Saturday, May 21, 2005

Density Or Dense?

5/21/05 Density Or Dense?

Justin Klosek: “The beautiful thing about mortgages is this: the collateral behind them is not marked to market. As long as you can pay, there is no margin call.”

Alan Greenspan: “The fairly large and still accelerating degree of extraction of equity from existing homes has been a major force in financing consumption of expenditures.”

LoanPerformance’s Mark Carrington stated “we’re seeing borrowers looking at a home as less of an investment but more of a money-management decision.”

Interest-only loans have been hot items for the last two years. For example, the national average was 31% for both 2003 and 2004. However, in Fort Walton, Fla. they amounted to 71% in 2004. San Diego’s was 64%, San Francisco’s 59%, and Reno’s 58%. Not surprisingly, many Florida locations have seen home price appreciation ranging between 35% and 45% over the past 12 months. Meanwhile, the Las Vegas market has been asleep at only a rise of 29+%. There are plenty more interest-only loans available. Just raise your hand. No waiting in line.

I am hardly surprised that Moody’s stated the rated issuance volume of U.S. collateralized debt obligations jumped 72% in this year’s first quarter on a year-on-year basis. Over the past year real estate loans have increased over 12% to $2.67 trillion. Even securities credit chimed in with a 17.5% annualized increase.

If you think we have problems, China cannot slowdown its infrastructure growth engine. Bloomberg reported that investment in China’s factories, roads, etc. rose over 25% in the first four months of 2005. That’s an appetite like we have for collateralized mortgage obligations and mortgage backed securities.

Not surprisingly, China’s imports of steel products rose to a 1-year high in April.

Saudi Arabia plans to invest in oil refineries in India.

Kuwait’s oil minister and head of OPEC stated today that global demand for oil will rise to 85.5 million barrels per day in this year’s fourth quarter. He said that high oil prices are needed to help fund higher oil production and exploration by producer countries. I hope you’re not short crude or oil stocks. That’s a sucker’s bet. How can you win when long-term demand outstrips supply?

Today, auto supplier Tiercon Components closed its Vassar, MI plant and 104 employees lost their jobs. Alcoa will close its Hawesville, KY auto casting facility and this will impact 158 workers.

Thursday, May 19, 2005

The Patch

5/20/05 The Patch

Economists call it a soft patch. The Conference Board’s Leading Economic Indicators Index has declined at a 1 per cent annual rate over the last six months. For the first four months of 2005, this index has exhibited four consecutive monthly declines.

May’s Empire State Index was a total wipe out. The May Philly Manufacturing Index fell to 7.3 from 23.5 in April. New orders declined to 15.7 from 28. Employment plummeted to 5.4 from 16.8. Prices received fell to 15.7 from 28. The Expectations Index fell to 22.3, the lowest level in 4 years. The Empire State and Philly results are not backward looks, as it were. They are the scoreboard for May.

The four-week average of new unemployment claims rose by 5,000 to 329,750. The number of former workers receiving state unemployment checks rose by 5,000 to 2.60 million in the week ending May 7, while the four-week average of continuing claims dipped 7,500. Considering that the economy has enjoyed continuing GDP gains for the last 3 ½ years, one might rationally expect wages to be higher and that the quality of new jobs would be higher. At the very least, wage gains should exceed the rate of inflation. Maybe one should question the soundness of the foundation of our economy.

Why should anyone be concerned. Long-term interest rates are near multi-decade lows. Mortgage rates are so low that 69% of Americans are homeowners. There might be a reasonable explanation. In 2001, 2% of new mortgages in the state of California were interest only. In 2004, that number had jumped to 49%. In 2005, I would expect it to exceed 60%. Does it get any better than that? Yes it does. With no money down, and only paying monthly interest, you get a big tax deduction. You get the upside and no downside. That’s better than the leverage many hedge funds have been able to create. It gets better. As the appraisals move higher, you can cash out equity from the home even though you haven’t put up any money. And Bush wants to provide more homeowner tax incentives on top of this! Only in America. No wonder everyone wants to cross our borders. We should let everyone in so they too can buy a home and help the prices go even higher. Bubbles have a way of getting bigger. They just need a little extra TLC.

