Saturday, May 28, 2005

Goldman Sachs, CNOOC, and Unocal

5/28/05 Goldman Sachs, CNOOC, and Unocal

When change occurs, it is wise to take notice. Historically, as an investment banker, Goldman Sachs’ franchise was advising on friendly mergers and acquisitions. Earlier this year, Goldman stated they would be open to advising on hostile deals under certain circumstances. Earlier in 2005, they were hired as co-investment banker/adviser to the management of CNOOC. They remain in that role, and that is after Unocal agreed to a merger with Chevron. In addition, it should be noted that Goldman Sachs has never had a head or co-head of investment banking in Asia outside of Japan. That changed on Thursday with the appointment of Bill Wicker as co-head of investment banking in Asia for Goldman. Wicker is located in Beijing. He is the one representing Goldman as investment banker to CNOOC. Wicker worked for Texaco (now part of Chevron). His specialty is energy. While the world focuses on the possible revaluation of the yuan, the fight for Unocal is escalating. A purchase of Unocal would make CNOOC the largest energy company in China. Unocal has 1.75 billion barrels of oil-equivalent proven reserves. Those reserves would enhance Chevron’s by 16%, a significant number; however, it would mean a great deal more to CNOOC. Goldman Sachs knows that. It’s only the press and most on Wall Street who are asleep. Of course, sheep normally stand around and accomplish little.

The average customer bill at Costco’s check-out counter is an astounding $400.

Last year, outstanding residential mortgage debt increased by an astonishing 13.2% to $8.7 trillion. So far in 2005, real estate loans have risen at a 12.5% growth rate to $2.66 trillion.

For the week, crude settled in at $51.85 a barrel.

Steve Saville: “The important thing to understand is that a price increase cannot possibly be related to inflation unless it was preceded by an increase in the money supply and a price decrease cannot possibly be related to deflation unless it was preceded by a decrease in the money supply.”

GM opened a new auto plant in Shanghai today. GM’s Asia Pacific head, Troy Clarke, stated “there is no country more important than China for the auto market.” From a potential profit standpoint for GM, he may be correct.
Able Labs cut 200 workers, and this is an example of a mass layoff. According to MasterCard, $2.5 trillion is approximately what is currently spent annually in the U.S. on Visa and MasterCard combined. By comparison, for the year ended March 2005, Visa cardholders spent $2.1 billion in China, an 83% growth rate year over year. It is amazing to me that, during the five years ended in June 2004, household mortgage debt increased by a whopping $2.8 trillion. Even more amazing, during the same time period, the value of homeowners residential real estate rose by $5.9 trillion.

Friday, May 27, 2005

CNOOC and Unocal

/27/05 China National Offshore Oil Corp. (CNOOC) and Unocal

In early January of this year there were reports in the Financial Times that CNOOC was considering a bid for Unocal. As we know, it was not long thereafter that Chevron agreed to buy Unocal. Only 10 days ago, I mentioned that CNOOC was having a board meeting on May 23 and May 24. The directors would be discussing a bid for Unocal. This morning the Financial Times reported that “non-executive directors at CNOOC have hired independent advisors to review the management’s plans for a possible bid of more than $16 billion for Unocal…People close to the situation said Rothschild and Charles River had been retained by independent directors of CNOOC, China’s third-largest oil company.” CNOOC is especially interested in Unocal’s energy properties located in Indonesia and Thailand. CNOOC is a sophisticated enterprise. You might be surprised to know that Henry Kissinger sits on their advisory board. Not long ago, CNOOC and Shell announced a $4.3 billion petrochemical joint venture. I continue to view Unocal favorably from a risk/reward basis. Operationally and statistically, it offers unusual value, and that is especially true in an environment where energy resources appear to be in short supply over the long-term. It is important to remember that oil output in China rose a meager 2% in 2004, while consumption was in double digits.

