8/6/05 You Tell Me
During the last three months, the equity indices have had a respectable rally. During this timeframe, the yield on 10-year Treasury bonds has risen from 3.88% to 4.39%, a jump of 13%. Any way you cut it, an increase of 51 basis points or one-half a percentage point is not something to ignore. It's not chopped liver. Higher interest rates do not provide ham sandwiches and they are quicksand to both the housing industry and equities. Maybe Fed Funds will rise to 4.25% by year-end, as suggested by Lehman. The point is they are going higher, and looking back, you will realize the Fed broke the back of the housing mania. Rather than hiring in home construction, there will be layoffs. There will be layoffs in the mortgage lending business. Real estate brokers will leave because it will become more difficult to earn a living. Rather than focus on payrolls in July, look out six months. Look out nine months. If you look past your nose, the thinking gets clearer.
Let's look at the gains in the services sector for July: retail 50,000; professional and technical 23,000; financial 21,000; food services 30,000; healthcare 29,000; and construction 21,000. Wait just a minute. Are these gains for real? Are they simply seasonally adjusted job gains? The BLS wouldn't pull a stunt like that. Or would they?
Let's take a closer look at the gains over the past 12 to 24 months. Over the past 12 months: credit intermediation 93,000; real estate 54,000; food services 262,000; and healthcare 256,000. Over the past two years retail has gained 352,000 jobs. You tell me. If the economy slows to 2% growth or less, how many of these seasonally adjusted added jobs will be flushed down the toilet?
Morgan Stanley's Richard Berner: "Flow of funds data from the Fed show that property values for the household and non-profit sector increased by 14.4% in the first quarter of 2005 from last year. If the current price is sustained for the year, the value of these properties will have risen by $2.7 trillion this year, more than 20% of U.S. GDP." Might we consider that real estate prices did in fact peak in this year's first quarter? Looking back in a few months, I believe we will find that this is exactly what has taken place. According to data from the California Association of Realtors, the unsold inventory index stands at 2.7 months versus 1.7 months in the year-ago period.
The EquiTrend tool measured overall brand equity for more than 1,100 brands in 35 categories based on five key measures: familiarity, quality,purchase intent, brand expectations and distinctiveness. In 2005, ReynoldsWrap(R) Aluminum Foil was ranked as the No. 1 brand in overall brand equity,followed by Ziploc(R) Food Bags, Heinz(R) Ketchup, Hershey's(R) Milk ChocolateCandy Bars and Chiquita(R) Bananas.
U.S. consumer credit rose in June at an annual rate of 8.2% or $14.5 billion. This represented a sharp reversal from May's revised drop of $1.2 billion.
The oil business is changing in Venezuela. Companies will be required to create joint ventures where state-owned Petroleos de Venezuela SA. has majority ownership or else. The 2001 Hydrocarbons Law decreed by Chavez will go into effect-- finally.
Amazon.com is exploring a possible entry into the music and video download business, music industry executives said Friday.
It is interesting that tax revenues are rising in 2005. It is even more compelling that interest on the U.S. debt has risen 13% over the past year, and this is during a period of historically low interest rates. Should rates rise another 75 basis points by year-end, interest on the U.S. debt will become a significant stumbling block. It is not a coincidence that the U.S. dollar index has resumed its decline. Even though the rate on 2-year Treasury bonds reached their highest yield since July 2001, the U.S. dollar index declined 1.4% this week. This should be highlighted by investors.
Leveraged speculation can lead to unalterable and dire consequences.
Doug Noland on April 20, 2001: "For the Greenspan Fed, it has come down to one simple (John Law-style) objective: at all costs, entice the speculative "Hot Money" to remain in "The Game," while attempting to encourage enough additional financial sector leveraging to maintain general systemic liquidity. The truth of the matter is that a system of "managed liquidity" functions with all the appearances of a miracle throughout the credit-induced bubble expansions, while instilling great (albeit, false) and increasingly entrenched confidence in both the system and monetary authority (as well as silly notions of New Paradigms). The menace of illiquidity, however, is always lurking around the bend as the downside brings the harsh reality of faltering asset markets, collapsing leverage, unavoidable illiquidity, and a wrecking ball process of shattering confidence."
Late Friday, Berkshire Hathaway released its second quarter results. The release indicates a marked-to-the-market loss of $600+ million in currency transactions. There are always little pricks who attempt to take cheap shots at Buffett. My memory is pretty fair. Buffett is the only investor who has produced 20%+ annualized returns for 40 years. Over the long-term, I would not want to place my money on the dollar. When the final tally is announced, I predict Buffett's Berkshire Hathaway will generate a handsome return on its currency transactions.
With crude closing at $62.31 a barrel, we can expect to pay record prices at the pump for the remainder of August. Before you know it, we will be going into winter. Heating oil is at $1.73. We can expect to pay record prices for heating oil in the coming months. Of course, the Fed is not concerned about inflation. Then again, maybe their heads are in an undesirable place.
Yesterday, China exported Baidu.com, a search engine company, to our financial market. I thought China was exporting deflation. Baidu's IPO was priced at $27. It closed the day at $122.54. Now that's a ham sandwich!
John Hussman: "Maybe the strong advance-decline line isn't a picture of uniformity at all, but is being driven higher because investors and institutions are chasing performance in speculative stocks. Maybe the behavior of the A-D line has gotten mixed up with a small-cap “blowoff.” "
As interest rates rise, P/E ratios decline.
For its first 30 years, Microsoft has been highly successful and has grown to the world's number one software company. Considering their product lines lack innovation and basically are clones of products produced by other companies, such as, Apple (Windows), Netscape (browser), Lotus (office notes), Sony (X-box), Oracle (database), Google (search) and others, I find it amazing that Microsoft is feverishly filing patent applications. So far, 4,000 patents have been received and another 3,300 are pending. Meanwhile, its shares traded at a nine-month high on Friday.
Bill Gates: "I think blogging is super-important, and we've got to do a lot more software. The phenomena for us is we've got in beta this MSN Spaces thing, and it lets you leverage everything you do around Messenger - that's your buddy lists and those relationships - to set up blogs, and who has access, and who gets notified." I guess we should add Google's blogger software to the growing clone list.
