Saturday, September 16, 2006

Observations

9/17/06 Observations

Rudolph-Riad Younes: "On the surface, the multiples are not a problem. Fifteen to 16 times forward earnings is not something to make anyone panic, although that's at the high end of the historical average. The problem today in the equity market is the level of profit margins. Margins are almost 100% above the historical average. If you think we are going back to the historical average, then you are talking about 30 times earnings. Add to that the global imbalances around the world, and equities are not a very safe place to be."

Barrons columnist Randall Forsyth writes "a reversal in commodities' decline could be about a week away, according to Paul Macrae Montgomery, who publishes the Universal Economics newsletter out of Newport News, Va. He points out that capital and commodities markets tend to reverse their trends on Sept. 22, an observation he attributes to W.D. Gann, whom he describes as a legendary trader."

Doug Noland: "I suggest this evening that we analyze sinking energy and metals prices - along with spiking equities (homebuilders, retailers, financials, etc.) and bond prices - within the context of heightened Monetary Disorder. Market pricing mechanisms - especially those distorted by highly speculative marketplaces - are these days unusually susceptible to bouts of mis-pricing. The general backdrop remains one of extraordinarily abundant liquidity at home and abroad - liquidity supportive of bond prices within a backdrop where housing vulnerability has basically taken the Fed out of the equation. I certainly don't believe lagging energy and commodities markets are today reflective of the robust inflationary biases that permeate global economies. Contrarily, I would expect quiescent bond markets these days to be conducive to continued Credit excess and attendant heightened inflationary pressures."

John Mauldin: "Paul Robinson: What happens when you have 3-plus years without a 10% correction in either the S&P 500 or DJIA? On March 15th, 2006 the market sustained 3 full years without a substantial sell-off from a 6-month high. This long a bull run has occurred only 3 other times in the past 100-plus years of market history and led to an average decline of 18.5% between the 3 occurrences.
In summary, I think it is too early to throw in my bearish towel. A slowdown means that earnings are not going to grow as fast as currently projected. That means some disappointments may (will?) be coming our way in the next few quarters.
Disappointments are the stuff that makes for bear markets. Can we come to the end of a Fed tightening cycle with no pain? A Kinder, Gentler Mr. Market? Now that would be different."

Mike Burk: "The market is overbought going into a seasonally weak week.
I expect the major indices to be lower on Friday September 22 than they were on Friday September 15."

George Ure: "Suppose you have a Federal Budget that is hopelessly bloated. The sucker is sooo big that any person in their right mind would be immediately incensed and reviled by its size. So how do you sell it? You announce the budget is "smaller than expected" and the stoopid sheeple think "Aha! Something good for a chance..." Well, it's never the case. The budget is still bloated, there's as much - or more - pork in it than ever, but because they said it was going to be a $100-trillion dollar hole over x-years, and it's down to only $99.9-trillion - a whole $1-billion in illusory "savings" you are misled into believing things got better. Sort of like backing the guillotine up up an 1/8th of an inch while falling toward your neck - that sort of "improvement" in the situation may sound good, but you're dead shortly no matter what."

Earthfiles.com reports ocean temperatures increased remarkably in the equatorial Pacific during the last two weeks.
"The development of weak El Niño conditions helps explain why this Atlantic hurricane season has been less active than was previously expected. El Niño typically acts to suppress hurricane activity by increasing the vertical wind shear over the Caribbean Sea region. However, at this time the El Niño impacts on Atlantic hurricanes are small. "We are still in the peak months of the Atlantic hurricane season, and conditions remain generally conducive for hurricane formation," said Gerry Bell, NOAA's lead seasonal hurricane forecaster."

Energyintel.com reports "downstream constraints have been one of the main factors -- if not the main factor -- behind record crude oil and products prices over the past few years, and they will ease neither quickly nor cheaply, US-based consultant Turner, Mason & Co. says in a new study looking at crude oil and refining trends over the next 20 years." This observation is a good deal different than political risk and/or speculative positioning. The latter two play a part but not the enduring factor behind the price of oil moving higher over time.

Charles Darwin: "It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change."

Hedge funds attracted $42.1 billion in investment in the second quarter, the most since 2003, and have returned 7 percent to investors this year through August, according to Chicago-based Hedge Fund Research.

