Happy Mother's Day

5/8/05 Happy Mother’s Day

Hopefully, every day is Mother’s Day.

Turning to other global thoughts, India will be one of the main drivers of Asian economic growth, even as high oil prices, high interest rates and weak export markets will slow down other countries in the region, the IIF said. India's economy will grow by 8 percent, even better than the 6.9 percent it saw in 2004, the report said adding that the region's other major economies like South Korea, Indonesia, Malaysia and Thailand’s growth will slow down, the Institute of International Finance said. "The average growth rate for the other leading Asian emerging market economies is forecast at 4.4 percent, down from 5.3 per cent in 2004," an IIF statement said. "High global oil prices and the upward trend in U.S. interest rates translate into slower growth for the region," the statement said.

Volkswagen AG will set up a $900 million car manufacturing facility in India’s southern Andhra Pradesh state. The facility would be spread across 350 acres and generate up to 10,000 jobs.

Talking about jobs, John Succo at Minyanville had an interesting observation. He mentioned that, GDP growth in the first quarter of 2004 rose 4.1% and in April 2004 the BLS reported a gain of 225,000 jobs. By comparison, in this year’s first quarter, GDP growth was 3.1% and the BLS reported on Friday a gain of 274,000 jobs, of which, 257,000 resulted from the BLS 2005 net birth/death adjustments.) In other words, the chances of future downward revisions are, in my view, highly likely.

At Wal-Mart, sales of food have outpaced general merchandise in 14 of the past 17 weeks.

In this year’s first quarter, Mexican citizens living outside of Mexico sent $4 billion back to their homeland, up 20% from the year ago period. Most of these individuals live in the U.S. From a cash flow basis, this $4 billion was exceeded only by oil and gas receipts and income from tourism. I wonder if there is any connection between this year’s first quarter increase in U.S. service jobs and the $4 billion sent back to Mexico?

Chief Maquinna, Nootka: "Once I was in Victoria, and I saw a very large house. They told me it was a bank and that the white men place their money there to be taken care of, and that by and by they got it back with interest. "We are Indians and we have
no such bank; but when we have plenty of money or blankets, we give them
away to other chiefs and people, and by and by they return them with
interest, and our hearts feel good. Our way of giving is our bank."

Investors might consider that, exchange traded derivatives and OTC derivatives, together total at least $500 trillion. The clock is ticking.

Paul Kasriel: “The higher import prices resulting from dollar depreciation vs. Asian currencies could add inflationary pressures in the U.S. This could put upward pressure on U.S. interest rates via an increase in the inflation premium component of interest rates.”

Ann Landers: “Rose-colored glasses are never made in bifocals. Nobody wants to read the small print in dreams.”

A Big Day

5/7/05 A Big Day

There is a great deal going on today. We have a V-E Day to celebrate, an important birthday to celebrate, and latter in the afternoon, the running for the roses. I hope all the activities bring smiles to many faces.

When you look at yesterday’s nonfarm payrolls report, some interesting points pop out. Both the number of unemployed persons and the unemployment rate were unchanged in April. About 1 in 5 unemployed persons had been jobless for 27 weeks or longer. The long-term unemployed have accounted for over 20 percent of total unemployment for 31 consecutive months. That’s a real employment soft patch. In addition, not very many of those 274,000 net new jobs really provide a means to support a family of 4. Most are low paying service jobs. As those types of jobs become a greater proportion of our labor force, the disparity between the haves and havenots gets wider and wider. That’s not an encouraging picture going forward.

Maybe it’s a good thing to work for the federal and/or state government. Take the state of Washington, for example. On average, Washington state employees pay $79 towards their monthly health premiums while the state government pays on average $575 per month in health premiums. Yearly benefits to Washington state employees amount to $1 billion. Meanwhile, the number of uninsured in the state continues to rise and the state encounters growing budget deficits. That’s not an encouraging picture going forward.

With one hand, the Fed continues to raise short-term interest rates. With the other hand, M-3 rose by $19.1 billion this week and by $73.2 billion over the past two weeks. This slight of hand does not provide an encouraging picture going forward. Fueling liquidity that leads to greater inflation does not create a neutral stance and/or balance the risk through higher short-term interest rates. In fact, both activities generate a destabilizing economic foundation.

ECRI’s Future Inflation Gauge rose to 119.7 in April from an upwardly revised 118.8 in March. The index’s annualized growth rate rose to 2.6% from 0.6% in March.

In the latest reporting period, bank credit rose by $4.3 billion and total commercial paper by $3.9 billion.

Crude closed out the week at $50.96 a barrel.

No matter how smart you are and no matter how much you know, there is some investor who is smarter and knows more than you do. That person may be a seller when you are a buyer and vice versa.

NeoRx Corp. will cut its staff by 40% and close a plant in Texas.

As of March 31, 2005, the S&P 500 companies had $617 billion in cash on their balance sheets. Charles Mulford, professor of accounting at Georgia Institute of Technology’s College of Management noted that the S&P 100 companies reduced capital expenditures by 19.6% from 2000 to 2003. During the same period, the group’s adjusted operating cash flow grew 20.8%. The average dividend payout ration was 32% in 2004, compared with the 54% historical average.

High Gas Prices Do Matter

5/6/05 High Gas Prices Do Matter

According to a national poll of 1,000 individuals conducted by Sacred Heart Universiyt, 71.3% nationwide said that higher gas prices are very seriously or somewhat impacting their quality of life. Additionally, 43.5% stated their summer plans will be slowed as a result of increased gas prices. Sacred Heart University economics professor, John Gerlach, opined "it is not surprising that Americans are making adjustments in their lifestyle, as they realize that the increase in gas prices is not a temporary spike but it likely to be with us for some time as the worldwide demand for oil continues to increase faster than supply." According to the poll, 51.2% of thise surveyed suggest their next car will be smaller and more gas efficient than their existing car. Gerlach stated "the impact on the types of cars Americans buy was reflected in the sales of vehicles in the U.S. in March when there was a significant downturn in the number of large SUVs purchased. If the higher gas prices persist for another six months, as I expect they will, it is logical to infer that the number of Americans who make adjustments in the types of vehicles they buy will be even greater than shown in the poll."

UT Starcom announced plans to cut 17% of its workforce or 1,400 jobs. HP will cut 1,900 jobs. Woodbridge Corp. in Brodhead, WI makes foam seats for autos and is laying off at least 115 workers. Riverside Paper is closing its Appleton, WI paper mill and 101 employees will lose their jobs.

Once again, yesterday, crude traded jus tbelow $50 a barrel but rallied to close at $50.83.

Ken Wood, founder of Woodie's CCI Room: "85% of trading is psychological, and 15% is made up of what we use to trade...people who don't feel good about themselves aren't going to feel good about their trading. Ego is a big problem."

It is not a coincidence that there has been support for the dollar over the past 4+ months. In my view, there are a few reasons for this turnaround in demand for dollars. There was a realization that the Fed would continue to raise short-term rates, and the upward path could take us to the 3.5% to 4% range in 2005. These measured one-quarter point increases would create a growing disparity with the ECB rates and thos ein Japan. In other words, the returns would be higher in the U.S. In addition, even though higher rates would most likely slow the U.S. economy, the latter's growht rate would still be higher than those in the eurozone countries and Japan. Why am Ibringing this discussion up today? Simply put, the April nonfarm payroll report will be out in afew hours. My software service is non-opertaional at this time, and therefore, my posting for today will be delayed. It is important to focus on the relevant facts in order to reach a rational conclusion. As always, it is best to keep one's mind focused on the simple. That's correct. To be right, most frequently the answer is obvious. The economic growth in the first quarter was less than expected. Interest rates were rising. Gas prices were rising. Inflation was rising. Consumer confidence was falling. The stock market was falling. The yield curve was getting flatter. March nonfarm payrolls were disappointing. Knowing all that, what possible reason would there be to forecast a job gain of 175,000 for April? What had changed in April? Yet, that is the average forecast by 60+ economists. The same trends that existed in March apparently existed in April.

Yesterday, GM and Ford bonds were downgraded to junk status. Do you think this was a surprise? Smart investors buy on bad news and sell on good news. Why? The news should ahve been anticipated and the market pricing should already have reflected the news. Interestingly, yesterday there was selling on the news. In never realized there were so many amateurs participating in daily market trading. That gives me reason to believe greater profit opportunities exist in the future.

My software has just begun to function once again. The market has been closed for one hour. Maybe my brain is not working. The nonfarm payrolls for April showed a gain of 274,000 net new jobs and February and March were revised upward by a total of 93,000 jobs. Those are whopping figures and I'm happy for the new jobs but pissed that my forecast stunk the house out. In April, the service sector gained 229,000 jobs, including 58,000 in leisure, hospitality, and food services; movies and telecommunications 12,000; mining 8,000; hospitals and doctors' offices 25,000; construction 47,000; retail 24,000; professional and technical 18,000; and financial services 17,000. Manufacturing lost 6,000 jobs. In other words, the hiring was widespread. The weekly gain in workers' pay was 5 cents an hour to $16 an hour. Over the past year, the average hourly earnings rose 2.7% and still trailed inflation, which is in a cyclical upturn. I will need to go back to ground zero and see where I could have been so far of in my forecast for net new job creation. For example, I never thought there were 35,000 new food service jobs in April or 24,000 new retail jobs--- not with rising gas prices.

GM

5/5/05 GM

Yesterday’s announcement by Kirk Kerkorian that, he wished to purchase an additional 28 million shares of GM at $31, generated a $5 gain in the stock or a market cap increase of $2.8 billion. The stock, surprisingly, opened for trading at only $30.52. Quickly, the buyers came to their senses and appreciated the untapped value in GM. Of course, it didn’t hurt that almost every hedge fund is short the stock. These same self-professed geniuses also took it on the chin in the GM bonds. These are the same bonds everyone considered junk. You might recall I mentioned that I would prefer owning these GM bonds to a U.S. treasury bond. Why? If you want to restructure GM, the bonds will come before the equity holder’s interests. In the meantime, they were yielding close to 11%. Don’t you know that, if the GM management omitted the common dividend, you are talking about saving $1.150 billion dollars? These bonds represent real value--- in my view. I don’t care how they are rated.

