Developments

12/11/06 Developments

The use of antidepressant drugs was associated with a significantly increased risk of developing type 2 diabetes in people who were already at greater risk of the disease -- and
this effect was not seen in those taking the drug metformin, according to a
report presented here today at the American Diabetes Association's 66th
Annual Scientific Sessions. Other studies yielded conflicting reports on
the role of depression in the risk for diabetes. Researchers concurred,
however, that those who have diabetes and depression need better management
for the latter, which can interfere with their ability to provide self care for their diabetes.

Delphi and the United Auto Workers union said on Friday that they had agreed on buyouts for all Delphi's UAW members of up to $140,000 per worker, depending on length of service. GM will assist Delphi with shouldering some of the costs.

The world economy is growing at a healthy pace but could be derailed by the United States' huge trade deficit or the ill effects of high energy prices, according to a statement issued Saturday by finance ministers from the G8.

Chevron Corp. announced Friday the opening of the Baku-Tbilisi- Ceyhan (BTC) pipeline with the delivery of its first cargo of Caspian crude oil to world markets. The inaugural shipment of about 600,000 barrels of crude was delivered by tanker to Savona, Italy, marking the start of export of Azerbaijan's crude oil via the BTC oil pipeline. The crude oil initially will come from the Azeri-Chirag-Gunashli (ACG) field in the Azerbaijani sector of the Caspian Sea and is expected to be joined by other volumes in the future, including production from across the Caspian region. Chevron has an 8.9 percent interest in the 1,094-mile pipeline that crosses Azerbaijan, Georgia and Turkey and holds a 10.3 percent interest in the Azerbaijan International Operating Company (AIOC) that is producing from and developing the ACG field. The $4.5 billion pipeline has a crude oil capacity of 1 million barrels per day and is expected to accommodate the majority of AIOC production. Chevron is also a participant in another regional pipeline: the Caspian Pipeline Consortium (CPC), a 935-mile crude oil export pipeline from the Tengiz Field in Kazakhstan to the Black Sea port of Novorossiysk in Russia. Chevron has a 15 percent interest in CPC, which provides a critical export route for crude oil from Kazakhstan.

Julian Phillips: "Sergei Ignatyev, chairman of the central bank, said 50% of Russia’s foreign exchange reserves are now held in the U.S.$, with 40% in the € and the remainder in the Pound Sterling, a mirror image of the Stabilization Fund. Previously it was believed that just 25-30% of the reserves were in the €, with virtually all the remainder in the U.S. $. The action could well prove to be the pathfinder for other nations intending to diversify from the U.S.$. Russia’s central bank now boasts the world’s fourth-largest reserves, after China, Japan and South Korea, with its gold and forex holdings rising by 36% so far this year to $247bn. Will Middle Eastern oil exporters follow suit now after leading us to believe they will? The most likely trio of these is the United Arab Emirates, Kuwait and Qatar. It is certainly confirming a trend shift away from the U.S.$. Asian countries may well join the queue. 39% of Russia’s imports came from the Eurozone in 2005, against just 4% from the US. The globe’s central banks together hold $4,250bn of reserves. Were these to move away from the dollar we will go to the brink of the worst foreign exchange situation the U.S.$ and for that matter any currency has ever seen since the last World War!"

Elliott Gue points out "the last time gas prices were this low relative to oil was in late 2001." Recently, I have mentioned natural gas on a few occasions. I continue to believe natural gas has excellent upside potential as we move through the hurricane season and closer to the winter months.

New Zealand's central bank warned that soaring energy costs, combined with a weakened currency, would keep inflation running well above its target for the next year despite the highest interest rates in the developed world. The Reserve Bank of New Zealand raised sharply its forecast for consumer price inflation, predicting it would peak at 3.9 per cent next year, up from 3.4 per cent in the first quarter of this year, and would not fall to within its 1 to 3 per cent target range until late 2007.

The inflation camp is getting mighty crowded. I can feel the boat getting top heavy. Maybe it would be wise to consider the possibility of deflation following inflation. How do you think Helicopter Ben and his cronies will fight deflation? Can you see the Fed as the largest buyer of treasuries? The aftermath will not be a pretty sight.

Crude And The Trade Deficit

6/10/06 Crude And The Trade Deficit

George Ure: "This $63.4 BILLION deficit has to be funded with what? Hint: Printing press. The moving average line in one of the charts offered looks like thing have improved. Fact is we had a larger balance of trade deficit in April than we did in the [revised] March figures. Worse: There were only 30 days in April, which pencils out to $2.1133 billion per day. On a 31 day month therefore, the deficit would have been $65.51 billion at the same run rate, which I will table right now as my forecast for May's number when they come out next month."

