Psychology

4/8/06 Psychology

All eyes were on the non-farm payroll report. Of course, when that occurs, you know there is a better place to look. What came out of the BLS was almost identical to my expectations--211,000 new jobs(I was expecting 220,000); wages up 0.2% in March and still trailing inflation; an average workweek with 33.8 hours-unchanged on the month; total hours worked in the economy rose 0.2%; an unemployment rate declining to 4.7%; and a labor participation rate of 66.1%. As anticipated, the servce sector, which includes professional and business, health care, retail, leisure and hospitality, accounted for 202,000 of the employment gains.

Paul Tudor Jones: "Don't focus on making money; focus on protecting what you have."

The first reaction was to think the market would be off to the races. Eyes should have been on the yield curve and Fed fund futures The 10-year Treasury quickly rose to 4.97%, the highest yield in 4 years, and the 30-year broke above 5% to 5.05%. Importantly, August Fed fund futures are now pricing in a 60% chance that fed funds will reach 5.25% by mid-August, vs. a 52% chance on Thursday. In sum, the trend in interest rates continues to move higher. As rates move higher, the rate of earnings growth for companies must come down and the P/E ratios decline in lock step. In addition, higher rates, as I have said on many occasions, become increasing competition for equities.

According to David Rosenberg at Merrill Lynch, approximately $2.5 trillion of household debt, or 21% of outstanding household debt, will be repriced upward in 2006.

Clifford Odets: "Life shouldn't be printed on dollar bills."

As I mentioned a few days ago, the Dow Jones Transportation Index hit an all-time high. I strongly urge you not to be left at the train station or the airport. At the very least, I would sell 75% of all rail and airline holdings. That includes the equipment manufacturers. Lower GDP growth and a strapped consumer make for an unpleasant combination for these industries.

Douglas Adams: "This planet has - or rather had - a problem, which was this: most of the people living on it were unhappy for pretty much of the time. Many solutions were suggested for this problem, but most of these were largely concerned with the movements of small green pieces of paper, which is odd because on the whole it wasn't the small green pieces of paper that were unhappy."

Energy Secretary Bodman said with U.S. refineries running at 86 percent capacity following the battering they received from hurricanes Katrina and Rita last year high crude oil prices and an annual U.S. shift to summer gasoline, the switch by refineries to ethanol as a fuel additive from MTBE could result in shortages in some areas this summer.

With the Chevy Tahoe, Impala and HHR; Buick Lucerne; Cadillac Escalade; and GMC Yukon all having a great month, consumers in March continued to respond enthusiastically to General Motors' new models. Retail sales of GM launch vehicles were up 30 percent compared to February and accounted for one-third of GM's total deliveries for the month. Success of GM's launch vehicles is a critical component of GM's North America turnaround strategy.

Oliver Goldsmith: "The mind is ever ingenious in making its own distress."

Starbucks traded at an all-time high. Intel traded at a 52-week low. Natural gas changed hands at a one-month low. The VIX finally showed some life on Friday. The S&P 500 closed below 1300. The idea is not to lose your capital. Cut your losses short.

Massachusetts Institute of Technology's Kerry Emanuel: "I'm worried about what the data is telling us," Emanuel said. "It's a pessimistic message, but barring a major (El Niño event), and barring a big volcanic eruption, there just isn't an objective basis for expecting a downturn in Atlantic hurricane activity."

American Airlines stated on Friday that it had matched a $50 increase in first-class and full-coach fares by rival Delta Air Lines Inc. in most of its markets. I am so glad that inflation is muted!

The first exchange-traded fund tracking crude-oil prices is expected to begin trading Monday on the American Stock Exchange, according to news reports.

Delphi Corp. won court approval on Friday for its attrition agreement with former parent General Motors Corp. and the United Auto Workers Union. The deal frees Delphi to offer GM-funded retirement incentives to about 13,000 UAW members, and allows 5,000 workers a chance to return to factory jobs at GM.

So why today's title of psychology? It refers to the volume of purchasing power and the volume of pricing power in relation to cost containment. What does that mean? As long as the volume of purchasing power outstrips the supply of pricing power, prices have a better chance of rising. When the opposite occurs, more attention is focused on increased risk factors (such as 5%+ Treasury bonds), which dampen confidence, and volatility comes out of hibernation. As frequently is the case, volume and volatility are kissing cousins.

High energy prices are “exacerbating” global economic imbalances, increasing the risks of a crisis, the International Monetary Fund will warn next week.

The IMF will say in its World Economic Outlook report that “global current account imbalances are likely to remain at elevated levels for longer than would otherwise have been the case, heightening the risk of sudden disorderly adjustment”. A draft of the second chapter of the report was obtained by Expansion, the Financial Times’ Spanish partner paper.

High energy prices do not matter? Consider this. FedEx Freight, the less-than-truckload unit of FedEx Corp., said Friday it would increase its general rate 5.95 percent on April 24. Rates for FedEx Express and FedEx Ground are not affected. The rate hike will apply to interstate and intrastate traffic and select shipments between the United States and Mexico and Canada. I wonder whether the Fed considers a price hike of 5.95% inflationary?

