Friday, July 01, 2005



When Barry Goldwater, in response to Jerry Falwell’s statement that “good Christians” should oppose Sandra Day O’Connor’s nomination to the Supreme Court, stated “ I every good Christian ought to kick Falwell’s ass.”

Sandra Day O’Connor: “No one learns more about a problem than the person at the bottom.”

Luther Vandross: “When I was larger, people said I was fat. Now that I’ve lost weight, they say I died.”

Paul Kasriel: “Over 60% of commercial bank loans and investments are mortgage related.”

Bank for International Settlements: “One simply cannot ignore the number of indicators that are now simultaneously exhibiting marked deviations from historical norms. Among the internal imbalances that compel attention, real policy rates in many industrial countries and in emerging Asia continue to hover around zero. Nominal rates on long bonds, as well as credit spreads and measures of market volatility, are remarkably low. The household saving rate in many industrial countries has been trending sharply downwards, and debt levels are at record highs. House prices in many countries have never been higher. And in China, the investment ratio has risen to a startling 50% of GDP. Finally, external imbalances have never been larger in the postwar period. Any or all of these numbers might well revert to the mean, with associated implications for global economic growth. Such an unwinding might be gradual, and possibly benign, but it could also be rapid and disruptive. In large part, what happens will be determined by real-financial interactions that we should not pretend to fully understand.”

GM Advertising: "You pay what we pay." It paid off in June. The company's truck sales rose 68% and car sales increased 4%.

Yesterday was an interesting start to the holiday weekend. Crude jumped up to $58.75 a barrel, gold dived to $428.80 an ounce, and 10-year Treasury yields bumped up to 4.04%. Meanwhile, some got excited to learn that the ISM Index in Jine rose to 53.8 from May's weak 51.4. On the downside, U.S. construction spending in May dipped 0.9% and residential construction declined 1.7%.

I want to thank Morgan Stanley for saying that MMM would be dead money for at least the near-term. Their comments helped to drive the stock down, and I was able to buy shares at $71.05. It was the first time I have felt the stock was a good value in well over two years. The stock closed at $73. I hope it continues to trade like this example of dead money. I might end up making a ham sandwich.

Approximately 8,000 hedge funds have approximately $1 trillion in assets under management. With all the derivatives in their portfolios, does anyone know the extent of the potential liabilities for those 8,000 hedge funds?

Here we are at the start of summer and the price for heating oil is surging. Isn't that rather unusual?

Ayn Rand: "Thinking men cannot be ruled.'

It's The Yellow Flag

7/1/05 It’s The Yellow Flag

As we begin the second half of 2005, the yellow flag calls for caution. Our economy is essentially based on the consumer. U.S. consumer spending in May was flat. Wages increased a slim 0.1%, the smallest gain in 11 months. With 70% of our citizens owning homes, we had better root for continued advances in housing prices. That will enable more extraction of equity from the housing sector and provided the needed cash for consumers to spend. The average worker cannot depend on wages rises, and those out of work, can’t depend on finding a job that pays a living wage after accounting for taxes and inflation.

The Conference Board surveys help-wanted advertising volume in 51 major newspapers across the country every month. Ad volume has proven to be sensitive to labor market conditions. The Conference Board’s Help-Wanted Advertising Index declined two points in May. The Index now stands at 37. It was 39 one year ago. Ken Goldstein, the Conference Board’s labor economist, stated “hiring intentions have turned cautious as business executives face the prospect of slower overall economic activity in the second half of 2005…The biggest obstacle to more hiring is the increase in labor costs relative to the rate of price increases.” It is important to note that, in May 2004, 73% of labor markets surveyed had rising want-ad volume. In May 2005, that percentage plummeted to 39%.

Chevron is seeking the WTO review of CNOOC’s proposal to buy Unocal. The Senate appears set to review the proposal. Meanwhile, Unocal stated its second quarter earnings would be $1.65 to $1.70 per share, up from street expectations of $1.37. Once again, reviews take time and the Unocal shareholder vote on the merger with Chevron is only 40 days away. Time has a way of racing during the summer vacation period.

