Saturday, March 24, 2007

More Thoughts

3/25/07 More Thoughts

Doug Noland: "It is worth noting that the primary dealer “repo” positions, as reported by the New York Fed, have increased about $280bn y-t-d (to a record $3.73TN) Global central bank balance sheets are experiencing unprecedented expansion, with this ballooning also having accelerated as of late. Additionally, there is little indication that the global leveraged speculating community has toned down its aggressive posture or that the boom in global derivative markets has begun to wane – subprime notwithstanding...And how can a boom in Credit derivatives (“doubled each year for the past five years” to $20TN) not be quite alarming?...Much of this risky mortgage exposure now resides in various securitizations and derivatives (including CDOs). It is, then, today not fair to ponder the facilitating role derivatives played in this huge and destabilizing Flow of Risky Credit. How significantly did the capacity of Wall Street “structured finance” to transform a large percentage of these weak Credits into highly-rated and liquid securitizations (“Moneyness of Credit”) abet the boom in risky mortgage Credit? Clearly, derivative market risk intermediation was integral to the flood of finance into the subprime space. Marketplace risk perceptions were drastically distorted during the boom, and we’re certainly seeing similar dynamics today throughout corporate and M&A finance...Analytically, I would instead stress the proposition that Credit and speculative excesses foremost inherently distort market pricing mechanisms. The process of ongoing excess promotes, throughout the Financial Sphere, unsustainable financial flows, unrealistic expectations, and increasingly weak and susceptible debt structures. In the Economic Sphere, the inflationary process promotes a misallocation of resources and structural maladjustment."

China's oil demand may rise 29 percent by 2010 from last year's levels, said an official from China National Petroleum Corp. Oil demand may reach 455 million metric tons (about 9.14 million barrels a day), Gong Jinshuang, senior research engineer at China's largest oil company, said in Beijing. Imports may increase to 250 million tons, accounting for more than 50 percent of demand, he said. In my view, there is little likelihood that oil producers will keep up with the growing oil demand from China, India, and other developing countries in future years. To think otherwise is unfounded optimism.

Kurt Richebacher: "The indispensable first condition for proper resource allocation at a national as well as global scale is avoidance of excessive money and credit creation. In many countries, and in particular in the United States, they are excessive as never before...In our view, the obvious major risk for speculation is in the economy - that is, in the impending bust of the gigantic housing bubble. Homeownership is broadly spread among the population, in contrast to owning stocks. So the breaking of the housing bubble will hurt the American people far more than did the collapse in stock prices in 2000-02. For sure, the U.S. economy is incomparably more vulnerable than in 2001. Another big risk is in the dollar."

John Mauldin: "Last year there were 400,000 foreclosures. (Moody's) estimates that that number will double in 2007. That means that there will be an additional 800,000 homes added to the supply of existing homes this year, which is at a seasonally adjusted 6.69 million homes. Doing the back-of-the-napkin math, that suggests there are about 3.6 million homes for sale on the market today. We could see that number grow by as much as 15-20% due to foreclosures alone over the coming months, as more homes go through foreclosure. Remember, the record foreclosures we are seeing today started as problems six months ago (or more in some states). As delinquency rates are rising sharply, the number of foreclosures six months from now is going to be even higher. It will take several years for this problem to work itself out."

Crain's Chicago Business: "Billionaire investor Sam Zell has presented a $33-per-share proposal for Tribune Co., according to a published report. A special board committee received details of the proposal this week, the Los Angeles Times reported in a story on its Web site Friday, citing a person familiar with negotiations who spoke on the condition of anonymity because deliberations are supposed to be confidential. A $33-per-share bid would be a $2.47 premium over Tribune's closing price of $30.53 Friday on the New York Stock Exchange."

The Oil Drum: "President Hugo Chavez said China is set to rival the United States as Venezuela's top oil buyer as he announced new plans with the Asian powerhouse to jointly ship oil, build refineries and expand crude production...The first full year of Peak Oil, that is structural undersupply simultaneously affecting markets in different world locations, is at minimum possible, and increasingly probable for June 2007-June 2008."

According to Bloomberg, Porsche AG, Volkswagen AG's largest stakeholder, said it will make a takeover offer for Europe's biggest carmaker after increasing its stake in the company. Porsche's supervisory board authorized the company to increase its holding to 31 percent from 27.3 percent of the voting shares, Stuttgart, Germany-based Porsche said in a statement today. The offer price will be 100.92 euros per ordinary share, the sports-car maker said. Volkswagen shares closed at 117.70 euros yesterday, valuing the company at 42.7 billion euros ($56.7 billion.).

Bill Bonner: "Unlike the Spartans at the Battle of Thermopylae, the small group of men who goaded President Bush into Iraq did so at no great personal sacrifice. It is the common man who will suffer the greatest sacrifice of this War on Terror."

John Quincy Adams: "America does not go abroad in search of monsters to destroy.”

U.S. inflation is likely to drop to 2 percent from about 2 1/4 percent, but pushing it below that may require higher interest rates, Federal Reserve Governor Frederic Mishkin said on Friday. Mishkin said he is "reasonably optimistic" that core inflation will drift down. But the process will take a while because of the recent rebound in prices for gasoline and petroleum products, he said.

Friday, March 23, 2007


3/24/07 Fireworks

Iran has captured 15 British sailors at gunpoint. The British Ministry of Defense said the men and their boats were seized off the coast of Iraq after they inspected a merchant ship.

The Oil Drum: "US Energy Secretary Samuel Bodman has called for the planned Iran-Pakistan-India gas pipeline to be abandoned, saying it could help Iran build nuclear weapons, according to a report on Friday. "There have been talks among Iran, India and other countries about finding ways of developing Iran's oil and gas assets," Bodman was quoted by the Hindu newspaper as saying. "If that is allowed to go forward, in our judgment, this will contribute to the development of nuclear weapons," Bodman told reporters, the Hindu said. "We need to stop this," Bodman said after attending a discussion on "Indo-US Nuclear Cooperation" organised by a business group in Mumbai, India's financial capital."

