakland-Fremont area and 53% for San Jose-Sunnyvale-Santa Clara.

According to LoanPerformance, 62% of home purchases were financed with interest-only loans in 2004. Van Akkeren observed "it's a clear signal that borrowers are stretching. They can't make mortgage payments on the plain vanilla 30-year or 15-year fixed-rate mortgage, so they expose themselves to more interest rate risk and more risk to price declines." Home buyers are not alone in assuming more interest rate risk. Look at our federal Treasury. They have lowered the average maturity on our outstanding federal debt issues to roughly three years. In so doing, they took advantage of lower interest rates on these shorter maturities rather than locking in rates for 10 to 30 years during this recent record-low interest rate period. That reflects risky short-range thinking, and it was entirely avoidable.

It will serve one well to remember that the overall housing sector is an important component of our GDP as well as recent payroll growth. When housing prices decline, it will additionally impact consumer spending. When our consumer spending generator sputters, it will be heard in China, Japan, Mexico, Canada, and many corners of the earth. Currently, consumer spending is running low on fuel. The back up generator, savings, is almost on empty. The risk is getting higher each and every day of being stranded out in the middle of nowehere in a no cell zone with no help on the way. Don't look to the government. Their finances are worse than yours.

Sunday, April 03, 2005

A Hero For All Seasons

4/3/05 A Hero For All Seasons

Philip James Bailey: "The hero is the world-man, in whose heart One passion stands for all, the most indulged." In a world sadly in need of a hero, the Pope stood tall for 26 years. Will Rogers said that "being a hero is about the shortest-lived profession on earth." Pope John Paul II was the exception.

Pope John Paul II: "The great danger for family life, in the midst of any society whose idols are pleasure, comfort, and independence, lies in the fact that people close their hearts and become selfish."

The greatest danger to our individual and societal independence is to follow in the footsteps of leaders who fail to speak truths that stands the test of time. One must always carefully examine spoken and written words and numbers. That is true in politics, religion, and finance.

Some words are spoken too late and with misinformed descriptions to have relevance. For example, William Poole of the St. Louis Fed stated "the upward thrust to the economy appears quite substantial and the risk of higher inflation over the next 6 months or so seems clearly greater than the risk that inflation will fall below a desirable range." How strong is an economy with a dearth of good-paying jobs? How strong is an economy where debt increases faster than GDP? How strong is an economy with almost no national savings? How strong is an economy when inflation outpaces wages?

Wal-Mart's March same-store sales increased 4.2%. Food sales were, once again, the star performer. Did you see where the company has begun to sell pets online?

A Hero For All Seasons

4/3/05 A Hero For All Seasons

Philip James Bailey: "The hero is the world-man, in whose heart One passion stands for all, the most indulged." In a world sadly in need of a hero, the Pope stood tall for 26 years. Will Rogers said that "being a hero is about the shortest-lived profession on earth." Pope John Paul II was the exception.

Pope John Paul II: "The great danger for family life, in the midst of any society whose idols are pleasure, comfort, and independence, lies in the fact that people close their hearts and become selfish."

The greatest danger to our individual and societal independence is to follow in the footsteps of leaders who fail to speak truths that stands the test of time. One must always carefully examine spoken and written words and numbers. That is true in politics, religion, and finance.

Some words are spoken too late and with misinformed descriptions to have relevance. For example, William Poole of the St. Louis Fed stated "the upward thrust to the economy appears quite substantial and the risk of higher inflation over the next 6 months or so seems clearly greater than the risk that inflation will fall below a desirable range." How strong is an economy with a dearth of good-paying jobs? How strong is an economy where debt increases faster than GDP? How strong is an economy with almost no national savings? How strong is an economy when inflation outpaces wages?

Wal-Mart's March same-store sales increased 4.2%. Food sales were, once again, the star performer. Did you see where the company has begun to sell pets online?