Saturday, October 22, 2005

Dangers In Greedville

10/22/05 Dangers In Greedville

Weyerhaeuser said it will close a pulp mill in Cosmopolis and a sawmill in Aberdeen due to poor markets, aging machinery and high operating costs. The closures were announced on the same day as the company reported falling profits. Both mills are in timber-dependent Grays Harbor County in Southwest Washington. Weyerhaeuser is the county's largest employer, with about 1,045 workers, according to data from the Grays Harbor County Economic Development Council. The local hospital is the next largest employer with about 590 employees. The two mills employ about 342. The largest is the 50-year-old Cosmopolis mill, which employs 245 making specialty pulp for plastics, photographic papers and cigarette filters. The 81-year-old, large-log lumber mill in Aberdeen produces about 125 million board feet per year of softwood lumber used in residential and commercial construction and appearance-grade millwork.
Weyerhaeuser said it had no choice but to close the under-performing mills, and the company expects more mills to close as it continues to cut costs.
"We recognize the impact of today's announcement for our employees, contractors, local communities and customers and we are committed to working constructively in the months ahead to prepare for the transition," said Steven Rogel, chairman, president and chief executive officer. "In a world of weakening markets and tightening economics we reached the point where we have no alternative."
The Cosmopolis operation is Weyerhaeuser's only specialty pulp operation, and "is not a strategic fit for the company," according to the announcement. But it won't close immediately. The exact date won't be determined until next year, and will be based on customer contracts. The age of the Aberdeen mill was a contributing factor in its closure, as were declining demand and prices and competitive position, Weyerhaeuser said.

Cisco has begun building a $50 million campus in Bangalore, India, which will have enough room for 3,000 employees. The 1-million-square-foot development will be located on the Outer Ring Road in Sarapur and Cisco expects to finish it by June of 2007. It will house Cisco employees working in the areas of research and development, information technology, sales and customer support. "India has been and continues to be a strategic market for Cisco both in terms of business opportunities and as a base for outstanding engineering talent," stated Cisco president and chief executive officer John Chambers.

According to Reuters, Albertsons Inc. has received a preliminary takeover bid from Kroger Co for the entire company, while its drug store unit has attracted bids from CVS, Walgreen’s, and Rite Aid. Kroger will be competing against several teams of private equity firms. Albertsons is the number two grocery chain behind Kroger. On Friday, the WSJ ran an article stating that some bidders had submitted preliminary offers for the company. According to The New York Times. those include consortiums led by investment groups, including one led by Kohlberg Kravis Roberts, one by Thomas H. Lee Partners, and another by the Yucaipa Companies. The Times article stated bids all are in the high-$20s-a-share range. It is wise to remember not to trade with the newspapers. One must do their own homework. With Goldman Sachs and Blackstone Group managing the auction, I continue to believe shareholders of Albertsons will be pleased with the outcome. It should be noted that things don’t always pan out the way I envision. In purchasing PKZ at $38, I thought a fair purchase price would be $52. As a bidding war between China and India appeared more likely, I raised my take-out value to $56 and then $62. India only bid once and we will end up with $55. The situation with Albertsons has many more players and more paths to the finish line. That’s not a negative. It makes for a more fluid bidding process. I remain comfortable with a value of $31 to $33 a share.
What others may believe is of no importance to me. It’s my money and I answer only to me. I should mention that, according to auctionblockdatabase.com, final bids for Albertsons are due the week of October 24.

Wal-Mart Stores, Inc. will web cast its annual analysts' meeting on Tuesday and
Wednesday, October 25-26, 2005. The web cast and conference call will take place at
the times noted below.

October 25 12:15 p.m. - 4:30 p.m. CDT 415-537-1832
October 26 7:30 a.m. - 3:00 p.m. CDT 877-871-4104

Wal-Mart stated today that, for the October reporting period, comparative sales for the U.S. are estimated to be within the company’s guidance of 2 to 4 percent.

Sol Palha on housing problems:
“There is always a way to spin a story and make it look like things are not so bad especially when so much is at stake but the following facts cannot be changed

* Housing prices have been dropping for 3 months in a row.
* In many cities the more expensive houses are taking longer to sell.
* Inventories are slowly building up, nothing dramatic yet but that's how bubbles usually pop.
* Mortgage rates are rising across the board. The 30-year mortgage has just hit a 15-year high.
* More and more individuals are slowly starting to look into the option of renting VS buying. In time this will gather even more steam
* Real Estate is also taking a breather in several hot international markets; China, Australia and Britain are the main ones that come to mind.
? A revision in the US Tax code could also have potentially detrimental effects on the housing sector.”

Liquidity generates a flow of funds but it does not guarantee profits. Year-to-date M3 has expanded at a 7.3% rate, bank credit at 11.9%, and real estate loans at 14.8%. In other words, there is plenty of money available. The cost for that money is rising. That means the need to make more money just to offset the increased cost of funds. The problem is not everyone is invested in Google. Instead, many investors engage in greater risk-taking. Unfortunately, too many risk takers are not smart enough to take that added risk. Many don’t even understand the extent of the risk taken, such as, in derivatives. You have a generation of schmucks who think they are geniuses taking on added risk. Innocent investors get hurt in the process. That’s progress in greedville?

Tim Geithner, NY. Fed President: “Our current account deficit is now running at a rate of above 6 percent of GDP, a level without precedent for a major economy. It matters because of the composition of the imbalance. Our trade deficit is now roughly the size of the current account deficit, and very large relative to our export base. And our net investment income balances are now likely to move into deficit. It matters because of the trajectory of the U.S. imbalance. On reasonable assumptions about its likely near term path, this deficit will produce a very large net deterioration in our net external liabilities relative to national income, with progressively larger net transfers of income to the rest of the world. This pattern should concern us because it is not simply the result of the savings and investment decisions of the private sector. The fact that we are using a substantial part of the savings we are borrowing from the rest of the world to finance an unsustainable level of public borrowing leaves us more vulnerable than if those savings were being used for productive private investment…these imbalances matter because at some point they will have to reverse. Market forces will at some point induce an adjustment. And that inevitable process of adjustment will bring with it the risk of large movements in relative prices, greater volatility in asset prices and slower growth in the United States and in the rest of the world.”