Yesterday, the U.S. ISM non-manufacturing index for April showed a decline to 61.7% from 63.1%. Importantly, the employment index dropped to 53.3% from 57.1%. This is the third important piece of information indicating the April nonfarm payrolls number will be below expectations. That maybe one reason why long-term Treasury bond yields remain so low. We should keep in mind that the Treasury indicated they would reintroduce the sale of 30-year U.S. Treasury bonds. Yes, the yields on these instruments did rise, but still remain extremely low on an historical basis.

Yesterday, was another bad day for layoffs. IBM, finally, announced cutting 13,000 jobs. They didn’t have the guts to make the announcement at the recent annual meeting. Interstate Bakeries stated they would close a Charlotte bakery and cut 950 jobs. Ericsson will cut 250 in the U.S. Gemini Cap mentioned they would be cutting jobs.

Yesterday, information was released showing that oil supplies rose to their highest levels since mid-1999 and that gasoline inventories rose to their highest point in a month. Yet, crude rose and is trading just under $51 a barrel. Interestingly, this is the same level, $50.85, that the price of crude has averaged for the first four months of 2005.

Comparable sales for Wal-Mart for the four-week periods ending April 29, 2005 and April 30, 2004 were as follows:
Wal-Mart Stores division—a gain of 0.1% versus the prior year’s 3.7%.
SAM’s CLUB--- a gain of 4.9% versus 8.3%.
Total U.S. comp sales--- a gain of 0.9% versus 4.4%.
The company estimates comp sales in May will rise between 2 to 4 %.

According to the California Association of Realtors, the median household income for the Bay Area is $67,770 a year, and with this income, Bay Area households fall $92,930 short of the income needed to qualify to buy the region’s median priced house. Statewide, California households, with a median income of $53,540, are $60,380 short of the $113,920 qualifying income needed to purchase a median-priced home at $488,600 in the state. This trend cannot continue well into the future.

Edmunds. com reported overall combined incentives extended by domestic Chrysler, Ford, and GM averaged $3,339 per vehicle sold in April, down $133 from the prior month. In April, Chrysler spent the most on incentives with $3,535 per vehicle.
Average domestic incentives have never been higher in any prior April. The combined market share of the Big Three reached an historic low of 56.1% in April 2005.

India’s forex reserves have ballooned by $13.5 billion since January to a record $142.6 billion, the sixth largest in the world. It is believed that, the composition of these forex reserves, have begun to shift more towards the euro and less towards our dollar.

Garrett Jones: “Had you held U.S. T-bills since 2001 you would have earned a nickel’s worth of interest and lost a quarter’s worth of purchasing power. If you had held $10 million worth of U.S. T-bills since 2001, your money would have lost $3 million of real value in terms of purchasing power. Municipal bonds, corporate bonds and mortgage debt all would have exhibited similar results since 2001. The point is that yield is irrelevant in a depreciating currency.” An investor had better be sure that a safe haven is a safe haven. When they raid the whorehouse, they take all the girls. That includes T-bills. The world is a small place. It’s tough to find a place to hide. Those short GM and its bonds can tell you that. You can wake up one morning, and boom!!!!! The world has changed. Before you plan on going to the bank, you had better make certain its location is still there.

First quarter productivity in the U.S. rose at a 2.6% annual rate, and that was better than expected.

U.S. jobless claims rose by 11,000 in the week ending April 30, and the number of people collecting unemployment checks rose by 38,000. These numbers were higher than expected.

There Is Real News

5/4/05 There Is Real News

Eight raises are not enough for the Fed. Inflation is contained--- or is it? How can it be contained with 10-year Treasury bond yields near an all-time low? Those suckers determine mortgage rates, and mortgage rates grease the wheels of the housing ATMs heard round the clock.

From Nouriel Roubini, Stern School of Business, and Brad Sester, University College: "Credit is too cheap in China. Nominal interest rates are very low for a fast-growing economy. Real interest rates are negative for many firms, as the nominal rate is lower than in the increase in producer prices. This has led to the substitution of capital for labor, even in the face of China's enormous reservoir of underused labor (labor that can be drawn in from the countryside as well as employees in some state firms). Work by some Chinese economists suggests a sharp falloff in the marginal productivity of capital, and total factor productivity. Labor productivity has been growing in large part because each unit of labor is now combined with more capital. The cheap price of capital is one reason why investment has soared in relation to GDP."

The IEA chief stated investment in new capacity by oil producing nations and energy companies is too small to meet future growth in demand. Meanwhile, crude dropped below $50 a barrel yesterday. Big deal. The recent decline has produced a blip at the pump. That’s where it counts. If the hedge funds want to play with themselves every day in the oil market, that’s up to them. Something has to keep 7,900+ hedge funds busy. At some point, most will disappear up their you know what.

Challenger, Gray, & Christmas announced that planned job cuts in the U.S. fell to their lowest level in almost five years in April as only 57,861 job cuts were announced by U.S. employers. However, job cuts this year are still 3% higher than in the first four months of 2004. Challenger stated that employers seem to be shifting from job elimination to worker retention. I don’t believe that. VF announced the close of a jeans plant in Wilson, NC with 445 jobs being lost. M.J. Soffe, another textile company, will cut 160 jobs in Fayetteville,NC and those jobs will go to El Salvador. Giant Supermarket will close several operations and cut up to 500 jobs.

GM’s April sales declined 7.4% and Ford’s were down 5%. By comparison, Toyota had its best sales month ever. Ever! Their sales rose 21.3%.

Warren Buffett: “You’re neither right nor wrong because other people agree with you. You’re right because your facts are right and your reasoning is right—that’s the only thing that makes you right.”

If real M2 growth is slowing as well as aggregate demand growth, what will the impact be on GDP growth and corporate earnings going forward?

Napoleon Hill: “Accurate thinkers permit no one to do their thinking for them.”

Corporate earnings as a percentage of GDP are at their highest level ever. Consumption as a percentage of our GDP is at our highest level yet. The rate of savings as a percentage of our GDP is declining towards record low levels. Short-term rates are still below the inflation rate. The United States market cap is roughly 50% of the total market cap in the entire world. With China, India, and other Asean economies growing faster than we are, our equity markets remain, in my view, comparatively too high. If the U.S. offered terrific value, you’d see companies eager to build new plants and increase their capital expenditures. Rather, they focus on stock buybacks and dividend increases. The real money should be made in investing in one’s business. I don’t see that happening. How many CEOs and CFOs do you see buying their own stock with new money aside from exercising cheap stock options? Enough said.

Tracinda Corp. on Wednesday said it plans to make a cash tender offer of $31 a share for up to 28 million shares of General Motors. The offer from Kirk Kerkorian's buyout firm is worth about $868 million. The offer price, which is 13% above GM's closing price of $27.77 on Tuesday, is without regard to General Motors' regular quarterly dividend of 50 cents per share expected to be paid in June 2005, Tracinda said. Stockholders will be entitled to retain the dividend expected to be paid in June 2005. Tracinda would own 8.8% of GM after the offer. Kerkerian presently owns 22 million GM shares. At age 87, Kerkorian has more balls than 99.4% of other investors around the globe. He puts his money where his mouth is.

Thank you Mr. Kerkorian. Our hedge is working. Long GM, Ford, and Harley Davidson and short DaimlerChrysler. The parts of GM and Ford are worth more than the whole--- at least in my opinion. If GM and Ford can’t compete with Toyota, Honda, Nissan, and others, sell the pieces. They are not American idols.

Azulstar Networks today announced the launch of the world's first metro-wide Voice over Wi-Fi telephone service. The carrier class fixed and mobile service, which was developed by Azulstar Networks and its partners, operates over the converged city-wide Wi-Fi wireless network that already spans over 60% of Rio Ranch, NM.

This Is Uninsured Week

5/3/05 This Is Uninsured Week (May 1-May 8)

Forty nine percent of uninsured adults with chronic conditions forgo needed medical care or prescription drugs due to cost, according to researchers at the University of Maryland, County of Baltimore, and the Urban Institute. Uninsured adults with chronic conditions were 4.5 times as likely as their insured counterparts to report an unmet need for medical care or prescription drugs. They more than 7 times as likely as insured adults with chronic conditions to lack a usual source of health care, and 27% reported no visits to health professionals in the past year compared to 7% of insured adults. Even so, 21% of uninsured adults with a chronic condition report spending at least $2,000 out of pocket on medical care in the 12 months prior to the survey.

Albert Einstein, Why Socialism? "The economic anarchy of capitalist society as it exists today is, in my opinion, the real source of [society's] evil… The owner of the means of production is in a position to purchase the labor power of the worker. By using the means of production, the worker produces new goods which become the property of the capitalist. The essential point about this process is the relation between what the worker produces and what he is paid, both measured in terms of real value. In so far as the labor contract is 'free,' what the worker receives is determined not by the real value of the goods he produces, but by his minimum needs and by the capitalists' requirements for labor power in relation to the number of workers competing for jobs. It is important to understand that even in theory the payment of the worker is not determined by the value of his product."

Nationally, the market value of real estate is approaching 200% of disposable income. In California, for example, few homeowners would qualify to buy the home they presently own.

Winston Churchill: "Play for more than you can afford to lose and you will learn the game."

U.S. March construction spending rose 0.5% and topped forecasts.

J.P. Morgan reduced its equity weighting to 55% from 70% with bond weighting at 25% and recommended cash levels at 20%.

The National Association of Realtors stated U.S. pending home sales fell by 0.3% in March.

The ISM Index for April fell more than had been projected. It declined to 53.3 from 55.2 in March. It was the fifth straight monthly decline and reached the lowest level since July 2003. Meanwhile, the prices paid sector dropped to 71 from 73, but employment also declined to 52.3 from 53.3 and new orders were disappointing with a slump to 53.7 from the prior month's 57.1.

Oil rebounded to close at 50.92 a barrel.

Elmer Davis: "The first and greatest commandment is, don't let them scare you."

Worldwide sales of semiconductors grew by 13.2 percent in the first quarter of 2005 compared to the same period of 2004, the Semiconductor Industry Association (SIA) reported Monday. Global sales of semiconductors in the first three months of 2005 amounted to $55.3 billion compared to $48.9 billion in the first quarter of 2004.

