5/15/04 Bush, China, BLS, Oracle, And Non-Reality

Bush is at it again. Few are buying the line. In Bridgeton, Missouri he stated “we knew Saddam had terrorist ties. The person responsible for the Berg death, Zarqawi, was in and out of Baghdad prior to our arrival, for example.” In a new Zogby poll, 58% disapproved of Bush’s overall performance; 64% are critical of his handling of the Iraq war; and 54% state that the U.S. is headed in the wrong direction.

China’s inflation rate rose to a 7-year high of 3.8% in April. Grain prices rose 34%. Retail sales increased 13%. China’s government is confident that it can cool GDP growth from the present 9 plus percent to 7 percent. Finance Minister Jin Renquing stated “we are confident that the government has the ability to realize a soft landing of the economy and smooth and sustained growth.” Despite their best efforts, steel investment surged 173% in the first two months of 2004. The Chinese economy is headed for a landing, but there isn’t a seat belt made today that can withstand the shock of a 747 landing on a rice patty. Much of the world’s recent export growth has been due to buying from China. That is true of Japan, the U.S., Germany, and many ASEAN economies.

Oracle lowered its bid for PeopleSoft from $26 to $21. This bid is going nowhere. I have stated this from day one. Our government will not approve it and the EU will not approve it. Oracle’s stock has proven a disappointment from the first announcement of this proposed acquisition. Yesterday, Oracle’s CFO stated “our revised offer reflects changes in market conditions and in PeopleSoft’s market valuation.” Maybe they should be more concerned about Oracle’s market valuation for their own shareholders.

The BLS has seen milk, eggs, butter, and gas jump in price over the past year. With higher inflation and the unemployment situation, there has been added pressure on food pantries. Yesterday, Ronald Guzick, regional economist at the BLS, stated “nobody buys everything in the market basket every month. Some things are going up, but other things are not going up and some things actually go down..” Guzick is a government employee. I am certain his wages and benefits have not actually gone down.

According to the BLS, real average weekly earnings increased by 0.2% from March to April after seasonal adjustment. However, a 0,3% increase in average hourly earnings was partially offset by a 0.2% increase in the CPI for urban wage earners and clerical workers. Average weekly hours were unchanged. Before adjustment for seasonal change and inflation, average weekly earnings were $520.71 in April 2004 compared with $510.02 a year earlier. In other words, for those lucky enough to be employed, it’s pretty damn tough to offset price increases for gas, milk, eggs, and butter. No wonder so many folks on Main Street think they are worse off today than in January 2001.

International Brotherhood of Police Officers voted for Bush in 2000 and yesterday endorsed Kerry. They stated "after three and a half years of disappointing leadership under George Bush, we need to change course in November and elect a President with a real record of supporting police officers and a lifetime of standing with law enforcement.”

The AAA stated on Thursday that gas prices hit another record high in the latest week at an average of $1.95 per gallon.

Japanese firms are eyeing India for its market and low cost of production. Yuzo Kawamori, general manager at Kansai Paint Co., remarked “I think we’ve come to the point where you can’t avoid India’s market. (Kansai is building its fifth pant in India.) Incomes are set to rise and potential buyers of goods could increase… I think there is that kind of growth attraction.” KDDI, Japan’s second largest telecom operator, inaugurated service in India in January. Dentsu, Japan’s largest ad agency, opened a second subsidiary in India in February. Toyota will begin production of car transmissions in India next month for exports to its affiliates around the world.

Kevin Rollins will become CEO of Dell in July. He stated that, in the latest quarter, overseas revenue increased 29% and that the company would continue to focus on sales outside the U.S.

By July 12, Material Sciences Corp. will close its steel coil coating facility in Middletown, Ohio and 87 jobs will be eliminated. The plant has been operating there for 11 years. The company maintains that the plant does not provide an adequate return to shareholders.

5/14/04 Crisis Or Opportunity?

Commerzbank’s Nick Parsons: “Experience, though, teaches us never to underestimate the markets’ ability to panic.”

In its report on Outsourcing in Financial Services, TowerGroup estimates that the financial services industry’s global IT spending on outsourcing services will grow from $27.8 billion in 2003 to $38.2 billion in 2006, representing a compound annual growth rate of more than 11%. The offshore component of this will grow 28% annually during the same time period.

