Seasonally Adjusted

2/4/06 Seasonally Adjusted

General Glut: "Of course, we should all remember that the US economy did not produce 193,000 actual jobs in January 2006. It produced 193,000 seasonally-adjusted jobs. The kind no one actually works. In the real world, the US economy eliminated 2.625 million jobs, the seasonally unadjusted kind that actually generate paychecks."

With today's release of a new Quinnipiac University poll that finds New York City
residents broadly supporting the opening of Wal-Mart stores in their city, Courtney
Lynch,national Steering Committee member of the recently formed Working Families for
Wal-Mart, released the following statement:
"While we're pleased with the results of this poll, they're not a
surprise. Working families everywhere support Wal-Mart -- and that includes
the people of New York City and those in union households, who are working
families too. They know that an independently-certified study showed that Wal-
Mart saves working families an average of over $2,300 per year. Wal-Mart saves
customers money, saves them time and is a good neighbor to the communities it
serves. Poll after poll, including this one, confirms that."

Car searches on cars.com hit a record high
in January, with the number of unique visitors exceeding 7.4 million,
according to the most recent Consumer Search Index report. The dramatic increase
in site traffic at the beginning of this year is especially significant given
January tends to be a slower month for car sales.
"The fact that we have experienced such a large rebound in site traffic is
significant not only for sites like cars.com, but it certainly represents a
positive start to 2006 for the automotive industry as a whole," said Joe
Wiesenfelder, senior editor at cars.com.  "In fact, many manufacturers already
are reporting better-than-expected sales in January."

Before I discuss the January employment report, let me say it has been compiled after
many revisions. More importantly, it is in stark contrast with the January ISM
Services Employment Index, which declined to 51.1% from 56.9% in December. In other
words, we have an economy that is heavily reliant on the services industry. How could
a January non-manufacturing employment index drop so much and yet the non-farm
payrolls rise by 193,000? In my view, it cannot and did not. Now to the report.
Nonfarm payroll employment increased by 193,000 in January and the unemployment rate
fell to 4.7 percent. Payroll employment was up by 140,000 in December and by
354,000 in November (as revised).In January, employment growth occurred in
construction, mining, and in several service-providing industries. In particular,
Employment in construction rose by 46,000 over the month and by 345,000 over the
year. Above-average temperatures in most of the country may have contributed
to fewer seasonal layoffs than usual in January.
In the service-providing sector, employment growth continued in health care over the
month. Jobs were added in doctors' offices, hospitals, and nursing and residential
care facilities. In January, employment in food services and drinking
places grew by 31,000.  Over the year, this industry has added 214,000 jobs.
Employment in professional and business services was up
by 24,000 in January, following 2 months of unusually large gains that totaled
138,000. In January, financial activities added 21,000 jobs.
Average hourly earnings for production or nonsupervisory workers rose by
7 cents in January to $16.41. Over the year, average hourly earnings rose by 3.3%,
the most in 3 years, but the gains still trailed the rate of inflation.
Importantly, the average workweek was 33.8 hours, the same as it has been for five
straight months.

As is often the case, the headlines projected the wrong picture.The initial reaction
to the Friday jobs report was the fear that interest rates would be increased to at
least 5%. The 2-year Treasury yield rose to 4.63%, the 10-year to 4.61%, and the 30-
year to 4.72%. Where they closed on the day was a diffeent story. The 2-year at
4.58%, the 10-year at 4.53% (notice the widening inverted yield), and the 30-year
at 4.63% or just a slightly higher yield than the 6-month Treasury bills. The dip in
yields produced a rally in the housing stocks, and in fact, Meritage Homes and M/I
Homes had a decent week. Not all housing stocks are created equal. Toll Bros. made
a new 52-week low on Friday at $30.70 before rallying to $32+. Just as the selling
in GM and Pfizer was overdone, so was the barrage of selling in many home builders.
By the way, the continued strength in this sector was believed to have contributed
25,000 new jobs in January.

Many believe the ECB will raise rates one-quarter of a point on March 2 to 2.50%.

Trends

2/3/06 Trends

Market research publisher Packaged Facts stated "People still want to lose weight, but they've lost their taste for extreme diets. They want to eat sensibly with a little indulgence; hence there's a shift in market share from frozen dinners and entrees, food bars, and meal replacement liquids and powders losing ground to more enticing desserts and candies, which are being reformulated to meet the demands of the low/no sugar, low fat, low glycemic dietary preferences of today's weight-conscious consumers."

