Game Plan

6/18/06 Game Plan

Delphi said it's reached an agreement with its second-largest union and General Motors to offer buyouts to hourly workers. Ford also expects 8,000 to 10,000 workers to take early retirement.

Bush stated his administration would not abandon Iraq. How about those on Main Street. Have they been abandoned by Bush? How about civil liberties? With the make-up on the Supreme Court, the 5-4 ruling the other day permits authorities with a search warrant not to knock but simply barge right through the door.

Mike Burk: "Whether you expect the current year to more closely resemble 1998 or 2002 depends on your longer term perspective. I think a longer term bear market began in 2000. 1998 was near the end of the last bull market and 2002 was near the beginning of the current bear market so I expect the pattern that plays out over the next several months will be closer to that of 2002 than 1998."

I recently mentioned the formation of the Asian currency. This will be just one more nail in the coffin of the U.S. dollar. You don't have to share my view. Keep your money in dollars and see where you'll be in the three to five years. You really think bread lines are just for history books?
U.S. ethanol prices reached record highs above $3.60 a gallon this week. So why do most of the ethanol stocks act so lousy?

David Petch: "The commodity boom currently underway in all areas is due do shortages. Shortages are the result of different circumstance depending upon the commodity."

A biodiesel plant will be built outside of Seattle. Cascade Natural Gas is under consideration for transporting the output from this facility. It is one thing to build an ethanol or biodiesel plant and quite another to distribute the end product to the end user. In sum, distribution is an element that is often under-appreciated and thereby undervalued. Such is the case, in my view, with Cascade Natural Gas. Private equity investors are awakening to this area.

The Brakes

6/17/06 The Brakes

China ordered banks to increase reserves to curb an investment boom in factories and real estate in the world's fastest-growing major economy.

Are you watching interest rates? Stocks for the last few days have ignored 2-year Treasury bonds at 5.16%, 10-year at 5.13%, and 30-year at 5.17%. The housing market will notice with mortgage rates trending higher next week.

The federal funds rate will likely rise to 5.75% byOctober despite slower expected U.S. economic growth, economists at Lehman Bros. said Friday, penciling in an additional rate hike from what they had expected.The reason? They expect core inflation rates to soar to 2.7% early next year, well above the FederalReserve's comfort zone. Lehman cut its forecast for gross domestic product by 0.2 percentage points to an average of 3% over the next four quarters.

Medtronic Inc. on Friday said new trial results show greater efficacy of the dual-chamber implantable cardioverter-defibrillators as compared with single-chamber ICDs in patients at risk of sudden cardiac death. The results showed that clinically significant adverse events can be reduced by one-third with dual-chamber ICDs compared with single-chamber ICDs in patients at risk of sudden cardiac death, the Minneapolis-based medical device company said. Medtronic presented the results of the DATAS, or dual chamber & atrial tachyarrhythmias adverse events study, clinical trial at Cardiostim 2006, the 15th World Congress in Cardiac Electrophysiology and Cardiac Techniques.

William Poole, president of the Federal Reserve Bank of St. Louis, said pressure from high energy prices could mean that U.S. inflation is greater than what has appeared in data and that the Fed would respond to persistent inflation with policies that keep it from rising further.

Jesse Livermore: “When the market leaders begin to lose relative strength even though the news is still very good, and buying strength and selling weakness no longer works, get out of stocks in general because the game is over."

Tim Adams, the under-secretary for international affairs at the US Treasury: “we view proposals for Asian currency co-operation with interest.” In effect, this would be an Asian currency similar to the creation of the euro.

The VIX bounced back on Friday with a range of 16.52 to 18.13, with a close of 17.25. It would be foolish to believe volatility is not alive and well.

Dorothy Thompson: "There is nothing to fear except the persistent refusal to find out the truth, the persistent refusal to analyze the causes of happenings."

Fissure

6/16/06 Fissure

Manufacturing activity in the Philadelphia region grew at a slower pace in June, the Federal Reserve Bank of Philadelphia said Thursday. The Philly Fed index fell to 13.1 in June from 14.4 in May. The new orders index improved to 17.7 from 2.7. Shipments rose to 17.7 from 11.7. The prices paid index fell to 48.7 from 55.3, while the prices received index rose to 14.0 from 10.3, indicating slightly elevated pass-through of higher costs. Meanwile, the Empire State Manufacturing index jumped to 29.0 in June from a revised 12.9 in May.

