Louisiana

8/29/05 Louisiana

U.S. Senator Mary L. Landrieu from Louisiana: “Eighty percent of the nation's offshore oil and gas supply, which is almost 30% of all the oil and gas consumed in this country, passes through these wetlands to be distributed to the rest of the nation. There are more than 20,000 miles of pipelines in federal offshore lands and thousands more inland that all make landfall on Louisiana's barrier islands and wetland shorelines. The barrier islands are the first line of defense against the combined wind and water forces of a hurricane, and they serve as anchor points for pipelines originating offshore…Port Fourchon, which supports 75% of the deepwater production in the Gulf, is the geographic and economic center of offshore drilling efforts along the Louisiana Coast. This port, and much of the nation's energy supply, is connected to the mainland by a 17-mile stretch of two-lane highway - LA 1 - that is inundated by flooding in relatively mild storms and is vulnerable to being washed out completely.”

Four of the 10 largest ports in the U.S. are located in Louisiana. The port of Southern Louisiana is the largest port in the U.S. and is a key port for both the import of crude oil as well as the export of grains.

Louisiana is losing its coastal land at the rate of 25 square miles a year.

Secretary Scott Angelle Louisiana Department of Natural Resources: “Louisiana’s coast is the land base for LOOP, America’s only offshore oil port that handles about 15% of this country’s foreign oil and is connected to more than 30% of the total refining capacity in the U.S. Much of the support infrastructure is located in the most rapidly deteriorating coastal areas.”

Offshore oil and gas production in the Gulf of Mexico is the second largest source of revenue to the Federal government. The first is taxes. Up to 90% of offshore oil and gas revenues have come from Louisiana.

Yesterday, Bush declared a state of emergency in Louisiana. It’s most unfortunate that Bush gave the orders to invade Iraq in 2003. Louisiana could have used the assistance of the 3,000 troops of the 256th Infantry Brigade of the Louisiana National Guard presently serving in Iraq.

Fed Governor Donald Kohn: "People may well perceive the economy as more stable than it is or central banks with greater power than we have to smooth the economy or to foresee our own actions...Clearly, reminders to the public of the inherent uncertainty in economic developments and policy responses are appropriate and should have some effect." As I have stated over the past year or so, Donald Kohn is my choice to replace Alan Greenspan as Fed chairman.

The only place lower than New Orleans in the U.S. is Death Valley.

It is early Monday morning and Katrina has yet to hit shore. I do not speculate about what I do not know. As such, I do not know how many folks will die from this storm, how many will be homeless, how much property damage will occur, and what impact there will be on the overall quality of life.

We do know that most refineries within the path of the storm have been shut down and personnel evacuated. Those corporate refineries include Valero, Murphy Oil, Exxon Mobil, Chevron, Conoco Phillips, and possibly, the Norco and the Convent refineries. The key to the near-term gyrations in the price of crude, gasoline, natural gas, and heating oil will be the continued shutdown of refineries and the scheduled re-opening of refineries. A great deal of information will be released. I suggest one only rely on the information released directly from individual companies and not information reported by the media. Disasters are a breeding ground for misinformation. Figures are thrown out and taken as the gospel. The media must report on the news. Obtaining the most recent facts is an on-going effort. In the case of Katrina, this may be exceedingly difficult. When in doubt, do nothing.

There have been reports that crude has traded above $70 a barrel, gasoline futures at $2.12, and heating oil at $1.97. One can be certain that volatility will become, in the short-term, the centerpiece of activity.

High gasoline, natural gas, and heating oil prices cannot be dismissed as "nuisance taxes." The rate of consumer spending is on the downswing and so is the demand for total domestic petroleum with deliveries dropping 3% in July, the largest year-to-year decline in 3 1/2 years.

Aristotle: "Probable impossibilities are to be preferred to improbable possibilities."

Stiorms Are Inevitable

8/28/05 Storms Are Inevitable

Fed Governor Donald Kohn: “"Investors have had an opportunity to observe that policy actions in 1987, 1998 and 2001-2003 cushioned the economy, but they did not stop major declines in the prices of equity in 1987 and 2001, or of risky credits in 1998."

Peter Mandelson, EU Trade Commisssioer, stated he was ready to present proposals to EU member that would release all Chinese-made garments held up in European ports by a dispute over textile imports.

According to Freddie Mac, homeowners took $59 billion in cash out of their houses in the second quarter, double the amount in the 2004 quarter and 16 times the average rate of the mid-1990s.

According to Mike Burk, the last 3 trading days of August and the 1st 2 trading days of Septemeber during the 1st year of the presidential cycle have a positive bias.

Citigroup chief economist Lewis Alexander believes the Fed will stop hiking short-term rates at 4% because “we think the economy is going to slow.”

Xinhuanet reported that the Kazakh government backs CNPC’s acquisition of PKZ. In my opinion, should ONGC/Mittal outbid CNPC, then the Kazakh government will back that bid.

"The freight for containerized cargo from November-December onwards for all major destinations like USA and Europe from India will start coming down," Vijay Chhajer chairman Chhajer & Co chairman and past president, Calcutta Freight Brokers Association said."The freight to US and Europe are projected to ease by 20-25 per cent in December-January," Chhajer said.

Hurricane Katrina has been upgraded to category 4 with winds approaching 135 miles per hour. As of yesterday, Shell, BP, at least 9 rigs, and a dozen or more platforms have been evacuated in the Gulf. This means that at least 563,000 barrels of daily crude production have been shut in due to Katrina, and approximately 2 billion cubic feet of natural gas production has already been lost. The storm is expected to hit near the major oil and gas hub at Port Fourchon, Louisiana early Monday morning and then continue to New Orleans.

It might be wise to reflect on some thoughts from Hyman P. Minsky.. He wasn’t a vaudeville comic or even a theatrical agent. He envisioned two types of finance- - - fragile and robust. Perry Mehrling wrote a book entitled “The Vision of Hyman P. Minsky. Participants at this weekend’s Jackson, Wyoming symposium might chew on the following from the book: “The degree of fragility or robustness in the economy as a whole ultimately depends on the fragility or robustness of financing arrangements at the level of the constituent economic units.”

Will Katrina prove to be another Hurricane Betsy or Hurricane Camille?

Spending Less- - Worrying About The Punch Bowl

8/27/05 Spending Less- - Worrying About The Punch Bowl

The Dollar General and Dollar Tree chains both say their largely low-income customers were making fewer visits to their stores and spending less, as a result of having to set aside more money for fuel. Then I got to wondering. Are the customers at Petsmart and Petco low-income too? I don’t believe so, but those two companies seem to be impacted by less spending. You know when they raid the whorehouse they take all the girls. It’s only a matter of time until Nordstrom, Coach, and other high-end retailers feel the pinch from $3 a gallon gas.

Doug Noland: “During Mr. Greenspan’s watch, Total US Credit Market Debt (TCMD) ballooned from (using year-end 1986) $9.8 Trillion to $37.3 Trillion (380%). As a percentage of GDP, TCMD expanded from 220% to 318%. Rest of World (ROW) holdings of US Financial Assets increased from $1.18 Trillion to $9.72 Trillion, or 826%. ROW holdings of US Credit Instruments increased 900% to $4.88 Trillion, including holdings of GSE securities which grew from $22 billion to $826 billion. Under Mr. Greenspan, Commercial Bank Assets expanded 332% to $8.713 Trillion, including a 624% increase in Mortgages. The Bank Asset “Security Credit” expanded 475% to $216 billion. The Liability “Fed Funds/Repo” increased 500% to $1.023 Trillion, while Deposits expanded 270% to $5.14 Trillion. Over this period, M3 Money supply inflated 280%. When it comes to Greenspan’s legacy, one must note that Total Mortgage Debt expanded 404% to $10.774 Trillion, with Home Mortgage borrowings up 480% to $8.282 Trillion. No group has so luxuriated in Mr. Greenspan’s leadership than Wall Street. Security Broker/Dealer Assets have increased more than ten-fold, from $185 billion to $1.941 Trillion. Broker/Dealer holdings of Credit Market Instruments jumped from $66 billion to $443 billion (670%). On the Liability side, Security Repos ballooned from $36 billion to $623 billion. Security Credit jumped from $84 billion to $777 billion. Almost walking distance from the Federal Reserve building in Washington, Fannie and Freddie perpetrated one of history’s greatest Credit expansions. On Greenspan’s watch, GSE Assets ballooned 830%, from $346 billion to $2.872 Trillion. Agency MBS (some included in GSE assets) surged 670% to $3.55 Trillion. Outstanding ABS exploded from $75 billion to today’s more than $2.70 Trillion.”

Airline consultant Alan Sbarra: "I don't think that the legacy carriers can survive long term with prices the way they are without more restructuring, The crazy thing about fuel prices is not just the level where they are, but how fast they got there."

The Seattle Federal Home Loan Bank asked the Securities and Exchange Commission (SEC) yesterday to withdraw its preliminary registration statement, becoming the 10th of the nation's 12 federal home-loan banks (FHLBs) to confirm they will miss Monday's filing deadline. The Seattle FHLB told the SEC in a letter that it needs to withdraw the filing it made in June to give it time to resolve accounting issues with its auditor, PricewaterhouseCoopers, and SEC staff members. The bank didn't say whether it would have to restate its earnings, as six of the FHLBs that are also delaying their registration have announced. Only the New York and San Francisco FHLBs are expected to meet the deadline to register with the SEC as required by the systems regulator, the Federal Housing Finance Board. Does anyone care other than myself that the U.S. government has accounting problems? How many agencies have not received a clean accounting bill of health for 2003 and 2004? When does accountability become a reality for the U.S. government? I didn’t hear anyone in Jackson, Wyoming warning about government accounting.

