Saturday, January 06, 2007

The Horizon

1/7/08 The Horizon

John Mauldin: "If we do get a mild recession and a correction in the stock market back to lower than trend valuations, I expect to finally turn selectively bullish on stocks. I am really looking forward to that...That being said, for all the reasons I haven outlined in this letter over the past few months - the inverted yield curve, the leading economic indicators, a housing recession, pressure on the consumer and more - I think we see the Goldilocks Recession in 2007. We will see. Stay tuned."

Tom Au: "In essence, the Chinese are doing to the Americans what the barbarians did to Rome; absorbing their more advanced culture and diffusing it among their larger population to produce a nominally stronger entity."

Doug Noland: " It is the nature of Credit and Economic Bubble imbalances, disparities and asset price inflation to keep policymakers confused, unassured, hesitant, and, in the end, accommodative. I find it rather astounding that some are today calling for the Fed to soon initiate an easing cycle. This would be an enormous mistake, one I don’t expect the Fed to be in any hurry to make. Unrelenting Financial Sphere excesses today pose by far the greatest systemic risk. To what extent the Fed and global central bankers recognize this reality may very well be The Key Issue for 2007. The Fed and the markets are in an especially tenuous position if the Bernanke Fed actually attempts to wrest some control of “money,” Credit and the entire financial system back from Wall Street and the speculator community. Ditto if foreign central bankers dare enter the fray."

"Uncertainty surrounding telecom industry consolidation led to lower
than expected revenue in North America during the fourth quarter," said
Krish A. Prabhu, Tellabs president and chief executive officer. "We expect
the revenue impact to be temporary since, as 2007 begins, our customers
continue to see growing user demand for bandwidth. Tellabs remains
well-positioned to benefit from this."

Iran's state oil refining company is in talks with India's Essar Group to build a new refinery in southern Iran, officials said, part of Tehran's $18 bln-drive to meet soaring domestic fuel demand, Reuters reported.
The estimated $2 bln-plus investment in a new 300,000 barrel per day (bpd) plant to process Iran's heavy crude would give the OPEC member's stagnant refining sector a boost and give Essar a foothold in the oil-rich but politically sensitive country, where it is already in talks over a steel plant.
As I have often stated, sanctions do not work. By their very nature, they are doomed to failure.

The New York Mercantile Exchange Inc. announced margin changes for its crude oil and related futures contracts, beginning at the close of business on Monday, the exchange said on Friday.
Margins for the crude oil, crude oil calendar swap, and crude oil financial futures contracts will increase to $3,000 from $2,500 for clearing members, to $3,300 from $2,750 for members, and to $4,050 from $3,375 for customers, the NYMEX said in a release.
Margins for the NYMEX miNY crude oil futures contract will increase to $1,500 from $1,250 for clearing members, to $1,650 from $1,375 for members, and to $2,025 from $1,688 for customers.

Australian based research organisation Resource Capital Research, which specialises primarily in the uranium sector among other minerals resources, has predicted spot uranium oxide prices rising to $115 a pound during 2007.
According to RCR’s latest quarterly review of the market, analyst John Wilson states: “Forward indicators suggest the uranium price is heading to US$90/lb by mid 2007, an increase of 37% from the current spot price [of $65 an ounce when the report was written]; and US$115/lb by September 2008, an increase of 75% over the current spot price. These price levels are revised up from our September uranium quarterly which indicated a uranium price of US$60/lb (+ 50%) May 2007 and US$88/lb (+31%) by late 2008. The upward revisions are largely driven by the expected impact to the uranium market of delays at the Cigar Lake project (Cameco) in Canada.” The current price is about $72 a pound.

Friday, January 05, 2007

The Good, The Bad, And The Ugly

1/6/06 The Good, The Bad, And The Ugly

Payroll employment rose by 167,000 in December, and the unemployment rate was unchanged at 4.5 percent. In 2006, payroll employment increased by 1.8 million, or an average of 153,000 per month. Average hourly earnings increased by 8 cents, or 0.5 percent or 4.2% for all of 2006.
Employment in professional and business services rose by 50,000 in December. Over the year, this industry has added 420,000 jobs.
Health care continued to add jobs, with a gain of 31,000 in December and 324,000 over the year.
In December, employment in food services and drinking places expanded by 23,000; job gains for 2006 totaled 304,000.
Over the year, transportation and warehousing employment increased by 106,000.
Mining employment trended up in December. Over the year, employment in mining has grown by 54,000, or 9 percent, mainly in support activities.
In sum, December service jobs rose by 178,000 and manufacturing fell by 12,000. November was revised upward to 154,000 jobs from 132,000. Good weather certainly helped the December job market because more construction workers were able to continue in their jobs.