Judge Sturgess: “Justice is open to everyone in the same way as the Ritz Hotel.”

Friday, October 21, 2005

Unstable Ground

10/21/05 Unstable Ground

Before I get into this morning’s discussion, I’d like to address an article in today’s WSJ.
This paper stated “Refco’s $430 million of bad debts stemmed by multiple customers, including money manager Victor Niederhoffer.” Vic wrote that all his debts to Refco have been paid in full. I believe him. When an entity or entities try to dismember one’s reputation in an unjustified manner, I don’t like it.

Lenny Bruce: “In the Halls of Justice the only justice is in the halls.”

Yesterday’s negative NYSE action was the biggest one-day drop in 4 months and must be viewed very carefully. Why? It came right after the biggest one-day up move in 3 months. This is more than out of the ordinary and helps to explain the rise in the VIX. Yesterday there were 144 new lows on the NYSE and only 39 new highs for the year. More troubling was that over three-quarters of the volume on the NYSE just happened to be on the downside. Now, please take the following with a grain of salt. Earlier in the week we had that $1.4 billion trade in ExxonMobil. This was followed by large buying in S&P futures that created short covering. Then there was yesterday’s down day. It appears to me that one or more large accounts are being liquidated. They appear to be heavily centered in energy commodities and energy-related equities. Today is option expiration. It could be a highly volatile ride.

Ford will be closing plants and announcing significant layoffs. What else is new?

I don’t write often about Google because it rubs salt in the wounds of many. I have been writing about Google for three years. It is a superior technology company and they offer many beta programs that can make your daily life a great deal more efficient. It serves no purpose to remind readers that I suggested a couple of years ago to purchase shares in this company when and if it went public. That’s not the purpose for mentioning Google. The company’s results for the quarter rose seven-fold. Whether Google goes to $335 or higher, it cannot hold up the rest of the market. There will always be a few companies that shine in dimming times, but eventually, when they raid the whorehouse, they take all the girls. Your beautiful sister, in this case, Google, might be the last to go, but it will go. The stay may be short, but it will go.

Crude is trading around $60 a barrel this morning. It is only a $10 decline from the recent top, and a natural reaction to less demand for gasoline as the peak driving season is behind us. That does not mean we should ignore $2.75 a gallon gas and high prices for heating oil and natural gas. The International Council of Shopping Centers thinks it is business as usual. They see same-store holiday sales in Nov. and Dec. rising by 3 to 3 ½ percent. In 2004, it was 2.3%. I think they’re nuts. They should be happy as a pig in manure if this season matched last year’s. The consumer is stumbling around the ring as if hit by Rocky Marciano.

Russian oil major Lukoil has proposed to PetroKazakhstan and China's CNPC to settle ownership disputes over a joint venture in Kazakhstan, two Russian news agencies reported.
"We have contacted PetroKazakhstan and CNPC - I sent a letter to these two companies - with a proposal to meet and hold talks to resolve our disputes," Interfax quoted Lukoil Vice President Andrei Kuzyayev as telling a press conference in Astana on Thursday.
The RIA Novosti agency also quoted Kuzyayev as making the similar remarks.

With regards to Albertson’s, according to auctionblockdatabase.com,
"Sources confirmed that due diligence began the week of Oct. 3, and that the KKR group has already gone to Albertson's headquarters for management presentations.
The other two groups were scheduled to go the week ofOct. 10. A deal announcement is expected around the end of November."

According to the People’s Daily in China, “The first pipeline for recycling natural gas concomitant in Kazakhstan, solely financed by the Chinese side, went into official operation on October 5 and the recycling levels have surpassed the standards set by the
Kazakhstan government, winning the full affirmation from the government…According to local media quoting well-informed sources, the government's support for CNPC's
acquisition is because it not only benefits the two oil companies, but also Kazakhstan. Firstly, located at the middle point of the China-Kazakhstan oil pipeline, the Kumkol oilfields under PetroKazakhstan produce nearly 7 million tons of oil annually, which
is very advantageous to the oil-transmitting pipeline scheduled to be complete by the end of this year. Secondly, CNPC's successful settlement concerning the rational use of petroleum concomitant gas is beneficial to solving the issue of resources waste and
environmental pollution for PetroKazakhstan. Thirdly, being favorable to eliminating contradictions existed between PetroKazakhstan and the Kazakhstan government
in the areas of petroleum exploitation and management, and to turning around the company's economic losses resulting from these. Fourthly, the Kazakhstan government wishes to realize multilateral capital structure in the energy resource area in order to
change the situation of western capital concentration in this area. More analyses show that the repeated enhancement between China and Kazakhstan in the area of energy resource cooperation is in line with the long-term strategic interests of the two countries.”

Seven-Eleven Japan increased its offer for Seven-Eleven (U.S.) to $37.50 from $32.50 per share. Before everyone gets excited for the arb community, the average cost for the arbs is about $35.50. That 2 dollar profit per share is overwhelmed by the losses on the books in Guidant. In addition, the positions in Guidant are significantly larger than those in Seven-Eleven. There is a spread of $1.75 remaining in PKZ. The deal should close in 5 days. That appears to me as an opportunity rather than a red flag (no pun intended).

The Conference Board announced yesterday that the U.S.leading index decreased 0.7 percent, the coincident index decreased 0.1 percent and the lagging index increased 0.2 percent in September.