Wireless-equipment firm Symbol Technologies is set to wrap up an auction that could see the sale of the $3.2 billion firm within days, The Wall Street Journal reported on Saturday. One person said that a deal could come in at a roughly $15 a share, which would mark a premium of around 20% to Symbol's trading price Friday.

Friday, September 15, 2006

Keeping It Real

9/16/06 Keeping It Real

Real average weekly earnings fell by 0.5 percent from July to August after
seasonal adjustment, according to preliminary data released today by the Bureau
of Labor Statistics of the U.S. Department of Labor. A 0.3-percent decline in
average weekly hours and a 0.4-percent increase in the Consumer Price Index for
Urban Wage Earners and Clerical Workers were partially offset by 0.1-
percent rise in average hourly earnings.

The bad news on real estate and home prices continues on a daily basis. Maybe you haven't noticed. Centex shares bottomed in mid-July at $42.90, and that was one month after rates topped out on treasury bonds. The stock rallied in early August to 52, and now in mid-Sept. it is up close to $55.

At the beginning of July, in 11 trading days, Wal-Mart shares dropped from 48 1/2 to 42 1/2. The range for July and Aug. was 42 1/2 to 45 1/2. In the last 10 trading days the shares rallied from 44 to 48 1/2. Pretty interesting I think.

Bush: "I don't question the patriotism of those that disagree with me." Keep it real, please!

Barry Ritholtz: "In the past 16 Federal Reserve tightening cycles, there has been one true soft landing in 1994. I continue to look at that not as impossible, but as a low probability event."

October crude climbed 28 cents to $63.50 a barrel in afternoon dealings, reversing course after the contract touched $62.05, its lowest level of the year. December gold fell $3 to close at $583 an ounce, its weakest closing level since mid-June. It ended the week with a loss of more than $34 an ounce, or 5.6%. December silver fell 7.5 cents to end at a two-month low of $10.875 an ounce. The contract, which fell earlier to a nearly three-month low of $10.55, marked a loss of 11.5% for the week. December copper fell 6.3 cents Friday to close at $3.3115 a pound, down 7.2% for the week.

Superior Industries International Inc. said Friday it is closing its manufacturing facility in Johnson City, Tenn., and plans to lay off around 500 workers.

The median consumer price index rose 0.3% (or 3.4% annualized) in August, the Cleveland Federal Reserve Bank said Friday. The median CPI is an alternative method of computing underlying core inflation that does not automatically exclude food and energy prices. Over the past year, the median CPI is up 3.4%, the biggest gain since July 2002. The CPI is up 3.8% in the past 12 months, while the core CPI (which excludes food and energy) has risen 2.8%. Inflation is under control?

The University of Michigan consumer sentiment index rose to 84.4 in September from 82.0 in August. The improvement all came from expectations of the economy six months ahead. The expectations index rose to 77.1 from 68.0 in the previous month. This is the highest since January. The current conditions index fell to 95.7 in September from 103.8 in August. This is the lowest level since October.

Marsh & McLennan said Friday it would cut 750 jobs out of its work force of about 55,000 as part of a move to save $350 million by the end of 2008. Conagra will cut 400 jobs. I would imagine Ford will end up cutting about 40,000+ jobs. Will Chrysler cut some jobs too?

December natural gas rose 9 cents to close at $4.982 per million British thermal units, recovering from its low of $4.81. The contract ended the week with a loss of 12.2%.

Thomas P. Au: "The country (China) has 1.2 billion (or more) people, many of whom are peasants seeking to improve their lives by moving to the cities because of the inherent poverty of the rural areas. Keeping a “critical mass” of them happy is necessary for social and political stability. In order to effect this, it is necessary to have a large pool of low-paying (by world standards) urban opportunities, many of which amount to “make work” positions that are still more remunerative than farmwork. An artificially weak currency is an important ingredient of such a strategy...In 1931, the United States was in a recession that then-President Herbert Hoover reasonably thought would soon end. The impending recovery was derailed by the collapse of the German economy, then the second most important in the world, not only because of its sheer size, but because of its connections to other countries in Europe. China’s economy plays a similar “second most important” role today because of her ties in Asia and elsewhere, and because its swings are larger than those of other, nominally larger, economies such as those of Germany and Japan. If a collapse of the Chinese economy comes hard on the heels of a deep U.S. recession in 2007-2008, the result could be a prolonged slowdown of global growth such as we saw in the 1930s."