An Important Day

4/7/06 An Important Day

Wal-Mart said March sales rose 1.4 percent at its U.S. stores open at least a year, slightly higher than the estimate it gave on Saturday for 1.3 percent growth. The company forecast April same-store sales growth will likely be between 4 percent and 6 percent. Easter falls in April this year, and last year it was in March, one reason for most retailers experiencing tepid same-store sales in March 2006.

The ECB and the Bank of England kept interest rates unchanged. The ECB indicated it may raise rates in the near future.

In early Thursday morning trading, the metals markets took off on a run. Gold topped $600, silver $12, copper $2.63, platinum $1096, and paladium $395. Compare the rise in metals with the trend in the dollar index, which has been treading water over the last three months. There is quite a difference.

Venezuela's state owned oil company Petroleos de Venezuelaz (PDV) will invest $80 billion to $100 billion between 2006 and 2012 to meet its goal of doubling output to 5.85 million barrels per day, the country's Vice Minister of Finance Eudomar Tovar stated.

Bankrupt auto parts maker Collins & Aikman Corp. stated it will sell its automotive fabrics business, cutting 1,200 jobs in plants in Roxboro and Farmville, N.C., and El Paso, Texas. "Certain styles of textiles heavily invested by the company have fallen out of favor with consumers, raw material prices have escalated and manufacturing has moved outside the United States," said Gerald Jones, a company executive.

When Scooter Libby was in the news every day, I provided my opinion on Libby, Joseph Wilson, and Valerie Plume. At the time, I stated that it was my belief that Libby had to have received orders from Bush and Cheney. Today we learned something from papers filed in court.
"The president and the vice president must be held accountable," U.S. Sen. Dick Durbin, D-Ill., said. "Accountable for misleading the American people, accountable for the disclosure of classified material for political purposes. It is as serious as it gets in this democracy."
U.S. Attorney General Alberto Gonzales said the president has the "inherent authority to decide who should have classified information." It should be noted that Fitzgerald was appointed by the Justice Department to find out if the leak was part of an illegal effort to discredit Plame and Wilson in retaliation for Wilson's article. If a connection is proved, then, in my view, action on impeachment should be taken for Bush and Cheney. They have not been given a get out of jail card.

Even though the most recent inventories of natural gas declined by 10 billion cubic feet, the price still declined to $7.

The Monster job employment index for March rose to 164 from the prior month's 157. Monster is still seeing a significant job turnover rate as well as continuing demand for accountants, auditors, healthcare workers, and financial services professionals.

Freddie Mac's latest 30-year mortgage rate is 6.43%.

The Citizens Against Government Waste (they issue the annual Pig Report) said the total number of pork-barrel earmarks in the 2006 budget declined 29 percent to 9,963, but their total cost increased 6 percent to $29 billion.

U.S. businessowners are adapting to higher energy prices and interest rates, but rising health care costs are dampening their plans to hire new employees and givepay raises during the next six months, according to the biannual PNC Economic Outlook survey. Of those who offer health insurance, nearly 6 outof 10 said they are likely to reduce their employees' coverage in the future. The survey of small- and mid-sized business owners and senior decision-makers across the United States also found that health care reform is theNo. 1 issue they would most like to see addressed in the 2006 mid-term elections, followed closely by the nation's reliance on foreign energy sources and tax reform. "The results show a stable outlook among business owners for their own sales and profits during the next six months, which suggests they are adapting to higher energy prices and interest rates," said Stuart Hoffman,PNC chief economist. "Many, however, are taking aggressive steps to counter continued increases in costs for employees' health care coverage, which could mean reductions in benefits for some employees."

Over the last two trading days Apple shares have risen approximately 20% from $60 to $72. The company's quarterly earnings are slowing, and they will continue to slow due to growing competition, increased market penetration, and consumer spending that is finally beginning to top out. Based on fiscal year 2006's estimated earnings, the shares are trading at about 35 times earnings or about a 40% premium to the current and projected quarterly earnings growth. In my view, those buying shares at these levels are showing mistaken judgment. It should be noted that Apple has a market cap of $61 billion, the same as that of MMM. Apple is not even in the same investment quality league as MMM.

Despite the fact that oil refineries operated at only 86% of capacity last week, the profit margin for turning three barrels of crude oil into two barrels of gasoline and one of heating oil was $14.51, based on futures prices in New York. As such, one might consider the strong possibility of a pause in the rise of gasoline prices. If refiner margins climb higher, politicians will begin accusing the industry of gauging.

