Saturday, July 09, 2005

Lopsided Employment

7/9/05 Lopsided Employment

Employment in financial activities has increased by 151,000 jobs over the past 12 months. More than half of the gain is in credit intermediation and the remainder of the gain is largely in real estate. Over the past year, construction has added 282,000 jobs and healthcare another 249,000 jobs. Meanwhile, 96,000 manufacturing employment jobs have been lost since August 2004. While wage gains amounted to 2.7% over the past year, inflation is not contained. Natural rubber hit a 9-year high, sugar a 7-year high, and orange juice a 3-year high. The Goldman Sachs Commodity Index has risen over 28% this year. Meanwhile, from 2000 to 2004, health insurance costs for workers surged 59%, and this year we can expect another double-digit increase.

Paul Kasriel: “If the Fed continues to push up the funds rate and the bond yield continues to fall, the Fed will be flirting with the disaster of a recession in 2006.”

Be careful about calling someone “trailer trash.” Some mobile homes are selling for more than $1 million.

Everything is not rosy at Unocal. There’s a small problem called environmental obligations. The company has estimated these potential obligations at about $771 million. That supposedly covers states like Texas, California, Montana, and New Mexico. There is also the possibility of future responsibility at 20 additional sites.

The Council of Economic Advisors is forecasting growth of 3.4% in 2005 for the U.S.

Countrywide Financial stated it is cheaper to do business in Arizona than in California. There are putting their money behind that statement by erecting twin 175,000 square foot office buildings and an employee center, in addition to two existing buildings, in Chandler, Arizona. Within several years, the company plans to employ up to 4,000 in that city.

In analyzing the Federal deficit, John Williams stated “much of the increase in the broad GAAP-based deficit was due to a set-up charge from booking the 2004 “enhancements” to the Medicare system. Net of the $6.4 trillion one-time increase in net unfunded liabilities, the annual broad deficit was about $4.7 trillion, which still would have been a shortfall with 100% taxation.” John anticipates the Fed will monetize the federal debt and trigger hyperinflation, and that gold will be the platform for credibility and trust.

I don't ever remember a day when every single one of the stocks I own was up. Except that happened yesterday. I'm not that smart and not that lucky for that to occur. I've been at investing for 40 years. It's not a hobby. Thursday and Friday's resounding rally made me think. This was not just short-covering. The Nasdaq is at a six-month high and some other indices are at all-time highs. Could it be? Is it possible that oil-related money and real estate-related money are switching gears and headed to another venue---into high-grade growth stocks? We're talking MMM, Wal-Mart, Cisco, Intel, Microsoft, and other large cap companies with good growth prospects selling at historically-low evaluations.

U.S. May consumer credit declined by 1.7% or $3 billion. It was the first drop since November 2003.

For the week ended July 8, Wal-Mart stated "food comparative sales were stronger than general merchandise. Average ticket drove the comp sales and the Southeast was the strongest region as customers prepared for Hurricane Dennis." The company reiterated that comp sales for July would rise between 3 and 5 percent.

Warren Buffett: "You're neither right nor wrong because other people agree with you. You're right because your facts are right and your reasoning is right – and that's the only thing that makes you right."

Friday, July 08, 2005

Typo And Misspellings

I apologize for a typo and two misspellings in this morning's blog. Haste makes waste and I did not proof read my writing this morning. I especially apologize to Nouriel Roubini about mistakenly insertin the word "not" in the sentence describing his piece on terroism. The misspellings will not be the last---unfortunately.

Thursday, July 07, 2005


7/8/05 Terrorism

I grieve for all Londoners, and especially the families who lost loved ones and for those who lost limbs and incurred serious injuries.

Frank I. Cobb: "If the author of the Declaration of Independence were to utter such a sentiment today, the Post Office Department could exclude him from the mail, grand juries could indict him for sedition and criminal syndicalism, legislative committees could seize his private papers ... and United States Senators would be clamoring for his deportation that he... should be sent back to live with the rest of the terrorists."

Rocco Galati: "19 terrorists in 6 weeks have been able to command 300 million North Americans to do away with the entirety of their civil liberties that took 700 years to advance from the Magna Carta onward. The terrorists have already won the political and ideological war with one terrorist act. It is mindboggling that we are that weak as a society."

Does Bush have a new consigliore in Bono?