The benchmark 30-year fixed rate mortgage average rose slightly in the week ending Thursday, to 6.63% from 6.62%, according to Freddie Mac. The mortgage agency said its weekly survey showed the 15-year loan also increased, to 6.25% from 6.23%. The 1-year Treasury-indexed adjustable rate rose, to 5.66% from 5.63%, and the 5-year hybrid ARM increased to 6.23% from 6.2%.

Natural-gas futures rose sharply to $7.20 per million British thermal units.

The Senate voted 98-1 Thursday to pass a $94.5 billion emergency-spending package that provides funding for ongoing military operations in Iraq and Afghanistan, as well as money for ongoing hurricane relief efforts, bird-flu preparedness and increased border security. The package cleared the House earlier this week and now goes to President Bush, who is expected to sign it. Who will foot the bill for this? China? Japan? India? Guess again.
Meanwhile, over 2,500 of our soldiers have been killed in Iraq? For what cause?

Capital flows into the U.S. fell sharply to $46.7 billion in April, a 25 month low. These funds are insufficient to cover our deficits in the month of April. Would you place your money in dollars? That's what you do when you invest in the U.S. Should we be concerned?

The July fed funds futures contract continued to imply a 100% chance that the Fed will raise its target on overnight rates to 5.25% in June from its current target of 5%, but now prices in a 75% chance they will raise rates again after their Aug. 8 meeting.

U.S. industrial production fell 0.1% in May, the Federal Reserve reported Thursday. This is the first decline since January. Capacity utilization fell to 81.7% in May from 81.9% in the previous month. This is the first decline in capacity since January.

The number of people collecting unemployment checks climbed by 15,000 to 2.425 million in the week ending June 3. It's the highest level of continuing claims in six weeks.

Interest rates continued to climb with the 2-year and the 30-year at 5.13% and the 10-year at 5.10%.

The VIX had a gigantic drop from 21.14 to 15.90 and this helped to spur the triple digit gain in the Dow and the major move in the Nasdaq and the S&P 500. In 10 trading days the VIX has rallied from 14 to about 24 and now back down to 15.90 in just two trading days.This reflects both fear and volatility and, in my view, the potential of a fissure, a crack in the foundation of the global financial system and, with it, a sharp reduction in liquidity leading to extreme day to day volatility. Preservation of capital must be the ultimate guidepost for investors, and that also means avoiding currencies based on debt and the printing press, such as, the U.S. dollar.

Dow Jones Industrial Average posted its first back-to-back triple-digit point gain since November 2004. The Dow industrials were up 197 points. It marks the Dow's biggest one-day point gain since April 21, 2005. With a gain of about 300 points in the Dow over the last two days, why should I be concerned? For the same reason I have been advising selling into strength for the last three months. Interest rates are rising, cash flow on Main Street is being squeezed, debt levels are rising in the public and private sectors, and liquidity is in jeopardy. Derivatives are a time bomb and the fissure created by them is about to break wide open.

KB Homes now sees fiscal 2006 per-share income of $10, while analysts are looking for $10.30. The company cited declining demand for new homes.

Bill Gates will step down from his day-to-day role at Microsoft Corp. in July 2008.

Morgan Stanley Capital International's World Index, a gauge of 23 developed markets, had its biggest advance since April 2003, climbing 2.1 percent to 1277.46. Europe's Dow Jones Stoxx 600 Index added 2.4 percent to 309.62, bringing its two-day climb from a six-month low to 2.6 percent.

Rob Parenteau: "As of Q1 2006, the gap between household sector expenditure and income widened $100b to a nearly $700b deficit at an annualized rate. This deterioration in the household financial balance has been going on since 1997. Since early 2005, the rate of decay has accelerated noticeably. The US household sector financial balance is plunging. "

Keeping It Real

6/15/06 Keeping It Real

Real average weekly earnings fell by 0.7 percent from April to May after
seasonal adjustment, according to preliminary data released today by the Bureau
of Labor Statistics of the U.S. Department of Labor. A 0.3 percent decline in
average weekly hours and a 0.5 percent increase in the Consumer Price Index for
Urban Wage Earners and Clerical Workers (CPI-W) were partially offset by a 0.1
percent rise in average hourly earnings.