Crude closed on Thursday at $47 a barrel.

Interstate Bakeries to lay off 1,400 workers. DeVry cuts 134 employees.

President Bush in a speech yesterday on Social Security: “The system is solvent for people born before 1950…We’re spending your money and left behind some paper that can only be good if the government decides to redeem the paper.” And how does that differ from Treasury bills or 10-year Treasury bonds? It doesn’t. The U.S. government continues to redeem existing outstanding debt only so long as the Congress authorizes an increase in the U.S. Treasury debt limit. Without that authorization, there is no money for the government to continue running.

Maytag has agreed to be acquired by an investor group for $14 a share in cash, or $2.1 billion including the assumption of $975 billion of debt. The group is led by private equity firm Ripplewood Holdings LLC and includes RHJ International (RHJIF), GS Capital Partners and the J. Rothschild Group of Companies.

The Patch

5/20/05 The Patch

Economists call it a soft patch. The Conference Board’s Leading Economic Indicators Index has declined at a 1 per cent annual rate over the last six months. For the first four months of 2005, this index has exhibited four consecutive monthly declines.

May’s Empire State Index was a total wipe out. The May Philly Manufacturing Index fell to 7.3 from 23.5 in April. New orders declined to 15.7 from 28. Employment plummeted to 5.4 from 16.8. Prices received fell to 15.7 from 28. The Expectations Index fell to 22.3, the lowest level in 4 years. The Empire State and Philly results are not backward looks, as it were. They are the scoreboard for May.

The four-week average of new unemployment claims rose by 5,000 to 329,750. The number of former workers receiving state unemployment checks rose by 5,000 to 2.60 million in the week ending May 7, while the four-week average of continuing claims dipped 7,500. Considering that the economy has enjoyed continuing GDP gains for the last 3 ½ years, one might rationally expect wages to be higher and that the quality of new jobs would be higher. At the very least, wage gains should exceed the rate of inflation. Maybe one should question the soundness of the foundation of our economy.

Why should anyone be concerned. Long-term interest rates are near multi-decade lows. Mortgage rates are so low that 69% of Americans are homeowners. There might be a reasonable explanation. In 2001, 2% of new mortgages in the state of California were interest only. In 2004, that number had jumped to 49%. In 2005, I would expect it to exceed 60%. Does it get any better than that? Yes it does. With no money down, and only paying monthly interest, you get a big tax deduction. You get the upside and no downside. That’s better than the leverage many hedge funds have been able to create. It gets better. As the appraisals move higher, you can cash out equity from the home even though you haven’t put up any money. And Bush wants to provide more homeowner tax incentives on top of this! Only in America. No wonder everyone wants to cross our borders. We should let everyone in so they too can buy a home and help the prices go even higher. Bubbles have a way of getting bigger. They just need a little extra TLC.

Crude closed on Thursday at $47 a barrel.

Interstate Bakeries to lay off 1,400 workers. DeVry cuts 134 employees.

President Bush in a speech yesterday on Social Security: “The system is solvent for people born before 1950…We’re spending your money and left behind some paper that can only be good if the government decides to redeem the paper.” And how does that differ from Treasury bills or 10-year Treasury bonds? It doesn’t. The U.S. government continues to redeem existing outstanding debt only so long as the Congress authorizes an increase in the U.S. Treasury debt limit. Without that authorization, there is no money for the government to continue running.

Off To The Races?

5/19/05 Off To The Races?

Three days of gains can lift the spirits and the pocketbooks, but they do not mean we are off to the races; however, there is a race on Saturday with a field of 14 horses at Pimlico in Baltimore. It’s called the Preakness.