Jerry Rao, the newly elected chairman of India’s IT industry alliance, NASSCOM, stated “the size of the entire Indian IT industry is less than the Accenture topline, forget the Microsofts.”

The intermediate goods index, part of the PPI, climbed 1.4% in April compared with March’s gain of 0.7%. Excluding food and energy, the rise was 1.1% versus 0.6%. Manufacturers of crude goods received prices that were 3% higher in April versus March’s rise of 0.7%. The crude oil energy portion of the index increased 6.3% in April following a 6.1% decline in March. Natural gas rose 7.9% in April after a 14% drop in March.

As of May 13, according to the Department of Defense, 456 U.S. soldiers and marines had been killed in action in Iraq since Bush declared an end to major combat operations on May 1, 2003. As of May 13, more than 770 U.S. service members have died since the beginning of the Iraq war.

The Rocket is 7-0 with an ERA of 1.99.

The miracle in San Antonio: Derek Fisher’s shot with 0.4 seconds on the clock. The near-miracle in San Antonio: Tim Duncan’s shot with one second remaining in the game. It’s not over until the fat lady sings.

Retail sales were down in April, the first drop in 7 months. The biggest culprit was the slowdown in auto sales. You can expect more where that came from.

Seventy four percent of emergency physicians surveyed stated that their uninsured patients are more likely to die prematurely. With at least 44 million uninsured Americans, why should Congress worry? They have been provided health coverage.

In the latest quarter, WalMart’s international sales rose 22.1% and the operating profit increased a whopping 46.6%. That’s where the action is at WalMart.

China’s consumer prices rose in April at their fastest pace in 7 years. Led by food, the increase was 3.8% compare with March’s rise of 3%. The government’s average inflation target is 3%. According to the People’s Bank of China, consumption accounts for less than 60% of China’s GDP.

China ran a $2.26 billion trade deficit in April. A year ago they had a $1 billion trade surplus. Year to date, China’s imports rose nearly 43% while exports rose 32%. For the first four months of 2004, China has a trade deficit of $10.76 billion compared to a $93 million surplus in the same four months of 2003. The trend is not encouraging.

A Kaiser Family Foundation study released this week estimated that caring for the 44 million uninsured Americans will cost the U.S.$41 billion in 2004.

Richard Myers, chairman of the Joint Chief s of Staff: “There is no way to militarily lose in Iraq. There is also no way to militarily win in Iraq.” Too bad he didn’t provide that advice prior to March 20, 2003.

5/13/04 Leave Your Worries On The Doorstop

Santomero: “Deflation worries are in the past.”

Sony cuts the price of PlayStation 2 to $149 from $179 in order to compete with Xbox.

The U.S. government posted a federal budget surplus of $17.6 billion in April compared with a $51.1 billion surplus a year ago. The surplus is the smallest for the month of April in 10 years. Outlays rose 12.4% from a year ago while receipts fell 4.8% from a year ago. The Treasury department took a page from CEOs who low-ball quarterly estimates only to come in results that “beat the street.” The Treasury department had primed bond traders with an April surplus of $15 billion. They beat their low-ball figure but it still stunk the house out. You can’t put a good spin on lousy cash flow.

According to Ipsos PharmTrends, the rate of non-fulfillment for prescriptions received from physicians outpaces the growth in prescription drug expenditures or fulfillment by consumers. In 2003, 16 million (14.5%) households in the U.S. did not fill a prescription they received, an increase of 21% above 2002 levels. The number of seniors with insurance to support payments for multiple prescription drugs is still much lower than the average. As Ipsos reported, “drug costs continue to be prohibitive for many Americans, particularly seniors. For many seniors on a fixed or low income, the price of multiple treatments can be unaffordable.”

The U.S. trade deficit widened by 9.1% in March to a record $46 billion, significantly higher than the pre-report estimate of $42.6 billion. The spin is that the rise was due to higher oil import prices and the strong U.S. economy that created a greater appetite for imports. Even though the dollar was weak in March, exports only rose 2.6%. The rise is mainly attributable to exports to the EU, China, and Japan.

The U.S. Energy Department stated that crude oil supplies fell by 1.1 million barrels in the latest reporting period. However, the American Petroleum Institute reported that the supply declined by 2.1 million barrels. Any way you cut it, the supply news was not good for pricing.

