Saturday, November 18, 2006

A Closer Look

11/18/06 A Closer Look

The National Association of Home Builders continues to state that the housing industry slump is bottoming out. A closer look at the numbers reveals a different
picture. A Commerce Department report showed starts of new U.S. homes plunged 14.6% in October to a seasonally adjusted annual rate of 1.486 million, the lowest level in more than six years. In addition, the largest percentage decline in permits took place in seven years. Building permits are down 28% year-on-year.

You believe inflation is under control? Consider this. UPS said its rates for 2007 would increase by an average 4.9% for ground shipments, air express and international parcels from the U.S. The company said the increase for air express and international shipments is based on a 6.9% rise in the base rate, less a 2% reduction in the current fuel surcharge.

The headlines about crude oil are that prices hit a 17-month low of $55-56 a barrel. Statistically that is correct. However, that price goes off the board tonight.
The new contract, January 2007, begins Saturday and that price is $58-59 a barrel. In reality, the range of $57 to $63 is still in play.

December crude closed at a 17-month low of $55.81 a barrel Friday, down 45 cents for the session and down 6.3% for the week. December natural gas climbed 42.4 cents, or 5.5%, to close at $8.179 per million British thermal units. The contract was up 38.5 cents for the week.

According to the latest survey by Bank for International Settlements, at the end of June 2006, the total notional value of all outstanding derivatives contracts in the over-the-counter (OTC) market was about $370,000bn – some 24 per cent, or almost $70,000bn, higher than in the previous six months. Compare that with the total value of ll securities traded in the global marketplace. You will come to the conclusion that the derivatives market is no longer a bubble waiting to burst, but rather so large that a mushroom cloud is forming and totally out of control.

Ashraf Laidi: "A more dollar-friendly version of the FX diversification story suggests that central banks will acquire more non-US dollar assets in their new accumulation, rather than carry out outright selling of their existing dollar reserves, which would be detrimental to the currency value of these holdings. This means that the future action of these central banks would entail purchasing assets denominated in yen, sterling and even gold. This notion is especially after a Chinese central bank official was quoted today as saying the bank has been buying yen for its $1 trillion in FX reserves, rather than selling their existing dollar reserves."

Nymex Holdings closed at $132.99 a share after being sold at a higher than expected $59 late Thursday. Do you think there is any froth to equities? When was the last time we had even a 5% correction in the Dow-- never mind 10%?

Brett Steenbarger: "if you just look for selling after an up day session and buying after a down day session, you would have had an edge--despite the fact that the market has been in an overall uptrend since 2004.
The trend is not necessarily your friend if you're buying highs in a rising market."

Thursday, November 16, 2006


11/17/06 HP

Helmerich and Payne President and C.E.O., Hans Helmerich commented, "The Company posted another record year in 2006. Our earnings for the current year more than doubled our previous all-time high of one year ago. We are also pleased to announce seven additional FlexRig orders, bringing our newbuild book to 73. Significantly, these orders were secured during a time of market uncertainty and natural gas price volatility. We believe it is an indication of the customers' strong preference for the FlexRig as a solution over conventional rigs even if overall rig availability becomes less of an issue. Our contention is that customer demand for drilling rigs that provide improved efficiencies, safety, and reliability will continue to push opportunities for the Company and provide us with attractive growth prospects."
HP is a contract drilling company that owns 117 U.S. land rigs, 11 U.S. platform rigs located in the Gulf of Mexico, and 27 international rigs, for a total of 155 rigs. Included in the total fleet of 155 rigs are 78 H&P-designed and operated FlexRigs. The Company has reached contractual agreements with customers that will result in the construction of 45 additional FlexRigs.
I have written about Helmerich and Payne on several occasions. If an investor is looking for quality management, a conservative balance sheet, growth and a low p/e, one would be hard pressed to find a better investment than Helmerich and Payne.

The median consumer price index increased 0.3% in October, the Cleveland Fed said Thursday. The median CPI is an alternative method of computing underlying inflation trends that does not automatically exclude food and energy prices, as the core CPI computed by the Labor Department does. The median CPI is now up 3.6% over the past year, the fastest inflation in more than four years.