Henny Youngman: “The horse I bet on was so slow, the jockey kept a diary of the trip.”

Motorola’s directors approved a $4 billion buyback of its outstanding shares over the next 36 months, subject to market conditions. At its present stock price, that would amount to about 10% of the outstanding shares.

Oil prices are hovering around $47 a barrel this morning, and that is a 3-month low. Yesterday, it was reported that crude inventories climbed by 4.3 million barrels last week to their highest level since July 1999. Part of the build up is due to the 2.1% decline in the year-on-year crude input to U.S. refineries on a 4-week average basis. Several refineries have been off-line for maintenance purposes. In other words, the reason for the recent decline in oil prices is not simply a fall off in demand. In fact, OPEC trimmed its forecast for oil demand for the year by a mere 80,000 barrels a day to 83.94 million barrels a day. OPEC boosted production by 276,000 b/d to 29.95 b/d in April. One should point out that reliance on OPEC is increasing with lagging output from Mexico and Russia. The story on climbing oil prices is far from over. There has been but a short respite. Enjoy it while you can. Memorial Day weekend is around the corner. AAA estimates that there will be a 2% increase in the number of cars on the road over last year. If you’re looking to fill up, now might be a better time than one week from today.

The headlines stated that U.S. consumer prices rose 0.5% in April but that the core rate was unchanged. When I fill up my tank, I don’t get the core rate price. When I ask for the core rate price, the station owner looks at me as if I’m from Saudi Arabia. For the 12 months that ended in April, all consumer prices were up 3.5%. So far this year, consumer prices are rising at a 4.8% annual rate compared with a 4.4% rate of increase at the same time last year. Food accounts for about 20% of the CPI. Food increased 0.7% in price in April, the most since May 2004. One should note that core prices exclude food and energy. When I go to the grocery store, I ask for the core price on vegetables, and the clerk at the check out counter calls over the manager. The manager tells me their posted prices are the prices. Should I give up eating vegetables? The government says I should eat vegetables, and I always do what the government says. Big brother knows best.

According to the BLS, average weekly earnings rose by 3.3%, seasonally adjusted, from April 2004 to April 2005. After deflation by the CPI-W, average weekly earnings decreased by 0.3%. In sum, inflation is eating the average worker alive.

Fed Governor Donald Kohn: “Interest rates still need to rise. But how far they have to rise is anybody’s guess.”

Palatin Technologies announced it will present at the Fourth Annual Needham Biotechnology Conference at 4:30 EST on May 25 at the New York Palace Hotel.

Industrial production fell 0.2% in the eurozone in March 2005 compared to February 2005. In March 2005 industrial production declined by 0.1% compared to March 2004.

Yesterday, the 10-year Treasury traded down to a 4.06% yield, the lowest in 3 months.

Netflix and Wal-Mart announced an agreement whereby Netflix will promote Wal-Mart’s DVD sales both online and in mailers to its 3 million subscribers, and Wal-Mart will offer its online customers the opportunity to sign up with Netflix at their current subscription price for 1 year. With respect to subscriber growth and financial performance, Netflix is not revising the guidance it provided on April 21 for its current fiscal year.

Wednesday, May 18, 2005

Facts, Conclusions, And Warnings

5/18/05 Facts, Conclusions, And Warnings

Volumes of mortgage applications dropped 10.5% in the week ended May 13 compared to the prior week, according to the Mortgage Bankers Association. Also on a seasonally adjusted basis, applications to purchase homes fell 10.8% on a week-to-week basis, while refinancings decreased by 10.0%. Refinancings accounted for 39.3% of last week's total applications, up slightly from the prior week's 39.2%, while adjustable-rate mortgages slipped to 33.9% from 35.3%.