* The leading index decreased sharply in September
as the economic impact of the hurricanes in the Gulf
region began to be reflected in the component data.
September’s decline in the leading index is its third
consecutive fall. In September, the largest negative
contributors to the leading index were the index of
consumer expectations and initial claims for
unemployment insurance. The growth rate of the leading
index has been slowing down steadily from a peak
growth of about 10.0 percent at the end of 2003, and
it is now fluctuating in the 0.5 to 1.5 percent annual
rate range in recent months.
* The coincident index, a measure of current
economic activity, decreased in September, and the
slight increase in August was revised down to a slight
decrease as actual data for personal income, which
partially reflects the impact of Hurricane Katrina,
became available. September’s decline in the
coincident index is also partly due to the effect of
the hurricanes as employment and industrial production
registered decreases. The coincident index has been
increasing at a relatively steady 2.5 percent annual
rate since April 2003, but its growth rate has
moderated in recent months.
* The leading index has slowed down steadily since
mid-2004. The impact of the hurricanes reinforced an
already existing moderation in the leading index.
Excluding the large positive contributions from the
interest rate spread, the leading index has been
fluctuating around a relatively flat trend throughout
2005. At the same time, the growth rate of real GDP
has slowed to a 3.3 percent annual rate in the second
quarter of 2005, down from a 4.3 percent rate in the
first quarter of 2004. Although it is too soon to tell
if the negative impact of the hurricanes on the
leading index will be lasting, the recent behavior of
the leading index is still consistent with the economy
continuing to expand more moderately in the near term.

Leading Indicators. Four of the ten indicators that
make up the leading index increased in September. The
positive contributors – beginning with the largest
positive contributor – were vendor performance,
building permits, interest rate spread, and stock
prices. The negative contributors – beginning with the
largest negative contributor – were average weekly
initial claims for unemployment insurance (inverted),
index of consumer expectations, real money supply*,
manufacturers’ new orders for nondefense capital
goods*, and manufacturers’ new orders for consumer
goods and materials*. The average weekly manufacturing
hours held steady in September.

The leading index now stands at 136.8 (1996=100).
Based on revised data, this index decreased 0.1
percent in August and decreased 0.1 percent in July.
During the six-month span through September, the
leading index increased 0.4 percent, with seven out of
ten components advancing (diffusion index, six-month
span equals seventy percent).

Coincident Indicators. Two of the four indicators that
make up the coincident index increased in September.
The positive contributors to the index – beginning
with the largest positive contributor – were personal
income less transfer payments*, and manufacturing and
trade sales*. The negative contributors to the index –
beginning with the largest negative contributor – were
industrial production and employees on nonagricultural
payrolls.

The coincident index now stands at 120.7 (1996=100).
Based on revised data, this index decreased 0.1
percent in August and increased 0.2 percent in July.
During the six-month period through September, the
coincident index increased 0.8 percent.

Lagging Indicators. The lagging index stands at 120.3
(1996=100) in September, with four of the seven
components advancing. The positive contributors to the
index – beginning with the largest positive
contributor – were average duration of unemployment
(inverted), average prime rate charged by banks, ratio
of consumer installment credit to personal income*,
and ratio of manufacturing and trade inventories to
sales*. The negative contributors – beginning with the
largest negative contributor – were commercial and
industrial loans outstanding*, change in CPI for
services, and change in labor cost per unit of
output*. Based on revised data, the lagging index
remained unchanged in August and increased 0.2 percent
in July.

The Philly Fed Index rose to 17.3 in Oct. from 2.2 in Sept. Troubling were the prices received sector increasing to 32.6 from 8.6 and the prices paid sector rising to 76.6 from 52.7. The latter was the highest level in 25 years. You remember 1980, don’t you? Inflation was not a pretty sight during the Carter years.

According to a national poll conducted by the Sacred Heart University Polling Institute, gas prices are seriously impacting the quality of life in America.

* Over three-quarters of all respondents, 77.6%, indicated that recent
gasoline price increases are very seriously (42.3%) or somewhat
seriously (35.3%) impacting their own quality of life. This is an
increase from 71.3% recorded in April 2005.

* Over half of all Americans surveyed, 55.8%, indicated they will travel
less this coming holiday season as a direct result of higher gasoline
prices. Another 37.4% suggested they would not travel less and 6.8%
were unsure. In April 2005, 43.5% of those surveyed said they would
travel less over the summer of 2005.

* Americans are using their credit cards to pay for gas much more
frequently today than a year ago. One-third (31.2%) of respondents who
have a car, truck or SUV said they are using credit cards to pay for
gas more frequently today than they were one year ago as a result of
higher prices.

* Increasing numbers of Americans surveyed are reporting their next car
will be smaller and more gas-efficient. Among those currently owning a
car, 56.0% now report their next car will be smaller and more gas-
efficient -- up from 45.7% in April 2005.

* 45.2% of those who will purchase a new car will consider a "hybrid"
vehicle, while 38.0% suggest they will not consider the new "hybrids."

According to John Gerlach, associate professor in the Economics and
Finance Department at Sacred Heart University, "The new survey clearly shows
that the continuation of high gas prices is forcing Americans to change their life style.
"More of us are also planning to buy more fuel-efficient cars than was the
case five months ago, and the sales of large SUVs have already declined from
their highs of a year ago. This is not good news for U.S. auto makers, who
have relied on the sales of these vehicles to offset losses on their
automobiles.
"Given the continuation of high gas prices and the outlook for more of the
same (not to mention higher home heating costs this winter), it is not
surprising that a growing number of Americans feel that their quality of life
is being negatively impacted. And it may very well get worse in the next six
months." Jerry Lindsley, director of the Polling Institute, commented that,
"spiraling gas and home heating oil prices may be the 'stealth issue' that
will impact the careers of incumbent elected officials in '06 and possibly '08
as much as they are impacting Americans' quality of life. With our survey
showing the President's approval rating down to 42% positive and recent
ratings of Congress down to 29% positive -- it may be 'incumbents beware.'
Consumer anger may impact both political parties alike if they don't get it
together on this quality-of-life issue."

