Saturday, June 04, 2005

Rafael Nadal And The U.S. Economy

6/4/05 Rafael Nadal And The U.S. Economy

Yesterday, it was Rafael Nadal’s 19th birthday. At the French Open, he celebrated by defeating the best tennis player in the world, Roger Federer, in four sets to reach the finals of this Grand Slam tournament. Nadal extended his winning streak to 23 straight matches. He will be favored to beat Mariano Puerta for the championship. Nadal has a sense of right and wrong and good sportsmanship. When a Federer shot was called out, Nadal went to the spot and showed the umpire that the ball was not out. The point was played over. After winning the last point of the match, Nadal went up to the net and said to Federer “I’m sorry for you.” Nadal is the real deal. He will get better over time. No one doubts that he is here to stay, and at the top.

Nadal is 180 degrees different from our economy. Many are convinced that the economy is slowing. Others believe it is a soft patch on its way to further strong growth. Others point to a GDP growth rate of 3.5% and that exceeds historical measures. For me, I believe the economy is not the real deal. Total mortgage debt amounts to $10.5 trillion, and soon will equal the size of our GDP. According to Doug Noland, global derivative positions surpass $220 trillion. What’s the intrinsic worth of these derivatives? Does anyone truly comprehend the potential fallout from these derivatives? These derivatives are backed by how much in liquid assets? Does anyone know the answers to these questions?

If you believe the Fed has inflation under control, then you’re a schmuck. The CRB is up 8% in 2005. The Goldman Sachs Commodity Index has risen 20.3% this year. Crude is at $55.03 a barrel. Copper has risen 25% in the past year. Over the past 17 months, wholesale uranium prices have more than doubled.

With housing prices continuing to escalate, is it any wonder that real estate agents are coining commissions? According to Real Trends, U.S. real estate agents collected $61.1 billion in commissions in 2004. That amount exceeds the GDP of most nations.

Henry Kissinger: “The amount of energy is finite, up to now in relation to demand, and competition for access to energy can become the life and death for many societies.” It might be well to remember that Kissinger is on the advisory board of CNOOC. The last chapter for control of Unocal has not been written.

Yesterday, Wal-Mart held its annual meeting. The management discussed the mistakes they had made over the past year. They included long checkout lines and the fact that several stores were not neat and clean. Management will correct the mistakes and lead the company to new heights. Their CFO Tom Schoewe stated “if you look back in time, we’ve been in this place. We continue to reinvent ourselves. Our share price will track our performance…just give it some time.” I suggest you do just that and consider buying stock at $47 and change. Wal-Mart is the American consumer’s best friend.

Not surprisingly, the two bright spots in yesterday’s job report were construction and health care. However, one might take note.U.S. employers added only 78,000 payrolls for May, and that was after a birth/death ratio of 205,000. Some time in the coming months, I expect the monthly payrolls number to be a negative one. Lowering interest rates from these already low levels will not create jobs. According to the June 2005 Duke University/CFO magazine Business Outlook Survey of 602 chief financial officers, CFO optimism is at a three year low. They expect health-care costs to rise nearly 9% in the coming year, and this is a major issue of concern. Other concerns are high fuel prices, reduced pricing power, and the possibility of increased interest rates. Many expect the Fed to raise short-term rates in June and again in the coming months. As a result of these factors, corporate executives are reducing their capital spending plans.

Activity in the U.S. non-manufacturing sectors slowed in May. The ISM non-manufacturing sentiment index fell to 58.5% from 61.7% in April.

Paul Kasriel: “Home equity loans on the books of U.S. commercial banks totaled $419 billion at the end of April…The growth rate of these loans has accelerated since the end of 1999. In fact, the compound annual growth rate of home equity loans on the books of commercial banks from December 1999 through April 2005 was 30.5%. Home equity loans are the fastest growing major category of commercial bank earning assets. Home equity loans now account for 6.6% to bank earning assets- up from 2.4% at the end of 1999.”

Health care is Michigan’s largest employer, providing more than 472,300 direct jobs and 254,340 indirect and induced jobs that pump $29.8 billion a year in wages, salaries, and benefits into the state’s economy, according to a study just released by the Partnership for Michigan’s Health. This sector contributes $8 billion in taxes to the state. Overall, the health sector’s direct employment exceeds Michigan’s agricultural and automotive manufacturing sectors. Today, nearly 16 of every 100 Michigan jobs are directly or indirectly created by health care.