Marsoft: "The dry bulk market experienced one of its strongest third quarters in history during 2006. In contrast to the usual seasonal pattern, where freight rates usually either stall or fall in the third quarter, this year they posted impressive gains, with the Baltic Dry Index soaring from just under 3,000 at the start of July to nearly 4,300 by mid-September, before dipping below 4,000 by the end of September. Dry bulk freight rates generally held firm in October.
Three-quarters of the recent increase in dry bulk trade came from the global iron ore trade, which jumped by more than 8% in just the past three months, leaving it up by a remarkable 17% compared to a year ago. This dramatic increase was consistent with a boom in steel production, as global output soared by 12% in the third quarter compared to last year. Iron ore imports into China and Europe were especially high in the third quarter, with long-haul shipments from Brazil to Asia also up sharply.
The sharp jump in global steel output was accompanied by an increase in steel products trade as well. Boosted by rising Chinese exports, this trade rose by 9% relative to the year-earlier level.
Besides the boom in the steel-related trades, the global steam coal trade was also quite strong in the third quarter, up 5% from the second quarter level and 5.5% higher than the year-earlier level. Sharply higher Chinese and North American imports were primarily responsible for the gain, along with modestly higher European imports."

Starbucks Corp. expects gross margins for fiscal 2007 to be about flat. On a conference call with analysts discussing their quarterly results, the company also said it expected earnings comparisons in the first half of the year to be more challenging than in the second half. The company expects total net revenue growth of about 20%, same-store sales growth in the range of 3% to 7% and earnings per share in the range of 87 cents a share to 89 cents a share for the fiscal year.

Crude for December delivery gave up $2.70 to close at $56.26 a barrel. The contract expires Friday. Natural gas declined 4.9% to $7.72 per million British thermal units.

The Philly Fed index rose to 5.1 from negative 0.7 in October and negative 0.4 in October. The new orders index fell to negative 3.7 from 13.4. The prices paid index fell to 26.7 from 32.0.

Elk Corp. will evaluate Building Materials Corp. of America's acquisition offer of $35 a share.

Johnson & Johnson will acquire Conor Medsystems Inc. for $1.4 billion, or $33.50 per Conor share,

Reckson Associates Realty Corp. confirmed it has received a $49 per share acquisition proposal from a partnership formed by entities associated with Harry Macklowe and Carl Icahn. Reckson said its board has determined to engage in discussions with Macklowe and Icahn. Reckson added that its shareholder meeting is scheduled for Wednesday, and the Reckson board has reaffirmed its recommendation of the company's $6 billion pending merger with SL Green.

Nymex Holdings Inc.'s IPO of 6.5 million shares was priced at $59 each late Thursday, raising more than $380 million.

Michael Pento: "As I have indicated in previous commentaries, home price to income ratios are at a record of 5.3:1, the inventory of existing homes are at a 10-year high of 7.3 months and new home construction rates continue to be above intrinsic population increases, all of which forebode a protracted and painful correction in real estate prices. These conditions have been slow to retard consumer spending but should continue to manifest themselves in pernicious fashion throughout 2007."

Wednesday, November 15, 2006


11/16/06 Signposts

Nouriel Roubini: "New home prices are now falling at a 10% annualized rates; and these figures do not even include the massive seller-side subsidies (such as a $40K free swimming pool for a $400k home) that are becoming a norm in a desperate housing market.
- The sellers of homes are becoming so desperate that they are now relying on Divine Providence to help them sell their homes: as reported in dozens of recent press items, sales of statues of St. Joseph are skyrocketing; it is has been a long-time popular belief that burying a statue of St. Joseph in the basement of your home helps you sell your home when housing is in trouble. Those statues sales skyrocketed in the housing bust of the early 1990s and they are going through the roof again today."

The American Petroleum Institute said crude supplies rose 6.7 million barrels for the week ended Nov. 10. The Energy Department had reported a rise of 1.3 million. Motor gasoline supplies were down 1.4 million barrels, the API said, vs. the 3.7 million-barrel fall reported by the government. Distillate stocks declined by 2.3 million barrels, the API said. The Energy Department had reported a fall of 3.6 million barrels.

