Saturday, June 18, 2005

Inflation, Speculation, Consumption, Instability

6/18/05 Inflation, Speculation, Consumption, Instability

The first six months of this year has been marked by rising prices—home prices, crude, copper, corn, soybeans, gold, and many other commodities. The CRB has risen 9.5% year-to-date, and this increase is nothing compared with the 27.5% surge in the Goldman Sachs Commodity Index. Other sectors in our economy are attempting to chime in with their own efforts. Year-to-date, M3 has expanded at a 4.9% rate and ex-Money Funds it is a rise of 7%. Bank credit and real estate loans have surged at a 15% annualized rate. Not surprisingly, our trade account deficit hit a record $195.1 billion in the first quarter, while foreign capital investment in the U.S. was at its lowest level of the year. Our citizens have tried to keep the economy on its growth trajectory. Household debt rose at a 9.3% annual rate in the first quarter to $10.5 trillion, almost equal to our annual GDP. According to the Federal Reserve, it costs our citizens 413.40 out of every $100 in disposable income to meet debt payments.

According to the Federal Reserve, the market value for real estate is 198% of disposable income, a record high. Stated differently, the NAR index of housing affordability is at its lowest level in about 14 years.

Paul Kasriel: “Although housing activity remains at a high level, its growth is stalling…My colleague, Asha Bangalore, calculated that fully 43% of the increase in private nonfarm payrolls since the current economic recovery/expansion got started has been housing-related employment. I have calculated that the dollar volume of new and existing home sales represent over 12% of nominal GDP- a record percentage.”

The University of Michigan consumer sentiment index surveys a meager 500 respondents. As such, I place little value in the information. This I have stated repeatedly. For those who find the data relevant, the most recent survey indicated that U.S. consumers turned optimistic in June for the first time this year. The index rose to 94.8 from May’s 86.9. The reasons given were an improving labor market. In fact, the most recent figures stunk, and lower gas prices, and they will be reversed with record crude prices. By comparison, the Chapman University California Composite Index of Consumer Sentiment surveys 5,000 homes in the state. Its second quarter index for 2005 declined to 95.6 from 100.0 in the first quarter. It was the second time in a row that Californians were more pessimistic than their peers nationwide. The main reasons were persistent high energy prices and the decreasing affordability of home ownership.

Hewitt Associates stated 2005 HMO rates are expected to climb 12.4% nationally, down from 17% in 2004. Glenn Melnick, senior economist at Rand Corp., stated employees and workers can expect health care costs to rise 8% to 10% each year for the next 10 years, while insurance premiums rise 11% to 13% annually. It will mean less salary increases, less permanent hires, and more out-of-pocket cost for workers.

North American-based manufacturers of semiconductor equipment posted $1.03 billion in orders in May and a book-to-bill ratio of 0.85 according to the San Jose-based trade group, Semiconductor Equipment and Materials International. A book-to-bill of 0.85 means that $85 worth of orders were received for every $100 of product billed for the month.

"While some semiconductor manufacturing equipment segments have improved, overall bookings levels have remained relatively constant over the past several months," says Stanley Myers, president and CEO of SEMI, in a written statement. "Total orders for new equipment are lower in comparison to the same period in 2004. However, last year was a tremendously strong growth year and current booking levels are significantly higher than they were in the 2002 and 2003 timeframe."

Friday, June 17, 2005

It's About The Money

6/17/05 It’s About The Money

If you want to feel good as an investor, then keep a cool head. Know your facts. Don’t be afraid to buy when company’s debt is called junk and don’t be afraid to sell when an analyst raises a target price for a stock. Who cares about the names and who cares about the analyst calls? You call the shots on your money. If you don’t, then you are a putz.

Theodore Sorenson: "Consistently wise decisions can only be made by those whose wisdom is constantly challenged."

