Saturday, July 23, 2005

Restructuring And Re-balancing

7/23/05 Restructuring And Re-balancing

The job cuts and the plant closing continue in the U.S. Kimberly Clark will sell or close about 20 plants and cut 6,000 from the payroll. National Spinning will close a plant and cut 100 jobs. Ball Corp. will eliminate 90 jobs. Oscar Suris of Ford stated “we have operating challenges that include our cost structure and excessive production capacity, and we have plans to address that. With Ford’s U.S. sales down nearly 4% in the first six months of 2005 and a loss from North American operations amounting to $907 million in this year’s first half, one can expect thousands more of its 35,000 salaried workers to be cut from the payroll. Interestingly, our auto industry has two things in common with China’s manufacturing sector--- excess capacity and lack of pricing power.

Yu Yongding in discussing the yuan: “The principle is stability as well as flexibility. We don’t want to encourage speculative capital inflows.” The yuan may have been revalued but much for China will remain the same--- surplus capacity, declining manufacturing prices, rising trade and current account surpluses, large capital inflows, and rising forex reserves. Re-balancing and restructuring takes time—possibly decades rather than months or years.

Zhang Yisheng, director of Chai Da Garment: “It’s impossible to ask international buyers to accept a higher price. The competition is too fierce.”

Whirlpool raised its bid for Maytag to $18.

China’s Nanjing Automotive will buy Rover.

UK’s economic growth is the slowest in a dozen years.

For the fourth straight week, bond prices declined. At 3.90%, the yield on 2-year Treasury bonds is the highest in 4 years. The return is beginning to look like a viable alternative to expectations for common stocks.

John Challenger: “We don’t know till afterward, but I do think we may be seeing a tipping point in the economic cycle that these big layoffs are flagging.”

Have you considered the possibility of rising employment cuts combined with higher interest rates?

"Our focus is to make sure they're doing a good job in underwriting, make sure that the borrower does have the repayment capacity to absorb potential (rate) increases, not just to underwrite borrowers at the teaser rate," said Barbara Grunkemeyer, deputy comptroller for credit risk at the OCC. If the availability of interest-only loans and other “teaser” ARM loans should diminish greatly, what will that do to housing prices? What will it do to construction jobs?

For Wal-Mart’s July reporting period, comparative sales for the U.S. are estimated to be within its guidance of 3 to 5 percent. For the week, general merchandise sales were stronger than food. Average ticket drove the comp sales and the West was the strongest region.

Thursday, July 21, 2005

After Shocks

7/22/05 After Shocks

When it comes to our U.S. dollar, the message has forever been "In God We Trust." For better or for worse, the rest of the word has shared that belief ----until today. With China's revaluation, the message has been transformed to "In a basket of currencies we trust." That changes the ground rules for investment in stocks, bonds, commodities, and currencies. Our dollars and our Treasury bonds no longer are the center of the investment universe. They play a large part, and nothing more. There is a visible shifting of power. The yuan will continue to gain in value, and, at least in the short term, increasing amount of money will flock into China. As was the case today, over time, interest rates will rise and the value of the dollar will resume its decline. There will be some regional strength left in certain housing markets, but the thrill will be gone, so to speak. The froth will vanish, and lo and behold, prices could even decline. Imagine that!

After the announcement of the yuan revaluation, the Indian rupee soared to its highest price against the U.S. dollar in 6 years with the rupee standing at 43.17 to the dollar. I have stated repeatedly over the past year that the rupee was my currency of choice. For the prior two years it had been the New Zealand dollar. A stronger yuan will assist India's exports, which account for about $10% of its economy. In the latest fiscal year, India's exports grew close to 25%.

Some folks believe the small revaluation of the yuan will help our exports. According to the Strategic Research Institute, in an effort to reduce costs, shorten time-to -market, and possible receive simultaneous approval in multiple markets, the pharmaceutical and biotech industry is increasingly looking to China to conduct clinical trials. The same advantages have already been found to exist in India.

With the yuan revaluation, shares of PetroChina jumped to $83, a new all-time high. The shares are trading at twice the P/E of PetroKazakhstan and make it possible for PetroChina to outbid others and still make an acquisition of PKZ that will be accretive to earnings at the outset.

Of the nearly 43,000 workers in Honeywell's aerospace division, more than 11,000 are at several sites in the Phoenix area. Within this division, about 2,000 jobs will be cut.

According to the Department of Labor, the median weekly earnings of the nation's 103.3 million full-time wage and salary workers were $643 in the second quarter of 2005. This was 0.6 percent higher than a year earlier, compared with a gain of 3% in the CPI.

