Friday, January 13, 2006

Changes

1/13/06 Changes

Even though it is Friday the 13th, there is no need to be frightened. There will be some changes but most everything will appear the same tomorrow morning. I suspect the 14th will represent the 27th straight day of rain for Seattle and tomorrow Alito will not have to avoid providing a direct response to a question.

Charles R. Swindoll: “We cannot change our past. We can not change the fact that people act in a certain way. We can not change the inevitable. The only thing we can do is play on the one string we have, and that is our attitude.”

As expected, Boston Scientific upped the ante for Guidant. Under the terms of the amended offer, Boston Scientific will provide Guidant shareholders with:

-- Improved Value: Acquire all of the outstanding shares of Guidant for
$73 per share, $36.50 in cash and $36.50 in Boston Scientific common
stock, subject to a collar. The amended offer is not subject to any
financing condition.

-- Certainty of Completion: Boston Scientific has now agreed that, if
required, it will divest all overlapping assets. This revision to its
offer addresses any perceived antitrust concerns articulated to Boston
Scientific by Guidant.

-- Certainty of Value: If the closing of the transaction does not occur by
March 31, 2006, the $73 per share price would be increased by $0.012
in cash for each day between April 1, 2006, and the date of closing
(representing an annual interest rate of 6 percent).

Let me just say that a higher offer does not guarantee a better offer. Would you prefer stock from Boston Scientific or J&J? Qwest found out that a higher offer did not guarantee success. I question the ability of Boston Scientific to swallow the debt required in this acquisition.

Denis Diderot: “There are things I can't force. I must adjust. There are times when the greatest change needed is a change of my viewpoint.”

As expected, Tyco announced its intention to split into three publicly traded companies. Such a split does not guarantee higher long-term value for shareowners.

The WSJ reported that China’s Cnooc is considering a bid of about $2 billion for Nations Energy, a Canada-based firm that has a large oil field in Kazakhstan.

Pfizer agreed to pay $1.3 billion to Sanofi-Aventis for the world-wide rights to Exubera, an inhaled form of insulin.

The California Public Utilities Commission approved investing $2.9 billion -- drawn from a new charge on utility bills -- into rebates for residents and businesses that install solar panels during the next 11 years.

Microsoft said Thursday that by the end of June it would begin selling advertising alongside its MSN Web search results. It previously relied on a partnership with rival Yahoo! for those ads, but has been testing its own system in the U.S. since October.

The Economist Magazine: "The accolades bestowed upon Alan Greenspan ahead of his retirement on January 31st have a strong whiff of irrational exuberance."

The Bush Administration now states the 2006 federal budget deficit will exceed $400 billion. In sum, the twin tower deficits for this year will approach $1.25 trillion!

NY Fed President Timothy Geithner: "The relatively low compensation for risk priced into asset markets today does not necessarily mean the future will justify that confidence." Complacency represents a great danger to your financial well-being. There is a significant difference between the “market climbing a wall of worry” and the “low compensation for risk priced into asset markers today.” It is essential for every investor to understand that difference.

A new Maryland law, which takes effect in 30 days, would require companies with more than 10,000 Maryland employees to spend at least 8 percent of their payroll on employee health care or pay the difference into the state's Medicaid fund. This law is directly aimed at Wal-Mart. If you were running this company, would you want to expand in Maryland?

Albertson's is planning to restart talks with potential buyers after a complex $15.7bn deal to take the struggling grocery chain private collapsed last month, The New York Post reported sources as saying in its Friday editions. The talks might have been rekindled at the urging of a group of Albertson's shareholders livid at the board for failing to seal the original deal, sources said.
The Post reported that the new discussions are aimed at inking a buyout over the next few weeks that mirrors the previous agreement to take the company private at $26 a share, sources said. That potential deal involved Supervalu acquiring 1,100 Albertson's stores, and drugstore chain CVS taking Albertson's pharmacy business. The rest of the stores would go to investment firms Cerberus Capital Management and Kimco Realty. The deal, which was for a combination of cash and Supervalu shares valued the company's equity at about $9.6bn.

