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."