The Labor Department stated that, in the last quarter, unit labor costs rose 3.5% annualized and productivity fell 0.6%, the first such drop since 2001. For all of 2005, productivity increased 2.7%, the smallest increase since 2001. In my view, it is unrealistic to expect productivity gains to continue as long as wage gains trail the rate of inflation.

The number of people collecting state unemployment benefits fell by 64,000 to a seasonally adjusted 2.5 million in the week ended Jan. 21, the lowest since Feb. 2001, and the uninsured rate fell to 1.95 from 2%, the lowest rate since Feb. 2001.

Since we invaded Iraq in March 2003, 2247 of our fighting men and women have been killed.

M/I Homes expects their 2006 EPS to rise 10% to $7.55 to $7.75 per share, and they anticipate delivering 5,000 homes in 2005. They have the highest backlog in the their 29-year history. The news was greeted with buying and the stock jumped $7 in early trading and held a good portion of the gains as it closed at $43.79, up 44.80 on the day and only a small premium to their $41 book value. On the other hand, Pulte Homes also announced good earnings, and the company continues to target 2006 earnings growth of roughly 10% to 15%, which is in-line with current guidance for earnings of $6.00 to $6.25 per share; however, the stock declined $1.35 to $37.55. After the close, Standard Pacific, another home builder, forecast 2006 revenue approaching $5 billion with per share earnings of $6.90. Forecasts in this sector continue toi outpace analyst expectations.

The White House has told Congress to expect requests for about $120 billion more for the wars in Iraq and Afghanistan in the ongoing budget year and $18 billion more for hurricane relief, Senate GOP aides say. Since 9/11, the requests for Iraq and Afghanistan total about $440 billion. Keep those printing presses rolling. This administration spends us deeper into debt and misspeaks about the financial health of our nation

Regulators are concerned about heavy commercial real estate exposures and risky mortgage lending practices at U.S. banks, Federal Reserve Board Governor Susan Bies said on Thursday. "There are certain rapidly growing business lines in banking operations that are placing pressures on risk-management systems," Bies stated.

Starbucks raised its outlook for 2006, and the stock responded by selling at a new all-time high. The great ones come through year after year.

March natural gas futures closed at the lowest level since June, down 4.3% to finish at $8.347 per million British thermal units. March crude fell $1.88, or 2.8%, to close at a three-week low of $64.68 a barrel.

Last month was the warmest January in 112 years, according to Weather Trends International.
As such, January construction hiring should get an added boost.

For the entire year, in the San Francisco Bay Area only 8,806 defaults were filed on houses and condos -- the lowest annual figure going back to at least 1992, when DataQuick first began tracking the data. The peak came in 1996 with 24,661 filings. Only 141 Bay Area homes were foreclosed upon in the fourth quarter. That is an amazingly low number.

Jim Rogers: “Maybe the trend is your friend for a few minutes in Chicago, but for the most part it is rarely a way to get rich.”

Is This The United States?

2/2/06 Is This The United States?

Rep. Lynn Woolsey gave her only pass to the State of the Union Address to Cindy Sheehan. The latter was removed from her seat by security personnel before being arrested. She was taken in handcuffs and charged with unlawful conduct. Why? She wore a T-shirt that read "2242 dead. How many more?"
Yesterday, Capitol police asked the U.S. attorney's office to drop the charges.

Beverly Young, wife of Rep. C.W. Bill Young of Florida — chairman of the House Defense Appropriations subcommittee — was removed from the gallery because she was wearing a T-shirt that read, “Support the Troops — Defending Our Freedom.”

Supposedly, our troops are over in Iraq fighting for Iraqi freedom. Maybe we should have all of our troops located throughout the world returned to our homeland in order to fight for American freedom. It's about time we took care of our own. When Bush stops stomping on our freedoms, then, and only then, will I consider uttering a good word about his presidency. I won't hold my breath.

Bush: "We love our freedom, and we will do everything in our power to defend our freedom." What a crock! Ask Cindy Sheehan and Beverly Young!

"The U.S. Capitol is not private property that belongs to the president, or even the speaker of the House, it belongs to the people," said Jamin Raskin, a constitutional law professor at American University in Washington who has discussed legal options with Sheehan. "The great irony was that Bush was extolling the virtue of freedom and civility in America, at the same time the police were dragging Cindy Sheehan out of the chamber."

Brad Setser: "Looking toward 2006, I suspect the US will need to engage in a $1 trillion debt for goods swap -- at least if oil stays above $65 and the US economy grows a bit faster than it did in the fourth quarter."