Chevron is in talks to join with Chinese petroleum producers on exploration and production projects one year after beating out Cnooc, a Chinese oil company, to acquire Unocal.The company is in discussions with Cnooc, PetroChina and China Petroleum & Chemical, known as Sinopec, "to explore partnership opportunities both inside and outside of China," said Steve Del Regno, managing director of Chevron's liquefied natural gas trading business in Asia. The talks could lead to joint development of oil and gas deposits, he said.

Freescale Semiconductor Inc. agreed to be bought by a private equity consortium for $17.6 billion. Under the terms of deal, the consortium will acquire all of the outstanding Class A and Class B shares of Freescale for $40 per share in cash. The consortium is led by The Blackstone Group, and includes The Carlyle Group, Permira Funds and Texas Pacific Group. Freescale said its board has approved the buyout.

Thursday, September 14, 2006

Well To Remember

9/15/06 Well To Remember

With Friday option expiration day it is well to remember what Robert McHugh
has pointed out: "Here's an interesting fact: The last three autumn declines fell from tops on the Friday, Monday, and Monday respectively of September triple witching weeks in 2003 (September 19th), 2004 (September 13th), and 2005 (September 12th). 2006's triple witching occurs this Friday, September 15th, so we may be very close to the start of the expected autumn decline of 2006. Each of those tops were followed by 550 to 700 point plus declines within a month."

It is well to note the differences in view between the DOE and the IMF as it relates to crude. The DOE sees a lessening of demand for crude in 2007 while the IMF sees crude moving up to $75 a barrel. The IMF sees world-wide GDP growth at 5% next year with the growth in the U.S. slowing to 2.9%. I recently pointed out the double digit growth in many Asean countries and that growth's impact on demand for crude and gold.

Ashland Inc. declared a special cash dividend of $10.20 per share, and said it has approved a stock buyback plan of up to 7 million shares. The special dividend will be payable Oct. 25 to shareholders of record as of Oct. 10, The company added that because of the size of the dividend, the New York Stock Exchange has determined that the ex-dividend date will be Oct. 26, the day after the payable date for the dividend.

October natural gas fell 45.9 cents to $4.99 per million British thermal units Thursday afternoon, after a $4.97 low -- the weakest intraday price for the contract since late April 2004. The Energy Department reported a 108 billion cubic foot rise in last week's natural-gas supplies. That was the first triple-digit climb since June 3 of last year, according to Ben Smith of First Enercast Financial.

Federal Reserve Gov. Susan Bies: "Investment in [commercial real estate] is again growing strongly, and we expect banks to assess the vulnerabilities of their portfolios to loss in expectation of the next downturn."

The U.S. Import Price Index rose 0.8 percent in August, the Bureau of
Labor Statistics of the U.S. Department of Labor reported. The August
increase was led by a 2.3 percent advance in petroleum prices, although a 0.5
percent rise in nonpetroleum prices was also a contributing factor. Prices of imports excluding petroleum rose 0.5%. The gain was helped by the biggest increase in imported food prices since March 2005. Over the past 12 months, import prices are up 6.6%. Export prices increased 0.4 percent for the second consecutive month in August.

Stratos International said it would explore strategic alternatives in an effort to maximize shareholder value, which may include a sale of the company. The Chicago maker of RF and microwave components and products said Steel Partners II, which expressed willingness to make an offer to buy the company, was welcome to participate in the effort.

U.S. retail sales rose by 0.2% in August, boosted by a surprising gain in auto sales that offset the drag from lower gasoline prices, the Commerce Department reported Thursday. Economists had expected retail sales to fall 0.2% after rising 1.4% in July. Auto sales increased 0.4% in August, despite reports from automakers earlier that showed declining sales. Sales excluding autos rose 0.2% in August. Sales at gasoline stations dropped 1% in August as gasoline prices tumbled. Sales excluding both autos and gasoline increased 0.4% in August.