The number of Pennsylvanians with employer-provided health insurance declined by 4.1 percent between 2000 and 2004 according to a new study by the Keystone Research Center and Washington D.C.-based Economic Policy Institute. The decline means that about 494,000 fewer Pennsylvanians get health insurance through their employer today than did in 2000. One in seven of the people who lost employer-provided health insurance coverage in the U.S. between 2000 and 2004 lived in Pennsylvania.

Justice Brandeis: “Our government... teaches the whole people by its example. If the government becomes the lawbreaker, it breeds contempt for law; it invites every man to become a law unto himself; it invites anarchy.”

Thursday, October 20, 2005

Revealing Numbers

10/20/05 Revealing Numbers

Nearly forty percent of U.S. families plan to go out less and entertain more at home because of recent increases in fuel and energy costs, according to a just-completed national survey from retailer Circuit City Stores, Inc. More than 4,200 men and women responded to Circuit City's holiday survey. With the 2005 holiday shopping season about to begin, a majority (55 percent) said they plan to buy a gift for the entire family; of those respondents, 33 percent plan to buy home electronics for the family.
Other survey findings:
Thirty-one percent said they would most like to receive a flat panel TV
as a tech gift this holiday; 17 percent want a digital camera; and 13
percent want DVDs and CDs.
The appeal of digital music is spreading beyond young enthusiasts.
Seventy-eight percent of survey respondents said their interest in MP3
players is growing and heightened interest is seen across all adult age
groups.
Seventy-four percent said the ability to carry and manage a large music
collection in a portable device attracts them to MP3 players; other
respondents cited the availability of easy and legal downloads.


Ashraf Laidi: “The foreign official (usually central banks) portion of total net foreign purchases of US Treasuries remained relatively understated at 11% and 13% in August and September. The 58% decline in net foreign purchases of US agency bonds to $15.7 bln was the biggest percentage decrease since October 2003 and was the lowest figure since April 2005.”

Yesterday’s September construction numbers revealed that 3.4% more new homes were built at an annual rate of 2.108 million. Building permits rose 2.4% to their highest annual rate in 32 years. This activity goes to explain the rising supply of homes on the market, the increasing time it requires to sell a home, and that the rising supply has had an impact on price levels. It’s the old story of supply and demand. Barry Ritholtz reminds us that “the Home Affordability Index -- comprised of the primary expenses of owning a Home, including purchase price, mortgage rates, insurance, property taxes, and maintenance -- has reached a 14 year low.” Let’s take a close look at one of the hottest housing markets—the Bay Area.
Sales in the nine-county Bay Area eased back a notch for the sixth month in a row as prices continued to rise at the same pace they have since the beginning of the year, a real estate information service reported. There were 11,205 homes sold in the nine-county region last month, down 7.8 percent from 12,154 for August, and down 7.2 percent from 12,075 for September last year, the real estate information service DataQuick said.
In the first nine months of this year, 96,591 homes have been sold, down 5 percent from 101,693 for the same period last year. That would make this the second highest since DataQuick started keeping records in 1988. Last year's sales were the highest.
"The Bay Area real estate market seems to have settled into a steady state, with few indicators pointing to any upcoming change." said Marshall Prentice, DataQuick president. "Supply and demand seem stable. We are keeping an eye on rising mortgage interest rates which could slow things down somewhat before the end of the year,"
The median price paid for a Bay Area home in September was $616,000, down 0.5 percent from $619,000 in August, and up 19.4 percent from $516,000 for September a year ago. DataQuick said a slight decline from August to September is normal for the season. Annual price increases so far this year have ranged from 17.6 percent to 20.5 percent. Sales in Santa Clara county were down 6.1 percent compared to last September, at 2,689, with the median price up 19 percent to $646,000. Sales in San Mateo county dropped the most in the area, down 17.9 percent to 819, but the median price rose 18.1 percent to $752,000.
The typical monthly mortgage payment that Bay Area buyers committed themselves to paying was $2,713 in September. That was down from $2,761 in August. A year ago it was $2,283.

Michael Ashton: “Headline PPI over the past year has now outpaced headline CPI by 2.2%. That is the least-favorable spread (for industry) since the mid- 1970s!”

Crude has dipped to the $62 a barrel level.

Tony Sagami has connected some dots for us. In 1974, “the cost of an home averaged $38,900, the median household income $11,197, a first-class stamp costs 8 cents, a dozen eggs cost 78 cents, and a gallon of regular gas was 53 cents…Fast forward to October 18, 2005. The Labor Department reported that inflation at the wholesale level -- the Producer Price Index or PPI -- jumped by 1.9% in September. That is the biggest single-month jump in the Producer Price Index in 31 years. On an annualized basis, you're looking at over a 22% inflation rate. The last time wholesale inflation has been this rampant was -- you guessed it -- 1974.”

If we wanted to worry, there are plenty of items on the plate: hurricane Wilma; the bird flu; rising interest rates; rising inflation; slowing economic growth; profit margin pressures; wages trailing the rate of inflation; energy prices squeezing the consumer; Fitzgerald’s investigation coming to a head; the Iraq war; Cheney, Rumsfeld, and others “hijacking the government’s foreign policy apparatus” (quote from the Financial Times); our twin tower deficits and…. With all of these worries how did the equity markets manage such a big rally yesterday? The answer is simple. There are many rallies in bear markets. There are some that would argue the general market is oversold and that it was poised to have a big rally. So what? Unless you trade day in and day out, short-term fluctuations don’t mean very much. They are good for headline news. My recommendation has not changed for months. Use rallies to cut back on holdings- - especially in companies that are weak sisters. Use pullbacks to increase positions in undervalued companies. A good example would be Wal-Mart.

Study results of more than 8,000 women worldwide who took the breast-cancer drug Herceptin are "simply stunning" and suggest the treatment is a potential cure for the disease, according to an editorial published today in the New England Journal of Medicine. Treatment must change today so that all patients who would benefit from the drug, also known as trastuzumab, can receive it, according to the editorial written by Gabriel Hortobagyi, director of the Breast Cancer Research Program at the M. D. Anderson Cancer Center of the University of Texas. "This observation suggests a dramatic and perhaps permanent perturbation of the natural history of the disease, maybe even a cure," Dr. Hortobagyi wrote. "Longer follow-up will determine whether this interpretation is correct."