Rep. Ron Paul: “I’m very concerned that the Patriot Act could be used to justify surveillance or intimidation of individuals solely because of their lawful political activities,” Paul stated. “The Act defines terrorism so broadly that legitimate protest or other political action could be chilled. For example, a scuffle at an otherwise peaceful pro-life demonstration might allow the federal government to label the sponsoring organization and its members as terrorists. Similarly, you could be placed under federal surveillance if you belong to a gun rights group that a future administration doesn’t like.”
Friday, August 05, 2005
Thursday, August 04, 2005
Ring The Register
8/5/05 Ring The Register
Puru Saxena: "America's economy is now worth US$ 11.2 trillion. Over the past 5 years only US$ 1.6 trillion was added to the economy while credit market debt rose sharply by US$ 7.6 trillion! In summary, it now takes a record amount of debt to produce one dollar of economic growth. America's debt to GDP ratio has ballooned to over 350% when compared to "just" 120% in the 1970's."
Microsoft Corp. said after Thursday's closing bell that it has named Kevin Turner as chief operating officer, effective Sept. 8. Turner previously served as president and chief executive of Sam's Club, a division of Wal-Mart Stores Inc. Turner, 40, will lead the company's sales, marketing and internal information-systems groups and report to Chief Executive Steve Ballmer. He's getting a pay package worth up to $33.4 million.
A slight downturn in economic expectations and a drop in the strength of personal finances has American consumers continuing to be unenthusiastic about the economy, among those surveyed by the August RBC CASH (Consumer Attitudes and Spending by Household)Index. The telephone survey of 1,000 individuals taken across the U.S. this week reflected increasing pessimism about the economy and investing, which first surfaced in the July RBC CASH index. The RBC CASH Index for August dropped again to a new low following a drop in July that seemed triggered by the London bomb attacks and increasing oilprices. But, there is a bright spot: consumers feel good about their jobs. Confidence in job security, traditionally one of the most robust and resilient indicators of consumer confidence, rebounded from a sharp drop in July. The RBC Jobs Index stands at 114.6, up significantly from last month's 109.6 and, looking forward to the next six months, a majority (52%) now feel it is unlikely that they, someone in their family or someone they know personally will lose a job as a result of economic conditions. "If people feel good about their jobs, they will feel good about theireconomic futures," said Vince Boberski, chief economist for RBC Dain Rauscher."I see hope in this job index and I think this confidence in jobs could begin to translate into general consumer confidence later in the year." "But, the continued weakness in the RBC CASH Index makes us more cautious about projections for the economy into 2006 and beyond," Boberski said. Outside of jobs, the RBC CASH Index survey found consumers feeling pessimistic for the second month in a row. The index for August stands at 72.6, roughly unchanged from July's 20-month low. While opinions about the current strength of local economies are unchanged from July, expectations for the next six months declined somewhat in August; the RBC Expectations Index declined marginally in August, and now stands at 32.2 (compared to 34.4 inJuly). Fifteen percent now feel their local economy will be somewhat weakersix months from now, compared to 11% in July. Overall, one-in-five (20%)believe their local economy will be weaker in the future. In addition, Americans now rate their current personal financial situationas significantly weaker than one month ago. One-in-five (21%) rate theircurrent finances as strong (compared to 24% in July). Coupled with this is a slight increase in the percentage of Americans who rate their personalfinances as weak (28% in August, compared to 26% in July). This trend in personal finances is clearly felt in the RBC Current Conditions Index, which stands at 85.8 (down from 87.0 in July) and the RBC Investment Index, which stands at 78.2 (down from 81.3 in July). The decline in personal financial strength is substantial enough to offset slight gains among those comfortable with making household purchases (major and otherwise), increased feelings of job security, and a small rise ininvesting confidence.
The UK cut their ST benchmark rate a quarter percentage point from 4.75% to 4.5%. Meanwhile, the country's broad money supply growth was a year-over-year rate of 11% during June of this year.
"So far this [oil] market resembles kids taking a dare to walk through a cemetery at night," said James Williams, an economist at WTRG Economics.
"Every sound is blown out of proportion and the crack from someone stepping on a twig can send the whole group running for the safety of a street lamp," he said. Crude is once again approaching the $62 a barrel level.
Would there be a large outcry if a state-controlled Chinese company made a proposal to buy a U.S. tobacco company?
At $8.65, September natural gas is trading at its highest price since November 2004.
Earlier in the week, I suggested a hedge ratio of going long 1.3 shares of Chevron and shorting 1 share of PetroChina. The disparity of the two market caps has narrowed to Chevron's $127 billion and PetroChina's $154 billion. I believe, in time, that ratio will move in favor of Chevron. Meanwhile, there are some who may wish to ring the register. Currently, the hedge trade is + 2 1/2 points in the Chevron long position and + 6 1/2 points on the PetroChina short sale.
According to SDI/Weather Trends Inc., this July was among the 14 hottest Julys since 1985. Meanwhile, yesterday it was 90 degrees in Bellevue, Washington.
Did you read the August 1 online edition of the journal Proceedings of the National Academy of Sciences where a carbon nanotech-laser treatment destroyed cancer cells without damaging healthy tissue? Stanford University scientists developed the treatment.
According to J.P. Morgan, this year’s global issuance of collateralised debt obligations (CDOs) was running at $123 billion by late July, sharply up from last year’s total in the same period of $78 billion.
Commander Eileen Collins looking at Earth from Discovery:"The atmosphere almost looks like an eggshell on an egg, it's so very thin. We know that we don't have much
and we need to protect what we have."
Danny McGoorty Irish Pool Player: "I have never liked working. To me a job is an invasion of privacy."
My math skills need a refresher course. I was wrong about the July payrolls report. I wasn't even close as 207,000 jobs were added to nonfarm payrolls, the Labor Department said Friday. The unemployment rate remained at 5%. Payrolls in May and June were revised higher by a cumulative 42,000. Average hourly earnings rose by 6 cents, or 0.4%, to $16.13.The average workweek was steady at 33.7 hours in July. Service-producing jobs rose by 203,000, including 50,000 in retail, the most in more than five years. Factory jobs fell 4,000. How many retail jobs do you need to hold at one time to make the mortgage payment? I'll take a closer look at this report and maybe discuss it a bit more tomorrow. In the meantime, I suggest keeping cool and avoid the economic gibberish on the TV.