Adam Hamilton: “Unfortunately stocks are still near the 2000 top of their long cycles. It usually takes 17 years or so for stock markets to run from their secular peaks to their secular troughs, so unfortunately we are probably only a third or so into this current secular bear. Investors who buy stocks today and want to hold for a decade or more likely face flat markets at best. Flat markets may not seem like the end of the world, but when the Fed's relentless fiat inflation is factored in it can lead to massive real losses over timespans exceeding a decade. From the late 1960s to the early 1980s the S&P 500 was unchanged nominally. But after inflation is considered these same investors lost nearly 2/3rd of their purchasing power just for being invested in stocks at the wrong time. Investors face similar peril today due to our similar waning phase in the long cycles.”

The Kazakhstan government has refused to intervene in the sale of Petrokazakhstan to China’s CNPC, saying the deal was between two private firms and it took place outside its jurisdiction. A Kazakh official said from Almaty that his government would not exercise its pre-emption right in favour of ONGC. ‘‘We cannot discriminate between the Indians and the Chinese,’’ he said.

According to the Taipei Times, alarmed by high world oil prices and sporadic shortages of gasoline and diesel fuel in big cities this summer, China's leaders are drafting plans to impose steep taxes on cars and sport utility vehicles with gas-guzzling engines. The taxes would add as much as 27 percent to the price of vehicles with big engines, notably sports cars and SUVs, auto-industry officials and people advising the government on the plan said. At the same time, taxes may be cut slightly for models with the smallest, most efficient engines, though the details of these cuts are still under discussion, they said.

According to ''Knowledge@Wharton'', which has brought out a special section on India this week, stated the country is emerging as a basic research hub. Harbir Singh, a management professor at Wharton, pointed out that all the leading pharmaceutical companies have set up research operations in India. "These companies have realized that India is not just a location where clinical trials can be conducted, basic research can also be done there," he added.
Singh believes that the movement of global R&D into India is still in early stages, but it will expand over time. "Indian firms are starting to realize that they must become innovators," he said.

G. Lammert, The Economic Fractalist: " A Completed Fibbonocci third Growth Sequence on Friday 26 August 2005
The fractal evolution since October 2002 strongly suggests that there are
very real and very simple quantum number fractal laws that underlie the
macroeconomy. This discovery will be little consolation to the turmoil that
is about to unfold over the next decade. August 24 (Wednesday's) and August 25 (Thursday's) trading days once again demonstrated on a 5 minute unit fractal level, the recurrent precise fractal
theme of x/2.5x/2x-2.5x - that pervades the economic universe. For the Wilshire 5000 the base was about 17 five minute units. The three sequential growth fractals were 17/42/34 of 34 before the fall on Friday morning. The lateral 'skeletonized' evolution of this fractal sequence suggests the final lower (very lower) high is close at hand. Friday August 26 is the Fibonacci 85th day of a 52/130/85 daily sequence dating since August 2004. 1.62 times 52 equals 84.24 days.... If growth sequences follow idealized Fibonacci related fractals, Monday 29 August 2005 will break lower in
a nonlinear manner. A deluge is coming. "

The August University of Michigan Consumer Confidence Index declined to 89.1 from 96.5 in July.

In looking at the short-term prospects for the stock market, one might consider balancing the flattest yield curve in 4 years and widening credit quality spreads with the rising weekly CBOE Total Put/Call Ratio and the rising VIX.

Greenspeak: "History has not dealt kindly with the aftermath of protracted periods of low-risk premiums."

A total of 1.5 million barrels of oil p/d and 10 billion cubic feet of naturl gas p/d are produced in the Gulf of Mexico. How will Katrina impact that production?

Yesterday, Petsmart traded at a new 52-week low of $24+, and this is down from this year's high of $36. The company anticipates earning roughly $1.20+ for 2005. I have written several times about Petsmart. My initial investment was at $4 in 1999. For the next 1 3/4 years the stock was as exciting as watching paint dry. This is an extremely well-managed company. They are in the process of rolling out a new program. The comapny will offer pet day care as well as pet boarding. This is a great move and is a natural extension of their on-site vet clinic. Should the stock approach an 18 times earnings multiple, I would suggest adding to long-term holdings.

A fire lasting from 4:15 p.m. to 5:05 p.m. Wednesday shut a fluid catalytic cracking unit at Golden Eagle but caused no injuries, according to Sarah Simpson, a spokeswoman for San Antonio-based Tesoro Corp., the refinery's owner. Some observers estimated that a restart of the affected unit might take at least two to three days, while some news reports predicted at shutdown of from seven to 10 days. Simpson declined to comment on that estimate. Golden Eagle, one of five Bay Area refineries that produce gasoline and other fuel for Northern California, can refine 168,000 barrels of crude oil each day. The shutdown of a catalytic cracker might typically reduce gasoline output by 50 percent, or about 6 million gallons a day, said David Hackett, president of Stillwater Associates LLC, an energy consulting firm. Golden Eagle is Tesoro's largest facility.

Sugar is at a 7-year high.

Prices of hazelnuts, cocoa beans, and almonds are rising faster than the price of homes and/or oil.

Wal-Mart stated that, for the August reporting period, comparative sales for the U.S. are estimated to be 3.3 percent compared to their guidance of 3 to 5 percent.

Thucydides: "The fact is that one side thinks that the profits to be won outweigh the risks to be incurred, and the other side would rather avoid danger than accept an immediate loss."

Developments

8/26/05 Developments

Peter Schiff: “The main reason American homeowners can access their home equity is that foreign savers are willing to lend them the money. Once foreigners come to their senses, mortgage credit will evaporate, and home equity will vanish along with it. Unlike legitimate savings that are permanent, provide real security, earn interest, and represent future purchasing power, home equity will prove ephemeral, disappearing as quickly as it appeared. From an individual perspective, counting home equity as savings is analogous to a gambler counting his chips while still seated at the card table. Having a big stack in front of you means nothing if by the end of the game you're busted.”

Over the past week, and as recently as yesterday, I have written about the worth of Petrokazakhstan’s 19 year-old refinery. Something came to my attention that reinforced Ron Kirby’s analysis concerning this year’s sharp decline in the Baltic Dry Index. To reiterate, he reached the conclusion that China had run short in their ability to refine heavy sour crude oil from Saudi Arabia and other Middle East countries. Yesterday, it was announced that China would be building another refinery in Kazakhstan: “BEIJING. August 25. KAZINFORM. /Talgat Baimukhambetov/
A subdivision of China’s national oil company CNPC has started construction of the petrochemical works to reprocess Kazakhstan oil in Xingjian Uygur Autonomous Region of China, Kazinform refers to the China’s “Oil newspaper”.
It is planned to invest USD 3.23 billion into the construction. 20 oil-refining installations and 12 petrochemicals production devices are believed to be set up there. Oil-refining part of the complex will be put into operation 2007 and petrochemical one a year later.
It will process 5.5 million tons of oil annually and produce 1.82 million tons of petroleum derivatives. Annual revenue of the complex upon the putting into the rated capacity is expected to hit USD 3.7 billion.” Unless PKZ has a giant oil find that has yet to be announced, the existing refinery should be quite sufficient to handle needs for some time. Notice that this new refinery will cost $3.23 billion. The entire bid for PKZ is only $4.18 billion, and that includes the $7 a barrel saved in transportation charges with the new pipeline.

Are the U.S. auto employee discounts losing effect? This month's car sales will
top 1.63 million units, a 14.8 percent increase over August 2004 (with the
same number of selling days), according to Edmunds.com.The combined monthly U.S. market share for General Motors, Ford, and Chrysler is estimated to drop to 55.5 percent in August, down from 61.0 percent in July Edmunds.com predicts that Chrysler will sell 214,000 units in August, up 20 percent compared with August 2004 but down 11 percent compared with July 2005. This would result in a new car market share of 13.1 percent for
Chrysler in August, up from 12.5 percent in August 2004 but down from 13.3 percent in July. Edmunds.com predicts Ford will sell 315,000 units in August, up 28 percent
compared with August 2004 but down 7.4 percent compared with July 2005. This
would push Ford's market share to 19.3 percent of new car sales in August, up
from 17.3 percent in August 2004 and 18.9 percent in July. According to Edmunds.com, GM will sell 378,000 units in August, down 5 percent compared with August 2004 and down 27 percent compared with July 2005. GM's market share is expected to shrink to 23.1 percent of new car sales in August, down from 27.9 percent in August 2004 and 28.7 percent in July. Noticing that its employee discount promotion was no longer as effective
as it was when it was originally introduced, GM has extended the program to
include some 2006 full-size trucks and SUV models. "This is a clever way for GM to draw consumers' attention back to its brand, and particularly to its less fuel-efficient vehicles," stated Edmunds.com Senior Analyst Jesse Toprak. "It is likely that Chrysler and Ford will follow suit once again."
This month, Honda is predicted to sell 162,000 units, up 28 percent
compared with August 2004 and up 13 percent compared with July 2005. Its
market share is expected to increase from 8.0 percent in July to 9.9 percent
in August -- a record high.
Nissan is predicted to sell more than 107,000 units in August, up
33 percent compared to August 2004 and unchanged from July 2005. Nissan's
market share is expected to reach 6.6 percent, up from 6.0 percent in July
2005.
Toyota is expected to sell 240,000 units, up 33 percent compared with
August 2004 and up 11 percent compared with July 2005, resulting in a change
in market share from 12.0 percent in July to 14.7 percent in August -- also a
record high.

The Conference Board stated the number of online help-wanted ads declined in July to 1.33 per 100 workers from 1.39 in June.

According to Barbara Ryan of the FDIC, banks and thrift institutions hold $3.5 trillion in single-family mortgages on their books. According to the FDIC, U.S. banks’ margins fell to a 15-year low.