Doug Parker, chief executive of US Airways Group, said Wednesday he's confident the carrier's $8 billion cash-and-stock bid for bankrupt Delta Air Lines Inc.would pass merger review. "We've done a good bit of work on this with antitrust counsel and feel very strongly there are no issues that can't be resolved," Parker said in a conference call with analysts.

RailAmerica Inc signed a definitive agreement to be acquired by an affiliate of Fortress Investment Group LLC for $16.35 a share cash. The total value is $1.1 billion, including refinancing of debt.

Business conditions for manufacturers in the New York region improved in November, with the Empire State index rising by about four points to a a five-month high of 26.7, the New York Federal Reserve Bank reported Wednesday. The indexes for new orders, shipments, unfilled orders and employees all improved in November. The long-term outlook also improved in November.

McDonald's Corp. expects to return at least $10 billion to shareholders from 2006 through 2008, the company's chief financial officer said on Wednesday.

The Fed says their major concern is fighting inflation. If that is the case, then they should begin by tackling the excess liquidity sloshing through the economy, and in particular, focus on derivatives and their role in increasing speculative liquidity.

December natural gas climbed 14.3 cents, or 1.8%, to close at $8.12 per million British thermal units, its highest closing level since Oct. 25. December crude rose 48 cents to close at $58.76 a barrel.

Richard Daughty: "And if you don’t think that prices are rising, then let’s stroll on over to the latest Economist magazine and take look for ourselves. Hmmm! The Dollar Index for all items is up 37.5% from a year ago. Sounds like higher prices to me! Food is up 20.1% from a year ago, and that sounds like higher prices to me, too! All Industrials is up 56%, which I am SURE is higher prices, and Metals is up 80.4%, which I am absolutely positive is higher prices! The only thing that is NOT up in this table is Non-food Agriculturals which is still up 2.8% from a year ago, a level of inflation that used to be thought of as alarmingly high, back before Americans lost their minds 50 years or so ago."

Tuesday, November 14, 2006

The Consumer

11/15/06 The Consumer

U.S. consumers have a positive view for the first time since early 2002, according to the weekly index published Tuesday by ABC News and the Washington Post. The consumer comfort index rose to 1 from negative 3 last week and negative 19 in August before gas prices began falling. In the latest survey, 65% of consumers say their own finances are in good shape, up 10 percentage points in the past six weeks. Forty-six percent say the economy is in good shape, up 13 points since August to a 5-year high. Forty percent say it's a good time to buy things, up eight points since August.

Same-store sales at the New Albany, Ohio-base company's Abercrombie & Fitch stores were up 1%; they rose 8% at its Hollister Co. stores and 20% at its Ruehl stores. Abercrombie said it still sees net earnings of $3.25 to $3.30 a share, including a 2-cent per-share charge for options expensing, in the second half of 2006. The low end of that forecast reflects flat same-store sales in the fourth quarter of 2006. Based upon this outlook, the company expects full-year earnings of $4.59 to $4.64 a share, including 10 cent a share for options expensing. In my view, A&F is fully priced.

Crude for December delivery dropped 21 cents to $58.37 a barrel. Natural gas prices rose 1.2% to $7.99 per million British thermal units.

The Dow closed at an all-time high and the S&P 500 at a 6-year high. Gold and silver were pretty flat on the day.

Norfolk Southern Corp. foresees "mixed business conditions" in 2006 and 2007. The company said it expects its revenue increases to moderate, with less robust economic expansion than in the first half of 2006. Norfolk Southern also said it expects lower production of autos and home appliances in the fourth quarter.

The 0.9% decline in core producer prices (excluding food and energy) in October was entirely due to falling vehicle prices, a spokesman at the Bureau of Labor Statistics said Tuesday. Excluding cars and trucks, the core producer price index rose 0.1% in October.

Home Depot Inc.sees pressure on the housing industry continuing into the fourth quarter and through 2007. "I don't think we've seen the bottom yet, and I don't see anything that says it's going to get significantly better in '07," Home Depot Chairman and Chief Executive Bob Nardelli said on the earnings conference call. The company reported a decline in quarterly profit, and said the slowing housing market was the biggest contributor to the falloff.

U.S. retail sales fell in October for the second month in a row, pushed lower by falling gasoline prices, the Commerce Department reported Tuesday.