Mexico's state-owned oil company Pemex's onshore and offshore proven, probable and possible hydrocarbons reserves were 46.6 billion barrels (Bb) at end-2005, 0.6% down compared to the previous year, newspaper El Universal reported.

Norway's 2006 oil output is expected to fall 5% this calendar year to 886 million barrels from 933 million bbl in 2005, the country's Petroleum Directorate said Thursday.

Marsoft: “With the exception of a brief rally in early November, the dry bulk market has generally been weakening since the middle of October. During the past month, the decline has been slow but steady, with the Baltic Dry Index tumbling from 3,000 in mid-November to less than 2,500 during the second half of December.”

Lucent lowered its revenue outlook for 2006 to flat to up in low single digits to roughly $2.05 billion, and this compares with the current First Call projection of $2.44 billion.
At $2.55 per share, the stock is selling at a market cap of 5 ½ times revenue. Barring an acquisition of the company, upside potential appears limited for 2006.

Robert C. Gallagher: “Change is inevitable - except from a vending machine.”

Thursday, January 12, 2006

Concerns

1/12/06 Concerns

NY Fed President Timothy Geithner: “ People must be concerned about what the current account deficit means for the future.” With the trade deficit amounting to $700 billion in 2005 and $800 billion in 2006, one might be concerned about the present. It’s unfortunate that the Fat Flush diet cannot be used on our twin tower deficits. We need a Congress and an Administration to take hefty doses of daily probiotics.

Shelley Berman: “If you've never met a student from the University of Chicago, I'll describe him to you. If you give him a glass of water, he says, "This is a glass of water. But is it a glass of water? And if it is a glass of water, why is it a glass of water?" And eventually he dies of thirst.”

There was below average demand for the 5-year Treasury auction. As such, yields rose. The dollar is at a 3-month low versus the yen. Since the beginning of January, the dollar has declined 2.7% versus the euro.

Crude is trading at $64 a barrel. Gas at the pump will jump another 10+ cents in the next two weeks.

The UK may be a net crude oil importer in 2006. The last time that occurred was 14 years ago. India continues to import 70% of its crude requirements.

Bush opened hundreds of thousands of acres around Teshepuk Lake, on Alaska’s North Slope, to oil drilling. I thought Congress had voted down expanded oil drilling in Alaska.

I read where Alito’s wife left yesterday’s confirmation hearing crying. The questioning seemed to have upset her. I feel badly for her. I would feel much worse for our nation if Roe v. Wade were overturned due to Alito replacing Sandra Day O’Connor.

Plutarch: “I don't need a friend who changes when I change and who nods when I nod; my shadow does that much better.”

In the roller coaster deal for Guidant, Johnson & Johnson stated late Wednesday they reached a new agreement to acquire Guidant in a deal worth $23.2 billion. Under the new agreement, Johnson & Johnson will pay $37.25 in cash and 0.493 shares of Johnson & Johnson common stock for each outstanding share of Guidant common stock. As of the market close on Jan. 11, the transaction has a per-share value of $68.06 to Guidant shareholders. Guidant shareholders will vote on the revised merger agreement on Jan. 31.
Boston Scientific will, in all probability, improve its bid. I have never seen such a fight over a company where the quality of its product line has come into question. To me, it is
irrational exuberance.

Christopher Thornberg, senior economist with the UCLA Anderson Forecast: “You are starting to see a slowdown in housing market activity, and that says loud and clear that things are starting to break. The feeling is that we have peaked. And beyond that is a downhill run.” He stated California home prices are about 30% to 40% overvalued, but that such a decline, if it occurs, would do so over the better part of a decade. He went on to state that “if you have a big decline in unit sales, you’ll have mortgage brokers and real estate agents and construction workers all losing jobs. And what’s driving the California job market now? Construction, finance, and real estate jobs. Those will go away.”

Lenny Bruce: A lot of people say to me, "Why did you kill Christ?" "I dunno... it was one of those parties, got out of hand, you know." "We killed him because he didn't want to become a doctor, that's why we killed him."