The Office of the Comptroller of the Currency, the Fed Board of Governors, the FDIC, the Office of Thrift Supervision, and the National Credit Union Administration concluded “home equity lending is an attractive product for many homeowners and lenders. The quality of these portfolios, however, is subject to increased risk if interest rates rise and home values decline. Sound underwriting practices and effective risk management systems are essential to mitigate this risk…The agencies found that, in many cases, institutions’credit risk management practices for home equity lending have not kept pace with the product’s rapid growth and easing of underwriting standards.”

Pimco’s Bill Gross: “We believe a range of 3 – 4 ½ % for 10-year nominal Treasuries will prevail during most of our secular timeframe.”

The folowing is a tale of two countries. U.S. industrial production fell 0.2% in April, while China’s industrial output growth quickened to 16% in April.

The demand for tobacco is slowing in the U.S., while demand in China is growing and China now represents one-third of the world’s annual consumption.

In this Made-In-America section, Zippo has been making lighters in the U.S. in Bradford, Pennsylvania since 1932. They make 14 million lighters a year, and that’s in spite of counterfeit lighters made in China. They guarantee their lighters for life, and replace worn-out parts for free. Maybe GM, Ford, and Chrysler should go that warranty route. It gives the consumer a different opinion of the product. Recalls don’t provide a warm and fuzzy feeling.

China’s April retail sales rose 12.2%.

The government cautions that housing data is subject to large sampling and other statistical errors, and that it can take five months for a trend in housing starts to emerge from the data. What importance should we place on the fact that construction of new homes in the U.S. rose 11% in April? This April figure is 3.6% higher than the pace reported in April 2004.

According to DataQuick, the median price for a Bay Area home was $586,000, a new record. That was 3.2% higher than the $568,000 recorded in March and 19.1% higher than the April 2004 level.

The PPI for finished goods advanced 0.6% in April, seasonally adjusted. At the earlier stages of processing, prices received by manufacturers of intermediate goods climbed 0.8%, while the crude index moved up 2.7%. Among finished goods, much of April’s increase was due to a 2.1% advance in the energy goods index. Excluding prices for energy goods, the finished goods index inched up 0.1%. The bond market continues unconcerned with inflation, and that fact is reflected in the narrowing yield spread between 2-year and 10-year Treasury bonds. With the differential approaching only 50 basis points, one might conclude deflation is lurking around the corner. As Mel Allen might have said, “how about that!”

In their fiscal second quarter report, Applied Materials reported that new orders fell 30%. I had to read that twice just to make certain my eyes were in focus. I thought everything was off to the races. The Nasdaq closed over 2000 last night and everyone went home with a smile.

I’m sure glad I pay little or no attention to brokerage reports. Between May 6 and May 12, Merrill Lynch polled 339 fund managers. They found that 56% of fund managers now expect global growth to weaken lightly or a lot over the next 12 months, while 23% expected a stronger world economy. A clear majority expected corporate profits to deteriorate slightly, while inflation was seen as likely to increase. The euro was seen as the currency most likely to depreciate over the coming year. Overall, it was the most negative polling result since 2001. One must remember an important point. For the most part, fund managers are investing other people’s money. Their opinions, therefore, are, in my view, worthless dribble.

I found it interesting that Nordstrom’s management increased their company’s forecast for 2005, while seeing only low single-digit comp sales growth in the second quarter. I guess the second half of this year will be a barn burner. Tell that to the 339 fund managers polled by Merrill Lynch.

Crude is trading at $49.15 a barrel this morning.

Tuesday, May 17, 2005

Net Capital Flows

5/17/05 Net Capital Flows

Most everyone on Wall Street went home happy yesterday. Interest rates held at low levels. Crude remained below $49 a barrel. The Nasdaq climbed above a moving average. The Dow had a triple digit gain. The dollar continued to climb to multi-month highs. You get the picture. As has been the case for the past five months, smiles frequently turn to frowns. In this instance, we have a problem with net capital inflows into the U.S. In the end, the flow of money determines prices for stocks, bonds, commodities, goods, and services.