Puru Saxena: "America's economy is now worth US$ 11.2 trillion. Over the past 5 years only US$ 1.6 trillion was added to the economy while credit market debt rose sharply by US$ 7.6 trillion! In summary, it now takes a record amount of debt to produce one dollar of economic growth. America's debt to GDP ratio has ballooned to over 350% when compared to "just" 120% in the 1970's."
Microsoft Corp. said after Thursday's closing bell that it has named Kevin Turner as chief operating officer, effective Sept. 8. Turner previously served as president and chief executive of Sam's Club, a division of Wal-Mart Stores Inc. Turner, 40, will lead the company's sales, marketing and internal information-systems groups and report to Chief Executive Steve Ballmer. He's getting a pay package worth up to $33.4 million.
A slight downturn in economic expectations and a drop in the strength of personal finances has American consumers continuing to be unenthusiastic about the economy, among those surveyed by the August RBC CASH (Consumer Attitudes and Spending by Household)Index. The telephone survey of 1,000 individuals taken across the U.S. this week reflected increasing pessimism about the economy and investing, which first surfaced in the July RBC CASH index. The RBC CASH Index for August dropped again to a new low following a drop in July that seemed triggered by the London bomb attacks and increasing oilprices. But, there is a bright spot: consumers feel good about their jobs. Confidence in job security, traditionally one of the most robust and resilient indicators of consumer confidence, rebounded from a sharp drop in July. The RBC Jobs Index stands at 114.6, up significantly from last month's 109.6 and, looking forward to the next six months, a majority (52%) now feel it is unlikely that they, someone in their family or someone they know personally will lose a job as a result of economic conditions. "If people feel good about their jobs, they will feel good about theireconomic futures," said Vince Boberski, chief economist for RBC Dain Rauscher."I see hope in this job index and I think this confidence in jobs could begin to translate into general consumer confidence later in the year." "But, the continued weakness in the RBC CASH Index makes us more cautious about projections for the economy into 2006 and beyond," Boberski said. Outside of jobs, the RBC CASH Index survey found consumers feeling pessimistic for the second month in a row. The index for August stands at 72.6, roughly unchanged from July's 20-month low. While opinions about the current strength of local economies are unchanged from July, expectations for the next six months declined somewhat in August; the RBC Expectations Index declined marginally in August, and now stands at 32.2 (compared to 34.4 inJuly). Fifteen percent now feel their local economy will be somewhat weakersix months from now, compared to 11% in July. Overall, one-in-five (20%)believe their local economy will be weaker in the future. In addition, Americans now rate their current personal financial situationas significantly weaker than one month ago. One-in-five (21%) rate theircurrent finances as strong (compared to 24% in July). Coupled with this is a slight increase in the percentage of Americans who rate their personalfinances as weak (28% in August, compared to 26% in July). This trend in personal finances is clearly felt in the RBC Current Conditions Index, which stands at 85.8 (down from 87.0 in July) and the RBC Investment Index, which stands at 78.2 (down from 81.3 in July). The decline in personal financial strength is substantial enough to offset slight gains among those comfortable with making household purchases (major and otherwise), increased feelings of job security, and a small rise ininvesting confidence.
The UK cut their ST benchmark rate a quarter percentage point from 4.75% to 4.5%. Meanwhile, the country's broad money supply growth was a year-over-year rate of 11% during June of this year.
"So far this [oil] market resembles kids taking a dare to walk through a cemetery at night," said James Williams, an economist at WTRG Economics.
"Every sound is blown out of proportion and the crack from someone stepping on a twig can send the whole group running for the safety of a street lamp," he said. Crude is once again approaching the $62 a barrel level.
Would there be a large outcry if a state-controlled Chinese company made a proposal to buy a U.S. tobacco company?
At $8.65, September natural gas is trading at its highest price since November 2004.
Earlier in the week, I suggested a hedge ratio of going long 1.3 shares of Chevron and shorting 1 share of PetroChina. The disparity of the two market caps has narrowed to Chevron's $127 billion and PetroChina's $154 billion. I believe, in time, that ratio will move in favor of Chevron. Meanwhile, there are some who may wish to ring the register. Currently, the hedge trade is + 2 1/2 points in the Chevron long position and + 6 1/2 points on the PetroChina short sale.
According to SDI/Weather Trends Inc., this July was among the 14 hottest Julys since 1985. Meanwhile, yesterday it was 90 degrees in Bellevue, Washington.
Did you read the August 1 online edition of the journal Proceedings of the National Academy of Sciences where a carbon nanotech-laser treatment destroyed cancer cells without damaging healthy tissue? Stanford University scientists developed the treatment.
According to J.P. Morgan, this year’s global issuance of collateralised debt obligations (CDOs) was running at $123 billion by late July, sharply up from last year’s total in the same period of $78 billion.
Commander Eileen Collins looking at Earth from Discovery:"The atmosphere almost looks like an eggshell on an egg, it's so very thin. We know that we don't have much
and we need to protect what we have."
Danny McGoorty Irish Pool Player: "I have never liked working. To me a job is an invasion of privacy."
My math skills need a refresher course. I was wrong about the July payrolls report. I wasn't even close as 207,000 jobs were added to nonfarm payrolls, the Labor Department said Friday. The unemployment rate remained at 5%. Payrolls in May and June were revised higher by a cumulative 42,000. Average hourly earnings rose by 6 cents, or 0.4%, to $16.13.The average workweek was steady at 33.7 hours in July. Service-producing jobs rose by 203,000, including 50,000 in retail, the most in more than five years. Factory jobs fell 4,000. How many retail jobs do you need to hold at one time to make the mortgage payment? I'll take a closer look at this report and maybe discuss it a bit more tomorrow. In the meantime, I suggest keeping cool and avoid the economic gibberish on the TV.
