Saturday, July 29, 2006

Thoughts

7/30/06 Thoughts

John Maudlin: "If the Fed pauses in August, it will only be because they think the economy is going to slow down much faster than it already is. I do not see how that can be good for the stock market. And if they raise rates yet again, they indicate that they are going to maintain the fight on inflation, until inflation and then the economy do in fact slow down. I just don't see how that is a good environment for the stock market."

I have a feeling in my gut that the current prices at the gas pump will be the highs for 2006.

There is so much press these days about myspace.com. Don't look now but Cyworld.com from South Korea is arriving in the U.S.A. in August. You shouldn't be surprised if Cyworld eats myspace's lunch.

Brett Steenbarger: "I went back to February, 1996 (N = 2618 trading days) and found 565 periods in which SPX had risen between 2%-5% in a ten-day period. When the move was smooth--seven or more of the days rising (N = 248)--the next ten days were up on average by .44% (154 up, 94 down). When the move was not smooth--six or fewer of the days rising (N = 317)--the next ten days were up on average only .08% (166 up, 151 down).
It thus appears that rises interspersed with selling have poorer near-term outcomes than rises that are smooth and consistent. The market's recent 10-day rise, by this gauge, is not necessarily a stimulus for superior returns going forward."

Saudi Arabia will receive about $200 billion in oil revenue this year.

Doug Noland: "It is worth noting that Bank Real Estate Loans expanded at a 13.7% annualized rate during the second quarter (from Fed data), with what appears a major push to commercial real estate lending. Estimates have second quarter bank loan growth as high as 11%, and it is simply difficult to envisage the economy faltering meaningfully in the face of such a rampant expansion of finance."

Volkmar Hable: "In every issue of this Investment Commentary since January I have warned to get out of stocks and prepare for a serious decline. Here we are in the middle of the second leg down, and there are still people owning stocks and hoping for a reversal. This rally into mid-July was the last chance (very likely for this year) to get out of long positions.
Remember: managing risk and avoiding losses is key for long-term success. Don't risk your capital and forget risk management for some short term gains. In a sideways market traders and investors should focus on opportunistic strategies!"

Cascade Natural Gas management is expecting earnings for fiscal year 2006 to be in the range of $1.12 to $1.16. Their outlook assumes average weather for the rest of the fiscal year and excludes fourth quarter costs related to the pending merger with MDU.

More than 60 percent of the United States now has abnormally dry or drought conditions, stretching from Georgia to Arizona and across the north through the Dakotas, Minnesota, Montana and Wisconsin, said Mark Svoboda, a climatologist for the National Drought Mitigation Center at the University of Nebraska at Lincoln.
An area stretching from south central North Dakota to central South Dakota is the most drought-stricken region in the nation, Svoboda said.
"It's the epicenter," he said. "It's just like a wasteland in north central South Dakota."

Benjamin Franklin: "He that's secure is not safe."

Friday, July 28, 2006

Clear Sailing?

7/29/06 Clear Sailing?

The first estimate of the second quarter's gross domestic product was 2.5%, and this compares with a 5.6 percent gain in the first three months of the year. I was estimating the figure would be over 3%. U.S. Treasury yields dropped immediately and, in fact, both the 2-year and the 10-year traded under 5%. That made my recent forecast for rates going up as looking pretty damn stupid. It won't be the last time I look that way. Stocks rallied into triple digit territory as the thought was the Fed will no longer raise rates again this year. That's the good news. The flip side: the dollar got creamed; the Personal Consumption Deflator rose 3.3% in this quarter as inflation reared its head and that was despite the rise in consumer spending at a modest 2.5% and fixed business investment increasing a weak 2.7%. The GDP should have been helped by the 3.3% rise in exports; however, residential fixed investment dropped by 6.8%. As an aside, what has been the strongest group in the market this week? Would you believe the homebuilders? Another part of the flip side is this: less growth means less tax receipts and larger government deficits. In addition, with slower growth and rising inflation corporate margins will come under greater pressure.

Crude declined towrds the $73 a barrel level while natural gas rallied further to the 7.25 per million BTU area.

In the second quarter, real final sales increased 2.1% annualized, down from 5.6% in the first quarter. Meanwhile, core consumer prices rose 2.9%, the fastest pace in 12 years. Core consumer prices have risen 2.3% in the past year, the fastest growth since 1995.

