Real Earnings, Inflation, And PKZ

8/17/05 Real Earnings, Inflation, And PKZ

Real average weekly earnings fell by 0.2 percent from June to July after
seasonal adjustment, according to preliminary data released today by the Bureau
of Labor Statistics of the U.S. Department of Labor.  A 0.4 percent increase in
average hourly earnings was more than offset by a 0.6 percent increase in the
Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).
Average weekly hours were unchanged. Data on average weekly earnings are collected from the payroll reports of
private nonfarm establishments.  Earnings of both full-time and part-time
workers holding production or nonsupervisory jobs are included.  Real average
weekly earnings are calculated by adjusting earnings in current dollars for
changes in the CPI-W.Average weekly earnings rose by 2.7 percent, seasonally adjusted, from July
2004 to July 2005. After deflation by the CPI-W, average weekly earnings
decreased by 0.5 percent.

On a seasonally adjusted basis, the CPI-U, which was unchanged in
June, increased 0.5 percent in July. Energy costs advanced sharply,
increasing 3.8 percent in July after falling 0.5 percent in June.  Within
energy, the index for petroleum-based energy rose 6.1 percent in July,
accounting for over one-half of the increase in the overall CPI.  Energy
services increased 1.1 percent.  The index for food increased 0.2 percent
in July.  The index for fruits and vegetables, which fell 1.2 percent in
June, increased 1.6 percent in July.  The index for all items less food
and energy increased 0.1 percent for the third consecutive month.  A
decline in new vehicle prices--down 1.0 percent in July--was more than
offset by increases in the indexes for airline fares and for lodging away
from home.

The tale of 2 economies: China's industrial output grew 16.4 per cent during
the first half of this year and the gross domestic product grew 9.5 per cent.
U.S. industrial production in July rose a slim 0.1% with capacity utilization
standing at 79.7%. With excess capacity, why should corporations build new plants
in the U.S.?

U.S. companies may have to pay an average of 12.6 percent more for
their employees' health insurance next year, according to a survey by
benefits consultant Hewitt Associates.The rates are for HMOs,plans that
provide for privately insures Americans.In response, 40 percent of employers are proposing to shift more medical costs to
workers in the form of higher deductibles and a larger share of
premiums, according to the Hewitt survey. Overall, employers' health care costs have doubled since 1998 to about
$7,600 a worker this year and may reach $8,000 in 2006, said Ron
Fontanetta, a principal at benefits consulting firm Towers Perrin.

Home sales in the Bay Area stepped back from the record territory of recent months, a real estate information service reported Tuesday. The number of homes and condos sold in July in the nine-county region dropped 11.9 percent to 11,470 from 13,014 for June. That was down 10.8 percent from 12,862 for July last year, according to DataQuick Information Systems. The median price paid for a Bay Area home was $606,000. That was down 0.7 percent from $610,000 in June, and up 17.9 percent from $514,000 for July a year ago. The biggest year-to-year decline in sales was in San Francisco, down 21 percent to $637,000 but the median price there rose 19.4 percent to $776,000. Sales in San Mateo county dropped 18.3 percent to $806,000where the median price was up 17.5 percent to $759,000.

PKZ currently accounts for 12% of the oil output from Kazakhstan, where about 3.3% of the world's oil reserves are located. In the case of Unocal, I frequently mentioned that the highest bid would not be the winning bid. In the case of PKZ, I believe the wnning bid will be the highest bid. There is much discussion that India and China will sign an agreement by year-end. This agreement would be a collaboration involving both countries when bidding for petroleum assets. The case of PKZ is quite different. This involves ONGC Videsh bidding with Mittal. It is not bidding alone as a country identity. I am quite sure that Goldman Sachs, as advisor to PKZ, recognizes the difference and the firm will seek out the best price for PKZ shareholders. With crude continuing to trade around $66 a barrel, PKZ's reserves have become increasingly valuable in 2005. There should be increased awareness that Kazakhstan has enormous potential for natural resources.

I would like to reinforce a statement I made a few weeks ago. The new pipeline carrying PKZ oil to China will save $7 a barrel in transportation costs. Based on proven oil reserves, that savings works out to $3.85 billion or $52 a share. You might want to read what PetroChina stated today about bidding for PKZ: "One of our key strategies is to focus on oil and gas assets that are closer to home because of China's oil needs,' a source at PetroChina was quoted as saying. "We plan to transport the oil through the China-Kazakhstan pipeline to our refinery in Dushanzi in Xinjiang in northwest China," the source added.

The average price of gasoline at the pump has risen to $2.52 a gallon, and records have been set daily since August 8.

Iran's oil revenues from exports are expected to reach a record $43 billion in 2005.

A nationwide poll released today by the John J. Heldrich Center for Workforce Development at Rutgers University revealed that nearly 7 in 10 workers plan to stay on the job past retirement age-- including a growing number who say the decision will be driven by financial need. In 2000, 82% stated they would be finally able to retire by 65. In the newest survey, the number has dropped to 63%. In addition, 28% of boomers stated they plan to work part-time in retirement because of a need for money.