Genentech Inc. plans to bring at least 20 new molecular entities into clinical development between 2006 and 2008 and more than 30 new molecular entities into clinical development between 2006 and 2010. This is up from the prior goal of 20 new molecular entities into clinical development between 2006 and 2010. The company said it made a "go" decision for a Phase III study of Omnitarg, Herceptin and Taxotere vs. Herceptin and Taxotere for patients with HER2-positive first-line metastatic breast cancer. The company also forecast U.S. product sales for the first quarter of 2007 to be essentially flat relative to U.S. product sales for the fourth quarter. In my view, Genentech shares are one of the most promising holdings for the long-term investor.

Some executives within Citigroup are pushing for the U.S. banking giant to make a bid for ABN AMRO , which is in discussions about a possible merger with Barclays , the Wall Street Journal reported on Friday.

General Electric Co. said on Friday it would launch a $1.14 billion takeover bid for leasing firm Sanyo Electric Credit Co. to further expand into Japan's $68 billion leasing market.

Tyson Foods announced plans to sell two poultry plants in Alabama and around 400 people will lose their jobs in the acquisition.

Dendreon has a prostate cancer drug review at FDA next week.

The short interest in GE rose 20 million shares to 46 million in March.

Four years after invading Iraq, the U.S. military still does not know how many tons of explosives were stolen from the country's massive prewar stockpiles or how many weapons caches remain unsecured, according to a government audit made public Thursday. The next question is how many dollars (cash) were utilized to buy favorable views from Iraqi officials on the war. Where did the cash come from?

Paul Kasriel: "
Today the Conference Board reported that its index of Leading Economic Indicators (LEI) for February declined by 0.5% on the heel’s of January’s downwardly revised 0.3% drop. The January-February LEI average is down 0.49% from its Q1:2006 average. If the January and February levels of the LEI are not changed after revisions, then in order for the first quarter’s LEI average to equal that of Q1:2006, the March LEI would have to increase 1.7%. The last time the month-to-month increase in the LEI even approached this magnitude was back in March 2004, when it increased 1.4%. So, as of right now, the odds favor the first quarterly average year-over-year contraction in the LEI of this current economic expansion. If, in fact, we are about to witness a year-over-year decline in the quarterly average of the LEI, would that be a big deal, cyclically speaking. History shouts, “YES!” A year-over-year contraction in the quarterly average LEI has heralded every recession (vertically shaded areas) since that of 1960, yielding only one false signal. That false signal occurred in late 1966 through early 1967. Back then, this period of economic turbulence was called the “mini-recession of 1967.”

An official with Iran's oil ministry says 60% of payments are now made in non-dollar currencies.
The U.S. has been trying to prevent overseas banks doing dollar deals with Iran, a move which Washington leaders think could undermine the Iranian economy.
However, Tehran has proved those efforts ineffective by introducing a currency shift in crude deals.
Iran has succeeded in ensuring that almost all European and some Asian clients have agreed to pay in currencies other than U.S. dollars, a senior oil official said on Thursday.

The Federal Reserve helped create a “perfect storm” in the US subprime mortgage market that could expose up to 2.2m more Americans to the threat of home foreclosure, Chris Dodd, chairman of the Senate Banking committee, said on Thursday.

The pace of U.S. existing home sales rose an unexpected 3.9 percent in February to a 6.69 million-unit annual rate as mild weather spurred home buying, the National Association of Realtors said on Friday. It was the biggest rise since an matching increase in March 2004. Inventories rose 5.9 percent to 3.748 million units available for sale, or a 6.7 months' supply at the current sales pace.

In an article Thursday by staff reporter Michael Oneal and media columnist Phil Rosenthal, the Chicago Tribune reports that Zell's bid "has regained the attention" of directors in charge of Tribune's "strategic review" of options, including outright sale of the company.
Quoting unnamed sources, the Tribune reported the board of director's special committee met by conference call Wednesday night to review Zell's proposal, which the paper said had been "tweaked."

Banknorth Inc. plans to cut 400 jobs and shut up to 24 branches as part of its plan to lower operating expenses by 5 percent to 8 percent by 2008.

The 2-year and 10-year government bonds both closed at a yield of 4.61%. We should carefully keep an eye on this relationship.

May crude rose 59 cents to close at $62.28 a barrel. The contract finished the week with a gain of $2.70. May natural gas fell 5.1 cents to close at $7.269 per million British thermal units, but it was up 5% for the week.

April gold fell $6.90 to close at $657.30 an ounce Friday but the contract finished the week $3.40 higher. May silver fell 1.9%, or 25 cents, to close at $13.23 an ounce, up 1.5 cents for the week. May copper fell 0.4 cent to end at $3.069 a pound for the day to end the week 1.9% higher.

The number of rigs drilling for oil and natural gas in North America fell by 158, or 7.4%, to 1,991, according to a weekly update by Baker Hughes Inc. The U.S. rig count rose five from last week to 1,745, while the Canadian rig count dropped 163 to 246. The U.S. offshore rig count fell by two to 74.

On Thursday and Friday unusual option trading continued in the BJ Services call options. The high level of activity centered mostly on the April $30 calls where 13,500 options traded over those two days and the $27.50 in the money calls with about 7800 options trading. Even the $32.50 calls traded 1550 options.