In 2003, the total volume of paper checks declined for the 3rd consecutive year, according to the Federal Reserve. On the other hand, the Automatic Clearing House Network operated by the Fed moved $27.4 trillion in 2003. In 2001, there were only 1.23 billion ACH transactions. The number jumped to 10.4 billion in 2003.

The Asian Development Bank expects China’s GDP to grow at an 8.3% rate this year. Japan’s total exports increased by 2.4 trillion yen last year, and 79% of that comprised increased exports to China. A word of caution is in order. Bank credits represented 85% of all funds raised in 2003 in China.

A representative price for a Montblanc pen in the U.S is $235. Just in the town of Wengang in China, there are at least 60 factories turning out carbon-copy counterfeits of Montblanc pens at the equivalent cost to the consumer of $1 to $2. The Chinese have transformed the word wholesale to counterfeit. Maybe you’d like a Harley jacket or a North Face ski jacket or a Ralph Lauren cashmere sweater or a “made in Italy” tie or maybe a Titleist golf ball or a DVD of your favorite movie. Fifty years ago designer dresses were being “copied” and sold at huge discounts. Now the variety of products available has exploded.

Tourism is Pennsylvania’s second-largest industry, and with about 117 million visitors annually, it is the fourth most visited state in the country, tied with New York. The total impact of travelers’ spending on the state’s economy is about $34 billion a year, and tourism is responsible for more than 563,000 jobs. Governor Rendell’s office provided these numbers. One would not think that Pennsylvania would equal New York in the number of tourists. One doesn’t think of this state as a major tourist destination. Compared with New York and Florida and California, Pennsylvania does not receive much buzz in the way of tourism. A little research can unlock some interesting facts. Maybe a bit more research and less rumor following could improve investing results.

5/12/04 The Senate

Martin Wolf: “The world is too complex and dangerous for the pious simplicities and arrogant unilateralism of George W. Bush.”

Raghavan Mayur, president of TIPP: “The share of households classified as ‘job sensitive’ is 32%. These households tend to be pessimistic about the economy.”

Abraham Lincoln: “The best thing about the future is that it comes only one day at a time.”

The average unemployment rate in urban China exceeds 11%.

According to a recent Goldman Sachs quarterly survey of global confidence, the general business outlook declined from 93.8 in February to 75.9 in March, the lowest level in almost one year. There was an unusually large drop in capital expenditure plans as well as the consideration of mergers and acquisitions.

As crude oil traded at a 13-year high of $40 per barrel and demand for crude reached a 16-year high, the U.S. Senate on Tuesday overwhelmingly passed $14 billion in tax breaks for the energy industry. Included are tax provisions for the renewable energy and energy efficient industries, including a $2,000 tax credit for buyers of gas-electric hybrid vehicles. There is an important tax credit for oil and gas production from marginal wells, which are defined as those that produce less than 15 barrels of oil per day. It is reported that more than 80% of all domestic oil production in the U.S. comes from marginal wells. There are incentives to encourage development of clean coal technology and renewable fuels. There are tax breaks for building more energy-efficient homes and buying more energy-efficient appliances. In addition, the bill would encourage construction of a $20 billion pipeline to carry natural gas from Alaska’s North Slope by guaranteeing a price support if the price falls below a certain level.

Yesterday Kerry had a chance to make some lasting political points. He blew the opportunity. The Senate by a single vote rejected an election-year effort Tuesday to extend federal unemployment benefits. It required 60 votes to pass. The vote was 59-40. Kerry was the only senator who missed the vote. He was campaigning Tuesday in Kentucky. If he is to get elected, Kerry had better get his priorities in order. The cost to extend the benefits would amount to about $6 billion. There is $13+ billion in the unemployment insurance trust fund.

Only one-fifth of HP’s PCs are built to order.