The Treasury Department stated yesterday that net capital inflows fell to $45.7 billion in March from $84.1 billion in February. Looking beneath the headline, the news is much more disconcerting. Foreign central banks became net sellers of U.S. assets for the first time in nearly 2 years. Chinese holdings of U.S Treasuries dropped in March for the first time in at least a year. Readers might remark that the yield on a 10-year Treasury bond is lower today than in March. That’s true. However, the buyers of $28.4 billion (net) of Treasuries in March just happened to be located in the Caribbean. That type of capital inflow is hardly the warm and fuzzy kind. It’s here today and gone tomorrow. The money to buy these bonds was borrowed from banks and brokerage firms. It did not represent new capital inflows. In sum, if you subtract the $28.4 billion from the $45.7 billion, the real capital inflow number was only $17.3 billion. That is a mere pittance compared to the daily money needed to fund our twin tower deficits. That revelation should begin to reverse the 6-7 month climb in the dollar. In addition, it should be noted that oil is paid for in dollars. When the dollar reverses, and it will in my opinion, the price of crude will resume its climb and so will the price of gold.

Michael Hampton: “Many funds are using a lot of dollar debt to finance assets, including those priced in euros and other currencies. Thus, since they are borrowing in dollars, they tend to benefit from a drop in the dollar, and a rally in non-dollar currencies helps their asset values grow faster than their debt.”

Talking about crude, Norway sold $17 billion of Treasuries in March.

It is interesting to note that recorded central bank inflows to the U.S. were exceeded by U.S. investor purchases of foreign equities.

Light sweet crude is trading around $48.84 a barrel and Brent crude is changing hands at $49.52 a barrel.

Yesterday, the British pound hit a 6-month low versus the dollar.

The New York Federal Reserve Bank reported that manufacturing activity deteriorated sharply for the second straight month in May. The Empire State Manufacturing index fell to –11.1 from 2.0 in April. This was the first negative, and lowest, reading since April 2003. The new orders index dropped to –7.1 from 1.2 in April. Unfilled orders fell to –17.3 from –8.2. The employment index fell to 0.2 in May from 8.5 in April. This is the lowest reading since September 2003. Overall, the index was truly weak and I can only figure that all available monies are plowing into N.Y real estate. After all, it’s a sure thing. Right?

John D. Rockefeller: “Competition is a sin.”

It has been reported that auto parts maker Collins & Aikman may file for chapter 11.

China’s exports rose faster than its imports for a sixth straight month in April. Exports rose 32% and imports increased 16%. I continue to believe that there will be a widening of the yuan’s trading band accompanied by a revaluation approximating 4%. That should quiet the mass currency manipulation hysteria.

From day one, I have been using Blogger.com’s software to write my daily musings. Two years ago, Blogger was purchased by Google. Blogger’s founder, Evan Williams, left and co-founded Odeo, a podcasting company. Their podcasting service goes live this month, and users should be pleasantly surprised.

Retail chains' same-store sales fell 1% in the week ended May 14 compared to the prior week, according to data compiled by the International Council of Shopping Centers and UBS.

This morning is out time! In a recent study by Microsoft, U.S. workers reported that 35 percent of the workweek is unproductive. CareerWomen.com, in an effort to help employers and employees understand when during the workweek they can expect to be most productive, recently polled U.S. workers and found that Tuesdays 10 a.m.-noon is the height of productivity.

Jackie Mason: “It's no longer a question of staying healthy. It's a question of finding a sickness you like.”

Monday, May 16, 2005

Prepare For The Future

5/16/05 Prepare For The Future

Henry Ford: “Women do not win formula one races, because they simply are not strong enough to resist the G-forces. In the boardroom, it is different. I believe women are better able to marshal their thoughts than men and because they are less egotistical they make fewer assumptions.”