Bush: "I fully understand that the intelligence was wrong, and I'm just as disappointed as everybody else is," he said yesterday. But he added: "Removing Saddam Hussein was the right thing for world peace and the security of our country." Harry Taylor: "I would hope, from time to time, that you have the humility and the grace to be ashamed of yourself...While I listen to you talk about freedom, I see you assert your right to tap my telephone, to arrest me and hold me without charges, to try to preclude me from breathing clean air and drinking clean water," real-estate broker Harry Taylor told Bush at a town-hall meeting.
"I have never felt more ashamed of nor more frightened by my leadership in Washington."
"You said, would I apologize for that?" Bush said. "The answer is absolutely not."

- Just 36 percent of the public approves of Bush's job performance, his lowest-ever rating in AP-Ipsos polling. By contrast, the president's job approval rating was 47 percent among likely voters just before Election Day 2004 and a whopping 64 percent among registered voters in October 2002.
- Only 40 percent of the public approves of Bush's performance on foreign policy and the war on terror, another low-water mark for his presidency. That's down 9 points from a year ago. Just before the 2002 election, 64 percent of registered voters backed Bush on terror and foreign policy. Just 35 percent of the public approves of Bush's handling of Iraq, his lowest in AP-Ipsos polling.

Over the years, I have discussed the Birth Death adjustment for the BLS monthly non-farm payroll report. Once again, the adjustment is a guess on the part of the BLS as to how many net new companies came into being and how many new jobs they created. The adjustment begins with today's non-farm payroll report. It is quite possible that today's report will provide at least 220,000 new jobs, and this data point could spook the Fed into even higher rates than previously thought. Once again, watch the wage growth (in relation to real inflation), hours worked, and overtime.

While on the subject of wages, corporate profits as a percentage of GDP (10%+) are running at their highest levels in approximately 40 years. Yet, despite these profits and despite high levels of productivity that go towards producing those profits, salary and wage gains have evn lagged real inflation for the past four years. When does this inequality translate into social unrest? Is the inmdividual on Main Street as non-volatile as the stock market has been in the last two years?

Developments

4/6/06 Developments

Thomas Hoening, Kansas City Fed president, said interest rates are very close to where they need to be after a series of quarter-point hikes. As a result, homebuilding stocks rallied.

The Snowman predicted that the payroll report for March would be "strong." It is anticipated that 200,000 new jobs will be created. I will be interested to see the data on the hours worked per week, the overtime hours, and whether the hourly pay gained after adjusting for inflation (and I do not mean the 2% the government spits out on a monthly basis.

Crude inventories continue to build on a weekly basis; however, as more drivers take to the roads in the Spring, gasoline inventories are dropping (but from very high levels). Demand is relatively flat as prices climb towards the $3 a gallon level.

In my view, the market greatly over reacted to the news that Apple would make Windows available on the Mac. Rick Sherlund of Goldman Sachs stated he doesn't expect any meaningful increase in Mac sales in the short term. And while Microsoft will make money selling Windows to Apple users, Sherlund said, that group is still only a small percentage of the market. In addition, Mark Stahlman, a Caris & Co. analyst in New York, also doesn't expect Apple's Boot Camp to help boost Apple's market share. Microsoft is readying the next version of Windows, called Vista, and this Apple software only works with the older Windows XP. "It's actually likely to lead to a decline in market share" because customers will pick Vista when it becomes available, Stahlman said. Apple shares rallied about 8% yesterday.

John Hull: "Yes, our tree has an interesting shape. The center branches reflect the shape of the zero curve. When extreme parts of the tree are reached the branching pattern changes to accommodate the mean reversion."

The ISM nonmanufacturing index rose to 60.5% from 60.1% in February. New orders rose to 59.5% from 56.2%. The employment index slipped to 54.6% from 58.2%. The price index fell to 60.5% from 64.8% in the previous month.

The sale of second homes accounted for 40% of the homes sold in 2005.

Bankrupt Tower Automotive Inc., a metal vehicle frames producer, has reached an agreement with retirees on pension and health care issues and remains in talks with its unions on proposed wage and benefit cuts, Chief Executive Kathleen Ligocki said on Wednesday. Talks are continuing with those unions and the company hopes to reach an agreement with them by the end of April, and if not, by the end of spring, Ligocki told reporters. These developments speak well for the Delphi/GM/UAW situation, and I referenced the Tower matter in my discussion of Delphi labor disputes. There is no question in my mind that Delphi/GM/UAW will come to an agreement without a strike. The market fails to appreciate this view.

Warren Buffett: "We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful."

Phelps Dodge, benefitting from record-high copper prices, said late Wednesday it will pay a special dividend of $2 per share, or about $400 million, to shareholders payable June 2.

Brookfield Homes Corp. said first-quarter net new orders totaled 227, down 56% from 517 during the same peirod last year. The decline was primarily in the San Diego/Riverside, Calif. and Washington markets. Brookfield added that in mid-summer it can make a "better assessment" of 2006's home closings.

A jury held Merck liable for the heart attack of a man who used Vioxx and awarded him $4.5 million in compensatory damages.

Office vacancies hit a 5-year low.

The S&P 500 hit a 5-year high. The FTSE 100 hit a 5-year high.