There’s a lot of buzz about GM and the unions. Let’s keep it simple. The facts will suffice. GM provides benefits to 360,000 UAW retirees. Unions do not legally represent the retirees. The current union contract with GM only covers active employees. It’s possible GM could legally terminate or modify retiree health benefits without violating the contract. The rub on benefits is simple. GM salaried workers pay 27% of their annual health care costs compared with 7% for the hourly workers. Over time, hourly workers will pay a greater share. It will come in steps and not overnight. That’s all you have to know. There’s a contract that runs through 2007. Until the contract comes up for renewal, the UAW will throw some bones to GM management. Maybe they’ll add up to $500 million. Maybe GM will need to cut salaries and bonuses for all salaried workers. The pain will need to be shared. In the meantime, GM is in the business of selling and financing vehicles. The union and the company cannot afford a strike over cuts in benefits. It will not happen. Of course, back in 2002 and early 2003, I never thought we would be stupid enough to invade Iraq. That goes to prove how little I know.

Did you notice that multifamily house starts declined 19.3% in May and that housing permits fell 4.6% in the month, the largest monthly drop since June 2004? Earnings for the home builders currently exceed expectations. I suggest one scale out of stock in this sector. It may come as a surprise, but the May price rise in the Bay Area reflects a slowing rate of appreciation. That has also been the case in San Diego.

Aldous Huxley: "An intellectual is a person who has discovered something more interesting than sex."

When the price of crude declined into the high 40s only a month or so ago, I suggested buying Apache in the $53-54 area. With crude rising to a 10-week high of $57 a barrel, now is the time to take money off the table in this sector. Near-record crude prices will place pressure on the consumer’s spending habits. Trade deficits will swell. Our inflation rate will increase, and the Fed will continue to raise short-term rates. Conservation and alternate forms of energy will come to the forefront--- again.

Very quietly, the price of gold has recently risen just over $20 an ounce to a 7-week high of $437 an ounce. Presently, 7 2/3 barrels of oil will buy you an ounce of gold in U.S. dollars. Maybe gold will continue to rally, but as with oil, I would prefer to sell into current strength, and that would mean also reducing one’s position in Goldcorp, my favorite holding in this sector.

The Philly Fed index in June did provide the first negative reading since 2003 and new orders did plummet to 2.5 from 15 in May. However, it didn’t take a brain surgeon to know that conditions in this neck of the woods were poor.

As for hiring, I would not get optimistic. For the week ending June 4, continuing unemployment claims rose by 58,000 to 2.64 million. Maybe Wal-Mart and Target and Walgreen’s are hiring. Maybe McDonald’s is hiring. Maybe your local hospital is looking to hire nurses. Maybe KB Homes and Toll Brothers are looking for carpenters and painters. But let’s get serious. It’s one thing for companies to repurchase shares of stock but it’s another thing to hire permanent workers in the U.S.

While oil prices are expected to remain high for the balance of the year -- peaking at $62 a barrel -- it is believed that prices will drop within the next five years, a survey of energy executives and institutional investors found at RBC Capital Markets 2005 North American Energy and Power Conference in Boston. Of those polled, two-thirds expect oil prices to fall back to $35 a barrel in the next five years, while nearly one-third said it could reach $100 a barrel in the same time-frame. Respondents also indicated that they believe oil prices will retreat to roughly $53 a barrel by year end. When asked about the average price at the pump this year, survey respondents believed prices would be about $2.60 a gallon. Separately, individuals predicted that natural gas would sell for $7.70 per million cubic feet (Mcf) by the end of the year, up significantly from last winter's $6.24 price.

David Mencia, comedian: “The trouble with this country is there are too many stupid people and not enough people to eat them.”

Effective July 5, Carter Cast, 41, will become president of In 2000, Cast joined as VP of marketing and site. In 2002, he was promoted to Sr. VP of merchandise and marketing. Most recently, he served as chief marketing officer at eBay. Cast’s return will add considerably to Wal-Mart’s fast-growing online business and only serve to enlarge the online commitment to customers.

From reading all the Boeing press releases, one would think the company has regained the lead from Airbus in the commercial aircraft business. That is not the case. With today’s latest order, Airbus has secured orders exceeding $35 billion during the Paris Air Show. That performance has surpassed all expectations--- with the exception of those by the Airbus management team.