The Consumer Price Index for All Urban Consumers (CPI-U) increased
0.5 percent in May, before seasonal adjustment, the Bureau of Labor
Statistics of the U.S. Department of Labor reported today. The May level
of 202.5 (1982-84=100) was 4.2 percent higher than in May 2005.
The Consumer Price Index for Urban Wage Earners and Clerical Workers
(CPI-W) increased 0.5 percent in May, prior to seasonal adjustment. The
May level of 198.2 (1982-84=100) was 4.3 percent higher than in May 2005.
The Chained Consumer Price Index for All Urban Consumers (C-CPI-U)
increased 0.3 percent in May on a not seasonally adjusted basis. The May
level of 117.2 (December 1999=100) was 3.4 percent higher than in May 2005.
On a seasonally adjusted basis, the CPI-U advanced 0.4 percent in
May, following a 0.6 percent rise in April. Energy costs continued their
advance--up 2.4 percent in May. Within energy, the index for petroleum
based energy increased 4.8 percent, while the index for energy services
fell 0.6 percent. The food index increased 0.1 percent in May. The index
for all items less food and energy rose 0.3 percent in May, the same as in
each of the preceding two months; the index for shelter again accounted
for over half of the monthly advance.

Dallas Fed President Richard Fisher said Wednesday he was "uncomfortable with what I see presently" on the inflation front. "We are seeing price pressures, and we have a duty to not let those take root," Fisher told a business group in Corpus Christi, Texas. Fisher said his favorite measure of inflation that ignores sharp price movements, was running at 2.4% rate, and is "just too corrosive" to be acceptable. He said he would be "relentlessly bird-dogging inflation to prevent a debasement of your dollars."

Yesterday, the bond market took it on the chin. The unfriendly inflation figures created a rise in rates. The bond market inverted even more with the 2-year at 5.10%, the 30-year at 5.09%, and the 10-year at 5.05%. With rates about to be increased by the Fed to 5.25%, you have to ask yourself who is stupid enough to buy treasury bonds at the aforementioned rates. Maybe they are looking for a tax loss.

Natural gas moved 7% higher on Wednesday. I continue to believe natural gas is undervalued.

Microsoft Corp. on Tuesday warned of eight "critical" security flaws in its Windows operating system and Office software that could allow attackers to take control of a computer. Microsoft, whose Windows operating system runs on 90 percent of the world's computers, issued patches to fix the problems as part of its monthly security bulletin. It was the biggest such update since February 2005. The company issued a total of 12 patches that address 21 security holes and cover problems in its Windows, Internet Explorer, Word, Powerpoint and Exchange Server products, security experts said." The significance of this large number of patches lies in the fact that 19 of them are remote code executions," said Amol Sarwate, manager of the Vulnerability Research Lab at Qualys.

With equities moving up in price yesterday, the VIX finally had a down day. The range was 23.49 to 21.45, and it closed one tick from the day's low at 21.46.

Russian Deputy Prime Minister Dmitry Medvedev: “This is for the coming generations to decide whether or not a new international currency will be created,” he said, quoted by the Itar-Tass agency. “Along with the growth of the demand for rubles, our currency could be one of the reserve currencies,” Medvedev said.

Shares in VeraSun Energy Corporation, the second-largest US ethanol producer, soared by as much as 30 per cent on their first day of trading in New York after an initial public offering raised $419.8m for the company and its shareholders.

Randall Forsyth: "Not only do government statisticians remove food and energy from the key "core" inflation measure, rising utility costs lower the CPI, and vice versa. You cannot make this stuff up; it is beyond satire. Yet it is a basis of Fed policy."

On a year to year basis, rents have risen 3.3%.