Diebold is cutting 300 jobs.

As expected, the Fed announced no changes in its planned course for rate-hike action. One should begin to ask what might account for this decision. The GDP is growing around 3.5%. Despite historically high corporate profit margins, workers see almost no change in their weekly paychecks. The Fed maintains inflation is under control, but wage gains trail the inflation rate. Will further interest rate hikes finally break the back of surging home prices? Is that the underlying Fed intention? If so, why not change some of the rules, so to speak, for real estate loans? After all, margin requirements can be changed, and they have been in the past. Maybe the new world order is growing accustomed to declining long-rates in the face of rising short rates. I wouldn’t count on that for much longer. Buffett has been wrong about the dollar’s rally in 2005, and Gross can be just as wrong about 3% long-term bonds. We can all make lousy forecasts. I’ve made plenty, and will make more in the future. You can go to the bank on that.

Thursday, June 30, 2005

The First Six Months Of 2005

6/30/05 The First Six Months Of 2005

There have been a surprising number of key stories so far this year. I say surprising because one of the highlights has been the low volatility in the equity markets. Let’s review the first six months--- in no particular order of importance.
Despite some pretty bright people like Buffett being short the dollar, the greenback has rebounded strongly against the euro, yen, and pound.
The domestic budget deficit has declined but the trade account has surged to record deficit levels. Fortunately, the savings in Asian countries have been there to bale us out by buying our Treasury bonds.
The Fed will once again raise Fed Funds today—to 3.25%. At the same time, long-term rates have been declining to the 4% level, and this fact has made the yield curve flatten to a differential of less than 40 basis points.
The Fed makes much of the personal consumption expenditures price index, a measure tied to consumer spending, only rising by 2%. This does not jibe with record gas prices at the pump and the Goldman Sachs Commodity Index rising 28% year-to-date.
The economies in the eurozone have slowed to growth of 1% or less, our economy is growing by 3.5% or more, but GDP in India and China continues to surge in the 8 to 9% range.
GM and Ford bonds were downgraded to junk levels. Health care costs, especially for retirees, are weighing heavily on the bottom line. That did not prevent Kerkorian from tendering for GM shares at $31. This created some large losses at hedge funds.
The death toll continued to rise in Iraq and Afghanistan and the American public no longer support Bush’s decision to invade Iraq.
Crude jumped to $60 a barrel, and growing demand from China has illustrated the need for more global refining capacity. China’s thirst for oil has led to CNOOC making a proposal to acquire Unocal. The proposal took 6 months in the making, and placed CNOOC at a time disadvantage since there will be a shareholder vote on the Chevron merger on August 10.
Housing starts continued at high levels, housing prices escalated even further, mortgage rates remained low, and real estate loans surged to record levels.
The Dow and the Nasdaq have gone nowhere over the first six months of 2005. Once again, a lesson can be learned. This is a market of stocks. Google is a perfect example as it surged to $300 a share and it’s market cap rose to $85 billion. By comparison, Yahoo’s is $50 billion and eBay’s is $45 billion.

In recent days, there has been more news. Mittal Steel plans to reduce global steel production by 1 million tons in the 3rd quarter in order “to restore equilibrium to the global supply and demand situation.” Crude dipped further to $57.26 a barrel as inventories for crude, gas, and distillates rose. Visteon stated they would end salaried retirees’ paid health care unless salaried workers leave by 2007. A total of 6,700 white-collar employees could be impacted. The CEO of MMM jumped over to Boeing as its CEO and Chairman. The Bank of America agreed to pay $35 billion for MBNA, the number one independent credit-card lender in the U.S. Due to pricing pressure in the marketplace for generic drugs, Dey Labs of Napa is reducing its workforce by 107 employees.