Rumsfeld predicted in February 2003 that the Iraq war could "last six days, six weeks, I doubt six months." When do Americans demand accountability? Do they ever?

PetroKazakhstan’s CEO Isautier: “We think that Lukoil has no right to preemption. We consider Lukoil's maneuver obstructive and unfounded. The takeover poses no prejudice to Lukoil's rights. As far as we are concerned, we remain confident that this transaction will receive the judge's approval and that it will take place.”
Isautier said he remained 'attentive and vigilant' regarding Lukoil, 'which in the past has had a less-than-outstanding behavior according to Western standards.'
In yesterday’s International Herald Tribune there was an article stating that, Sean Dunphy, a Toronto-based lawyer from Stikeman Elliott, who spoke on behalf of Lukoil, said that the Russian company was trying to protect its rights in Kazakhstan, not to derail the transaction. "We're not trying to hold the shareholders up to ransom," he stated.
Just to set the record straight. Since purchasing shares at $38, I have not sold one share. In fact, I added to my holdings last week at the $47 level. I too am confident that this transaction will have a successful conclusion.

Claude McDonald: “Most worries are reruns.”

Mortgage rates climbed for the sixth consecutive week, and haven't been this high since July 2004. The average 30-year fixed rate mortgage increased from 6.1 percent to
6.17 percent, according to Bankrate.com's weekly national survey of large lenders.

Ford Motor Credit Company reported net income of $577 million in the third quarter of 2005, down $157 million from a year earlier. On a pre-tax basis from continuing
operations, Ford Motor Credit earned $901 million in the third quarter,
compared with $1.1 billion in the previous year. The decrease in earnings
primarily reflected higher borrowing costs and the impact of lower receivable
levels, offset partially by improved credit loss performance. Ford Motor Company reported a net loss of 15 cents per share, or $284 million.
The loss from continuing operations was 10 cents per share, or $191 million,
excluding special items. There was a worldwide automotive pre-tax loss of $1.3 billion, excluding special items. Full-year earnings results are expected to be at the low end of the current guidance range of $1.00 to $1.25 per share from continuing operations, excluding special items.

"The third quarter of 2005 was characterized by both accomplishments and
challenges," said Hank McKinnell, Pfizer’s chairman and chief executive officer
"While 2005 revenues have been reduced by the loss of exclusivity of certain
major products and by lower sales of the selective COX-2 inhibitors, the
remainder of Pfizer's product portfolio in aggregate continues to grow
strongly. And the next generation of Pfizer medications continues to advance,
with a number of U.S. launches, positive regulatory reviews, U.S. and E.U.
filings of Sutent, and the completion of the Phase III clinical program for
varenicline.
"Revenues in the third quarter of 2005 reflected lower prescription growth
and increased competition in key therapeutic markets in the U.S., such as the
lipid-lowering market, where the rate of growth in the third quarter declined
significantly versus the first half of the year; and the erectile-dysfunction
market, which has been in decline compared to 2004. The effects of these
considerations are expected to temper fourth-quarter revenues as well. As a
result, Pfizer now expects full-year 2005 adjusted diluted earnings per share*
of $1.92-$1.94 and full-year 2005 reported diluted EPS of $1.02-$1.04. We are
evaluating our financial prospects for 2006 and 2007 in light of current and
anticipated business conditions and are withdrawing our prior guidance for
those years at this time. We plan to provide new guidance early next year,
after we have completed our annual planning process.”
With Pfizer temporarily withdrawing guidance for 2006 and 2007, some investors
could get spooked. As such, for long-term investors one should consider this weakness an opportunity rather than a concern. It might be wise to note that seven of
Pfizer's top ten medications showed growth in the third quarter of 2005 over
the same period in the previous year. On a year-to-date basis, through the
first nine months of 2005, nine of Pfizer's ten top-selling medications show
growth over the same period in the previous year. Six of these ten show
double-digit year-to-date growth. Considering the sales volume for these drugs, this performance should not be considered chopped liver.

Coca Cola repurchased $1.6 billion of its stock year-to-date and intends to repurchase a total of at least $2 billion of its stock for the full year 2005. The currency benefit to operating income in the third quarter was 6%. The company had previously estimated that its underlying effective tax rate on operations would be approximately 24 percent
for the full year. The Company now anticipates that the underlying effective tax rate for the full year 2005 will be approximately 23.5 percent, primarily because of the mix of profit contributions from lower taxed locations. To bring the effective tax rate for the first nine months of 2005 in line with the company's currently estimated full year underlying effective tax rate, Coca Cola recorded income tax expense at an underlying effective tax rate of approximately 22.5 percent in the third quarter. The company decided in the first quarter of 2005 to repatriate accumulated income earned outside the United States of approximately $2.5 billion under the provisions of the American Jobs Creation Act (the "Act") and recorded a related tax provision in prior quarters. The maximum amount that the Company can repatriate under the Act is $6.1 billion. The company approved in October, subject to Board of Directors approval later today, a plan to repatriate the remaining $3.6 billion. Therefore, the Company would record a
tax provision of approximately $200 million in the fourth quarter of 2005
related to the additional repatriation. As I have stated so often, it is a good thing to check the comparative tax rate, currency fluctuations and their impact on earnings, and the repatriation of foreign earnings for U.S. corporations. Headline reports do not tell the story for Coca Cola and others.

Book of Odes: “He who depends on himself will attain the greatest happiness.”

The number of Americans collecting jobless benefits rose by 36,000 to 2.89 million in the week ending Oct. 8, the most since August 2004. Continuing claims are up by about 300,000 since Katrina devastated the Gulf Coast on Aug. 29.

Wednesday, October 19, 2005

No Laughing Matter

10/19/05 No Laughing Matter

Hurricane Wilma is serious business. There is no telling where it’s landing destination will be on our shores. The current forecast is Florida. As a category 5 hurricane with 150-175 winds, the potential devastation could be enormous. It’s no laughing matter.