According to rigzone.com, the Permian Basin, which stretches from Lubbock and Midland to the New Mexico border and has long been the state's center of production, showed a decline in oil production from 304 million barrels in 1994 to 236 million barrels last year.

Hut Landon: "If a pit bull romances your leg, fake an orgasm."

The Understated CPI

5/2/05 The Understated CPI

Verizon Communications Inc. today announced it had agreed with MCI, Inc. to further amend the terms of the Feb. 14, 2005 agreement to acquire MCI. As with the original offer and the revised bid of March 29, the MCI Board of Directors is unanimously recommending approval of the amended agreement to its shareholders. Under the amended agreement, each MCI share would be exchanged for cash and stock worth at least $26.00, consisting of cash of $5.60 expected to be paid promptly upon approval of the transaction by MCI's shareholders plus the greater of 0.5743 Verizon shares for every share of MCI Common Stock or a sufficient number of Verizon shares to deliver $20.40 of value. Under this price protection feature, Verizon may elect to pay additional cash instead of issuing additional shares over the 0.5743 exchange ratio.

It has been reported that Texas Pacific and Warburg Pincus will purchase Neiman Marcus for about $5 billion or $100 per share.

The funniest joke I have heard in some time came from the CEO of Sun Microsystems who remarked that his company was interested in making a large acquisition but that Sun was not interested in buying Dell. The market cap for Dell is 7 times larger than that of Sun. Maybe Sun's CEO has been out in the sun too long.

Oil declined this morning to just above the $49 mark.

For the first time since August 2003, the manufacturing index for the 12 eurozone countries declined below 50. It fell to 49.2 from March's 50.4. Below 50 indicates contraction. In addition, the new orders index declined to 48.9 from 50.4. It was the lowest level since July 2003. The indicator for employment dropped to 47.6 from 48.8.

Tomorrow, the ISM reports on U.S. manufacturing for April. It won't be as weak as the above mentioned eurozone index; however, I envision it will be weaker than the projections offered by 56 economists who have been surveyed. In addition, I suspect a report will show a steep drop in March factory orders as well a drop in the supply managers' index of services. Finally, later in the week, we should see a report indicating a rise in unit labor costs with a decline in productivity. These statements should be well appreciated by the Fed prior to tomorrow's FOMC meeting.

I am greatly concerned by many Fed members regarding inflation as "contained." In fact, the CPI is understated. It should be noted that the annual COLA for Social Security benefits and federal and military pensions are tied to changes in the CPI. The recent understatement is the result of the 1983 change in calculating the cost of housing, which involves both ownership as well as renting. Before 1983, the BLS took into account the price of a home, mortgage rates, insurance, and property taxes. In 1983, a switch was made from an asset-based approach to the cost of putting a roof over one's head. This change involved estimating what a homeowner would get upon renting out their home. The BLS states that the cost of renting comprises 6.31% of the total CPI. However, the cost of owners' equivalent rent is 23.16% of the CPI. The latter represents the understatement. Moody's chief economist, John Loski, points out that in 2003 and 2004 housing prices rose an average of 7.7% a year, while the owners' equivalent rent increased only 2.4%. Lonski stated in the fourth quarter of 2004 "an even wider gap existed between the 9.2% annual rate of home sales price inflation and the 2.3% rate of owners' equivalent rent inflation." As I have stated many times over the past several months, there is a common belief today that, in many large metroloitan areas, it is cheaper to rent than to buy. If the CPI is understated by roughly 7 percentage points for 23.16% of the CPI, then we have a problem, and that problem provides data that inflation is not "contained."

Approaching The Tipping Point

5/1/05 Approaching The Tipping Point

Year-to-date, bank credit has expanded by $310 billion or 14.9% annualized. This even outstrips the 13.7% rise in real estate loans over the past year. In the meantime, during the week of April 18, M3 surged $53.6 billion to a record amount that is just shy of $9.6 trillion. For an $11 trillion economy, that's not hay. There are those who believe that the inflation scare is over. For the past week, the Goldman Sachs Commodity Index dropped 6.8%! Of course, the means this Index is up ONLY 13.8% year-to-date!!!!

For those who think housing and condos are in the bubble stage, consider that the new Wynn Las Vegas hotel cost $1 million per room.

Rather staggering is the knlowledge that there are over 7,900 hedge funds. I can live with that. Are you concerned that they have more than $1 trillion under management?

April same-store sales for Wal-Mart rose 0.9% with food comp sales stronger than general merchandise. Everyone has to eat.

Have you ever heard of the small town of Stamps, Arkansas with its population of 2,134? Alan White Co., a furniture manufacturer, is its largest employer with 200 people on the payroll. The company announced the plant is closing due to high fuel costs, and all jobs will be lost.

In this year's first quarter, U.S. households spent themselves into a $322 billion annualized deficit. Simply put, spending and borrowing exceeded incomes by a record amount.

Why is it that, during the first year of the presidential cycle, the first five trading days in May have risen 90% of the time for the last 77 years?

Yesterday was the Berkshire Hathaway annual meeting. It was not business as usual. Questions propped up about AIG and, for legal reasons, not addressed. Buffett and Munger opined that the overhaul of Social Security can wait. There was one event that did not make the financial headlines---- Over 70 pilots from NetJets joined together in a show of solidarity, picketing outside the Berkshire Hathawayshareholders' meeting at Qwest Arena. The pilots passed out leaflets to raise awareness regarding their continued struggle to receive a fair contract from the fractional airline, a subsidiary of Warren Buffett's conglomerate. "Our issues have seemingly fallen on deaf ears," said Captain Alan Hayes,who has been a NetJets pilot for three years. "There is a real problem in this company when our pilots are paid around half the industry average for flying the same equipment." NetJets pilots, who have been recognized as the safest in the private jet industry, endure low wages, insufficient benefits and unreasonable scheduling demands. They have been working nearly four years without a new contract after their last negotiated agreement came up for renewal in 2001. "It is time for management to step to the plate and propose an agreement that includes a wage and benefit package that shows they recognize theoutstanding job these pilots are doing," said Nick Reyer a business agent for Teamsters Local 1108. "Eighteen percent of our pilots make a salary that qualifies them for public assistance -- that is unacceptable." More than 80 percent of the 2,000 NetJets pilots rejected a contract proposal in August 2004 that was severely lacking in wage increases andbenefits while increasing the already long hours the pilots are required to work."We are all here to let Warren Buffett and all his shareholders know that we deserve a fair contract," Hayes said. "While all of these investors areenjoying the fruits of our labor, our pilots struggle to make ends meet. Mr.Buffett has always had a reputation of paying exceptional employees what theydeserve. We only ask for the same consideration."

Abrupt Turns

4/30/05 Abrupt Turns

Today marks the close of the initial one-third of 2005. We have just encountered abrupt turns in our economic roadmap.

Crude oil closed just below $50 a barrel. It was down about 11% for the week, and had its lowest close since Feb. 18th. This fact held most of the market's trading attention.

There was another story I found particularly telling. The U.S. employment cost index in the first quarter had its smallest rise in six years. Total compensation costs for civilian workers increased 0.7 percent from December 2004 to March 2005, seasonally adjusted, virtually unchanged from the 0.8 percent gain from September to December 2004, the Bureau of Labor Statistics of the U.S. Department of Labor reported. Benefit costs rose 1.2 percent, outpacing the gain for wages and salaries of 0.6 percent. The Employment Cost Index (ECI), a component of the National Compensation Survey, measures quarterly changes in compensation costs, which include wages, salaries, and employer costs for employee benefits for civilian workers (nonfarm private and State and local government). Rises in benefit costs accounted for nearly 60 percent of the increase in compensation costs for civilian workers from December 2004 to March 2005. Among private industry workers, benefit costs contributed approximately 60 percent of compensation gains during the quarter, with health insurance costs and nonproduction bonuses accounting for nearly one-third of the gain in compensation costs. Among State and local government workers, benefit costs comprised a little over half of compensation cost gains during the December to March period, with health insurance costs accounting for one-fourth of the gain in compensation costs. For State and local government workers, compensation costs rose 1.0 percent in March, compared with a gain of 0.9 percent for the quarter ended in December. Benefit costs advanced 1.2 percent for civilian workers in the March 2005 quarter, following a gain of 1.6 percent in the December 2004 quarter. Private sector benefit costs rose 1.1 percent for the March quarter, moderating from the 1.6 percent gain in the previous quarter. Benefit costs for State and local government workers increased 1.5 percent in the March quarter, unchanged from the prior quarter. The bottom line is that, even with low employment costs, hiring is muted. If corporations like Microsoft, IBM, Dell, Cisco, and others are pouring billions into stock repurchases, how is it that business spending and hiring are on the lower rungs of the to-do list? Where's all the innovation? Where's the expansion? Is the hiring in India and China?

Solectron announced job cuts of 3,500, Bechtel 350, SunTrust 122, and 1450 at Progressive will take early retirement. With the aging of the population, there will be much more retiring going forward. We're not alone. The population is aging in Japan, China, and throughout Europe.

The government reported that incomes are up, spending is up even more than incomes, and savings is not even scratching the surface. Have you wondered why the savings rate in China is so high?

The University of Michigan April consumer confidence index was 87.7 versus 92.6 in March.

The Chicago PMI in April was 65.6 versus 69.2 in March with new orders declining to 71 from 76.7 but prices paid dropped from 68.2 to 66.1.

As we turn the page and move into May, the Fed will give us another interest rate increase of one-quarter point and this will be consistent with their steady marked increases. The nonfarm payrolls will not be a reason for joy, and that will bring at end to next week's trading. That leaves the run for the roses on Saturday.

The last turn in the road cannot be ignored as the Center for Housing Policy mentioned that, in a recent six-year period, the number of low and middle income working families paying more than half their income for housing has increased 76%. Barbara Lipman, the reserch director for the center, stated "the price (housing) is going up faster than the wages of working families." This is more important, in my view, than the price of gas at your local station.

With the increasing violence in Iraq, 1575 of our soldiers have now been killed since our invasion in March 2003. The number of our wounded escalates daily. Did Chalabi just become their oil minister or was that a misprint? Is this freedom or corruption? Or maybe nothing has changed but the names to protect the guilty.