Thursday, March 22, 2007


3/23/07 Focusing

Japan's trade surplus grew 7.7% in February from a year earlier, the Ministry of Finance said Thursday. The trade surplus rose to 979.58 billion yen ($8.34 billion) from a year earlier. Economists surveyed by Dow Jones Newswire had forecast the trade surplus would shrink 30.7%. Japan's trade deficit with China rose 21-fold to 308 billion yen ($2.62 billion). The widened trade gap reflected a sharp rise in Chinese clothing imports which rose 61.3%.

The dollar is sitting at a two year low vs. the euro.

After Wednesday's gains, the S&P 500 has moved back above its 50-day moving average.

Chicago Tribune: " Tribune's special committee met via conference call Wednesday night to review Zell's proposal, which these sources believe was altered to change the mix of debt and equity.
It was one of a series of such meetings that one source said is expected to lead up to a full board meeting on March 30, when the company is scheduled to make a decision about its future after six months of deliberation. The outcome of the meeting, if any, was unclear.
"They're constantly negotiating," said this source. "Zell's deal fell out of favor for a brief period, but now it's back."... One source close to management said the company also is starting to wonder whether Zell's deal would be better for employees and the ongoing enterprise.
Because the deal would create an ESOP and change Tribune's corporate structure, the new company would enjoy substantial tax savings. As a result, although the Zell deal would involve more debt than the "self-help" plan, it would also create more cash flow, which makes the strain on the company about the same, this source said.
Moreover, it would likely allow the company to pay a higher price for the outstanding shares than the value created by the self-help deal. That would benefit both outside shareholders, including the Chandlers and the company's second-largest shareholder, the McCormick Tribune Foundation, as well as employees who hold shares in 401(k) plans."... "There's huge potential downside for employees and huge potential upside," said this source. "But leveraging up any other way is just as risky."

George Ure: "The Federal Reserve Bank (Bernanke) desperately wants to lower the interest rates to save the housing market. This move by China could force the Federal Reserve to do the opposite of what it wants to do, raise the interest rate, and risk a collapse of the housing, stock and other US markets. Even worse, if China decides to actually start selling the Treasury Bonds it’s already accumulated, it’ll force the Treasury to buy them back. Purchase of Bonds by the Treasury acts to increase the amount of dollars circulating in the US. Increased dollars = Inflation. Worse still, if China’s sale of Bonds sparks (panics) other countries to sell the Treasury Bonds that they have accumulated, it would force a massive buy-back of Bonds by the Treasury. Massive buy-back by the Treasury = massive increase in circulating money = Hyperinflation."

KB Homes Chief Executive Jeffrey Mezger: "Profit margins on our 2007 first-quarter deliveries were constricted due to the persistent imbalance in housing supply and demand that is fueling intense competition and pricing pressure among home builders and other participants in the new home and resale markets," the CEO said in a statement. "We believe these conditions will likely continue for at least the remainder of 2007."

The number of Americans signing up for state unemployment benefits fell to the lowest level in six weeks in the week ending March 17, the Labor Department reported Thursday. Seasonally adjusted initial claims fell by 4,000 to 316,000. The four-week average of new claims fell by 3,750 to 326,000. Both figures are the lowest since the week of Feb. 3. Initial claims had risen to a 17-month high in early March. Meanwhile, the number of people collecting unemployment checks fell by 69,000 to 2.50 million in the week ending March 10, also the lowest in six weeks. The four-week average of continuing claims fell by 1,250 to 2.56 million, after hitting a 13-month high the previous week.

Arizona is the only state in the Four Corners region with no natural-gas storage, leaving it open to potential shortages.

John Rubino: "In the mid-1990s, the FHA started insuring riskier loans. Borrowers were no longer required to make a down payment. Lenders could arrange larger loans simply by projecting that a borrower's income was likely to increase. The share of Americans who own homes rose to almost 69 percent last year from 65 percent in 1996. The FHA was responsible for a share of the increase. So were subprime lenders, which make loans with high interest rates to the same people traditionally served by the FHA. But now the number of foreclosures also is pushing into record territory, driven by defaults on FHA and subprime loans, according to estimates made by the lending industry. "The mortgage industry has said they have increased home ownership," HUD's inspector general, Kenneth Donohue, told a U.S. House committee last week. "However, at what cost to the American people?"

Roger Cole, the director of the Fed's banking supervision and regulation division, warned in congressional testimony that more borrowers may face problems. "Some borrowers are clearly experiencing significant and personal challenges, and more subprime borrowers may join these ranks in the coming months," Cole said in testimony prepared for a Senate Banking Committee hearing on the U.S. mortgage market.

The Conference Board said Thursday their index of leading economic indicators fell 0.5% in February. Four of the 10 indicators increased in February. The index is up 0.2% in the past six months. "The housing and manufacturing sectors are clearly going through a correction, but the consumer sector appears to be holding up," said Ken Goldstein, labor economist for the private research organization, in a press release. "That mix should generate moderate but choppy growth ahead."

In February, employers took 1,280 mass layoff actions, seasonally ad-
justed, as measured by new filings for unemployment insurance benefits
during the month, the Bureau of Labor Statistics of the U.S. Department
of Labor reported today. Each action involved at least 50 persons from
a single establishment; the number of workers involved totaled 143,977,
on a seasonally adjusted basis. The number of mass layoff events in-
creased by 43 from January, and the number of associated initial claims
rose by 17,609. During February, 419 mass layoff events were reported in
the manufacturing sector, seasonally adjusted, resulting in 64,072 initial
claims. Compared with the prior month, mass layoff activity in manufacturing
increased by 30 events and by 12,931 initial claims.

Sun Tzu: "When the leader is morally weak and his discipline not strict, when
his instructions and guidance are not enlightened, when there are no
consistent rules. Neighboring rulers will take advantage of

Bernanke: "Credit risk is a very important topic."