5/11/04 Scanning The Globe

The Defense Science Board and the National Defense University have finished separate reviews of the $23.5 billion Air Force plan to lease and buy 100 Boeing 767 refueling tankers. According to sources familiar with the Defense Science Board report, there is less urgency in replacing the Air Force’s 40-year-old tanker fleet, partly due to improved efficiency in maintenance operations and also they raised the possibility of buying used 767s from cargo airlines instead of purchasing new ones. The National Defense University stated the commercial lease was inappropriate since Boeing had a quasi-monopoly on the aircraft and that the military was a quasi-monopoly buyer. Boeing knows the 767 tanker project is stalled. They announced the layoff of 50 contract workers on the 767 program in Wichita. A spokesman for Boeing stated “there will be a number of additional employees on the tanker team affected by this.” It is important to note that the future of the 767 assembly line could hang in the balance because of the commercial version of the aircraft have slowed considerably. I anticipate the line will be shut down in late October. Boeing is in a heap of trouble. Commercially, they are essentially a one-product manufacturer, the 737. Even with their defense business, the company’s future revenue stream is suspect. It will be several years until a 7E7 is built and delivered. With the loss of income from the tanker deal, Boeing will need to revise its earnings estimates and its projections for future layoffs. Boeing will be a further drag on the performance of the Dow.

It’s coming up to ice cream season. Get ready to pay more for a scoop, pint, quart, or gallon. According to the International Dairy Foods Association, retail and restaurant ice cream constitutes a $20 billion business in the U.S. with the average person consuming 26 servings of ice cream a year. A pint of Ben & Jerry’s ice cream is going up 8%, the most in the company’s 26 years. Because of several cyclones in Madagascar, the price of vanilla syrup rose from $75 per gallon to over $400. Due to political unrest in the Ivory Coast, the price of cocoa rose about $1 a pound, the largest jump in 17 years. As one woman in New Hampshire remarked, “it’s ridiculous. You can go to the market and buy a half-gallon for the same price as a small cone.”

Toyota’s fourth quarter net income more than doubled, and their annual net profit exceeded $10 billion, twice the combined earnings of GM and Ford. One should note that currency exchange losses cut the profit by about 140 billion yen.

Anthony Cordesman: “Those Americans and Britons who mistreated the prisoners acted in the direct interests of al-Qaeda, Iraqi insurgents, and their enemies throughout the world. Their names will be written invisibly on the body bags of every coalition soldier and friendly Iraqi who dies from now on- and the consequences of their actions will exact a price in blood for years to come.”

Assets under the global hedge fund business now exceed $1.1 trillion, according to the Alternative Fund Services Review.

With orange juice futures having recently hit a 27-year low, you might consider switching from milk to orange juice. Florida has the largest crop in the state’s history, and that, combined with lower demand resulting from the low-carb diet craze, has pressured prices.

MCI to cut 7,500 jobs.

Alan King: “Marriage is nature’s way of keeping us from fighting with strangers.”

Delta Air has asked pilots for a 30% wage cut. The pilots have countered with a 9% reduction. The company stated that, if they don’t get the requested 30% reduction, then it might have to file for bankruptcy. In its filing, Delta stated “if we cannot achieve a competitive cost structure, regain sustained profitability and access the capital markets on acceptable terms, we will need to pursue alternative courses of action…including the possibility of seeking to restructure our costs under Chapter 11.”

Today, Cisco reports its quarterly results after the close. It might be wise to note that this quarter had 14 weeks compared with the 13 weeks in the prior year period. As such, it is not unreasonable for a Cisco shareowner to hope for close to a 10% rise in this quarter’s revenue.

The Saudi Ambassador stated that “Saudi Arabia believes that it is necessary for OPEC to increase the production ceiling by at least 1.5 million barrels per day.”

The ASEAN finance ministers held a meeting one month ago in Singapore. The President of the Asian Development Bank estimated that ASEAN countries, taken together, posted a better-than-expected GDP growth of 4.5% last year, slightly higher than the 4.1% achieved I 2002. The 10 ASEAN countries are now forecast to post an average GDP growth of 5.5% in 2004 and 5.2% in 2005. It is anticipated that Viet Nam will continue to be the fasting growing ASEAN country with an expected growth rate of 7.2%, followed by 6% in Lao PDR and Malaysia, and I the 4 to 5.5% range in the other ASEAN countries.

Federal Finance Minister Shaukat Aziz has expressed optimism that Pakistan would achieve an 8% GDP growth rate within three years.