For the first nine months of 2005, homeowners felt pretty darn wealthy. All of sudden, it became apparent that selling a home was not so easy. The inventory of unsold homes began to approach 5 months. Flipping homes was no longer the center of conversation at parties. Five years earlier, it was the Nasdaq. In the last quarter of 2005, talk focused on Google and Apple. Now, after the first seven trading days of 2006, investors are beginning to feel their oats. There is talk of the Dow making a new all-time high in 2006. The Nasdaq is holding its recent gains. The train is leaving the station. All aboard!!!!
Standard and Poor's said after Wednesday's closing bell that its investment policy committee has reaffirmed its positive outlook on the U.S. equity market for 2006, and said it expects a 9% rise in the S&P 500 Index to 1360 by year-end. It should be noted that this index closed at 1290 last night. The difference between 1290 and 1360 is 5.5%.
Do you want to remain invested at present levels to make 5.5% for the next 11 2/3 months? Are you totally nuts? And that is assuming the S&P investment policy committee is correct.

Friedrich Nietzsche: “Insanity in individuals is something rare, but in groups, parties, nations and epochs it is the rule”

Wednesday, January 11, 2006

Facts And Opinions

1/11/06 Facts And Opinions

Murray Rothbard: “Inflation tends at once to repress saving-investment and to cause consumption of capital.”

In the latest Commerce Department report, U.S. wholesale sales fell 0.7%, the biggest decline since April 2003.

Wal-Mart created over 125,000 new jobs in 2005. Wages for average hourly full-time store workers rose from $9.68 in 2004 to $10.11 in 2005.

OfficeMax will close 110 stores. They did not provide the number of jobs that will be cut.

Marc Faber: “I would argue the CRB index will outperform the Dow over the next 10 years.

The International Council of Shopping Centers stated about 40% of gift cards are redeemed in January. As the number of gift cards sold each holiday season increases, the month of January will become a more important month for retailers.

Boeing delivered 285 commercial airplanes in 2004, 290 in 2005, and expects to deliver 385 planes this year.

For the months of November and December, China’s imports rose faster than their exports. As such, their trade surplus in the fourth quarter of 2005 dwindled to only $5 billion, a sharp decline from the $25 billion in the Jan-March 2005 quarter. I would not be surprised to see China start to run monthly trade deficits some time in 2006. If the U.S. is depending on China to purchase Treasury bonds, Agencies, and corporate offerings, I think there will be disappointment. If there is a surplus, it will go into commodities, and that includes gold.

Italy’s Lottomatica will buy Gtech for $35 per share in a cash merger.

Home Depot announced the largest acquisition in their company history. They will purchase Hughes Supply for $46.50 per share in cash. That’s a nice beginning to 2006. I very much appreciate the $9 per share ham sandwich. Home Depot is buying a first-class
Company.

John Hussman: “If we restrict valuations to a price/peak earnings multiple of 16 or higher (the current multiple is 19), we find that on average, S&P 500 earnings declined by -8.6% over the 18 months after the final rate-hike. Yet despite this decline in earnings (which would normally raise the raw P/E ratio if prices were to remain constant), the raw P/E ratio actually declined as well, by an average of -1.3%. The result was an average loss, including dividends, of -6.5% over the 18 month period (an annualized loss of -4.4%).
Suffice it to say that the bullish argument – based on the “common knowledge” that P/Es expand once the Fed is done tightening – really has no data to support it. Nor is there data to support the notion that corporate earnings have grown at all in the period after a tightening cycle, particularly when those earnings began at fresh records at the top of their long-term historical 6% growth channel (as they currently reside).”

The U.N.'s food agency warned Wednesday that avian influenza could become endemic in Turkey, and said the virus poses a serious risk to neighboring countries.

DuPont, a component in the Dow, warned that fourth-quarter earnings would fall short of expectations due to operation disruptions from hurricane's Katrina and Rita, as well as weaker-than-anticipated performances in its crop protection chemical, performance coatings and surfaces businesses.

On a seasonally adjusted basis, applications for mortgages to purchase homes rose 9.3%, while refinancing applications increased 9.9%. Refinancings accounted for 42.2% of total applications and adjustable-rate mortgages amounted to 28.1%.