Natural-gas inventories climbed 17 billion cubic feet for the week ended March 16, the Energy Department said Thursday. Total stocks now stand at 1.533 trillion cubic feet, down 279 billion cubic feet from the year-ago level, but 239 billion cubic feet above the five-year average, the government data said.

April gold closed at $664.20 an ounce, up $4.20 and May silver rose 1.2%, or 16 cents, to close at $13.48 an ounce. May copper gained 5.4 cents to close at a three-month high of $3.073 a pound.

Forecasts for an active 2007 hurricane season have provided underlying support for natural gas and crude oil. Crude and natural-gas futures closed Thursday at their highest levels in about two weeks. May crude closed at $61.60 a barrel, up 3.5%, or $2.08, while April natural gas finished at $7.32 per million British thermal units, up 2.2%, or 16 cents for the session.

Wednesday, March 21, 2007

The Numbers

3/22/07 The Numbers

The American Petroleum Institute reported a rise of 5.7 million barrels in crude supplies for the week ended March 16. The Energy Department had reported a climb of 4 million barrels. Motor gasoline supplies were up 753,000 barrels, the API said. The government reported a fall of 3.4 million. Distillate supplies were down 168,000 barrels, the API said, compared with the government's 1.7 million-barrel decline.

Thomas Weisel Partners analyst Eric Gomberg said he believes Advanced Micro Devices is planning a round of price cuts, on the order of 30% to 35%, and may tap the financial markets to offset expected negative free cash flow through most of 2007.

Pat Buchanan: "For it was Pelosi who quietly agreed to strip out of the $100 billion funding bill for Iraq a provision that would have required President Bush to seek congressional approval before launching any new war on Iran. Pelosi's capitulation came in the Appropriations Committee...According to John Nichols of The Nation, Pelosi's decision to strip the provision barring Bush from attacking Iran without Congress' approval "sends the worst possible signal to the White House." "The speaker has erred dangerously and dramatically," writes Nichols. Her "disastrous misstep could haunt her and the Congress for years to come."

President Vladimir Putin on Wednesday ordered officials not to state Russian financial matters in currencies other than the ruble.

Equities took off on Wednesday as the Fed considered risks to the economy on an equal footing with inflation risks. The Fed release omitted the clause seen in recent statements that "additional firming may be needed." I guess the glass is considered half full or possibly the bearish sentiment was a good contrary indicator coming into Monday of this week.

May crude rose 36 cents to close at $59.61 a barrel. April natural gas rallied 3.6%, or 25 cents, to close near a two-week high of $7.16 per million British thermal units ahead of Thursday's update on U.S. natural-gas supplies.

April gold was last quoted at $660.30 an ounce. May silver fell by 5 cents to close at $13.32 an ounce and May copper shed 1.5 cents to close at $3.019 a pound, a day after closing at a three-month high.

Hancock Fabrics Inc. and its subsidiaries on Wednesday filed a voluntary petition for Chapter 11 relief in the U.S. Bankruptcy Court for the District of Delaware.

Motorola announced a big management shake up. The company expects a first quarter loss of 7 to 9 cents.

Sam Zell said Tuesday that he remains in talks with Tribune Co. and his proposal to acquire the media conglomerate still is on the table. In an interview with The Associated Press, Zell said he doesn't believe his proposal has lost momentum or fallen out of favour with Tribune, as some reports have suggested.

Tuesday, March 20, 2007


3/21/07 Thoughts

NYSE Margin Debt Advanced 3.6 Percent to Second Straight Record reaching $295.9 billion in February.

Carl Futia: "I think the rally phase which began from the March 14 low is just about over even though neither the Spiders nor the Q's managed to reach my upside targets. The next significant move should be a swing down to the ultimate low of the correction which began from the February 22 top. The downside targets are 1360 in the futures, 135.00 in the Spiders, and 41.00 in the Q's.
I don't think the bull market which began from the 2002 low points is over. I expect all three markets to make new bull market highs within the next three months."

Fremont General Corp. of Santa Monica, a sub-prime lender, said it had told "significant numbers" of its 2,400 home-loan employees to expect pink slips in two months.

Nouriel Roubini: "The sub-prime and overall mortgage carnage is now likely to lead to a financial crisis whose cleanup and bailout costs will make the S&L bailout bill look like spare change. We are only at the beginning of this fallout but, already, several proposals and bills in Congress have been submitted to help millions of sub-prime homeowners on the verge of bankruptcy and foreclosure. The prospect of millions of homeowners thrown homeless on the street is already shaking politicians of every stripe. The relatively modest bailout envisaged by the first bills currently proposed in Congress will mushroom into a much bigger fiscal bailout of homeowners, borrowers and lenders once the garbage of sub-prime, near-prime and pseudo-prime toxic waste spreads around the economy and likely leads to a hard landing recession that will cause a much bigger financial and banking crisis."

The Financial Times said Dubai Aerospace Enterprise is in talks with private equity operation Carlyle Group to buy Landmark Aviation and Standard Aero.

Paul Kasriel: "With the release of the February 2007 CPI data, this combination has reappeared. The real monetary base in February was down 0.5% year-over-year and the spread was negative by 54 basis points. As things now stand, in order for the first quarter of this year to have a positive year-over-year change in the real monetary base, the March value of the real base would have to be about 0.2% above that of March 2006. With the year-over-year increase in the March CPI likely to be around 2.3%, this would require a year-over-year increase in the March nominal monetary base of 2.5% in order to get a positive year-over-year change in the real monetary base. The fact that this combination exists on a one-month basis suggests that the conditions for a recession to develop exist, but are not yet sufficient to suggest that a recession is imminent. So, I have put up the recession watch flag, not yet the recession warning flag. But stay close to your weather radio."

