Saturday, June 25, 2005

Commercial Dealings

6/25/05 Commercial Dealings

Doug Noland: “Finance has evolved from vulnerable and less than "robust" to exceedingly "fragile" on a global scale, although this fragility is masked by robust housing inflation, ballooning central bank balance sheets, and overly-abundant global liquidity.”

Over the last 4 weeks, M3 has gained $80 billion and totals $9.70 trillion. At the rate it is gaining, soon it will equate to the size of our GDP.

Real estate loans stand at $2.72 trillion. How many more real estate agents were added to the nonfarm payrolls in June?

China’s foreign reserves are approaching $700 billion, but that is not helping their oil problem. Their oil imports rose 8.2% to 10.4 million metric tons in May. Over one-third of this year’s global oil demand growth is accounted for by China. It’s no wonder they want to acquire Unocal. Their thirst for oil represents a potential stumbling block for their nation’s long-term growth plans. Peter Robertson, Chevron’s vice chairman, stated “clearly, this is not a commercial competition. We are competing with the Chinese government, and I think that is wrong.” However, he went on to say that the Chinese offer “is not a knock-out blow. We are going to win this one. I am convinced of it.” So am I. The signed merger agreement with Unocal provides Chevron the right to call a shareholder vote on its offer before Unocal can allow its shareholders to consider any deal. A shareholder vote will most likely occur in late August. Time is on Chevron’s side. CNOOC let the six months slip away. They can only blame themselves.

For the latest week, comparative sales for the U.S. for Wal-Mart are estimated to be within the company’s guidance of 2 to 4% growth. Importantly, general merchandise comparative sales were stronger than food.

The Dow has been down for the last five trading days. The last time this occurred was January 5th. This past week the Utility index gained 1% and the dollar index a bit over 1%. Year-to-date, the CRB is up 10% and the Goldman Sachs Commodity Index a cool 28%.

Ten year Treasury bonds yield 3.92% and the spread with the 2 year now stands at 34 basis points. Japan’s 10 year bonds yield 1.20%.

Orders for non-defense capital goods, ex-aircraft, fell 2.3% in May, the largest decrease since last October. Excluding transportation, durable goods orders in May dipped 0.2%, the third decline in the last four months. Durable goods shipments rose 0.2% in May.

Friday, June 24, 2005

Fourth Quarter Fireworks

6/24/05 Fourth Quarter Fireworks

We’re almost at the halfway mark of 2005, but the fact is, we’re in the fourth quarter, so to speak. The beliefs surrounding range bound markets will be proven wrong. Volatility will take care of that. Oil has reached $60 a barrel for two consecutive days. The thought that high oil prices do not take a toll is pure bullshit. Just ask Federal Express. They stated that their first quarter earnings would fall below estimates due to high fuel prices, and the stock got slammed. There is an undercurrent of fear that our economy has the potential to unravel. As such, gold has begun a new assault on $450 an ounce, and stood at $443.20 last night. One of our chief export markets, Europe, is having trouble. Growth has slowed to a level that is even below our savings rate. Italian consumer confidence is falling, growth projections are being reduced for Germany, and German 10-year bonds touched a 3.10% yield yesterday, the lowest on record. The euro dipped below 1.20 versus the dollar.

Much was made of first-time claims for state unemployment benefits falling 20,000 to 314,000 in the latest week. I’d rather look at the better-paying jobs where IBM is cutting 13,000 in Europe and the U.S. but hiring 14,000 in India. Alcoa is cutting 5% of its workforce.

What impact will China have on energy prices and inflation? China stated that their coal imports rose 59% to nearly 10 million tons in the first 5 months of 2005, and that demand will increase even further this summer.

Genentech expects capital expenditures of $1.7 billion in 2005. This company is on the march to much better sales and earnings in future years.

Callaway Golf appears to be in play.