Angelo Mozilo, Countrywide Financial’s CEO: “Competition is affecting margins.”

Silver, at $6.83, had its lowest close in 7 months.

According to SEMI, worldwide billings of chip equipment fell 21% in the 2nd quarter from a year ago.

It is important to take a close look at how the market absorbs news. Toll Bros. reported that profit doubled in the 2nd quarter, and the company raised their outlook for the remainder of the year. Shortly after the opening, the stock rallied on the news and traded up to $51.72; however, the stock slumped and closed down almost 2 points on the day at $48.10. The shares are now down 10 points from its recent all-time high.

Crude is holding above the $67 level. Unlike silver, gold holds firmly at $443.10.

Smithfield Foods is cutting 570 jobs.

Yesterday, Wal-Mart traded at a 52-week low as did Verizon.

Plans by India and China to mount joint bids for foreign energy projects are still at a "pioneer" stage and will not end their rivalry for resources, a top Indian official stated.

China has become the world's largest consumer of platinum. According to the Platinum Guild International, China boasts over 30 platinum retailers, and the volume of imported platinum has exceeded 40 tons, which is over half of the world's total output. The guild Chairman says the global sales revenue of platinum stands at one and a half billion US dollars each year, and more than half is contributed by China. With the increased spending power of many Chinese, the country's demand for this precious material is expected to continue growing.

China's central bank denied market rumors today that it would soon further revalue the yuan, saying the market would determine the exchange rate.

Ikea has expansion plans for China. The company expects a 21% rise in China sales in its fiscal year ending this month.

It was reported that Venezuela will supply China with 15-20% of its annual crude requirements.

Has anyone noticed the recent increase in crop formations photographed on several continents?

-Colonel Joseph J. Bryan III, Founder of the CIA's psychological warfare staff, special assistant to the secretary of the Air Force, advisor to NATO, and board member of the National Investigations Committee on Aerial Phenomenon (NICAP).

• "These UFOs are interplanetary devices systematically observing the earth, either manned or under remote control, or both."

• "Information on UFOs, including sighting reports, has been and is still being officially withheld."

People inquire as to why Wal-Mart placed ads in Vogue Magazine. The answer is pretty simple-- to increase the number of upper-income shoppers coming into their stores. The company needs to increase same-store sales in order to offset rising utility expenses that increased by $100 million in its second quarter as well as the additional $30 million to truck merchandise from its U.S. distribution centers to stores. Those additional costs add up to almost 5 percent of Wal-Mart's second-quarter profit of $2.8 billion.

The annual KansasCity Fed's Economic Symposium starts this morning in Jackson, Wy. Fortunately, for the moose, buffalo, and elk, they are able to tune out Greenspeak.

Timber!!!

8/25/05 Timber!!!

Federal Reserve Bank of Chicago president Michael Moskow stated that the Fed needs to keep raising interest rates in order to fight inflation. Why? “Inflation this year and next is likely to come in at the high end'' of the Fed's forecast of 1.75 percent to 2 percent, Moskow told the Illinois Certified Public Accountant Society. ``Because the economy is running nearer to potential, unfavorable cost developments are more likely to pass through to core inflation.''

Nouriel Roubini: “This increase in short rates and increase in our net foreign debt implies that the U.S. net factor income payments will become negative for the first time in the third quarter of this year. So, net factor income will start to add to the current account deficit and this component of the deficit will rise to over 1% of GDP in the next couple of years.”

Yesterday it was reported that sales of new homes increased 6.5% to a record high in July. Inventory of unsold new homes at the end of July rose to a record 460,000, an increase of 15% from a year earlier. At the current sales pace, this inventory represented 4 months of sales. Possibly most important, the median price of a new home declined for the third consecutive month. For all the talk of homes increasing in price, in fact, the median price of a new home in July 2005 was 4% less than the price in July 2004. How long will it be before home builders offer new homes at the same discounted price provided to employees? It worked for GM. Right?

Moody’s lowered the debt ratings on GM and Ford debt.

The price of crude traded at $68 a barrel this morning. The Energy Department stated domestic inventories of gasoline are 7% below year ago levels. However, the supply of distillate fuel is 4% above last year’s level. The price of natural gas traded at a 2-year high.

On Tradesports.com roughly 95% are willing to bet that the DJIA will not be at or above 11,750 on 12/31/05. Inasmuch as the market accommodates the fewest number of people at any one time, that 95% might not be in the right camp. On the other hand, even a busted clock is right twice a day.

Due to Asia’s economic expansion, Lehman Bros. stated that South Korea’s won, the New Taiwan dollar, the Singapore dollar, and the Thailand baht may gain by 20 to 30% next year.

Johnson Controls to buy York Int’l for $56.50 per share.

There are rumors that Wells Fargo is interested in buying Lloyd’s TSB.

The Wall Street Journal reported that Hawaii will set a cap on the price of gasoline.

Boeing received orders for 200 planes in May, 162 in June, and 88 in July. Maybe they will need to do some additional discounting.

U.S.-made durable goods orders in July declined 4.9%, the first decline in 4 months. Shipments of durable goods decreased 0.1% after two straight monthly increases. Orders for core capital goods equipment fell 3.7% in July, the largest drop since last October. Excluding transportation, durable goods orders fell 3.2%. Excluding defense, durable goods orders fell 4.5%.

Talking about the bidding war for PetroKazakhstan, a top official in the Petroleum and Natural Gas Ministry stated that “ONGC is looking at ways to re-enter the race…Let them (ONGC) look for avenues first and tell us what they need. We will respond to their needs.” This is quite different from the situation involving the Chinese government, CNOOC, and Unocal. PetroKazakhstan is not just a low-key commercial transaction for either India or China. There hasn’t been an oil refinery constructed in a very long time. PKZ’s refinery, the largest in Kazakhstan, is only 19 years old. In the refinery world, that is almost brand new. Their oil fields are not far from the company’s processing operation. I discussed reserves being that of light sweet crude oil. Well over a month ago, I discussed the South Turgai Basin field. I continue to believe that current and future drilling will prove that PKZ’s proven and probable reserves are very much understated. That cannot be said for too many oil companies. With infrastructure in place, pipelines being added to lower transportation and marketing costs, the on-going drilling program, and the quality of their crude, PKZ offers strategic advantages to both ONGC and CNCP. Given the long-term demand for crude in both India and China, buying PKZ becomes a no-brainer.

Eastman Kodak to cut 900 jobs.

Six Flags Inc. is seeking proposals from third parties regarding a possible sale of the company.

Now that the world market is undergoing a wheat crisis Kazakhstan, with
exports of 5 million tons of grain expected in 2005, is becoming a major
player. Access to the sea for this landlocked country in Central Asia is
nevertheless of prime importance. The new grain terminal at Ventspils in
Latvia, which is to be launched tomorrow (26 August), will provide access to
the Baltic Sea for Kazakhstan's wheat.

Topping Signs

8/24/05 Topping Signs

Single-family sales in Santa Cruz County dropped nearly 30 percent. July's median price of $759,000 was down 4.3 percent from June, but up 19.5 percent year-to-year. Single-family home sales were also down 16.3 percent year-to-year in San Francisco, down 11.3 percent in the Monterey region and down 13.7 percent in Santa Clara county. The median price of $750,000 in Santa Clara was down 1.3 percent from June, but was still 17.2 percent above last year. San Francisco's median of $724,890 was also down 1.3 percent from June, but up 11.3 percent from last year. California homes are staying on the market a little longer this year on average, the CAR reported. CAR's Unsold Inventory Index for existing, single-family detached homes in July 2005 was 3.2 months, compared with 2.4 months for the same period a year ago. The index indicates the number of months needed to deplete the supply of homes on the market at the current sales rate. The median number of days it took to sell a single-family home was 28 days in July 2005, compared with 24 days for the same period a year ago. CAR’s chief economist David Lerach stated “there seems to be some air coming out of these balloons.” Nationwide, sales of previously owned homes fell 2.6% in July. Importantly, the inventory of homes available for sale in July on a nationwide basis equates to 4.6 months’ supply at the current sales pace, the highest level since 1998.

The Center for Economic and Policy Research noted that the housing market has created more than $5,000bn in "bubble wealth", equivalent to $70,000 for the average family of four.

Saxon Capital: “Should real estate on the West Coast flatten out I would be worried about a credit event.” How worried would you be if real estate on the West Coast declined in price and the inventory of unsold homes on the market expanded?

BHP Billiton, the world’s biggest mining company, stated it expects commodity prices to “ease” as demand growth slows.

Australia's Rio Tinto, Brazil's CVRD, and Australia BHP Billiton control approximately 75% of the iron ore in the world.

China’s Baosteel cut steel prices by 15%.

With a potential storm brewing in the Gulf, crude is trading this morning above $66.

Ford is planning another round of cost cutting, and this may include plant closures.

MBNA is Wilmington, DE’s largest private employer. B of A has stated that 6,000 jobs would be eliminated in its acquisition of MBNA. However, B of A stated its credit card business would be headquartered in Wilmington.

Gartner expects total PC sales to decline by 0.4% in 2006.

ONGC CMD Subir Raha on the takeover battle for PKZ: "We have not yet thrown-in the towel."

The value of China's textile exports in the first seven months of this year totaled 61.5 billion US dollars, according to the Ministry of Commerce on its official web site. In July, textile exports grew 23.2 percent compared with the same period last year, slowing from the 27.8 percent growth rate posted in June. According to the Ministry, China's textile exports to the EU rose 130 percent year-on-year to 8.65 billion US dollars in the first half, with June exports accounting for 2.1 billion US dollars, a yearly increase of 85 percent. In reference to the dispute on textile shipments between China and the European Union, the Ministry said the difference is partly due to the time lag between recording imports and exports, and the different methods of gathering data. China's statistics don't include goods that are shipped from China to Europe through a third country.