It was reported that $175 million was spent on security at the G-8 meeting. Maybe it would have been better spent on London. There was advanced intel that yesterday's attack was a possibility.

Sam Kinison: "I don't worry about terrorism. I was married for 2 years."

Gold, crude, and the equity market had a volatile day yesterday. Gold could not hold a $5 an ounce rally, crude bounced back from a $4 a barrel loss, and the Dow climbed from pre-market trading down 170 points to close with a gain of better than 30 points. These fireworks make those on July 4th look pretty puny. With Dennis approaching our shores, crude has risen above $61 a barrel this morning.

With the 30-year Treasury yielding 4.31%, the spread is down to 60 basis points with the 2-year. You might want to read John Williams' piece entitled the Federal Deficit Reality: An Update. John has done a fine analysis and it should be read by all Americans. Using generally accepted accounting principles, John shows that the actual budget deficit is $11.1 trillion. That is not a misprint. His work can be found at Meanwhile, the CBO sees the 2005 U.S. deficit possibly declining to $325 billion. Williams and the CBO are both talking about the same country---ours!

Nouriel Roubini did not a fine piece entitled The Economic and Financial Impacts of Terrorism. It can be found at

Not surprisingly, the pound made a 18-month low versus the dollar.

For the week ended July 1, crude supplies dropped by 2.7 million barrels, gas by 483,000, and distillate supplies rose by 1.2 million.

Gartner Inc. stated that world-wide semiconductor capital equipment sales will decline 11.9% in 2005.

Vitria will cut 15% of its workforce. U.S. Airwyas will reduce its Philly crew by 89 people.

Wal-Mart estimates their U.S. comp sales for July will rise between 3 and 5 percent. They estimate earnings per share for the second quarter will meet expectations of 65 cents.

China's central bank expects their GDP to grow 9.2% in the first six months of this year, and 9% for the full year.

According to iSuppli, India's contract-manufacturing business is expected to nearly triple in revenue over the next five years to $2.03 billion.

Costco Wholesale Corp. said sales at warehouses open at least a year were up 9 percent in June, compared with a year ago, beating the consensus estimate of 7.6 percent. But the 9 percent figure is deceptive, as a shift in the timing of the Fourth of July holiday added 2 percent to 3 percent to the figure, Costco said in a press release.

The percentage of households in California able to afford a median-priced home stood at 16 percent in May, a 3 percentage-point decrease compared with the same period a year ago when the Index was at 19 percent, according to a report released today by the California Association of REALTORS® (C.A.R.). The May Housing Affordability Index (HAI) declined 1 percentage point from April, when it stood at 17 percent.

What can you say about a golden parachute being worth close to $114 million for Purcell at Morgan Stanley---except maybe that golden is really golden at that firm---except when it comes to producing profits for its shareholders. This firm has truly tarnished its once-proud image.

Back to the real world for the average person. In June, the average hourly earnings rose 3 cents to $16.06 or $541.22 per week, and earnings rose 2.7% over the past year-- not even enough to fill a tank up with gas. The average workweek was unchanged at 33.7 hours. To come close to Purcell's golden parachute the average worker would need to work how many hours, how many weeks, and how many years? Could it be? Over 100 years?

Once again, the economists got the employment number wrong for June. Their projection was light by 50,000 jobs. The total was 146,000 with 150,000 new services jobs, such as, 56,000 professional and business; 25,000 healthcare; 18,000 construction; 19,000 hospitality; 9,000 temp; and 9,000 retail. Naturally, factories lost jobs.

Wednesday, July 06, 2005


7/7/05 Turmoil

Seven separate explosions hit the London subway system today, and one hit a double-decker bus. The source of the explosions is unnamed. The extent of the casualties has not been defined. The subway system has been shut down.

OPEC stated they will not be able to meet demand in 2015. Fortunately, they are not the only game in town. Briefly, crude traded above $62 a barrel this morning, and then settled back towards the $60 level. We can expect volatility to be the norm.