According to CFO.com, financial executives' attitude on the U.S. economy has gone downhill. In the midst of weakening housing prices and consumer demand, plus concern about fuel costs, labor costs, and interest rates, nearly 50 percent of CFOs are more pessimistic about the economy than they were three months ago. This pessimism is the highest it's been in more than five years, according to the latest results of the quarterly Duke University/CFO Business Outlook Survey.
Although one-third of the CFOs surveyed predict a U.S. recession in the next year, they are relatively upbeat about the prospects for their own companies. Nearly 46 percent are more optimistic about their companies' prospects compared to last quarter, but only 19.8 percent are more optimistic about the U.S. economy. Still, both numbers showed a decline from when the survey was last taken, at the beginning of the summer.

Ford Motor Co. and the United Auto Workers union have agreed to offer buyouts to all of the auto maker's 75,000 UAW-represented workers in the U.S., according to a media report Thursday. This action could make a material and quite positive difference to the long-term cash flow for Ford.

Gold ended about $4.60 an ounce lower and crude ended the day lower at $63.25 a barrel.

My best idea for the day was to sell the Jan 2007 puts on Freeport McMoRan with a strike price of $35 for 55 cents. The stock closed sharply lower at $52.

Wednesday, September 13, 2006

Breaking The Losing Streaks

9/14/06 Breaking The Losing Streaks

Crude and gold were able to break their losing streaks on Wednesday as both managed small gains. The rise in energy shares helped to boost the Dow by 45 points.

The federal government ran a $64.6 billion deficit in August, the Treasury Department reported Wednesday. The deficit was up 25.9% from the deficit of $51.3 billion reported in the same month last year. The Congressional Budget Office estimated the August deficit at $67 billion. For the fiscal year so far, the deficit is down 14.1% to $304.3 billion from $354.1 billion this time last year. Between the federal deficit and the trade deficit, the twin tower deficits are alive and well and growing to the sky. The bond market is oblivious and rates continue to drop on treasury bonds. Why buy the latter when money market funds provide the same yield?

The Energy Department said crude supplies fell 2.9 million barrels to 327.7 million for the week ended Sept. 8. Motor gasoline inventories stocks rose for a fourth week in a row, up 100,000 barrels to total 207.0 million barrels. Distillate supplies climbed 4.7 million barrels to 144.6 million.

Hanesbrands is cutting 2,000 employees and we will soon offically read about the increased employee cutbacks at Ford. Visteon will be hurt by the Ford retrenchment and will have layoffs of their own. Not to worry. Everything is just dandy in hiring land. Just ask our Secretary of Labor.

Goldman Sachs has many smart employees and yet the managers of their hedge fund lost 10% of the fund's capital in one month. How many other hedge funds had similar experiences?

Kurt Richebacher: "The U.S. economy makes up a quarter of the world total...that it should have more than half of the world's current account deficits is a spectacular success - only made possible by its great wealth and status."

"Home Depot is up on speculation that Eddie Lampert is building a position in the shares," said Tim Biggam, options strategist at Man Securities, an option brokerage firm in Chicago.
"This rumor has prompted enormous option volume on the call side as hot money players buy first and ask questions later." Why invest in HD when you can invest in
Lowe's?

Thedeal.com reports an analyst says Ericsson and Motorola would make a good fit for
Tellabs.

Xilinx is now forecasting a sequential decline in revenues of -4% to -7%. Previously it showed a flat to -5% projected drop.

Tuesday, September 12, 2006

Reality Is On The Horizon

9/13/06 Reality Is On The Horizon

Several times a month I provide a quote from John Hussman, a smart money manager who understands how to manage risk. Here is some of what he said on Monday. "Investors seem willing to take high risks because those risks seem the only alternative to still modest-yielding Treasury bills. They also seem willing to charge ahead on even the smallest relief in inflation data, in hopes that Fed hikes are finally behind us. Yet given current valuations, a move to 19 times record earnings on record high profit margins would take less than a 10% climb. And even if the market does scratch its way to 19 times record earnings on record profit margins, the slope on the other side of that peak will probably be very steep. Even an inevitable 10% correction, which is already long overdue, would wipe out the gain. The likelihood of durable market gains over-and-above T-bill yields is very slim.
In short, the financial markets are caught in a low-stakes but potentially sensitive position. Small, statistically insignificant surprises in inflation have the potential to send the market higher, but on an ultimately profitless round-trip. Meanwhile, disappointments have the potential to be quite damaging...Suppose that there was a high 80% chance that the market will rise 10% over the coming year, and just a small 20% chance that it will decline 15% over the coming year. Sound like good odds? Well, given those odds, the expected return would be [.80(10%) + .20(-15%) = ] 5%, which is the same as you'd get in risk-free T-bills. A risk-averse investor wouldn't take the bet."