Viktor Frankl: “We who lived in concentration camps can remember the men who walked through the huts comforting others, giving away their last piece of bread. They may have been few in number, but they offer sufficient proof that everything can be taken from a man but one thing: the last of the human freedoms -- to choose one's attitude in any given set of circumstances, to choose one's own way.”

Whole Foods Market Inc. stated Tuesday it will rely on wind energy for all of its electricity needs. It is purchasing 458,000 megawatt-hours of wind energy credits a year -- enough to power 44,000 homes annually -- from Renewable Choice Energy of Boulder, Colo.

The volume of China's trade with the European Union and the United States topped 200 billion U.S. dollars in 2005, according to statistics with the General Administration of Customs of China released here Wednesday.
EU remained as China's largest trade partner, with bilateral trade volume reaching 217.31 billion dollars, up 22.6 percent year-on-year.
Bilateral trade volume between China and the United States amounted to 211.63 billion dollars, up 24.8 percent.
Japan registered as China's third largest trade partner with their trade volume up 9.9 percent to 184.45 billion dollars.
In 2005, the volume of trade between China and the Republic of Korea (ROK) topped 100 billion dollars for the first time.

Tuesday, January 10, 2006

Developments

1/10/06 Developments

A couple of weeks ago I stated my preference for owning GM and Pfizer in 2006 rather than Google and Apple. Most of my friends thought I had gone off the deep end. They may still be right. In the meantime, Kerkorian has urged GM to cut the company’s $1.1 billion annual dividend in half and to hasten plans to cut losses. Wagoner, GM’s CEO, stated today he expects a ``significant'' reduction in losses this year with added revenue from new models and savings from plant closings and the elimination of 30,000 jobs. GM’s stock traded at $18.33 on December 29, and last night closed at $22.41. For the past week, it has been the hottest stock in the Dow. Not bad for a company everyone predicted was on the way to a bankruptcy filing.

Another stock that was given up for dead was Saks. Yesterday, the company stated it might sell its Parisian boutiques, the chain that contributed $700 million in annual sales. In addition, the company announced some very positive management changes. Over the last four trading sessions, the stock has risen from $16.45 to $18.71. Not bad for a company almost every analyst had counted out.

Yesterday had some interesting developments. The Dow closed above 11,000 for the first time since June 7, 2001. Gold closed at $550.50 an ounce, its highest close since January 1981. What are the odds of this happening on the same day?

Coming right on the heels of reports of lackluster 2005 holiday retail sales, a new report shows that investors in retail real estate are more bullish than ever, with 75% of
investors confirming that they plan to increase their 2006 holdings by at
least 25%. This, and more information on investor sentiment, is confirmed in
a 130-page report, a portion of which is being published this week by REZA
Investment Group in collaboration with National Real Estate Investor and
Retail Traffic. The research is based on 2005 year-end surveys to 10,000
owners and developers.

HSBC, the world’s third largest bank, operates in 77 countries. Bob Piggott, the company’s head of group crisis management, is estimating that up to half of its staff could fall ill or be absent from work at the peak of the next flu pandemic.

Dr. Anthony Fauci, the director of the National Institute of Allergy and Infectious Diseases, stated “in the 20th century, there were three pandemics, which means an average of one every 30 years. The last one was in 1968, so its 37 years. Just on the basis of evolution…we’re overdue.”

On a seasonal basis, the demand for gold starts to wane in February. The holiday season has ended as has the peak wedding festival period in India. One might consider cutting back on positions as the month of January comes to a close.

Medical costs now consume 16 percent of nation's economic output -- the highest proportion ever.

Robert V. Green: “The most important thing in investing is to match an investment methodology with the investor’s personality.”

The U.S. Treasury on Monday announced a $13 billion sale of five-year notes and $9 billion in 10-year inflation-protected securities (Tips) this week - the first tranches of approximately $100 billion in coupon-bearing notes due to be issued in the next month. It will be the biggest single month of supply since a similar period in 1996, according to Bank of America figures.

Jack Welch: “If you don’t have candor, you don’t have much of anything.”