Wednesday, August 03, 2005
Trials And Tribulations
8/4/05 Trials And Tribulations
King Pharmaceuticals (KG) and Palatin Technologies, Inc. (PTN) announced yesterday that they have initiated patient enrollment in two double-blind, placebo-controlled Phase IIb clinical trials of PT-141 in patients with erectile dysfunction (ED). The main objectives of these studies are to further evaluate safety, treatment duration, patient populations and a range of doses that will be incorporated into Phase III pivotal trials. PT-141 is a melanocortin agonist that King and Palatin are jointly developing for the treatment of male and female sexual dysfunction. The first Phase IIb clinical trial will evaluate the safety and efficacy of PT-141 in 560 non-diabetic patients suffering from mild to severe ED. The second clinical trial will similarly evaluate 265 diabetic patients with ED. Both clinical trials will involve an "at home" three-month treatment period conducted at approximately 35 clinical trial sites throughout the United States. Additionally, the clinical trials will evaluate a range of PT-141 intranasal doses between 5 mg and 15 mg. "The initiation of these two double-blind, placebo-controlled Phase IIb clinical trials is a major milestone in the development of PT-141. We believe the data from this extensive Phase IIb program will allow us to confidently select doses, end points and treatment periods for use in the design of the pivotal Phase III trials," commented Dr. Carl Spana, CEO and President of Palatin Technologies. The non-diabetic Phase IIb clinical trial is scheduled to conclude in mid-2006, while the conclusion of the diabetic Phase IIb clinical is scheduled to follow in the second half of 2006.
Yesterday, the Institute for Supply Management reported that its index designed to measure the economy's service-sector activity fell to 60.5 in July. The consensus forecast was looking for something around 61.0, and the results compared with a June result of 62.2. One should keep in mind that our economy is essentially services based rather than manaufacturing based Importantly, there was a 10.5-point surge in the index's prices-paid component. It rose to 70.3, versus June's reading of 59.8.
David Taffi: "The next time you pull out a Federal Reserve Note with an incremental cost of production near zero and the electronic version cost of absolute zero, remember what side of the trade you are on. They want inflation. They need inflation. We will have inflation. "
Applications for U.S. home mortgages fell last week as interest rates on 30-year loans rose more than in any week since March, industry group figures showed on Wednesday. The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity fell 0.3 percent in the week ending July 29, adding to the previous week's 5.8 percent loss. The four-week moving average is down 3.2 percent.
General Glut: "Maybe making new houses and home improvements out of gingerbread is a good strategy going into the future. At least we'll be able to eat them then, because we might very well have to. There won't be any income sources left to buy food."
As a percentage of personal disposable income, household debt is at an all-time high, while the savings rate has dropped to 0%. That combination spells trouble.
Despite inventory of crude oil being 8% above year-ago levels, crude sits just above $61 a barrel this morning.
Since we invaded Iraq in March 2003, at least 1,821 members of our U.S. military have been killed.
India consumed about 33 billion cubic yards of natural gas in 2002, and consumption is forecast to rise to 44 billion in 2010 and 60 billion in 2015.
Almost unnoticed, France's Total announced Tuesday the purchase of a small Canadian oilsands company Deer Creek Energy Ltd for $1.35 billion. I wonder whether Total will be a bidder for PetroKazakhstan. On a comparable basis, PKZ offers much more value than does Deeer Creek Energy.
For August, Wal-Mart is projecting a 3 to 5 percent same-store sales increase.
Ernest Hemingway: "The first panacea for a misguided nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists."
King Pharmaceuticals (KG) and Palatin Technologies, Inc. (PTN) announced yesterday that they have initiated patient enrollment in two double-blind, placebo-controlled Phase IIb clinical trials of PT-141 in patients with erectile dysfunction (ED). The main objectives of these studies are to further evaluate safety, treatment duration, patient populations and a range of doses that will be incorporated into Phase III pivotal trials. PT-141 is a melanocortin agonist that King and Palatin are jointly developing for the treatment of male and female sexual dysfunction. The first Phase IIb clinical trial will evaluate the safety and efficacy of PT-141 in 560 non-diabetic patients suffering from mild to severe ED. The second clinical trial will similarly evaluate 265 diabetic patients with ED. Both clinical trials will involve an "at home" three-month treatment period conducted at approximately 35 clinical trial sites throughout the United States. Additionally, the clinical trials will evaluate a range of PT-141 intranasal doses between 5 mg and 15 mg. "The initiation of these two double-blind, placebo-controlled Phase IIb clinical trials is a major milestone in the development of PT-141. We believe the data from this extensive Phase IIb program will allow us to confidently select doses, end points and treatment periods for use in the design of the pivotal Phase III trials," commented Dr. Carl Spana, CEO and President of Palatin Technologies. The non-diabetic Phase IIb clinical trial is scheduled to conclude in mid-2006, while the conclusion of the diabetic Phase IIb clinical is scheduled to follow in the second half of 2006.
Yesterday, the Institute for Supply Management reported that its index designed to measure the economy's service-sector activity fell to 60.5 in July. The consensus forecast was looking for something around 61.0, and the results compared with a June result of 62.2. One should keep in mind that our economy is essentially services based rather than manaufacturing based Importantly, there was a 10.5-point surge in the index's prices-paid component. It rose to 70.3, versus June's reading of 59.8.
David Taffi: "The next time you pull out a Federal Reserve Note with an incremental cost of production near zero and the electronic version cost of absolute zero, remember what side of the trade you are on. They want inflation. They need inflation. We will have inflation. "
Applications for U.S. home mortgages fell last week as interest rates on 30-year loans rose more than in any week since March, industry group figures showed on Wednesday. The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity fell 0.3 percent in the week ending July 29, adding to the previous week's 5.8 percent loss. The four-week moving average is down 3.2 percent.
General Glut: "Maybe making new houses and home improvements out of gingerbread is a good strategy going into the future. At least we'll be able to eat them then, because we might very well have to. There won't be any income sources left to buy food."
As a percentage of personal disposable income, household debt is at an all-time high, while the savings rate has dropped to 0%. That combination spells trouble.
Despite inventory of crude oil being 8% above year-ago levels, crude sits just above $61 a barrel this morning.
