Contrast

3/25/06 Contrasts

New-home sales fell 10.5% in February to an annualized 1.08 million units, well below forecasts and the lowest level since May 2003, the Commerce Department said. Median prices fell 1.6% vs. January to a 7-month low of $230,400. They dropped 2.9% vs. a year earlier, the biggest slide in three years.The gloomy report contrasts one day after a trade group said existing-home sales in February shot up a monthly 5.2%. It should be noted that, although resale prices retreated from their October peak, they still rose 10.6% vs. a year earlier.The market take has been for the housing stocks to rebound for the last two weeks. Will it be just a relief rally? For many of these companies selling at low P/Es, most of the damage has probably been inflicted; however, that doesn't mean they have much upside in the near term. Friday's new home sales info created a rally in the Treasury market. That could also be viewed as a relief rally. The fundamentals are lacking for the rally to hold- in my view.

GM's sales are up 1.5% through February this year, compared with the same period a year ago. According to the consumer Web site Edmunds.com, among domestic automakers, GM is now offering the lowest incentives, an average of $2,638 per vehicle. GM is turning over its cars and trucks faster than any other domestic automaker. A new GM car or truck is only in inventory for about 63 days before being sold, compared with 70 at Ford Motor Co. and 82 at Chrysler Group. Toyota Motor Corp.'s days-to-turn is 30 days. But GM is showing improvement from its 76 days-to-turn a vehicle last year. GM is getting consumers to pay more for its vehicles, despite cutting prices. The automaker's net price, or the actual amount it has been able to get consumers to pay for its new cars and trucks, was up $240 in February, or 0.9%, to an average of $25,643.

Aldous Huxley: "At least two thirds of our miseries spring from human stupidity, human malice and those great motivators and justifiers of malice and stupidity, idealism, dogmatism and proselytizing zeal on behalf of religious or political idols."

Microsoft announced the new version of its Office software suite would be delayed until next January for consumers to coincide with the postponed launch of its Vista operating system. Both of the company's cash cows, the new Windows and the new Office suite, will miss the holiday shopping season. Gates and Ballmer need to take a long look at their lack of performance.

Contrast residential construction with non-residential construction. The latter is anticipated to rise up 9 percent this year to $531 billion, the most since at least 2001, according to the Associated General Contractors of America. There will still be growth in jobs in the construction industry in 2006.

Once again, it might be worth looking at the disparity between $64 crude and $7.25 natural gas with the low P/E ratios for many of the terrific companies in the energy landscape. Such a contrast leads me to the on-going conclusion that it makes more sense to buy another company than to drill for oil and gas. Buying reserves by buying an entire company makes sense. We have seen the purchase of Unocal, Burlington Resources, PetroKazakhstan etc. The values are too robust to ignore. Don't be surprised to see a $100 billion oil and gas deal this year. Borrowing costs are low, energy prices are high, and it is a cinch to hedge the value of reserves in the futures market.

North Georgia is losing nearly 1,300 jobs in three plant closings-- Fruit of the Loom, Springs, and Ratun.

The head of Caterpillar on Wednesday warned that deteriorating trade relations between the US and China could plunge the global economy into recession and called on Congress to back away from protectionist measures. The U.S. has few friends left in the world. Soon we'll have fewer trading partners. You can depend on the Congress to make the wrong business decisions.

C.S. Lewis: "Of all tyrannies, a tyranny exercised for the good of its victims may be the most oppressive. It may be better to live under robber barons than under omnipotent moral busybodies. The robber baron's cruelty may sometimes sleep, his cupidity may at some point be satiated; but those who torment us for our own good will torment us without end, for they do so with the approval of their own conscience."

Happenings

3/24/06 Happenings

Back in 1981 Lucent and Alacatel, a French company, talked merger. It did not come off. Last night the WSJ reported those talks had resumed. It would equate to a price of $3+ a share for Lucent holders-- not exactly a bonanza but better than a kick in the ass.

Stockholders in Google received a good boost late yesterday evening. The shares were added to the S&P 500 and they rallied 9%+.

