Saturday, May 07, 2005

A Big Day

5/7/05 A Big Day

There is a great deal going on today. We have a V-E Day to celebrate, an important birthday to celebrate, and latter in the afternoon, the running for the roses. I hope all the activities bring smiles to many faces.

When you look at yesterday’s nonfarm payrolls report, some interesting points pop out. Both the number of unemployed persons and the unemployment rate were unchanged in April. About 1 in 5 unemployed persons had been jobless for 27 weeks or longer. The long-term unemployed have accounted for over 20 percent of total unemployment for 31 consecutive months. That’s a real employment soft patch. In addition, not very many of those 274,000 net new jobs really provide a means to support a family of 4. Most are low paying service jobs. As those types of jobs become a greater proportion of our labor force, the disparity between the haves and havenots gets wider and wider. That’s not an encouraging picture going forward.

Maybe it’s a good thing to work for the federal and/or state government. Take the state of Washington, for example. On average, Washington state employees pay $79 towards their monthly health premiums while the state government pays on average $575 per month in health premiums. Yearly benefits to Washington state employees amount to $1 billion. Meanwhile, the number of uninsured in the state continues to rise and the state encounters growing budget deficits. That’s not an encouraging picture going forward.

With one hand, the Fed continues to raise short-term interest rates. With the other hand, M-3 rose by $19.1 billion this week and by $73.2 billion over the past two weeks. This slight of hand does not provide an encouraging picture going forward. Fueling liquidity that leads to greater inflation does not create a neutral stance and/or balance the risk through higher short-term interest rates. In fact, both activities generate a destabilizing economic foundation.

ECRI’s Future Inflation Gauge rose to 119.7 in April from an upwardly revised 118.8 in March. The index’s annualized growth rate rose to 2.6% from 0.6% in March.

In the latest reporting period, bank credit rose by $4.3 billion and total commercial paper by $3.9 billion.

Crude closed out the week at $50.96 a barrel.

No matter how smart you are and no matter how much you know, there is some investor who is smarter and knows more than you do. That person may be a seller when you are a buyer and vice versa.

NeoRx Corp. will cut its staff by 40% and close a plant in Texas.

As of March 31, 2005, the S&P 500 companies had $617 billion in cash on their balance sheets. Charles Mulford, professor of accounting at Georgia Institute of Technology’s College of Management noted that the S&P 100 companies reduced capital expenditures by 19.6% from 2000 to 2003. During the same period, the group’s adjusted operating cash flow grew 20.8%. The average dividend payout ration was 32% in 2004, compared with the 54% historical average.

Friday, May 06, 2005

High Gas Prices Do Matter

5/6/05 High Gas Prices Do Matter

According to a national poll of 1,000 individuals conducted by Sacred Heart Universiyt, 71.3% nationwide said that higher gas prices are very seriously or somewhat impacting their quality of life. Additionally, 43.5% stated their summer plans will be slowed as a result of increased gas prices. Sacred Heart University economics professor, John Gerlach, opined "it is not surprising that Americans are making adjustments in their lifestyle, as they realize that the increase in gas prices is not a temporary spike but it likely to be with us for some time as the worldwide demand for oil continues to increase faster than supply." According to the poll, 51.2% of thise surveyed suggest their next car will be smaller and more gas efficient than their existing car. Gerlach stated "the impact on the types of cars Americans buy was reflected in the sales of vehicles in the U.S. in March when there was a significant downturn in the number of large SUVs purchased. If the higher gas prices persist for another six months, as I expect they will, it is logical to infer that the number of Americans who make adjustments in the types of vehicles they buy will be even greater than shown in the poll."

UT Starcom announced plans to cut 17% of its workforce or 1,400 jobs. HP will cut 1,900 jobs. Woodbridge Corp. in Brodhead, WI makes foam seats for autos and is laying off at least 115 workers. Riverside Paper is closing its Appleton, WI paper mill and 101 employees will lose their jobs.

Once again, yesterday, crude traded jus tbelow $50 a barrel but rallied to close at $50.83.

Ken Wood, founder of Woodie's CCI Room: "85% of trading is psychological, and 15% is made up of what we use to trade...people who don't feel good about themselves aren't going to feel good about their trading. Ego is a big problem."