At 9:25 AM yesterday, 10-year Treasury bond yields hit 3.82%, the lowest level since April 2004. By the end of the day, rates had climbed back to 3.98%. Maybe, initially, some traders thought the muted jobs report indicated the Fed was through raising rates. It’s unimportant what they thought. The Fed is not through raising rates. Inflation is still on the rise. Inflation is still enemy number one for the Fed. If the economy slows too much, the Fed will turn up the printing presses. When that happens, and it will, then the dollar will resume its decline. The U.S. dollar index is at 88.04. I believe its upside potential from here is minimal.

Tuesday is the GM annual meeting. I wonder whether there will be any mention of unlocking the value in GMAC? With rates below 4%, there could be another round of mortgage refinancing. That could only mean more ringing of the cash register for GMAC.

Friday, June 03, 2005

The Real Property Transfer Tax

6/3/05 The Real Property Transfer Tax

While everyone writes about the so-called housing bubble, have you considered the impact of higher property prices on municipal coffers? Let’s take San Francisco. In fiscal year 2003-2004, the real property transfer tax provided SF with $78.85 million. The recent projection calls for a rise to $106.54 million in the current fiscal year. In San Francisco, a real property sale of $800,000 provides the city with a $5,400 transfer tax.

J.C. Watts, Jr.: “The government taxes you when you bring home a paycheck. It taxes you when you make a phone call. It taxes you when you turn on a light. It taxes you when you sell a stock. It taxes you when you fill your car with gas. It taxes you when you ride a plane. It taxes you when you get married. Then it taxes you when you die. This is taxual insanity and it must end.”

While most analysts write-off Wal-Mart and lower their projections for 2005 and 2006, I suggest they go back to the drawing board. A few months ago, I wrote that the company was experimenting with a 24-hour drive-up pharmacy window similar to Walgreen’s. Would you like to shop at Wal-Mart at 2AM? Your local store is open for business 24 hours a day. That’s the whole store. It will be interesting to see how Target, Kmart/Sears, and others respond. I wonder who will be eating each other’s breakfast, lunch, and dinner? Betting against Wal-Mart is a losing proposition. It will do even more same-store business, and their efficiencies will get even better.

First quarter nonfarm productivity rose 2.9, while costs rose 3.3%. When the rise in consumer prices is taken into account, real hourly compensation rose 3.9 in the first quarter of 2005. Real hourly compensation had increased 6.4 percent in the previous quarter. Of course, much of the rise in compensation occurred in health care benefits rather than take-home pay.

In the latest week, U.S. crude supplies rose 1.4 million barrels, but heating oil inventories declined by 700,000 barrels. Crude is trading at $54.05.

Last week, jobless claims rose by 25,000 to 350,000, the highest level since March 26. However, economists predict a gain of 175,000 nonfarm jobs in the month of May. Meanwhile, Challenger, Gray & Christmas stated that announced layoffs In the U.S. rose by 42% to 82,283. In 2005, layoff announcements are running 4.6% ahead of last year’s pace.

The stockpiles of copper in London fell to a 17-year low. What do you think short supplies will do to the price f copper? Of course, the Fed thinks inflation is under control.
So does the bond market. Six months ago, Bloomberg surveyed 62 economists. They predicted the 10-year Treasury would yield 4.78% by mid-year. Why doesn’t the pay for economists reflect their performance (or lack there of)?

The Italian minister suggests exiting the euro and going back to the lira. Like everyone is lined up to buy the lira.

"The textile integration is a legitimate right that China is entitled to, based on our commitments made to the WTO (World Trade Organization) by opening greatly our agricultural market and services market to the outside world," Chinese Commerce Minister Bo Xilai told PBS' Nightly Business Report. "Therefore, it is a kind of balance between our rights and our obligations. So, if we cannot have our right of the textile integration, why are we opening our agriculture and services sectors to the outside world?" Bo said.

Merger and acquisition activity continues in high gear. Sun Microsystems is buying Storage Technology for $4.1 billion, and L-3 Communications is acquiring Titan Corp. for $2.65 billion. How many large companies are growing organically besides Wal-Mart, Dell, Starbucks, Costco, and Apple?

H.E. Martz: “He who builds a better mousetrap these days runs into material shortages, patent-infringement suits, work stoppages, collusive bidding, discount discrimination-and taxes.”