Housing starts increased 9% to a seasonally adjusted annual rate of 1.525 million in February from a revised 10-year low of 1.399 million in January. Starts are down 28.5% compared with February 2006. Building permits, which are not as affected by weather, fell 2.5% in February to a seasonally adjusted annual rate of 1.532 million from 1.571 million in January. Permits are down 28.6% compared with February 2006.

Affiliated Computer Services on Tuesday received a proposal to be acquired by a group led by Darwin Deason, its founder, and private equity firm Cerberus Capital Management L.P. for $59.25 per share. The total value of the deal, including debt, is about $8.2 billion, according to a press release from Deason. Do you remember Drexel Burnham in the 1980's and their "highly confident" letters? Guess what. Citigroup Global Markets has provided a letter to Deason's group saying its "highly confident" of its ability to raise the debt necessary to complete the transaction. As they say, only the names have been changed to protect the innocent.

ICSC expects March's reported sales to grow 4% to 5% as the earlier Easter this year will inflate the March performance at the expense of April.

Swiss chocolate maker Chokoladefabriken Lindt & Spruengli AG said Tuesday that full-year profit rose 21 percent after the company boosted sales in North America. Net income rose to 209 million Swiss francs (US$172.8 million; euro129.9 million), from 172.7 million francs, the company said in a statement. Sales gained 15 percent to 2.59 billion francs (US$2.14 billion; euro1.61 billion) as the company posted sales of more than US$500 million (euro375 million) in North America for the first time. "Through higher sales in every important market segment, not least owing to many innovative products and outstanding marketing activities, the group once again outpaced the growth of the overall chocolate market many times over," Lindt said in a statement. Lindt is also the owner of the Ghirardelli chocolate brands

Lear Corp.'s board is recommending that shareholders of the auto parts supplier vote in favor of a buyout offer valued at about $2.8 billion from a group affiliated with Carl Icahn, according to a federal filing Tuesday. Under the agreement proposed last month, Icahn-controlled American Real Estate Partners LP is paying $36 a share.

Altria shareholders will receive 0.692024 of a share of Kraft - whose brands include Oreo cookies, Oscar Mayer meats and Ritz crackers - for each share of Altria common stock owned as of 5 p.m. EDT on the record date March 16. On March 30, Altria will distribute all of the shares of Kraft that it owns, or about 88.9% of Kraft's outstanding shares, as of the record date. Altria shareholders will receive cash in lieu of fractional shares for amounts of less than one Kraft share, the company said.

Richard Daughty: "But foreigners slurped up another huge $15 billion load of government and agency debt last week, so we still have "selling ourselves to foreigners" going for us, but purely as a stopgap scheme, you understand. We are assured that a blessed miracle will appear shortly. One has never appeared before, but this time, they say, it will - although for some reason that they can't say. Right."

The Middle East and North Africa will become the world's ``fourth center of private equity'' as increasing wealth and population attract global buyout companies, according to Carlyle Group co-founder David Rubenstein.

The FBI engaged in widespread and serious misuse of its authority in illegally gathering telephone, e-mail and financial records of Americans and foreigners while hunting terrorists, the Justice Department's chief inspector said Tuesday.

Halliburton Co. said Tuesday it now expects first-quarter earnings to come in below analyst consensus estimates and forecast per-share earnings of 49 cents to 54 cents for the quarter. Analysts surveyed by Thomson Financial are currently looking for first-quarter earnings of 59 cents a share. The company stated "during the first quarter, the Production Optimization and Fluid Systems Divisions of Halliburton’s Energy Services Group have experienced reduced activity in North America. A significant portion of these lower than anticipated results is attributable to decreased drilling and completion activity in Canada and the northern United States."

With a 94-2 vote, the Senate passed a bill that canceled a Justice Department-authored provision in the Patriot Act that had allowed the attorney general to appoint U.S. attorneys without Senate confirmation. Democrats say the Bush administration abused that authority when it fired the eight prosecutors and proposed replacing some with White House loyalists.
"If you politicize the prosecutors, you politicize everybody in the whole chain of law enforcement," said Judiciary Committee Chairman Patrick Leahy.

A weekly gauge of consumer attitudes fell 7 points to negative 5 this past week, matching the largest one-week decline in the 21-year history of the ABC/Washington Post consumer comfort index.

April crude closed up 14 cents at $56.73 a barrel Tuesday. May crude, which became the front-month contract at the day's end, fell by 45 cents to close at $59.25.

April gold rose $4.70 to close at $659 an ounce. May silver gained 13.7 cents to also close near a three-week high of $13.37 an ounce and May copper finished at a three-month high of $3.034 a pound, up 1.25 cents.

Monday, March 19, 2007

Happenings and Observations

3/20/07 Happenings and Observations

John Hussman: "Stocks remain very richly valued. The bait taken by investors here is the belief that the market's “price-to-forward operating earnings” ratio is reasonable. Unfortunately, this morsel of bait carries a very sharp hook. “Forward operating earnings” did not even exist prior to the 1980's, and if one proxies it historically as Cliff Asness has done (based on how it relates to other fundamentals with longer records), you find that the historical norm of “price-to-forward operating earnings” is about 30% below current levels. Adjusting for the present elevation of profit margins, the normalized level is probably even lower. In short, the evidence does suggest that investors are holding onto a thread of willingness to speculate, which allows us to hold a modest exposure to market fluctuations through call options here. But that thread is short and thin – another 2% of downside, say, on a weekly closing basis, would be enough to suggest breakage. So with valuations rich on the basis of historically reliable fundamentals, our investment position is constructed to behave as a fully-hedged stance fairly quickly into any further decline, while still retaining a modest benefit of the doubt through call options."

Business Week: "China and India are producing more holders of advanced degrees, a new study says, and that's the real challenge to American competitiveness."