According to PresidentNazarbayev of Kazakhstan, the Atasau-Alashankou pipeline, which is to transport oil from Kazakhstan to China, is to be operational as of December 2005. Contractors are hard at work and have promised President Nazarbayev that the pipeline will be ready by December 16th 2005, declared the President in a press conference following the talks between Kazakhstan and China,represented by the country's president, Hu Jinato. "Cooperation between our nations is now at another level, that of the realisation of great projects, and this pipeline is the first great bilateral project we have launched this year," stated President Nazarbayev. He added that both countries had also looked at the possibility of constructing a gas pipeline between both countries. Negotiations are under way between KazMunaiGas - Kazakhstan's national oil and gas company - and the Chinese National Petroleum Corporation (CNPC)on the construction of such a gas pipeline. This pipeline would open the Chinese market to Kazakh natural gas suppliers. This market is in constant growth: according to Chinese experts, the country's requirements in natural gas supply will grow beyond the 200 billion cubic metres by 2020 -representing a yearly growth of between 11 and 13%. The Atasau-Alashankou pipeline is 988 kilometres long and is the second phase of the petroleum transportation project between Kazakhstan and China. The pipeline starts from the rail link at Atasau in the Karaganda region (Central Kazakhstan) and crosses the border at the Droujba-Alashankou rail terminal. The cost of the construction of this section of the pipeline is estimatedat US$ 700 million. Private investments in the project are at US$ 650 million. Upon completion of the Atasau-Alashankou pipeline, the route WesternKazakhstan - China will have carrying capacity of 10 million tons of oil per year at the initial stage, and 20 million tons of oil per year by 2008. Maximum carrying capacity of the project makes up 50 million tons and that can only be reached by 2035; that is why it is most likely that the oil exports from Kazkahstan to China along this route will reach 20 million tons of oil per year by 2015. Predictions for Kazaktsan's oil and condensated gas production for 2005 stand at 60 million tonnes, 51 of which is destined for export (including 10 million tonnes destined to China). Total oil reserves are estimated at over 6 billion tons (ground-based fields), for the most part concentrated in Western Kazakhstan. The Caspian Sea basin has a number of large oilfields such as Tengiz, Astrakhanskoye, and the oilfields of Buzachi Peninsula. Taking into account the recently discovered Kashagan oilfield - with forecasted oil reserves estimated at about 7 billion tons - the total oil reserves of Kazakhstan are estimated at 13 billion tons, which will allow Kazakhstan to enter the top ten oil producing countries.

U.S. stocks funds fell 0.3% on average during the first half of 2005.

Challenger, Gray & Christmas stated that June planned job cuts rose to 110,996 and that, year-to-date, planned job reductions rose 14% to 538,274. Is everyone looking for a great June nonfarm payrolls report?

Brad Setser, senior economist for Roubini Global Economics, estimates that the amount of foreign assets the Chinese accumulate each month by exporting more than they import is valued at around $20 billion. No wonder they can afford to build pipelines.

Tropical storm Cindy passed through the Gulf. The U.S. Minerals Management Service stated that Cindy forced the shut-in of 12.7% of daily oil production, representing 190,506 barrels, in the Gulf of Mexico. The energy markets are focused on Dennis, a possible very early hurricane. With that concern, crude closed above $61 a barrel for the first time. For August delivery, both heating oil and gasoline contracts closed at a record price of $1.79. In certain locations, $3 a gallon at the pump may become a reality sooner than later.

Interestingly, even though crude hit a record price, both ExxonMobil and Chevron were down on the day.

Some analysts suggest that half the battle to making money in the market is to be in the right sector. It's not a good thing to make sweeping statements. Take the gold sector. Until a few days ago, gold was selling for $440 an ounce. Newmont Mining is 12 points from its 52-week high and only about three points from the low. On the other hand, Goldcorp is only a small fraction from making a new 52-week high. In sum, your sector may be ok but you can lose your ass in the wrong stock-- even if the sector has legs.

United Healthcare announced they will purchase PacifiCare for $8.1 billion in cash and stock.

Walgreens pharmacists in northern Illinois and northwest Indiana went on strike Wednesday night, complaining of inadequate staffing levels they say could threaten patients' health. Walgreens announced those pharmacies would remain open.

With Dennis expected to hit in a day or so, Transocean, the world's largest offshore oil and natural gas driller, stated it will be evacuating about 250 workers from three deep-water rigs. BP said nonessential workers were evacuated from deep-water facilities in the eastern gulf.

Franzia Wine brought you two buck Chuck (Charles Shaw) and now will provide $4 a bottle Napa Creek wine made from Napa Valley grapes. That means at least 85% of the wine must come from grapes grown in the Napa Valley. I have a feeling this product will fly off the shelves at Trader Joe's.

Yesterday we had a triple-digit down day for the Dow. Today's opening will not be pretty.