On Friday, in very early morning hours trading, oil briefly broke the $55 level on the downside- to roughly the low hit in mid-December of 54.86. Crude was able to bounce off that level to close at $56.13.

February gold closed at an over two-month low of $606.90 an ounce Friday. It was down $19.30 for the session to tally a loss of $31.10, or 4.9%, for the holiday-shortened week. March silver closed at $12.23 an ounce, down 60.5 cents, or 4.7%, for the session and down 5.5% from last Friday's closing level. March copper fell 6.7 cents to end at $2.535 a pound, losing 11.7% for the week. In all, it was an ugly week for several commodities. Looking back, I think we'll discover heavy margin liquidation as well as pressure from shorting.

The Treasury market took it on chin from the strong employment report and we saw the yield on the 2-year rise to 4.79%, the 10-year to 4.68%, and the 30-year to 4.77%.

As is frequently the case in January, the U.S. dollar index found some support and it rose to 84.50+.

Motorola issued a warning for the quarter and the stock got hit by as much as 2 1/2 points to just above $18.

President Bush has quietly claimed sweeping new powers to open Americans' mail without a judge's warrant, the New York Daily News has learned.
The president asserted his new authority when he signed a postal reform bill into law on Dec. 20. Bush then issued a "signing statement" that declared his right to open people's mail under emergency conditions.
That claim is contrary to existing law and contradicted the bill he had just signed, say experts who have reviewed it.
Bush's move came during the winter congressional recess and a year after his secret domestic electronic eavesdropping program was first revealed. It caught Capitol Hill by surprise.
You may believe we live in a democracy. I prefer to state we have a democracy with a dictator and vice-dictator at the helm. It can only end badly.

Milton Friedman: "Inflation is the one form of taxation that can be imposed without legislation.”

Thursday, January 04, 2007


1/5/06 Volatility

The ISM nonmanufacturing index fell to 57.1% from 58.9% in November. The new orders index dropped to 54.4% from 57.1%. The prices paid index rose to 59.1% from 55.6%.

The National Association of Realtors reported Thursday that the pending home sales index fell to 107.0 November from 107.5 in October. The index is based on sales contracts for existing homes signed in November. The pending sales index is down 11.4% from November 2005.

Excluding transportation, orders for U.S. goods fell by 0.5% in November. Orders for durable goods rose 1.6% in November, down from the 1.9% estimated by the government a week ago. Orders for nondurables, meanwhile, were flat.

The McCormick Tribune Foundation, which owns 11.7% of Tribune shares, and the Cantigny Foundation, which owns 1.4%, hired the Blackstone Group to help them consider various alternatives related to their stakes in Tribune, which is currently exploring a possible sale of some or all of its assets. The McCormick Tribune Foundation said in a regulatory filing Thursday that it has signed a non-disclosure agreement under which Tribune will provide it with certain financial information not available to the public. The information will be helpful to the foundation as it ponders its next move, it said. The foundations are considering a ``wide range of options'' that include a bid, said Joseph A. Hays, a spokesman for the McCormick foundation, which was set up in 1955 after the death of former Tribune chairman Robert McCormick. The foundation ``must look at its options to protect and enhance the holdings it has.''Meanwhile, the Financial Times stated the Tribune Company has a mid-January deadline for bids for the company.

ConocoPhillips said it experienced "significantly lower" worldwide refining and marketing margins in the fourth quarter compared to the third quarter. It also said its midstream and chemicals results are expected to be lower in the fourth quarter than in the third quarter.

The number of workers filing for state unemployment benefits for the first time rose by 10,000 to 329,000 in the week ended Dec. 30, the highest amount since Nov. 25. The number of former workers continuing to receive state unemployment checks fell 76,000 to 2.44 million in the week ending Dec. 23. This is the lowest level since the week ended Nov. 11. The four-week average of continuing claims fell 16,000 to 2.48 million, the lowest level since Dec. 2.

Ken Perkins, president of RetailMetrics LLC, a research company in Swampscott, Mass., said retailers were forced to mark down heavily to bring in sales.
"Clearly, this was a promotional Christmas," he said. "Consumers clearly waited until the last minute."