According to the Financial Times, only 18 per cent of Iraqis have confidence in US-led forces, a new poll showed on Monday, as US President George W. Bush faced anti-war protests at home four years after the invasion that toppled Saddam Hussein. What percentage of Americans trust Bush and Cheney?

Clayton Dubilier & Rice Inc. agreed to buy ServiceMaster Co. for about $4.7 billion, gaining the U.S. owner of TruGreen ChemLawn and Terminix pest control. The leveraged buyout firm will pay $15.63 a share in cash for the company, 16 percent more than the March 16 closing price.

Brett Steenbarger: "The equity put-call option data tell us that bearish sentiment is off the chart. Literally.
My data show that we have seen 12 of the last 15 trading sessions in which the volume in equity put options has exceeded the volume in equity calls. To put that into perspective, from January, 2001 through mid-February, 2007, we only had a total of 44 days (out of 1527!) in which put volume exceeded call volume among equities.
Moreover, we've had several days recently (February 27 and March 13 stand out) which have seen higher put-call ratios than *any* day during the 2001-2003 bear market. Indeed, during that bear market, we *never* saw a 20-day put-call ratio exceed 1.0, as it does at present."

The Economist: "If the economy were heading for trouble, corporate bonds would surely be suffering. But, according to Moody’s, the cost of insuring against the default of a typical high-yield bond is currently below a 12-month average. And investors can hardly be blamed for being sanguine: the historic driver of spreads has been the default rate, and Standard & Poor’s says there was just one corporate default in February, keeping the annual default rate at a little over 1%. If equities have wobbled, the sell-off has been mild, even by the standards of last May. Again, it is difficult for investors to get too bearish, when every day seems to bring a multi-billion-dollar bid for a Boots or an Altadis. In the late 1990s there was supposed to be a "Greenspan put" that insured the markets; is there now a private-equity put? So it looks as if investors are undecided at the moment—caught between worrying economic data, and the strong technical position (good cashflows) of the market. When investors are undecided, markets tend to move quite erratically. So the best bet for the moment is that volatility will continue."

Triad Hospitals Inc. said on Monday it agreed to be bought by Community Health Systems Inc. for $5.1 billion, which Community said would create the biggest publicly traded U.S. hospital chain. Community agreed to acquire Triad for $54 per share in cash, or about $6.8 billion, including $1.7 billion in debt. The new company would run about 130 hospitals.
Hercules Offshore Inc. said Monday it would acquire Todco for $2.3 billion in cash and stock. The combined company would have 33 jackup rigs, 27 barge rigs, 64 liftboats, three submersible rigs, nine land rigs and one platform rig. Todco shareholders will receive 0.979 shares of Hercules Offshore and $16 in cash for each share of Todco common stock outstanding. The premium points out the undervalued position of so many oil and gas companies in today's market. There will be a great deal more consolidation and the big premiums should come as no surprise to the patient investor.

"You're going to see continued [inflationary] pressure," predicts Michael Darda, chief economist at MKM Partners, an investment firm in Greenwich, Conn. "Firms will find the pricing power [to pass along increased costs]. I think it is a broad-based issue."

Martin Whitman: "Because The Stock Exchange of Hong Kong Limited (“Hong Kong Stock Exchange”) seems to be relatively inefficient compared to U.S. equity markets, it is sometimes possible to acquire the equities of extremely well-financed companies at prices that represent substantial discounts from the discount prices at which the publicly-traded common stocks of shares owned in controlled subsidiaries are selling. Two of these “double discount” issues – Hang Lung Group Common and Henderson Investment Common – were acquired during the quarter."

Paul Craig Roberts: " We are faced with the almost certain fact that the two highest law enforcement officials of the United States are criminals." Link to the entire article:

Remarks of Salt Lake CityMayor Ross C. "Rocky" Anderson at Rally for Impeachment:

Sir Edmund Burke: "The only thing necessary for the triumph of evil is for good people to do nothing."

Germany's TUI AG unveiled a tie-up of its tourism unit with Britain's First Choice to boost its position as Europe's biggest travel firm in the face of new competition from merging rivals. The two firms said on Monday they planned to create TUI Travel Plc, a London-based tourism giant with about 12 billion pounds ($23 billion) of revenues, just weeks after rivals Thomas Cook and MyTravel announced plans to merge.

Brazil's state-run oil company Petrobras and two partners announced a deal valued at nearly US$4 billion (euro3 billion) to buy Ipiranga, the No. 2 oil distributor and refiner in Latin America's largest nation, the companies said Monday.

Shipping company EGL Inc. said on Monday it has agreed to a management-led buyout worth $1.7 billion. EGL shareholders will receive $38 per share, $2 more than a previous buyout proposal in December. The Houston-based company said the price represents a 27 percent premium over its shares' $29.78 closing price on December 29, the last trading day before the original proposal.

Zmann: "Canadian oil imports continue to rise, hit record in January: I'd point out that Canada accounts for nearly 20% of U.S. imports (nearly half of OPEC's current total coming to the U.S.), and production there is growing slowly and has set several records in recent months...Mexico is up 190,000 bopd in January, but still at its second lowest level in the past year. This is pretty important and the one month rebound does not a recovery make:

* Cantarell -- Production at Mexico's largest field, the Cantarell offshore complex dropped by 12% in 2006, and a 15% decline is expected this year.
* Pemex just reported another paltry year for reserve replacement (41%), due to a combination of usuriously high taxes which leave little for reinvestment and a prohibition on foreign investment.
* Bloomberg reports that Pemex reserves have fallen by half since 2002.
* The Mexican congress rejected calls for opening the industry to foreign investment last year.

Comment: They won't be the third largest importer of oil to the US for long."