It is not a coincidence that there has been support for the dollar over the past 4+ months. In my view, there are a few reasons for this turnaround in demand for dollars. There was a realization that the Fed would continue to raise short-term rates, and the upward path could take us to the 3.5% to 4% range in 2005. These measured one-quarter point increases would create a growing disparity with the ECB rates and thos ein Japan. In other words, the returns would be higher in the U.S. In addition, even though higher rates would most likely slow the U.S. economy, the latter's growht rate would still be higher than those in the eurozone countries and Japan. Why am Ibringing this discussion up today? Simply put, the April nonfarm payroll report will be out in afew hours. My software service is non-opertaional at this time, and therefore, my posting for today will be delayed. It is important to focus on the relevant facts in order to reach a rational conclusion. As always, it is best to keep one's mind focused on the simple. That's correct. To be right, most frequently the answer is obvious. The economic growth in the first quarter was less than expected. Interest rates were rising. Gas prices were rising. Inflation was rising. Consumer confidence was falling. The stock market was falling. The yield curve was getting flatter. March nonfarm payrolls were disappointing. Knowing all that, what possible reason would there be to forecast a job gain of 175,000 for April? What had changed in April? Yet, that is the average forecast by 60+ economists. The same trends that existed in March apparently existed in April.

Yesterday, GM and Ford bonds were downgraded to junk status. Do you think this was a surprise? Smart investors buy on bad news and sell on good news. Why? The news should ahve been anticipated and the market pricing should already have reflected the news. Interestingly, yesterday there was selling on the news. In never realized there were so many amateurs participating in daily market trading. That gives me reason to believe greater profit opportunities exist in the future.

My software has just begun to function once again. The market has been closed for one hour. Maybe my brain is not working. The nonfarm payrolls for April showed a gain of 274,000 net new jobs and February and March were revised upward by a total of 93,000 jobs. Those are whopping figures and I'm happy for the new jobs but pissed that my forecast stunk the house out. In April, the service sector gained 229,000 jobs, including 58,000 in leisure, hospitality, and food services; movies and telecommunications 12,000; mining 8,000; hospitals and doctors' offices 25,000; construction 47,000; retail 24,000; professional and technical 18,000; and financial services 17,000. Manufacturing lost 6,000 jobs. In other words, the hiring was widespread. The weekly gain in workers' pay was 5 cents an hour to $16 an hour. Over the past year, the average hourly earnings rose 2.7% and still trailed inflation, which is in a cyclical upturn. I will need to go back to ground zero and see where I could have been so far of in my forecast for net new job creation. For example, I never thought there were 35,000 new food service jobs in April or 24,000 new retail jobs--- not with rising gas prices.

Thursday, May 05, 2005


5/5/05 GM

Yesterday’s announcement by Kirk Kerkorian that, he wished to purchase an additional 28 million shares of GM at $31, generated a $5 gain in the stock or a market cap increase of $2.8 billion. The stock, surprisingly, opened for trading at only $30.52. Quickly, the buyers came to their senses and appreciated the untapped value in GM. Of course, it didn’t hurt that almost every hedge fund is short the stock. These same self-professed geniuses also took it on the chin in the GM bonds. These are the same bonds everyone considered junk. You might recall I mentioned that I would prefer owning these GM bonds to a U.S. treasury bond. Why? If you want to restructure GM, the bonds will come before the equity holder’s interests. In the meantime, they were yielding close to 11%. Don’t you know that, if the GM management omitted the common dividend, you are talking about saving $1.150 billion dollars? These bonds represent real value--- in my view. I don’t care how they are rated.

Yesterday, the U.S. ISM non-manufacturing index for April showed a decline to 61.7% from 63.1%. Importantly, the employment index dropped to 53.3% from 57.1%. This is the third important piece of information indicating the April nonfarm payrolls number will be below expectations. That maybe one reason why long-term Treasury bond yields remain so low. We should keep in mind that the Treasury indicated they would reintroduce the sale of 30-year U.S. Treasury bonds. Yes, the yields on these instruments did rise, but still remain extremely low on an historical basis.