General Motors Corp.'s finance unit received $8.8 billion in cash by selling a bigger stake in a commercial-mortgage unit than originally planned to Kohlberg Kravis Roberts & Co. and its investing partners. Kohlberg Kravis, Five Mile Capital LLC and Goldman Sachs Group Inc. agreed to buy a 78 percent stake in GMAC Commercial Holding Corp. In August, they said they would purchase 60 percent. The partners paid $1.5 billion in cash and repaid $7.3 billion in loans that General Motors Acceptance Corp. made to the mortgage unit, GMAC spokeswoman Joanne Krell said in an interview.

Resales of U.S. homes increased 5.2% in February to a seasonally adjusted annualized rate of 6.91 million, the National Association of Realtors said Thursday. Economists were expecting sales of about 6.52 million. The boost in sales in February was likely due to warmer than usual weather in January, when sales that were closed in February were initiated, the realtors said. The supply of unsold homes also rose 5.2% in February to 3.03 million, close to the all-time record of 3.04 million in 1986. The inventory represents 5.3 months supply, unchanged from January. Median prices are now up 10.6% year-over-year to $209,000.

Italian energy firm Eni halted crude exports from its Nigerian Brass River terminal, around 200,000 barrels per day, after a pipeline attack last week, a company official said on Thursday. Worries continue about crude supply from Nigeria, Africa's largest producer, where Royal Dutch Shell and other companies have already shut down 630,000 bpd, 26 percent of the country's capacity, due to attacks on oil installations.

The May crude contract rose by 3 1/2% yesterday to $63.91 a barrel and April natural gas rose 5% to a one-month high of $7.33 per million BTUs. At this rate, March inflation will not look so rosy and that has not been lost on the bond market.

Bayer AG, Germany's biggest drug company, offered 16.3 billion euros ($19.5 billion) in cash for birth-control pill maker Schering AG, topping a hostile bid by Merck KGaA.

Schering investors will get 86 euros for each of their shares, Leverkusen, Germany-based Bayer said today in a statement to the Frankfurt exchange. Berlin-based Schering, which rejected Merck's bid of 14.6 billion euros 10 days ago as too low, plans to accept the offer, according to the statement.

Next Tuesday will be a black day for hundreds of white collar workers at GM. There will be another round of layoffs announced.

Conclusions

3/23/06 Conclusions

The capacity of GM India's Halol facility is being increased to 85,000 units from the present 60,000 units. The company currently produces the Chevrolet Optra and Chevrolet Tavera in the Halol plant. GM India has set a target of selling 50,000 units in 2006 as against 30,837 cars sold in 2005. With the introduction of 3 new Chevy models in 2006, I believe the company can sell more than 50,000 units in India this year.

The Committee on Foreign Investment in the United States is reviewing state-owned Dubai International Capital's acquisition of Doncasters, which operates U.S. plants making parts for defense contractors. The takeover had been due to be completed by the end of this month. Asked whether it would be delayed, Sameer Al Ansari, chief executive of Dubai International Capital, said: "Yes." He declined to say how long the delay would be. The Doncasters deal would give the Gulf Arab company control of several U.S. plants that make aerospace turbines, turbine blades, and airfoils for aircraft engines. Dubai International agreed in December to buy Doncasters from Royal Bank of Scotland's equity finance business.

General Motors Corp. and Delphi Corp. on Wednesday announced agreements with the United Auto Workers to reduce the number of U.S. hourly employees at both through an accelerated attrition program. GM will offer most of its 113,000 U.S. hourly workers incentives to retire or quit the company, while Delphi will give 13,000 of its 23,000 UAW workers the chance to retire. In addition, up to 5,000 Delphi workers eligible for the early-retirement deal could return to work at GM, where they would retire with full benefits. "This is the fundamental restructuring that they have needed for a very long time," said David Cole, director of the Center for Automotive Research in Ann Arbor. "I would say things are looking a lot better today than they were yesterday."Because of Delphi’s bankruptcy filing, this agreement is subject to court approval, and the hearing is on April 7.