Finally, illustrated what’s good for the goose is good for the gander. Could a hotel be built on the land owned by Supreme Court Justice David H. Souter? A new ruling by the Supreme Court which was supported by Justice Souter himself itself might allow it. A private developer is seeking to use this very law to build a hotel on Souter's land.Justice Souter's vote in the "Kelo vs. City of New London" decision allows city governments to take land from one private owner and give it to another if the government will generate greater tax revenue or other economic benefits when the land is developed by the new owner. On Monday June 27, Logan Darrow Clements, faxed a request to Chip Meany the code enforcement officer of the Towne of Weare, New Hampshire seeking to start the application process to build a hotel on 34 Cilley Hill Road. This is the present location of Mr. Souter's home. Clements, CEO of Freestar Media, LLC, points out that the City of Weare will certainly gain greater tax revenue and economic benefits with a hotel on 34 Cilley Hill Road than allowing Mr. Souter to own the land.The proposed development, called "The Lost Liberty Hotel" will feature the "Just Desserts CafĂ©" and include a museum, open to the public, featuring a permanent exhibit on the loss of freedom in America. Instead of a Gideon's Bible each guest will receive a free copy of Ayn Rand's novel "Atlas Shrugged." Clements indicated that the hotel must be built on this particular piece of land because it is a unique site being the home of someone largely responsible for destroying property rights for all Americans.This is not a prank" said Clements, "The Towne of Weare has five people on the Board of Selectmen. If three of them vote to use the power of eminent domain to take this land from Mr. Souter we can begin our hotel development." Machiavelli must be smiling.

Tuesday, June 28, 2005

Facts Speak Volumes

6/29/05 Facts Speak Volumes

It is the President's job to protect the American people. It is not accomplished by confusing the facts. Iraq had nothing to do with September 11th. Absolutely nothing at all. We all know that, and this includes each and every member of the Bush administration. They would like you to think otherwise. Unfortunately, by invading Iraq, the President has not protected the American people. He has made our country less safe. He has created hatred in a foreign land where thousands and thousands of innocent Iraqis have been killed along with at least 1,740 of our fighting men and women. Thousands and thousands of innocent Iraqis have been injured along with close to 15,000 Americans. If the President wants support for his agenda, he should invite Tony Blair to the White House. The two deserve one another's company.

Bush maintains that sacrifices are worth the war in Iraq. Maybe that statement has to do with who might be doing the sacrificing. Veterans Affairs budget documents projected 23,553 would return this year from Iraq and Afghanistan and seek medical treatment. However, VA Secretary Jim Nicholson told a Senate committee the number has been revised upward to 103,000 for the fiscal year that ends September 30. The VA expects to be short $2.6 billion for veterans care. House Appropriations Committee Chairman Jerry Lewis, R-California, told Nicholson the failure to alert Congress earlier to the problems "borders on stupidity."

Rep. Ron Paul: "Continuing to justify our presence in Iraq because we must punish those responsible for 9/11 is disingenuous to say the least. We are sadly now at greater risk than before 9/11."

"Apple is taking podcasting mainstream by building it right into iTunes," says Steve Jobs, CEO of Apple in a written statement. The new Podcast Directory in iTunes 4.9 features over 3,000 free audio programs, making it one of the largest podcast directories in the world, the company claims.

Japan's industrial production fell 2.3% in May as demand from China and the U.S. slowed.

In the week ended 6/24, mortgage applications declined 1.1% from the prior week.

Crude has dipped below $58 a barrel.

Ecopave Australia is a Melbourne-based family-owned organization with a long asphalt manufacturing background. The company stated it has taken more than 20 years and extensive testing to develop a road-grade bitumen substitute, the first commercially viable, non-petroleum based, asphalt bitumen substitute for roads. It is made from the waste material derived in refining sugar cane, molasses.

The U.S. June Conference Board's Consumer Confidence Index rose to 105.8 from 103.1, the highest since June 2002. The present situations index increased to 120.7, the highest since September 2001, from 117.8, and the expectations index rose to 95.8 from 93.4. Interestingly, the percentage of the 5,000 households polled expecting to buy a home in the next six months dipped to 3.4% from 3.5%, and the share expecting to buy a car fell to 6.5% from 7.8%. I wonder how much of the rise in consumer confidence is due to record housing prices.