Representative Ron Paul: "Anecdotal evidence and common sense dictate that government CPI statistics are habitually grossly understated - so much that it would be funny except that savers are being robbed. Meanwhile, our new Fed chairman says that the CPI overstates inflation! What is going on here? Is Bernanke, who evidently must not eat, drive or pay electric bills just incompetent? Or do you think there is an Orwellian agenda here where statistics are manipulated for political purposes?"

Fear Factor

6/14/06 Fear Factor

The VIX had a slight down opening, and then all broke loose. After touching down at 20.27, the VIX roared back to close at 23.81, the second consecutive day it closed at the high for the day. You can smell the volatility in equities and the fear factor present in the minds of fund managers. Equities took it on the chin again. The Dow average dropped 86.44, or 0.8 percent, to 10,706.14, down 8 percent from a five-year high set on May 10 and 0.1 percent for 2006. The S&P 500 lost 12.71, or 1 percent, to 1223.69, bringing its loss for the year to almost 2 percent. The Nasdaq Composite Index dropped 18.85, or 0.9 percent, to 2072.47, the lowest since October. But the real story was in commodities -- gold down $44.50; silver dropping 13% to 9.625; copper slumping 21.8 cents to $3.01 a pound; crude sliding to $68.56 a barrel; and of course there was a downer for platinum etc. You get the picture. This is not the time to panic. Rather, one should take a long look at Chevron, ConocoPhillips, Apache, Pioneer Drilling, Goldcorp, and Pan American Silver.

There are clear inflation worries, and the BLS explained it pretty darn clearly.
Costs of intermediate goods, or materials such as lumber or steel that are used to make finished
products, rose 1.1 percent last month and are up 8.9 percent in the 12 months ended in May. Prices of raw materials, or so-called crude goods, rose 2 percentand were up 8.6 percent in the last 12 months. Excluding food and energy, intermediate prices increased 1.1 percent, the biggest gain since October, after rising 0.4 percent in April. Core crude goods prices rose 6.2 percent after rising 4.7 percent. So, there is inflation in the pipeline; however, it may begin to slow as demand slows. It's necessary to look over the hill.

Indices in Japan and Australia had their biggest decline since Sept. 2001.

Intel plans to reduce prices on its pentium chips.

Gary Lammert: "The nonlinearity at the terminal portion of the current second 148
year US grand fractal cycle, reasonably can be expected as having the
potential for the greatest percentage drop in the shortest period of time.
The sudden devolution of current asset valuations likewise could potentially
have greater and more vexing- social-political ramifications and dislocations
as compared to prior historical periods of turmoil following collapses
from generational macroeconomic saturation areas of debt and
consumption. Large scale political and social turmoil are the carts
that are pulled(or overturned) by the antecedent macroeconomic horse
stumbling into the unexpected very deep and low viscosity quicksand
found atop generational asset saturation areas."

U.S. state revenues are forecast to rise 5.1 percent in fiscal 2007, supporting bigger spending demands and healthy surpluses, a new survey showed on Tuesday. Revenues for fiscal 2006 were running 3.4 percent above budget forecasts, exceeding projections in 37 states and meeting expectations in 10 states, the National Governors Association and National Association of State Budget Officers said in their 2006 Fiscal Survey of the States.

Mark Hulbert points out that, according to Norman Fosback, the Fosback Index is close to record low levels currently, which means that fund managers are close to being more bullish than they've ever been. Only twice previously, according to Fosback, did the Fosback Index get as low as where it is right now: "At the peak of the glamour stock frenzy in 1972 and at the broad top of the tech bubble six years ago."

Pressures

6/13/06 Pressures

Power generator Mirant Corp. withdrew its $8 billion unsolicited bid for NRG Energy Inc. on Monday under pressure from Mirant shareholders who said they would make more money if Mirant sold itself instead.

Broyhill, the furniture maker, to cut 700 jobs and close a factory.

Gold traded at a two-month closing low for the August contract. July silver also lost 13 cents to $11.08 an ounce and July copper gave back 4.75 cents to trade at $3.22 a pound.

Embarq Corp. said TRC Capital of Ontario is offering to buy as many as 2 million, or 1.34%, of Embarq's common shares at $39.75 each. In my view, the company's shares are worth closer to $50 a share.

Microsoft will not fix a serious flaw in Windows 98 and Windows Millennium Edition because a patch could break other applications.