YouTube, which hosts video clips uploaded by its users, said it had received $8m in second-round funding from Sequoia Capital, a venture capital firm that was an original backer of companies such as Yahoo! and Google.

According to the Detroit Free Press, General Motors will cut its engineering staff in Michigan for a second time later this month as it continues to shift some work to emerging markets such as Brazil, where GM is hiring engineers to develop the next-generation small pickup.

The euro hit another record high against the yen and a two month peak versus the greenback on expectations the European Central Bank will tighten monetary policy in the coming months.
Noted analyst Dennis Gartman warned yesterday that the euro may be breaching resistance if it can take out the $1.22 level and sustain the gains. Late yesterday and today the euro has done just that and is up in early trade over $1.2280.

Research In Motion Ltd., maker of the BlackBerry, reports its earnings for the fiscal fourth quarter after the market's close today. Early last month, Research In Motion cut its quarterly guidance to a range of 64 cents to 66 cents per share on revenue of $550 million to $560 million, down from a previous forecast of 76 cents to 81 cents per share and $590 million to $620 million in revenue. Both estimates exclude $612 million in costs from its recently settled patent dispute with NTP Inc. On average, analysts polled by Thomson Financial are expecting the company to post earnings of 67 cents per share and $567.2 million in sales. With increasing competition from other devices, I believe the price/earnings multiple will come down. Over the past year, the shares have advanced 30% and they reflect, in my view, operations out to 2008. I can't see that far. Maybe you can. I would cut back on holdings. As you all know, I have been a big fan of the Blackberry. I was also an early big fan of a black box that became the Xerox machine. There was a time to cut back on Xerox holdings too.

In early 2003, I suggested the purchase of Schlumberger at $35. Last year their revenue growth was almost 25%. Through the remainder of the decade, thanks to growth in Russia, the company believes its topline growth will average in the mid to high teens. At an all-time high of $133 and selling at 26 times 2006 earnings, I think we should reduce our holdings by 50%.

A Possible Scenario

4/5/06 A Possible Scenario

"Right now we face some powerful negative forces that could lead to a dollar panic, a stock market crash, or abanking crisis," said Investment U ChairmanMark Skousen in a lecture recently at Columbia University. "The basis of my remark," says Skousen, "is a warning issued by none otherthan former Fed Chairman Paul Volcker. A year ago he warned that 'The U.S. isskating on increasingly thin ice... The circumstances seem to me as dangerousand intractable as any I can remember, and I can remember a lot.'" Whether that thin ice breaks, cracks or holds, says Skousen, depends onseven trends that are driving the U.S. economy. "It's a medley of economicwoes," he says, that include: -- An overreacting Fed, switching from "easy money" to "tight money." The Fed has been a major source of instability in the financial system. For example, Greenspan was chairman for 19 years, and switched policies seven times! The Fed often overshot its target on both ends - raising interest rates too high in 1989, 1994, and now, and pushing them too low in 1992 and 2003. -- Inflation and structural imbalances. The Fed's "easy money" policy caused in part the "irrational exuberance" of the tech stock market bubble in the late 1990s and the real estate bubble in this decade. When the bubble bursts, as it inevitably must, the effects aren't pretty. -- Poor consumer/investor finances. Our government policies promote overspending and undersaving on a massive scale. The saving rate has turned negative, and household debt as a percentage of disposable income is at a dangerous level, exceeding 150%. -- A vulnerable financial/banking system. We live in a global laissez-faire financial system that is highly leveraged with debt financing, derivatives and fractional reserve banking. Hedge funds are not really "hedged," but highly speculative, and another collapse along the lines of Long-Term Capital Management in 1997 could be disastrous. -- Trade deficits and out-of-balance capital flows. The trade deficit is at record levels. To make up this imbalance, foreigners must invest $2 billion a day in the U.S. -- Overburdened federal debt levels, unfunded liabilities and rising interest rates. The Senate just raised the national debt ceiling to $9 trillion, representing 70% of GDP. Interest expense is now the third-largest category of the federal budget, only exceeded by defense spending and domestic welfare expenditures. Imagine the impact as interest rates start climbing again. -- The rising cost of war/natural disasters. Last year, we faced a large jump in the deficit as a result of the rising costs of the war in Iraq and the expenses related to the Gulf hurricanes."

In the first quarter, Boeing delivered 98 commercial airplanes, of which 72 were next generation 737s.

"We believe we'll be on a path to investment-grade rating at the closing or shortly thereafter," said GMAC Chairman Eric Feldstein, who will continue as chief executive of the unit after the sale.

Prescription drug prices soften dramatically even with moderate competition, the Food and Drug Administration said Tuesday in an analysis that shows the arrival in the marketplace of just two generic versions of a brand-name medicine can nearly halve the price consumers pay.In fact, in the real world there is no reason why the prices cannot decline by 75%, and frequently they do.