Crude has not declined a great deal from the year high. On Friday, it closed at $71.60 a barrel. Yet, energy shares have fared much worse. Let's consider the following: ExxonMobil at $58.80; Chevron at $57.53; ConocoPhillips at $60.57; Apache at $61.23; and Schlumberger at $59.22. Each one of these companies represents, in my view, quality and value for long term investors. I especially like Chevron for its cash flow and dividend yield.

Doug Noland: "Highly speculative/leveraged markets in sharp decline normally infer liquidity issues and the potential for dislocation. But these times are anything but normal. The spigot of liquidity gushing out of the U.S. Credit system remains wide open. Will global Credit systems continue relishing in excess liquidity, or will equity market and speculator vulnerability increasingly encroach upon lending and debt issuance. Can global central bankers talk domestic Credit systems into demonstrating some restraint? To be sure, we have precisely the backdrop for extraordinary uncertainty, continued market volatility, and global financial fragility. This is Macro Credit Analysis at its most challenging, fascinating, confounding, frustrating, and inevitably humbling best."

Sometimes it's wise to take a closer look at the breakdown of the year highs and lows on the NYSE. Yesterday, there were 26 new highs; however, 7 were preferred stocks. Only one of the 26 was a household name --- Wells Fargo, my favorite in the banking group. There were 40 new lows. One was Embarq. It might prove worthwhile to take a look at this company, a recent spinoff from Sprint.

Once again we had an inverted yield curve with the 2-year at 5% and the 10-year at 4.98%. More importantly, look at the 30-year at 5.03%. There is little to differentiate between the 2-year and the 30-year Treasury bonds. In the meantime, Fed fund futures are predicting an 84% probability of an increase to 5.25% later this month and a 30% probability of a further rise later this year. Treasury bond prices do not reflect these probabilities.

Bill Bonner: "Every era has its clowns, its heroes, its fools…and its winners and its losers. Often, the honorable among them are sent to the scaffold; the dishonorable go to Congress."

According to rigzone.com, a Nigerian government official said Friday that 800,000 barrels a day of oil production are shut in at the country's Niger Delta, higher than previously reported.

the local harvest will wind up with 1.5 million or 1.6 million bushels -- far short of the 3.5 million bushels his seven elevators in the area normally take in.

Folks here already knew it would be bad.

Kiowa, Kansas straddles the Oklahoma-Kansas border. It has only gotten 1.6 inches of rain, and virtually no snow, since last October. If anything, the crop -- almost all top quality No. 1 wheat -- did better than many expected. Some folks had even feared the area would harvest just a third of a normal crop this season and are grateful for even half a crop given the lack of rainfall.

Inverted

6/9/04 Inverted

For the first time since March the yield curve inverted with the 2-year at 5% and the 10-year at 4.99%. Even though interest rates for the 10-year and 30-year declined, the dollar had its best rally in some time. That was despite the ECB, Korea, Turkey, and India all raising rates. Japan's Nikkei had its biggest loss in 1 year with a drubbing of 463 points. Yet, equities in the U.S managed to end Thursday on a flat note after retreating earlier in the day by triple digits. Crude had been below $70 a barrel but closed at $70.35, and thta helped to spur a rebound in the oil sector.

The White House on Thursday updated its 2006 economic forecast, boosting expectations for real growth in gross domestic product and inflation. The report estimates that real GDP will grow by about 3.6% during calendar year 2006, up 0.2 percentage points from the December outlook. The White House said higher-than-expected inflation to date prompted an upward revision of its forecast for a rise in the 2006 consumer price index to 3% from 2.4%. The administration forecasts average monthly jobs growth of 156,000, with a 4.7% unemployment rate for the year.

Gold for August delivery finished down $18.80 at $613.80 an ounce, its lowest level since April 13.

Recent inflation data contain some "danger signs" that bear watching, said Federal Reserve board governor Donald Kohn on Thursday. "I've found the recent inflation data somewhat troubling," Kohn told the Senate Banking panel.

First-time claims fell by 35,000 from the previous week's revised figure of 337,000, the Labor Department said. The four-week average of new claims fell by 5,750 to 327,750.

``The big policy blunders have been associated with the failure of central banks to keep inflation expectations under control,'' said Mark Gertler, head of New York University's economics department, who wrote a series of papers with Bernanke when the chairman was a professor at Princeton University. ``That is where the current Fed is coming from.''