Last year, 31 CEOs of U.S. automakers, suppliers, and publicly traded dealership groups had a median income of $4.2 million. That’s up 72% from 2003. How many of these same companies will file for bankruptcy in 2005 and 2006?

According to Automotive News’ annual ranking of the world’s automakers by sales and production, Toyota gained by nearly 600,000 vehicles on GM to close to within 1.38 million in sales in 2004. In the January-March 2005 quarter, Toyota’s automotive revenues led GM’s $40.31 billion to $37.30 billion.

The dollar is trading at a 7-month high versus the euro. With more bulls moving into the dollar camp, I think the dollar rally should prove to have weak knees and unstable legs. In just five months, we have gone from a large bearish dollar camp to one with bullish overtones. I prefer the side with the least noise. I do my best thinking that way.

Crude is close to a 3-month low and hovering just below $48 a barrel.

eBay’s Meg Whitman stated “ultimately China could be eBay’s largest local market in a 5 to 10 year period.”

The Washington DC unemployment rate is 8.2%. Unfortunately, hard unemployment times have not found their way into the Congress and the Administration.

According to government estimates, the PBGC’s obligations exceed assets by $23 billion. Corporate pension plans are underfunded by approximately $450 billion. That underfunding, combined with mounting woes from Medicare and Social Security, make for sleepless nights for retirees.

China’s April CPI climbed 1.8%, the smallest rise since October 2003. This followed a rise of 2.7% in March. The People’s Bank of China’s one-year lending rate is 5.58%; however, 7-year Chinese government bonds are yielding a record-low 3.71%. That looks like an inverted yield curve to me. What does that tell you about China’s GDP growth rate in the coming months?

This morning is the annual meeting for Goldcorp (symbol GG ). At 11 am EST you can be connected to the conference call by dialing 1-877-677-7774. I suggest it will be time well spent. Goldcorp is the world’s lowest cost million ounce gold producer with total cash costs approximating $94 per ounce. Operating cash flows are up sharply in this year’s first quarter compared with the year-ago period. The acquisition of Wheaton was timely and should prove beneficial over the long-term. Goldcorp’s Red Lake and Luismin mines achieved record gold production for the quarter. I am particularly high on the Red Lake operation. Shares of Goldcorp sell in the $12 a share range. With the dollar trading at a 7-month high versus the euro, it is not surprising that gold shares and gold bullion have provided disappointing returns in 2005. In my opinion, it would be a mistake to dismiss precious metals from one’s portfolio for the long-term. Goldcorp would be my first choice for investment in this sector. Gold is not for everyone. It will not provide any income and it can be volatile. I do not view gold as an inflation hedge. I consider it as an alternative holding for the U.S. dollar for those taking a 3 to 5 year view.

Henry Ford: “Thinking is the hardest work there is, which is probably the reason so few engage in it.”

UPS and Overnite Corporation today jointly announced a definitive agreement for UPS to acquire Overnite for $43.25 per share, or approximately $1.25 billion in cash.

Palatin Technologies, Inc. today announced that it will present at the 2005 UBS Global
Specialty Pharmaceuticals Conference at 10:00 a.m. Eastern Time on Monday, May
23, 2005 at the Grand Hyatt Hotel in New York City.

John P. Hussman, Ph.D.: “The flexibility to vary one's investment stance based on prevailing market conditions, particularly valuations, will most probably be essential to investors focused on achieving strong risk-adjusted returns over time.”

Sunday, May 15, 2005

Ford

5/15/05 Ford

This past week, Wall Street and the media paid particular attention to Moody’s downgrade of Ford’s corporate bond obligations. Not surprisingly, they ignored the significance of a happening at Ford’s annual meeting on May 12. A little background would be helpful.