Slowing Growth/Rising Inflation

4/29/05 Slowing Growth/Rising Inflation

For the past year I have discussed wages not keeping pace with inflation- - - a bitter pill for Main Street. This morning the Commerce Department reported that the U.S. economy grew at a 3.1% annual rate during the first quarter. It was the slowest pace in two years but it matched the average for the 1991 through 2001 period. A 3.1% rate of growth is just fine for a $11 trillion economy. Anyone who tells you differently is a putz. The problem is the implicit price deflator rose at a 3.2% annual rate in the quarter, up from the prior quarter's 2.3% rise. In other words, growth didn't keep pace with inflation - - - a bitter pill for our GDP. Core consumer prices rose at their fastest rate since the fourth quarter of 2001. There additional points worth noting. Inventories jumped higher at an annual rate of about $80 billion, the fastest addition to inventory levels since the second quarter of 2000. That's a warning sign going forward. In addition, business capital spending and software investment were disappointing. Not surprisingly, the one bright spot was residential construction spending growing at a 5.7% rate in the quarter. We would be in some pickle wthout the multi-year burst in residential construction. Bubbles are not all bad. They can carry a good deal of the economic load. It's just that their staying power is hard to predict.

Nikolai Lenin: "The way to crush the bourgeoisie is to grind them between the millstones of taxation and inflation."

In the week ending April 23, U.S. weekly jobless claims rose by 21,000.

The management at Starbucks mentioned they now have 300 stores in China, and many have ome of the best margins in the company. With China having over 100 cities with more than 1 million people, China can be expected to be a growth engine for Starbucks for years to come. The same can be said for Wal-Mart.

On Friday, crude dipped below $50 a barrel before closing at $51.77 a barrel, up 16 cents on the day.

Ernest Hemingway: ""The first panacea for a misguided nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists."

Robert Bosch GMBh, the world's largest auto supplier, lowered its sales forecast for 2005.

The 10-year Treasury bond yield is 4.17%, the lowest in 10 weeks. Miracles never cease.

Jean De La Bruyere: “Out of difficulties grow miracles.”

U.S.-based stock funds took in $22 billion in February and $15 billion in March. After all the house buying frenzy, I’m surprised there was money left over for stocks.

Microsoft repurchased more than 95 million shares of common stock for $2.42 billion during the quarter and has repurchased more shares year to date than it did for all of fiscal 2004. Including stock-based compensation expense, management’s guidance for fiscal 2006 ending June 30 is in the range of $1.26 to $1.30 per share.

Good News And Bad News

4/28/05 Good News And Bad News

The Energy Department reported that crude supplies rose 5.5 million barrels in the latest week; however, distillate supplies fell 1.4 million barrels and gasoline supplies dropped 300,000 barrels. Crude stocks are 9% above year ago levels and stand at the highest level since 5/31/02. One must acknowledge that some of the build up is the result of refining difficulties in three states. The market focused solely on the rising supply number and prices for natural gas, crude, and crude products fell, on average, by 4.2%. Crude is currently trading at $51.35 a barrel, down $7 a barrel from April 4. The decline is long overdue, and hopefully, drivers will begin to see some price relief at the gas pump level. As we move into May, the heavy summer driving season can be expected to bring down gasoline supplies.

The bad news was learning that March durable goods declined 2.8%, the largest drop since September 2002. In addition, February’s numbers were revised downward from a gain of 0.5% to a decline of 0.2%. In sum, we have had three consecutive monthly declines in durable goods orders. The core orders- capital equipment used by businesses- fell 4.7% after a drop of 2.5% in February. It was the largest decline since November 2003. The analysts focus on earnings growing 12% in the first quarter, and yet, unfilled orders fell 0,5% during the month of March. I don’t see businesses investing in capital equipment or in new permanent hires. That doesn’t say much for business going forward.

Miguel Kiguel, Argentina’s former finance undersecretary: “Once you know the markets are there, and there is financing, you behave as if financing will be there forever.”

In March, there were fewer orders for aircraft, cars, and machinery. Interestingly, Boeing’s revenues for commercial aircraft were down 5% in the first quarter. Their earnings from operations in this division rose by a slim $37 million. All the headlines are for plane orders going out to 2009, and the orders are accomplished via deep price discounting. Meanwhile, Integrated Defense Systems carries the day at Boeing. This division had revenues of $7.5 billion in the quarter and dwarfed the results in the commercial plane business. Operating margins were 11.2% versus 7.7% for the plane division, and earnings from operations in the defense business was $458 million higher than for planes. Boeing is merely an arm of the U.S. government. It should be noted that Boeing’s backlog of orders was lower at the end of the first quarter than at the end of 2004. Boeing’s operating margins for the quarter declined to 5.3% from the year ago period.

Sigmund Freud: “Most people do not really want freedom, because freedom involves responsibility, and most people are frightened of responsibility.”

The Bank of Japan stated that deflation will last one more year.

The Reserve Bank of India increased the rate it pays commercial banks to borrow overnight to 5 percent, from 4.75 percent, after raising the so-called reverse repurchase rate by a quarter point Oct. 26.

Between closing a Miami baking plant and thrift stores in 2 states, Interstate Bakeries will eliminate 600 jobs. More layoffs took place at Sears headquarters on Monday and Tuesday. More are expected—at least 500. The AMI Doduco plant in Reidsville, NC, which makes electric conductors and rivets, is closing and 128 people will lose their jobs.

Bill Gates: “The whole idea of the H1-B visa thing is, don’t let too many smart people come into country. The thing basically doesn’t make sense. I’d certainly get rid of the H1-B visa cap. That’s one of the easiest decisions. Anybody who’s got good computer-science training, they are not out there unemployed. We’re just not seeing an available labor pool.” Google doesn’t seem to have difficulty in hiring the best engineers. Maybe the bloom is off the rose at Microsoft.

Texas leads the nation! In Texas, 27% of those with jobs are without health insurance. How come the President doesn’t push his “home boys” to do something to correct the situation? Unfortunately, silver spoons and reality rarely break bread at the same dinner table.

P&G management comments on first quarter results: “Gross margin decreased 10 basis points versus the prior year period. The margin impacts of higher commodity costs were partially offset by the scale benefits of volume growth, pricing actions and cost reduction
programs. The company's operating cash flow for the quarter was $2.65 billion
compared to $2.98 billion in the comparable prior year period. Higher net earnings were offset by an increase in working capital, primarily inventory. Capital expenditures for the quarter were 3.3 percent, slightly lower than the prior year period and below the company's long- term target of about 4 percent of net sales.” Meanwhile. P&G management raised earnings per share guidance to a range of $2.64 to $2.65 for the fiscal year.

ExxonMobil earned $1.22 per share in the first quarter, up from 81 cents in the year ago period.

Palatin Technologies, Inc. today announced that it will present at the Rodman & Renshaw Techvest 2nd Annual Global Healthcare Conference in Paris, France at 9:45 a.m. local time (3:45 a.m. EDT) on Thursday, May 5, 2005. Carl Spana, Ph.D., President and Chief Executive Officer of Palatin Technologies, will provide an update on the Company's corporate and development programs.

Mortgage rates inched lower this week, remaining at the lowest point since late February. The average 30-year fixed rate mortgage ticked lower from 5.86 percent to 5.85 percent,
according to Bankrate.com's weekly national survey of large lenders. The 30-year fixed rate mortgages in this week's survey had an average of 0.32 discount and origination points.

Uncertainties

4/27/05 Uncertainties

According to new numbers from the Leading Indicator of National Employment (LINE), April employment growth slowed slightly, yet the number of manufacturers hiring for open positions increased. Hiring projections for May remain positive as HR professionals expect to increase employment headcount in May. LINE is a collaboration between the Society for Human Resource Management (SHRM) and the Rutgers School of Management and Labor Relations. This is the third straight month where employment growth has slowed, and the sixth month that the number of vacant positions has increased, primarily for nonexempt jobs. In addition, the LINE Recruiting Difficulty Index is at its highest level since July 2004. This reinforces the conclusion that while manufacturers are recruiting, many are having a difficult time finding skilled labor to fill open positions, creating an unmet demand for labor in the U.S. manufacturing sector. The March LINE Report indicated employment growth for March would be between January and February levels, which the BLS later confirmed. This month’s index suggests that job growth in April will be close to the levels achieved in March. It should be noted that HR professionals at over 500 manufacturing firms provide the data for the SHRM/Rutgers LINE Survey. The HR professionals are not making economic forecasts, but instead are reporting on plans already in place to increase hiring or layoffs during upcoming 30 days.

Confucius: “Maturity of mind is capacity to endure uncertainty.”

In March 2005, employers took 1,194 mass layoff actions, seasonally adjusted, as measured by new filings for unemployment benefits during the month, the BLS reported yesterday. Each action involved at least 50 persons from a single establishment, and the number of workers involved totaled 130,848, on a seasonally adjusted basis. The number of layoff events rose by 66, and the number of associated initial claims increased by 13,164 from February. In the manufacturing sector, 371 mass layoff events were reported during March 2005, seasonally adjusted, resulting in 55,3777 initial claims, both figures higher than the previous month. From January through March 2005, the total number of events (seasonally adjusted) at 3,779, and initial claims (seasonally adjusted) at 399,522, were lower than in January 2004 (4,043 and 415,048, respectively). However, with the GDP growing by 4% or so in 2004, the net difference in initial claims resulting from mass layoffs according to the BLS was less than might have been expected. It is a further indication of the muted advances made in nonfarm payrolls.

Humphrey B. Neill: “When everybody thinks alike, everybody is likely wrong.”

Thucydides: “So little do men take in search for the truth; so readily do they accept whatever first comes to hand.”

U.S. April consumer confidence fell to a five-month low. The Conference Board’s index of consumer sentiment dropped to 97.7 in April, a third straight decline, from a revised 103 in March. The April decline was the biggest since last August. A year ago the index stood at 93. Lynn Franco, director of the Conference Board’s Consumer Research Center stated “consumers do not anticipate an improvement in economic growth, nor in their incomes. They expect an even tighter job market over the summer months.” This statement was confirmed by the expectations index which dropped to 87.2, the lowest since July 2003, from the prior month’s reading of 93.7

Lactantius: “The first point of wisdom is to discern that which is false; the second is to know that which is true.”

Clarence Darrow: “To think is to differ.”