Since we invaded Iraq in March 2003, at least 1,821 members of our U.S. military have been killed.
India consumed about 33 billion cubic yards of natural gas in 2002, and consumption is forecast to rise to 44 billion in 2010 and 60 billion in 2015.
Almost unnoticed, France's Total announced Tuesday the purchase of a small Canadian oilsands company Deer Creek Energy Ltd for $1.35 billion. I wonder whether Total will be a bidder for PetroKazakhstan. On a comparable basis, PKZ offers much more value than does Deeer Creek Energy.
For August, Wal-Mart is projecting a 3 to 5 percent same-store sales increase.
Ernest Hemingway: "The first panacea for a misguided nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists."
Tuesday, August 02, 2005
One Year Ago
8/3/05 One Year Ago
The July payroll numbers are released this Friday. The average estimate of economists is a gain of 180,000 jobs. Do you remember last July? The gain was 32,000, and it was the worst jobs report since December 2003. Services added a net 14,000 jobs, and this was after a gain of 14,000 in the health sector and a gain of 42,000 in the professional sector, of which most were administrative (low paying) and the remainder largely temp professional jobs. What happened was simple. The month was hit with negative bias factors mixed with negative revisions. Could this combo happen again this Friday? I wouldn't bet the ranch on 180,000 jobs and I wouldn't look for much improvement in wages and hours worked. Workers have been taking it on the chin for several years. So how is it that U.S. consumer spending grew 0.8% in June while incomes rose only 0.5% and the personal savings rate fell to 0%, the lowest since October 2001? Freddie Mac has the answer. U.S. homeowners took cash out of their equity in their homes in 74% of the mortgages refinanced in the second quarter, the highest percentage since the end of 2000. Equity cashed out rose to $59 billion in the second quarter from $43 billion in the first quarter. Freddie Mac expects homeowners to take out $162 billion in 2005 after cashing out $140 billion in 2004. Homeowners cash out equity when they take out a larger loan balance when they refinance. As home prices escalate and mortgage rates remain at historically low levels, the ability to cash out is enhanced.
David Campbell: "Discipline is remembering what you want."
In the June quarter, Delta Airlines experienced a $385 million increase in fuel expense over the prior year's quarter. This amounted to an increase of 57.5%. Interestingly, the company's market cap is $363 million. The company stated that "every 1 cent increase in the average annual cost per gallon of jet fuel results in approximately $25 million in additional mainline fuel expense per year." In sum, the price of fuel matters a great deal to stockholders in airline companies. You had better hope oil does not rise much higher than it is presently.
UTStarcom, a wireless and network supplier, is finding business conditions pretty rough in China. The company experienced a sharp second quarter decline in sales in China, incurred a loss, and stated that 3rd quarter sales would be approximately $100 million below Wall Street estimates.
With PetroChina stock gapping up to the $94-$95 level, what chance is there for ONGC to make PKZ an offer it can't refuse? Maybe with a little luck, PKZ holders will receive a healthy share exchange offer from PetroChina and then the arbitrageurs will be wanting to short PTR stock. We can make it on both sides-- with a little luck. I should also mention that Chevron should take a long look at buying PKZ. Chevron's joint venture in Kazakhstan would fit beautifully with PKZ's operations. Double digit free cash flow growth should make a healthy incentive for potential buyers.
I will ask this question once again. If housing is so strong, then why have lumber prices declined in 2005?
Will the UK lower interest rates this week?
Since we invaded Iraq in March 2003, over 1,800 members of our Armed Forces have been killed.
According to the Moscow Times, Google may open a center in St. Petersburg, Russia and hire 3,000 employees.
Crude is trading at $62 a barrel early Wednesday morning.
William James: "In the practical use of our intellect, forgetting is as important as remembering."
If corporate profits in the third and fourth quarter grow by double digits, then there is a great likelihood that the yield curve will cease being flat. That may prove a problem for the housing market.
The July payroll numbers are released this Friday. The average estimate of economists is a gain of 180,000 jobs. Do you remember last July? The gain was 32,000, and it was the worst jobs report since December 2003. Services added a net 14,000 jobs, and this was after a gain of 14,000 in the health sector and a gain of 42,000 in the professional sector, of which most were administrative (low paying) and the remainder largely temp professional jobs. What happened was simple. The month was hit with negative bias factors mixed with negative revisions. Could this combo happen again this Friday? I wouldn't bet the ranch on 180,000 jobs and I wouldn't look for much improvement in wages and hours worked. Workers have been taking it on the chin for several years. So how is it that U.S. consumer spending grew 0.8% in June while incomes rose only 0.5% and the personal savings rate fell to 0%, the lowest since October 2001? Freddie Mac has the answer. U.S. homeowners took cash out of their equity in their homes in 74% of the mortgages refinanced in the second quarter, the highest percentage since the end of 2000. Equity cashed out rose to $59 billion in the second quarter from $43 billion in the first quarter. Freddie Mac expects homeowners to take out $162 billion in 2005 after cashing out $140 billion in 2004. Homeowners cash out equity when they take out a larger loan balance when they refinance. As home prices escalate and mortgage rates remain at historically low levels, the ability to cash out is enhanced.
David Campbell: "Discipline is remembering what you want."
In the June quarter, Delta Airlines experienced a $385 million increase in fuel expense over the prior year's quarter. This amounted to an increase of 57.5%. Interestingly, the company's market cap is $363 million. The company stated that "every 1 cent increase in the average annual cost per gallon of jet fuel results in approximately $25 million in additional mainline fuel expense per year." In sum, the price of fuel matters a great deal to stockholders in airline companies. You had better hope oil does not rise much higher than it is presently.
UTStarcom, a wireless and network supplier, is finding business conditions pretty rough in China. The company experienced a sharp second quarter decline in sales in China, incurred a loss, and stated that 3rd quarter sales would be approximately $100 million below Wall Street estimates.