Yesterday morning equities fed on a meal served by two Fed members-- Fisher and Lacker. Fisher stated the Fed can tolerate a lower level of U.S. unemployment than it previously did thanks to the global economy and productivity gains. Lacker said growth is proceeding on "a solid pace" this year, but that "inflation is low and stable." In particular, Lacker said the price index for core personal consumption expenditures, a favorite Fed indicator, showed inflation well-contained. It might be helpful to discuss employment with respect to wage gains trailing inflation, and it might prove fruitful to analyze the real level of inflation and not some government statistic that does not live in the real world. In my view, Fisher and Lacker provide no meat on the bone and listening to them is a waste of time.

Advanced Micro Devices Inc. said on Tuesday it had begun recording revenue from Fab 36 in Dresden, Germany, and was on track to double production capacity by 2008.

The United Arab Emirates and Qatar, which together hold almost $30 billion of foreign exchange reserves, said they may buy more euros on expectations the currency will appreciate. ``We are permitted to hold as much as 40 percent of our reserves in euros, and as much as 90 percent in dollars,'' Qatar's Central Bank Governor Sheikh Abdullah bin Khaled al-Attiyah said. ``We sold euros last year when the currency was high, and could buy again,'' he said.

Wal-Mart plans to build more than 50 stores in urban areas over the next two years and, sounding more governmental than corporate, said it would also create programs to support small businesses — including its competitors — in the process. It plans to create "jobs and opportunity zones" around 10 of its new urban stores.

Challenger, Gray & Christmas Inc. said Tuesday that companies announced 64,975 job cuts in March, a 26-percent drop from the 87,437 cuts announced in February and 25-percent lower than March 2005, when job cuts totaled 86,396. The March figure was the lowest since last April`s 57,861 job-cut announcements. With the March decline, the pace of 2006 job cuts is decidedly slower than a year ago. In the first quarter, employers announced 255,878 job cuts, 11-percent lower than the 287,134 cuts announced in the first three months of 2005. The first quarter was 11.3-percent lower than the fourth quarter of 2005.

Maxtor will cut 900 jobs and Calpine 775 jobs. Washington Mutual is laying off 132 workers in its technology group.

In an interview with The Detroit News on Tuesday, Wagoner said that the massive overhaul of GM operations will produce markedly improved results in 2007.
He also expressed confidence that a costly strike will be avoided at bankrupt parts maker Delphi Corp., and that many GM and Delphi hourly workers will take early retirements or buyouts as the automaker downsizes..."Wagoner ticked off the milestones so far on GM's road to recovery: health care cost cuts for salaried and hourly workers, a dozen plant closings, the planned elimination of 30,000 factory jobs and the sale of a controlling interest in GM's prized finance division.
He is particularly pleased with the agreement reached last month by the UAW that will offer buyouts ranging from $35,000 to $140,000 to every one of GM's 113,000 hourly employees and another 13,000 workers at Delphi."
"What could be better?" Wagoner said. "We have a number of people who would like to retire. We provide them a reasonable, but not excessive incentive to retire. It's not a comprehensive solution, but it's a very important piece of the puzzle."
"Buying out older workers, he said, is critical to opening GM jobs for workers who may be displaced in Delphi's reorganization plan. Beyond that, the buyouts can create space for idled workers in the controversial "jobs bank" program, which provides full pay and benefits for laid-off workers. More importantly, the attrition program was negotiated and accepted by the UAW."

An Iranian news agency report claims that Iran may be the world's third-largest gas producer in the next four years as existing gas projects, particularly the South Pars development, are implemented. Based on the current statistics, the world's annual gas consumption stands at 2,618.5 billion cubic meters, which is equivalent to 50 million barrels of oil per day, the Persian service stated.

San Jose has a nearly 55 percent chance of seeing housing prices slump during the next two years, according to a study released Tuesday.
Increased prices and higher interest rates are making it harder for buyers to afford homes in Santa Clara County, said PMI Mortgage Insurance Co., which named San Jose as one of the areas where the prices are likely to drop.
In all, 48 of the nation's 50 largest metropolitan statistical areas (MSAs) face a greater risk of declining home prices this quarter, according to the report.
A San Jose drop ranks 11th most likely among those 50. Elsewhere in the Bay Area, the downturn risk is slightly greater, with a 58 percent chance in the Oakland area and a 55 percent risk in San Francisco area.
Fourteen of the top 50 MSAs now have risk scores above 500, meaning they face a 50 percent or greater risk of home price declines in the next two years, up from 11 MSAs last quarter.

Pimco's Bill Gross: " Profit-incented/yield-starved foreign individual investors have joined hedge funds and the PIMCOs of the marketplace in what has been called the Yen carry trade, substituting 0% yields in Japan for double-digit rates in emerging market bonds and currencies, high single-digits in spread product, and in turn "settling" for a mere 400-500 basis point pickup in good old fashioned U.S. Treasuries. ....
Our [US] markets since mid-2004 that have been the main recipients of the Yen carry trade, a phenomena made possible by the widening spread of U.S. and Japanese short rates and the relative assurance by the BOJ that the Yen would not be allowed to appreciate significantly against the dollar. This one-sided bet has fostered the borrowing/exodus of money from Japan and the reinvestment of those funds in anything with a yield here in the U.S... To be blunt, the dollar must go down as it loses its carry."