"The economic and social price of yuan revaluation is climbing higher by the day," senior economist Liang Hong wrote in the China Economic Times, which is published by the State Council, or China's cabinet. "As more 'hot money' flows into the country and the trade surplus grows worse, the task at hand becomes more complicated."

All Aboard!!!! With Unocal now trading at $65, an increasing number of analysts are writing about a bidding war for the company. Interestingly, I never read one thing from these same analysts when Unocal traded at $55 only a short time ago. How often are sheep herded to the slaughter?


6/28/05 Obesity

According to a study published in the journal Health Affairs, between 1987 and 2002, private spending on obesity-linked medical problems catapulted from $3.6 billion, or 2% of all health spending, to $36.5 billion or 11.6% of spending. Treating diseases, such as, diabetes and heart disease, is a leading reason for the double-digit health insurance premium hikes. The U.S. Centers for Disease Control and Prevention suggest that about 60 million Americans are obese. The fact is that obesity prevention is a major objective in the medical profession. This Thursday, Trevor Hallam, executive VP for R&D for Palatin Technologies, will present data from preclinical evaluation of PT-15 for the treatment of obesity at the GTCbio metabolic diseases partnering and deal-making summit in San Francisco. PT-15 is Palatin’s novel, small molecule, melancortin receptor subtype-4 selective agonist that is in development for the treatment of obesity. Administration of PT-15 results in a decreases in food intake that is associated with a significant reduction in body weight and improvement in metabolic parameters in rodent models of obesity. After 11 days of treatment, daily food consumption was reduced by approximately 30-50%, accompanied by up to a 15% reduction in body weight. A significant decrease in blood glucose and plasma insulin levels was also observed. These findings were not associated with adverse effects such as sickness, taste aversion or disruption of normal behavior. Carl Spana, President and CEO of Palatin, stated “the concomitant improvement in metabolic parameters is especially supportive of the potential for PT-15 as treatment for obesity in humans.”

John Hussman: “The key is to allow for uncertainty in every specific instance…the longer the horizon, the narrower the range that uncertainty becomes.”

International Paper’s quarterly results are below expectations. Creative Technology warned MP3 player sales are slowing.

Lear Corp. to cut up to 7,700 jobs globally. Kemet will cut 150 jobs. Cray will eliminate 90 jobs.

Paul Kasriel pointed out that, in the week ended June 15, holdings of Mortgage Backed Securities in large domestically chartered U.S. banks dropped $65 billion.

Bill Gross: “If the asset pumps run dry and the kerosene cans empty, the inevitable path of the U.S. economy will reflect slow growth at best and recession as a realistic alternative. Inflation then would return to low 1% levels in the ensuing years and be pressing the deflationary crossover line. Nominal Treasury paper would enter the 3-4% zone for 10-year maturities and lower still for shorter intermediates.”

The yen fell to an 8-month low and the Japanese 10-year bond hit a 22-month low. The Nikkei 225 fell to a 2-week low. It will be interesting to note the Tankan survey of business sentiment that is released this Friday.

Monday, June 27, 2005

Caught Unaware

6/27/05 Caught Unaware

The saying goes that the market climbs a wall of worry. Unfortunately, there are times when the market is caught flat-footed and possibly is unaware of the extent of the problems lurking around the corner. Such can be the case in an extended period of low volatility.

Do you really believe it is business as usual with gas nearing all-time highs and crude approaching $61 a barrel? When will consumers be impacted by harsher borrowing criteria? Households have spending thresholds. It may not seem possible, but it is. Debt- to-income ratios are reaching alarming levels in the U.S. The vulnerability card should soon be in sight in most areas of the country. The lenders will discover the meaning of stressed cash-flow conditions. Those searching for investment yield will get a kick in the groin. Being unappreciative of potential risks will serve as an ugly lesson. When psychology changes, liquidity can turn on a dime. This can lead to violent swings in asset prices. Profit warnings will increase, and the flight to quality will become a stampede. That will not include our dollar and our Treasury bonds. Gold will glitter.