Rep. Joe Barton will allow a vote on whether to add a provision to the energy bill aimed at blocking CNOOC's proposal to buy Unocal.

The revised Conference Board's U.S. Leading Economic Indicators Index has increased at a 1.2 percent annual rate over the last six months, but this is down from a peak of about 10 percent at the end of 2003.

Citing the positive trends in the economy, bond data, and corporate activity, Standard & Poor's Ratings Services painted a rosy picture of current conditions in the U.S., but cautioned that existing risks could lead to a turnaround. "Things are about as good as they get," stated David Wyss, chief economist, at Standard & Poor's Midyear Economic and Credit Update and Outlook. "This trend is going to continue for the next several quarters." He highlighted growth at 3.7%, inflation at 2% excluding energy, and unemployment at 5%. Corporate cash balances have set record highs, posting double-digit increases for the past 12 consecutive quarters. But skyrocketing energy prices and the trade deficit are casting a bit of a shadow over this upbeat assessment. With its tightening stance, which includes nine rate increases and three more expected by the end of 2005, the Federal Reserve is trying to achieve a neutral federal funds rate without slowing down the economy. However, Treasury bond yields are now lower than when the Fed began ratcheting up short-term rates in June 2004. The federal funds rate has risen to 3.25% from 1%, while rates on 10-year issues have actually dropped, to 4.2% from 4.8% during this period. Mr. Wyss predicted that bond yields should start to rise, though not as much as short-term rates. Although this will produce a flatter yield curve, he said this is no cause for worry: "Periods when the yield curve has been flat but positively sloped have shown about the same economic growth and actually better performance than periods in which the yield curve has been steep." Mr. Wyss did express concern about pensions, because 80% of those at corporations in the S&P 500 Index of stocks currently have a net underfunding of 11%. While this marks an improvement over the 13% underfunding in 2003, he questioned how the shortfall would improve, and pointed out that pension fund managers' projections of 8.25% average returns over the next few years seem overly optimistic.

It's Only The Beginning

7/21/05 It’s Only The Beginning

The People's Bank of China said the current yuan-dollar peg of 8.3 is being dropped in favor of a peg vs. a basket of currencies. The new peg vs. the dollar will be 8.11, and this represents a 3% change. The currencies included in the basket will most likely be the yen, euro, Singapore dollar, and other Asian currencies. The change means China will need to purchase less dollars and less dollar-denominated Treasuries to maintain the peg. It is only the beginning. There will more 3-4% changes in the future. Our dollar will become less important for foreign investors and less important in international trade. I continue to believe that, in the future, stocks, bonds, and commodities will be traded on the world markets against a basket of currencies rather than the dollar as it is presently. The reaction today was a decline in the value of the dollar and Treasury bonds. The yen surged in value, and gold, the euro, and the Singapore dollar gained in value. Over the long term, the market will look back and realize that today was the beginning of the air going out of the bubble on our low Treasury yields. Higher yields on Treasuries will lead to higher yields on mortgages, and that will reduce the housing sizzle.

Yesterday, the Nasdaq and the S&P 400 hit 4-year highs.

Bay Area apartment rents cost about 15% less than 4 years ago.

Greenspan: “History cautions that long periods of relative stability often engender unrealistic expectations of its permanence and, at times, may lead to financial excess and economic stress.”

PNC Financial is cutting 3,000 jobs.

Crude closed under $57 a barrel. U.S. crude stocks declined 900,000 barrels in the week ended July 15, while imports rose 871,000 barrels per day. Gasoline supplies fell by 1.3 million barrels and distillate stocks rose by 2.3 million barrels.

D.R. Horton, a large homebuilder, stated it has a record $7 billion sales order backlog at 6/30/05.

Greenspan: “The apparent froth in housing markets appears to have interacted with evolving practices in mortgage markets. The increase in the prevalence of interest-only loans and the introduction of non-exotic forms of adjustable-rate mortgages are developments of particular concern.”

Last week first-time jobless claims fell by 34,000, and the number of people receiving unemployment checks fell 41,000 to 2.577 million in the week ending July 9.