With public support for the Iraq war ebbing and President George W. Bush's popularity skidding, voters across Wisconsin approved measures calling for an immediate withdrawal of US troops from Iraq.

General Motors Corp. said it doesn't endorse a request by supplier Delphi Corp. to reject employee contracts and fire 25 percent of its workforce to avoid losing $8.1 billion through 2010. The U.S. Bankruptcy Court in New York will consider Delphi's request at a hearing in May. " GM does not endorse the debtor's decision to move the court at this time for authorization to reject their collective bargaining agreements and modify their retiree welfare benefit obligations," Michael Kessler, a lawyer representing the Detroit-based automaker, said in court papers.

According to the Financial Times, China will impose a special tax each time companies sell locally produced crude formore than $40 a barrel. How would you like to be a shareholder in Sinopec, PetroChina, or CNOOC?

Yesterday, the dollar hit a 10-week low against the euro.

Mortgage application volumes increased 7.2% in the week ended March 31 compared to the prior week, data from the Mortgage Bankers Association show. Also on a seasonally adjusted basis, applications for mortgages to buy homes jumped 8.4%, while the week-to-week growth in refinancing applications was 5.3%.

Reversal Day

4/4/06 Reversal Day

Yesterday was a key day. It reflected the growing stupidity on the part of money managers and individual investors. In fact, one might say it was amateur night. The idea is not to look for reasons to be bullish or bearish. Think rationally and then the results have a better opportunity for success. The Institute for Supply Management Mfg Index for March declined to 55.2 from February's 56.7. It is basically unchanged from March 2005's 55.3. Investors greeted the news with enthusiasm. Why? The weakness meant the Fed would not raise rates much higher, and the Dow quickly climbed 120 points in the plus column. Stupid! The important point was the prices-paid component that climbed 4 points in the month of March to 66.5, and is now 18 points or 37% higher than July 2005's level. This reflects growing inflation and that spells trouble. It means the Fed is more likely to raise rates in the coming months and not stop.

What else did investors ignore? Retail gasoline prices rose by 9 cents to an average of $2,63 a gallon, the highest price since last October. Silver, gold, and copper continued to climb to multi-year highs. Crude closed at $66.74 a barrel after trading above $68. Natural gas hit 7.63 but closed at 7.24.

What else did investors ignore? China's Cheng Siwei, a vice chief of the national parliament, stated yesterday that his country should trim its holdings of U.S. debt and can stop buying dollar bonds. China is a leading financier of the U.S. current account deficit and holds the world's largest foreign exchange reserves.

William Greider: “The US financial position is rapidly deteriorating, due mainly to America's persistent and growing trade deficit. US ambitions to run the world, in other words, are heavily mortgaged. Like any debtor who borrows more year after year with no plausible way to reverse the trend, a nation sinking deeper into debt enters into an adverse power relationship with its creditors -- greater and greater dependency.”

By the end of yesterday's trading day, the gain in the Dow had been trimmed to 35 points and the Nasdaq and the Russell 2000 were both in the red. The Dow Jones Transportation Index closed at a new all-time high. I would suggest cutting back in all securities within this sector. Interestingly, new 20 and 65 day highs rose above March levels; however, this was accompanied by the rise of 20 and 65 day lows. A study of the new highs would reveal the vast majority took place during the morning rally, while the lows were taking place in the afternoon selloff- not surprisingly.

The stupidity of investors never ceases to amaze me. After GM announced the sale of 51% of GMAC, the shares sold at $22 only to close just above $20 due to the reaction that its March sales were down 14.5%. March is an unimportant month for auto sales. What did investors ignore? Robert S. "Steve" Miller, the chairman and chief executive of Delphi Corp., said Monday that the troubled auto parts supplier would be able to avoid a strike by its unionized workers.
After an address to the Detroit Economic Club, Miller was asked by a reporter whether Delphi would be able to avoid a strike, and he responded: "Absolutely." "We are determined to work this out," he said. The afternoon sell-off in shares of GM are an immense opportunity, in my view. Miller went on to state "we intend to honor our accumulated pension obligations, thereby avoiding termination of our pension plan," Miller said in his speech. "We want to restore our under-funded plan out of future profits, but we will need time. This means we must find a way to stretch out our required pension plan payments. "And it is essential that the restructured Delphi be a robust enterprise, indeed. Failure to achieve our goals could hurt our retirees and further burden our nation's pension safety net system. " In addition, I strongly believe the GMAC bonds will be upgraded in the ratings and that will lower GM's cost of borrowing.