The yield curve has inverted once again. The 2-year Treasury yields 4.58% and the 10-year is at 4.56%. The spinmeisters will tell you that this time it's different. Losers always have that for an explanation.

Richard Daughty, The Mogambo Guru: "The Federal Reserve is creating $50 billion a freaking month? The money supply is being directly increased by fifty freaking billion bucks (FFBB) a freaking MONTH (AFM)? And how much IS $50 billion a month, you ask? It's $417 for everybody in the country that does not have a government job. PER MONTH! Your insane government is indebting you by another $417 per month, every freaking month! And they have been doing this for years! And they will CONTINUE to do this, more and more, for more years! Hahahaha! We're idiots!"

The administration has refused to release internal documents on Hurricane Katrina, materials on Abramoff, and now its domestic eavesdropping program. What does the administration have to hide?

Next week, after a five year hiatus, the Treasury will be auctioning 30-year bonds. It will be part of the $48 billion in bonds to be sold. Please remember that the Treasury has exceeded the debt limit. Not one peep has come from any member of Congress.

Crude oil futures prices fell by more than $1 a barrel Wednesday after the U.S. government released data showing crude oil and gasoline supplies on the rise; however, prices are still above $66 a barrel and prices at the pump are on the rise. It's only February. Wait until the peak driving season.

Electronic Arts, the world's largest maker of video games, laid off 5 percent of its 7,000 world-wide workforce Wednesday, including 142 people in Redwood City.

Hospira announced plans to phase out its North Chicago manufacturing operations and close 2 other plants. In total, 1100 jobs will be eliminated. Yesterday, Abbott Labs stated 250 jobs were cut.

Four years ago, buying gold or gold shares was a no no. Today, the cheering for gold, silver, platinum, copper, aluminum-- you get the idea-- is getting deafening. I'm not much for noise. Plus, the seasonality for gold and the like is not friendly beginning in February. I suggest one considers taking money off the table in this sector. Selling into strength makes for a nice day.

Research In Motion said today the English High Court has decided that all patent claims against it in relation to certain Blackberry products in the UK by litigant InPro are invalid.

We have 46+ million uninsured Americans. How many of them are currently saving money? How many have an ability to save money? How many are unemployed? Do you really think someone who suggests health savings accounts is in touch with reality? Like father like son.

Fresh Del Monte Produce Inc. plans to cease its pineapple operations in Hawaii in 2008, saying the fruit can be grown for less in other parts of the world." It would be cheaper for Del Monte to buy pineapples on the open market than for the company to grow, market and distribute Hawaiian pineapple," the company said Wednesday in a statement. We now have pineapple outsourcing. How about that!

Yesterday's Top Story

2/1/06 Yesterday's Top Story

There was plenty from which to choose: Greenspan leaving the Fed; the Fed raising rates and leaving the door open for more increases; a new Fed head; Alito being confirmed; the passing of Coretta Scott King; the State of the Union Address; the Enron trial; the Oscar nominations; and Google's quarterly report. For me, the top story was Google. This company is more significant for today and tomorrow.

There are many aspects to the Google report. The company does not provide guidance, and therefore, analysts will not be spoon-fed and most likely will get almost every forecast incorrect. Google's earnings were disappointing to the Street but they exceeded internal company forecasts. The purpose here is not to suggest buying or selling Google at around $390 per share. The purpose is for you to take this opportunity to think as an owner of Google, the business. For the prior two quarters, the tax rate was 30%. In the December quarter it was 42%, and yet, income jumped to $469 million or $1.56 a share on revenue that increased 86% to $1.9 billion. That 24%+ profit margin is quite extraordinary.
The company invested heavily in IT infrastructure, new employees, sales and marketing, campus facilities, and real estate. The fact is Google employees can be proud of their accomplishments. The company is putting money back into the business and doing it in a smart way. Meanwhile, most other companies are focusing on stock buybacks, and that is not a sign of expansion. Google is the most aggressive hiring company in the Silicon Valley (where 53% of the engineers are foreign born).
Google is building for the long-term. Their business is providing information to the world, and no one does it better. Instead of checking the stock price every hours, try and relax and let the management run the business. There will be volatility; however, I am confident that Google's stock price can overcome the disappointment of many Wall Street analysts who have no idea what it is to think like an owner of a business.

A Surprise In The Wings?

1/31/05 A Surprise In The Wings?

The large-cap Russell 1000® Index outperformed the small-cap Russell 2000® Index in 2005, ending a string of six consecutive years of underperforming the small-cap index. Tthe Russell 1000 provided a 6.27% return for 2005, while the Russell 2000 reflected a 4.55% gain.