Talking about the oil service sector, Cramer stated "We have way too many of these companies, and I have to believe that there could be major merger activity. Remember, that's what Halliburton's CEO told me as recently as last month." Cramer's #3 value buy for 2007 is Halliburton, which he owns for his charitable trust. My number one value play for 2007 is BJ Services. You probably want to commit me in that the stock made a new 52-week low and I look really stupid. We'll have to see how things sort out by year-end. Last January the stock sold at a new 52-week high of $42. In the interim, earnings and revenues are sharply higher.

The American Petroleum Institute reported a rise of 1.7 million barrels in crude supplies for the week ended Dec. 29. The Energy Department had reported a decline of 1.3 million. Motor gasoline supplies were up 6.7 million barrels, the API said, vs. the government's reported rise of 5.6 million. Distillate supplies rose 5.3 million barrels, the API said, compared with the 2 million-barrel climb reported by the government.

Recently, the VIX has moved from the just below the 10 level to a bit below the 12 level, and that historically remains very low.

Wal-Mart Stores Inc. said Thursday that strong sales of electronics, groceries and pharmacy items led to better-than-expected same-store sales in December.

February crude fell $2.73 to close at $55.59 a barrel -- the contract's weakest closing level in 19 months. The contract has lost more than 9% in two sessions. February natural gas closed nearly unchanged at $6.162 per million British thermal units.

February gold fell $3.60 to close at $626.20 an ounce in New York Thursday. March copper fell by 4.7 cents to end at $2.602 a pound, but March silver added 16.5 cents to close at $12.835 an ounce.

Lester Brown, founder of the Earth Policy Institute, a Washington-based environmental think tank, warned that nearly twice as much corn as the government has estimated will be needed from the 2008 harvest to feed the ethanol plants that will be online by then. He blamed the lag on the failure of industry trade groups to keep up with development of ethanol plants.

President Ford: "Our inflation, our public enemy number one, will, unless whipped, destroy our country, our homes, our liberties, our property and finally our national pride as surely as will an well-armed wartime enemy."

Wednesday, January 03, 2007

No Surprises

1/4/06 Few Surprises

Bob Nardelli resigned as Chmn and CEO of Home Depot. This should have come as no surprise.

Nabors Industries Ltd. said that it expects fourth quarter 2006 results to miss analyst forecasts due to a weaker-than-expected performance at its Lower 48 and Canadian operations. The rig operating company said that fourth quarter earnings are expected fall in a range of 95 cents a share to $1.00 a share, implying full year earnings per share of between $3.53 and $3.58. Analysts polled by Thomson First Call had been looking for fourth-quarter average earnings of $1.11 a share and full year earnings of $3.71 a share. With the stock at at $29+, this should have come as no surprise.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity, which includes both refinance and purchase loans, for the week ended December 29 increased 3.6 percent to 575.6. The index stood at 555.8 in the previous week, which was its lowest level since early August.

U.S. private-sector employment fell by 40,000 in December, the first decline in nearly four years, according to the ADP employment report released Wednesday. "These findings suggest an abrupt slowing of employment," following relatively strong job growth averaging 121,1000 over the past three years," said Joel Prakken, chairman of Macroeconomics Advisers, the economic firm that computes the ADP index from anonymous payroll data provided by Automatic Data Processing Inc. Economists surveyed by MarketWatch are expecting nonfarm payrolls - both public- and private-sector - to grow by about 103,000 for December.

The ISM manufacturing sentiment index rose to 51.4% from 49.5% in November. The production index rose to 51.8%, the new orders index rose to 52.1%, and the prices paid index fell to 47.5%.

Staffers in the Los Angeles Times' business section made their annual predictions. The annual predictions are "based on interviews with analysts, investors and executives, along with some educated guesswork," the article related.
The Chandlers' comeback: Tribune Co. is bought by the Los Angeles newspaper dynasty that is its largest shareholder, which is intent on avoiding a huge tax bill had the company — owner of the Los Angeles Times, the Chicago Cubs, KTLA-TV Channel 5 and many other properties — been sold off piecemeal.
It should be noted the LA Times, once owned by the Chandler family, was sold to the Tribune Company.

Ford Motor Co. on Wednesday posted a 12.8% decline in December U.S. auto sales to 233,621 vehicles. Most of the weakness came from the truck side, which saw a 14% drop to 163,003 units. Meanwhile, GM's sales fell 13%.