Puru Saxena: “China produces more steel than the U.S. and Japan combined. China produces 5 times more cement than the U.S. China consumes 21% of the world’s copper and 27% of the world’s iron ore.” China is on the hunt for more energy resources. The U.S. Energy Information Administration estimates China will consume 8 million barrels of oil daily by the end of 2006. The U.S. uses about 20 million barrels per day.

With crude at $51+ per barrel, the yearly cost of imported oil for the U.S. is about $225 billion. When you combine that amount with the interest on our burgeoning debt level, it is easy to see the cracks in our financial stability.

In April, adjusted for inflation, personal spending rose 0.2%, while real disposable income rose 0.1%. That leaves but crumbs for savings.

The Conference Board’s Help-Wanted Advertising Index was unchanged in April at 39. It was 38 one year ago. Conference Board Economist Ken Goldstein stated “the labor market indicators were soft in April…Hiring intentions again turned cautious in April.” That statement clearly is in conflict with the April non-farm payrolls report issued by the BLS.

Thursday, May 26, 2005

It's Not Over

5/26/05 It’s Not Over

Keep your eye on the parts. General Motors Corp is considering selling or floating on the stock market its residential mortgage business that could yield between $8 billion and $10 billion, The Times (of London) said without attribution. It already is in talks to sell its commercial mortgage company.

Toll Brothers, the luxury home builder, reported net income that more than doubled in the latest quarter. Not surprisingly, prices for luxury homes in the Bay Area, Los Angeles, and San Diego posted double-digit price gains and record highs in the first quarter of 2005 compared to a year ago. Values in the Bay Area have now posted five consecutive quarters of double-digit increases on a year-over-year basis.

U.S. durable goods orders rose 1.9% in April, the first increase in four months; however, the increase can be attributable for the most part to Boeing receiving orders for 14 planes in April compared with 11 in March. Overall, durable goods inventories have risen faster than orders and shipments for the past three months.

Crude supplies declined for the second time in 15 weeks, and helped to explain the rise in crude back over the $51 a barrel level. Of course, with about 32 million people taking to the road this holiday weekend, current large crude inventories will be drawn down fairly quickly.

Yesterday was the annual meeting for ExxonMobil. The company expects worldwide economic growth to average just under 3% per year through 2030. Global energy demand should increase by 1.7% per year, reaching 50% more than today by 2030. The company stated that, on average, the world’s oil and gas fields are declining in production at between 4% and 6% per year. According to the International Energy Agency, the investment required to meet total oil and gas energy needs worldwide through 2030 will be about $200 billion per year. Over an extended period of time, no one can predict the monthly price changes in crude. However, it would be foolhardy to dismiss the long-term supply and demand pressures for crude and the enormous yearly capital required to meet those demands. In my view, it would make sense to include oil and gas as a strategic part of a long-term portfolio.

A new index of healthcare costs, produced by Milliman, which provides actuarial services to the sector, found the average family would pay $12,214 this year, up 9.1 per cent on 2004.

The dollar has risen close to 8% versus the euro in 2005.

First quarter GDP growth revised up to 3.5%.

Ruckett: "Between today and tomorrow are graves, and between promising and fulfilling are chasms."

Wednesday, May 25, 2005

Supply And Demand

5/25/05 Supply And Demand

Prices of U.S. homes climbed at the fastest year-over-year pace since the 1970’s. The median sales price rose 15.1% on a year-over-year basis to $206,000. Meanwhile, according to the California Association of Realtors, the median price of an existing home in California in April topped the half-million mark for the first time. The price rose 12.5% over April’s 2004 $452,680 to $509,230. Year-to-date sales are up 5.1% compared to one year ago. In Santa Clara County, the heart of Silicon Valley, the median home price in April was $750,000, up 21.4% in a year’s time.

Applications for mortgages rose 4.3% on a seasonally adjusted basis in the week ended May 20 compared to the prior week, according to the Mortgage Bankers Association. Refinancings paced the increase in applications, rising 6.4% on a week-to-week basis, while applications to purchase homes increased 2.8%.