Chevron management has taken a smart route in its effort to acquire Unocal. Even though the two companies have a signed merger agreement and the deal is about 60 days until closing, Chevron provided Unocal with a waiver to its merger agreement. This will permit Unocal to negotiate directly with CNOOC. This will not make CNOOC’s balance sheet richer with equity or provide them with more oil reserves. The fact is that a higher price does not necessarily make for a better deal. We saw that with Qwest and MCI. Quality counts for the long-term. This isn’t about strategic assets for the U.S. It’s about what’s best for Unocal and Chevron shareholders in a combined effort going forward. CNOOC needs to enrich its balance sheet and deepen its management team before embarking on playing in the big leagues. They are in way over their heads.

Bush's 34 percent approval rating in the new Field poll is down from 41 percent in a February survey and far from the 74 percent rating he had in the months following the Sept. 11, 2001 terrorist attacks. The 57 percent of California adults who are unhappy with the way Bush is doing his job is also a high-water mark for his presidency. "The war is driving Bush's ratings down more than anything,'' said Mark DiCamillo, director of the Field Poll. "His numbers on the economy aren't stellar, but it's the war where the numbers are really sliding." Only 28 percent of Californians approve of the job Bush is doing on the war in Iraq, while 68 percent are convinced he's on the wrong path. A little more than two years ago, in April 2003, 61 percent of those surveyed backed Bush's efforts on the war.
Yesterday Bush talked to a grade school about his plans for Social Security. He must believe the voting age will be greatly reduced or possibly future poll numbers will be influenced by youngsters.
Yesterday, Palatin Technologies announced it settled its dispute with Competitive Technologies(CTT) regarding its license agreement with CTT for certain peptides for the treatment of sexual dysfunction. This will enable Palatin to concentrate on continuing development of PT-141 and other product opportunities in development. One should note that a significant advantage of Palatin’s focus on melanocortin-based therapeutics is the lack of side effects and the fact they do not act directly on the vascular system.

Thursday, June 23, 2005

Bridge To Palookaville

6/23/05 Bridge To Palookaville

It took all of six months for CNOOC’s top management, non-executive board members, financial advisors, and team of lawyers to present Unocal with a friendly approach that provides $67 per share in cash to Unocal shareholders. This is a proposal. It is not a cash tender offer. Rather, CNOOC “is seeking a consensual transaction with Unocal.” I don’t know about you but “consensual” could mean a transaction arrived at by mutual consent or it could mean an arrangement with sexual overtones. CNOOC did not specify. It gets better. Maybe CNOOC equates this friendly approach with ATMing a piece of property. CNOOC brings nothing to the party but $3 billion in cash plus bridge loans from Goldman Sachs, JP Morgan, Industrial and Commercial Bank of China (ICBC), and CNOOC Limited’s majority shareholder. This, these geniuses believe, will effectuate an $18.5 billion purchase of Unocal and “ensure that the company will retain a strong balance sheet and maintain financial flexibility” and “maintain a strong investment-grade credit rating.” When you cut through all the crap, CNOOC wants to buy Unocal for only one reason - -approximately 70% of Unocal’s current proved oil and gas reserves are in Asia and the Caspian region. CNOOC arrived late to the party, with minimal equity, and a game plan that was devised by the wazoo bird. Meanwhile, Chevron’s signed merger agreement has merit, and the combination will be completed in August. CNOOC’s friendly approach is but a bridge to Palookaville. A bird in the hand is worth a good deal more than a friendly approach.

HBOS Plc, Britain’s biggest mortgage lender, stated house prices fell 0.6% in May, the most in seven months.

Last year Ford used 86% of its North American manufacturing capacity, and these operations are expected to produce a large loss in 2005. Still, Ford will earn a $2 billion profit in 2005. There will be more North American plant closings and more hourly workers cut from the payroll to go with the 1,750 salaried workers announced Tuesday that would be eliminated from the company. Maybe Ford’s bonds will be reduced to junk status. If so, I believe it would present an opportunity for the prudent risk taker.

Clorox Chairman and CEO Jerry Johnston stated that California’s anti-business climate contributes to it costing a third more to do business in the state than in other Western states.

UK manufacturing orders fell to their lowest point since October 2003, and there is increasing pressure on profit margins as it is more difficult to pass on rising costs. It sounds like this malaise is catching in the U.S.