Richard Daughy points out that Roger S. Renken of the Northwest Territorial Mint writes of "An interesting new development. I have had 2 separate clients be limited in the amount of money they are allowed to wire transfer to $100k in one day." I think one should ponder the ramifications of this action.

February gold fell $8.20, or 1.3%, to close at $629.80 an ounce Wednesday, the contract's lowest level since Dec. 26. March silver closed at $12.67 an ounce, down 26.5 cents. March copper dropped 22.2 cents, or 7.7%, to end at a nine-month low of $2.649 a pound. Those declines did not surprise me. The huge drop in crude did catch me by surprise. I was not prepared for this one-day decline to $58.32. Crude oil in New York has fallen 16 percent in the past year when measured in euros, 17 percent in British pounds and 4.9 percent in yen. When you are a foreign producer and receive dollars for your crude, foreign currencies and their value related to dollars really makes a difference.

George Ure: "While it seems to be falling, the fact is that oil has a sort of intrinsic value. When folks see the price of oil bouncing around, it's only the exceptional investor that looks at oil and says "Hmmm...the value of the money/medium of exchange may be flopping around a bit underlying it all..."

On January 4, people will demonstrate at the opening of Congress. Protesters from up and down the East Coast, some dressed in orange Guantanamo torture jumpsuits, will
demand that Congress investigate and hold accountable the Bush administration for criminal liability, and that the House of Representatives immediately initiate Articles of Impeachment against Bush for "high crimes and misdemeanors."

The Fed said several members argued that recent "subdued" economic data meant that "the downside risks to economic growth in the near term had increased a little and become a bit more broadly-based than previously thought." If the Fed is worried about growth, what implications might that be for the dollar?

Mortgage Lenders Network USA, a large U.S. subprime lender, said it has stopped funding loans and accepting applications for loans, citing deteriorating conditions in the mortgage market, and has temporarily laid off about 80% of its 1,800 employees.

Mike Shedlock: "Attitudes can only go so far before they reverse course. When consumers were camping out overnight to buy condos and knocking on strangers’ doors and getting into bidding wars to buy houses, that trend was bound to reverse. With negative savings rates for 18 consecutive months, that trend is bound to reverse. The belief that nothing can shatter U.S. consumer spending habits will be the next bubble to burst. Given that consumer spending is 75% of the economy, a massive reversal in consumer and lending psychology spells trouble for inflationists (and the economy), regardless of what the Fed does. That reversal is at hand."

Con-way Inc. after Wednesday's closing bell said it now expects fourth-quarter earnings from continuing operations of 72 cents to 76 cents a share. The company had previously forecast per-share earnings from continuing operations of 81 cents to 87 cents a share for the quarter.

Tuesday, January 02, 2007

More Data Points

1/3/06 More Data Points

The NTC Economics/Royal Bank of Scotland purchasing managers index for manufacturing in the euro zone unexpectedly slipped to 56.5 in December from 56.6 in November. A similar poll of U.K. manufacturing also fell, to 51.9 in December from 52.5 in November.

February gold climbed $3.80 to $641.80 an ounce in electronic trading on CME Globex. March silver was up 23 cents, or 1.8%, at $13.165 in electronic trading.

The dollar was weak against the euro, pound, and the yen.

Lennar slashed its fourth-quarter profit forecast by as much as 46 percent, citing lower profit margins amid the deteriorating U.S. housing market.
Lennar Chief Executive Stuart Miller said "Market conditions continued to weaken throughout the fourth quarter and we have not yet seen tangible evidence of a market recovery." So much for the turnaround in the housing market.

Steel products maker Nucor Corp. said Tuesday it has offered $1.07 billion for Canada's Harris Steel Group Inc. whose board is recommending that its shareholders accept the all-cash bid.

John Hussman: "Contrary to popular assertions, the recent advance is emphatically not the result of an ocean of “liquidity.” The rate of money growth has slowed considerably both domestically and abroad, particularly on an inflation-adjusted basis. Mortgage equity withdrawal is also slowing. Foreign central banks continue to tighten. What we're seeing is not liquidity, but risk-blindness. Corporate and junk yield spreads are very narrow, which has allowed private-equity investors to acquire capital for risky acquisitions at nearly risk-free rates. If you think about it from an overall equilibrium standpoint, what's really going on in a leveraged buyout is that certificates of stock ownership are retired, and certificates of debt are created (though the holders of those certificates may not be the same). Equity risk is thereby transformed into default risk, that's all. Presently, dangerously thin equity risk premiums are being transformed into dangerously thin default risk premiums. The bagholders here will ultimately be investors who purchased that debt, either directly or indirectly through hedge funds, but it may take a while." I recommend all readers study this observation from John Hussman. You do not want to ever be blind to risk.