At least 1,667 U.S. military members have died since we invaded Iraq in March 2003.

U.S. May nonfarm payrolls were the weakest since August 2003 with a meager increase of 78,000 jobs. Average hourly wages increased by 3 cents. Don't spend it all in one place.

Wednesday, June 01, 2005

The Lines Are Drawn

6/2/05 The Lines Are Drawn

There are only about three weeks until the summer season begins. The children’s school year is coming to a close and families go on vacation. Traders experience the summer doldrums but, at the same time, hope for a summer rally. Even though the VIX is only about $1.40 from the year’s low and indicates little expectation for near-term volatility, what would you call the recent drop in Treasury bond yields and the recent rise in the price of crude? How would you describe the French and the Dutch giving a no vote to the EU Constitution and the corresponding drop in the euro? There’s plenty to keep you hopping.

Of course, there’s business as usual. Ford’s May U.S. sales declined 11%, GM’s 5%, while Toyota’s rose 7.8%.

Crude jumped to $54.60 a barrel and, at the same time, since the Fed says inflation is under control, the 10-year Treasury yield dropped through the floor to 3.89%. No wonder people expect $1.4 trillion in mortgages to be generated in 2005. That’s a pretty hefty number in a $11 trillion economy. Fed Governor Fisher said of the economy “we’re going fine.” The word “fine” means something else to me. The ISM factory index fell in May for the sixth straight month. The index declined to 51.4% from April’s 53.3%, and it was the lowest reading since May 2003. That’s not fine. New orders fell to 51.7% from 53.7%. That’s not fine. The employment index stunk the house out. It dropped to 48.8% from 52.3%. It’s the first time the index has fallen below 50 in 18 months. Below 50 denotes a contraction. That truly is not fine. The price index plummeted to 58% from April’s 71%. The fact is factory activity is not required to create a mortgage, or any collateral debt obligation, or the myriad of derivatives available today. Our economy creates a paper trail - - - - piles and piles of paper printed from computers. Is it any wonder that the factory sector is losing momentum? The factory is going the way of the horse-drawn carriage. Why bother manufacturing a product in a factory when you can sell some real estate in Manhattan for $1.8 billion or for $2 billion like the O&Y property? Why bother with a factory when a computer can create a search engine accompanied by advertising that can practically print cash flow and generate a $285 stock like Google?

I have often said that the next Microsoft is Microsoft and the next Google is Google. With much digging, it's possible to mine for the next big winner. Maybe Airgo Networks of Palo Alto is such a company. It is privately-owned and the leader of Multiple Input Multiple Output (MIMO) technology, the foundation for next generation Wi-Fi. Samsung announced it will ship the world's first laptops with embedded MIMO-enhanced Wi-Fi technology based on Airgo's chipset. NPD Techdata reports that sales of Wi-Fi products with Airgo's True MIMO chipset have been growing at a 48% monthly compounded growth rate since the first full month of shipping in the U.S. retail market. Greg Raleigh, president and CEO of Airgo, stated that the company's MIMO solution has more than 10 times the performance of competing Intel Centrino alternatives. According to the Tolly Group, Samsung laptops embeeded with Airgo's MIMO technology provide a more reliable user experience with 8 times the speed and 13 times the coverage as compared to the same notebook model with the latest model of the Intel Centrino wireless card, and it's 2.1 times more energy efficient than the Centrino wireless. Do not underestimate the founders of Airgo. In 1998, they sold their prior company to Cisco for a great deal of money. Airgo has, in my view, even greater potential.

Average U.S. home prices in the first quarter climbed 12.5 percent from a year earlier, pushed higher by low mortgage rates, income growth and speculation in some markets, the Office of Federal Housing Enterprise Oversight said Wednesday.

Pending sales of existing U.S. homes rose to a record in April, indicating that home sales in May and June could hit new highs, data released on Wednesday by the National Association of Realtors showed.

EBay will buy for $620 million in cash.

Toll Bros. traded at a new all-time high.

Tuesday, May 31, 2005


6/1/05 Yesterday

The 10-year Treasury bond closed at a yield of 3.997%, the lowest yield in over 3 months. The spread between the 10-year and the 2-year narrowed to 41 basis points. The euro declined below 1.23. It was not that long ago when it traded at 1.36. I wonder what the strength in the dollar will do to the earnings of P&G, IBM, and other multinational corporations. A hit of 3% or more might be reasonable to expect.