I remember going to the first LinuxWorld Expo in San Jose in 1999. It was certainly not well attended. It was a novelty. Not any more. The LinuxWorld Conference & Expo opens in Boston today for a four-day run that includes a keynote speech by Microsoft Corp.’s Bill Hilf, director of platform technology strategy. It’s the first time ever that a Microsoft executive has delivered a formal address at the conference, although the company has offered technical presentations at past shows. Hilf plans to talk about “Interoperability: Dealing with the Diversity and Heterogeneity of Today’s IT Marketplace” Thursday morning.
For Microsoft, the interoperability focus reflects the need to evolve and respond to customers' needs, Hilf said. Hilf came to Microsoft in 2003 from IBM, where he led IBM’s Linux technical strategy for the global emerging and competitive markets group. He runs a multitude of Linux distributions in Microsoft’s Linux lab, has been involved with open-source software for more than a dozen years.

Municie, Indiana is 60 miles from Indianapolis. Sallie Mae Corp., the big private lender, announced plans to open a 700-employee debt management center. The pay: $9 an hour, less than half the average manufacturing wage in Muncie in 2004 and below the $20,000 federal poverty level for a family of four. A new manufacturing plant will open this spring, creating 410 jobs at wages of about $15 an hour. And a Wal-Mart Supercenter--the second such outlet in Muncie--is scheduled to open soon, providing about 400 jobs. Last week, Muncie's 85-year-old transmission plant, once a workplace for more than 3,000 General Motors employees, closed. There are 67,000 people in Muncie. The city is being transformed from $20-to-$25-an-hour jobs for minimum wage or $9- or $15-an-hour jobs. Fifty-one percent of the 7,700 students in the system qualify for free lunch. There are a growing number of Muncies across the country. The GDP numbers fail to show it.

Brett Steenbarger: "Low 10-day volatility leads to subnormal performance in the intermediate term."

In the 20th anniversary edition of Beyond Borders: The Global Biotechnology Report 2006, Ernst & Young reports that the revenues of publicly-traded biotechnology companies surpassed $60billion for the first time in the sector's 30-year history. "The global biotechnology industry's revenues are growing at strong rates, product approvals are bringing innovative drugs to market, and the long- elusive goal of profitability is quickly approaching," said Donn Szaro, leader, Global Biotechnology and Pharmaceutical sectors, Ernst &Young. Revenues of the world's publicly-traded biotech companies grew 18 percent in 2005, reaching an all-time high of $63.1 billion. As revenues increased, the industry's net loss decreased by a dramatic 30 percent, to $4.3 billion. The industry secured 32 new product approvals in the United States, including 17 first-time approvals.

Wade Huettel, Chief Operating Officerof Tax Relief Network states, "The tax climate doesn't look real encouraging for consumers right now. We regularly see a correlation between people who find themselves having tax problems -- also facing bankruptcy. 2005 was aU.S. record for people filing bankruptcy. Some statistics show 1 in 56 U.S. homes filing last year."

Computer Sciences Corp. is in talks to sell itself in a deal that could be worth more than $10.6 billion, and also is expected to announce 5,000 jobs cuts, The Wall Street Journal reported today, citing people familiar with the matter. Most of the job cuts will come from Europe.

French building materials company Lafarge said today that it has raised its offer to buy out the rest of its North American unit to $82 a share, from a previous price of $75 a share. The company also extended the offer for the 46.8% stake of the company until April 28.

Figures gleaned from Tampa Bay area Realtors associations show listings have jumped 250 percent, from 10,414 homes in February 2005 to 24,253 homes in February 2006. Tampa Bay area home sales were off an estimated 29 percent in February versus a year earlier.

Arcelor SA on Tuesday unveiled a series of takeover defenses, including a special payment of more than $6 billion to shareholders, to spurn the advances of larger rival Mittal Steel.

French oil company Total and Italy's ENI have refused to accept the new Venezuelan rules for producing crude, which obliges multinationals to become minority partners of state oil company PDVSA and consequently will end their operations in Venezuela.

Nigeria's Oil Minister Edmund Daukoru said Monday Royal Dutch Shell PLC (RDSA) has told him it will take around a month to bring back most of the country's shut-in oil production.

"While there is much work to be done, the GM board has great confidence in Rick Wagoner, his management team and the plan they are implementing to restore the company to profitability," said George Fisher, who serves as the presiding director of the 12-member GM board.

Euro-zone unemployment fell to 8.2% in February from 8.3% in January.

Anna Quindlen: "If God is watching us, as some believers suggest, as though we were a television show and God had a lot of free time, the deity would surely be bemused by how dumbed-down devotion has sometimes become in this so-called modern era. How might an omnipotent being with the long view of history respond to those who visit the traveling exhibit of a grilled-cheese sandwich, sold on eBay, that is said to bear the image of the Virgin Mary? It certainly argues against intelligent design, or at least intelligent design in humans."