Penn State food scientists have found that mushrooms are a better natural source of the antioxidant ergothioneine than either of the two dietary sources previously believed to be best. The researchers found that white button mushrooms, the most commonly consumed kind in the U.S., have about 12 times more of the antioxidant than wheat germ and 4 times more than chicken liver, the previous top-rated ergothioneine sources based on available data. Joy Dubost, doctoral candidate in food science, who conducted the study, says, "Numerous studies have shown that consuming fruits and vegetables which are high in antioxidants may reduce the risk of developing chronic diseases. Ergothioneine, a unique metabolite produced by fungi, has been shown to have strong antioxidant properties and to provide cellular protection within the human body." Shiitake, oyster, portobellos, and crimini contain even more ergothioneine than the white button kind.

Lentils contain protein and cholosterol-lowering soluble fiber. India is the world's biggest producer and consumer of lentils.

Standard & Poor's said Wednesday it plans to unveil several home-price indexes in the second quarter for 10 cities. They'll serve as the basis of cash-settled futures and options contracts expected to launch in April.

Pennsylvania is working to make certain that manure is moved and applied in ways that are sensitive to the environment and addresses the needs of farmers. So far, the state has certified almost 600 individuals, and these additional training sessions will provide more learning opportunities for manure haulers and brokers. After this week's speeches, the state is considering making Bush an honorary manure hauler.

A recent study estimates that 9.4% of all mortgage borrowers as of September had no or negative equity in their homes. That jumped to 29% of owners who took out first mortgages last year. So borrowers with about $800 billion in mortgages owe more than their homes are worth, stated First American Real Estate Solutions. They estimate that $297 billion worth of 2004-05 adjustable-rate first mortgages could end up defaulting — resulting in $110 billion in lender losses. As Jackie Gleason would have said, "a mere bag of shells."

China’s exports to East Asia (excluding HK) last year were 25.1% of exports, to Europe, 21.9%, to the US 21.4%, and to other markets 31.5%. There is this notion that tariffs on China's exports to the U.S. will create a big threat to China's economy. In fact, lessening Chinese exports to the U.S. will only raise the rate of inflation in our country. China does not need the U.S. but the U.S. needs China to recycle its dollars into our Treasury market. Unfortunately, China has recently curtailed its purchases of our debt instruments. I envision these actions to continue.

A Surprise In The Wings

3/22/06 A Surprise In The Wings

According to Mohammed Sharaf, CEO of DP World, the US navy had been calling at Jebel Ali, DP World’s main port in Dubai, for 16 years. He stated “since Dubai has been a close friend of the US for three decades, and a staunch ally in the fight against terrorism, and since we at DP World have been serving the US Navy directly since 1990, the misunderstanding came as a real shock,” he said. There is potential additional concern with Dubai International Capital’s £700m ($1.2m, €1m) purchase of Doncasters, a privately held British aerospace manufacturer that works on sensitive US weapons programs, including the Joint Strike Fighter. There are those in Congress just waiting to pounce on this situation and make a name for the upcoming elections.

Yesterday, the base metals were on the march once again. Silver gained 20 cents to close at a 23-year high of $10.56 and copper traded up to $2.37 before closing at $2.32.

There was quite a bit of action yesterday in the bond pits. The yield curve readjusted itself with higher yields resulting-- from the 1-year at 4.73% to the 30-year at 4.74%. Rather than to focus on a mild inverted relationship between the 2 and 10-year, I prefer to state it was essentially a flat curve by the end of trading.

April crude picked up a bit to close at $60.57 and May crude ended at $62.34.

Jones Apparel is considering the possible sale of the company. They have many good brands but for some reason I just don't see much upside from the $35 level. Maybe the brands can be sold off piece by piece. I have not been able to get in touch with my female side. I'll watch from the sidelines.