The May Chicago PMI was pitiful as the index fell to 54.1% from 65.6% in May. It was the lowest level since June 2003. The production index slumped to 56% from 68.9%, while new orders plummeted to 57.9% from 71%. Prices paid dropped to 54.3% from 66.1%. This is the third in a string of lousy reports. It was N.Y., Philadelphia, and now Chicago.

The Conference Board’s Consumer Confidence Index rose in May to 102.2 from April’s 97.5. It had declined in April. The Present Situation Index rose from 113.8 to 116.7, and it is 26 points higher than a year ago. Even though the Expectations Index improved to 92.5 from 86.7, it is still slightly below year-ago levels. The employment picture was mixed.

The Business Roundtable’s May 2005 CEO Economic Outlook Survey shows that America’s leading CEOs expect continued solid economic growth for the next six months, but with a slower pace expected at 3.4%. In sum, the Index eased to 94.3 from the first quarter level of 104.4, and March 2004 was the last time the Index registered 94.3.

According to a research report released by William T. Wilson, Ph.D., chief economist for Keystone India and a leading U.S. economist, India’s economy will surpass Japan’s to become the world’s third largest economy, behind the U.S. and China, within 25 years. He expects India’s population to surpass China’s by 2030, and it will have the youngest labor force in the world. Dr. Wilson stated “that rising domestic investment is likely to lift India’s trend GDP growth rate above 7% for some time.”

According to an annual survey conducted for Cingular Wireless, men talk 35 percent more on their wireless phones than women, more than double the 16 percent lead men held in 2004.

Worldwide sales of semiconductors in April totaled $18.2 billion, a sequential decline of 1.2 percent from the $18.4 billion reported in March, according to a report Tuesday from the Semiconductor Industry Association, a San Jose-based trade association.
The SIA stated, however, that April sales were up 6.9 percent from the $17 billion reported in April of 2004. The SIA noted that April is traditionally a strong month for semiconductor sales.

This morning, oil futures hit a 3-week high at $52.36 a barrel. On May 30, Shell's oil refinery in Deer Park, Texas, the sixth-largest U.S. refinery, cut its output.

Chinese shares fell to an 8-year low, and this despite an economy that grew by 9% in this year's first quarter. Stephen Roach of Morgan Stanley is predicting a slowdown in China's economy. The question is how much of a slowdown? Would GDP growth of 7% be so terrible? In the meantime, the thought of such a slowdown has turned Roach from a bear on bonds to a bull. He stated that the yield on the 10-year Treasury could decline to 3.5% over the next year. If that were to occur, most certainly we would have an inverted yield curve. The sentiment on bonds right now reminds me a bit of the sentiment on the U.S. dollar at the start of 2005. There was almost universal belief that the dollar would continue its decline in 2005. Of course, the contrarians were proven correct.

Two Sides To The Story

5/31/05 Two Sides To The Story

As the first five months of 2005 come to a close, it is interesting to note how unusual this time period truly has been. As the Fed continues to raise short-term rates, long-term rates have declined. The Fed tells us that inflation is under control. If that were so, then the Goldman Sachs Commodity Index would not be a star performer in the early going of 2005. Our trade deficit continues to climb and now equates to 6% of our GDP, and, at the same time, our dollar has rallied since December 2004. In fact, the euro is trading at an 8-month low versus the dollar. On the whole, housing prices have continued to rise and homebuilders continue to raise their profit projections, but their stock prices have not been making new highs. Headlines surround the woes of AIG, GM, Ford, Fannie Mae, and other giants, but the S&P 500 survives the turmoil and resides near the 1200 level. Companies in the S&P 500 announced first quarter earnings that rose in the low double-digits, and yet, we are told the economy is in a soft patch. When the GDP rises 3.5%, it is tough to make a case for a soft patch. The soft patch can be found in the wages of our workers where inflation has devoured any wage gains.

As we approach June, there is turmoil in international trade. There is bickering about aircraft and textiles. China is ending tax breaks for foreign companies. The U.S. is placing pressure on China to revalue its yuan. China may use its foreign exchange reserves, which are approaching $700 billion, to purchase oil. The markets have not placed a great likelihood on international trade turning into a war zone. Then again, back in January, who thought France would vote no on the EU constitution?