Steve Moyer: "Languishing long-term interest rates relative to short-term rates are a persistent deflationary clue. Yield-curve inversion is another. Emerging market stock market crashes taking place one-by-one, worldwide, point to the same outcome. So does the sudden, precipitous 2006 drop in the Homebuilders Index ($RUF). One by one, commodities will be taking unanticipated hits. Rampant, dot.com style real estate speculation is already drying up nationwide as local markets soften one by one. Take it from this investment realtor: Real estate deflation has begun and will persist for a longer period than almost anyone can imagine."

Not surprisingly, equities got slammed on Monday. The range for the day for the VIX was 17.89 to 21.07, and it closed at the high for the day. Traders were busy getting rid of positions in the last half hour of trading, and yet, the volume for the day was not particularly robust.

John Hussman: "What?!! How can I even mention the notion of a bear market when we're so “clearly” oversold and close to a bottom? Well, the S&P 500 is only down about 5.5% from its peak of a few weeks ago, and it's precisely the “fast, furious, prone-to-failure” rallies that keep investors holding on until an enormous amount of damage is done."

Crude-oil prices closed under $71 a barrel Monday for the third time in four sessions.

Monday represented the seventh consecutive down day for the Nasdaq index. The S&P 500 index fell to its lowest level since November, and all the gains in 2006 have been wiped out.

The federal budget deficit widened to $42.8 billion in May from $35.4 billion in May 2005, the Treasury Department said Monday.

On Wednesday, Goldman Sachs and the Chicago Mercantile Exchange offer the first derivatives auction tied to the core consumer price index.

During the most recent quarter, Pioneer Drilling's average revenues per day increase by 34 percent to $17,622 and the average number of rigs in Pioneer's fleet was 55. Average daily drilling margins improved by 92% over the year ago period.

The Mogambo Guru: "For good measure (I suppose), the Fed bought up $2 billion in government debt last week, too, blatantly committing the ultimate fraud: creating money to buy government debt for itself, which is then (supposedly) turned over to the U.S. Treasury."
As an aside, I frequently provide quotes from Mogambo Guru and believe his thinking is original and his words provide an air of levity.

Palatin Technologies, Inc. announced that management will present at the Needham Fifth Annual Biotechnology and Medical Technology Conference on Thursday, June 15, 2006 at 4:00 p.m. EDT at The New York Palace Hotel, New York City.

Ford has said it spent about $3.5 billion to cover 550,000 hourly and salaried workers, retirees and dependents last year; GM spent $5.4 billion in 2005 for its 1.1 million employees, retirees and dependents.

"Although housing prices are stretched, it is hard to see the catalyst for a crisis in the market," says Nicolas Retsinas, director of the Joint Center for Housing Studies at Harvard. "The overvaluation looks pretty well balanced by longer term supports for house prices, so we may just see a few years with little action. Houses will revert to being something to live in rather than money makers." The study states over the past five years house prices have outstripped income growth more than sixfold – the median home now costs more than four times median household income in 49 out of 145 metropolitan areas in the US, a record. In 14 metropolitan areas, the median house is now worth more than six times median income. Last year saw the average house price shoot up 9.4 per cent – the biggest rise in the average house price since records started more than 40 years ago.

The Real Story

6/12/06 The Real Story

Before one invests going forward, it might prove fruitful to discern what the bond market is telling us. I have recently discussed the inverted yield curve; however, let's take a closer look. The 2-year rests at 5.02% and the 10-year at 4.99%. However, possibly more important, the 30-year yield is now down to 5.03%, and a short time ago it was over 5.20%. Is this the time to be on the sidelines? Why would the 2-year be rising in yield and the 30-year be declining? Clearly, there is an expectation for a quarter point increase by the Fed at the end of June. But why is the 30-year declining in yield? That denotes slower growth and slowing inflation. If that were the case, why has the dollar rebounded somewhat over the past two weeks? Markets don't always fit neatly into a package. There isn's a set formula provided by Einstein. What would I suggest? Use the rally in the dollar and 10 and 30-year Treasury bonds to reduce those holdings. Should the equity market rally in the short term, I would continue to cut back on questionable holdings.