The U. N. World Meteorological Organization (WMO) reported yesterday that the current hole in the ozone above Antarctica now covers 9.5 million square miles (25 million square kilometers).

Chalongphob Sussangkarn, president of the Thailand Development Research Institute, stated “it is quite hard to understand why the world’s largest debtor (the United States) is the one that controls the world’s financial system. We (East Asia) always monitor what the US Federal Reserve says about interest rate movements. (East Asian) creditors should be the ones who determine the world’s fate.”

According to the latest Harris Poll, President Bush's job approval
ratings are at their lowest point of his presidency as only 40 percent of U.S.
adults have a favorable opinion of his job performance, while 58 percent have
a negative opinion. This is a decline from just two months ago in June when
the president's ratings were 45 percent positive and 55 percent negative.

PetroChina president Jiang Jiemin stated his company has not received formal notification from Warren Buffet of his intention to sell his shares in PetroChina. I had reported that there were market noises that supposedly Buffett had filed to sell the shares held by Berkshire Hathaway.

Mortgage applications volumes declined 0.7% in the week ended Aug. 19 compared to the prior week, according to Mortgage Bankers Association data. On a seasonally adjusted basis, applications for mortgages to buy homes fell 2.2%, but refinancings rose 1.2%.

Risk And Sweet Luck

8/23/05 Risk And Sweet Luck

Whether a purchase was made of PKZ shares at $38 or whether one contemplates a purchase at $53.75, the first consideration is risk. An amateur might conclude that the risk is less at $38 than at $53.75. Actually, that would not be the case. At $38 there was speculation that at least two buyers, ONGC and Petrochina were interested in acquiring the company. At this point in time, we have an announced and approved deal at $55 with CNPC and the possibility of ONGC returning with a higher offer. The Kazakh government is supportive of the deal. Lukoil is supportive of the deal. The shareholders will vote in October. By then, a majority of the shares will be owned by risk arbitrageurs and they certainly will vote for the deal. In my view, at $53.75, PKZ represents an outstanding risk/reward. If ONGC/Mittal eventually outbid CNPC, they will need to provide a break up fee that approximates $2 a share, not an overwhelming obstacle. If ONGC/Mittal were to win the battle at $58 per share, for example, the total cost would come to approximately $4.4 billion (with the break up fee) and this is roughly 10% higher than the bid they submitted on August 19. We know that ONGC/Mittal had stated they were willing to improve their bid if certain PKZ operating information was provided. In sum, maybe you will get lucky. The cost to get lucky is only time. At $53.75, your investment will be returned to you in October, and that gives no value to the one share in a new company to be received, and that is being valued at $1. It should not be forgotten that Mittal has business interests in 14 countries, and in roughly half of them there are oil and gas opportunities. Mittal has considerable experience and influence in Kazakhstan.

The Energy Department reported that the retail price of gasoline rose more than 6 cents last week to an average of $2.61 a gallon nationwide, or 73 cents a gallon higher than the same time a year ago. Despite soaring fuel prices, AAA expects an increase in the number of Americans taking road trips over the upcoming Labor Day holiday weekend.
They estimate that 34.5 million Americans will travel 50 miles or more from home, an increase of about 1 percent from last year. More than 80 percent of those trips will be by motor vehicle.

Crude oil is holding above the $65 a barrel level and natural gas jumped to $9.56. We are approaching the peak season for hurricanes. At present, there are worries about a developing storm in the Bay of Campeche. The largest oil field region in Mexico is the Gulf of Campeche.

Ron Kirby made an interesting observation. He alludes to China’s limited refining capacity to process larger amounts of heavier sour grades of crude oil (high-sulfur crude from Saudi Arabia, Iran, and other Middle East producers.) Hence, the reason for recent supertanker bookings for oil exports from the Middle East falling below the monthly average for 2005 might be the lack of China’s heavy crude refining capacity. If Ron Kirby’s analysis is correct, and I believe it is, then PetroKazakhstan’s reserves should be valued at a premium by China and India. Why? PKZ is a low-cost producer of sweet light crude oil. In addition, the company’s refinery combines efficiently with the new pipeline going to China that opens for business in January 2006. In view of these factors, I am raising my estimate for PKZ’s fair value from $58 a share to $62.

Close Call

8/22/05 Close Call

Recently, I raised my buyout estimate for PetroKazakhstan to $58 a share. It turned out to be a close call. China's CNPC International, the parent of PetroChina, has offered $4.18 billion, or $55 a share, for PetroKazakhstan (PKZ), a premium of 21.1% to Friday's close. PetroKazakhstan agreed to a $125 million break-up fee. The transaction is expected to close in October. The Boards of Directors of PKZ and CNPCI approved the agreement, and PKZ’s board of directors has recommended that its shareholders accept CNPCI’s offer. CNPCI has further agreed to consider a proposal (which is also subject tothe approval of the PetroKazakhstan Board), whereby PetroKazakhstan will incorporate a newly formed oil and gas company ("Newco") and capitalize it with approximately US$76 million in cash (representing US$1.00 per
PetroKazakhstan common share) to be spun out to PetroKazakhstan shareholders. If CNPCI accepts the proposal, CNPCI will pay PetroKazakhstan shareholdersUS$54.00 in cash and one share of Newco per PetroKazakhstan common share. A mix and match facility will be created matching, on a proportionate basis,
PetroKazakhstan shareholders who elect to receive US$1.00 in cash rather thanone Newco share with PetroKazakhstan shareholders who elect to receive additional Newco shares rather than an amount of US$1.00 per additional Newco share. If the new company is created and spun out, Bernard Isautier will act
as Chairman of its Board of Directors. If the Newco proposal is implemented, Newco will be listed on a
securities exchange and will seek oil and gas development opportunities in Central Asia (other than Kazakhstan), including with co-venturers having good relationships with one or more Central Asian governments.

Today, Google will launch an upgrade to “Desktop”, its freeware that mirrors Microsoft Windows. Wall Street needs to grasp that Google is a great deal more than merely a search engine company with growing advertising revenues.

Richard Benson: “Home sales run about 9 million a year (this includes housing starts of 2 million and existing home sales of 7 million). If over 20 percent of homes purchased are investor properties, it appears that practically all new housing starts in America are accounted for by speculative buying. If second home buyers are added into the equation, speculative and investment buying of real estate (not owning to live in) actually exceeds total housing starts!”

China's central bank said today it would raise interest rates on deposits of U.S. and Hong Kong dollars by 0.375 percentage point. The increases, effective from Tuesday, would raise the one-year rate for U.S. dollar deposits to 2 percent and that for Hong Kong dollar deposits to 1.875 percent, the People's Bank of China said in a statement.

According to Korea's Ministry of Foreign Affairs and Trade, Chinese Premier Wen Jiabao expressed interest in a free trade agreement between the two countries when he met with Prime Minister Lee Hae-chan in June. China overtook the United States as Korea's largest trading partner in 2004, accounting for more than 20 percent of the country's exports. Additionally, more than one-third of foreign direct investment by Korean companies has been going to China since 2003.

According to CNPC, the corporation produced 65.45 million tons of crude oil in the first six months, up 3.9 percent, and 18.4 billion cubic meters of natural gas, up 20.1 percent. CNPC has reported a newly proven geological reserve of natural gas that will account for 60 percent of this year's plan while itsdomestic natural gas output reached 17.2 billion cubic meters, up 21.6 percent year on year. In the last ten years, China saw its proven reserve of natural gas grow by over 120 billion cubic meters annually and annual output grow by over 10 percent.

Today's Dallas Morning News provided this information on trade with China:

Last year, imports from China reached $197 billion, higher than any other U.S. trading partner except Canada. The largest imports were:

1. Furniture

2. Toys

3. Footwear

4. Plastic products

5. Computers

6. Tools, screws, latches, etc.

7. Sporting goods

8. Cooking, ironing, heat appliances

9. Kitchenware

10. Electrical and electronic products

Meanwhile, U.S. exports to China totaled only $35 billion last year, but they have been growing.

TOP 10 EXPORTS TO CHINA IN 2004

1. Paper and paper waste

2. Mixed metal scrap

3. Fabrics and raw cotton

4. Newspapers

5. Foam waste and scrap

6. Logs and lumber

7. Wood pulp

8. Plastics

9. Frozen fish

10. Other synthetic resins

SOURCE: PIERS Maritime Research

John P. Hussman: "The relationship we've observed since 1965 between stock valuations and interest rates has not been a “fair value” relationship. To the contrary, stock valuations during this period have substantially “overshot” fair value in both directions, becoming substantially overvalued when interest rates were low, and becoming substantially undervalued when interest rates were high. Interest rates may have been correlated with stock valuations, but they haven't “justified” them."

I would like to make a closing remark on the PKZ deal. The agreement contains customary provisions prohibiting PKZ from soliciting any other acquisition proposal but allows the Board of Directors of PKZ to accept and recommend a superior proposal if it is required to do so to avoid breaching its fiduciary duties and upon payment of a termination fee of US$125 million. Under the agreement, CNPCI has the right to match any such superior proposal. It is possible that the last chapter has not been written on PKZ.

The Dumb Dumb Award

8/21/05 The Dumb Dumb Award

In yesterday’s radio Address, Bush stated “we have combated terrorists on the home front by disrupting terror cells and their financial support networks. We're fighting the terrorists in Afghanistan, Iraq, and around the world, striking them in foreign lands before they can attack us here at home. And we're spreading the hope of freedom across the broader Middle East.” Anyone who buys this message gets the dumb dumb award for 2005.