U.S. employment costs increased 0.9% in the second quarter after a 0.6% gain in the first quarter, the Labor Department reported Friday. This is the largest increase since the first quarter of 2005. The increase in the employment cost index was slightly above forecasts. Benefit costs rose 0.8% in the quarter, after a 0.5% rise in the first quarter. Wages and salaries rose 0.9%, up from a 0.7% gain in the first quarter. This is the fastest growth in wages since the first quarter 2003. Unfortunately, the gains still trailed the rate of inflation, and the higher wages also led to higher income taxes being paid --- a double whammy.

The Andersons Inc. said second-quarter earnings declined slightly to $10.3 million, or 66 cents a share, from $10.4 million, or 67 cents a share, a year earlier. Revenue rose to $378.1 million from last year's $365.1 million. For 2006, the company raised its earnings forecast to $1.90 to $2.10 a share from $1.70 to $1.90. The stock came under heavy selling yesterday and still appears to have a valuation significantly above its historical norm.

Merrill Lynch upgraded Embarq Corp. to buy from neutral, citing better-than-expected operating expenses. In addition, the broker told clients it believes management's outlook is conservative with regard to cash flow, and possibly long-term shareholder returns. The stock has had a nice move from $40 to $45+.

Inco Ltd. said that its offer for Falconbridge expired on July 27 because the 50.01% minimum share tender level of the offer had not been reached. Inco said that it would now concentrate on completing its transaction with Phelps Dodge to create the world's second-largest nickel producer and one of the world's largest copper producers.

For state and local governments, compensation costs increased 3.8 percent for the year ended June 2006, compared
with the over-the-year gain of 3.5 percent in March 2005. How is it that government employees have larger wage gains than those found on average in the private sector? After all, who pays the compensation for those government workers? Hello!!!! Is anyone home?

Personal saving was a negative $141.0 billion in the second quarter, compared with a negative $97.0 billion in the first quarter. Main Street is getting to mirror the operating budget of the U.S. government. It's shameful.

Dow Jones Industrial Average posting its best weekly point gain since November 2004. On the week, the benchmark index gained around 3.2%. The Nasdaq Composite Index on the week was up 3.7% and posted its best weekly point gain since January 2006. The S&P 500 Index, meanwhile, posted a weekly gain of 3.1%. Gold for August delivery settled up $2.30 at $634.80 on the New York Mercantile Exchange, a gain of 2.4% on the week. It is highly unlikely that equities and gold will head in the same direction for much longer than this past week.

ECB will likely hike interest rates 25bp on August 3, and possibly again on October 5. Will the actions of the ECB have any impact on the upcoming Fed meeting?

Jas Jain: "I predict a 5-10% drop from June to August for Santa Clara County(CA) home prices (an easy prediction from the data) and 10-20% by Feb’07. High-priced places like Los Altos should see a 20-30% decline, if not more, by Feb’07. When the Existing Home Sales are reported for August, in late September, all hell will break loose in financial markets because the current “slowdown” mantra for the US economy will be replaced by recession in the near future mantra."

Lord Byron: "Hark, hark! Deep sounds, and deeper still,
Are howling from the mountain's bosom:
There's not a breath of wind upon the hill,
Yet quivers every leaf, and drops every blossom:
Earth groans as if beneath a heavy load."

Thursday, July 27, 2006

Growth, Slowdown, Or Recession?

7/28/06 Growth, Slowdown, Or Recession?

Nouriel Roubini: " In brief, the Three Bears of high oil prices, rising inflation leading to higher policy rates, and a slumping housing markets will derail the Goldilocks (of high growth and low inflation) and trigger a sharp U.S. slowdown in 2006, that may turn into a recession in 2007." He rates the chances of a recession at 50%.

The Fed and the bond market are looking for a slowdown.

For the second consecutive trading session equity indices could not hold on to their gains.

September crude climbed 60 cents to close at $74.54 a barrel Thursday. August natural gas rose 15.5 cents to $7.042 per million British thermal units, closing at its highest level since June 19 after a surprise decline in last week's U.S. supplies.

Gold for August delivery closed up $10.60 at $632.50 an ounce on the New York Mercantile Exchange. Other metals prices were mixed. Silver settled up 31 cents at $11.345 an ounce, platinum rose $1 at $1,242 an ounce and palladium gained 45 cents at $320.45 an ounce. Copper closed down 65 cents at $3.4785 a pound.