The Chicago Fed Midwest Manufacturing Index -- a measure of manufacturing output in Illinois, Indiana, Iowa, Michigan and Wisconsin -- fell to a seasonally adjusted level of 102.1 in January, from 104.6 in December. The Chicago Fed said in a press release that the December figure was revised from a previously reported 104.5.

The NAHB/Wells Fargo Housing Market index fell three points in March to 36 from a downwardly revised 39 a month earlier, the group said. While the March reading was up from a 15-year low of 30 in September 2006 as five years of double-digit home price gains and rising interest rates squeezed affordability, it came in well below a reading of 54 in the same month a year ago. The index shows that about one-third of builders have confidence that the housing market is healthy. "Builders are uncertain about the consequences of tightening mortgage lending standards for their home sales down the line, and some are already seeing effects of the subprime shakeout on current sales activity," said David Seiders, chief economist for the industry trade group.

April gold climbed 40 cents to close at $654.30 an ounce Monday. April silver was up 1.8 cents to close at $13.233 an ounce and May copper closed at a three-month high of $3.0215 a pound, up 1.05 cents for the day.

April crude fell 52 cents to close at $56.59 a barrel Monday. The April contract goes off the board after tomorrow's close. April natural gas fell 7.7 cents to end at a two-month low of $6.847 per million British thermal units.

The American Medical Association said Monday it has asked the Department of Justice to block the proposed acquisition of Sierra Health Services Inc by United HealthGroup Inc.

From Seeking Alpha: "The Marley Group submits: A few minutes past 12:00 Friday afternoon, a block trade of over 3 million shares of Bronco Drilling Company occurred. This single transaction alone, accounted for volume over 5 times the daily average for the past three months and represented an exchange of more than 10% of Bronco Drilling’s current market cap. Anytime a trade of such magnitude occurs, it is necessary to look into.To my knowledge, there exists only one shareholder who could have potentially executed such a large sale, Wexford Capital LLC. While an SEC Filing wont be made until Monday, it looks as if they have unloaded their remaining stake in Bronco. Under normal conditions, such extreme selling pressure would be a cause for concern, however this was an event that has been anticipated for months. Considering this knowledge, two positives can be drawn from today’s action. Firstly, the overhead resistance that Wexford’s planned unloading has caused has been lifted. Secondly, from a technical perspective, such extreme volume as was experienced today often represents a bottom in a stock’s movement. With Wexford finally out of the way, Bronco may be ready to run."
Disclosure: The author has a long position in Bronco Drilling Company.

On Monday, about 3500 BJ Services April $27.50 call options traded at $1 and approximately 10,600 of the April $30 call options traded at 32 cents with the common stock at $27.35.

Sunday, March 18, 2007

The Fourth Anniversary

3/19/07 The Fourth Anniversary

Barclays Plc has approached Dutch bank ABN AMRO with a merger plan that would create a global bank worth 80 billion pounds ($155 billion), UK newspapers reported on Sunday.
The Sunday Times said Barclays approached ABN AMRO, the Netherlands' biggest bank, after British hedge fund TCI recently called for a merger or a breakup of ABN AMRO.Barclays Plc has approached Dutch bank ABN AMRO with a merger plan that would create a global bank worth 80 billion pounds ($155 billion), UK newspapers reported on Sunday. The Sunday Times said Barclays approached ABN AMRO, the Netherlands' biggest bank, after British hedge fund TCI recently called for a merger or a breakup of ABN AMRO. Contact between the two banks is at an early stage and may not lead to a deal, the Sunday Times said, adding Barclays was "keen to act as a white knight to save ABN from its current problems."

According to the Fnancial Times, Altadis, the Franco-Spanish tobacco group, early on Saturday rejected an £8bn approach by Imperial Tobacco, saying the unsolicited bid was too low. The move came as Altria – owner of the Philip Morris cigarette brands – considered whether to intervene in the process. People familiar with the matter said they were “looking hard” at the situation.

Robert McHugh: "The Broadening Top formation is a Bearish pattern. Thomas Bulkowski, in his Encyclopedia of Chart Patterns, suggests this pattern has only a 9 percent failure rate after a breakout. He mentions the average decline is 18 percent, with the highest probability decline being 10 percent. A rule of thumb for measuring a downside target is to use half the formation's height. That measuring stick has a 91 percent success rate.
This pattern appeared in the multi-year period from 1998 through 2000, just before the 1987 stock market crash, in 1986, just before the 1972-73's 26.5 percent one-year plunge, just before the 1966 plunge, before the 1957 crash, and just before the 1929 crash. The start of the 2007 decline has already involved a mini-crash. More could come. This is a risk factor for those invested heavily in the stock market.
A 10 percent decline -- the most likely result according to Bulkowski -- would take the Dow Industrials back down to the 11,500ish area. More decline is possible. Using the rule of thumb of half the formation's height would target the 10,400ish area."

Jay DeVincentis: "We remain in Buy Mode and expect the Qs to re-testing the gap set between February 26 and 27. We anticipate the Qs to consolidate and move higher to the 44.5 level as we approach the March 24th key reversal date."

Talking to Stanford University business school students in California, Microsoft's CEO Ballmer said Google had built only one good business and “everything else is sort of cute” — in other words largely irrelevant.
This also provoked Robert Scoble’s ire. “You’re up against a formidable competitor and one you’ve never seen before that has some real, significant weapons that you can’t deal with.”
Robert Scoble writes the Scobleizer web log, one of the most-read sources of technology commentary on the internet. He owes his status to the three years he spent at Microsoft, where he was given free rein to comment on the company’s affairs from the inside.

Saturday's deaths brought to at least 3,217 members of the U.S. military who have died since the Iraq war started in March 2003, according to an Associated Press count. On Tuesday, it is the fourth anniversary of our invasion of Iraq. The Administration and the Congress should visit the homes of all members of the military who have perished, who have been wounded, and who have returned with deep emotional scars--tell those family members our invasion was worth it.