Sales of new homes in March climbed to a record. The Commerce Department reported that sales increased 12.2% to 1.431 million houses at an annual rate. However, the median price fell to $212,300 in March from $234,100 a month earlier.

The Michigan Business Activity Index, compiled by Comerica Bank, held steady at 108 in March. The index has been fluctuating in a narrow band around the 108 level since June 2004. Dana Johnson, chief economist at Comerica Bank, stated “the Michigan economy remains in a prolonged bottoming pattern, neither contracting nor expanding. With a number of its flagship companies in the early stages of cost cutting initiatives, key Michigan employers are fighting hard to stay competitive. These structural adjustments are likely to delay a turn up in activity for at least several more months.”

Tom Peters: “If you’re not confused, you’re not paying attention.”

According to a new report by Research and Markets, online advertising spending is projected to increase by 20.2% in 2005, reaching $11.3 billion by year’s end. That means Internet advertising will account for 4% of all U.S. advertising spending during the coming year, up from approximately 3.5% in 2004.

Anyone who reads this daily musing knows that I have been negative on IBM for a long time. It may have come as a surprise that I recently suggested purchasing shares at $72. I envisioned that, with their upcoming annual meeting, cost- cutting measures would be announced. Instead, yesterday, it was the same old IBM. They raised the quarterly dividend by 2 cents a share and authorized $5 billion in additional funds for use in its stock repurchase program. In 2004, IBM spent $7.1 billion on share repurchases and $1.2 billion on dividends. In 2003, they spent $4.3 billion on share repurchases and $1.1 billion on dividends. No mention was made of cost-cutting measures. Their use of cash flow does not meet with my requirements for owning stock. I suggest the sale of any shares recently purchased.

Crude prices remain above the $54 level. In all likelihood, inventories for the latest period will reflect a decline. However, that is simply a guess. As for the dynamics of the oil market, I defer to Simmons & Co. According to this firm, 70% of our oil is pumped from fields that exceed 30 years of age and 20% from 14 fields over 60 years in age. In sum, with projected increases in oil consumption in ASEAN nations and in others as well, the long-term prognosis is for looming supply shortages.

the volume of mortgage applications rose 5.9% on a seasonally adjusted basis in the week ended April 22 compared to the prior week, according to the latest data compiled by the According to the Mortgage Bankers Association, in the week ending April 22, applications for mortgages to purchase homes increased 3.3% on a week-to-week basis, while refinancings jumped 9.8%. Compared to this time last year, however, refinancing activity is down 14.6%, said the MBA's Michael Cevarr. In addition, refinancings accounted for 39.3% of total applications, up from the prior week's 38.0%, while adjustable-rate mortgages slipped to 34.7% from 35.4%.

According to the South China Morning Post, property prices in Shanghai, China's most expensive city, have begun to fall after the government introduced lending curbs and a capital gains tax. Average prices fell 15% to $914 per square meter last week.

Linda Ellerbee: “If men can run the world, why can't they stop wearing neckties? How intelligent is it to start the day by tying a little noose around your neck?”

Upside-down

4/26/05 Upside-down

The latest study from Kelley Blue Book Marketing Research is entitled New Vehicle Buyer Attitude Study on Financing. It finds that six out of ten people who are about to buy a new vehicle prefer a longer-term loan with low monthly payments when financing their next vehicle. Industry estimates are that nearly 30% of new-vehicle shoppers currently owe more on their vehicle than it is worth. Additionally, the average term for a consumer vehicle loan grew from 48 months in 2000 to 63 months in 2004. The study states that these consumers who are “upside-down” in their current vehicle loan could put themselves further into financial jeopardy by extending their new-vehicle loan past the average four-to-five year term, yet as a group they do not seem concerned about the ramification. Jack Nerad, editorial director of Kelley Blue Book’s kbb.com, stated “consumers who purchased vehicles with little or no money down and for a six or seven year term, will find they owe more than the car is worth when seeking out their next new vehicle.” I wonder whether the same observation could be made for the real estate buyer, especially the investment buyer and second-home vacation buyer. Purchases are frequently being made with little or no money down and for a six or seven year interest-only term. PMI Group, a large private mortgage insurance company located in Walnut Creek, Ca, recently completed a study that ranks large cities most likely to experience a downturn in housing prices in the next two years. Boston ranked number one, followed by San Jose/Santa Clara/Sunnyvale in second place and San Francisco/Oakland/Fremont in third. The PMI study looked only at the largest 50 metro areas and did not consider the percentage of investor-owned homes. Instead, it focused on the fundamental factors that influence housing prices -- the job market, net migration and the price of homes relative to incomes relative to historical standards for the area.

Yesterday, it was announced that Boeing had firm orders for 18 777’s and 14 787’s from Air Canada, an airline that emerged from bankruptcy protection in October. Deliveries of the new planes will begin in 2007 and extend through 2009. The bulk of the plane financing would be guaranteed by the Export Import Bank of the United States. Air Canada also recently secured $642 million in U.S. financing, and officials stated they had negotiated a “progressive payment schedule” so that Air Canada would not be forced to put all the cash for the deal up front. As for pricing, Robert Milton, chairman of Air Canada’s parent company, stated “I am confident no one has ever done better on a deal.” Boeing failed to release the discounted pricing information on the order. I feel confident the discount was at least 50%.

Due to rising oil prices, Germany’s six leading economic institutes cut their forecast for growth this year in half to about 0.7%.

BP, the world’s second-largest publicly traded oil company, reported a 29% increase in first quarter profits.

Japan’s consumer spending declined for a second month in March, and the economy lost jobs. Will the U.S. be soon to follow?

North Korea stated that it would regard any sanctions by the United Nations as an act of war.

I expect that April U.S. consumer confidence declined. It would be the third consecutive monthly drop. According to a survey by UBS and Gallup, investor optimism fell to 52 in April, the lowest reading in nearly two years. In May 2003 the reading was 42.

China’s 2004 current account surplus came to a record $59 billion (U.S.) or 4.2% of GDP.

Morgan Stanley’s Stephen L. Jen: “In contrast to Japan and Korea, China, in my view, does not have “too much” official reserves. China needs to accumulate official reserves to ‘pre-fund’ the private sector outflows expected in the years ahead. U.S. $1 trillion in official reserves in the coming years may not be unreasonable.”

Mark O’Byrne: “One billion is a lot of money. Let’s put one billion in perspective. It has nine digits in it and for purposes of illustration:
A billion seconds ago, it was 1959.
A billion minutes ago, Jesus was alive.
A billion hours ago, our ancestors were living in the Stone Age.
A billion dollars ago was only 8 hours and 20 minutes, at the rate Washington is spending today.”

According to Rydex AdvisorBenchmarking, their April Advisor Confidence Index (ACI) declined 7.32% to its lowest level since the indicator’s inception. The ACI dropped from 119.90 to 111.12. The current economic outlook declined by 9.53%, the six-month economic outlook by 8.27%, the 12-month economic outlook by 4.18%, and the stock market outlook by 6.91%. It should be noted that their Consumer Confidence Index had declined in February and March. Higher gas prices, increasing interest rates, sagging stock prices, and a muted labor market have dampened consumer confidence.

According to the California Association of Realtors, the median price for a home in March in the Silicon Valley was $733,000, up $28,000 from February and up from $625,000 in March 2004. According to Freddie Mac, thirty-year fixed mortgage rates averaged 5.93% during March 2005, compared with 5.45% in March 2004. Adjustable rate mortgage interest rates averaged 4.23% in March 2005 compared with 3.41% in March 2004.

In today’s trading, crude has slipped to $54.26 a barrel.

In a survey of 103 economists conducted by the National Association for Business Economics, 35% reported higher wages and salaries in this year’s first quarter, up from 28% in the fourth quarter of 2004. It was the highest reading since the second quarter of 2000. The remainder of those polled reported no change in wages and salaries in this year’s first three months.

Offense And Defense

4/25/05 Offense And Defense

Today marks the beginning of the last trading week in April. It’s no secret that historically the May through October period is the most challenging six months of each year. That means a good offense and a good defense especially will require adept risk management.

As we move into May and face another Fed rate hike, it is well to remember the impact rising interest rates do historically have on the overall construction and building industries. Since November 2001, 450,000 construction jobs and 400,000 mortgage brokers and real estate brokers have been added to nonfarm payrolls. I would hope that economists don’t figure on this sector to be a major engine for employment growth in the next few years. Is there another area of growth to replace this sector?

Goldman Sachs’ senior economist, Jan Hatzius, estimates that homeowners withdrew “mortgage equity” totally $640 billion in 2004. I hope economists are not figuring on consumers garnering this type of cash flow for expenditures in the coming months.

Valero is buying Premcor in a $8+ billion cash and stock deal. It will create the largest crude oil refiner in North America.

Hellman & Friedman will buy Doubleclick, the Internet ad company, for $1+ billion.

President Bush and Crown Prince Abdullah of Saudi Arabia will meet today at the Crawford ranch. Even though the Saudis are pumping about 10 million b/p/d of crude, Bush may blame them for the high gas prices. It’s the Administration’s modus operandi to blame others for troubles in this world and to assume no responsibility.

Microsoft will demonstrate a wafer-thin PC using only flash memory and no hard drive.

Wei Benhua, vice director of the State Administration of Foreign exchange: “I made it clear to them: this is your problem. You should put your own house in order before you blame your neighbors. Wei blamed the U.S. trade deficit on “a flawed U.S. economic policy.” He stated “China has no time table for (currency) reform.”

John P. Hussman, Ph.D: “The current Market Climate – jointly unfavorable valuations and market action – has historically been characterized by negative average returns, but also by relatively high volatility, resulting in a very poor return/risk tradeoff. That also means, by definition, that the range of possible short-term outcomes is likely to be very wide. An unfavorable Market Climate emphatically does not translate into predictable short-term market losses. The small “predictable” component of returns in this Climate – the average daily loss – represents only a few basis points a day. That's a figure that is utterly, absolutely and completely swamped by daily volatility. The same is true for weekly, monthly, and to some extent even quarterly changes. Again, the predictable component of returns, though negative on average in this Climate, is overwhelmed by the volatility.”