There are several questions one might ask prior to the State of the Union message. One is definitely whether the enormous slowdown in GDP growth from the 3rd to the 4th quarter of 2005 was an aberration. I don't believe the answer is to be found in the recent rise of interest rates in the Treasury bond market. I suspect the answer is in the housing market. In some geographical sections of our country builders are providing some incentives in order to hasten the sale of their houses. As with the initial incentives provided on autos, the housing incentives are garnering better than expected results. In sum, the sale of new houses, over the next few months, may surprise on the upside. These results could kick-start the buying of existing homes as well. Do I think these positive results will have a substantial duration? No I do not. However, they will provide enough of a lift to confuse the equity and debt markets.

Yesterday, gold, silver, and platinum traded at multi-year highs.

Hughes Supply stated revenues for the fiscal year 2006 are now expected to be approximately $5.4 billion, a 23% increase over the previous year's revenues of $4.4 billion. EBITDA (Earnings Before Interest, Tax, Depreciation and Amortization) is now expected to be approximately $309 million, a 25% increase over the previous year's EBITDA of $248 million. Net Income is expected to be approximately $152 million, an increase of 23% over the previous year's net income of $124 million. Earnings per diluted share are expected to be approximately $2.26, compared to $1.95 per diluted share in the previous year, an increase of 16%. Previous guidance issued on November 17, 2005, indicated fiscal year 2006 revenues of $5.3 billion, net income of $141 million - $143 million, and diluted earnings per share of $2.11 - $2.14.

U.S. consumer spending increased 0.9 percent in December outstripped the second straight monthly 0.4 percent increase in personal income.

Kraft Foods Inc., the nation's largest food manufacturer, said Monday it would eliminate 8,000 more jobs, or about 8 percent of its work force, and close up to 20 production plants as it broadens an ongoing restructuring effort.

Exxon Mobil Corp, the world's largest publicly traded oil company, on Monday reported a quarterly profit of $10.7 billion.

OPEC is likely to maintain output near a 26-year high in the second quarter, the United Arab Emirates oil minister said, joining officials from Saudi Arabia, Algeria and Qatar who expect output to remain unchanged.

The Treasury announced it will borrow a record $188 billion in the first quarter of 2006.
The government still expects to hit the statutory debt ceiling in mid-February. My math showed the debt ceiling was reached last week.

March natural gas rose 88.2 cents, or 10.4%, to close at $9.389 per million British thermal units -- its highest ending level since Jan. 10.

Guidant Corp. stated it has received Conformite Europeene Mark approval for its Xience V Everolimus-eluting coronary stent system. The company will begin marketing the drug eluting stent in the 25 countries of the European Union. Meanwhile, Boston Scientific, the company buying Guidant, has seen its stock drop precipitously. One year ago it was trading at $35. Yesterday, it declined to below $21(the last time it sold at these prices was 3 years ago) and the market cap has dropped to $17 billion or about $8 billion less than the deal signed to buy Guidant. Abbott Labs can’t be too happy. They agreed to buy a chunk of Boston Scientific’s shares at $25. Maybe the selling in Boston Scientific has been overdone.

A rising tide lifts all boats. Unfortunately, all tides are not created equal, such as, the tsunami that hit Sri Lanka and Katrina’s damage to New Orleans and other parts of the Gulf coast. Over the horizon, the potential for a wave of debt repudiation accompanied by an inflationary swell does exist.

Events

1/30/06 Events

Arcelor stated "The board has swiftly concluded that Arcelor and Mittal Steel do not share the same strategic vision, business model and values."

Fairmont Hotels & Resorts Inc. said it has agreed to be acquired by investment groups Kingdom Hotels International and Colony Capital for $3.9 billion.

According to the WSJ, GlaxoSmithKline Plc has restarted talks to buy Europe's biggest biotech company Serono SA for a lower price, after an auction for up to $15 billion failed to find buyers.

Japan's industrial production rose for a fifth month, the longest expansion since 1999.

Emily Dickinson: “The truth dazzles gradually, or else the world would be blind.”

The insurrection of a group of Justice Department lawyers in the Bush administration, described to Newsweek by current and former administration officials, is one of the most significant and intriguing untold stories of the war on terror, Newsweek reports in the
current issue. This is the link to the full story:
http://www.msnbc.msn.com/id/11079547/site/newsweek/

Dalai Lama: “Anger and hatred cannot bring harmony. The noble task of arms control and disarmament cannot be accomplished by confrontation and condemnation. Hostile attitudes only serve to heat up the situation, whereas a true sense of respect gradually cools down what otherwise could become explosive. We must recognize the frequent contradictions between short-term benefit and long-term harm.”