October crude fell $1.85 to close at $63.76 a barrel, its weakest closing level since Feb. 15. The contract has lost a total of $6.50, or 9.3%, since its close of $70.36 on Aug. 31. October natural gas fell 9.6 cents to close at $5.574 per million British thermal units. Gold has been down for five straight days. The time to buy shares in these industries is when everyone is selling and they are out of favor. You might consider ConocoPhillips, Schlumberger, Apache, Encana, BJ Services, Barrick Gold, Goldcorp, Freeport McMoran, Baker Hughes, etc. I have sold puts on all these shares at strike prices sharply under the present market. That strategy is foreign for many investors.

"There is no doubt left in nearly any observer's mind that fundamentally this [home-building] industry has more bad news ahead of it, but we believe the pessimism is reaching a crescendo," wrote Susquehanna Financial Group analyst Stephen East in a research note Tuesday. My favorite homebuilder remains Centex, and a couple of weeks ago my best idea was to sell puts on Centex.

Don Tomnitz, chief executive of D.R. Horton Inc. (DHI), Tuesday said the company is preparing itself for a tougher housing market in 2007 compared to 2006, with prices finally stabilizing in 2008. "We have never seen housing prices and demand slow as quickly as they have during this downcycle," said the CEO of the nation's largest home builder when measured by 2005 deliveries. "Demand has evaporated to the extent of about 20% to 30% for the industry, and in a tighter timeframe than we've seen before." The use of incentives by builders to move homes in a slower sales environment will continue for the next three to four quarters, Tomnitz estimated.

On Tuesday, some of the old favorites made some nice moves-- McDonald's, Wal-Mart, Best Buy, Goldman Sachs, and Ford. Each was recommended at various times over the past three years, and all when they were getting crushed. Remember McDonald's at $12+?

Beazer Homes USA Inc. CFO Jim O'Leary said the company doesn't see conditions in the U.S. housing market improving in the near-term as home cancellations rise. "About 50% of the people canceling on us now have home-to-sell issues . . . and some are looking for better deals," the CFO said Tuesday at the Credit Suisse Homebuilders Symposium. "A lot of buyers are having trouble closing [on their existing homes], and they don't want the risk of owning two homes in this market," O'Leary added.

The U.S. trade deficit widened by 5.0% in July to a record $68.0 billion, the Commerce Department said Tuesday. The July deficit surpasses the previous monthly record of $66.6 billion set in October.The U.S. trade deficit with China widened to $19.6 billion in compared with $17.6 bln in the same month last year.

Centex Corp. Chief Executive Timothy Eller said Tuesday the company's customers are having difficulty selling their own homes in order to buy Centex homes, which is pushing up cancellation rates. "Resale inventories are increasing . . . as speculators who were looking to flip houses to make a buck are getting out," Eller said.

The DOW had a triple digit gain and the VIX traded down as low as 11.55. Complacency is running wild. My best idea for the day is selling the Jan 2007 puts on Phelps Dodge with a strike price of $55 for 50 cents. The stock is selling at $84+. That's a lot of money, in my view, to insure a drop of 29 points for 4 months. Phelps Dodge is still generating a good deal of cash on a daily basis.

In my view the November mid-term elections surround Iraq and the following: real wages for most Americans are marginally below where they were four years ago, in spite of strong overall growth in gross domestic product. According to the Bureau of Labour Statistics, the average hourly wage for private sector non-farm workers was $8.17 in August 2006 (at 1982 prices) compared with $8.23 in August 2002. Why vote for a party when you aren't getting a fair share of the pie? Corporate profits keep getting a larger share of GDP and so do the top 5% of wage earners. The disparity will bring a change in the House I believe.