Having been the chairman of the board and chairman of the executive committee of a company listed on the N.Y. Stock Exchange, I know a bit about meetings to discuss the best interests of shareholders. The board of Unocal is faced with a higher proposal from CNOOC; however, absolutely no assurance can be provided that this deal can close. Hence, in my view, the decision to go with Chevron is a no-brainer. A bird in the hand is worth plenty in this uncertain environment.

What A Day!

7/6/05 What A Day!

Yesterday, one had to stay especially alert to all the happenings. Advancing stocks led decliners by close to 2 to 1. This was in the headwind provided by $60 crude oil and rising copper, soybeans, wheat and factory orders in May, excluding civilian and defense orders, declining 0.3%. You might ask how is it then possible that gold hit a 1-month low of $423? I don’t walk on water, and surely don’t have all the answers.

I was happy to see GM extend the employee discount through August 1. Ford and Chrysler finally decided to join the effort.

The Financial Times reported that Chevron has ruled out selling any Unocal Asian assets. Meanwhile, the Chinese Foreign Ministry stated “we demand that the U.S. Congress correct its mistaken ways of politicizing economic and trade issues and stop interfering in the normal commercial exchanges between enterprises of the two countries.” Rather than cry sour grapes, the Chinese should attempt to produce counterfeit oil and gas. Then, they’d really have customers lined up at their doorstep.

The State Department’s Sean McCormack said the Defense Production Act of 1950 “provides a process for reviewing foreign acquisitions of U.S. companies to determine the effect on U.S. national security.” Something tells me that such a review would take more than 35 days.

According to J.P. Morgan, $100 billion of repatriation (bring back profits made outside the U.S. The one-year window provides taxation of these profits at 5.25% or close to a free lunch. It does reduce the federal deficit this year by $5.25 billion.
Corporate M&A activity will remain strong during the second half of 2005 as companies seek growth through acquisitions in consolidating industries such as automotive, retail, utilities, energy,healthcare and financial services according to the Transaction Services group of PricewaterhouseCoopers. However, the combination of a stalled junk bond market and potentially higher interest rates could pose a problem later in the year. On Monday, July 11, there will be a meeting of the U.S.-China Joint Commission on Commerce and Trade. The meeting will be held in China. It should make for some worthless quotes, such as, developing bilateral economic and trade cooperation is in the interests of both countries. For the week ended July 1, mortgage applications rose 9.6% from the prior week. The International Council of Shopping Centers stated same-store retain chain sales would rise 4.5% in June, the best performance since February’s gain of 4.7%.

Tuesday, July 05, 2005


7/5/05 Happenings

In his first public appearance last week, new Toyota President Katsuaki Watanabe decided to give his engineers something to keep them on their toes: Develop a car that could travel across the United States on one tank of fuel.

Chevron is calling for a review of U.S. takeover policy. Reviews take time. Only 35 days remain until the Unocal shareholders vote on the merger with Chevron.

The dollar is trading at a 14-month high versus the euro, and yet, stocks in Europe are trading near a 3-year high.

Will the euro carry trade replace the dollar carry trade?

Chicago’s sales tax increase took effect Friday. The quarter-point increase to 9% is only exceeded by Stone Park’s 9.25% in the entire state of Illinois.

Much was made of the improvement in the ISM Index; however, the ISM job index only climbed to 49.9 from 48.8 in May. If the nonfarm payrolls report is to show an increase of 192,000 jobs in June, then the rise will need to come from the service sector. A big deal might be made of that increase, but what will be the change in average hourly earnings? Not much I’m afraid.

Pan Rui, professor at Fudan University in Shanghai: “We invest too much in U.S. federal bonds, and they don’t make us much money. Now we’re learning to invest more wisely, to try to invest in American companies and industries.” Professor, you need to have China’s proposed purchases be made in a timely manner. Maybe a Swiss watch would help instead of a counterfeit Rolex.

Don’t be surprised to see Chevron provide a little kiss to Unocal shareholders by increasing the stock portion of their offer from 1.03 Chevron shares to 1.07. With the increased price of oil and natural gas, the deal should still be accretive to Chevron on slightly improved terms.

Bruce Springsteen: “In America everything’s about who’s number one.”

Economists forecast that the Commerce Department will report that factory orders rose 3% in May after a slim increase of 0.9% in April.