Robert J. Shiller is arguing that the housing craze is another bubble destined to end badly, just as every other real-estate boom on record has.

Adam Hamilton: “Believe it or not, today the Gold/Oil Ratio is at its lowest level in history by far. Prior to this summer the average GOR extreme low, of which there had only been five in three decades, was 9.3. Today the GOR is at 6.6, a whopping 30% below previous historical average extreme levels!”

The Army is planning for the possibility of keeping the current number of soldiers in Iraq -- more than 100,000 -- for four more years, the Army's chief of staff said Saturday.

Mike Burk: “Seasonally the week following the 3rd Friday in August during the 1st year of the presidential cycle has been modestly positive. Since 1965 both the OTC and S&P 500 (SPX) have been up 70% of the time.”

China's total volume of automobile imports dropped by one-third in the first half of this year, according to Beijing-based Economic Information Daily. In the latter half of this year, China's car imports are expected to exceed that in the first half year, Ding Hongxiang, general manager of China Trading Center for Automobile Import said. The car import decrease in the period was related to the growing investment and production of Toyota, Nissan and Honda.

Prime Minister Paul Martin will meet with Chinese President Hu Jintao in Canada next month as part of the Chinese leader's first North American tour, the Vancouver Sun reported.

According to a recent report issued by the Peoples Bank of China, the country faces a potential property bubble whose bursting could leave banks with huge losses. Average real estate prices in China rose by 14.4 percent in 2004 over the previous year, and they rose by 12.5 percent in the first quarter of 2005, the report said. "Property price inflation can easily result in prices soaring out of line with real values and thus cause a bubble," said the report. "Once the bubble bursts, it can cause a contraction in the real estate sector and significant losses for banks." Housing loans, including those to property developers, stood at 2.6 trillion yuan ($310 billion) at the end of 2004, accounting for about 15 percent of all yuan-denominated loans, the report said.

“China and India together are a third of humanity, and they don’t want to ride bicycles anymore,” said Anne Korin, the co-director of the Institute for the Analysis of Global Security, a Washington think tank. “Their transportation demand, which is to say their oil consumption, is growing at a phenomenal rate.”

Google has initiated an advertising campaign in China by holding a thousand-people promotion meeting with its partner Hotsales Network Information Technology Company in Shanghai to introduce the Google AdWords service to various companies.

“The supply of oil has been growing all these years in approximate consonance with demand,” said Michael Klare, professor of peace and world security studies at Hampshire College. “Now it appears that the historical trend is changing. Demand is galloping ahead of supply,” said Klare, author of “Blood and Oil: The Dangers and Consequences of America’s Growing Dependency on Imported Petroleum.” “You’re going to see more competition because demand around the world is increasing faster than supply.”

This month, Russia and China have put their armies together for the first time in military exercises on the Shandong peninsula, in the Yellow Sea about 275 miles southeast of Beijing.

Venera Galyamova, a researcher at the Kazakhstan Institute for Strategic Studies, sees Central Asia becoming "the arena for the battle between the United States on one side and China and Russia on the other side. For China, influence in the region also means asserting itself as a global power to rival the United States." China's exploding economy thirsts for oil, and within two decades Kazakhstan is expected to be a leading oil exporter. In my opinion, the battle for control of PetroKazakhstan is much more significant than the CNOOC’s proposal to buy Unocal.

From Current Opinion in the June 2005 Endocrinology & Diabetes: “Summary: Recent studies have reiterated the critical role the central melanocortin pathway plays in the control of energy balance. Given the public health challenge that obesity presents, the potential attractiveness of the melanocortin system as a therapeutic target only grows as knowledge of its molecular physiology increases.” I continue to believe that Palatin Technologies, a leader in the melanocortin system, offers outstanding potential for the long-term investor in the areas of obesity, sexual dysfunction, and others.

According to Reuters and the AP, German travel company TUI AG said today it has agreed to buy Canadian firm CP Ships for $2 billion in a deal aimed at strengthening its container shipping business. Hanover-based TUI stated the Canadian company's board of directors unanimously recommended that its shareholders accept the all-cash offer of $21.50 per share -- a premium of 9.7 percent over CP Ships' closing share price on Friday. TUI mentioned the acquisition would accelerate the growth of its Hapag-Lloyd container shipping business -- putting the combined company in the world's top five in terms of capacity. Between them, the companies currently operate 139 ships, with another 17 on order.

The dollar had its biggest weekly gain against the euro in more than two months.

Ufosnw.com recounts the 50th anniversary of the incident in Kelly, KY (20 miles from the Tenn. border):
"Shortly after sunset on Sunday August 21, 1955 a flying saucer landed in a field outside of a farmhouse near Kelly, Kentucky. For the next three or four hours a farm family was terrorized by beings who approached the farmhouse. Several members of the family fired rifles and shotguns at the creatures. Some of the shots hit the creatures, but had no effect. The creatures were described as about 3 feet tall with oversized heads, huge luminous yellow eyes, big ears, long arms, and big hands ending in "talon". The beings glowed all over with a silvery luminescence. and they seemed to float rather than walk. (See drawing above made by one of the witnesses.) The family finally made a run for their car and drove to Hopkinsville, Kentucky and reported the incident to the sheriff. The sheriff and other law enforcement personnel then went out to the farmhouse with the family. They found nothing. (Some witnesses have noted that a green luminous substance was seen in the grass in the yard.) The law enforcement personnel then left after completing their investigation. The family then decided to go to bed. Almost immediately the creatures returned and more shots were fired. The creatures again were not affected by the bullets. Finally near dawn the creatures left and never returned. Articles were written in several newspapers the next days and onlookers flocked to the farmhouse after hearing of the incident." Which rings clearer to you--- this incident in Kelly, KY or Bush's August 20, 2005 radio address?

Clyde Francis Lytle: " Unless we know the difference between flowers and weeds, we are not fit to take care of a garden. It is not enough to have truth planted in our minds. We must learn and labor to keep the ground clear of thorns and briars, follies and perversities, which have a wicked propensity to choke the word of life."

Tea Leaves

8/20/05 Tea Leaves

Henry K. To: "Given that the economic recovery since 2001 has mostly been about the housing industry (including mortgage consulting and financing) and the financial services industry, I would definitely pay heed to the breakdown of both the Philadelphia Bank Index, the recent explosion of insider selling in the financial sector, and the continuing decline in M-3 growth in the United States. Moreover, on a more micro level, the liquidity in both cash and margin accounts are now getting dangerously low - a red flag that is further exacerbated by the amount of leverage now "in the system." It is now not a good time to go long - let alone go long on margin."

American consumers will pay more for orange juice because of a U.S. Commerce Department ruling ordering penalty tariffs of up to 60 percent on orange juice concentrate from Brazil, Brazilian growers said Thursday.

Yesterday, crude oil jumped back to the $65 barrel level. The price of ethylene, a petrochemical that's a key building block in everything from plastics to antifreeze, has jumped 29 percent in the past two weeks. At 44.5 cents per pound, it's just pennies below a five-year high hit last December, according to Bloomberg News data.

For 60 years, truckers could drive for 10 consecutive hours. On Jan. 1, 2004, the Federal Motor Carrier Safety Administration changed the rule to allow them another hour behind the wheel. A federal court, however, threw out the changes. On Friday, the truck-safety agency announced that a revision to the rule would still allow the big rigs to roll for 11 hours, three hours more than safety advocates say they should. The Advocates for Highway and Auto Safety said the Bush administration had simply repackaged an unsafe rule. Studies show the risk of deadly crashes significantly rises after the 10th and 11th hours of driving, said Joan Claybrook, president of the safety group Public Citizen. "Trucks are going to continue to be rolling time bombs on the highway," Claybrook said. "So many drivers are tired, and that's what causes so many crashes." More than a year ago, a federal court struck down the rule, saying it was "arbitrary and capricious" and failed to consider truckers' health. The Bush administration was left to revise it. Just think. The next time the danger level is raised from yellow to orange, it might signify an overtired truck drive on the highway.

North American chip equipment suppliers booked $1.02 billion worth of orders in July, down 36% from a year-ago, trade group SEMI said Friday. That equates to a book-to-bill ratio of 0.93.

Kazakhstan has doubled oil production to 1.2 million barrels per day since the Soviet Union collapsed, putting it in the world's top 20 oil producers. It plans to triple production by 2015 thanks to new oilfields.

Russian President Vladimir Putin called Thursday for an international conference on Iraq by year's end and a timetable for withdrawal of foreign troops from the country, saying they were considered "occupying forces" by many Iraqis. "We deem it necessary to work out a schedule for the staged withdrawal of foreign troops" in Iraq, Putin told reporters following talks with Jordan's King Abdullah II in the Black Sea resort of Sochi.

4400 Northwest Airlines machinists went out on strike.

MCI cut 600 workers in Alpharetta, GA.

As we approach the month of September, one must keep in mind that historically September is the worst month for the Dow with a decline 70% of the time.

The football season will soon officially begin. Frequently, the talk turns to defense, and that has provided impetus to investment pundits to issue a warning for investors to become more defensive in the management of their portfolios. From my perspective, defense begins and ends by buying right and knowing what you are buying. You increase the opportunity to generate profits by buying when the risk/reward ratio is strongly in your favor. There needs to be demonstrated value and adept management. That combination is the best defense. In addition, do not let greed and/or ego enter into a buy or sell decision. Investing is not about you. The stock you buy does not know your name.

Maytag stated that 200 employees at their Newton plant would be cut on Sept. 2 and the workforce at that facility would be reduced to 1,000.