According to the WSJ, a U.S. "troop surge" in Iraq could trigger a surge in oil prices, too, warns Bank of America chief market strategist of global wealth & investment management Joseph Quinlan, according to a Washington Wire report. Mr. Quinlan figures a troop surge could "push oil prices closer to $70 a barrel, in the near-term, knocking the wind out of the financial markets and global economy."

Monday, January 01, 2007

News In The new Year

1/2/07 News In The New Year

Wal-Mart Stores Inc. estimated on Saturday that December sales rose 1.6 percent at its U.S. stores open at least a year, beating its forecast of flat to up 1 percent. We still don't know the full impact of gift cards, and I anticipate they will spur growth for the company in January and possibly February.

3,000 of our troops have now died in Iraq. That does not describe the horrors experienced by the tens of thousands physically wounded and the thousands returning home with psychological impairments. When will those responsible for this horrific decision to invade Iraq, when will they receive their final judgment?

Slovenians were able to pay for their morning bread rolls and coffee with euros today after the former Communist country switched to Europe's single currency.

Industrial and Commercial Bank of China overtook Bank of America late last week to become the second-biggest bank in the world by market value after a dramatic 31 per cent jump in its share price on the mainland during the last week.

The exchange rate of Renminbi, the Chinese currency, is expected to appreciate by some five percent to one US dollar for 7.44 yuan, according to Xinhua Economic Analysis Report released Monday.

Nissan Motor Co. will build a 200,000 unit-a-year car factory in India with an initial investment of 50 to 60 billion yen ($420 to $500 million), the Nikkei newspaper said on Monday.

Don Hays: "Corporations last year...made over $400 billion of cash take-overs of U.S. corporations. Besides that, they bought back $600 billion of their own stock. There has never been anything like this in the history of the U.S. stock market. We now have a 3% reduction of stock available for purchase today in relation to the supply one year ago."

Financial Times: "It was the year private equity turned into a record machine. In 2006, the value of US buy-outs hit $410bn according to Dealogic, more than twice last year’s level. Blackstone raised an all-time high for a fund of $20bn. And, you guessed it, the firm struck the biggest ever deal. Its $36bn buy-out of Equity Office Properties took the crown only months after KKR had beaten its own 16-year benchmark (dating back to the RJR Nabisco acquisition in 1989). Meanwhile, debt markets made the party possible as credit spreads for high-yield debt flirted with new lows amid minimal default rates. And hedge funds fuelled the party as they searched for yield by rushing to put money into the leveraged loan market."

Sunday, December 31, 2006


1/1/07 2007

I would like to take this opportunity to wish you and your families a very happy and healthy New Year. I want to do something a bit different and will provide a forecast for 2007. In my view it will be highly volatile year-- in politics, in weather conditions, in the economy, and in the stock market. Let's get specific.
Please do not move to commit me. My initial prediction is that Bush and Cheney will not be president and vice president by the end of 2007, and that the country will have its first female as president, Nancy Pelosi.
I believe there will be a winter prior to Spring 2007 and would take advantage of natural gas prices as a trading vehicle. The range most likely will be between $5.50 and $9.50.
The drought in some areas of the country and outside our borders will come into play once again in 2007. That will make for increased demand for water and for several soft commodities.
The dollar will decrease in importance as an instrument of trade, and there will be a move towards trading bonds, equities,and commodities in both dollars and euros and possibly even yen.
A major focus will be on 2008- for China and the Olympics and for the U.S. presidential election. China's infrastructure demands will continue to increase and press supplies of various construction supplies. Thus, inflation will be alive and well.
As for interest rates, they will follow the path of inflation. The Fed will do their part, and will continue to print money at a 5-6% rate, and thus, depreciate the value of your dollar holdings by a similar rate.
As for the stock market, the VIX will no longer be forgotten. It will be alive and well. There will be large swings in the equity indices, and a range of 25% from the highs and lows would not be a surprise.
What stocks would I buy for 2007? I would buy Interactive Brokers when it goes public this year. In addition, I would buy the following: USO, BJ Services, Helmerich and Payne, Bronco Drilling, Nabors, and the Tribune Company.
Lastly, it is wise to remember that, in many instances, it is cheaper to buy a company than to build from scratch. As such, M&A activity will remain at a high level.