Ken Goldstein, Labor Economist at the Conference Board: “The September data indicate a general weakening in the job picture nationwide—a trend we were seeing before the recent hurricanes. That data was consistent with the Conference Board’s latest CEO Confidence Survey, which is also down.” This survey sagged to its lowest level in four years. In addition, their Consumer Confidence Survey revealed consumers stated jobs are “hard to get” and fewer claimed jobs are “plentiful.” The Conference Board also stated the number of new online job ads declined 4.4% in September from the level in August.
This general weakening is no laughing matter. Wages on Main Street already trail the inflation rate. Now jobs are getting harder to get and less plentiful. Hurricane Wilma can only make the situation worse.

Rodney Dangerfield: “I told my psychiatrist that everyone hates me. He said I was being ridiculous - everyone hasn't met me yet.”


Janet Yellen is president of the SF Fed. Yesterday she gave a speech in Salt Lake City. In sum, she stated that the current Fed funds rate of 3.75% is at the lower end of her estimate of a neutral rate policy, which she places in a range of 3.5% to 5.5%. Yellen observed “this suggests a presumption that the rate will need to be raised further.” In addition, she mentioned that core inflation is already near the top of her “comfort range.”
It appears that the Fed could raise rates at their next two meetings, and this would bring Fed funds to 4.25%, near the mid-point of the range provided by Yellen. This means mortgage rates will continue to increase and so will interest on credit cards. More importantly, the U.S. government will be paying more interest on the national debt and that will increase the yearly budget deficit. All in all, this is no laughing matter.

Approximately 10 months ago, J&J agreed to acquire Guidant for about $25 billion. Inasmuch as Guidant’s annual sales did not exceed $4 billion, I thought the purchase price was ridiculously high. Unfortunately, for many, my view was not shared. That’s not unusual. More unfortunate was the recall of thousands of implantable defibrillators and pacemakers made by Guidant. Those items are now back in use. However, the question of safety made the $25 billion price tag even more questionable. For the first time, and that was yesterday, J&J’s vice chairman stated “we are continuing to consider the alternatives under our merger agreement.” Guidant’s stock tanked 11% to $64.10. There are some serious risk arb positions in this deal. The question is whether the product recalls have created a material advance change clause delineated in the December 2004 merger agreement. Cutting through the legalities, this deal will have its price reduced downward. Guidant management and shareholders need to assume the consequences for the recalls. They tarnish a company’s reputation, and it takes time to regain the public’s trust as well as the medical community’s. A price of $65 or below would not surprise me.
This is no laughing matter.

Yesterday over 99% of the votes cast by Petrokazakhstan shareholders were in favor of the sale to CNPC for $55 cash per share. However, it’s not over until the fat lady sings. The fat lady in this case was Alberta judge Neil Wittman. He heard a motion brought by Lukoil to reject or defer the $55 deal. Lukoil’s complaint revolves around a 50-50 joint venture with PKZ called Turgai Petroleum. I have written several times about this joint venture, and I know it well. Lukoil claims they have pre-emptive rights to acquire PKZ’s 50% interest under change-of –control provisions. Lukoil has asked to have the dispute decided by arbitration in Stockholm. That will not happen. The deal between PKZ and CNPC has an expiration date of Nov. 30. Lukoil will not win this case before Judge Wittman. Why? Lukoil is unable to trigger the pre-emptive rights clause because, when CNPC buys PKZ, there will be no change of control of Turgai Petroleum. It will remain a 50-50 ownership. Those rights are not triggered because PKZ is not separately selling its 50% Turgai interest to a third party. If I know that, and I am not a judge, I believe it is fair that Judge Whittman should know it too. After 4 hours of arguments, by PKZ, CNPC, certain PKZ shareholders, and Lukoil, the judge deferred his decision until October 26. This is no laughing matter.

David Brenner: “A vegetarian is a person who won’t eat anything that can have children.”

The Producer Price Index for Finished Goods rose 1.9 percent in
September, seasonally adjusted, the Bureau of Labor Statistics of the U.S.
Department of Labor reported today. This advance followed increases of 0.6
percent in August and 1.0 percent in July. At the earlier stages of
processing, prices received by manufacturers of intermediate goods climbed
2.5 percent in September, after moving up 0.7 percent in the preceding
month, while the crude goods index rose 10.2 percent, following a 2.3-
percent gain in August. The September PPI represented the largest surge in
about 15 years. It’s no laughing matter.

The August foreign investment flows into the U.S. amounted to $91.3 billion, and comfortably exceeded the $59 billion trade deficit for that month. However, when you consider our real budget deficit approached $500 billion for the government fiscal year ending Sept 30, 2005, then you realize the $91.3 billion still represents a shortfall and does not cover our monthly twin tower deficits. It’s no laughing matter.

Yesterday Goldman Sachs traded 24.5 million shares of ExxonMobil at $57 a share.
This amounts to about $1.4 billion. That kind of money is no laughing matter. The question one might ask is why an entity would want to sell that much stock in a company
that is well positioned for the long term and where the shares are not over valued? Maybe the answer is no laughing matter either.

Dick Cavett: “If your parents never had children, chances are you won’t either.”
It’s no laughing matter.

Tuesday, October 18, 2005

The Way It Is

10/18/05 The Way It Is

Soaring energy prices and the enormity of Hurricanes Katrina and Rita will have a significant impact on the U.S. economy, putting upcoming holiday retail sales at risk. But the economic havoc generated by the two deadly hurricanes in and of itself is unlikely to trigger a recession, The Conference Board reported yesterday..
"While the economic damage assessment is still underway, it is already
clear that the impact from Hurricanes Katrina and Rita will be the biggest
among natural disasters in recent U.S. history," says Ken Goldstein, Senior
Economist of the Conference Board. "But economic growth could slow down enough
to make it feel like a recession, even if one does not occur technically."
The fallout from the hurricanes will have a major impact on the
economy and the business cycle:
It has already produced energy-price shocks that will cut into consumer
spending.
The magnitude of damage to lives and property is still being measured.
Consumer confidence has fallen, a further danger sign for consumer
spending.
The labor market continues to cool off.