The VIX Index is beginning to wake up. It rose 10% yesterday and is up about 36% from its low. Traders often believe that the summer means a dull market with low volatility. Keep an eye on Iran. Volatility might be very much alive and well.

Have you ever considered going long lumber and shorting copper? Even though stockpiles of copper are at a 9-month high, copper is selling for a record $3,660 a ton.

The market cap for HP is about $73 billion. Dell's is roughly $89 billion. Hopefully, they will get to the same point. That would be, in my view, a sameness bringing forth uncommon value.

Volumes of mortgage applications rose 2.2% in the week ended Aug. 12 compared to the prior week.

India has received 1,312 applications for patent of pharmaceutical products, becoming only the second country after the U.S. to get a large number such requests.

Fifty-three metropolitan areas representing 31% of the total U.S. housing market are considered extremely overvalued and confront a high risk of future price corrections, according to study conducted by National City Corp. The study determines a market extremely overvalued if prices are 30% above where the study estimates they should be based on historic price data, area income, mortgage rates and population density.

Dan Scheinman, Cisco's Sr. VP for corporate development: "We came to India for the costs, we stayed for the quality, and we're now investing for the innovation."

Lifelines

8/16/05 Lifelines

The Baku-Tbilisi-Ceyhan pipeline passing via Turkey is scheduled to start carrying Azeri crude this Autumn with a capacity set to rise to one million barrels a day by the end of the decade. There are also plans to link this pipeline to the oil fields in Kazakhstan with a new pipeline.

A recent report released by the Shanghai Academy of Social Sciences (SASS) points out that the country's crude oil reserves will be exhausted within 14 years, based on the current proven oil reserve and scale of production. However an energy expert with the State Information Center told Interfax that the estimation is too pessimistic. China has a total national oil reserve standing at 2.38b tons. If the country continues to produces 180-200m tons every year, current reserves will be exhausted within 14 years, said the SASS report. "The proven oil reserve figure will definitely rise with the development of technology, and therefore, the reserves cannot be exhausted so quickly, " Niu Li, an energy expert with the Economic Prediction Center of the State Information Center, told Interfax. Niu added that reserves usually rise more quickly than actual production rates. Niu also said that the country may find more resources in the East China Sea and Xinjiang in the intervening years. "However, rapid economic growth will lead the country to import even more crude from the global market in the near future," said Niu. 68% of the 390 Chinese cities that rely on local mineral reserves to sustain their economies are in the "mature production stage" while another 12% are facing depletion. The Daqing Oilfield, the country's largest, produced 50m tons of oil per annum for 27 years in a row until 2004, but there are plans to allow output to fall by 40% by 2010, reaching only 30m tons per year. China's annual crude demand is expected to rise by 9.7% to 318m tons this year, suggesting that the country will need to import 135m tons this year, accounting for 42.45% of total demand and exceeding last year's figure of 40.5%, said a recent report by the Development Research Center under the State Council. The country's daily oil demand is predicted to reach 9.3m barrels by 2010, increasing by 37% from 2005, the Deutsche Bank predicted.

The NAHB-Wells Fargo housing market index slipped to 67 in August from 70 in July. It's the lowest level since April. "Builders still remain upbeat and confident," said Dave Wilson, president of the NAHB and a builder from Ketchum, Idaho." The index for current sales dropped to 72 from 76, the lowest in more than a year. The index for buyers' traffic fell to 50 from 55, matching the April low. The index for future sales remained at 77.

The Treasury Department reported U.S. June foreign capital inflows of $71.2 billion, up from $55.8 billion in May. A close look at the inflows for the first six months of 2005 give me an uneasy feeling. Those with the jack are not giving us their savings. Japan provided $21 billion and China provided $49 billion, but the UK gave us $120 billion and the remainder of Europe a total of $80 billion. In other words, those that could least afford it, provided the most. That does not speak well for the future.

Jack Benny: "I went to a meeting for premature ejaculation. I left early."

Singapore retail sales rose 9.4 percent in June from a year earlier, according to a report issued Monday,

After yesterday's close on the New York Stock Exchange, PKZ put out the following statement:
"PetroKazakhstan Inc. (the"Company") in response to market rumors and as requested by the Toronto StockExchange announces that it has received proposals to acquire all outstanding common shares of the Company pursuant to the process announced in its June 27, 2005 news release.The Company is in the process of assessing these proposals and expects that further discussions with interested parties will continue." In my view, the bidding for PKZ has taken on a very dynamic turn. I never gave much of a chance for India's ONGC to come out on top. However, ONGC's bid was made jointly with Lakshmi Mittal, majority owner of Mittal Steel, the world's largest steel company. He has a long history of doing business in central Asia and is responsible for much of the economic revival in this region. His presence in the bidding process changes the landscape considerably. For a PKZ shareholder, the news of the joint bid with Mittal is terrific news. The joint bid of China National Petroleum and PetroChina can no longer be considered the runaway favorite. There will be stiff competition, and, in my view, the bidding could go higher than I had previously envisioned. In any event, the eventual buyer will be getting an excellent long-term value, and one which is not fully appreciated. Both bidders understand the political climate, and I do not envision this aspect to be a problem. One point has been overlooked by many investors. Kazakhstan's 39.6 billion barrels of oil reserves at the end of 2004 were 35 percent greater than the U.S. total, according to data compiled by BP Plc.