What are the growth trends for China and India? How will they impact the price of oil, gold, steel, copper, etc? Here's a clue. India's industrial production grew in July at the fastest pace in a decade. Production at factories, utilities and mines rose 12.4 percent from a year earlier, the largest increase since June 1996, the Central Statistical Organisation said in New Delhi.
Power companies almost doubled electricity output in July to keep up with demand from factories producing cars and textiles, while government spending on roads and ports boosted sales at Steel Authority of India Ltd.
I rest my case. Reality is on the horizon. Look at the recent drops in oil and gold as an opportunity. Let others dump their holdings. This is precisely what has occurred over the past 4 years.

Monday, September 11, 2006

Concerned?

9/12/06 Concerned?

Hovnanian's CEO: "Buyer psychology has shifted . . . buyers are more content to wait on the sidelines than they were," the CEO said. "Cancellation rates have been creeping up."

M/I Homes Inc. CEO Robert Schottenstein said Monday the company's operations have changed to defense from offense the past few years, particularly with regard to land positions, due to the pullback in housing. "We've faced tough times before, but the times we're in now are somewhat unique," the CEO said. The company's housing markets haven't bottomed out yet and likely won't improve until 2008, Schottenstein said.

Bush: In March 2002 speaking of bin Laden: "I am truly not that concerned about him."Over the last 5 years our nation has spent in excess of $1.5 trillion on our defense budget. Al-Zawahiri and bin Laden have not been caught. Are you concerned? Where there's a will there's a way. Obviously Bush did not and does not have the will to bring these al-Qaeda leaders to justice. Yet he stands at ground zero in a somber fashion. He is a disgrace to this country and to those who perished and were injured in 9/11.

Ipsco is strengthening its position as a major producer of tubular steel for the oil and gas industry with a US$1.46-billion takeover of Kentucky-based NS Group Inc.

My best idea to sell Jan 2007 puts on Chevron with a strike price of $50 for 40 cents.

Yesterday And Today And Tomorrow

9/11/06 Yesterday And Today And Tomorrow

We're safer than we were 5 years ago? Al Qaeda promises more attacks. Do you believe the threats will stop? One can't live in fear; however, a fear premium will remain in the market. That is true for crude, gold, and many other commodities.
China has $1 trillion in foreign currency reserves. If you were running that country, would you buy crude, gold, copper, and steel or the U.S. doillar? I didn't mean to insult your intelligence.

Freescale Semi is considering an LBO proposal or possibly proposals.

Gold traded under $600 an ounce and crude traded close to $65. Other energy commodities are also taking it on the chin. The supply and demand situation has not changed on a long-term basis. One needs to respect the seasonal driving patterns as well as the growth prospects for Asean countries.

Life reinsurer Scottish Re said Monday that it has received a number of potential bid proposals and has provided a number of parties with due diligence information. The company said that it will review the proposals and selected parties will be invited to a second round during which additional due diligence will occur. It is possible that this process could result in an announcement of a transaction as early as mid- to-late October or early November, it added. The company also said that it has also received three written proposals for possible financing and expects to receive several additional proposals in the near future. The company said it plans to raise between $150 million and $250 million to reduce short-term liquidity pressures.

Gary Lammert: "At the current level of US interest rates and housing cost, the population of credit worthy borrowers have become inadequate to maintain positivity in US money growth. At this point in US economic history not to maintain money expansion and asset valuation worth is to be subject to a causal deflationary implosion from the existing massive debt load and servicing requirements.
On the other side of the equation is the US dollar and the inflation ridden dollar-denominated commodities and CRB. With the exception of the Australian currency, the US dollar as compared to its sister international competitor currencies is supported by differentially higher interest rates. For the Federal Reserve, logic might dictate that any lowering of the Fed Funds rate would lower the value of the dollar vice other currencies and thereby exacerbate commodity inflation.
This Federal Reserve dilemma regarding lowering interest rates to maintain the forward momentum of the US borrowing dependent economy aptly characterizes the current US economic end game elements of overwhelming debt, commodity inflation, inadequate wage growth, over consumption, and overproduction, and oversupply."