The October U.S. Empire State Index declined to 12.1 from 15.6 in September.

Henry To: “Real estate as a percentage of household assets made another record high
At 30.23% - - - surpassing the 30% level for the first time in history.”

Silver closed at $7.87 an ounce, a one-year high, while gold closed at $477.

Wil Rogers: “Ancient Rome declined because it had a Senate; now what's going to happen to us with both a Senate and a House?”

Gartner Inc.stated that, for U.S. PC shipments in the third quarter, Dell had a 30.7% market share and H-P had a 19.1% market share.

Refco filed for bankruptcy.

Rising fuel costs have drained consumers' purchasing power and ``will undoubtedly be a drag'' on global economic expansion, Alan Greenspan stated.

Nearly 70 percent of African Americans say they would have less than three months of available cash to pay for living expenses if faced with a life crisis today, according to a new survey by financial services company HSBC - North America. Additionally, nearly half of African Americans surveyed reported having no savings at all. The survey found that most consumers, regardless of race, are also worried about their level of savings.

Hedge funds were up an average of 1.73% in September, according to the HedgeFund.net-PerTrac Universes. The top 25% of hedge funds gained an average of 2.62%, while the bottom 25% of hedge funds was up an average of 0.34% for the month. Emerging Markets sector funds, the month's top performing strategy, were up an average of 3.71% in September. By comparison, the S&P 500 was up 0.70% during the month. Through September, the year-to-date average gain for hedge funds was 6.32%. The top 25% of hedge funds gained 9.73% for the year-to-date, while the bottom 25% was up 1.31% over the same period. The S&P 500 is up 1.39% since the beginning of 2005. Hedge funds included in these calculations were up 0.86% on average in August. The top 25% of hedge funds gained an average of 1.45% in August, while the bottom 25% was up an average of 0.05% during the same period.

Marc Faber: “Once the housing inflation comes to an end, and households can no longer refinance their homes at lower interest rates, consumer confidence will tumble and lead to a rising savings rate, and along with it, to a recession. This could happen sooner than expected, given the fact that the shares of the largest lender to the housing industry, Fannie Mae, just hit an eight years' low and that the shares of homebuilders now appear to have topped out! However, not to worry too much! The Fed, once it notices that the asset inflation, which supported consumption, has come to an end will once again turn on the money printing press. But will it help? I doubt since further money printing is likely to result in consumer price inflation exceeding personal income gains…Under this scenario long term bonds would be about the worst possible
Investment.”

GM’s annual expense for providing medical care for 750,000 employees, retirees and their family members will decrease by $3 billion before taxes. To partially offset those reductions in health care, GM said it would deposit $3 billion into a voluntary employee health benefit fund in 2006, 2007 and 2011. If GM meets certain financial goals, the company may put more money into the fund. I would not hold my breath though.

Provid Pharmaceuticals of North Brunswick, NJ is a world leader in peptide mimetics technology, In addition, the company offers capabilities in structure-based drug design, lead optimization, protein biochemistry and assay development. Provid and Palatin Technologies entered into a research services agreement for the optimization of leads emerging from PTN’s Proprietary MIDAS novel drug discovery technology. Dr. Trevor Hallam, EVP of R&D at Palatin, stated “Provid’s experience in all aspects of medicinal chemistry is going to be a key factor in the acceleration of our internal drug pipeline.”
It should be noted that yesterday afternoon MDB Capital Group initiated coverage on PTN with a buy rating. It’s a little like chicken soup. It can’t hurt.

In the say it isn’t so department, is it possible there was fraud at the voting polls in Iraq over the weekend? Could Cheney be part of the probe conducted by Fitzgerald? This is all too much for me to absorb on an early Tuesday morning.

In the BS department, India’s oil minister stated ''after PetroKazakhstan gets restructured and a legal framework worked out, perhaps we can start talking about how to acquire an Indian participation in assets run by PetroKazakhstan.”

Tom Clancy: “The difference between fiction and reality? Fiction has to make sense.”

Regarding Novartis's offer to acquire the remaining 57.5 pct stake it does not already own in Chiron Corp, the company stated that there “can be no assurance that an agreement will be reached”after Chiron's directors said the offer was inadequate. In effect, that’s nothing new and a smart negotiating ploy.

According to the NHC, tropical Storm Wilma gained strength in the Caribbean Sea but shifted its expected path to the east toward Florida. With that forecast, crude has dipped to the $63 level.

Barry Ritholtz: “Before 1983, CPI measured housing inflation by looking at what it cost to own a home (house prices, mortgage, property taxes). After 83, BLS changed the housing component, using the concept of Owner’s Equivalent Rent. Revert back to the true cost of housing, and Core CPI spikes to a more realistic 5.3%.”

You still do not believe in global warming? According to earthfiles.com, the average global temperature anomaly for combined land and ocean surfaces for September (based on preliminary data) was 1.13 degrees F (0.63 degrees C) above the 1880-2004 long-term mean. This was the warmest September since 1880. The second warmest September was in 2003.

You still do not believe in UFOs? You might want to see the pictures taken at various times over the last few months. They can be seen at ufosnw.com.

We are in the midst of earnings season. It might be wise to focus on the guidance for future quarters as well as noting comparative tax rates, the number of shares repurchased (IBM and Citigroup, for example), the topline growth, and the trend in gross profit margins. The headlines frequently do not reflect the nitty gritty.

China imported 19.53 million tons of soya in the first nine months of 2005, up 39.9 percent year-on-year, China Securities Journal reported, citing the most recent data from the General Administration of Customs. In September alone, the country imported 1.87 million tons of soya, up 29.3 percent over the same month of last year, the report said.
In the 2004-2005 fiscal year, China imported a total of 25.8 million tons of soya, more than last year's import and higher than the figure estimated by the US Agricultural Department. For years I have written about soy as an excellent source of protein as well as the growing consumption of soy. In my view, that trend will continue well into the future.