Yesterday, was another bad day for layoffs. IBM, finally, announced cutting 13,000 jobs. They didn’t have the guts to make the announcement at the recent annual meeting. Interstate Bakeries stated they would close a Charlotte bakery and cut 950 jobs. Ericsson will cut 250 in the U.S. Gemini Cap mentioned they would be cutting jobs.

Yesterday, information was released showing that oil supplies rose to their highest levels since mid-1999 and that gasoline inventories rose to their highest point in a month. Yet, crude rose and is trading just under $51 a barrel. Interestingly, this is the same level, $50.85, that the price of crude has averaged for the first four months of 2005.

Comparable sales for Wal-Mart for the four-week periods ending April 29, 2005 and April 30, 2004 were as follows:
Wal-Mart Stores division—a gain of 0.1% versus the prior year’s 3.7%.
SAM’s CLUB--- a gain of 4.9% versus 8.3%.
Total U.S. comp sales--- a gain of 0.9% versus 4.4%.
The company estimates comp sales in May will rise between 2 to 4 %.

According to the California Association of Realtors, the median household income for the Bay Area is $67,770 a year, and with this income, Bay Area households fall $92,930 short of the income needed to qualify to buy the region’s median priced house. Statewide, California households, with a median income of $53,540, are $60,380 short of the $113,920 qualifying income needed to purchase a median-priced home at $488,600 in the state. This trend cannot continue well into the future.

Edmunds. com reported overall combined incentives extended by domestic Chrysler, Ford, and GM averaged $3,339 per vehicle sold in April, down $133 from the prior month. In April, Chrysler spent the most on incentives with $3,535 per vehicle.
Average domestic incentives have never been higher in any prior April. The combined market share of the Big Three reached an historic low of 56.1% in April 2005.

India’s forex reserves have ballooned by $13.5 billion since January to a record $142.6 billion, the sixth largest in the world. It is believed that, the composition of these forex reserves, have begun to shift more towards the euro and less towards our dollar.

Garrett Jones: “Had you held U.S. T-bills since 2001 you would have earned a nickel’s worth of interest and lost a quarter’s worth of purchasing power. If you had held $10 million worth of U.S. T-bills since 2001, your money would have lost $3 million of real value in terms of purchasing power. Municipal bonds, corporate bonds and mortgage debt all would have exhibited similar results since 2001. The point is that yield is irrelevant in a depreciating currency.” An investor had better be sure that a safe haven is a safe haven. When they raid the whorehouse, they take all the girls. That includes T-bills. The world is a small place. It’s tough to find a place to hide. Those short GM and its bonds can tell you that. You can wake up one morning, and boom!!!!! The world has changed. Before you plan on going to the bank, you had better make certain its location is still there.

First quarter productivity in the U.S. rose at a 2.6% annual rate, and that was better than expected.

U.S. jobless claims rose by 11,000 in the week ending April 30, and the number of people collecting unemployment checks rose by 38,000. These numbers were higher than expected.

Wednesday, May 04, 2005

There Is Real News

5/4/05 There Is Real News

Eight raises are not enough for the Fed. Inflation is contained--- or is it? How can it be contained with 10-year Treasury bond yields near an all-time low? Those suckers determine mortgage rates, and mortgage rates grease the wheels of the housing ATMs heard round the clock.

From Nouriel Roubini, Stern School of Business, and Brad Sester, University College: "Credit is too cheap in China. Nominal interest rates are very low for a fast-growing economy. Real interest rates are negative for many firms, as the nominal rate is lower than in the increase in producer prices. This has led to the substitution of capital for labor, even in the face of China's enormous reservoir of underused labor (labor that can be drawn in from the countryside as well as employees in some state firms). Work by some Chinese economists suggests a sharp falloff in the marginal productivity of capital, and total factor productivity. Labor productivity has been growing in large part because each unit of labor is now combined with more capital. The cheap price of capital is one reason why investment has soared in relation to GDP."

The IEA chief stated investment in new capacity by oil producing nations and energy companies is too small to meet future growth in demand. Meanwhile, crude dropped below $50 a barrel yesterday. Big deal. The recent decline has produced a blip at the pump. That’s where it counts. If the hedge funds want to play with themselves every day in the oil market, that’s up to them. Something has to keep 7,900+ hedge funds busy. At some point, most will disappear up their you know what.