Caraustar Industries announced it will close a folding carton plant in Thorndike, Mass. on July 15. Approximately 70 salaried and hourly employees will lose their jobs.

Brad Setser and Nouriel Roubini: “In 2004, foreigners bought an amazing $900 billion in U.S. long-term bonds; the United States exported a dollar of debt for every dollar of goods it sold abroad.”

Yesterday, the yield on 10-year Treasury bonds fell to 3.94%.

Woodside Petroleum is Australia’s second largest oil and gas company. Management mentioned annual production could double by 2009 to 120 million barrels of oil equivalent.

Wednesday, June 22, 2005

Beginning To Taper Off

6/22/05 Beginning To Taper Off

The California economy is a picture "of an economy not at the start of a new expansion, but very near the end of an old one," wrote UCLA Senior Economist Christopher Thornberg in the UCLA Anderson Forecast of the California and national economy. On the plus side, taxable sales are up 10 percent so far this year, over last, non-real estate investment is rising, office vacancy rates are declining and airports and seaports are busy, Mr. Thornberg reports. But on the minus side, personal income growth has been slow and taxable sales and wages are out of balance. Sales are driven by consumer demand, which is driven by the "wealth effect" of a hot real estate market, he stated. In other words, people are spending more because their homes are more valuable, not because they're getting larger paychecks. California's economy could weaken further if the real estate market cools off, Mr. Thornberg warned. "Prices don't have to go negative to have an impact. Just 15 percent to zero percent [growth] is enough to start the dominoes falling." The U.S. economy will experience sluggish growth this year and next, but "the likelihood of a recession within a year is minimal," wrote Forecast Director Edward Leamer. Nationally, the wealth effect of consumer spending driven by rising home values is beginning to taper off, wrote Mr. Leamer and Senior Economist Michael Bazdarich, but not enough to trigger a recession.
Detroit Pistons’ Chauncey Billups: “If it ain’t rough, it ain’t right.”
Winn Dixie will shut/sell 326 stores and cut 22,000 jobs. Because of weak North American sales, Ford will eliminate more jobs. In addition to a cut of 1,000 salaried jobs announced in April and to be completed on June 30, Ford will trim 5% of salaried jobs in North America and also eliminate 2005 bonuses for salaried managers worldwide as well as suspending matching grants for 401K plans effective July 1. Safeway is offering buyouts to 5,800 workers.
Ameritrade will buy T D Waterhouse for $3 billion.
Once again, the yield on the 10-year Treasury bond has fallen below 4%, and stands at 3.99%. The 30-year is at 4.28%. After a dramatic 2-day drop in yield, the German 10-year bond stands at 3.14%. Two policy makers sought cuts in the Bank of England lending rate.
U.S. external debt now equates to more than 25% of our nation’s GDP.
Gary Stern, president of the Minneapolis Fed: “Right now there’s no reason to stop tightening credit.”
The cost of our military operations in Iraq and Afghanistan now exceeds $300 billion. The original projection was a range of $50 to $70 billion. We should also keep in mind that there is a $409 billion budget for defense spending.
Andy Rooney: “For all those men who say, Why buy the cow when you can get the milk for free. Here’s an update for you: now days, 80% of women are against marriage. Why? Because women realize it’s not worth buying an entire pig just to get a little sausage.”
Morgan Stanley’s 2nd quarter earnings declined 24%.