According to estimates by The Economist, the total value of residential property in developed economies rose by more than $30 trillion over the past five years, to over $70 trillion, an increase equivalent to 100% of those countries' combined GDPs. Not only does this dwarf any previous house-price boom, it is larger than the global stockmarket bubble in the late 1990s (an increase over five years of 80% of GDP) or America's stockmarket bubble in the late 1920s (55% of GDP).

Yesterday, copper prices hit record highs above $3,340 a ton.

California has been hit by four earthquakes this week. Today, Wall Street must deal with quadruple witching. Will it go smoothly or will tremors be felt? Fireworks don’t arrive until July 4th.

Jack Gibb: “Self-confidence is the result of a successfully survived risk.”

Thursday, June 16, 2005

The Expected/ The Unexpected

6/16/05 The Expected/ The Unexpected

"Patients need medicine but this is not the right medicine," Libyan Energy Minister Fathi Bin Shatwan told Reuters. "The problem is not a problem of supply, it's a problem of refining."

During the first five months of 2005, the CPI has risen at an annualized rate of 3.65%. Of course, the Fed states that inflation is under control.

Average weekly earnings rose by 2.6%, seasonally adjusted, from May 2004 to May 2005. After deflation by the CPI-W, average weekly earnings decreased by 0.3%. That’s a wonderful recipe for disaster on the part of the American worker and the American consumer.

Potash Corp. traded up to a new all-time closing high of $96.34. The company raised its second quarter earnings forecast from $1.00-$1.25 to $1.40 to $1.50. The stock has tripled over the past 12 months. Naturally, it’s hardly ever mentioned by the media.

According to a research report released today by Fraser Institute, Canadian seniors pay 64% more, on average, than American seniors for generic versions of drugs that are among the most recommended by physicians for patients aged 65 and over. Meanwhile, the prices for brand-name drugs most recommended for seniors are 36% lower on average in Canada than in the U.S.

Colgate Palmolive CO. stated today that it plans to close an historic soap making plant in Kansas City, Kansas that currently employs 250 people. The company will outsource the production of bar soap to a third party. The plant is on the former site of the Peet Brothers Soap Co., which opened in 1872 and later joined B.J. Johnson Soap to form Palmolive in 1927.

According to a study by the Public Policy Institute of California, over the next ten years, state Medi-Cal costs are projected to grow at a faster annual rate than state revenues. The study states that, in 2003, 5% of fee-for-service Medi-Cal enrollees incurred more than 60% of all costs. The study reveals that rapid inflation in health care costs- not increases in the number of enrollees- is the driving force behind mounting expenses. Currently, California spends $12 billion annually on Medi-Cal from its general fund, and these expenditures are expected to reach nearly $29 billion annually by 2015.

Pfizer agreed to purchase Vicuron Pharmaceuticals for $1.9 billion in cash or $29.10 a share, a 74% premium to the stock’s three-month closing price. Vicuron has approximately $130 million in cash and lost $15.4 million in this year’s first quarter on revenues of $1.8 million. The company is in Phase 3 trials for its anidulafungin, a treatment for the most common hospital-acquired fungal infection. Over the past few months, they announced an extended collaboration with Pfizer to develop oxazolidonones, one of the first new major classes of antibiotics to enter the market in more than 30 years. In addition, Vicuron has an application with the FDA for dalbavancin, an intravenous antibiotic for the treatment of serious Gram-positive infections.

Yesterday, Mallinckrodt and Palatin Technologies, Inc. announced that they have extended their marketing agreement for Palatin's infection imaging agent, NeutroSpec(TM) (Technetium Tc-99m fanolesomab), to include exclusive marketing and distribution rights in Europe. "Mallinckrodt is excited about NeutroSpec's potential to become a breakthrough diagnostic tool," stated Steve Hanley, president of Tyco
Healthcare Mallinckrodt's Imaging business. "We believe that our global sales
and marketing teams are extremely well positioned to capitalize on the
potential of this technologically advanced product. The amended agreement,
allowing NeutroSpec to penetrate untapped international markets, is evidence
of our commitment to its worldwide success."