Challenger, Gray, & Christmas announced that planned job cuts in the U.S. fell to their lowest level in almost five years in April as only 57,861 job cuts were announced by U.S. employers. However, job cuts this year are still 3% higher than in the first four months of 2004. Challenger stated that employers seem to be shifting from job elimination to worker retention. I don’t believe that. VF announced the close of a jeans plant in Wilson, NC with 445 jobs being lost. M.J. Soffe, another textile company, will cut 160 jobs in Fayetteville,NC and those jobs will go to El Salvador. Giant Supermarket will close several operations and cut up to 500 jobs.

GM’s April sales declined 7.4% and Ford’s were down 5%. By comparison, Toyota had its best sales month ever. Ever! Their sales rose 21.3%.

Warren Buffett: “You’re neither right nor wrong because other people agree with you. You’re right because your facts are right and your reasoning is right—that’s the only thing that makes you right.”

If real M2 growth is slowing as well as aggregate demand growth, what will the impact be on GDP growth and corporate earnings going forward?

Napoleon Hill: “Accurate thinkers permit no one to do their thinking for them.”

Corporate earnings as a percentage of GDP are at their highest level ever. Consumption as a percentage of our GDP is at our highest level yet. The rate of savings as a percentage of our GDP is declining towards record low levels. Short-term rates are still below the inflation rate. The United States market cap is roughly 50% of the total market cap in the entire world. With China, India, and other Asean economies growing faster than we are, our equity markets remain, in my view, comparatively too high. If the U.S. offered terrific value, you’d see companies eager to build new plants and increase their capital expenditures. Rather, they focus on stock buybacks and dividend increases. The real money should be made in investing in one’s business. I don’t see that happening. How many CEOs and CFOs do you see buying their own stock with new money aside from exercising cheap stock options? Enough said.

Tracinda Corp. on Wednesday said it plans to make a cash tender offer of $31 a share for up to 28 million shares of General Motors. The offer from Kirk Kerkorian's buyout firm is worth about $868 million. The offer price, which is 13% above GM's closing price of $27.77 on Tuesday, is without regard to General Motors' regular quarterly dividend of 50 cents per share expected to be paid in June 2005, Tracinda said. Stockholders will be entitled to retain the dividend expected to be paid in June 2005. Tracinda would own 8.8% of GM after the offer. Kerkerian presently owns 22 million GM shares. At age 87, Kerkorian has more balls than 99.4% of other investors around the globe. He puts his money where his mouth is.

Thank you Mr. Kerkorian. Our hedge is working. Long GM, Ford, and Harley Davidson and short DaimlerChrysler. The parts of GM and Ford are worth more than the whole--- at least in my opinion. If GM and Ford can’t compete with Toyota, Honda, Nissan, and others, sell the pieces. They are not American idols.

Azulstar Networks today announced the launch of the world's first metro-wide Voice over Wi-Fi telephone service. The carrier class fixed and mobile service, which was developed by Azulstar Networks and its partners, operates over the converged city-wide Wi-Fi wireless network that already spans over 60% of Rio Ranch, NM.

Monday, May 02, 2005

This Is Uninsured Week

5/3/05 This Is Uninsured Week (May 1-May 8)

Forty nine percent of uninsured adults with chronic conditions forgo needed medical care or prescription drugs due to cost, according to researchers at the University of Maryland, County of Baltimore, and the Urban Institute. Uninsured adults with chronic conditions were 4.5 times as likely as their insured counterparts to report an unmet need for medical care or prescription drugs. They more than 7 times as likely as insured adults with chronic conditions to lack a usual source of health care, and 27% reported no visits to health professionals in the past year compared to 7% of insured adults. Even so, 21% of uninsured adults with a chronic condition report spending at least $2,000 out of pocket on medical care in the 12 months prior to the survey.