As reported by the Financial Times, there are several reasons that voluntary imposition of a tax on its exports may be preferable to a China yuan revaluation, write Lawrence Lau, professor of economic development at Stanford University and Joseph Stiglitz, Nobel laureate in economics.

Business confidence in Germany, Europe's largest economy, fell to a 19-month low in April as the Ifo institute stated its index fell to 93.3 from 94 in March, the third monthly drop in a row. The Ifo says three consecutive declines signal slowing economic growth. The decrease was led by business expectations, with a sub-index dropping to 93.6, the lowest since June 2003, from 94.6.

With refinery problems in Louisiana, Texas, and Kansas, crude climbed to $56 a barrel and currently is trading at $55.75.

Each quarter, McDonald Financial conducts a national survey of randomly selected individuals with investable assets of $500,000 or more, and/or annual personal income of $150,000 or more. Its Affluent Consumer Confidence index fell to 50 this month from 55 in January, when the poll was last conducted.

Reverse mortgages were initiated in 1989. According to HUD’s data, only a few hundred seniors used the loans in 1997. HUD reported the number of reverse mortgages in 2004 doubled to more than 40,000 from the previous year. California, with nearly a third of the mortgages, ranked first, followed by Florida, Texas, and New York. Many seniors make use of reverse mortgages in order to take care of mounting medical bills.

Networx

4/24/05 Networx

MCI reiterated what it expressed over two weeks ago -- namely that
it would deem a Qwest offer of $30 to be superior to the $23.10 provided under
the current Verizon-MCI merger agreement -- apparently concluding that the
difference was sufficient compensation for the increased risks associated with
completing the transaction and executing the business plan thereafter.
Verizon believes its pending transaction with MCI creates long-term, as
well as short-term, value for the shareholders of both companies by protecting
the integrity of MCI's business, ensuring that MCI's customers have continuing
access to the best communications services, retaining key employees, and
stabilizing MCI's financial position and prospects.
Under the terms of the Verizon-MCI definitive merger agreement, Verizon
may elect to require MCI to continue to finalize its proxy statement and to
organize a meeting of MCI's shareholders to consider the agreed transaction
with Verizon. Alternatively, Verizon may elect to terminate the agreement with
MCI. Upon such a termination, Verizon would be entitled to be paid by MCI a
$240 million break-up fee plus an expense reimbursement of up to $10 million,
and the same amounts would be payable following an MCI shareholders meeting if
the Verizon-MCI transaction were not approved and an agreement was signed with
Qwest.

What might influence Verizon to improve its current bid for MCI? The GSA will open up the bidding in May for a 10-year contract, starting in 2007, to run Networx, a communications services program for most federal agencies to utilize. It will combine local, long-distance, data, and wireless services. The contract could potentially be worth $10 to $20 billion. MCI has a global high-speed data network that would be desirable for Verizon. With that network, Verizon could win the Networx contract.

Mark Twain: “Don't part with your illusions. When they are gone you may still exist, but you have ceased to live.”

Through 25 months of fighting in Iraq, approximately 1570 members of our military have been killed in that foreign land. Close to 15,000 soldiers have been wounded. It’s no wonder that the majority of Americans do not approve of the Administration’s invasion of Iraq.

James Zogby, president of the Arab American Institute: “We don’t have a democracy. We have a civil war in the making. We have a very volatile situation that can explode at any time. The rest of the Arab world hate us even more that they did, if you can imagine that.”

Red Skelton: “Congress: Bingo with billions.”

In less than two weeks, the BLS shall provide a report for April nonfarm payrolls. A rational perspective might be achieved by acknowledging that more jobs were available in April than the prior month. However, more frequently, these jobs do not pay a living wage as the cost of living has exceeded compensation due to rising inflationary costs, and this dilemma has been facing Main Street for the past months.

Fed Governor Donald Kohn: “Although the odds seem favorable for an orderly adjustment, the current imbalances are large and--importantly for gauging risks--unusual from a historical perspective. Thus, we have little experience to call on in judging when and how they will be corrected. In such circumstances, we cannot rule out sudden shifts in expectations, whether or not they are unreasonable to begin with, and asset prices may change suddenly. Investors may recognize the unsustainability of some flows and prices, but believe they can adjust in advance of the market--as apparently many thought they could in the tech-stock bubble--and their reactions when prices move could add to volatility. Moreover, we cannot rule out governments engaging in unwise policies--policies that might undermine confidence or might hinder market adjustments and associated changes in asset prices.”

The amount Americans owed on home equity lines of credit, according to the Federal Insurance Deposit Corporation, increased to approximately $491 billion at the end of 2004, up 42 percent from a year earlier, and more than triple the amount at the end of 2000. According to the National Association of Realtors, among first-time home buyers in 2004, the median down payment was 3%, half what it was in 2003.

Are Expectations Substantially Distorted?

4/23/05 Are Expectations Substantially Distorted?

Before I get to Fed Governor Donald Kohn’s remarks made yesterday, I would like to touch on a few matters. The order is of no significance.

Ryanair previously announced that it contracted to purchase 29 Boeing 737-800 planes for delivery between now and March 2006. We learned through a Ryanair proxy filing that the cost per plane is about $29 million versus the list price of between $61.5 million to $69.5 million on Boeing’s Web site. Once again, it is clear that Boeing will make the vast majority of its net income from its defense business rather than from the sale of commercial aircraft. I do not believe the company’s shareowners fully grasp the transformation in Boeing’s cash flow and the competitive pricing burdens weighing on its future.

Maytag may close its Hoover vacuum plant. Lear Corp. plans to close some plants this year and move production to other countries. The company has 280 facilities and employs 110,000 workers. Its best customers are GM and Ford.

China’s oil imports rose 23% in March. Not surprisingly, crude closed at $55.45 per barrel.

In June 2004, I suggested that Wal-Mart shareholders consider scaling back the size of their holdings. The stock was $10 higher than the present price. Now, the street seems to have lost its love for the company. I would now suggest the purchase of the shares. Day in and day out, Wal-Mart is the consumer’s best friend. Their everyday low pricing prolongs purchasing power.

The Goldman Sachs Commodity Index is up 22% year-to-date.

In this year’s first quarter, Bank of America’s deposits grew by $11.4 billion, while liabilities jumped by $103 billion.

The U.S. purchases about one-third of China’s annual exports. We had better maintain our appetite for their goods because exports now represent 35% of China’s GDP versus 20% back in 1999.

Thanks to financial companies, builders, and energy enterprises, first quarter earnings for the S&P 500 will rise at least 12%. That’s about 50% higher than envisioned back in December. One should ask about the sustainability of that pace as interest rates rise and inflation takes its toll. The stock market looks forward and not backwards. You’re only as good as your last trade. In other words, can the S&P 500 repeat the first quarter? Google might but will the Bank of America? Dell might but will P&G? Until the answer comes into clearer focus, increased volatility will become a more frequent reality.

Talking about Google, the company unveiled a beta map site program. The link is
maps.google.com.

I have stated on many occasions that Donald Kohn would be my choice to replace Alan Greenspan when the latter retires at the end of this year. Yesterday, Kohn spoke at the 15th Annual Hyman P. Minsky Conference at The Levy Economics Institute of Bard College located in Annandale-on-Hudson, NY. I would like to provide a few quotes from his remarks:

“We should not hesitate to raise interest rates to contain inflation pressures just because it might set off a retrenchment in housing prices. Nor should we hesitate to raise rates because higher rates mean higher debt-servicing burdens for the current account, the fiscal authority, or households.”

“To the extent that current spending behavior is built on realistic expectations- in particular, for future short-term interest rates, the exchange rate, rates of return on capital investments in the United States relative to those abroad, and housing price appreciation- the transition should be relatively orderly: Asset prices should adjust gradually to changing developments, as should the spending patterns of households and firms. But if current expectations are badly distorted, then the way forward may not be so smooth. Eventually, reality always asserts itself over wishful thinking, and such realignments are sometimes abrupt, as illustrated by the collapse of the high-tech bubble a few years ago. In such circumstances, asset prices can adjust sharply, and private spending may also respond quickly, making it difficult for monetary and fiscal policy actions to provide a timely enough counterweight to keep the economy continuously on track. Are expectations substantially distorted? Because we seldom have direct and reliable readings, it is hard to say…Complacency would be ill-advised.”

Yesterday

4/22/05 Yesterday

There is a reason for old adages. They occur and recur. Yesterday was a perfect example of the market accommodating the fewest number of people at any one time. There was something for everyone to cheer about and, at the same time, something for everyone that could create worry. The prior day’s trading was a huge disappointment for the bulls. Yesterday’s 206 point gain in the Dow, 48 point Nasdaq advance, and 22 point jump in the S&P 500 generated joy in Mudville. It created hope for the bulls and hopefully improved liquidity in the overall equity markets. It also offered an opportunity to sell some weak sisters on strength.

The BLS reported that median weekly earnings of the nation’s 100.9 million full-time wage and salary workers were $653 in the first quarter of 2005. This was 3% higher than a year earlier, compared with a gain of 3% in the CPI over the same period. In other words, wage gains were devoured by inflation. As for staffing growth, we should remember that Manpower reported employment gains of 4.1% in January, 3% in February, 0.5% in March, and saw no pick up in April. Such a trend denotes a hesitancy to hire, and that does not provide comfort to one’s confidence levels going forward.

The Conference Board reported that its Composite Index of Leading Economic Indicators declined 0.4% in March. Only two of the ten indicators that make up the leading index increased in March. The coincident index, an index of current economic activity, rose 0.2% in March after rising 0.1% in February and declining 0.5% in January. This index has been increasing at a 2.5% annual rate since April 2003. On the other hand, the Lagging Index declined 0.1% in March, following a 0.3% increase in February and a 1% increase in January. Overall, in this year’s first quarter, growth was described by the Conference Board’s chief economist as “choppy” and “moderate.” One might note that the 0.4% decline in the March LEI was the largest in 2 years.