Fed Governor Donald Kohn: “Managers also routinely estimate their exposures under so-called tail events, that is, asset price movements that are much more extreme than our usual experience, often appear driven by unique and idiosyncratic circumstances, so their implications are open to question and a challenge to risk managers…Tail events, by their nature, are likely to be accompanied by heightened uncertainties…A firm can no longer assume that it will be able to reduce its risk quickly by adjusting positions. Trades may be possible mostly at smaller volumes, and large trades almost surely will have greater price effects than normally observed…The challenges posed by tail events are not limited to market liquidity. They have broader effects on the measurement and management of market and counter-party credit risk, too…The dynamics of prices during tail events for individual assets and for assets in relation to each other likely are different from those observed in normal market conditions. This phenomenon raises questions about typical assessments of the likelihood of future changes in values.”

I believe Kohn’s discussion of exposures under tail events is supremely important and should be given serious thought by all investors, not just money managers. Kohn continues to present the broadening risks in this global financial landscape. He is to be commended for doing so, and remains my one and only choice to replace Alan Greenspan as Fed chairman.

U.S. April capital inflows amounted to $47.4 billion. You can do the math. Our twin tower deficits will exceed $1 trillion in 2005. Our savings rate is barely in the plus column. I continue to believe our long-term interest rates will exceed the projections of economists routinely polled by Bloomberg.

In the latest week, there was a substantial pickup in refi applications. In fact, the refi index is at its highest level since 2004. Let’s keep the home ATM well-oiled. Mortgage rates are sharply lower than one year ago, and so are monthly payments. The average 30-year fixed mortgage rate this time last year was 6.35 percent. At the time, the monthly payment on a $165,000 loan was $1,026.69. With the average rate now 5.73 percent, the monthly payment on the same $165,000 loan is $960.80. Refinancing now would save nearly $66 each month, or more than $24,000 over the loan term.

The Vix is trading near the low for the year. I guess traders believe volatility has been buried. I believe future volatility will bury many traders, and not just Marin Capital.

U.K. retail sales rose 0.1% in May, the lowest annual growth in 6 years.

Airbus received a $6 billion order for 100 A320s from India’s InterGlobe Agency.

China’s fixed asset investment jumped 28% in May.

At least 1,714 U.S. soldiers have been killed since we invaded Iraq in March 2003.

The Dow Jones Utility Average has risen 11.4% year-to-date. It last traded at this level in July 2001.

The joke for the month of June has been provided by Paul Merski, chief economist for the Independent Community Bankers of America. He proclaimed “bankers are being very diligent now about their lending practices.” Translated, this means if you’re not a corpse, you can get a loan.

For 2005, projects consumers will charge on their credit cards more than $30 billion on fast food. Has anyone seen any actual cash in the hands of American consumers? Maybe we should close the U.S. mints.

Wednesday, June 15, 2005

Sure Things

6/15/05 Sure Things

As we approach the close to the first six months of 2005, we can look back on some sure things:
1. Eight increases in the fed funds rate would make long-term interest rates go higher.
2. Four increases in crude output by OPEC (with the fifth to be announced today) would
cause the price of oil to decline.
3. The U.S. dollar would continue to decline against all major currencies.
4. GM’s common stock would be a great short as the company reported billions of dollars in losses.
5. Restrictions on investments by the Chinese government would cool their economy.
6. Record housing prices in the U.S. would top out as the affordability index declined.
7. Gains in employment would bring gains in wages.
8. The ISM manufacturing index would stop declining as the economy grew between 3.5 and 4 percent.
9. Gold would not rise to an all-time high versus the euro.
10. Finished goods inflation, intermediate goods inflation, and crude goods inflation would not fall from November 2004 to May 2005.

Once again, being a contrarian isn’t such a bad idea. There are worse things in this world.

I was interested in the findings of the latest Manpower hiring expectations survey for the third quarter. They polled 16,000 employers, and 57% expect their job numbers to stay the same in the upcoming quarter. Thirty-one percent anticipate a boost in hiring, and that is essentially unchanged from one year ago, while 6 percent forecast a drop in hiring. Manpower CEO Jones stated “this indicates that employers are hiring on an as-needed basis , but are still not ready to staff up until demand for their business truly requires it.” In other words, nothing has changed. It’s business as usual.