In yesterday's early evening hours Microsoft announced it will not release the consumer version of its new Windows operating system called Vista until January 2007, after previously saying it hoped to release the software in time for the holiday season. The bulls on this stock will say it is not a big deal. The fact is Windows is the company's cash cow and retailers have been waiting for this new version for a couple of years. In my view, positions in this stock should be cut back sharply. With 60,000 employees and billions spent each year on research and development, there is no excuse for not performing. In addition, Gates has said that security is the major priority of Microsoft. Why the delay in Vista? The need to improve security.

According to the Detroit News, General Motors Corp. is expected to announce as early as today it will offer retirement incentives -- ranging from $35,000 to more than $100,000 -- to nearly all of its 113,000 U.S. hourly workers. In addition, GM is preparing to take back potentially thousands of former workers at bankrupt auto supplier Delphi Corp., many of whom could then retire as GM employees, the people familiar with the discussions said. On Tuesday evening, GM, Delphi and the United Auto Workers were said to be on the verge of completing the buyout agreement.

Paul Kasriel points out a record 61% of total bank credit is mortgage related. Banking institutions had better hope that the housing market remain alive and well.

Bernanke: "Although U.S. trade deficits cannot continue to widen forever, these deficits need not engender a precipitous decline in the dollar, nor should such a decline, were it to occur, necessarily disrupt financial markets, production or employment." The man is a comic and doesn't even know it.

Nearly 70% of Americans own their homes, a record high, but the rate of homeownership for working families with children is lower than in 1978, according to a study being released Wednesday by the Center for Housing Policy. Affordability does matter for the health of the housing market.

As for the health of the equity market, one can easily check for a daily temperature. Simply keep track of the daily 20 and 65 day new highs and lows. Right now the new low list is expanding and the new high list is contracting. That would indicate a patient in need of rest. The question might be how long for the patient to get back to feeling spry? Doctoring is an imperfect science. Taking the daily temp should keep you out of some trouble though.

GM built 415,143 SUVs in 2005, and I estimate the number will exceed 430,000 this year. In 2005, the average transaction on a Tahoe was $33,500 and this year it will be around $40,000. David Healy, an experienced auto analyst, stated the increased production of the 2007 models will probably add about $180 million to GM's pretax profit and about $480 million to revenue. Healy said GM's previous lineup of full-size SUVs and pickups contributed $51 billion in revenue last year, about half of North American revenue and 26 percent of total sales.

The volume of mortgage applications dropped 1.6% in the week ended March 17 compared to the prior week, according to data compiled by the Mortgage Bankers Association. Also on a seasonally adjusted basis, applications for mortgages to buy homes fell 2.3% on a week-to-week basis, while refinancing applications eased 0.6%. On an unadjusted basis, overall mortgage activity was 13.8% lower than in the comparable week a year ago.

Unrealistic

3/21/06 Unrealistic-- the software is having diffculty this morning. If investors were disappointed by Bernanke's speech last night, they have only themselves to blame for unrealisitc expectations. Ben and the Beige Book both painted an upbeat outlook for the economy, and this despite a cooling housing market. That should have come as no surprise as record base metal prices reflect that assessment. It was unrealistic to think there was simply one more rate hike coming --not with gas at the pump rising 14 cents last week to $2.55 a gallon, and that is 40 cents higher than one year ago. If you just happen to drive a car, inflation is alive and well and not tame. Not every aspect of the economy is upbeat. Target's same-store sales for March will rise between 1.5% to 2.5%. It's no wonder the stock is acting poorly. On the other hand, Oracle shares have picked up nicely of late but yesterday their database revenue fell short of some investor expectations. According to the Detroit Free Press, many of the thousands of Delphi Corp. workers who are expected to return to General Motors Corp. in a deal under negotiation with the UAW could work at the automaker for a few days or weeks and then retire with a GM pension and retirement benefits. Yesterday morning Spring arrived. It's a wonderful time to appreciate the beauty of nature. Take the time to wander about. If there is pruning to do after winter, why not start with your portfolio.

So Are Cyclones

3/20/06 So Are Cyclones

GM currently has about 105,000 blue-collar workers represented by the UAW. Delphi has more than 23,000. An agreement with the UAW, Delphi, and GM is close to being finalized.