The Conference Board reported that the leading index for Japan increased 0.1 percent and the coincident index increased 0.3 percent in April.

The VIX had another wild ride yesterday. Opening at 17.92, it traded up to 20.75, a level not reached for about 3 years, and closed at 18.35. Until the VIX begins to settle at lower levels for a few weeks, I don't see much of a rally sticking for equities.

Texas Instruments Inc. late Thursday boosted its financial targets for the second quarter, with sales helped by increased demand for cell-phone chips and its bottom line boosted by a tax benefit and a legal settlement.

Albertson's LLC, the supermarket chain partly controlled by private-equity firm Cerberus Capital Management LP, plans to close 100 stores, or about 16 percent of its locations, because they are unprofitable.

Despite what many believe, I don't believe our U.S. Treasuries are a safe haven. Rather, I believe they should be avoided --- unless you wish to lose your capital.

Abraham Lincoln: "You can fool some of the people all of the time, and all of the people some of the time, but you can not fool all of the people all of the time."

Taking It On The Chin

6/7/06 Taking It On The Chin

It's really disappointing when a rally can't hold after several down days. The plate was set. Crude, gasoline, natural gas, the metals, etc were all lower. The dollar was a bit stronger. The yield curve was getting flatter. The VIX was somehat weaker. Yet, I wasn't buying it. Some key stocks acted lousy, such as, Intel. As a matter of fact,
its shares fell Wednesday 2.3 percent, hitting a three-year low, and closed at $17.33
a low that was last reached in April 2003. Then there is Microsoft. It closed just above $22. Both companies are loaded with cash. The U.S. Treasury could only wish for their balance sheets.

Procter & Gamble said late Wednesday that it still expects its sales to grow between 20% and 24% in its fiscal fourth quarter while earnings per share should come in between 52 cents and 54 cents.

Atlanta Federal Reserve Bank President Jack Guynn, speaking to a business group in Atlanta, said that inflation risks are now elevated, even though there are fresh signs that the U.S. economy is slowing.

U.S. consumers took on an extra $10.6 billion in debt in April, the most in 10 months, the Federal Reserve reported Wednesday. Total outstanding consumer credit in April rose by 5.9% to $2.170 trillion, the Fed said. Revolving debt like that on credit cards rose by $3 billion, the most in seven months, the Fed said. Nonrevolving debt like automobile loans, meanwhile, rose by $7.6 billion, or 6.7%. The consumer credit figure was far above expectations. When you combine rising consumer debt with rising inflation and trailing wage gains, you have a recipe for a train wreck.

For 2006, EMC continues to expect earnings of 54 cents to 57 cents a share, or 70 cents to 73 cents a share on a pro forma basis, on revenue of between $11.1 billion and $11.3 billion. Revenue is currently seen coming in at the lower end of that range, the company said.

As I mentioned, the VIX started weaker and traded down to 16.07. As the rally in equities faded, the VIX promptly turned around and touched 17.86 before closing at 17.80.

Chief financial officers are growing more pessimistic about the U.S. economy, but still plan to increase capital spending and hiring this year. Their expansion plans will be in
substantial jeopardy, however, if inflation, the Federal Funds rate or the price of oil continues to rise.
These are some of the conclusions of the June 2006 Duke University/CFO
Magazine Business Outlook survey, which asked CFOs from a broad range of
global public and private companies about their expectations for the
economy. The survey concluded June 1 and generated responses from 980 CFOs,
including 584 from the U.S., 215 from Asia and 181 from Europe. The survey
of European CFOs was conducted jointly with RSM Erasmus University in the
Netherlands. Results in this release are for the U.S. firms, unless stated
otherwise.
The study's main findings are:
-- Only 24 percent of CFOs are more optimistic about the U.S. economy, in
contrast with 42 percent last quarter;
-- 49 percent are more optimistic about their own companies, however,
suggesting the pressures facing the economy have yet to affect most firms
directly;
-- Rising wages, falling consumer demand, and increased fuel costs top
CFOs' lists of concerns;
-- CFOs say their bottom lines will suffer if core inflation rises to 3.5
percent, the Federal Funds rate goes above 5.5 percent, or if the price of
oil surpasses $75 a barrel;
-- Companies will increase capital spending 7.5 percent over the next 12
months, an increase from last quarter, when CFOs predicted a rise of 6.5
percent;
-- Earnings are expected to increase 10.4 percent over the coming 12
months;
-- Corporate cash balances will grow another 2.1 percent.
Business optimism about the U.S. economy declined sharply, with only 24
percent of U.S. CFOs more optimistic than they were last quarter; 46
percent are less optimistic. At the same time, CFOs' optimism about their
own firms remained fairly steady, with 49 percent growing more optimistic
and 28 percent becoming more pessimistic.
"CFOs are telling us that we are moving closer to the danger zone for
the U.S. economy, but that their firms can ride it out for now," said John
Graham, a finance professor at Duke's Fuqua School of Business and director
of the survey. "There are several risk factors that are near the tipping
point, and if any of them worsens, it would heighten the risk of a
corporate slowdown."
CFOs WORRIED ABOUT WAGES, INFLATION, CONSUMER DEMAND.