Timberland Co. is exploring a plan to sell itself, The Wall Street Journal reported Tuesday, citing people familiar with the matter. The company has hired Goldman Sachs to explore potential buyers for the company, the report said. The Swartz family has about 70% of the voting power of Timberland, the report added.

The average daily volume for Stratos International is 32,000 shares. Yesterday the volume was 817,000 shares and traded up 4.2%. I continue to believe this is an excellent risk/reward, and the company is exploring alternatives that I feel will lead to a buyout.

Barry Ritholtz: "I've checked the grapevine, and have it on fairly good authority: Today's explosion was caused by a covering (or unwinding of) a 122k emini SPX contracts.That's a notational value of $4B."

Mark Twain: "There are two times in a man's life when he should not speculate: when he can't afford it and when he can."

Monday, November 13, 2006

More Interest In Communication Companies

11/14/06 More Interest In Communication Companies

Bids are due on Monday for Clear Channel Communications Inc. , the largest U.S. radio company, and two private equity groupings are expected to make offers for the $17 billion firm, sources familiar with the situation said. That would equate to at least $35 a share.

Additional interest in being expressed in the Tribune Company, owner of the LA Times and the Chicago Cubs.

John Hussman: "Beyond the comments on the “Fed Model” I've made in recent weeks, it also bears repeating that when the overall level of yields has been low, a “buy signal” on the Fed Model (meaning that 10-year Treasury yields are lower than the forward operating earnings yield on the S&P 500) has not been a reliable buy signal for stocks at all, but has often been a great sell signal on bonds.
As for the universally-known fact that slower economic growth means slower inflation, I would submit that it's not a fact at all."

Two private equity firms have agreed to buy apparel retailer Eddie Bauer Holdings Inc. for $286 million in cash, the clothing chain said Monday. Under terms of the deal, a holding company owned by affiliates of Sun Capital Partners Inc. and Golden Gate Capital will pay $9.25 per share in cash and assume $328 million in debt.

Dallas Federal Reserve President Richard Fisher Bank characterized the economy as "growing forcefully." He must be in another country.

Claus Vogt: "If the Fed was the responsible for the booms, it follows that it's also responsible for the negative consequences of any subsequent busts. Moreover, it implies that more of the same -- still another round of easy money from the Fed -- is tantamount to treating an alcoholic with alcohol. It will neither prevent the fallout of the bursting bubbles nor cure the economic imbalances they harbor. My view: The Fed is not part of the solution; it's part of the problem. And whatever the Fed decides to do will be too little, too late to prevent at least a cyclical recession in the U.S. ... and too much, too soon for any investor who's not prepared for inflation and surging commodity prices. So be sure to be ready for both: Recession AND inflation."

Wynn Resorts Ltd will pay shareholders a special cash dividend of $6 a share following its sale of certain Macau casino rights for $900 million. The distribution will be payable on Dec. 4 to stockholders of record on Nov. 23 and may be subject to tax as ordinary dividend income. The shares rose 6.3 percent to a record high.

December gold fell $4.30 to close at $625.80 an ounce Monday.

December crude fell $1.01 to close at $58.58 a barrel. December unleaded gasoline fell 2.77 cents to end at $1.535 a gallon and December heating oil closed at $1.66 a gallon, down 3.66 cents. December natural gas added 10 cents to finish at $7.894.

Health care costs could rise more than 10 percent in 2007, unless companies change their plans, according to a report by PricewaterhouseCoopers.

Rep. Ron Paul: "Are ever growing entitlement and military expenditures really consistent with a free country? Do these expenditures, and the resulting deficits, make us more free or less free? Should the government or the marketplace provide medical care? Should younger taxpayers be expected to provide retirement security and health care even for affluent retirees? Should the U.S. military be used to remake whole nations? Are the programs, agencies, and departments funded by Congress each year constitutional? Are they effective? Could they operate with a smaller budget? Would the public even notice if certain programs were eliminated altogether? These are the kinds of questions the American people must ask, even though Congress lacks the courage to do so.
If we hope to avoid a calamitous financial future for our nation, we must address the hardest question of all: What is the proper role for government in our society? The answer to this question will determine how prosperous and free we remain in the decades to come."