Michaels Stores Inc., the largest arts-and-crafts retailer in the United States, is expected to announce strategic alternatives that could lead to sale of the company, the Wall Street Journal said on Monday. As of March 15, 2006, the company owned and operated 896 Michaels stores in 48 states and Canada, 165 Aaron Brothers stores, 11 Recollections stores, and four Star Wholesale operations.

John Hussman: “For investors who like Bollinger Bands, it's notable that the Dow, S&P and Russell 2000 indices are all at the very top of very extended advances in the daily, weekly, and even monthly bands.
So while the market appears reasonably firm from the standpoint of the major indices, it also appears to be strenuously overbought. The total return on the S&P 500 remains behind lowly T-bill returns for the period from July 1998 to the present (less than 3% annually). The Russell 2000 – by far the strongest index during this period – has achieved less than 8% annually in total return since then. Even a modest decline would wipe out the advantage that the S&P has enjoyed over T-bills over the past two years. New highs can be enticing, so it's useful to keep them in perspective.”

At least 2,314 U.S. military personnel have died in the Iraq war, and another 20,000 have been injured. This is progress?

Yesterday, a category 5 cyclone named Larry hit the Australian coast along Queensland with 180 mph winds.

This past week zinc prices hit an all-time. They have risen 25% this year. Of course, inflation is tame. So are cyclones.

Around two million households in Britain will struggle this year to pay domestic gas and electricity bills. By the end of 2006, the number of households facing fuel poverty -- spending over 10.0 percent of their total income on fuel -- will have doubled since 2003, according to the Fuel Poverty Advisory Group (FPAG). Domestic energy prices in Britain will have rocketed by some 35.0-percent over the same three-year period, government advisory body FPAG said last week. Of course, this could never happen in the U.S. Inflation is tame. So are cyclones.

Dell to double its staff in India to 20,000 by 2009.

Toni Simonetti, GMAC spokeswoman, said GM was still actively pursuing the sale of a majority interest in GMAC to a third party. However, confidentiality agreements now in place meant she could not comment on reports about potential bidders, Simonetti said.

Approximately one in five U.S. oil refineries is owned by foreign companies.

Bernanke will speak to the Economic Club of New York at 7 p.m. ET today. I wonder whether he will arrive by helicopter.

British consumer products maker Reckitt Benckiser, known for such major U.S. brands as Lysol, Easy-Off and Woolite, is reported in talks to bid $10.5 billion for the over-the-counter medicines arm of Pfizer, according to a report in the Sunday Times of London.

Benjamin Franklin: “There are two ways of being happy: We must either diminish our wants or augment our means - either may do - the result is the same and it is for each man to decide for himself and to do that which happens to be easier.”

Welcome to the world of petroeuros. You will hear and read that this does not matter.
Complacency makes light of risk.

Is there a special burial ground for day traders and momentum traders?

Reality World

3/19/06 Reality World

At the beginning of last week I paid $2.25 per gallon for gas at my local Arco station. By Friday, the price had risen to $2.39 a gallon. For the last two years, each week I have purchased large crimini mushrooms for $2.99 a pound. Yesterday, the price had been raised to $3.99 a pound. There are other specific examples of price increases in the past several days. Maybe you live and breathe the CPI numbers from government. I live in the real world. When it comes to investing, I suggest you flush the statistics coming out of Washington. They may be hazardous to your financial well being.

Prudential Plc, Britain's second- biggest insurer, stated it rejected a takeover approach from larger U.K. competitor Aviva Plc.

Wal-Mart is beginning to flex its muscles in China. Currently, the company has 56 stores there. They will open an additional 20 this year. Joe Hatfield, CEO of Wal-Mart Asia, stated the company’s China operations could be as big as its U.S. business in 20 years. Wal-Mart now has approximately 3,700 U.S. stores. Should you want to invest in China, one way might be to purchase shares in Wal-Mart, and hold them for the next 20 years.