Sales of existing U.S. homes rose 4.5% in April to a record seasonally adjusted annual rate of 7.18 million. The inventory of unsold homes rose 5% to 2.48 million, representing a 4.2 month supply.

China produced 175 million tons of crude oil in 2004, while their imports soared 35% in the year to 122 million metric tons (854 million barrels.) Rand Corp. projects that China will depend on imports for 60% of its oil supply and 30% of its natural gas by 2020. Wang Gongli, president of China Oil and Natural Gas Designing Institute, estimates that China will consume 450 million tons of crude oil and 200 billion cubic meters of natural gas by 2020, and half of the supply would depend on imports. He projects that China’s maximum annual output could not exceed 200 million tons of oil in the future.

Wang Xianzheng, a vice director of China’s State Administration of Work Safety, stated that the country now produces about 1.67 billion tons of coal a year, and that by 2010, China is expected to consume 2.2 billion tons of coal a year, resulting in a shortage of 330 million tons a year.

Hispanics are the fastest-growing minority group in the U.S. and their buying power is estimated at $700 billion or larger than Canada’s GDP and approximately 9.4% of America’s total buying power. Among retailers serving the Hispanic community, Wal-Mart’s average market share is 37.3%. On the pharmacy side, Walgreen’s average market share is 40.3%.

China increased the amount of foreign currency companies can buy for investment abroad by 52%. Companies can invest a combined U.S. $5 billion this year. The rules took effect May 19.

At $49.80 a barrel, crude is approaching the $50 level.

The Nasdaq has risen for 8 consecutive trading sessions.

Since our March 2003 invasion of Iraq, at least 1,642 American troops have lost their lives. The fighting is escalating. How many more of our heroic men and women will be killed and/or injured?

Tuesday, May 24, 2005

Women And E-Commerce

5/24/05 Women And E-Commerce

According to the National Retail Federation’s survey of 137 retailers nationwide, online sales of cosmetics and fragrances are anticipated to jump 33% to $1.6 billion this year, while online sales of jewelry and luxury goods are headed for a 31% rise to $3.2 billion in 2005. Flowers, gift cards, and gift purchases are expected to increase 30% to $4.8 billion. This survey projects online retail spending, excluding travel, to amount to about $110 billion this year, a 23% increase from 2004, and this would mean online retail sales would account for 7.7% of total retail sales. A growing percentage of online purchases are made by women. Four years ago the percentage was 51.7%. Today, most likely it exceeds 64%. Interestingly, the survey indicates that retailers spent $877,630 on average for search-engine ads in 2004, more than twice the $399,923 spent in 2003. Retailers found that search engine marketing delivered 43% of their customers to their Web sites. A new retail format was announced yesterday. It’s called Epicenter, and lets shoppers browse goods from 50 to 60 catalogs, online retailers, and specialty stores in a single mall-based store.

MidAmerican Energy Holdings Co., a utility controlled by Warren Buffett's Berkshire Hathaway Inc., agreed to buy PacifiCorp for $5.1 billion in cash plus approximately $4.3 billion in net debt and preferred stock, gaining the largest provider of power in the U.S. Northwest.

Savings in the U.S. has trended down to around 1%. By comparison, the Chinese save about 40% of their income.

The UBS surveyed 800 investors for its Wealth Management Investor Optimism Index. Results showed that the index fell to 50 in May, its lowest level in two years. Meanwhile, German investor confidence declined to a 6-month low. Contrarians view both as a bullish sign, and possibly that’s a reason for the recent climb in equity prices.

Sweet Sue is closing its Athens, Ga. canned chicken plant on June 3. A total of 175 employees will lose their jobs. Northwest Airlines proposed firing 2,031 of its mechanics and asked the remaining 2,381 mechanics to take a base pay cut of about 26%. I wonder whether the company’s officers will take the same pay cut.