According to Bloomberg, computer-related stocks in the Standard & Poor's 500 Index have gained 23 percent since July 21, when their industry-group index set this year's low. The advance is the biggest among the 10 groups in the S&P 500. Before then, they ranked last for the year with a 13 percent loss.

It is more than likely that the foreign exchange reserves will continue to grow in China, India, and Russia. Each country is in the process of diversifying those reserves away from dollars. In the case of China that country has no more than 1% of its reserves in gold. In sum, gold is significantly under-owned by China. I would anticipate that China will become a "floor" under the price of gold over a long stretch of time. As India becomes more prosperous as a nation, that country's demand for gold jewelery will increase, and that nation too will be buying more gold. In the case of Russia, with increasing cash flow from oil and natural gas, I would expect that nation to place more of its reserves in gold. Essentially, demand for gold no longer is dependent on the "terror card." There are greater economic reasons behind demand, and they will be present on a daily basis.

Ludwig von Mises: "Foreign-exchange control is today primarily a device for the virtual expropriation of foreign investments. It has destroyed the international capital and money market."

Sunday, November 12, 2006

Strategic Oil Reserves And The Dollar And Gold

11/13/06 Strategic Oil Reserves And The Dollar And Gold

China's new strategic oil reserves should only be used in the case of real supply disruptions and not for commercial purposes, the International Energy Agency said last week. China, which now imports nearly half its crude, pumped the first drops into the storage tanks at Zhenhai in August to protect itself against supply disruptions. About 3 million barrels of Russian crude have been placed there, which are enough to meet about 11 days of its imports. Another two facilities are planned for completion before mid-2007 as Beijing aims for more than 100 million barrels in reserve by 2008.

Robert McHugh: "The U.S. Dollar has formed a Head and Shoulder Top over the past few months... All this is the start of a protracted move into the 60's, one that will be stair-step rather than freefall as Central Banks around the world work in orderly fashion to devalue the Dollar. There was just simply too much M-3 created over the past several years."

Mike Burk: "Short term indicators show breadth deteriorated during last weeks rally. I expect the major indices to be lower on Friday November 17 than they were on Friday November 10."

Mike Hewitt: "I would like to take a quote from another Reserve Bank publication, this time from page 8 of Philadelphia's The National Debt, "The Federal Government, with the cooperation of the Federal Reserve, has the inherent power to create money - almost any amount of it. This power makes technical bankruptcy out of the question." So not only are the banks committing fraudulent activity in the sense that they claiming asset value from their debt and secondly loaning out more than they have borrowed, they are protected from any risk of bankruptcy courtesy of the public! You and I would pay more for prices of goods and services should the Fed have to dilute the money supply further by printing sufficient money to prevent bankruptcy of a bank! This is nothing short of outrageous."

Doug Casey: "The world's total market valuation of publicly traded gold equities adds up to only about $150 billion, or just .0033 of the $45 trillion combined value of the world's equities."

According to the Financial Times, Larry Yung, the third richest man in China has bought an $800m stake in resources group Anglo American held by the Oppenheimer dynasty, a landmark deal in China’s aggressive acquisition of African resources.

Two-thirds of Americans-66 percent- believe that President Bush will be unable to get much done for the remainder of his second term, according to the November 9-10, 2006 Newsweek Poll. Only 30 percent say he can be effective. Bush's approval rating has dropped to an historic low in the Newsweek Poll of 31 percent-four points below the rating recorded the week before the midterm elections in the November 2-3 poll. Only 29 percent of Americans say they are satisfied withthe way things are going in the United States; 63 percent say they are dissatisfied.

Looking Forward

11/12/06 Looking Forward

Bloomberg reported "natural gas demand in China, the world's biggest energy user after the U.S., may increase by more than 15 percent annually for the next 20 years, a government official said."

Freddie Mac U.S. Economic Outlook: "Given the past increases in mortgage rates, refinance activity continues to be strong due to continued incentives to cash-out home equity and refinance ARMs scheduled to have a payment reset in the next several months. The refinance share of loan applications for the next two quarters is projected to average 44%. Mortgage debt will grow by a rate of 9.1% in the last quarter of this year and drop to 5.8% in early 2007.'"