As short-term and long-term rates converge and credit spreads narrow, it will become more difficult for banks to generate positive results. A greater emphasis must be placed on management skills and depth of management. As such, I am suggesting a hedge transaction that may not be to everyone's liking. Wells Fargo has increased the dividend for 18 consecutive years and the return on equity is just below 20%. The bank's market cap is $102.5 billion. The combined market cap for Citigroup, Bank of America, and JP Morgan Chase is $525 billion. I suggest buying 5 shares of WFC and shorting 1 share of C, BAC, and JPM.

Shares of Wal-Mart traded at slightly above $46 in February 2003, April 2005, and on Friday. The last time the stock dipped below $45 was in mid-2002. Unfortunately, when Wal-Mart ads state "everyday low prices," they were not intended to describe the price for its own shares.

A Clearer Picture

8/19/05 A Clearer Picture

Marsoft Incorporated: “After remaining very strong through the first four months of 2005, the dry bulk market weakened significantly from May through July. The decline was broad-based, with spot rates and one-year time charter rates falling by an average of 15-20% during the second quarter. Although this left most rates at levels similar to where they were a year ago, the market slumped further in July, with the Baltic Dry Index falling to its lowest level since April 2003, nearly 6 months prior to the start of the shipping market boom.”

The Financial Times reported that the new issuance of asset-backed securities is on course to top $1 trillion for the first time in 2005 as the number of auto, student, and home equity loans continue to increase. In 2004, total ABS issuance was $896.6 billion, up 53.2% from 2003. Home equity loans grew by 10% in the first half of 2005 and accounted for about 40% of the ABS market during this time period.

According to a study by the Public Policy Institute of California, 20% of home buyers in California plow more than half their monthly income into their mortgages. Affordability rates have dropped to 16% statewide and to 9% in San Diego, according to the CAR. For moderate-income Californians—those earning $30,000 to $60,000—almost a third are spending more than half their income on housing, according to the study. In San Diego, 62% of home buyers opted for interest-only loans in 2004, according to First American/Loan Performance. In my view, there may be isolated pockets in the U.S. where home prices are still rising, but as a generalization, I strongly believe the fizzle is out of the housing market sizzle.

GeorgeOrwell: "In times of universal deceit, telling the truth will be a revolutionary act."

The Philly Fed Index had some interesting points. Despite continued cost pressures, prices for firms’ own manufactured goods were essentially steady in July. Only slightly more firms reported higher prices for their own manufactured goods than reported lower prices, and 78% of the firms indicated steady prices. The current prices received index fell from 12.0 to 3.0, its lowest reading since August 2003. Despite the moderation in the prices received for their own manufactured goods, firms reported higher production costs. Thirty-three percent of firms reported higher inputs costs in July. It should be noted that, going forward, 76% of the manufacturers expect further increases in energy costs, 65% expect price increases for raw materials, and 52% expect increases for intermediate goods. To me, this means lower profit margins, and lower profit margins are a prelude to less hiring and more layoffs.

George Washington: "Guard against the postures of pretended patriotism."

The Conference Board reported that, during the six-month span through July, the leading index increased 1.1%, the coincident index increased 1.1%, and the lagging index rose 1.7%. Ken Goldstein, the Conference Board’s chief economist stated “the leading economic indicators suggest moderate growth into the fall. The spike in energy prices is one factor in this outlook, which mirrors the economic situation in much of the rest of the industrialized world. Of more concern is the level of business and executive confidence. Both investment and hiring intentions reflect a level of caution over both pricing and profit strategies.”

There is a story from AFX News out of Hong Kong that Buffett is considering selling Berkshire’s stake in PetroChina. This rumor has contributed to the sharp decline in PTR stock. However, it does not explain away that, on a relative basis with Chevron, PetroChina’s market cap was way out of line when the shares were at $95 just a short time ago. On a full disclosure basis, I did write Buffett and pointed out PTR’s market cap as well as my view that PKZ was significantly undervalued. I doubt whether he even read my note. With ONGC/Mittal and PetroChina vying for PetroKazakhstan, shares of PKZ have awakened to the tune of 8 points, but I still believe it is a sleeper.

Frequently, bond mavens point out that U.S. Treasuries exceed Japan’s government debt in yield by roughly 2 ¾ percentage points and German debt by 1%. The reasoning goes that this differential in yield accounts in great part for foreigners purchasing our government debt. It might also explain arbitrageurs buying our debt and shorting Japan and Germany. In sum, our 10-year Treasury bonds yielding 4.21% might have little or nothing to do with our country being viewed as a safe haven. A country with twin tower debt exceeding $1 trillion in 2005 is, in my view, a country led by financial misfits. I wouldn’t care if the leaders shoot themselves in the foot, but spare the rest of the innocent taxpayers.

Today's Business Week had a list of 9 oil companies viewed favorably for portfolios. Included were PKZ and Ultra Petroleum.

Crude has rallied above $64 a barrel this morning with a greater focus on the problems in Ecuador.

TRW is closing a plant in Michigan and cutting 400 jobs.

Since we invaded Iraq in March 2003, at least 1,862 U.S. soldiers have died.

Rumsfeld: "Death has a tendency to encourage a depressing view of war."

Good News Bad News

8/18/05 Good News Bad News

8/18/05 Good News Bad News

Yesterday, crude declined $2.83 a barrel to close at $63.25. That’s the good news. With gasoline inventories 12% below last year’s levels, there are concerns about potential shortages. In addition, there are supply disruptions in Ecuador and Nigeria. Petroecuador
stated crude production had fallen 90% to 20,000 barrels. Shell Oil disclosed output disruptions at their flow station in Nigeria. To add a little more to the near-term direction of crude, Bloomberg reported Goldman Sachs Group Inc., the third- biggest U.S. securities firm by market value, raised its oil forecast for next year to $68 a barrel and said crude will stay at about $60 a barrel for years to come. Goldman's projection for New York crude prices for 2006 was boosted from $55 a barrel. The forecast for oil to stay at $60 after that was raised from $45 a barrel because cost uncertainties have delayed investment in new oil projects, according to the Aug. 17 report from the firm's Commodity Research analysts, including Steve Strongin and Jeffrey Currie.

Keep believing the figures on how great the employment picture is. Keep believing that Wal-Mart does not provide a decent wage and decent benefits. More than 11,000 people applied for 400 jobs at the company’s new 148,000 square foot store in Oakland, CA.

Keep believing that things are getting better in Iraq. More than 60 U.S. troops have been killed in Iraq this month.

The Wall Street Journal stated that Tommy Hilfinger is preparing to auction itself in the coming weeks. I hope the auction goes better than Hilfinger’s reality show. If you blinked, you missed it.

Barry Ritholtz: “Without energy, the SPX year-over-year quarterly earnings gains are a pathetic 4%.” The bulls had better root for Goldman Sachs’ new oil price projection to be correct. Of course, there is a downside to higher oil prices, such as, the PPI rising 1% in July. For math mavens, that’s an annual rate of 12% or surely enough for the Fed to continue raising rates high enough for the yield curve to invert.

According to the Economic Policy Institute, real hourly earnings fell in all but two out of the last 15 months. In fact, they reported that the real hourly wages of the workforce remain at almost the exact level as when the economic recovery began in November 2001. They stated “in July 2005 dollars, the wage was $16.15 in November 2001 but only $16.13 last month.” That being so, it is no wonder that we have reached the tipping point on housing prices as well as consumer spending. Those betting on a favorable Christmas season are in for an unwelcome surprise.

China will stop the alumina and iron alloy processing trade from August 22.The move is aimed at curbing exports of alumina and iron alloy which are high energy consuming products. According to the National Development and Reform Commission, China has already banned some iron and steel product exports, canceled export rebates of some products, and reduced the export rebate of steel and coal. The move will help control the processing of products that demand high energy consumption, high pollution and resources.

Trade between Iran and China came to some $7 billion in 2004, up 25 percent from $5.6 billion the previous year, with commercial exchanges projected to reach $10 billion a year by the end of 2010, according to Tehran's Iran-China Chamber of Commerce.
By comparison, Finance Ministry figures show Japan's trade with Iran came to 1.01 trillion yen in 2004, up just 2.3 percent from 991.3 billion yen in 2003.

Yesterday there was good news and bad news. For those long commodities and U.S. treasury bonds, you experienced some costly blows. For those long the dollar, you munched on a ham sandwich. For me, I lunched and heaved. That’s better than never having entered the ring. For those who can’t take a punch, I suggest you stay at the beach.

Michael Althsuler: “The bad news is time flies. The good news is you're the pilot.”

Real Earnings, Inflation, And PKZ

8/17/05 Real Earnings, Inflation, And PKZ

Real average weekly earnings fell by 0.2 percent from June to July after
seasonal adjustment, according to preliminary data released today by the Bureau
of Labor Statistics of the U.S. Department of Labor.  A 0.4 percent increase in
average hourly earnings was more than offset by a 0.6 percent increase in the
Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).
Average weekly hours were unchanged. Data on average weekly earnings are collected from the payroll reports of
private nonfarm establishments.  Earnings of both full-time and part-time
workers holding production or nonsupervisory jobs are included.  Real average
weekly earnings are calculated by adjusting earnings in current dollars for
changes in the CPI-W.Average weekly earnings rose by 2.7 percent, seasonally adjusted, from July
2004 to July 2005. After deflation by the CPI-W, average weekly earnings
decreased by 0.5 percent.

On a seasonally adjusted basis, the CPI-U, which was unchanged in
June, increased 0.5 percent in July. Energy costs advanced sharply,
increasing 3.8 percent in July after falling 0.5 percent in June.  Within
energy, the index for petroleum-based energy rose 6.1 percent in July,
accounting for over one-half of the increase in the overall CPI.  Energy
services increased 1.1 percent.  The index for food increased 0.2 percent
in July.  The index for fruits and vegetables, which fell 1.2 percent in
June, increased 1.6 percent in July.  The index for all items less food
and energy increased 0.1 percent for the third consecutive month.  A
decline in new vehicle prices--down 1.0 percent in July--was more than
offset by increases in the indexes for airline fares and for lodging away
from home.