Wednesday, July 20, 2005

Sealed With A Kiss

7/20/05 Sealed With A Kiss

Chevron provided a timely kiss by raising its offer for Unocal to 40% in $69 per share in cash and 60% in 1.03 Chevron shares. On an after-tax basis, this is superior to CNOOC’s cash proposal plus Unocal shareholders can vote and close on the Chevron deal in 3 weeks. It’s a no-brainer. This might have been a bitter pill for the Chinese government, but they got great news in Kazakhstan. The new pipeline to China will be completed in December and oil will flow in January 2006. This is important for China, PetroChina, and PetroKazakhstan. The main issue for PetroKazakhstan is the cost of transporting oil and not the cost of finding the oil. With the pipeline, the combined cost of exploration and transportation should not exceed $5 a barrel. This makes PetroKasakhstan hugely profitable, and PetroChina should be the likely buyer for the company. China needs the oil for this pipeline and the fit with PetroKazakhstan is right on the money. I am raising my buyout price, and believe the value far exceeds the present $3 billion market cap. It should also be noted that the possible oil reserves for the company have been raised to 300 million barrels, and that makes the proven, probable, and possible a total of 850 million barrels.

Eastman Kodak will cut an additional 7,500 to 10,000 jobs. Tyson is closing plants and cutting 450 employees. VF, maker of Wrangler and Lee jeans, is closing its last garment manufacturing plant in El Paso and it is also the company’s last sewing facility in the U.S. It will leave 395 employees without jobs. VF was once El Paso’s largest private employer.

The median home price in the Bay Area exceeds $600,000.

Results of a survey released Tuesday by Mercer Human Resource Consulting show the size of the average raise this year is little changed from 2004, when pay hikes averaged 3.5 percent. A separate survey issued last month by the Conference Board was in line with Mercer's, finding that salaries are expected to rise an average 3.5 percent.
Amgen raised its earnings forecast for 2005 to $3.10 to $3.20 per share from $2.80 to $2.90 per share. The great ones find a way to exceed expectations.
Today, Wal-Mart is opening a new 292,000 square foot experimental supercenter in McKinney, Texas. It will be open 24 hours a day, seven days a week, and employ about 450 people. This store “will experiment with materials, technology, and processes, which include: reducing the amounts of energy and natural resources required to operate and maintain the stores; reducing the amount of raw materials needed to construct the facility; and substituting, when appropriate the amount of renewable materials used to construct and maintain the facility.”
The June semiconductor book-to-bill rate was 0.93. The 3-month average of orders for the month was a 33% drop posted a year earlier, but 5.5% above May 2005 levels.
HP contributed $1.2 billion to its pension and post-retirement plans in 2003, $613 million in 2004, and expect to spend $910 million in 2005. Any U.S. worker hired after Jan. 1, 2006 will only receive a 401K plan. It will be more generous than the present plan.
In the past year, the wholesale price of diesel has increased 54 cents to $1.75 a gallon. The current average national diesel price of $2.39, according to the U.S. Department of Energy, doesn’t cover the added costs truck stops pay for taxes and transporting the fuel.
Beginning this week, 4,689 businesses in Beijing will take mandatory weeklong breaks on rotation to save daily kilowatt usage. Worker salaries will not be reduced or cut. They will six days instead of five day weeks from September in order to make up for lost production, according to the Xinhua News Agency.

Tuesday, July 19, 2005

The Fog Will Clear

7/19/05 The Fog Will Clear

In June, UK house prices declined for the 11th consecutive month. Could that happen in the U.S.? The NAR-Wells Fargo housing market index dipped to 70 in July from a six-year high of 72 in June. The index of current single family home sales fell to 75 in July from 77 in June. Prospective sales fell to 77 from 80. Buyers’ traffic was unchanged at 55. New construction remains at about a 2 million annual unit pace, and, with 70% of Americans now homeowners, that is a heady figure to maintain.

Greenspan talks about slowing economic growth and more Fed rate hikes. I don’t hear him discussing Fed tightening of the money supply. Telling the whole story would be refreshing. Real M2 money supply growth contracted in the quarter ended June 2005.

Bill Gates: “"So even [though] India and China are going to grow quite a bit, it's a big problem for us that we can't get these great students."
IBM stock jumped about 5% yesterday after trading on the NYSE had ended. The company’s earnings in the quarter exceeded expectations. The media did not report that IBM ended the 2nd quarter with $8.7 billion in cash, and that IBM had repurchased shares totaling $1.6 billion. Outstanding debt stands at $23.7 billion with a debt-to-equity ratio of 6.7 to 1. Basically, net income for the six months was $3.23 billion, and that amount was used to repurchase IBM shares. This is a recurring theme and may help to explain why IBM’s stock has been a poor investment for some time. Where’s the organic growth?
Foreign capital inflows to the U.S. increased to $60 billion in May. Foreign central banks purchased $13.2 billion in long-term U.S. assets in May. However, Central banks purchased $6.8 billion in U.S. Treasuries in May, down sharply from April’s $13.9 billion.
There are a couple of points I would like to reiterate about CNOOC and Unocal. CNOOC will not raise its bid without Unocal’s endorsement. Will all the political upheaval surrounding the CNOOC proposal, it is difficult for the Unocal board to be certain that CNOOC will be in a position to close on the purchase. Japan is also voicing concerns behind the scenes because most of Unocal’s Indonesian gas field production is delivered to Japan and other Asian destinations. Should CNOOC buy Unocal, would Japan still get that gas production? Don’t bet on it.
HP will cut 14,500 jobs or about 10% of its workforce.
According to Project Construction Office in Iraq, the U.S. has not spent 60% of its pledged $21 billion for reconstruction.