Walgreen's June same-store sales increased 7.8%.

Mercury Interactive warned on 2nd quarter results.

So far this year, Boeing has been the star performer in the Dow. Going forward, I believe that Wal-Mart will hold that position.

Sunday, July 03, 2005

Freedom And Bravery

7/4/05 Freedom And Bravery

Elmer Davis: "This nation was conceived in liberty and dedicated to the principle - among others - that honest men may honestly disagree; that if they all say what they think, a majority of the people will be able to distinguish truth from error."

Evelyn Waugh: “Beer commercials are so patriotic: 'Made the American Way.' What does that have to do with America? Is that what America stands for? Feeling sluggish and urinating frequently?”

Bruce Springsteen: " People deserve better. They deserve truth. They deserve honesty. The best music... is essentially there to provide you something to face the world with."

There is a way to discover whether a housing bubble truly exists. Let's take the area in and around Tampa, Florida. Rick T. Murray, a housing industry analyst for Raymond James & Associates Inc., quantified the number of buyer investors in Hillsborough County by tracking Homestead exemption filings. Florida offers a tax break for primary residences, known as the Homestead Act. The act allows an individual to shelter $25,000 of assessed value of his or her primary residence from real estate taxes. In a research report titled "Condos Gone Wild" issued June 20, Murray concluded that individuals who failed to claim the Homestead Act deduction owned the property as an investment or a second home. According to the Hillsborough County Property Appraiser's Office, 45 percent of all townhomes and condos sold in 2004 were for investment purposes. Additionally, 38 percent of all single-family homebuyers in 2004 did not file for Homestead exemption. The sum of non-filing buyers of condos, townhomes and single-family homes as a percentage of total sales was 39 percent for the county, up from 25 percent in 2000 -- an increase of 56 percent.

Misery loves company. The euro and the pound fell to their lowest level in 13 months against the dollar.

Roger Federer consistently plays tennis at a level seldom attained by others. The others, such as, Sampras and Borg, retired some years back.

Klaus Kleinfeld, Siemens CEO: "If you want to earn a lot, you have to add a lot of value." It doesn't always work that way. Frequently, those at the top take credit for the contributions made by others.

China National Petroleum Corporation holds a 75% interest and Iran's Naftgaran Company a 25% interest in a southern Masjed Soleyman project in Iran, which aims to increase the output of oil wells to 28,000 barrels per day from the present 5,000 barrels per day in the first phase. Additionally, they will seek production od another 10,000 barrels per day. The Masjed Soleyman field was discovered 97 years ago.

Independence And Liberty

7/3/05 Independence And Liberty

George Carlin: "I do this real moron thing, it's called thinking, and I'm not a very good American because I like to form my own opinion."

Thomas Jefferson: "The natural progress of things is for liberty to yield and government to gain ground."

If you think more, there is a much greater opportunity for you to save more. You'll have less time to spend money on things you don't really need or want.

Wal-Mart's weekly sale summary for July 2nd: "Comparative sales for the U.S. are estimated to be 4.5% compared to our guidance of 2 to 4 percent. Strength was seen in seasonal merchandise sales during the reporting period. For the week, general merchandise comparative sales were stronger than food. The Northeast was the strongest region and average ticket drove the comp sales." In my view, Wal-Mart shares are an uncommon value at the present level of $48+.

All this talk about Unocal and CNOOC is crap. It's not about the Chinese government acquiring American oil interests. If it were, Venezuela would not own Citgo and its refineries. This deal is about value and timing. Where do you think Chevron shares would sell without arbitrage shorting pressure? Before the deal was announced, Chevron was $64 and not Friday's $57. At $57 a share, Chevron represents uncommon value. The stock yields about 3%. If it sells at just 10 times rearnings, it will trade at $65. You get 1.03 shares for 70% of your Unocal stock. At 65, that 1.03 equates to about $67 a share. A shareholder would receive those shares tax-free. With the CNOOC proposal, a tax would be paid. You end up getting about $54 a share with no call on the future growth of Chevron. This deal is a no-brainer. That's assuming others are like George Carlin and do the moron thing called thinking.

Here we are at the beginning of the second half of 2005, and we have three uncommon values in Wal-Mart, Chevron, and MMM. Does it get better than that? Those ham sandwiches will be served up sooner rather than later. How sweet it is!

Rene Rivkin: "When buying shares, ask yourself, would you buy the whole company."