A shareholder proposal to be included in the 2005 proxy materials for this year’s annual meeting was submitted by Edward Olson and Jack Leeds. This proposal requested that the board “take steps to adopt a recapitalization plan to provide for all of our Company’s outstanding stock to have one vote per share. This would include all practicable steps including any encouragement and negotiation with Ford family shareholders to request that they relinquish for the common good of all shareholders any preexisting rights." Ford and its attorneys fought to have the proposal excluded from the proxy materials. On March 7, the SEC in a No-Action Letter, advised Ford that it may not omit from proxy materials for its 2005 annual meeting the Olson/Leeds shareholder proposal that the board of directors take steps to adopt a recapitalization plan to provide that all outstanding stock have one vote per share. Presently, the Ford family shareholders are allowed 16 votes per share compared to the one vote per share for regular shareholders.

On May 12, Ford held its 50th annual shareholder meeting in Wilmington, DE. A grand total of 92 people attended in person. In total, 89.55% of the outstanding shares were represented by proxy or in person at the annual meeting.

We now come to proposal 7 at the annual meeting. This proposal related to consideration of a recapitalization plan to provide that all of the company’s stock have one vote per share. Voting for the proposal was 25.05%. Against was 74.95%. Abstaining was 1.44%. For those not familiar with proxy votes, you might think this vote was one-sided. On the contrary, without a strong proxy fight, the vote showed much underlying shareholder support for the proposal. In fact, if a well-organized proxy fight were mounted, I believe the proposal could be passed at next year’s annual meeting. (I don’t know anyone more qualified to make that assessment.)

That brings us to the election of directors. With the election of Stephen Friedman, the Ford board now has 11 members, and they are divided into 3 classes. It’s a staggered board where a member comes up for re-election every three years. Theoretically, it would require three years to change the composition of the entire board. Realistically, it would not require that length of time.

If proposal 7 is passed at next year’s annual meeting and 3 dissident members to the board were elected, the landscape at Ford would change overnight. If Ford’s board thought they would lose the vote on proposal 7 as well as the vote for 3 directors, they would look to avoid the embarrassment long before the annual meeting. Of course, there are some companies that are in denial. I have witnessed this first hand, and seen that company lose over 90% of the vote for directors.

In sum, in my view, the control of Ford may very well be in play. Please note that I have no interest in any Ford stock or debt instruments, and I plan on having none in the future. Like so many family-run businesses that are in the domain of public ownership, Ford is mismanaged with an arrogance that pisses me off. Read the words carefully chosen by Ford’s attorneys to the staff of the SEC Commission’s Division of Corporation Finance. “The decision to request the holders of Class B Stock (owned by the Ford family) to redeem their stock for Common Stock is an integral part of the Company’s ability to manage its business and affairs, including its capital raising, capital management, and financing activities.” The lawyers stated that allowing shareholders “to dictate such policies would inevitably result in second-guessing of the day-to-day business decisions of the Board and management of the Company, which shareholders must not be permitted to do by way of misuse of the shareholder proposal process.” In my view, if Ford were managed like Toyota, there would be no shareholder proposal 7. Based on their lack of performance, in my opinion, the appropriate exit strategy would be to escort Ford’s top management out of their ivory tower corporate digs.

Before I leave this subject, a little background information would be helpful to the reader. When the company went public in 1956, the Class B shares, which could only be owned by the Ford family, had a voting stake of 40%, and that approximates 42% today. According to the 1956 prospectus, Ford could not be merged, sold, or liquidated without the approval of the Class B holders. Today, the wording is the majority of the vote of Class B shareholders is required to “merge or consolidate with or into another corporation…dispose of all or substantially of our property and assets…transfer any assets to another corporation…voluntarily liquidate or dissolve.” Now you realize the importance of shareholder proposal 7. Should owners of 5% of a company’s equity control 42% of its votes?

Ford has a market cap of $17+ billion with a cash position of $19+ billion and debt outstanding of approximately $161 billion. Eliminating the stock’s 40-cent cash dividend would save about $750 million. In 2004, Ford Motor Credit provided $4.7 billion in “dividends” to the auto operations. This will not be repeated in 2005.