Newly unsealed court documents show Guidant Corp. drafted a letter warning doctors of a dangerous electrical malfunction in some of its devices designed to restore a normal heartbeat, but the letter was never sent. Boston Scientific must be overjoyed about buying Guidant. Johnson & Johnson were luckily outbid.

The United States said on Wednesday Iran must suspend nuclear enrichment throughout any negotiations with major powers, but western diplomats said the proposed deal to resolve the atomic crisis could allow Tehran to eventually resume these activities.

State Department spokesman Sean McCormack told Reuters suspension is a "firm condition" of the major powers' offer to begin negotiations aimed at persuading Iran to abandon its weapons-related activities and "that condition would have to hold throughout any potential negotiations."

Continued Weakness

6/7/06 Continued Weakness

Wachovia Securities cut its earnings estimates for the homebuilding group, and expects margins to compress amid fierce competition and inventory overhang. Overall, Wachovia now sees an earnings decline of 11% on average for calendar 2006 and 32% for calendar 2007. It anticipates new home sales will fall 12% in 2006 and 8% in 2007 amid a "sharper, more rapid downturn" in demand than previously expected. Not surprisingly, the group got slammed and made new 52-week lows. D.R. Horton Inc., the nation's largest homebuilder by units, fell $1.40, or 5.6 percent, to $23.41; KB Home fell $3.28, or 6.7 percent, to $45.82 and Pulte Homes Inc. fell $1.64, or 5.5 percent, to $28.11. Toll Brothers Inc. fell $1.03, or 3.7 percent, to $26.55 and Hovnanian Enterprises Inc. fell 96 cents, or 3.1 percent, to $29.75.

General Motors Corp. will continue to face competitive challenges and record high commodity prices as it struggles to cut costs, Chairman and Chief Executive Rick Wagoner said on Tuesday.

John Hussman: "With corporate profits pushing above 9% of GDP, the unemployment rate at just 4.6%, and S&P 500 earnings at the top of their 6% long-term growth channel, investors should not be at all surprised to see “surprising” wage inflation, accompanied by disappointing profit margins and weak earnings growth in the next few years."

Yesterday the VIX continued to have a wide trading range and trended higher. The range was 16.65 to 18.56 with a close of 17.34. As volatility increases, the chances in my mind are greater for more disappointments in equity trades.

On Mondat Cascade Natural Gas had an unusual trading day. Volume was about 200,000 -- extremely high for Cascade, and the range was very wide -- 20.30 to 21.14 with a close at 20.84. I pay particular attention to unusual trading patterns.

Saudi Oil Minister Ali Naimi, in an interview with The Wall Street Journal published Monday, said the country's output in April averaged 9.1 million b/d, its lowest level since January 2005.

Luxembourg Prime Minister Jean-Claude Juncker said that the "level of the euro today is giving us some concern". He added: "I don't think we are in dangerous waters but we enter (them) if the level increases."

Senator Russ Feingold: "There are serious issues facing this Congress -- the war in Iraq, health care, high gas prices, relief and recovery after Hurricane Katrina, the economy. These are the issues on which the American people are demanding that Congress act. But instead, we are spending much of this week debating this poorly thought out, divisive, and politically motivated constitutional amendment that everyone knows has no chance of success in the Senate."

The Devil Made Me Do It

6/6/06 The Devil Made Me Do It

Ms. Rice dismissed the threat from Iran but the market did not. Monday was preoccupied with crude at $73 a barrel and gasoline at $2.20 a gallon. From the opening bell, equities were on their heels. The VIX had a gap opening higher at 14.97, the low for the day, and quickly traded above the 15 level and held there with little volatility. That was until Helicopter Ben had some words of concern about the rising core inflation level combined with a slowing economy. It did not take long for the VIX to rally up to 17 and it closed up 2.53 points on the day. While the VIX galloped higher, the Dow got balsteed for 200 points, the Nasdaq for 50 points, and the S&P 500 for 23 points. Even my Cascade Natural Gas got carried to the cleaners. It traded at $21.15 early in the session and then got kicked to close at $21.56. Of course that gives me an opportunity to add to my position on weakness. The same may be said for Univision as it approaches the $35 level. Overall, the action was not pretty. I often wonder what investors have been thinking. Inflation is alive and well and housing is slowing and so is consumer spending.