Doug Noland: "A major problem with the current monetary boom - the "Moneyness of Credit Bubble" - is the enormous and widening gulf between the markets perception of safety and liquidity and the acute vulnerability of the actual underlying Credits. Runaway booms invariably destroy the "money" - in whatever form it takes - whose inflationary expansion was responsible for fueling the Bubble. This lesson should have been learned from the late-twenties experience, or various other fiascos as far back as John Law. When current perceptions change - when trillions of instruments are reclassified and revalued as risky instruments as opposed to today's coveted "money" - Dr. Bernanke will learn why a central bank's monetary focus must be in restraining "money" and Credit excesses during the boom. And the longer this destabilizing period of transforming risky Credits into perceived "money" is allowed to run unchecked, the more impotent his little "mop-up" operations will appear in the face of widespread financial and economic dislocation - on a global scale."

I would like to take a moment to discuss the selling of naked puts. Frequently, I will note my best idea of the day. Recently, for example, it was selling the Whole Foods Jan. 2007 puts with a strike price of $37.50 for 45 cents. At the time the shares were selling for $46+. I only suggest a strategy that I do for myself.
I believe selling these puts was highly conservative. If someone elected to sell their shares to me at $37.50 less the 45 cents, I would be buying Whole Foods at an excellent long term value. If the shares do not retreat to $37.50 by the third Friday in January, then I pocket the 45 cents a share. To me, it's heads I win and tails I win. Is this a strategy for you? That's for you to decide.

John Mauldin: "Gary Gordon, an executive vice president at mortgage investment firm Annaly Capital and a former chief US equity strategist at UBS, expects construction to fall to 4% of gross domestic product from 6% today - itself not enough to push the economy (now growing at 2.6%annual rate) into recession. "The big risk is the ripple effect." New home buyers typically buy new furniture as well. "Housing turnover is a leading indicator of furniture sales, which is why analysts keep trimming earnings estimates for home furnishing retailers."Not to mention the problems if falling values make it more difficult for homeowners to borrow against their equity. Gordon estimates that if cash-out refinancing falls to 2001 levels, it would drain $300 billion from the economy, or roughly the same impact as another $60 increase in the price of a barrel of oil. And did I mention the increase in interest expenses for adjustable-rate mortgages?"

Here's a little something to ponder. In sum, if you wish to watch your weight, consider gold as an alternative to dollars.
How Many Wheelbarrows are You Worth?
by Adrian Burridg

Some fun statistics.
According to the US Bureau of Engraving and Printing each bill in circulation weighs 1 gram.
Every ounce contains 31.1 grams.
Every pound contains 12 troy ounces.
So if you are worth US$1 million dollars and you requested the currency in $1 dollar bills you would have 32,154 ounces or 2679 pounds of physical currency in your possession.
According to this wheel barrow for sale at Canadian Tire - it can hold 210 pounds.
This means that US$1 million dollars would weigh approximately 13 wheel barrows if you had to transport it via $1 dollar bills. The largest currency in circulation in the US is the $100 dollar bill.
Conversely if you held $1 million dollars in gold you would have 1592 ounces of gold (1,000,000 divided by $628.20) or approximately 133 pounds of gold which would be a little more than one half of one wheel barrow.
Now the US has M3 currency in circulation of approximately US$11 trillion dollars. If we use the same $1 dollar bill calculation we would find that we have just over 100 million wheel barrels of US dollar bills - if the entire money supply was $1 dollar bills which obviously it is not. This is also one wheel barrow of US dollar bills for every 3 men, women and children in the United States.
Again it would be 1 million wheel barrows of M3 money supply if we use the $100 dollar bill as the bill in the calculation.
Here is the math.
11,000,000,000,000 (11 trillion)
Divided by 100 (for the $100 dollar bill) = 110,000,000,000 grams.
Divided by 31.1 to get the number of ounces = 3,536,977,491.96 ounces.
Divided by 12 to get the number of pounds = 294,748,124.3 pounds
Divided by 210 pounds to get the number of wheelbarrows = 1,403,562.50
Multiplied by 100 to get the number of wheelbarrows if we use the $1 bill instead of the $100 dollar bill.
Buy all the gold you can carry.
How many wheel barrows are you worth?