Yesterday, equity buyers preferred to focus on the Philly Fed survey where current manufacturing conditions jumped from March’s 11.4 reading to April’s 25.3. March’s reading was the lowest in 20 months. The new orders index rose seven points, and the shipments index rose almost 15 points. Indicators for unfilled orders and delivery times changed little from March. The current inventory index rose nine points and is now positive for the first time in six months. The current employment index increased seven points to its highest reading in three months, and the current workweek index increased 18 points to its highest reading in 14 months. There was bad news however. The prices paid diffusion index rose 21 points, its highest reading in three months. Nearly 56% of firms reported higher prices for inputs this month, compared with 36% in March. Only 5% of the manufacturers reported decreases in their input prices. Higher prices for final manufactured goods were also widespread this month. Thirty-three percent of firms reported higher prices for their goods, and the prices received index increased 13 points to its highest reading in six months. In addition, the index for future activity fell slightly this month with the future new orders index falling by one point and the future shipments index declining about eight points. Overall, the Philly Fed index reflected a rebound in growth from a weak March accompanied by a sharp pickup in inflation. For me, that’s not a great recipe for economic success. The bulls maintain, however, that prices are going up because of continued purchasing pressures. I guess that means inflation is good for the economy. I know it’s not good for the people on Main Street and their purchasing power.

Crude is back up to $54.30 a barrel. ConocoPhillips’ refinery in Louisiana will be down for one more week.

Costco’s forecast for its third quarter earnings trailed forecasts.

Google’s earnings exceeded expectations by 20 cents per share and sales exceeded analyst forecasts by $62 million. The company is operating on all cylinders. So is the stock.

Qwest raised its cash and stock offer for MCI to $30 per share. Needy buyers often create desperate pricing.

Berkshire Hathaway has taken a significant ownership interest in BUD. The latter may be a household name but its beer sales have exhibited lackluster growth of late. In that respect, it’s akin to Coke.

China recorded a capital account surplus of 110.66 billion U.S. dollars last year, up 110 pct from the previous year, the State Administration of Foreign Exchange (SAFE) said in a statement on its website.

Eastman Kodak Company EK reported a first-quarter net loss of 50 cents per share, on a revenue decrease of 3%. The loss reflects charges for focused cost reductions, while the company's sales reflect a decline in traditional products and services of 18% and an increase in the digital portfolio of 23%.
Kodak's reported net loss for the quarter included a non-operational charge that reduced earnings, on a net basis, by 53 cents per share, reflecting focused cost reductions announced in January 2004. By removing the cost-reduction charge from the calculation of earnings, Kodak had operational earnings per share of 3 cents in the first quarter. The savings generated by the prior focused cost reduction activities were offset by lower sales of traditional products, rising raw material prices, and costs associated with NexPress Solutions, which Kodak acquired in May 2004.
The company also reiterated its per-share operational earnings guidance of $2.60 to $2.90 for all of 2005.

A chemical added to processed meat products is responsible for a 6700% increased risk in pancreatic cancer, says author and nutritionist Mike Adams. The conclusion is based in part on research conducted at the University of Hawaii that reveals a 67-fold increased risk of pancreatic cancer in people who consume large quantities of hot dogs, sausage and other processed meats, versus those who consume little or no processed meat. The study was led by Dr.Ute Nothlings and was announced at the annual gathering of the American
Association for Cancer Research.

The World According To The Fed

4/21/05 The World According To The Fed

Roger Ferguson, Fed Vice Chairman: “In 1985, our foreign assets were about equal to our foreign liabilities, so that our net international investment position was roughly zero. By 1995, our investment position had deteriorated to negative 4 percent of GDP, and by 2004, we estimate this negative position to have reached about one-fourth of GDP. If current account deficits continue to boost the negative international investment position, eventually the cost of servicing that position, which so far has been quite modest, would rise to an unsustainable level. Obviously, the current account would have to adjust to ensure that excessive debt burdens are not maintained…My sense is that implications of current account adjustment for U.S. economic growth and inflation will most likely be benign.” All of a sudden, unsustainable equates with benign.

The latest Fed Beige Book: “Upward price pressures have strengthened.” What a benign statement! According to the latest BLS statistics, real average weekly earnings fell by 0.3% from February 2005 to March 2005. The 0.6% rise in the CPI was the culprit.

Jared Bernstein, senior economist at the Economic Policy Institute: “Real wages continue to deteriorate for many U.S. workers. This marks the 11th consecutive month wherein annual wage growth failed to outpace inflation.”

Charley Reese, columnist for King Features Syndicate: “The American people are being screwed, blued and tattooed by the politicians in Washington, and most don’t even know it. They are suffocated by the incessant amount of fertilizer poured on them by the overpaid, overperked, overpensioned politicians who have voted themselves into the top 5 percent of income. Public servants, my foot.”

The GM plant in Linden, NJ closed yesterday. Ford’s plant in Edison, NJ closed in late February. They were the last two auto assembly lines in NJ. Ford will cut production in the second quarter.

JDS Uniphase will close 2 U.S. manufacturing facilities, ship those operations to China, and cut more than 700 jobs. Guilford Mills is closing its Greensboro, NC plant and cutting 101 employees as well as cutting 130 from its workforce at its Fuquay-Varina plant in South Wake County. Qwest will layoff 144 workers in Seattle.

Motorola had a bright quarter and lifted its second quarter outlook. I continue to believe the company offers exceptional long-term potential. Nokia’s profit was up 18% and the company raised the mobile market outlook to 15% growth from 10% for all of 2005. On the other hand, Qualcomm lowered its forecast for sales and profit from operations for the entire year.

According to John S. Herold Inc, employment by the largest U.S.-based oil and natural gas producers declined 4.1% in 2004, the 20th annual decline in the past 23 years. This statistic differs sharply from the 50% rise in crude over the past 12 months.

U.S. crude oil supplies dropped for the first time in 10 weeks and gasoline inventory declined. June crude is trading around $53.50 a barrel. As a matter of interest, in 1967, one U.S. dollar purchased 4 gallons of gas.

Ebay’s profits rose 28% and quarterly sales topped $1 billion for the first time.

The CRB Index rose yesterday to the 307 level. Inflation remains alive and well.

UK retail sales fell 0.1% from the previous month.

IBM hit a high of about $135 in 2000. Since early February of this year, the stock has once again been in a downdraft. For the past two weeks, that decline has accelerated. Last night the stock closed at 72, back to the price set 3 years ago. Management has related the difficulty created by a longer sales cycle. Last night Cramer recommended switching from IBM to EMC. That’s a nonsensical thought. Going from a services/consulting company to a storage outfit is mad. I don’t know when IBM will be able to close deals on a quicker note. I do know they have plenty of room to cut costs. It’s one thing to run from IBM at 95. It’s quite different to be a seller at 72. As for EMC, it might make an excellent takeover target.

China’s CPI rose 2.8% in this year’s first quarter. However, upstream products were priced more than 10% higher in the quarter. A major problem could be the severe draught in some parts of south China and southwest China this spring. We will have to see what impact it will have on farmers and their summer harvest.

Macquarie Bank FX Research: “There is no inflation in the US if you don't drive a car or need to pay to deliver or receive goods, particularly if you don't eat or have holidays. And of course, everyone is naked, because what you spend on clothes isn't counted either.”

McDonald’s CEO reported that “in March, McDonald's U.S. business marked its 24th consecutive month of positive comparable sales - a feat not achieved in nearly 25 years. I am encouraged by the ongoing strength and resilience of our U.S. business. Revenues increased 6% during the quarter and strong comparable sales helped offset higher commodity costs.”

According to Bankrate, mortgage rates fell to the lowest point in two months, and have now dropped four weeks in a row. The average 30-year fixed rate mortgage dropped from 5.95 percent to 5.86 percent. The 30-year fixed rate mortgages in this week's survey had an average of 0.3 discount and origination points.

GM stated “there is no issue” over the company’s ability to repay $300 billion in debt.

In the largest one-week decline since December 2001, first-time claims for state unemployment benefits plunged by 36,000. One should keep in mind that there were seasonal adjustments with the early Easter holiday. I continue to report on the growing number of daily plant closings and employee layoffs.

The Great Divide

4/20/05 The Great Divide

Housing has been bolstering our economy for at least the past 3 years. Housing starts plummeted 17.6% in March, the largest decline since Jan. 1991. Building permits fell 4%, single family permits fell 5.4%, apartment starts fell 31.6%. In the week ended April 15, mortgage applications declined 1.6%.

For the second quarter, Ford expects to break even or lose 15 cents a share. Meanwhile, GM had the worst quarterly loss in 13 years. The real disappointment was the slim 8.4% increase in first quarter China sales. That is not discounting the problems in North America and the anticipated $5.6 billion in health care costs in 2005.

It was reported that U.S. core PPI only rose by 0.1% in March. The overall PPI is up 4.9% in the past 12 months, and that’s not tame. The real clunker in March was the fact that intermediate energy goods increased 3.7%, and that crude energy goods prices increased 5.5% in the month. Today, we find crude trading at $52.75 a barrel and heating oil at $1.50 a gallon. The crude/gold ratio stands at about 8.24 to 1. Dennis Gartman told his readers he expects the ratio to climb to 15 to 1.

Speaking of Dennis Gartman, he expressed in his Gartman Letter today that “we are out of the dollar, and we suspect that we shall remain out of the dollar for some very long while into the future.”

The March SEMI book-to-bill orders were down 26% in March from one year ago. However, that did not prevent Intel from having a net income increase of 255 and a revenue increase of 17% in the first quarter. In addition, the company boosted its forecast for 2005 gross margins. Intel is experiencing “good growth in emerging markets” and the laptop market.

Yahoo reported that its latest quarterly revenue topped $1 billion for the first time. The company’s net more than doubled with internet advertising bolstering results.

U.S. Air and America West are in advanced merger talks.

Fitch lowered its rating on Berkshire Hathaway’s bonds from stable to negative.

According to the National Conference of State Legislatures, 26 states face fiscal budget gaps.

PricewaterhouseCoopers' 'Trendsetter Barometer' interviewed CEOs of
360 privately held product and service companies identified in the media
as being among the fastest growing U.S. businesses over the last five years.
The surveyed companies range in size from approximately $5 million to
$150 million in revenue/sales. Driven by the need to offload complex regulatory compliance and free up capital, fast-growth CEOs have turned to
outsourcing of human resource functions -- and achieved high satisfaction for
both quality and savings.

"The housing bubble has been created more by the business press than reality," said Sam Zell, chairman of Equity Office Properties Trust and Equity Group Investments LLC. "You can't have a crash without oversupply."