Tuesday, June 21, 2005

Summer And Chinese Fireworks

6/21/05 Welcome To Summer And Chinese Fireworks

If you think it will be a dull summer, think again. According to the Financial Times, China National Offshore Oil Corporation is poised this week to trump Chevron's $16.7bn bid for fellow US oil group Unocal. People close to the situation said CNOOC's four executive directors would ask their four non-executive colleagues to back the deal at a board meeting likely to take place in Beijing tomorrow or Thursday. According to Bloomberg. the cash bid might be $71.50 a share. This is a time to be careful with any purchase of Unocal stock. It’s possible that Chevron could raise their cash portion for 30% of the shares by 10% to $71.50 and the stock portion by 10% and agree to sell to CNOOC Unocal’s Asian oil properties after their purchase of Unocal is consummated. The upside potential for Unocal may be a good deal less than the $71.50. The easy money, in my view, has been made.
As for Maytag, there is very little room for profit. Haier, along with Bain and Blackstone, made a conditional bid of $16 in cash, topping Ripplewood’s $14 cash bid. I’m not a big fan of Maytag. I think it’s seen it’s best days.
John Hussman: “If a decline wipes out your equity in the short-term, there is no long-term.”
Thank goodness for stock prices. Nine out of ten leading economic indicators declined in May. The only positive indicator was the rise in stock prices. It was the fifth straight decline for the Conference Board’s U.S. monthly leading economic indicators without an increase. Would a rational person consider this a soft patch or a possible precursor to a recession?
Medicare and Medicaid make suggestions to insurance plans as to what medications to cover. This is hardly a free market at work. I thought Bush and company were free marketers. Maybe that’s only true if the contracts go to their buddies.
I want to thank Henry To for pointing out that “the latest level of M-3 is only 1.03% and 1.94% above its 20-week and 40-week moving average. The percentage deviation from the current level of M-3 relative to its 20 to 40 week moving averages is actually below its 23 year averages.” This is an important observation.
Sometimes an unusual event marks a turning point. Will a bid by CNOOC for Unocal prove to be this year’s high for oil? If the world economy slows from here, what will the impact be on the price of most commodities? I don’t want to be the last guy on the block to find out. When in doubt, cut back on positions.

Monday, June 20, 2005

They Said

6/20/05 They Said

President Bush said we are at war in Iraq because our country was attacked.

Porter Goss said he has an excellent idea where Osama bin Laden is located. However, our respect for the sovereignty of various countries makes it difficult to capture bin Laden.

OPEC said there isn't a supply problem. Crude moved to new record territory above $59 a barrel.

The Federal Reserve said inflation is well contained. The Goldamn Sachs Commodity Index has outperformed all other major indices so far in 2005.

Sunday, June 19, 2005

HappyFather's Day

6/19/05 Happy Father’s Day

It must be a killer being away from one’s family fighting in blistering heat and not knowing when you might leave to go home. Can you imagine what it’s like for the families of our troops—living every day with fright and not knowing when and in what condition a loved one will return home?

The most seriously disabled veterans will now have to wait for their claims to pass a second review before they can receive any disability pay from the federal Veterans Affairs Department, according to a new policy ordered last week. In my view, this policy should be regarded as bordering on the criminal.

Those who sold Wal-Mart shares on Friday will be sorry. In the latest week, general merchandise comparative sales were stronger than food. There was seasonal strength in air conditioners and fans, as there had been one week earlier. There was additional news. Apparel sales took off, and this has not been the case recently. It would not surprise me to see the company’s June same-store sales near the top of the expected 2 to 4 percent range.

The Dow and the Russell 2000 have closed up for 7 consecutive trading days. This is not an every day happening, so to speak. It provides a terrific opportunity to sell into strength.

Venezuela signed a deal to supply China with 30,000 barrels of fuel oil on a daily basis. On Friday, the first shipment of 1.8 million barrels sailed to China. Venezuela currently supplies the U.S. with about 15% of our oil imports. How long can we depend on this arrangement?

Robert McHugh: “If the Fed allows money supply to grow at an astronomical rate, something far beyond normal, something inconsistent with its rhetoric regarding "measured" increases in interest rates, then it is occurring because the Fed knows something. What do they know? If M-3 is growing twice as fast as GDP, five to twenty times as fast as inflation, is growing at an outrageous rate during an interest rate tightening phase, then the Fed sees a risk out there somewhere that threatens the velocity of money process, threatens to contract money supply, threatens to devalue wealth - some threat or risk the Fed feels it must compensate for.” If the Fed knows of some extraordinary risk, then that risk has gone unrecognized in the equity and credit markets.