The Chicago Tribune: "The strain of war has worn down families, many of whom were unprepared for the isolation and demands of such a long conflict. Though many wives said they still believe in the mission and support their husbands, they acknowledge that they have sacrificed more than they bargained for. For this article, the Tribune interviewed only infantry soldiers. While there are many women serving in Iraq, only men serve in combat infantry units.
Divorce rates soared in 2004, the year after the war began. Among married Army officers, divorces rose 78 percent from 2003, while divorces among enlisted personnel rose 28 percent, according to the Army. Army officials credited counseling and other programs with a substantial decrease in officer divorces in 2005. Divorce rates for enlisted soldiers, however, have remained about the same.
Some couples that seemed the most committed when the war began were among those to divorce. Others continue the fight to hold their families together while battling financial woes, alcoholism, infidelity, emotional problems and injuries. Some welcomed new babies into the family. Now, women are stepping up again to take care of children alone as dad heads off to war."

Sunday's Zaman: "The week's most recent legal suicide in the US came from the FBI. According to a Justice Department report, the FBI is guilty of serious misuse of the controversial US Patriot Act, exploiting it to gather information on tens of thousands of American citizens without the proper authority. They have collected and categorized private information about US Green Card holders and citizens through 'national security letters'. Hence, FBI, an enforcer of US laws, has itself violated the law...When President Bush was asked about why no one had been held responsible for the problems in his administration during his first term, he answered: "We had an accountability moment. And that's called the 2004 elections." The Washington Post said " Two years and a stinging midterm election later, Bush is having another accountability moment, but this one isn't working out as well."

Chris Low, FTN Financial chief economist: "Because foreclosures are so high, there is a steady stream of houses hitting the market. It means the supply-demand imbalance remains for another couple of years."

"It's clear that when (investors) think of the discount sector, they have to build in this downside," said Stephen Hoch, director of Wharton Business School's Jay H. Baker division of retailing. "But if delinquencies spread, that puts banks under pressure and the entire financial system gets tighter," he said.

Plutarch: "An imbalance between rich and poor is the oldest and most fatal ailment of all republics."

"Employers are shying away from hiring Guard and Reserve personnel because they cannot run a company when someone is subject to being called away a year at a time," says Ted Daywalt, chief executive of VetJobs, which helps place veterans in the workforce.

More than 155,000 women have served in Iraq and Afghanistan, the Washington Post reported. Of those, more than 16,000 are single moms, which is an unprecedented total, military experts say. “How these women have coped and how their children are managing have gone little-noticed as the war stretches across a fourth year,” the Post noted.

It turns out that Teresa Heinz's late husband, John Heinz, regarded the deployment of single or soon-to-be mothers as barbaric, reported the Boston Globe. He thought it "questionable whether an 18-year-old tantalized by offers of tuition money has any inkling of what he or she is giving up in 'volunteering' to leave children yet to be born behind." The policy reminded Heinz "of the story of Rumpelstiltskin, the dwarf in German folklore who exacts a terrible price for helping a desperate young woman -- her first-born child."

From Seeking Alpha: "Birinyi's Ticker Sense submits: Over the last year and a half we have found that the ISM Commodities Survey has been an effective barometer of future inflation. When the number of commodities rising in price has risen, year over year CPI tends to follow in the coming months. Likewise, when the number of commodities rising in price declines, inflation has tailed off in the ensuing months. Currently, the ISM commodities survey has indicated that the number of commodities rising in price rose from the prior reading in three out of the last four months. The last time we saw this was in December 2005, which was followed by an up-tick in inflation last Spring that sent global markets reeling. While it is not necessarily pertinent to today's report, investors should keep this on their radar in the months ahead, given the indicator's past reliability. Longer term, the ISM Commodities Survey still remains below its downtrend from the peak readings in 2004."

Pakistani Prime Minister Shawkat Aziz on Sunday underlined the importance of establishment of Iran, Pakistan and India gas pipeline. Islamabad-based newspaper of 'Dawn' quoted Aziz as saying that he assigned the officials in charge of the project to finalize action plan on implementation of the tripartite project. "The project dubbed peace pipeline is considered a major element to help reinforce security in the region," he added. Pakistani government has planned to demand electricity from Iran and the Central Asian countries, the prime minister noted.

Tom Englehardt: "Seymour Hersh's recent report that Iran-Contra veterans working out of Dick Cheney's office are using stolen funds from Iraq to arm al Qaeda-tied groups and foment a larger Sunni-Shia war is a very big deal."

An interesting article on the Valerie Plame situation:

For plane builder Airbus and German airline Lufthansa AG, the A380's first flight to North America on Monday is a chance to show off the superjumbo to potential U.S. buyers and to the airports they hope will be flight bases for the double-decker jet...The air show Monday begins at Frankfurt International Airport when the 73-meter-long (more than 239 foot-long) plane takes off as Lufthansa Flight 8940 at 9 a.m. (0800GMT) for the eight-hour flight to New York's JFK Airport, scheduled to land at 12:30 p.m. (1630GMT). On board will be 550 people, mostly Airbus and Lufthansa employees along with some reporters.

White House spokesman Tony Snow said Friday the White House cannot stand by its assertions that Miers was the first to suggest firing all federal prosecutors. "At this juncture, people have hazy memories," he said. "The thing we can say with assurance is Karl [Rove] recalling she raised it." Tony, people don't have hazy memories. They just plain lie.

In the latest Newsweek poll, Bush's approval rating remains at 30%.

The Senate Judiciary Committee chairman said Sunday he intends to subpoena White House officials involved in ousting federal prosecutors and is dismissing anything short of their testimony in public.