The press in Detroit report Iraqi Americans were once some of Bush's biggest supporters among Michigan’s Middle Eastern communities. In April 2003, Iraqi Americans jammed a hall in Dearborn to cheer Bush during a speech he delivered celebrating Iraqi freedom. A May 2003 poll by EPIC/MRA showed 72% of local Michigan Iraqis approved of Bush's handling of the war. But now the mood has changed, according to a poll taken of 503 Arab Americans in Michigan. Among all Arab Americans, including Iraqis, 77% gave Bush a negative rating on the Iraq war. The poll was conducted June 13-22 by Lansing-based EPIC/MRA and has an error margin of plus or minus 4.4 percentage points. Among Iraqi Christians, known as Chaldeans, only 31% gave Bush a positive rating on the war, while 66% gave a negative rating.
Rumsfeld stated insurgency in Iraq could continue for up to 12 years? Do you think he really has a clue? In March 2003, do you believe Rumsfeld thought approximately 1,740 of our soldiers would be killed in the ensuing 27 months or that almost 15,000 would be injured? The Administration either was caught unaware of the dangers in Iraq or possibly did not fully appreciate those dangers. Over-confidence has a way of shielding one from the truth.
This week we will read about another Fed interest rate hike and their measured plan going forward. Meanwhile, the convergence of short-term and long-term rates come into sharper view. So many reasons are provided for declining long-term rates: the global savings glut; corporate savings levels; low inflation worries and expectations; excess global capacity; and the carry trade. We are now to believe that low interest rates will be the norm for some time to come. I’ve never believed going with the crowd was profitable over the long-term. The majority view of economists is hardly a road to riches.

Sunday, June 26, 2005

Struggles And Exit Strategies

6/26/05 Struggles And Exit Strategies

According to the Detroit News, United Auto Workers President Ron Gettelfinger said the union won't be bullied into making health care concessions to General Motors Corp. or Delphi Corp. despite the deep financial problems threatening the automaker and its largest supplier. The union, which represents factory workers at GM and Delphi, will continue talking to both companies but will not take any hurried action. "We're not even thinking about doing anything until we get our arms wrapped around the magnitude of the issue," Gettelfinger said of the situation at GM. "It may turn out that we don't need to do anything at all. It may be smoke and mirrors."

We should keep a watchful eye on Nigeria, the fifth largest oil supplier to the U.S., but more importantly, it provides our country with light, sweet crude oil preferred by refiners.

We consume 20.8 million barrels of oil per day out of the 84 million barrels per day consumed around the globe. Something has to give. Americans are not even 5% of the world’s 6 billion people.

Over the past three decades, no single major oil discovery has been made in our universe.

John Zogby: “Bush’s second-term agenda has been very strange. He is not talking about anything America cares about.” Bush will speak to the American people on Tuesday. Let’s see how many will be watching.

Glen Beaman: "Stubborness does have its helpful features. You always know what you are going to be thinking tomorrow."

In the struggles surrounding Iraq, Social Security, John Bolton, stem cell research and other matters, an exit strategy can be devised. In the struggle over oil supplies, only long-term deals and alliances are viable.

Chevron and CNOOC co-own a project to import LNG from Australia. CNOOC is involved with Chevron in offshore oil production in the Bohai Bay of northeast China. In my view, Unocal will become one more asset partially-owned by both parties. Everyone will come out a winner.

China’s central bank Governor Xiaochuan stated it’s too soon to drop the yuan’s decade-old peg to our dollar.

Mike Burk: “Typically there is a rally during the last 2- 3 trading days of June… I expect the major indices to be higher on July 1 than they were on Friday June 24.”

Alcoa announced that 6,500 more jobs would be cut from their payroll.