China’s May industrial output rose 16.6%, the fastest pace in three months. This summer there will be another megawatt shortfall, and the government will have factories taking rolling shutdowns between July 10 and August 26. China’s industrial production rose 16.3% for the year’s first five months, and some of this rise was an effort to build inventories prior to the factory shutdowns during the sweltering summer months.

Yesterday, GM stock touched the $36 level. Much of the rise was attributed to an article in the Detroit News. The paper suggested that GM could take unilateral action against the unions to reduce health care expenses, which are expected to increase to $5.6 billion in 2005. This equates to $1,500 for every vehicle produced by GM. Some agreement will be reached on out-of-pocket health care expenses for current and retired employees, such as, co-payments and deductibles. However, if co-pays are increased to $20 per visit, how much of the savings for GM will be eaten up by inflation in health care costs? The market is overestimating, in my view, the net savings that GM can expect in 2005 and 2006.

I was looking at the BLS information provided on the PPI. I noticed something of interest. Almost every month, we read about the record number of houses being built. Yet, over the past 12 months through May, the price of softwood lumber, hardwood lumber, and plywood has declined. Normally, record demand would create higher prices. Some courses in economics might consider that a sure thing.

With the dollar index continuing to make new 2005 highs, why are commercial traders covering short positions in gold? If the Fed raises interest rates three more times, why are commercial traders so anxious to cover their shorts in gold?

The PPI index is really not very helpful. It’s not a real-time gauge. For example, prices for energy goods fell 3.5% in May. It’s June 15 and crude is trading at $55.64 a barrel. At this level, the price of energy goods will rise in June, and with it, the PPI.

Retail sales for May declined 0.5%. However, how much of the drop can be attributed to cooler weather. Let’s wait for June data and see the comparison with May.

Every year in the U.S. alone, a half million Americans are rushed into the
operating room for emergency abdominal surgery. For tens of thousands of them
- disproportionately women - they will only later realize it may have been
unnecessary. Misdiagnosed appendicitis costs more than $2.4 billion annually
in hospital charges, lost time and wages, and medical malpractice lawsuits.
To address this issue, Tyco International yesterday brought together a broad
panel of medical and economic experts to outline the problem and describe how
a breakthrough imaging agent, NeutroSpec(TM) [Technetium (99m Tc)
fanolesomab], manufactured by Palatin Technologies, can help reduce the human pain and economic cost of misdiagnosed appendicitis.
Carl Spana, Ph.D., president and chief executive officer of Palatin,
stated, "We are very excited to continue our successful collaboration with
Tyco Healthcare. NeutroSpec(TM) is now available to the entire nuclear
medicine community and is positively impacting the diagnosis and management of
equivocal appendicitis."
"Every year in the United States, misdiagnosed appendicitis extracts an
enormous human and economic toll," said Ed Breen, Tyco Chairman and CEO.
"Thousands of patients and their families are affected directly - and it takes
a $2.4 billion bite out of our healthcare dollars. Even more shocking, it's
preventable. Through our Tyco Healthcare and Mallinckrodt businesses, Tyco
now offers technologically advanced products like NeutroSpec to provide
physicians with the tools to accurately diagnose patients and improve the
quality of patient care everywhere."
NeutroSpec, marketed by Tyco's Mallinckrodt business, is an imaging agent
that provides non-invasive, fast, and accurate scintigraphic imaging for
patients five years of age or older with equivocal signs and symptoms of
appendicitis. It allows physicians to see clearly the "function" of the
appendix rather than just the anatomy - resulting in a reliable diagnosis.
NeutroSpec attaches to the white blood cells (and myeloid precursors) at the
site of the infected appendix, "lighting up" the infection at its source. In
the pivotal trial, NeutroSpec was found to be 96 percent accurate in ruling
out appendicitis within 90 minutes.

Pira Energy’s Gary Ross: "World demand in the second half will average 3 million barrels a day more than in the second quarter."

U.S. May CPI declined 0.1% as energy prices fell 2%. The core CPI rose 0.1% in May.