Economic news for today: Sept. PPI, August net foreign securities purchases, and the Oct. NAHB Housing Market Index. In addition, Janet Yellen gives a talk on the economy.

Robin Williams: “When the media ask George W. Bush a question, he answers, ‘can I
use a lifeline.’”

Monday, October 17, 2005

Business As Usual

10/17/05 Business As Usual

There are times when news outside of the financial world takes center stage over earnings season or mergers. This is one of those times. I am not a political analyst; however, I can think for myself. In my view, prior to October 28, Karl Rove and, possibly, Scooter Libby will be indicted for, at least, obstruction of justice and lying to a Grand Jury. Problems for the Administration do not end there. We still have the situation with Jack Abramoff and Michael Scanlon. The name of Susan Ralston may also be raised. She was the personal assistant to Rove, and before that, Abramoff’s secretary. How far did these tenacles reach? Do not be surprised if they went very very deep. Politics can be a nasty and unsavory profession. Richard Nixon is one example. He does not have a monopoly in this regard. It is going to be a very long winter going into springtime with respect to damaging political news.

Margaret Thatcher:“You don't tell deliberate lies, but sometimes you have to be evasive.”

As I frequently mentioned, there will be other hurricanes this season after Katrina and Rita. Wilma is looming in the Caribbean. The storm has spooked the oil market with the price jumping this morning to $64 a barrel. One should not forget that two-thirds of U.S. oil production in the Gulf of Mexico region is shut in, and 10% of U.S. refining capacity remains idle.

Which is more important to you—the weekend vote on the Iraq constitution or the fact that at least 1,976 members of our fighting forces have been killed in Iraq since we invaded this country in March 2003?

On Saturday, CNPC made peace with the Kazakh government over their planned purchase of PKZ. The purchase should be finalized on Oct. 19. China National Petroleum Corp. signed an agreement to sell a 33% stake in PetroKazakhstan Inc. to KazMunaiGaz. for $1.4 billion, and refine a determined amount of crude oil through the Shymkent oil refinery which it will jointly own with the Kazakh state-owned company, according to the Asian WSJ and Bloomberg.

China is expected to meet the 15 pct growth target of M2 money supply set earlier this year by the country's central bank, the Securities Times reported, citing a government official.
Li Yang, director of the Institute of Finance and Banking at the Chinese Academy of Social Sciences, said he expects M2, which rose 17.9 pct year-on-year to 28.7 trln yuan at the end of September, to continue to meet government expectations.

The OPEC oil cartel revised lower its 2005 and 2006 forecasts for the crude oil its members produce, by 200,000 barrels a day in 2005 and by 400,000 barrels a day in 2006.

Ayn Rand: “Thinking men cannot be ruled.”

Sunday, October 16, 2005

Barriers

10/16/05 Barriers

On Jan. 1, 2006, a new law goes into effect. The current law allows those owing monies on credit cards
to pay a minimum of 2% monthly on the outstanding balance. This will be increased. The average household credit-card balance is $9,205, according to credit research firm Cardweb.com, up from $8,940 in 2002. Nationally, outstanding credit-card debt has ballooned from $443.49 billion in 1995 to $797.97 billion currently. "In principal, raising minimum payments makes sense because it allows consumers to pay off their debts faster and save thousands of dollars in interest," said Joseph Ridout, who manages the consumer hot line at Consumer Action in San Francisco. With sharply higher home-heating bills, inflation continuing to outpace wage gains, and higher interest rates diminishing refinancing opportunities, the higher minimum credit card payments will further strangle the individual and/or families on Main Street.

According to the Detroit Free Press, as of Sept. 1, there were 40,110 Michigan families seriously delinquent on their mortgages or in foreclosure. In metro Detroit alone, nearly 26,000 homes were in foreclosure. The state's 2005 mortgage delinquency and foreclosure rates are 50% higher than the national average, a startling statistic that reveals a large number of metro Detroiters are being forced out of their homes and into financial ruin.

Over the years, I have often written that government economic figures are a barrier to reality. The unemployment rate is closer to 10% than it is to 5%. The CPI is closer to 5% than it is to 2%. The 2005 budget deficit is closer to $500 billion than it is to $300 billion. As the city of New Orleans discovered, you cannot ignore the ineffective levees forever.
In Washington, you cannot spin the country's way out of looming financial ruin. Turning blind eyes to reality is an act of desperation and ignorance, a combination that can leave you homeless and on a bread line. Don't turn to Washington for help. Mostly bankrupt souls reside along Pennsylvania Avenue and on Capitol Hill. You can blame yourself for that fact.You voted them into office. I know the alternatives weren't great, but maybe if you didn't demand the media to look up a candidate's rear end for every personal detail of one's life, more qualified candidates would run for public office. No one is perfect and no one gives you the right to practice as a proctologist without a medical degree.

The government of Kazakhstan has done its best to legislate aginst free enterprise. Yesterday "President Nazarbayev signed the law amending legislation on the subsoil and on conducting oil operations. The document aims to perfect
state regulation in this sphere." According to a letter seen by Reuters on Friday, CNPC stated that PKZ's Shymkent
refinery could be run on a parity basis with the Kaz government as long as CNPC purchased PKZ. It should be noted that CNPC signed the agreement to purchase PKZ back in August or two months prior to Nazarbayev signed the new law. As the Kaz energy minister stated in writing on Friday, "so we might be facing a legal collison, but I think it won't happen." If the Kazakhstan government wants to attract future investment, I strongly suggest barriers not be erected to free enterprise. Don't bite the hand that feeds you. The world can be a lonely place.

Ronald Reagan:
"There are no constraints on the human mind, no walls around the human spirit, no barriers to our progress except those we ourselves erect."