The most dangerous strain of bird flu has hit the Turkish part of Cyprus, the European Commission announced over the weekend.

Jim Allchin, who heads the Microsoft Windows division, gave an overview last week of Windows Vista, the new version of Microsoft's flagship software that Allchin's team is set to deliver before he retires at the end of 2006. He said it's on track to go on sale by the holidays. However, he stated, “I will also make a cautionary notice that I will not ship this product if it doesn't achieve the quality that's demanded by our customers. So although everything looks great right now, quality will be the deciding factor. I feel pretty good right now and we'll see how it goes the rest of the year.” Those now buying Microsoft shares need to hope the quality factor will be up to Allchin’s expectations. I don’t invest on hope.

Tokyo's Nikkei 225 index gained 90.55 points, or 0.6 percent, to finish at 16,551.23 -- its highest close since Sept. 4, 2000. Monday's rise was the Nikkei's fifth straight trading day of gains totaling 7.8 percent, more than recouping losses from the mid-month sell-off triggered by the investigation into startup Livedoor Co.

John Hussman: “Treasury bills – despite unusually low yields during the past several years – have outperformed the S&P 500 index, including dividends, for what is now more than seven-and-a-half years (for an annualized total return of about 2.6% during this period).”

Nigerian militants released four foreign oil workers on Monday, ending a 19-day hostage crisis, but threatened to resume attacks on oil facilities in the world's eighth largest exporter.

The decline in the housing stock sector reflects a belief that the coming decline in both home building and home prices will be severe. After looking over historical data it appears more likely that gradual is more likely than the sudden bursting of prices. We may arrive at the same price level, and it may be lower to the tune of 20% or more nationwide, but it may take three years to get there rather than nine months. Consequently, it is likely that the earnings for many home builders could surprise on the upside over the next six plus months.

For 2006, Kodak expects to record a loss from operations of $900 million to $1.1 billion.

Niccolo Machiavelli: “Benefits should be conferred gradually; and in that way they will taste better.”

Gift Cards

1/29/06 Gift Cards

Over and over again, I have stated that the rapid growth in gift cards has changed the landscape for retailers during the holiday season. Retailers record revenue from gift cards when they are redeemed, not when they are sold. The fact is that retailers have consistently underestimated the revenue generated by gift card sales. Wall Street was disappointed with the 2.2% increase in Wal-Mart’s December same-store sales. Since almost every analyst is unable to see beyond his or her nose, that is not surprising. The weakness in Wal-Mart shares presented a buying opportunity. Why? A significant percentage of gift cards are redeemed in January. Thus, on Saturday, Wal-Mart estimated that January sales rose 4.7 percent at its U.S. stores open at least a year, toward the high end of its forecast, as shoppers redeemed holiday gift cards. Now the analysts can upgrade their ratings on Wal-Mart shares. For this lack of performance, the analysts receive large holiday bonuses. Target Corp. expects its January same-store sales to show an increase in the range of 4.5 percent to 5 percent. Presently, Target’s P/E is much higher than that of Wal-Mart’s. I believe the differential will narrow.

Mike Burk: “Next week is made up of the last 2 trading days of January and the first 3 trading days of February during the 2nd year of the Presidential Cycle. This is a strong period, up about 2/3 of the time.”

February 6, 2006 is the record date for the determination of Hughes Supply shareholders entitled to vote at the meeting to consider and vote on a proposal to approve the
Agreement and Plan of Merger, dated as of January 9, 2006, between The Home
Depot, Inc. and the Company, providing for the acquisition of Hughes Supply by The
Home Depot.

"Insuring the uninsured is a fine objective," stated Regina E. Herzlinger, a professor at Harvard Business School. "Health savings accounts will increase coverage, and that's great. But they are being touted as a way to control costs, and I very much doubt that claim."

M3 is up $209.3 billion over the past ten weeks, a 10.8 percent annualized rate of growth.
Printing money is what the Fed does best. Owning dollars and dollar-denominated assets is for masochists. Shortly, there won’t be enough gauze to cover your wounds.

Rob Peebles notes “cash squeezed Americans can find 25,000 payday lending locations across the country (up 3,000 since 2002).”

Georgetown University Professor Stephen Wayne, an expert on the American presidency:
"There's been a de-emphasis of this year's State of the Union rather than an emphasis," Wayne said. "That's because he's (Bush's) got little to offer that's new, and a lot to defend."

Vauvenargues: “Generosity gives assistance rather than advice.”