5/10/04 Cracks

According to Trilby Lundberg, U.S. gasoline prices rose by slightly more than 10 cents per gallon in the past two weeks, the biggest jump since last August. The weighted national average for all three grades of gasoline was just over $1.96 per gallon. The markets are concerned about inflation. Think about this. The price of mini-vans has been cut once again. More importantly, beginning May 1, Ford began offering its dealers $1,500 per F-150 pickup sold this month. This vehicle is regarded as Ford’s bread and butter item, its hottest seller. Look around you on the highways. Over the past two weekends, were there less cars on the road? The Saudis have recommended increasing oil production, and the price of gas is down over a $1 per gallon on the commodity markets today. The average American worker is being squeezed. With wages and salaries failing to meet or exceed the inflation rate, cash flow is in harm’s way. With the recent sharp rise in interest rates, it is highly doubtful that the consumer shall have a continued willingness to take on more debt. Big ticket items, such as, cars will be the first to back up on the dealer shelves, so to speak. Greater incentives are on the way. It will be interesting to watch the auto companies offer zero percent financing as they swallow the higher interest costs.

In California, this year’s budget shortfall represents 16% of the $76 billion general fund budget.

Since 2000, food stamp use grew faster in Arizona than in any other state due to the state’s rapid population growth accompanied by the difficult economic conditions and a sluggish job market.

Suffering the biggest daily loss since 9/11, the TOPIX fell 5.68% and the Nikkei plunged 4.84%.

This month, the Bank of America opens it branch in Southern India. They may hire 1,500 people there instead of the originally projected 1,000.

Norsk Hydro, the world’s third largest aluminum producer, announced cutting up to 800 jobs. Management complained that productivity was too low at their plants.

The Goldman Sachs Commodity Index (GSCI) is the most widely followed commodity index. With its heavy weighting in energy, it is not surprising that the index rose 30% in 2002, 20% in 2003, and so far this year another 18.4%. Between January 1970 and March 2004, the GSCI returned an annualized 12.1%. As such, as a generalization, I do not believe commodities are the place to be today. As they decline in price, the vision of inflation will appear less ominous. This will prove a friendlier scenario for treasury securities.

Over the past three years, the strongest industry in our country has been housing. It has been the stalwart. As 30 year mortgages approach 6.25%, the dependency on housing would be ill-advised. Its recent run has seen its best days, and so has refinancing. With the tax credits fading into the sunset, the extra terrestrial economic goosing is behind us. It’s back to basics. We are no longer playing on artificial turf, as it were. That means you will need to change shoes and wear cleats.

Last week it was doughnuts and today it is pasta. The maker of Ronzoni and San Giorgio pasta will file for Chapter 11 bankruptcy. Pasta sales are down 7% from a year ago.

Since December, 250,000 employees have been added in retailing and restaurants. As consumers cutback on discretionary spending, I wonder how many of those 250,000 will lose their lower wage-paying jobs? The good news is those jobs do not require an expensive college education. As such, repaying college loans should not be an issue.

5/9/04 Happy Mother’s Day

I would like to spread some cheer. Comerica’s National Recession Watch Index, which forecasts the likelihood of a national recession occurring six to 12 months in the future, registered a 6% probability in April. That is the same reading as the one in March. The chief economist for Comerica stated “this marks the 33rd consecutive month below 12% and suggests that the U.S. economy will experience above-average real GDP growth over the next 12 months. A slow drift upward in the Recession Watch Index may have begun. A similar pattern of strength prefaced the 1994-95 expansions.” Comerica is Michigan’s oldest and largest bank. I certainly hope their economic vision proves to be on the mark.

Five meat packers control 74% of the beef we eat today. Four companies control 66% of the pork we consume. However, 50 companies control 95% of the chicken we eat. McDonald’s, with its 30,000 locations, is the largest buyer of beef and chicken and the second largest buyer of pork. The company owns 90% of the Chipotle chain, which has 300 restaurants and is expanding. As Chipotle’s roll-out goes nationwide, I believe McDonald’s will then become the nation’s largest buyer of pork.

It was just one year ago in the beginning of June that interest rates had a very swift and sharp rise. At that time, very few bond experts had predicted this increase. The situation has now shifted 180 degrees. Those same experts anticipate a continuing rise in interest rates. In my view, when the Fed raises rates in June, that will represent the high point in long-term interest rates for 2004. The Fed is not only way behind the curve. They have been benched by the daily movement in rates. The Fed has become the manipulator of last resort. They have dishonored the free enterprise system. Ayn Rand would no longer recognize Alan Greenspan.

Cheney: “Don Rumsfeld is the best secretary of defense the United States has ever had. People ought to get off his case and let him do his job.” One must forgive Cheney. Casper, Wyoming is not known for deep thinkers.