Trizec Properties, Inc. said Monday that Brookfield Properties and Blackstone Group have agreed to buy it and Trizec Canada Inc. for $8.9 billion. Brookfield will buy the shares of Trizec Properties not owned by Trizec Canada for US $29.01 per share in cash.

The ISM nonmanufacturing service index fell to 60.1% from 63.0% in April. New orders fell to 59.6% from 64.6%, but the employment index rose to 58.0% from 56.5%. Inflation pressures continued to mount with the price index surging to 77.5% from 70.5% in the previous month. This is hardly muted inflation.

I got to thinking about the Democratic ticket for 2008. This is not my strong point, but I'll give it a whirl. My thinking is Gore/Biden for the Dems.

The dollar fell to a one year low against the euro on Monday. So much for our bogus strong dollar policy.

This is an example of how a company should be run. A backhoe digging in an alley in the 200 block of Maple Street in Yakima on Sunday afternoon hit a natural gas line, causing a leak that forced residents and businesses to evacuate for about an hour. The backhoe struck the line, which was three or four feet underground, about 2 p.m., said acting Battalion Chief Dave Willson of the Yakima Fire Department.
Firefighters were called to the scene immediately. Because of a light breeze, they evacuated residents in several apartment buildings and blocked access to businesses on South Second Street between Maple and Pine streets. Workers from Cascade Natural Gas were called out and quickly clamped the pipe, stopping the leak, Willson said. People were allowed to return to their homes and businesses about 3 p.m. No injuries were reported.

The yield on July futures on the Fed funds rate was about 5.19 percent, pricing in a 74 percent chance of a quarter-point increase in June, up from 48 percent odds before Bernanke spoke.

"Following the current period of volatility and instability we expect investors to refocus on the previous concerns of continuing high oil prices leading to higher inflation, which would ultimately lead to higher interest rates and a subsequent slowing down of the U.S. economy resulting in a weaker U.S. dollar," said Jonathan Battershill, an analyst at Citigroup in Sydney. "All of these factors would result in stronger gold prices." Citigroup is now expecting average gold prices of $700 an ounce in 2007 followed by $750 in 2008.

Can Words Cause Harm?

6/5/06 The Devil Made Me Do It Minus One

Rice dismissed Iran's threats to disrupt energy supplies: ``We shouldn't put too much emphasis on a threat of this kind,'' Rice said on the ``Fox News Sunday'' program. ``After all, Iran is also very dependent on oil revenue.'' You have to forgive Ms Rice. She doesn't understand markets. Words/threats not necessarily action can create a spike in the oil trading pits. That price increase can generate greater profits for Iran. The leader in Iran is crazy like a fox- no pun intended. He's happy to discuss the situation without conditions but also will withhold oil from countries causing potential harm to his country. In addition, as for understanding threats or potential threats, Ms. Rice might consider our chasm in intelligence when it came to Iraq. Or maybe there wasn't an intelligence problem and the Administration's agenda was to invade Iraq anyway on its march into Iran. I think I said that in 2000. You can look it up.

Bloomberg points out the difference in yields between 10- year notes and Treasury Inflation-Protection Securities, or TIPS, has widened about 30 basis points to 2.64 percentage points this year. The gap is what investors expect inflation to average over the next decade. Inflation is not muted. Only some government employees believe that. For example, the cost of imported petroleum rose 11.5 percent in April from a month earlier, the biggest increase since March 2005, and compared with a year earlier, the price was up 32.5 percent.

One old friend of President Bush says that gay marriage barely registers on the president's moral radar, despite the fact that he publicly embraces an amendment banning gay marriage and that many credit this issue with propelling him to a second term. "I think it was purely political," the friend tells Newsweek in the June 12 issue(on newsstands Monday, June 5). "I don't think he gives a s--t about it. He never talks about this stuff." How shocking !!!!!!!!!!

Amid threats of a lawsuit from Adobe, Microsoft acknowledged Friday that it would remove support for saving files in PDF from Office 2007, as well as dropping its own rival format XPS from the productivity suite and Windows Vista.