With PetroChina stock gapping up to the $94-$95 level, what chance is there for ONGC to make PKZ an offer it can't refuse? Maybe with a little luck, PKZ holders will receive a healthy share exchange offer from PetroChina and then the arbitrageurs will be wanting to short PTR stock. We can make it on both sides-- with a little luck. I should also mention that Chevron should take a long look at buying PKZ. Chevron's joint venture in Kazakhstan would fit beautifully with PKZ's operations. Double digit free cash flow growth should make a healthy incentive for potential buyers.
I will ask this question once again. If housing is so strong, then why have lumber prices declined in 2005?
Will the UK lower interest rates this week?
Since we invaded Iraq in March 2003, over 1,800 members of our Armed Forces have been killed.
According to the Moscow Times, Google may open a center in St. Petersburg, Russia and hire 3,000 employees.
Crude is trading at $62 a barrel early Wednesday morning.
William James: "In the practical use of our intellect, forgetting is as important as remembering."
If corporate profits in the third and fourth quarter grow by double digits, then there is a great likelihood that the yield curve will cease being flat. That may prove a problem for the housing market.
Uncommon Comparative Values
8/2/05 Uncommon Comparative Values
Every year I mention a situation which holds, in my view, uncommon comparative value. In 2005, when Harley Davidson’s market cap exceeded GM’s, I suggested buying GM and shorting Harley. Then I suggested buying GM, Ford, and Harley Davidson and shorting DaimlerChrysler. Today, we have another uncommon comparative value. Chevron’s market cap is $123 billion and PetroChina’s is $163 billion. Chevron is more attractive based on its earnings per share, book value, depth of management experience, technology, diversified asset base, dividend yield, and the strength of its balance sheet. There are only 8 days left prior to the Aug. 10 vote on the Unocal merger. That represents 8 days for arbitrageurs to short Chevron prior to the merger becoming effective. I do not believe this uncommon comparative value will last for a long time. You might consider buying 1.3 shares of Chevron and shorting 1 share of PetroChina. This strategy is not for the faint of heart. Just because we normally do quite nicely on these relationship trades doesn’t mean this will work out. However, I wouldn’t bet against it. Value normally wins out.
John P. Hussman: “Large capitalization breadth has glaringly failed to confirm the recent advance. The apparent strength in market breadth is little more than a speculative chase after small-cap momentum.”
In the first six months of 2005, China imported a net 400,000 bpd of oil products, according to Customs data, compared to 700,000 bpd in the year earlier period. For all of 2005, China’s Commerce Minister is estimating China’s demand for crude oil will rise about 6% from last year’s 6.2 million bpd; however, this year’s second half consumption will be only 1.2% above last year’s comparable period. Have you considered that, over the short-term, demand for oil products could in fact be slowing? Maybe crude at $61 a barrel is overpriced. Maybe over the long-term, demand for natural gas will grow faster than crude, and maybe natural gas is the place to have your investment dollars. If the price of crude does decline in the short-term, there is no question that the hot money in PetroChina will get burned and that investors in Chevron will weather the storm quite nicely on a comparative basis.
The June pending existing home sales index rose 3.6% from June 2004.
The July ISM Manufacturing Index rose to 56.6% from 53.8% in June. The new orders index rose to 60.6% from 57.2% in June. The production index rose to 61.2% from 55.6%. The employment index rose to 53.2% from 49.9%. The prices paid index fell to 48.5% from 50.5%. The surprising strength in this report was unwelcome news to the bond market, and the yield on the 10-year Treasury bond rose to 4.32%. Does anyone believe the yield will rise above 5% before year-end?
Fool’s gold is the Russell 2000. The p/e on this index is 30 times plus.
Next month the acquisition of Western Wireless by Alltel will become effective. About 140 Western Wireless workers will lose their jobs.
June construction fell for the fourth consecutive month, but on an annualized basis, the value of construction came in at $1.1 trillion or about 10% of GDP.
One might keep an eye on the Rydex Cash Flow ratio. It tells you how much cash was actually moved in or out of the fund.
The U.S. population is 295 million. Australia’s is 20 million. In June, the economy in Australia created 41,700 new jobs, and in the last 10 months, a total of 362,000 new jobs. Before you get excited about job creation in the U.S., you might take a peek elsewhere. It’s no wonder that, over the past three years, the strength in the Australian dollar has overwhelmed the performance (or lack of) of our dollar.
Every year I mention a situation which holds, in my view, uncommon comparative value. In 2005, when Harley Davidson’s market cap exceeded GM’s, I suggested buying GM and shorting Harley. Then I suggested buying GM, Ford, and Harley Davidson and shorting DaimlerChrysler. Today, we have another uncommon comparative value. Chevron’s market cap is $123 billion and PetroChina’s is $163 billion. Chevron is more attractive based on its earnings per share, book value, depth of management experience, technology, diversified asset base, dividend yield, and the strength of its balance sheet. There are only 8 days left prior to the Aug. 10 vote on the Unocal merger. That represents 8 days for arbitrageurs to short Chevron prior to the merger becoming effective. I do not believe this uncommon comparative value will last for a long time. You might consider buying 1.3 shares of Chevron and shorting 1 share of PetroChina. This strategy is not for the faint of heart. Just because we normally do quite nicely on these relationship trades doesn’t mean this will work out. However, I wouldn’t bet against it. Value normally wins out.
John P. Hussman: “Large capitalization breadth has glaringly failed to confirm the recent advance. The apparent strength in market breadth is little more than a speculative chase after small-cap momentum.”
In the first six months of 2005, China imported a net 400,000 bpd of oil products, according to Customs data, compared to 700,000 bpd in the year earlier period. For all of 2005, China’s Commerce Minister is estimating China’s demand for crude oil will rise about 6% from last year’s 6.2 million bpd; however, this year’s second half consumption will be only 1.2% above last year’s comparable period. Have you considered that, over the short-term, demand for oil products could in fact be slowing? Maybe crude at $61 a barrel is overpriced. Maybe over the long-term, demand for natural gas will grow faster than crude, and maybe natural gas is the place to have your investment dollars. If the price of crude does decline in the short-term, there is no question that the hot money in PetroChina will get burned and that investors in Chevron will weather the storm quite nicely on a comparative basis.
The June pending existing home sales index rose 3.6% from June 2004.