Paul Kasriel: “I think I figured out why economists downplay the significance of the LEI (Leading Economic Indicators) index. It is to preserve their jobs. After all, if the LEI does a better job of forecasting the behavior of the economy than do economic forecasters, why do we need economic forecasters?”

The yield curve continues its flattening ways, and soon will look like a pancake. Will these pancakes be doughy? How tasty will they be?

Monday, May 23, 2005

Retail Internet Sales And E-Commerce

5/23/05 Retail Internet Sales And E-Commerce

Last year, consumer spending rose 3.8%. It was the largest increase since 2000. According to 50 economists surveyed by the National Association for Business Economics, consumer spending will increase 3.7% in 2005. This despite all the concern for higher gas prices at the pump and wage gains trailing inflation over the past 12 months.

Just because a mall closes or a mall looks empty, it doesn’t mean that consumer spending is dormant. First quarter retail Internet sales rose 23.8% to $19.8 billion in the U.S. from $16 billion, according to preliminary numbers released Friday by the Commerce Department. E-commerce sales for the first quarter rose 6.4% from the fourth quarter, and we should remember that holiday sales produce the best results for the year in the fourth quarter.

E-commerce sales now account for 2.2% of total retail sales, and the percentage has been rising quarter by quarter at a rate exceeding 20%. Our GDP grew by 4.4% in 2004, and this torrid pace has begun to slacken to about 3.7%; however, as long as the consumer spends, as long as interest rates remain at historically low levels, and as long as the median price of new as well as previously owned homes continue to rise to record levels, the economy will not fall into a recession. That does not mean the equity and debt markets will rise to new heights. It just means they will not fall through the floor. At the moment, it would take an extraordinary shock to make that happen. Saying it another way, in the Preakness, Afleet Alex went to his knees and still won the race handily. Our economy has gone to its knees in the past and come back to win the world economic race. Today, we are matched against China and India. China’s economy grew by 9.4% in the first quarter and India’s probably closer to 7.4%. They’re here to stay. The competition will get fiercer. We need to fight harder to remain the leader. It will take more than simply the consumer, low interest rates, and the frothy housing market.

Sunday, May 22, 2005

Biting Can Draw Blood

5/22/05 Biting Can Draw Blood

Paul Kasriel: “The facts that the spread ( between the 10-year Treasury and the fed funds rate) has narrowed dramatically, and nominal and real M2 growth have slowed… are sending very strong signals that monetary policy is starting to bite.” Investors would be wise to focus on Kasriel’s observation. Fighting Fed monetary policy is a losing proposition.

June 7th is about two weeks away. That’s the date for the GM annual meeting. It will not be business as usual. GM is not going the way of United Airlines. GM management and directors will see to that and so will Kirk Kerkorian. Those who have written GM off will be proven wrong. The union officials, the employees, the retirees, the suppliers, the shareholders, and the officers and directors will make the necessary changes to turn this company around. It will take time. But it will happen. In my view, patience will be rewarded. Hedge funds would be wise to discover another playground.

Lately, I have read a few observations on Wal-Mart. Today, Wal-Mart is our nation’s biggest private employer and the largest customer for companies like P&G. If anyone thinks this company will not run over the competition and through walls, then they will be carried out broke. This morning I read a piece by David Petch, a bright guy. He wrote “get out of Walmart (he couldn’t even get the name right. It’s Wal-Mart) stock while one has the chance, because the revaluation (the yuan) will translate into a 30-40% decline in their revenue.” I suggest Wal-Mart’s officers and directors pin that up on their office walls. Ten years from now, we can look back and recall Petch’s warnings. By then, Wal-Mart will have 350 stores in China and their total company sales could approach $750 billion.

It’s wise not to bite the hand that feeds you. GM and Wal-Mart are responsible for feeding a great many Americans. How many industries are dependent on those two companies? How many consumers depend on them for their paychecks. How many times do those paychecks turn over in their respective communities? GM and Wal-Mart represent a significant part of our American way of life. Be careful about raining on their parade.