The volume of help-wanted advertising in major U.S. newspapers held steady in June, the Conference Board said Thursday. The help wanted index remained at 33 in June. The index was 39 one year ago. The index has been declining steadily. In the last three months, help-wanted advertising declined in all nine regions of the country. At the same time, the rise in ad volume online continued to slow.

Sales of new homes fell 3% in June to a seasonally adjusted annual rate of 1.13 million, the Commerce Department said Thursday. Revisions to previous months' sales show a softer market than previously reported. Sales in the first six months of the year were down 11.9% to 598,000 from the 679,000 in the first six months of 2005. The inventory of unsold homes on the market rose by 0.7% to a record 566,000, representing a 6.1-month supply at the June sales pace. The median sales price was up 2.3% year-over-year at $231,300.

Demand for U.S.-made durable goods rose 3.1% in June, led by a surge in demand for transportation goods, the Commerce Department said. Excluding the 8.6% rise in transportation orders, orders for durable goods increased 1%.

We could be witnessing a turn down in housing, a slowdown in hiring, but overall GDP growth in excess of 3.25%. In addition, with inflation still on the rise, profit margins for many companies could come under pressure. In sum, it is a mixed picture and requires an investor to be light on one's feet.

Wednesday, July 26, 2006

Not To Be Overlooked

7/27/06 Not To Be Overlooked

Union Stamping & Assembly Inc. plans to shut down its 922,000-square-foot South Charleston stamping plant by the end of the year, according to reports published in the Daily Mail of Charleston.

The saga of Jones Apparel is drawing to a close. Does the company take a lesser amount in a sale, such as what happened to Albertson's, or do they sell some individual brands? Maybe less is better in this retail environment.

If GM can achieve even greater savings in their restructuring efforts, how about Ford? I think analysts will be surprised in 2007 and 2008.

Birds Eye Foods plans to close a frozen food plant in Watsonville, California by the end of the year. The facility employs 550 people. In addition, the company will try to sell 5 other plants that have 740 workers.

On Wednesday we saw disappointments with Boeing and Norfolk Southern RR and, once again, the Dow Transports took it on the chin. The favorable earnings in the oil patch enabled some stocks in the group to trade at all-time highs.

The Fed Beige Book talked about the economy slowing down somewhat. It doesn't take a genius to know that the GDP growth rate in the first quarter will not continue inasmuch as it was a catch-up period from when the violent hurricanes impacted the fourth quarter of 2005. In addition, we don't need the Fed to tell us residential real estate is slowing. Basically, the Fed told us nothing we didn't already know. What else is new? What do you expect from government employees?

Yankee Candle hired Lehman to explore alternatives and the stock rose from $22 to $26. A couple of things to note. The price of oil has had a material impact on the cost of wax for candles. Secondly, when you light those candles, what are you breathing? The only candles that are safe for your health happen to be beeswax candles. The latter make up a tiny tiny part of Yankee Candle's sales. In addition, candles are a discretionary retail item. With the consumer being squeezed, candles are not exactly at the top of a have to buy list.

Pulte Homes sees full-year earnings of $4 to $4.30 per share, while analysts are looking for $4.44. The question is whether the company can earn $3 per share in 2007.

The Chicago City Council passed a measure that requires mega-retailers with more than $1 billion in annual sales and stores of at least 90,000 square feet to pay workers at least $10 an hour in wages plus $3 in fringe benefits by mid-2010. The current minimum wage in Illinois is $6.50 an hour and the federal minimum is $5.15.

The new Massachusetts health plan, the first in the U.S. requiring all residents to have medical insurance, won the approval of the federal government, helping to ensure medical coverage for the state's poorest citizens.
U.S. Health and Human Services Secretary Michael Leavitt today signed a waiver that will allow Massachusetts to receive $385 million in federal funding to help pay for the care of the poor and enable low-income workers to purchase insurance.

The dollar fell the most in three month against the euro after a Federal Reserve report said the pace of economic growth has slowed.

Yesterday's auction of $22 billion in new 2-year Treasury notes had a bid-to-cover -or bids rendered to bids accepted - ratio was 2.03, according to Action Economics, and that level was the lowest since April, 2005. If most money managers think the Fed is about to stop raising rates, then why was the demand for the 2-year notes so mediocre? If the dollar is declining, why would a foreigner want to buy a dollar denominated Treasury bond?

Tuesday, July 25, 2006

Disappointments And Nice Surprises

7/26/06 Disappointments And Nice Surprises

Bush: "Violence in Baghdad still terrible." More troops to be sent as there are more dying in Iraq than in Lebanon.