Meanwhile, India goes about its business almost unnoticed. Corporate India continues to shine, with over 50 percent growth in its net profit for the second year in a row. A total of 1325 companies, which have declared their full-year results for 2004-05, posted 54.81 percent growth in net profit. In 2003-04, the growth was 59.1%. The world might consider giving India a bit more attention. They are a coming force.

We should ponder the conundrum at the Fed. Has global financial engineering and the myriad of derivatives overpowered the Fed’s ability to effectuate monetary policy? Richard Duncan adds “if the U.S. current account continues widening faster than the U.S. budget deficit, it could drive down yields on government bonds and therefore the interest rates on mortgages so low that it creates an asset bubble in the United States that the Fed could not control.”

Despite OPEC increasing the pumping of its oil, crude is trading just below $52 a barrel. All the jawboning has not broken the back of crude. With the thirst for oil rising in China and India, it is difficult to make a case for supply matching demand over the long-term. When was the last time a large oil find was announced?

Rather than get frustrated in this environment, just remain calm. Go with the tried and true, and that’s the special situations. Don’t try scalping a point here and there. Focus on the Unocals. Focus on the great ones that are out-of-favor. Years from now, you’ll ask yourself why you didn’t buy Wal-Mart at $47. The same schmucks that don’t give Wal-Mart the proper respect also dumped on McDonald’s at $12 and change. At $30, they love McDonald’s stock. McDonald’s is one of a kind and so is Wal-Mart. Both companies live for their customers and both print profits. Making money in the stock market requires a disciplined state of mind and lots of independent study and independent thinking. Just ask Warren Buffett.

Monday, May 30, 2005

Memorial Day

5/30/05 Memorial Day

Rev. Aaron Kilbourn: “The dead soldier’s silence sings our national anthem.”

Our freedoms rest with the remains of our brave fallen soldiers. Our freedoms live on through the bravery of each American who is willing to protect and fight for the rights provided us by our Forefathers and the Constitution we hold dear to our hearts and souls. Each day our lives must salute the fallen as well as serve as an example for future generations. Freedom can exist only through an every day fight for its cherished survival.

Rafael Nadal and Danica Patrick are the real deals.

The French rejected the EU constitution. Meanwhile, the euro is trading at a 7-month low versus the dollar.

China will abolish textile export tariffs.

Angry Bear: “It does appear that housing has peaked in the past when price adjusted M3 has peaked. Price adjusted M3 appears to be peaking right now: April 2005 only saw a 1% increase year-over-year.”

Forty six investors polled by Ried, Thunberg & Co., a bond research firm out of N.J., stated the yield on 10-year treasury bonds is likely to remain close to 4%. This firm’s weekly index measures the outlook for U.S. government debt and is currently measuring 42, and that equals the most bullish reading of 2005. This bullishness could reflect the anticipated decline in the ISM Manufacturing Index for May and the less robust employment numbers for May. It could also reflect short-covering in the week ended May 24. I don’t believe it reflects a flight to quality. Only a bozo would believe our nation has the capability to pay off its indebtedness. We have to increase the debt limit just to pay the interest on the debt.

Sunday, May 29, 2005

Trying To Kick-Start

5/29/05 Trying To Kick-Start

According to the Detroit Free Press, GM will announce Wednesday that it will offer all buyers the same discount that employees get, giving consumers nationwide thousands of dollars off the price of every 2005 car or truck except the Chevrolet Corvette, a person familiar with the plan said Friday. The employee discount varies by model.

Wal-Mart announced that domestic same-store sales for the month of May rose approximately by an estimated 2.5%. Once again, gains in food sales outstripped those from general merchandise.

As the talk continues to focus on the Fed, and whether they will raise short-term rates soon again and, if so, how much higher until they stop, it might prove more productive to keep an eye on the nation’s money supply growth. Year-to-date M2 growth rate is a mere 1.6%. It is slipping monthly. It is the Fed that is generating the so-called soft patch. The slowdown in money supply growth goes hand-in-hand with slower economic growth. Fine tuning an $11 trillion economy is more than an exercise in futility. As long as the country has mounting twin tower deficits and lives day-to-day on foreign savings, the Fed becomes a less significant piece of the economic world order. The U.S. consumer may stir the pot, but the Fed’s unwillingness to accept at least partial responsibility for the Nasdaq and housing bubbles, make for their lame duck rationality.