The July ISM Manufacturing Index rose to 56.6% from 53.8% in June. The new orders index rose to 60.6% from 57.2% in June. The production index rose to 61.2% from 55.6%. The employment index rose to 53.2% from 49.9%. The prices paid index fell to 48.5% from 50.5%. The surprising strength in this report was unwelcome news to the bond market, and the yield on the 10-year Treasury bond rose to 4.32%. Does anyone believe the yield will rise above 5% before year-end?
Fool’s gold is the Russell 2000. The p/e on this index is 30 times plus.
Next month the acquisition of Western Wireless by Alltel will become effective. About 140 Western Wireless workers will lose their jobs.
June construction fell for the fourth consecutive month, but on an annualized basis, the value of construction came in at $1.1 trillion or about 10% of GDP.
One might keep an eye on the Rydex Cash Flow ratio. It tells you how much cash was actually moved in or out of the fund.
The U.S. population is 295 million. Australia’s is 20 million. In June, the economy in Australia created 41,700 new jobs, and in the last 10 months, a total of 362,000 new jobs. Before you get excited about job creation in the U.S., you might take a peek elsewhere. It’s no wonder that, over the past three years, the strength in the Australian dollar has overwhelmed the performance (or lack of) of our dollar.
Sunday, July 31, 2005
Risk Arbitrage
8/1/05 Risk Arbitrage
According to the current issue of Newweek, the Pentagon has developed a detailed plan in recent months to scale down the U.S. troop presence in Iraq to about 80,000 by mid-2006 and down to 40,000 to 60,000 troops by the end of 2006, according to two Pentagon officials involved in the planning who asked not to be identified because of the sensitive nature of their work. Their account squares with a British memo leaked in mid-July, report Senior Editor Michael Hirsh and National Security Correspondent John Barry in the current issue of Newsweek. "Emerging U.S. plans assume that 14 out of 18 provinces could be handed over to Iraqi control by early 2006, allowing a reduction inoverall [U.S. and coalition forces] from 176,000 down to 66,000," says the Ministry of Defense memo.
Lloyd Douglas: "If a man harbors any sort of fear, it makes him landlord to a ghost."
According to the Financial Times, CNOOC is struggling to keep its attempt to buy Unocal alive amid mounting concerns that political opposition and the US group's backing for a $17.3bn bid by Chevron might force the Chinese company to withdraw its $18.5bn offer. The state-controlled Chinese company is likely to make a decision within the next 48 hours, with an announcement expected as early as Wednesday or one week prior to the shareholder vote on Chevron's acquisition of Unocal.
The battle for control of Unocal can serve as an excellent learning experience for those wishing to engage in risk arbitrage. The way the process begins is often the way it ends. CNOOC was the first company to express an interest in acquiring Unocal. That interest surfaced in the beginning of 2005. It is hard to imagine that CNOOC waited until June 23 to go public with a specific proposal, and even then, it had contingencies. It's not enough to talk and dangle an interest. Maybe that influenced millions of Unocal shares to be purchased, and maybe the loss on those shares will serve as a lesson. I doubt it though. Greed has a way of overpowering rationality and clear thinking. I have never seen a company with so many experienced advisors produce so much hot air. The handwriting was on the wall for months. So few bothered to look with a dispassionate eye. That's why Unocal has been trading at a premium to Chevron's bid for over 90 days. Risk arbitrage is a good deal more complicated and sophisticated than buying and selling shares of GE, for example. It's not for the faint of heart, but it can be most rewarding. Unfortunately, most get burned out after only a few years. That's life in the fast lane.
Doug Firebaugh: "Usually a person has more faith in their fear than faith in the future."
For shareholders of PetroKasakhstan, the ineptness exhibited by CNOOC may serve as a blessing. PetroChina will not make the same mistakes, and their effort to acquire PKZ should be aggressive, focused, and timely. I would be more than surprised if PetroChina did not come out a winner. It should be quite a battle with ONGC. China going head-to-head with India.
Andre Gratian: "The Decennial pattern has an unblemished history for the past 125 years, and if history repeats itself, the Dow Jones industrials and the S&P 500 will be higher on December 31st, 2005, than they were on January 1st."
Back in the latter part of 2004 and just before Microsoft paid a $3 dividend, I had recommended cutting back on holdings in the company at $30 per share and above. This weekend Barron's wrote a bullish piece on Microsoft. I would continue to reduce holdings at $28 and above, and this equates to $31 and above the pre-dividend payment.
Douglas V. Gnazzo: "The greater the debt, the greater the potential demand for dollars to pay off that debt. Which is why I said that massive debt amounts to a massive synthetic short position against the dollar."
Saudi's King Fahd died. Crude oil climbed above $61 a barrel this morning.
Atkins Nutritionals made a bankruptcy filing.
According to the current issue of Newweek, the Pentagon has developed a detailed plan in recent months to scale down the U.S. troop presence in Iraq to about 80,000 by mid-2006 and down to 40,000 to 60,000 troops by the end of 2006, according to two Pentagon officials involved in the planning who asked not to be identified because of the sensitive nature of their work. Their account squares with a British memo leaked in mid-July, report Senior Editor Michael Hirsh and National Security Correspondent John Barry in the current issue of Newsweek. "Emerging U.S. plans assume that 14 out of 18 provinces could be handed over to Iraqi control by early 2006, allowing a reduction inoverall [U.S. and coalition forces] from 176,000 down to 66,000," says the Ministry of Defense memo.
Lloyd Douglas: "If a man harbors any sort of fear, it makes him landlord to a ghost."
According to the Financial Times, CNOOC is struggling to keep its attempt to buy Unocal alive amid mounting concerns that political opposition and the US group's backing for a $17.3bn bid by Chevron might force the Chinese company to withdraw its $18.5bn offer. The state-controlled Chinese company is likely to make a decision within the next 48 hours, with an announcement expected as early as Wednesday or one week prior to the shareholder vote on Chevron's acquisition of Unocal.