Tuesday, June 14, 2005

Oil And Gold

6/14/05 Oil And Gold

Despite OPEC trying to talk down the price of crude, yesterday saw a jump of 4% to over $55 a barrel. Today crude is trading around $55.25 a barrel. Demand is anticipated at 84 million barrels in 2005; however, spare capacity might not meet demands of diesel, jet fuel, and heating oil.

Peter Drucker “Quality in a product or service is not what the supplier puts in. It is what the customer gets out and is willing to pay for. A product is not quality because it is hard to make and costs a lot of money, as manufacturers typically believe. This is incompetence. Customers pay only for what is of use to them and gives them value. Nothing else constitutes quality.”

An analyst lowered her earnings estimate for Google, and the stock is down about $4 to $5 in trading this morning. On the other hand, Best Buy raised its estimate for 2006 earnings to $3.10 to $3.25.

The military announced that more than 1,700 of our soldiers have been killed in Iraq since our invasion in March 2003.

Scott Burns pointed out that the true federal deficit is $2.3 trillion more than has been reported. That number does not come out of the air. Trustees for Medicare and Social Security announced that the underfundings for Medicare and Social Security in 2005 are $33.7 trillion, or $2.3 trillion more than they reported in 2004.

Normally, when the dollar rises, gold does not rise too. However, recently, the dollar has been rising against the euro and the yen, but gold has rallied to $431.10 an ounce, the highest closing price since May 5th. This needs careful monitoring. It may be painting a picture for the global economy in coming months.

Charles Handy: “In a knowledge economy, a good business is a community with a purpose, not a piece of property.”

U.K. home prices fell at their fastest rate since 1992 with 49% of those surveyed reporting that prices declined in the three months to May. Meanwhile, U.K. inflation remains at a 7-year high.

China’s May retail sales jumped 12.8%. The Financial Times reported that China’s Haier is considering bidding for Maytag.

Banc West agreed to buy Commercial Federal Corp. for $1.36 billion in cash.

Shell predicts that energy prices will rise over the next two decades. With growing demand from China and India, that is a safe statement.

Epicurus: “Wealth consists not in having great possessions, but in having few wants.”

Monday, June 13, 2005

Usability Of Capital

6/13/05 Usability Of Capital

Mistaken identity can create a real problem. Sometimes we look in the mirror and actually believe unusual powers have been granted to us. Let’s take a peek at the most powerful person on the planet, President George Bush. He looked in the mirror and actually believed that, in January 2005, he had political capital to spend. If we fast forward to June 2005, do you see any political capital possessed by Bush? Rather, he is becoming a daily liability to those seeking re-election in 2006.

Now, let’s look at the housing market. Rising prices have created excess capital for homeowners. Let’s examine that statement. As a result of rising home prices, hundreds of billions of dollars have been extracted by homeowners. Has this money spurred record consumption and almost no savings? If you don’t save, how can there be real capital at the end of the day? In the case of homes, therefore, home-spending capital has risen but not investment capital. If you sell your home at a record price, what will you do with the money? Pay off the existing debt on your home? Reduce your credit card debt? If it’s your primary residence, you will need to purchase another home or be forced to pay taxes on the profit. When you buy another home, it too will be at a record price. Trading up will only get you more potential spending capital- - - as long as housing prices continue to rise. In the end, who makes the real money? Local, state, and federal governments receive your taxes. Mortgage entities receive fees. Real estate brokers receive fees. Then there are the moving companies etc etc. So, when the Fed states household worth has risen to $49 trillion, one should reflect on the usablity of this net worth. Borrowing is one thing. Spending is one thing. Capital that sticks to your bones is quite something else. Capital can be illusory. Just ask President Bush.

There is another area of capital illusion. Let’s evaluate the liquidity in the equity markets frequented by sheep----often referred to as money managers. As long as there is the perception of real value, capital has an ability to retain its value. Suppose that vision changes? Look at GM and Ford bonds. Suppose the growth rate for the Nasdaq 100 is adjusted downward by analysts. Suppose some analyst wakes up to the fact that Google should not be valued at $80 billion or more? If valuations change on a dime, how many hedge funds will go out of business overnight? In an over-leveraged investment community, risks are often under appreciated and real capital is frequently over estimated.