If the Dow were to rally to approximately 11,300, I would suggest you consider fully hedging your portfolio. Protecting your capital should be an on-going focus for all investors.

Toys “R” Us will close 75 stores and cut 3,000 jobs.

Alcoa’s quarterly profits were a disappointment. They declined to 26 cents from 30 cents.

Iran removed seals on its nuclear research sites on Tuesday, despite international calls to refrain from resuming sensitive nuclear work, officials said. Mohammad Saeedi, deputy chief of the Atomic Energy Organization of Iran, told reporters that the research work would be resumed later Tuesday under the supervision of the International Atomic Energy Agency (IAEA), the UN nuclear watchdog.

Federal-Mogul Corp., a 106-year-old auto-parts supplier, stated Friday it will cut 10% of its workforce or 4,500 workers and could close 25 plants as part of a new 3-year restructuring plan.

Collins & Aikman has 17,000 employees in North America. They will soon file a reorganization plan. A number of plants could be closed and a significant number of workers cut from the payroll.

In my view, 2006 will be an important year. It will mark the end of the “goldilocks” economy. Volatility and risk will become every day words. Fireworks will not be reserved for only July 4th. The yellow light is flashing.

Monday, January 09, 2006

The Real Deal

1/9/06 The Real Deal

Richard Nixon's defense secretary, Melvin Laird: ''Both the Vietnam War and the Iraq war were launched based on intelligence failures and possibly outright deception."

A secret government report stated that 80% of the Marine Corps deaths in the Iraq war could have been avoided with the proper body armor, and the body armor was available as far back as 2003. Whose decision was it not to supply the needed body armor? You get one guess.

Since we invaded Iraq, the number of our Armed Forces that have been killed is almost at 2200.

If you were a foreign nation, would you purchase our dollar or our bonds? What makes you believe they are safe havens? GM and Ford were once safe havens. So was AT&T and Eastman
Kodak and plenty of other former blue chips. Times change and so do risks. This is no time for complacency.

There is a growing danger in the increasing level of Executive Power at 1600 Pennsylvania Ave.-- as well as the increasing concentration of power. It's time for the voters to wake up to this danger.

Sunday, January 08, 2006

It Does Matter

1/8/06 It Does Matter

There is a debate over whether a negative savings rate matters. You see, 2005 will be the first year since the Depression that the U.S. has experienced a negative savings rate, one where spending exceeds income. Many Fed officials have expressed the view that the primary focus should be on household wealth, and in the last few years, home prices have risen sharply and the net worth of most American families has gone up despite the spending spree. They point out that cash taken from equity of homes approximated $200 billion in 2005 and may amount to about $100 billion this year. They make a valid point. However, the same could be said for the stock market bubble in 1999-2000. Most households could cash out many stocks selling at unrealistic and unsustainable prices. Then the Nasdaq collapsed 80% and suddenly those households didn't feel so rich. Home prices will not decline that same 80%, but they have the potential to drop 30% or more. Will they? I think so.

We have a situation where wages do not exceed the rate of inflation, and probably won't again in 2006. As the economy slows, companies will continue on the path of cutting costs. That does not lead to healthy wage gains. It leads to cutting high-paying jobs and replacing them with employees who will accept lower wages. Maybe they will be in the U.S. or possibly outside our borders. The result is the same. If households are to meet the rising cost of healthcare, education, energy, and other expenses, the choice narrows to increasing debt or cutting spending. Up to now, the choice has been to increase debt. We are approaching a crossroads. Soon there will be no choice. Why? The debt load will topple families as well as this nation. There will be a cry to save. We will go back to basics, a good thing. Saving does matter. There is no free lunch. Stock prices do not live permanently in the stratosphere nor do home prices. It's not different this time. Listen to the Fed and the Administration and you and your family will be wiped out.

For the January reporting period, Wal-Mart's comparative sales for the U.S. are estimated to be within their guidance of 3 to 5 percent. Despite what some analysts have stated, I believe the improvement over December can be attributed to gift cards being spent on merchandise. It does not indicate new accelerating spending levels on the part of the consumer.