Monday, July 18, 2005


7/18/05 Zazzle

Emily, a category 4 hurricane with winds of 135 mph, slammed into the Yucatan Peninsula, which is best known for Cozumel. To those in the oil business, it is known for the Cantarell oil field that supplies about 3% of the global supply of 84 million barrels of oil daily. Shell abandoned three offshore facilities, suspending output of around 1,000 barrels daily and halting 20 million cubic feet of gas production. Mexico's state oil company, Petroleos Mexicanos, has evacuated its Bay of Campeche staff on offshore rigs and closed its taps. Petroleos Mexicanos exports 80 percent of its 3.4 million barrels in daily production to the United States, the world's largest consumer of energy. Emily appears headed for the Gulf Coast between Cabo Rojo, Mexico and Baffin Bay, Texas.

MMM revised its 2005 adjusted earnings estimate to $4.20 to $4.25 from $4.15 to $4.25 per share.

Citigroup's earnings fell short of 2nd quarter estimates and revenues declined 3.2%.

Bank of America's earnings exceeded estimates.

A preliminary $17 per share bid in cash and stock by Whirlpool for Maytag topped the offer by
Haier and others. Whirpool will decide by August 9th whether it will be a binding bid. There are potential anti-trust concerns.

Zazzle of Palo Alto, the Internet's leading customized products marketplace, received $16 million in funding from Kleiner Perkins and Sherpalo Venures, the same VC combo that funded Google in the beginning. At Zazzle, individuals, groups, and businesses can celebrate and share their interests by creating, buying, and selling high quality, uniquely customized products including apparel, posters, cards, and stamps. For example, for the first time, Walt Disney has made 130 of its legendary characters (3,500 images) available to the public for the purpose of creating personalized gifts and apparel.

Sunday, July 17, 2005

Are You Peeing On An Electric Fence?

7/17/05 Are You Peeing On An Electric Fence?

Never underestimate the potential carnage that can be produced by a hurricane. Emily’s winds are currently at 155 mph and it is tracking to hit Mexico’s Yucatan peninsula on its way to the Gulf of Mexico and possibly the southern tip of Texas, and that could mean Houston where there recently has been severe flooding.

I am always amazed when the future is projected based on past history involving the word “always.” A typical example is stating that, for consecutive decades stretching from 1885 to 1995, the 5th year of the decade has always seen higher prices for the Dow Jones Industrials. Predicated on that performance, we should see higher prices by year-end 2005. Could something happen to interrupt that streak? When was the last time Florida experienced 4 major hurricanes in 5 weeks as it did in 2004?

The unprecedented can take place. Robert Shiller diagnosed, in advance, the dotcom bubble in stocks. He recently concluded that, after adjusting for inflation, home prices increased annually between 1890 and 1994 by 0.4%, and after periods when home prices outpaced inflation, they slowed down—possibly declining or stagnating.

How often has the Fed reduced the Fed funds rate to 1%? Would not that be considered an artificially manufactured low rate to stimulate housing, construction, and stock and bond prices, and hopefully lead to a higher rate of consumer spending? Nevertheless, the artificial can generate real results. Last week all-time highs were seen for mid cap and small cap indices. The NAR has upped their housing estimates to new all-time highs. The Russell 2000 and the 3000, the S&P 500, and the Wilshire 5000 hit multi-year highs. Up through last Thursday, the Philadelphia Semiconductor Index had risen for 9 straight days. All the while, inflation was muted. Right? Gas at the tank was at an all-time high. Corn prices were at their highest level in over a year. The Fed stated that home values increased 55% since 2000 to $18 trillion or more than 1 ½ times the size of our GDP. That is unprecedented! The Administration pointed to the strength in our June industrial production. It rose 0.9% thanks to a 5.3% increase in the output of utilities (it was hot and required more air conditioning) and the rise in auto production created by the employee discount program. Without utilities and autos, the June industrial production was up a meager 0.1%. What would the inflation rate be counting energy and food prices? Not muted.

Will Rogers: “There are three kinds of men:
1. the one that learns by reading.
2. the few who learn by observation.
3. the rest of them have to pee on the electric fence for themselves.”