The tale of 2 economies: China's industrial output grew 16.4 per cent during
the first half of this year and the gross domestic product grew 9.5 per cent.
U.S. industrial production in July rose a slim 0.1% with capacity utilization
standing at 79.7%. With excess capacity, why should corporations build new plants
in the U.S.?

U.S. companies may have to pay an average of 12.6 percent more for
their employees' health insurance next year, according to a survey by
benefits consultant Hewitt Associates.The rates are for HMOs,plans that
provide for privately insures Americans.In response, 40 percent of employers are proposing to shift more medical costs to
workers in the form of higher deductibles and a larger share of
premiums, according to the Hewitt survey. Overall, employers' health care costs have doubled since 1998 to about
$7,600 a worker this year and may reach $8,000 in 2006, said Ron
Fontanetta, a principal at benefits consulting firm Towers Perrin.

Home sales in the Bay Area stepped back from the record territory of recent months, a real estate information service reported Tuesday. The number of homes and condos sold in July in the nine-county region dropped 11.9 percent to 11,470 from 13,014 for June. That was down 10.8 percent from 12,862 for July last year, according to DataQuick Information Systems. The median price paid for a Bay Area home was $606,000. That was down 0.7 percent from $610,000 in June, and up 17.9 percent from $514,000 for July a year ago. The biggest year-to-year decline in sales was in San Francisco, down 21 percent to $637,000 but the median price there rose 19.4 percent to $776,000. Sales in San Mateo county dropped 18.3 percent to $806,000where the median price was up 17.5 percent to $759,000.

PKZ currently accounts for 12% of the oil output from Kazakhstan, where about 3.3% of the world's oil reserves are located. In the case of Unocal, I frequently mentioned that the highest bid would not be the winning bid. In the case of PKZ, I believe the wnning bid will be the highest bid. There is much discussion that India and China will sign an agreement by year-end. This agreement would be a collaboration involving both countries when bidding for petroleum assets. The case of PKZ is quite different. This involves ONGC Videsh bidding with Mittal. It is not bidding alone as a country identity. I am quite sure that Goldman Sachs, as advisor to PKZ, recognizes the difference and the firm will seek out the best price for PKZ shareholders. With crude continuing to trade around $66 a barrel, PKZ's reserves have become increasingly valuable in 2005. There should be increased awareness that Kazakhstan has enormous potential for natural resources.

I would like to reinforce a statement I made a few weeks ago. The new pipeline carrying PKZ oil to China will save $7 a barrel in transportation costs. Based on proven oil reserves, that savings works out to $3.85 billion or $52 a share. You might want to read what PetroChina stated today about bidding for PKZ: "One of our key strategies is to focus on oil and gas assets that are closer to home because of China's oil needs,' a source at PetroChina was quoted as saying. "We plan to transport the oil through the China-Kazakhstan pipeline to our refinery in Dushanzi in Xinjiang in northwest China," the source added.

The average price of gasoline at the pump has risen to $2.52 a gallon, and records have been set daily since August 8.

Iran's oil revenues from exports are expected to reach a record $43 billion in 2005.

A nationwide poll released today by the John J. Heldrich Center for Workforce Development at Rutgers University revealed that nearly 7 in 10 workers plan to stay on the job past retirement age-- including a growing number who say the decision will be driven by financial need. In 2000, 82% stated they would be finally able to retire by 65. In the newest survey, the number has dropped to 63%. In addition, 28% of boomers stated they plan to work part-time in retirement because of a need for money.

The VIX Index is beginning to wake up. It rose 10% yesterday and is up about 36% from its low. Traders often believe that the summer means a dull market with low volatility. Keep an eye on Iran. Volatility might be very much alive and well.

Have you ever considered going long lumber and shorting copper? Even though stockpiles of copper are at a 9-month high, copper is selling for a record $3,660 a ton.

The market cap for HP is about $73 billion. Dell's is roughly $89 billion. Hopefully, they will get to the same point. That would be, in my view, a sameness bringing forth uncommon value.

Volumes of mortgage applications rose 2.2% in the week ended Aug. 12 compared to the prior week.

India has received 1,312 applications for patent of pharmaceutical products, becoming only the second country after the U.S. to get a large number such requests.

Fifty-three metropolitan areas representing 31% of the total U.S. housing market are considered extremely overvalued and confront a high risk of future price corrections, according to study conducted by National City Corp. The study determines a market extremely overvalued if prices are 30% above where the study estimates they should be based on historic price data, area income, mortgage rates and population density.

Dan Scheinman, Cisco's Sr. VP for corporate development: "We came to India for the costs, we stayed for the quality, and we're now investing for the innovation."

Lifelines

8/16/05 Lifelines

The Baku-Tbilisi-Ceyhan pipeline passing via Turkey is scheduled to start carrying Azeri crude this Autumn with a capacity set to rise to one million barrels a day by the end of the decade. There are also plans to link this pipeline to the oil fields in Kazakhstan with a new pipeline.

A recent report released by the Shanghai Academy of Social Sciences (SASS) points out that the country's crude oil reserves will be exhausted within 14 years, based on the current proven oil reserve and scale of production. However an energy expert with the State Information Center told Interfax that the estimation is too pessimistic. China has a total national oil reserve standing at 2.38b tons. If the country continues to produces 180-200m tons every year, current reserves will be exhausted within 14 years, said the SASS report. "The proven oil reserve figure will definitely rise with the development of technology, and therefore, the reserves cannot be exhausted so quickly, " Niu Li, an energy expert with the Economic Prediction Center of the State Information Center, told Interfax. Niu added that reserves usually rise more quickly than actual production rates. Niu also said that the country may find more resources in the East China Sea and Xinjiang in the intervening years. "However, rapid economic growth will lead the country to import even more crude from the global market in the near future," said Niu. 68% of the 390 Chinese cities that rely on local mineral reserves to sustain their economies are in the "mature production stage" while another 12% are facing depletion. The Daqing Oilfield, the country's largest, produced 50m tons of oil per annum for 27 years in a row until 2004, but there are plans to allow output to fall by 40% by 2010, reaching only 30m tons per year. China's annual crude demand is expected to rise by 9.7% to 318m tons this year, suggesting that the country will need to import 135m tons this year, accounting for 42.45% of total demand and exceeding last year's figure of 40.5%, said a recent report by the Development Research Center under the State Council. The country's daily oil demand is predicted to reach 9.3m barrels by 2010, increasing by 37% from 2005, the Deutsche Bank predicted.

The NAHB-Wells Fargo housing market index slipped to 67 in August from 70 in July. It's the lowest level since April. "Builders still remain upbeat and confident," said Dave Wilson, president of the NAHB and a builder from Ketchum, Idaho." The index for current sales dropped to 72 from 76, the lowest in more than a year. The index for buyers' traffic fell to 50 from 55, matching the April low. The index for future sales remained at 77.

The Treasury Department reported U.S. June foreign capital inflows of $71.2 billion, up from $55.8 billion in May. A close look at the inflows for the first six months of 2005 give me an uneasy feeling. Those with the jack are not giving us their savings. Japan provided $21 billion and China provided $49 billion, but the UK gave us $120 billion and the remainder of Europe a total of $80 billion. In other words, those that could least afford it, provided the most. That does not speak well for the future.

Jack Benny: "I went to a meeting for premature ejaculation. I left early."

Singapore retail sales rose 9.4 percent in June from a year earlier, according to a report issued Monday,

After yesterday's close on the New York Stock Exchange, PKZ put out the following statement:
"PetroKazakhstan Inc. (the"Company") in response to market rumors and as requested by the Toronto StockExchange announces that it has received proposals to acquire all outstanding common shares of the Company pursuant to the process announced in its June 27, 2005 news release.The Company is in the process of assessing these proposals and expects that further discussions with interested parties will continue." In my view, the bidding for PKZ has taken on a very dynamic turn. I never gave much of a chance for India's ONGC to come out on top. However, ONGC's bid was made jointly with Lakshmi Mittal, majority owner of Mittal Steel, the world's largest steel company. He has a long history of doing business in central Asia and is responsible for much of the economic revival in this region. His presence in the bidding process changes the landscape considerably. For a PKZ shareholder, the news of the joint bid with Mittal is terrific news. The joint bid of China National Petroleum and PetroChina can no longer be considered the runaway favorite. There will be stiff competition, and, in my view, the bidding could go higher than I had previously envisioned. In any event, the eventual buyer will be getting an excellent long-term value, and one which is not fully appreciated. Both bidders understand the political climate, and I do not envision this aspect to be a problem. One point has been overlooked by many investors. Kazakhstan's 39.6 billion barrels of oil reserves at the end of 2004 were 35 percent greater than the U.S. total, according to data compiled by BP Plc.

For the first seven months of 2005, the CSFB/Fremont Hedge Fund Index climbed 3.29%.

Delta Airlines is selling its Atlantic Southwest Airlines for $425 in cash to SkyWest. The company stated yesterday that it isn't likely to get further debt financing because of its low credit rating and already-pledged assets and its operating cash flow won't be enough to meet the company's liquidity needs for the rest of the year.

John M. Berry on the Federal budget deficit: " Assuming current laws were unchanged, as the CBO is required to do, the cumulative budget deficit was projected to be about $2.1 trillion for the coming 10 years. Using some more realistic assumptions about extending expiring tax cuts, increases in discretionary spending and gradually reducing the military costs of fighting in Iraq and Afghanistan, the total would be more than double that amount."