Albert Einstein, Why Socialism? "The economic anarchy of capitalist society as it exists today is, in my opinion, the real source of [society's] evil… The owner of the means of production is in a position to purchase the labor power of the worker. By using the means of production, the worker produces new goods which become the property of the capitalist. The essential point about this process is the relation between what the worker produces and what he is paid, both measured in terms of real value. In so far as the labor contract is 'free,' what the worker receives is determined not by the real value of the goods he produces, but by his minimum needs and by the capitalists' requirements for labor power in relation to the number of workers competing for jobs. It is important to understand that even in theory the payment of the worker is not determined by the value of his product."

Nationally, the market value of real estate is approaching 200% of disposable income. In California, for example, few homeowners would qualify to buy the home they presently own.

Winston Churchill: "Play for more than you can afford to lose and you will learn the game."

U.S. March construction spending rose 0.5% and topped forecasts.

J.P. Morgan reduced its equity weighting to 55% from 70% with bond weighting at 25% and recommended cash levels at 20%.

The National Association of Realtors stated U.S. pending home sales fell by 0.3% in March.

The ISM Index for April fell more than had been projected. It declined to 53.3 from 55.2 in March. It was the fifth straight monthly decline and reached the lowest level since July 2003. Meanwhile, the prices paid sector dropped to 71 from 73, but employment also declined to 52.3 from 53.3 and new orders were disappointing with a slump to 53.7 from the prior month's 57.1.

Oil rebounded to close at 50.92 a barrel.

Elmer Davis: "The first and greatest commandment is, don't let them scare you."

Worldwide sales of semiconductors grew by 13.2 percent in the first quarter of 2005 compared to the same period of 2004, the Semiconductor Industry Association (SIA) reported Monday. Global sales of semiconductors in the first three months of 2005 amounted to $55.3 billion compared to $48.9 billion in the first quarter of 2004.

According to, the Permian Basin, which stretches from Lubbock and Midland to the New Mexico border and has long been the state's center of production, showed a decline in oil production from 304 million barrels in 1994 to 236 million barrels last year.

Hut Landon: "If a pit bull romances your leg, fake an orgasm."

The Understated CPI

5/2/05 The Understated CPI

Verizon Communications Inc. today announced it had agreed with MCI, Inc. to further amend the terms of the Feb. 14, 2005 agreement to acquire MCI. As with the original offer and the revised bid of March 29, the MCI Board of Directors is unanimously recommending approval of the amended agreement to its shareholders. Under the amended agreement, each MCI share would be exchanged for cash and stock worth at least $26.00, consisting of cash of $5.60 expected to be paid promptly upon approval of the transaction by MCI's shareholders plus the greater of 0.5743 Verizon shares for every share of MCI Common Stock or a sufficient number of Verizon shares to deliver $20.40 of value. Under this price protection feature, Verizon may elect to pay additional cash instead of issuing additional shares over the 0.5743 exchange ratio.

It has been reported that Texas Pacific and Warburg Pincus will purchase Neiman Marcus for about $5 billion or $100 per share.

The funniest joke I have heard in some time came from the CEO of Sun Microsystems who remarked that his company was interested in making a large acquisition but that Sun was not interested in buying Dell. The market cap for Dell is 7 times larger than that of Sun. Maybe Sun's CEO has been out in the sun too long.

Oil declined this morning to just above the $49 mark.

For the first time since August 2003, the manufacturing index for the 12 eurozone countries declined below 50. It fell to 49.2 from March's 50.4. Below 50 indicates contraction. In addition, the new orders index declined to 48.9 from 50.4. It was the lowest level since July 2003. The indicator for employment dropped to 47.6 from 48.8.

Tomorrow, the ISM reports on U.S. manufacturing for April. It won't be as weak as the above mentioned eurozone index; however, I envision it will be weaker than the projections offered by 56 economists who have been surveyed. In addition, I suspect a report will show a steep drop in March factory orders as well a drop in the supply managers' index of services. Finally, later in the week, we should see a report indicating a rise in unit labor costs with a decline in productivity. These statements should be well appreciated by the Fed prior to tomorrow's FOMC meeting.