Inventories of homes for sale rose to a nine-year high (almost 7 months supply) while price appreciation slowed to 0.9% versus June 2005,the weakest pace in 11 years, the National Association of Realtors reported Tuesday. Yet, the homebuilding stocks still rallied for the thirs consecutive day. The CEO of Centex had lowered the EPS guidance for 2006 to $7 per share. The question is how will 2006 be? With such a high supply of homes for sale, I think it prudent to take a 40% haircut for 2007 for Centex. That leaves us with $4.20 per share. With the stock at $48, that equates to about 11 times next year's earnings. Let's compare that with BJ Services, a large oil services company. The shares closed on Friday at $30 and on Monday at $31. Yesterday they reported a great quarter up 86% and projected a 20%+ revenue gain for 2007. At $33, the stock sells at about 11 times 2007 earnings. I would rather own BJ Services over Centex.

Mike Shedlock: "Home prices are 4-5 standard deviations above wages increases and 4-5 standard deviations above rental prices."



MMM missed even lowered guidance and the stock got clipped 4 points to $67+.

UPS had operating margin problems and they look like they will continue for the second half. The stock dropped 16% in value.

One week before the Federal Open Market Committee met, the directors of the Kansas City and San Francisco regional Fed banks said they were in favor of holding the discount rate steady and "believed that more time was needed to assess the outlook for both economic growth and inflation." That information sent the equity market into a rally mode in the last hour of trading on Tuesday. Yet, the August fed funds contract implies a 54% chance that the Fed will hike its target on fed funds by a quarter percentage point to 5.5% on Aug. 8, vs. a 43% chance late Monday.

The Conference Board said its consumer-confidence index rose to 106.5 in July from a revised 105.4 in June, while economists surveyed by MarketWatch had been expecting a drop to 103.9 on average, from the initial estimate of 105.7. The present situation index rose to 133.0 from 132.2, while the expectations index edged up to 88.8 from 87.5. Expectations of inflation one year in the future held steady in July.
Separately, the National Association of Realtors said sales of existing homes fell 1.3% to a seasonally-adjusted annualized rate of 6.62 million, vs. economist forecasts for a decline to 6.58 million.

An auction of $7 billion in Treasury Inflation Protected Securities attracted a record high 69% level of bids from indirect bidders. The indirect bid includes foreign central banks. The bid-to-cover - or bids rendered to bids accepted ratio - was a strong 2.24. The auction also produced a high yield of 2.494% and a median yield of 2.480%.

"Over the last three months home sales have held in a narrow range, easing to a level that is near our annual projection, which tells us the market is stabilizing," said David Lereah, NAR chief economist.

In an interview last week with Automotive News, Ford Chief Financial Officer Don Leclair said that selling 900,000 F-Series vehicles this year "would be a real stretch, quite honestly, given where we are today and where the market was in the second quarter." As such, Ford increased incentives by $500 to $1,000 on the F-Series. In the last couple of trading days buyers have come into Ford shares and the stock has rallied about 10% from last week's new yearly low of $6.06.

Crude saw some profit taking and backed down to $73.75 a barrel.

Hewlett-Packard Co.late Tuesday said it agreed to acquire Mercury Interactive Corp. for $52 a share through a cash tender offer.

Richard Daughty:"The JOC-ECRI Industrial Price Index jumped in July, rising to 130.17 from 128.18! That one-month gain of 1.6% in prices is a lot of inflation in one month! What is even more interesting, if you think that being eaten alive by inflation is 'interesting', is that the index is up from 108.95 a year ago at this time, which is an inflation rate of 19.5%!"

According to Bloomberg, bonds of U.S. home builders, profitable through April, have turned into the biggest losers this year in the market for debt with ratings below-investment grade.

"The era of easy oil is over in our country," Mexico's Energy Secretary Fernando Canales told a news conference. Don't cry for Mexico. Pemex was expropriated in 1936-1937 from American companies. Expropriation is another term for stealing.

If the Univision deal fails to close by April 26, the Saban consortium each day would have to increase its $36.25-a-share offer a rate of 8% a year, the SEC filing said.