The Way It Is

4/3/06 The Way It Is

Rick Wagoner, GM CEO: "Excuse me, what part of $15 billion in health care (cuts), 12 plants (closing), 30,000 people (cut), attrition programs, salaried health-care and retirement (cuts), salaried head-count reduction, a new sales and marketing strategy, advancing product programs-what part of that doesn't exhibit a sense of urgency in doing what matters?' What's frustrating to me is a lack of recognition of the progress." You can add to that the majority sale of GMAC. According to the WSJ, the Cerebus group will pay $8 billion in cash up front and another $6 billion in cash. The additional money will come as some assets are monetized over time through a series of complex adjustments that will transfer additional value to GM from GMAC.

Evan Esar: "An economist is an expert who will know tomorrow why the things he predicted yesterday didn't happen today. "

Alcatel and Lucent are merging. In effect, Lucent is selling to Alcatel for about $3 a share, a sad ending to the owner of Bell Labs. Lucent shareholders have truly lost a bundle with this company. Over the next 24 months 10% of the combined workforce or 8,000 workers will be laid off.

Folks talk about $2.50+ a gallon for gasoline but when was the last time anyone referred to the $3.50+ cost for propane gas. Here is an energy source for heating and cooking that is controlled by the likes of Johnny two-toes, so to speak. If you study the demographics of those using propane, you will note these folks are last in the nation to be able to afford the $3.50 + a gallon. Wasn't it only a few years ago the cost was $1 a gallon?

John Hussman: "Among stocks belonging to the S&P 500, those rated “A” or “highest quality” have gained just 1.01% year-to-date. In contrast, companies rated “B -” or “lower quality” have gained 10.17% year-to-date. At the bottom of the quality barrel, those S&P 500 companies rated “C” or “D” for “lowest quality” (or in reorganization) have gained a striking 16.90% year-to-date. The pattern is the same in the Russell 2000, where the highest, lower, and lowest quality stocks in the index have posted average year-to-date gains of 7.38%, 13.03% and 20.09%, respectively."

Smart & Final Inc. announced that its Board of Directors has determined to review the Company's strategic alternatives. The Company said this decision was made in view of the recent announcement by Casino Guichard-Perrachon S.A.("Groupe Casino"), the Company's majority shareholder, that Groupe Casinointends to sell a significant portion of its non-core assets by the end of 2007. Groupe Casino did not announce however any specific plan with respect to its 56% ownership in the Company. The Company expects to engage legal and financial advisors to assist inits review of strategic alternatives. There can be no assurance as to the timing of the Company's process or that any specific transaction will result from this process. Founded in 1871 in downtown Los Angeles, Smart & Final Inc. currently operates 250 non-membership warehouse stores for food and foodservice supplies in California, Oregon, Washington, Arizona, Nevada, Idaho and northern Mexico.

Gary Lammert: "It is highly likely that the ongoing, accumulating, and overwhelmingUS debt load has directly caused the nearly perfect evolution offractal growth patterns of its composite Wilshire equity valuationsthat have evolved since October 2002. If the proportionality corollaryhypothesis is correct a devolution of the greatest historicalsignificance may occur in 1/10 or less of the time that occurred atthe end of the first half of the US Second Grand Fractal - from 1929 to 1932. The implications for the global community will be ...historical."

General Motors is rapidly expanding its manufacturing operations in Russia. To increase sales in the booming market, GM is negotiating with multiple cities to build its first factory in Russia, possibly in St. Petersburg. Also, GM will announce this week it is expanding production in Kaliningrad.

Over the past several years, I have mentioned that analysts are at a disadvantage in not having run a company. It is hard for them to appreciate the nuances in bringing on new plants and/or contracting with an outside source for additional production. Over the last four months, Intel has lowered its revenue projections- in the beginning of December and in the middle of January. The reduction in January was much larger than the one in December. It is quite possible that the main reason for these reductions is that the company has been losing market share in the mobile arena to Advanced Micro Devices. Interestingly, AMD shares have been punished along with those of Intel. In the month of March, the stock got hammered from $42+ to its present $33+. For the last six months, the mid-point of the trading range has been about $31.50. What are analysts missing? In the first quarter, AMD's new Fab 36 initiated production. In June, Chartered Semiconductor will become an additional manufacturing source of AMD 64 microprocessors. Rather than try to fine tune first quarter margins that will be hampered by the production ramp, revenue mix, and the like, it might be wise to focus on the current growth rate that is significantly higher than the current p/e of 21 times 2006 earnings. In my view, there will be an increasing demand for higher margin chips over time. These shares are volatile and they are not for the faint of heart. On the other hand, I believe they present an opportunity for the longer term investor.

The Nikkei 225 Average rallied to its highest level in almost six years.

The Semiconductor Industry Association said worldwide sales of semiconductors in February fell 2.2% from January to $19.22 billion. Sales rose 6.8% from February 2005, said the association, which noted February is historically a weak month for sales. The SIA said there is some evidence of inventory accumulation during the first quarter, but that inventories will likely be balanced by the third quarter. It added there are also indications that sales of cell phones will exceed earlier forecasts of 10% growth in 2006, mostly due to demand for lower cost phones in China and India.

Edgar R. Fiedler: "The herd instinct among forecasters makes sheep look like independent thinkers. "