The battle for control of Unocal can serve as an excellent learning experience for those wishing to engage in risk arbitrage. The way the process begins is often the way it ends. CNOOC was the first company to express an interest in acquiring Unocal. That interest surfaced in the beginning of 2005. It is hard to imagine that CNOOC waited until June 23 to go public with a specific proposal, and even then, it had contingencies. It's not enough to talk and dangle an interest. Maybe that influenced millions of Unocal shares to be purchased, and maybe the loss on those shares will serve as a lesson. I doubt it though. Greed has a way of overpowering rationality and clear thinking. I have never seen a company with so many experienced advisors produce so much hot air. The handwriting was on the wall for months. So few bothered to look with a dispassionate eye. That's why Unocal has been trading at a premium to Chevron's bid for over 90 days. Risk arbitrage is a good deal more complicated and sophisticated than buying and selling shares of GE, for example. It's not for the faint of heart, but it can be most rewarding. Unfortunately, most get burned out after only a few years. That's life in the fast lane.
Doug Firebaugh: "Usually a person has more faith in their fear than faith in the future."
For shareholders of PetroKasakhstan, the ineptness exhibited by CNOOC may serve as a blessing. PetroChina will not make the same mistakes, and their effort to acquire PKZ should be aggressive, focused, and timely. I would be more than surprised if PetroChina did not come out a winner. It should be quite a battle with ONGC. China going head-to-head with India.
Andre Gratian: "The Decennial pattern has an unblemished history for the past 125 years, and if history repeats itself, the Dow Jones industrials and the S&P 500 will be higher on December 31st, 2005, than they were on January 1st."
Back in the latter part of 2004 and just before Microsoft paid a $3 dividend, I had recommended cutting back on holdings in the company at $30 per share and above. This weekend Barron's wrote a bullish piece on Microsoft. I would continue to reduce holdings at $28 and above, and this equates to $31 and above the pre-dividend payment.
Douglas V. Gnazzo: "The greater the debt, the greater the potential demand for dollars to pay off that debt. Which is why I said that massive debt amounts to a massive synthetic short position against the dollar."
Saudi's King Fahd died. Crude oil climbed above $61 a barrel this morning.
Atkins Nutritionals made a bankruptcy filing.
Governments
7/31/05 Governments
Edward R. Murrow: “A nation of sheep will beget a government of wolves.”
In 2004, the state of Illinois was the nation’s leading soybean producer and also the number 2 corn producer as it accounted for almost 20% of the corn crop. Maybe you have been reading about the lack of rain in Illinois. The dry spell is the worst in 20 years, and it is stunting the soybean and corn crops. So what do our elected politicians in the House and the Senate do? They pass the energy bill, and within that bill is a provision that 7.5 billion gallons of ethanol must be added to the fuel supply annually. It doesn’t matter that ethanol producers presently receive tax breaks worth more than 50 cents a gallon. These elected officials never gave a thought to the supply and demand situation of corn when the weather impacts the crop. Why? Because these same elected officials are intent on getting re-elected. It doesn’t concern our citizenry that they are voting for individuals who are dead from the neck up.
Thick Nhat Hanh: “In order to rally people, governments need enemies. They want us to be afraid, to hate, so we will rally behind them. And if they do not have a real enemy, they will invent one in order to mobilize us."
Japan’s June exports rose 3.6% from a year earlier. The June unemployment rate fell to a 7-year low. June industrial production rose 1.5% from May. The Japanese economy has improved for three consecutive quarters. The most glaring problem has been the lack of consumer spending, which rose but a mere 0.1% in June versus June 2004, but in fact, declined 1.4% from May 2005. This cautious consumer spending has not been lost on the currency market as the dollar stands at 112.42 versus the yen. One might ask whether Japan is making a turn for the better and, at the same time, whether the American consumer has spent his wad, so to speak. Saying it another way, at current levels, what is the risk/reward of going long the yen versus the dollar? I much prefer a creditor nation over a debtor nation. Long term the dynamics are in your favor.
Wayne Krauthramer: “Before the New Deal of the 1930s workers received their pay in cash in a pay envelope with no deductions. The income tax had been around for 23 years and the income tax did not tax wages. People were paid in cash in a pay envelope, not by paychecks!”
Woodrow Wilson: "We have come to be one of the worst ruled, one of the most completely controlled and dominated Governments in the world."
Edward R. Murrow: “A nation of sheep will beget a government of wolves.”
In 2004, the state of Illinois was the nation’s leading soybean producer and also the number 2 corn producer as it accounted for almost 20% of the corn crop. Maybe you have been reading about the lack of rain in Illinois. The dry spell is the worst in 20 years, and it is stunting the soybean and corn crops. So what do our elected politicians in the House and the Senate do? They pass the energy bill, and within that bill is a provision that 7.5 billion gallons of ethanol must be added to the fuel supply annually. It doesn’t matter that ethanol producers presently receive tax breaks worth more than 50 cents a gallon. These elected officials never gave a thought to the supply and demand situation of corn when the weather impacts the crop. Why? Because these same elected officials are intent on getting re-elected. It doesn’t concern our citizenry that they are voting for individuals who are dead from the neck up.
Thick Nhat Hanh: “In order to rally people, governments need enemies. They want us to be afraid, to hate, so we will rally behind them. And if they do not have a real enemy, they will invent one in order to mobilize us."
Japan’s June exports rose 3.6% from a year earlier. The June unemployment rate fell to a 7-year low. June industrial production rose 1.5% from May. The Japanese economy has improved for three consecutive quarters. The most glaring problem has been the lack of consumer spending, which rose but a mere 0.1% in June versus June 2004, but in fact, declined 1.4% from May 2005. This cautious consumer spending has not been lost on the currency market as the dollar stands at 112.42 versus the yen. One might ask whether Japan is making a turn for the better and, at the same time, whether the American consumer has spent his wad, so to speak. Saying it another way, at current levels, what is the risk/reward of going long the yen versus the dollar? I much prefer a creditor nation over a debtor nation. Long term the dynamics are in your favor.
Wayne Krauthramer: “Before the New Deal of the 1930s workers received their pay in cash in a pay envelope with no deductions. The income tax had been around for 23 years and the income tax did not tax wages. People were paid in cash in a pay envelope, not by paychecks!”
Woodrow Wilson: "We have come to be one of the worst ruled, one of the most completely controlled and dominated Governments in the world."
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