U.S. March CPI increased 0.6%, with the core rate jumping 0.4%, the biggest increase since August 2002. Naturally, Fed members believe inflation is not a problem.

Starwood Executive Chairman Barry Sternlicht: “You can sell anything you can get your hands on in Las Vegas, but nobody knows what it costs to build there because contractors are stretched so thin. It’s wacko out there but it’s fun, as long as you get a chair when the music stops.” When they raid the whorehouse, they take all the girls!

Credit Derivatives, Risk, And Sentiment

4/19/05 Credit Derivatives, Risk, And Sentiment

According to a recent survey by ISDA, the credit derivatives market was worth $8.4 trillion at the end of 2004, 123% higher than the year before and about 45 times bigger than in 1997. One area of concern is collateralized debt obligations which are complex pools of credit risk bundled frequently into highly leveraged packages. The Fed recently stated it was concerned that up to 1 in 10 investors who buy CDOs may not fully understand the risks. In all likelihood, the credit derivatives market will exceed the size of our country’s GDP in 2005. If there a hiccup in CDOs should occur, the consequences could be profound. Such risk, in my view, is clearly not built into today’s equity and credit markets. It should be noted a growing number of deals remain unconfirmed between counterparties months after their agreement by traders. Not surprisingly, volatility as measured by the VIX index is on the rise.

Gary Shilling: “Markets remain illogical longer than you or I can remain solvent.”

Mark Twain once said that a cat that sits on a hot stove will never sit on a hot stove again, nor on a cold one either, because they all look alike. Is there any correlation between a hot stove or a cold stove and the appearance of market risk in today’s investing environment?

According to the latest AAI I statistics, 42% of investor sentiment was bearish, 42% was neutral, and 17% was bullish. The bullish camp was the smallest in 13 years. Meanwhile, Market Vane’s bullish consensus increased last week to 64% from 63%. Obviously, statistics can have a large variance, and that’s why it’s necessary to do your homework.

The ARMS Index was developed by Richard Arms 38 years ago. It is a volume-based breath indicator with analysis of advancing/declining issues in relationship to their corresponding volume. If the ratio is 1, then there is a balance, above 1 more volume in declining issues, and below 1 more volume in advancing issues. As of the market close on Friday, the 10-day moving average was 1.195, and that was a fairly neutral reading in spite of the sharp decline in the market indices last week.

We are smack in the middle of earnings season for this year’s first quarter. It is well to remember that corporate profits are approaching $1.1 trillion or 9% of GDP. The 25-year average is about 7%. Consequently, it is wise to lower our expectations for earnings going forward.

In January, MMM predicted sales growth of 5 to 7%. For the first quarter, sales rose 1.8%. Profits in health care rose 18%, and this division carried the day for the remainder of the company.

Buick’s sales were down 22% in this year’s first quarter and Pontiac’s sales were down 17%. Which brand will be “fired?”

The March Spherion Employment Report showed that 53% of 3,200 employed adults surveyed in Ohio feel there are fewer jobs available, up 10 percentage points from February. In addition, the percentage of Ohio workers who believe the economy is getting weaker or staying the same was 76%, an increase of 7 percentage points from February. Where is Pastor Parsley now? Breaking bread with Karl Rove and Tom DeLay?

Kerr-McGee announced it is commencing a modified “Dutch Auction” tender offer for up to $4 billion of its common stock. The offer will expire on May 18 unless extended. Shareholders will have the opportunity to tender some or all of their shares at a price not less than $85 per share or more than $92 per share. If the tender is fully subscribed, $4 billion of common stock will be repurchased, representing 27% to 29% of the outstanding shares as of March 31, 2005.

According to the Photo Marketing Association International, sales of digital cameras are expected to increase by 13% in 2005 to where 52% of households would own a digital camera by the end of 2005.

The German investor confidence index declined for the first time in 6 months in April.

According to Bloomberg, China’s economy probably grew by 9% in this year’s first quarter, the slowest growth in 2 years. India’s economy increased to as much as 8% in the fiscal year ended March 2005.

In February 2005, industrial production in the eurozone was down 0.5% compared to the prior month.

Britain’s CPI rose 1.9% in March over last year, the highest in almost 7 years.

Sunroc will close its Harrington, DE plant. And 124 workers will be cut from the payroll.

Lucent Technologies, Inc. (LU) said second-quarter net income rose to $282 million, or 6 cents a share, from $88 million, or 2 cents a share, in the year-earlier quarter. The earnings released today included 2 cents in tax benefit. The results were in line with the forecast of analysts polled by Thomson First Call. Revenue for the period climbed 6% to $2.34 billion. Compared with the year-ago quarter, revenues in the United
States increased 10 percent and revenues outside the United States increased 1
percent. Importantly, Lucent posted its highest quarterly revenues for wireless since 2002. Looking ahead, management said it sees 2005 revenue growth in the mid-single digits. Jeong Kim, the former chief executive and founder of Yurie Systems, which Lucent acquired in 1998, will rejoin Lucent as president of Bell Labs. He will succeed Bill O'Shea, who is retiring after 33 years of service to the company. Kim left Lucent in 2001. His return is a big boost for Bell Labs.

From the Financial Times: “A few months ago Ian Sideris, a partner at Simmons & Simmons law firm, was completing a contract for a collateralised debt obligation when he asked a delicate question: who was the investor buying this CDO, a complex instrument that allows investors to buy pools of debt? The answer took him aback.

Rather than a hedge fund or bank, as Mr Simkins had expected, the client was an Australian charity. "We need to realise that the universe of investors for this type of product has widened in the last year," he says. "But then you also have to wonder about the capacity of some of these new investors to understand the economics [of what they are buying]."

Global Melting

4/18/05 Global Melting

Nouriel Roubini: “The trouble is that, using protectionist language to bully China to revalue its currency is a dangrerous and reckless game to play. Given the current volatile times and sharply falling US equity markets, protectionist rattle-sabering to move the dollar down may lead to a financial crash. One should only remember that one of the immediate trigger of the 1987 stock market crash was investors' anxiety about U.S. trade and fiscal deficits and U.S. criticism of West Germany and Japan economic policies and currency values. On the weekend before the 1987 stock market crash, Treasury Secretary Baker made a statement in a television interview that the dollar should slip further, publicly criticizing the German government. The US advocacy of a stronger German Mark and Japanese Yen then triggered a sudden exit of foreign investors from US financial markets and the stock market crash of Black Monday as it led to expectations of capital losses on US dollar assets. Thus, bullying of China into unilaterally revaluing is not only bad economic policy: it may also lead to a financial crash.”

Benchmark indices declined in all of the 16 Western European markets that were open.

Japan’s stocks plunge 3.8% to a 4-month low. It was the biggest drop in 11 months.

European shares stand at a 2 ½-month low.

Germany’s Dax Index declined 2.5%.

The Euro Stoxx 50 fell 2.2%.

Oil dipped below $50 a barrel to $49.96.

Philips Electronics NV’s first quarter tumbled close to 80%.

Brad Setser predicts the U.S. current account deficit may worsen this year to the $850 to $900 billion range.

Paul Volcker: “Home ownership has become a vehicle for borrowing.”

John Hussman stated “this is the first time since early 2003 that the Fund (Hussman Strategic Growth Fund) has been fully hedged by fully offsetting the value of our stock holdings with short sales in the S&P 100 and the Russell 2000…This is not a market that’s likely to be accommodating to anybody who is reckless about risk here.”

IMF managing director Rodrigo De Rato observed “if policies do not adapt, do not change to react to these imbalances, we run the risk of an abrupt correction of the markets… when confidence for different reasons could evaporate or could be reduced.”

Alcan will likely close a number of its aluminum smelting plants in Europe due to soaring costs.

Hyundai targets 1 million vehicle sales in China by 2010.

Adobe reached an agreement to buy Macromedia for $3.4 billion in an all-stock deal.

When negative sentiment reaches abnormal heights, as is the case this morning, it is not unusual to experience a sharp rally. As I have stated for the past five months, I would utilize rallies to reduce positions in equities where the price does not currently reflect the risk potential for revenue and earnings disappointment. In other words, it is hoped that, as an investor, you truly know the prospects for the companies in which you have an ownership interest. It is not sufficient to read analyst reports. Independent research is required.

Nationwide, the number of mortgages for investment property has jumped 43 percent over the last three years to 8.65 percent of all mortgages in 2004, according to San Francisco research firm LoanPerformance. In San Diego County, mortgages for investment property have soared 95 percent to 12.48 percent of all mortgages over the same time period, said LoanPerformance.

Gaps

4/17/05 Gaps

"Labor is prior to, and independent of, capital. Capital is only the fruit of labor, and could never have existed if labor had not first existed. Labor is the superior of capital, and deserves much the higher consideration." Lincoln's First Annual Message to Congress, December 3, 1861.

Sol Palha: “History has shown us that good plays always have a pain/aggravation and then frustration stage before finally exploding up. Gold, natural gas, oil, silver, nanotech, biotech etc. all went through similar stages.”

According to a study by Torto Wheaton Research in Boston, the cost of renting an apartment in the Washington DC area in 2004 was just 59% of the cost of buying a home. That’s down from 82% in 2001 and presently the widest gap since 1989. I feel confident a similar study of the San Francisco Bay Area would show even more disconcerting results. In sum, there are times when it is more prudent to rent than to buy.

In the equity markets there frequently are gaps between value and perceived growth. To take advantage of this gap requires, at the very least, much study and patience. It means waiting for the appropriate risk/reward. After making such a choice, there usually will be an additional waiting period accompanied by pain/aggravation and frustration. Self-doubt might arise. You need to know what you are buying, and be comfortable with that knowledge. The waiting period could last for two years. Can you handle that frustration? The payoff time gap must be considered. So must your personality. Are you cut out for this endeavor? I savor the challenge.

If you own Merck at $45 and the stock gaps down to $25 because of Vioxx concerns, what do you do? Do you sell on the news? Do you average down because Merck is not a one trick pony? Merck is back to $35. What do you do? If you can’t handle gaps, don’t invest. There will be others like Merck.

Some businesses go out of style because of new technology. Universal Music’s record-processing plant in Gloversville, NY will close and 112 union workers will lose their jobs. There isn’t much call for vinyl records these days.