I am greatly concerned by many Fed members regarding inflation as "contained." In fact, the CPI is understated. It should be noted that the annual COLA for Social Security benefits and federal and military pensions are tied to changes in the CPI. The recent understatement is the result of the 1983 change in calculating the cost of housing, which involves both ownership as well as renting. Before 1983, the BLS took into account the price of a home, mortgage rates, insurance, and property taxes. In 1983, a switch was made from an asset-based approach to the cost of putting a roof over one's head. This change involved estimating what a homeowner would get upon renting out their home. The BLS states that the cost of renting comprises 6.31% of the total CPI. However, the cost of owners' equivalent rent is 23.16% of the CPI. The latter represents the understatement. Moody's chief economist, John Loski, points out that in 2003 and 2004 housing prices rose an average of 7.7% a year, while the owners' equivalent rent increased only 2.4%. Lonski stated in the fourth quarter of 2004 "an even wider gap existed between the 9.2% annual rate of home sales price inflation and the 2.3% rate of owners' equivalent rent inflation." As I have stated many times over the past several months, there is a common belief today that, in many large metroloitan areas, it is cheaper to rent than to buy. If the CPI is understated by roughly 7 percentage points for 23.16% of the CPI, then we have a problem, and that problem provides data that inflation is not "contained."

Sunday, May 01, 2005

Approaching The Tipping Point

5/1/05 Approaching The Tipping Point

Year-to-date, bank credit has expanded by $310 billion or 14.9% annualized. This even outstrips the 13.7% rise in real estate loans over the past year. In the meantime, during the week of April 18, M3 surged $53.6 billion to a record amount that is just shy of $9.6 trillion. For an $11 trillion economy, that's not hay. There are those who believe that the inflation scare is over. For the past week, the Goldman Sachs Commodity Index dropped 6.8%! Of course, the means this Index is up ONLY 13.8% year-to-date!!!!

For those who think housing and condos are in the bubble stage, consider that the new Wynn Las Vegas hotel cost $1 million per room.

Rather staggering is the knlowledge that there are over 7,900 hedge funds. I can live with that. Are you concerned that they have more than $1 trillion under management?

April same-store sales for Wal-Mart rose 0.9% with food comp sales stronger than general merchandise. Everyone has to eat.

Have you ever heard of the small town of Stamps, Arkansas with its population of 2,134? Alan White Co., a furniture manufacturer, is its largest employer with 200 people on the payroll. The company announced the plant is closing due to high fuel costs, and all jobs will be lost.

In this year's first quarter, U.S. households spent themselves into a $322 billion annualized deficit. Simply put, spending and borrowing exceeded incomes by a record amount.

Why is it that, during the first year of the presidential cycle, the first five trading days in May have risen 90% of the time for the last 77 years?

Yesterday was the Berkshire Hathaway annual meeting. It was not business as usual. Questions propped up about AIG and, for legal reasons, not addressed. Buffett and Munger opined that the overhaul of Social Security can wait. There was one event that did not make the financial headlines---- Over 70 pilots from NetJets joined together in a show of solidarity, picketing outside the Berkshire Hathawayshareholders' meeting at Qwest Arena. The pilots passed out leaflets to raise awareness regarding their continued struggle to receive a fair contract from the fractional airline, a subsidiary of Warren Buffett's conglomerate. "Our issues have seemingly fallen on deaf ears," said Captain Alan Hayes,who has been a NetJets pilot for three years. "There is a real problem in this company when our pilots are paid around half the industry average for flying the same equipment." NetJets pilots, who have been recognized as the safest in the private jet industry, endure low wages, insufficient benefits and unreasonable scheduling demands. They have been working nearly four years without a new contract after their last negotiated agreement came up for renewal in 2001. "It is time for management to step to the plate and propose an agreement that includes a wage and benefit package that shows they recognize theoutstanding job these pilots are doing," said Nick Reyer a business agent for Teamsters Local 1108. "Eighteen percent of our pilots make a salary that qualifies them for public assistance -- that is unacceptable." More than 80 percent of the 2,000 NetJets pilots rejected a contract proposal in August 2004 that was severely lacking in wage increases andbenefits while increasing the already long hours the pilots are required to work."We are all here to let Warren Buffett and all his shareholders know that we deserve a fair contract," Hayes said. "While all of these investors areenjoying the fruits of our labor, our pilots struggle to make ends meet. Mr.Buffett has always had a reputation of paying exceptional employees what theydeserve. We only ask for the same consideration."