Food prices, which account for a third of China's consumer price index, in May rose 2.4 percent from a year earlier after increasing 3.1 percent in April. That's the smallest gain since August 2003. Overall, May CPI in China increased 1.8% from year earlier levels, a 19-month low. We can expect China to continue its exportation of falling prices to the U.S. This will place increasing pressures on manufacturers to close non-competitive domestic plants and to shift production to areas outside our borders.

Iran oil minister Zanganeh: “Oil prices will remain high until 2006 or 2007 as there will be no excess capacity in the market until then.” Crude is currently trading around $53.40 a barrel.

The euro is trading close to1.20 to the dollar and the yen is just over 1.09 to the dollar.

ECB chief economist Issing stated the bank may reduce interest rates for the first time since 2003. With a growth rate not exceeding 1%, that would not be a surprise.

Unicredito to acquire HVB Group in a $19.2 billion cross border deal, and 9,000 jobs will be eliminated as a result of the merger.

Qatar Airways will buy 60 Airbus A350 planes for delivery between 2010 and 2015.

It was only a matter of time. Morgan Stanley’s Purcell was shown the exit door.

General Motors Corp. will cut base U.S. sticker prices for some Chevrolet, Pontiac and Saturn brand models.

Sunday, June 12, 2005

Governments Speak Out

6/12/05 Governments Speak Out

In an 8-page memo written in the summer of 2002 and prepared for Tony Blair, it concluded ''a post-war occupation of Iraq could lead to a protracted and costly nation-building exercise…As already made clear, the U.S. military plans are virtually silent on this point.''

Anthony Santomero is president of the Philly Fed and a voting member of the FOMC. Yesterday, he made a speech to bankers in Washington. He stated “if the economy evolves as I anticipate over the next year or so, I expect we will continue to move the federal funds rate toward neutrality at a measured pace.” Earlier in the week, the chairman of the Fed stated he did not precisely know what a neutral rate might be in the current economic environment. However, it seems clear that the Fed will raise the fed funds rate by a quarter of a point later this month and again in August. Unless the yield curve becomes more sloped between now and August, it is quite probable we will be looking at an inverted yield curve. Santomero is concerned with potential slowing productivity growth accompanied by rising labor costs, higher short-term inflation expectations joined at the hip by rising consumer prices, and the possibility that pricing power in various business sectors will become less contained over time.

Yesterday, I referred to Afleet Alex as the real deal. Privately, I thought he would win the Belmont Stakes by 10 lengths. I was wrong. It was 7 lengths. The horse was the favorite. However, my thinking was predicated on a study of his genetics as well as his training. On his mare’s side, there is huge speed in his background. The speed, combined with his distance conditioning, should have been more than enough to bury the field, a field comprised of essentially second-rate horses.

There are no sure things in this life; however, there are plenty of rational risk/reward possibilities. This is true in all walks of life. The idea is to position oneself properly to take advantage of these possibilities, and then to have enough confidence to act accordingly. You must leave the would haves and/or the should haves out of the conversation. That’s for losers.

A major investor, Pershing Square Capital Management L.P., in Wendy's International Inc. has hired private equity firm Blackstone Group LP to recommend restructuring and evaluate strategic alternatives for the U.S. hamburger chain, a regulatory filing revealed Friday. Wendy’s rose 3% in price. Pershing holds call options and shares equal to 9.9% of Wendy’s outstanding shares. It’s possible that a split of Wendy’s into two parts- -the restaurant part and Horton’s donut chain—could lead to additional shareholder value. On the other hand, maybe Pershing’s filing is simply an effort to get the stock to move higher prior to the sale of their interest. Pershing paid Blackstone an initial fee of $500,000. That’s hardly chicken feed; however, the amount leaves me underwhelmed. I’ll leave Wendy’s to others. In my view, there are more interesting situations.

Saudi Arabia’s oil minister Ali al-Naimi stated there is not enough demand for the medium and heavy crude oil that constitute Saudi Arabia's spare capacity. Meanwhile, Norway, the world’s third-largest oil exporter, is currently producing at maximum output levels.