In the January-July period, Kazakhstan's industrial output grew 5.1% year-on-year.

The EU pledged its support for Iran becoming the main transit route for central Asian oil and gas--- in exchange for a freeze on Tehran's nuclear program. The Iranian government rejected the proposal.

Yesterday's N.Y. Post article on Dow Jones caused quite a stir. The article did not cite any specific sources but still stated that some younger members of the Bancroft family, Dow Jones' controlling shareholder, are considering placing the company up for sale. The stock rose to $41+. In May, the stock sold at a yearly low of approximately $32. This month, members of the Bancroft family sold 99,000 shares in various transactions. With a market cap of almost $3.5 billion and selling at a stiff multiple of projected cash flow, at these levels I'll let the speculators risk their money.

Canadian premiers and territorial leaders signed a resolution calling on Ottawa to take all necessary measures to recover softwood duties and force Washington to respect the ruling under NAFTA that would have ended punitive duties on Canadian softwood lumber. Nafta panels have concluded on three occasions that the U.S. failed to prove that Canadian softwood poses a material threat of injury to .S. producers. Quebec Premier Jean Charest stated "this last ruling brings us to a tipping point. This issue contaminates other trade issues." British Columbia Premier Gordon Campbell stated "it's hard for us to see how you can build a long-term relationship in any kind of trade if the Americans aren't willing to live up to their obligations." The Bush administration is doing an excellent job of alienating our trading partners. It will not be long before we look in the mirror and realize our nation is without friends.

Teddy Roosevelt: "The President is merely the most important among a large number of public servants. He should be supported or opposed exactly to the degree which is warranted by his good conduct or bad conduct, his efficiency or inefficiency in rendering loyal, able, and disinterested service to the Nation as a whole. Therefore it is absolutely necessary that there should be full liberty to tell the truth about his acts, and this means that it is exactly necessary to blame him when he does wrong as to praise him when he does right. Any other attitude in an American citizen is both base and servile. To announce that there must be no criticism of the President, or that we are to stand by the President, right or wrong, is not only unpatriotic and servile, but is morally treasonable to the American public. Nothing but the truth should be spoken about him or any one else. But it is even more important to tell the truth, pleasant or unpleasant, about him than about any one else."

According to the AP, drivers in the southern province of Guangdong were waiting for hours for gas in lines up to a kilometer (a half-mile) long, sometimes leaving with empty tanks when supplies ran out, state media reports said. In the southern city of Shenzhen, which borders Hong Kong, more than half of all gas stations closed Monday as shortages worsened, the Hong Kong-based newspaper South China Morning Post reported Tuesday. Meanwhile, crude prices dipped to $65.50 a barrel this morning.

Wal-Mart Stores, Inc reported record second quarter sales and earnings for the
quarter ended July 31, 2005.  Net sales were $76.8 billion, an increase of
10.2 percent over the second quarter of fiscal 2005.  Net income for the
quarter was $2.8 billion, an increase of 5.8 percent from $2.7 billion in the
second quarter of fiscal 2005.  Earnings per share were $0.67, up from
$0.62 per share in the same prior year quarter. Net income for the six months ended
July 31, 2005 was favorably impacted by two items totaling $145 million after
tax or $0.03 per share:  an increase due to favorable tax resolutions of $77
million and positive legal developments of $68 million after-tax.
Lee Scott, President and CEO, said, "I am proud that the hard work of our
associates allowed us to report another record quarter.  Early in the quarter,
our results were disappointing; however, July came in stronger than expected.
Wal-Mart Stores did miss their plan as our customer continues to be impacted
by higher gas prices and it is difficult to improve our expense leverage in
the current environment." The company forecasts earnings per share for
the third quarter to be between $0.55 to $0.59, and for the year, the forecast is
$2.63 to $2.70 per share. To reach the upper end of the range, comp sales will need
to remain in the 4% growth area.

How have these high gas prices hurt consumer spending?
If the average car owner drives 12,000 miles a year and uses 600 gallons of gas
a year, the current high price of gas (being 67 cents a gallon higher than
this time last year) costs that driver about $8 more a week. With home prices having
risen substantially over the last few years, that $8 pales by comparison.

Jay London: "They asked me what I thought about euthanasia. I said I'm more
concerned about the adults."

Monday Musings

8/15/05 Monday Musings

Time spent in Chapter 11 can mean hemorrhaging money. In this year’s second quarter, UAL Corp. reported spending $1.4 billion on reorganization.

China’s July industrial production rose 16.1%.

As some of the troubled refiners return operationally, the crude market has cooled somewhat with prices drifting back towards the $66 per barrel level. Meanwhile, over this weekend, prices at the pump averaged $2.50 per gallon nationally.

Lowe’s expects to open a total of 150 stores this year with annual sales growth of 17% and an earnings per share range of $3.31 to $3.37. Lowe’s, like Walgreen’s, remains a choice for long-term investors. The stock rarely looks undervalued, but the annual consistency makes up for any valuation questions.

It is quite amazing that so few investors know much about Kazakhstan. This Republic, with 15 million people living in an area almost 4 times the size of Texas, is the largest of the former Soviet republics in territory, excluding Russia. It borders the Aral Sea and the Caspian Sea, and is rich in natural resources, such as, major deposits of petroleum, natural gas, coal, iron ore, and manganese.

Agilent unveiled a restructuring designed to cut 1,300 jobs and lower costs by $450 million, under which it will sell its chip unit for $2.66 billion and spin off two other businesses.

Work on a pipeline designed to transport natural gas from the Caspian region and the Middle East to the European Union (EU) has begun, a Romanian newspaper reported Friday.

China's second-biggest steelmaker, Anshan Iron and Steel Group, said today that it has merged with smaller competitor Benxi Iron and Steel Group, creating a rival for the nation's No. 1 steelmaker, Baosteel. China is the world’s biggest steel producer. It consumes about one-third of global steel output.

The President of India Dr APJ Abdul Kalam suggested that the Oil and Natural Gas Company(ONGC) should jump into the production of the alternative sources of energy and should make India an independent energy country by the year 2030. He hoped that ONGC would become a global energy giant in the years to come.

The average forecast for the July CPI is a rise of 0.4%. The government will emphasize the inflation rate ex food and energy. This implies that filling up your car with $2.50 a gallon gas is not materially different than it was in July 2004. If you believe that, then you probably believe we invaded Iraq over WMD. Is there any reason to believe that inflation has not invaded your household’s cash flow? Many say inflation is a hidden tax. I don’t find it so hidden. If there is inflation, and if you believe inflation will continue into at least the near-term future, then there is no justification for the spread between 2-year and 10-year Treasury bonds being a mere 21 basis points. That, to me, is an accident waiting to happen. Others probably disagree. Time will tell the real story.

Trends In The Making

8/14/05 Trends In The Making

The yen had its biggest weekly gain against the dollar since January.

Over this weekend, it has been reported that Delta Airlines is seeking bankruptcy financing from GE and others.

Josiah Royce: “Unless you can find some sort of loyalty, you cannot find unity and peace in your active being.”

According to the National Association of Realtors' statistics, 960,000 condos sold this year as of June, 12.4 percent, more than in all of 2004 and up 46.1 percent from all of 2002. The average condo price was $223,500 in June, up 14.8 percent from last year and 57.1 percent from three years ago.

Paul Krugman: “These days, Americans make a living selling each other houses, paid for with money borrowed from the Chinese."

Last year, foreign nationals earned almost 60% of American engineering doctorates. According to Engineering Trends, the U.S. ranked 16th per capita in the number of doctoral candidates and 25th in engineering undergraduates per million citizens.

On July 2, the "Joint Statement of the People's Republic of China and the Russian Federation Regarding the International Order of the 21st Century" sent a message to Washington stating that "the peoples of all countries should be allowed to decide the affairs of their own countries, and world affairs should be decided through dialogue and consultation on a multilateral and collective basis. The international community should thoroughly renounce the mentality of confrontation and alignment, should not pursue the right to monopolize or dominate world affairs, and should not divide countries into a leading camp and a subordinate camp..."

With regard to Iran, Bush stated he is keeping “all options open.” Russia and China have supplied Iran with arms, and stand ready to support that nation militarily. Both have kept all their options open. Hopefully, this will remain simply a war of words.

P.J. O’Rourke: “War is a great asshole magnet.”

Sol Palha: “Lumber prices topped out in July 2004 (over 1 year ago), experienced a sharp correction and then attempted to rally again but failed to take out their July 2004 highs. In contrast the Housing index (which is more or less a reflection of the housing markets) continued to rally and put in a new high in July exactly 12 months after the lumber market topped. This is a huge form of inter market negative divergence in action.”

As long as the yearly money supply growth exceeds GDP growth by 50 to 100%, the future path of the dollar will be down. There are too many dollars placed in circulation looking for a home, and there are too many alternative and available places for countries like China to park their growing hoard of free cash flow.

P.J. O’Rourke: "Every government is a parliament of whores. The trouble is, in a democracy, the whores are us."

In the past, I have discussed the Baltic Dry Index (BDI), a worldwide compilation of rates to book cargoes of raw materials on shipping routes around the globe. The index does not count ships carrying finished goods. From spring 2004 towards the end of 2004, a blow-off move carried the index from roughly 2650 to 6250. It has since plunged to roughly 2000. Only 3 years ago, the index stood at 1000. The real estate market is tame compared to the BDI. If expectations for future worldwide GDP growth were rosy, the BDI would not be in a funk.

Terence ( Publius Terentius Afer): “When the mind is in a state of uncertainty, the smallest impulse directs it to either side.”

The National Guard and Reserve have suffered more combat deaths in Iraq during the first 2 weeks of August than in any full month of the entire war.