A majority of Americans polled would like to see Democrats take control of Congress in this year's elections, according to the new Newsweek Poll, while 34 percent would like Congress to remain in Republican hands. Only 36 percent of Americans approve of the way the president is handling his job --the lowest score George W. Bush has received in the Newsweek Poll. Sixty-four percent of Americans are dissatisfied with the way things are going in the United States at this time, while only 30 percent are satisfied.

Bush’s radio address on 3/18/06: “The security of our country is directly linked
to the liberty of the Iraqi people, and we will settle for nothing less than
complete victory.” Meanwhile, Allawi stated Iraq is in the middle of a civil war.

George Will: “At this moment, one of the most dangerous since World War II, America's perils are exacerbated by the travails of a president indiscriminately despised by Democrats and increasingly disregarded by Republicans.”

India's Prime Minister called for fewer restrictions on foreign-exchange conversion.

In Afghanistan, according to Lt. Gen. Michael Maples, head of the Defense Intelligence Agency, "insurgents now represent a greater threat to the expansion of Afghan government authority than at any point since late 2001."

Hundreds of thousands have been protesting in all corners of France against a new law
allowing businesses to fire young workers in the first two years on a job without giving a reason, removing them from protections that restrict layoffs of regular employees. The stupidity of government officials never ceases to amaze me.

Mike Burk: “Several of the major indices including the Wil-5, SPX, OTC and R2K have had 4 or more consecutive down days quickly followed by as many as 6 consecutive up days. This kind of volatility has occurred most often near turning points…we are in the midst of the period the high for the 2nd year of the Presidential Cycle is usually observed.
I expect the major indices to be lower on Friday March 24 than they were on Friday March 17.” Meanwhile, the Dow is up 5.2% this year, its best start since 1999.

John Maudlin: “Homebuilders are still adding to inventory on the front end. But inventory on the backend is building as homes sales slow. This is somewhat interesting as the inventory of homes for sale is rising to new all-time highs!… Freddie Mac reports that cash-out refinancing rose by 70% last year, but they also forecast a drop of more than 50% for this year!…If their forecast is correct, that means there will be over $125 billion less available for consumer spending in 2006. Now that is another 1% of GDP.”

Paul Kasriel: “Households' cash outlays for goods, services and nonfinancial assets (e.g. houses, SUVs) were approximately $662 billion more than their cash inflows in 2005 - a record in dollar terms and a record 7.3% of disposable income…In 2005, capital appreciation accounted for 102% of the increase in household net worth. If the inflation in house prices is slowing and we are not entering a new super bull market in stocks, how will households keep increasing their net worth going forward? Cut back on their spending?”

From time to time, I write about uncommon values in individual stocks. In each case, I try to measure the risk against the potential reward. A good example would have been Saks, a company that was out of favor at $16+ after falling from $24. Today we come to another such situation, Symantec. It trades at $15+ and has few friends in the investment community. The company’s purchase of Veritas was completed in December 2005. It was accomplished through an exchange of shares and, at the time of the original merger announcement, was valued at $13.5 billion. Today, all of Symantec has a market cap of $16 billion. Their fiscal year ends at the end of March, and cash flow will be $1.6 to $1.7 billion. Cash will be around $3 billion. For the year that begins April, cash flow will rise to approximately $1.8 billion and EPS are estimated at $1.14 and revenue at $5.5 billion. You may recognize Symantec through its Norton anti-virus software. Vulnerability management is vital to all computer users. Symantec offers anti-virus, anti-spam, anti-phishing, compliance, behavior-based security, database and audit security, storage management, data protection, backup, save and restore software. No company comes close to offering such a complete array of security software. They are the market leader. Management is repurchasing $1 billion in stock. By the end of the March 2007 fiscal year, the number of shares outstanding will be just over 1 billion, and cash per share will approach $4. Integrating Veritas into Symantec has been a headwind, but that is now behind us. For patient investors, I can envision these shares returning to the 20’s in price. If I were running a big enterprise software company, I would be looking at Symantec as an acquisition candidate. That would be icing on the cake.