Monday, July 24, 2006

Monday's Trading

7/25/06 Monday's Trading

Early in the trading session the Dow leaped to a triple point gain, the fourth in several weeks. By the end of day, the Dow had risen about 180 points, the Nasdaq by 40, and the S&P by 20. Some of the bounce could be attributed to the end of the pressure brought on by the July options that expired on Friday. Not surprisingly, the high for the day for the VIX was the opening trade and soon it retreated by about 2 1/2 points to the day's low of 14.95. The Treasuries were basically unchanged but crude closed above $75 and natural gas climbed to $6.60 per million BTUs. What caught my eye were the homebuilding stocks that rallied for the second successive day.

John Hussman: "The U.S. economy is likely to slow and inflation is likely remain persistent, because the U.S. has ascended a mountain of debt upon which there are currently no promising directions to climb. All of the growth in U.S. gross domestic investment since 1998 has been financed by foreign capital inflows, and while the Federal government continues to expand the stock of U.S. debt, the appetite of foreigners for new debt, in addition to their existing holdings, can hardly do anything but slow.
As the growth of foreign capital inflows declines (I'm not suggesting that foreigners will actually sell their existing Treasury debt, just reduce their absorption of new debt), gross domestic investment is likely to stagger, particularly in the area of housing, and credit expansion in the U.S. is likely to slow as well."

Back in November 2004, you had an opportunity to purchase Merck shares at $25 and then again one year later. I mentioned almost two years ago that the drop from $45 to $25 due to Vioxx was way overdone. Now the shares are back to $39. With 14,000 lawsuits still outstanding, I suggest we pass the baton to some others who are now enthusiastic at this level. Maybe the shares will move much higher. I'm satisfied with booking the profit now.

Highlights of the Centex quarter ended June 30, 2006 (compared to last year's first quarter):

* Home closings increased 1% to 8,318

* Revenues grew 13% to $3.27 billion

* Home Building operating earnings decreased 17% to $281 million

* Earnings per diluted share from continuing operations declined 11% to $1.39

* Unit backlog declined 17% on a decrease in sales (orders) of 21%

Tim Eller, Centex Corporation Chairman and CEO, said, "We have responded to the significant variations in local market conditions with a strategy that balances sales pace with margin performance, and this is reflected in our results for our first fiscal quarter of 2007. We are placing emphasis on the development of balance sheet capacity over growth in our land position. This investment capacity, along with our geographic and segment diversification, will enable us to capitalize on growth and consolidation opportunities as individual markets rebound."

According to Bloomberg, California declared an electricity emergency as it braces for another power-demand record and the possibility of the most severe energy shortfall in five years because of a persistent heat wave.
A stage 2 emergency was declared at 1 p.m. local time by the California Independent System Operator, indicating that the reserve margin, a measure of surplus power, is below 5 percent. Utilities will be allowed to restrict power to some customers who accept cuts during emergencies in exchange for lower rates.
California, with an economy twice the size of Russia's, has struggled to improve the reliability of its electricity system as a growing population spurs demand. The state said it may call the first stage 3 emergency, which would lead to rolling blackouts, since 2001, when an industry restructuring and market manipulation by traders led to widespread electricity shortages.

Shares of Tokyo Steel Manufacturing Co., Japan's largest electric-furnace steelmaker, had their biggest decline in almost nine years after the company said first-quarter profit slumped 43 percent on lower sales.

South Korea's Korea National Oil Corp. signed a deal Monday with Newmont Mining Corp. to acquire a 100% stake in BlackGold oil sands leases in Alberta, Canada, South Korea's Ministry of Commerce, Industry and Energy said Monday.
The deal is worth $270 million, the ministry said in a statement.
Newmont Mining's BlackGold leases acquired by the state-owned oil company contain oil reserves of around 250 million barrels, the ministry said.

It's Official

7/24/06 It's Official

AMD announced the purchase of ATI Technologies for $5.4 billion in cash and stock. Time will tell whether this was a prudent move.

HCA announced that it will be purchased for $51 in cash in the largest LBO in history. Time will tell whether this company's cash flow can carry such an enormous debt load. I wouldn't try it.

Polo Ralph Lauren raised its forecast Monday for the first quarter of fiscal 2007. The New York-based designer said stronger worldwide demand at full prices for its apparel and accessories at its retail stores and better department- and specialty-store sales were helping profit margins. The company said revenue will swell by a percentage in the mid-20s, expanding operating margins.

The European Commission on Monday cleared Alcatel's proposed $13.45 billion acquisition of Lucent Technologies Inc. The commission said it concluded that the deal would not significantly impede competition. When this deal was announced Lucent traded up to $3.30. Now it's just above $2. Mergers are not always profitable for the shareholders.