For the first seven months of 2005, the CSFB/Fremont Hedge Fund Index climbed 3.29%.

Delta Airlines is selling its Atlantic Southwest Airlines for $425 in cash to SkyWest. The company stated yesterday that it isn't likely to get further debt financing because of its low credit rating and already-pledged assets and its operating cash flow won't be enough to meet the company's liquidity needs for the rest of the year.

John M. Berry on the Federal budget deficit: " Assuming current laws were unchanged, as the CBO is required to do, the cumulative budget deficit was projected to be about $2.1 trillion for the coming 10 years. Using some more realistic assumptions about extending expiring tax cuts, increases in discretionary spending and gradually reducing the military costs of fighting in Iraq and Afghanistan, the total would be more than double that amount."

In the January-July period, Kazakhstan's industrial output grew 5.1% year-on-year.

The EU pledged its support for Iran becoming the main transit route for central Asian oil and gas--- in exchange for a freeze on Tehran's nuclear program. The Iranian government rejected the proposal.

Yesterday's N.Y. Post article on Dow Jones caused quite a stir. The article did not cite any specific sources but still stated that some younger members of the Bancroft family, Dow Jones' controlling shareholder, are considering placing the company up for sale. The stock rose to $41+. In May, the stock sold at a yearly low of approximately $32. This month, members of the Bancroft family sold 99,000 shares in various transactions. With a market cap of almost $3.5 billion and selling at a stiff multiple of projected cash flow, at these levels I'll let the speculators risk their money.

Canadian premiers and territorial leaders signed a resolution calling on Ottawa to take all necessary measures to recover softwood duties and force Washington to respect the ruling under NAFTA that would have ended punitive duties on Canadian softwood lumber. Nafta panels have concluded on three occasions that the U.S. failed to prove that Canadian softwood poses a material threat of injury to .S. producers. Quebec Premier Jean Charest stated "this last ruling brings us to a tipping point. This issue contaminates other trade issues." British Columbia Premier Gordon Campbell stated "it's hard for us to see how you can build a long-term relationship in any kind of trade if the Americans aren't willing to live up to their obligations." The Bush administration is doing an excellent job of alienating our trading partners. It will not be long before we look in the mirror and realize our nation is without friends.

Teddy Roosevelt: "The President is merely the most important among a large number of public servants. He should be supported or opposed exactly to the degree which is warranted by his good conduct or bad conduct, his efficiency or inefficiency in rendering loyal, able, and disinterested service to the Nation as a whole. Therefore it is absolutely necessary that there should be full liberty to tell the truth about his acts, and this means that it is exactly necessary to blame him when he does wrong as to praise him when he does right. Any other attitude in an American citizen is both base and servile. To announce that there must be no criticism of the President, or that we are to stand by the President, right or wrong, is not only unpatriotic and servile, but is morally treasonable to the American public. Nothing but the truth should be spoken about him or any one else. But it is even more important to tell the truth, pleasant or unpleasant, about him than about any one else."

According to the AP, drivers in the southern province of Guangdong were waiting for hours for gas in lines up to a kilometer (a half-mile) long, sometimes leaving with empty tanks when supplies ran out, state media reports said. In the southern city of Shenzhen, which borders Hong Kong, more than half of all gas stations closed Monday as shortages worsened, the Hong Kong-based newspaper South China Morning Post reported Tuesday. Meanwhile, crude prices dipped to $65.50 a barrel this morning.

Wal-Mart Stores, Inc reported record second quarter sales and earnings for the
quarter ended July 31, 2005.  Net sales were $76.8 billion, an increase of
10.2 percent over the second quarter of fiscal 2005.  Net income for the
quarter was $2.8 billion, an increase of 5.8 percent from $2.7 billion in the
second quarter of fiscal 2005.  Earnings per share were $0.67, up from
$0.62 per share in the same prior year quarter. Net income for the six months ended
July 31, 2005 was favorably impacted by two items totaling $145 million after
tax or $0.03 per share:  an increase due to favorable tax resolutions of $77
million and positive legal developments of $68 million after-tax.
Lee Scott, President and CEO, said, "I am proud that the hard work of our
associates allowed us to report another record quarter.  Early in the quarter,
our results were disappointing; however, July came in stronger than expected.
Wal-Mart Stores did miss their plan as our customer continues to be impacted
by higher gas prices and it is difficult to improve our expense leverage in
the current environment." The company forecasts earnings per share for
the third quarter to be between $0.55 to $0.59, and for the year, the forecast is
$2.63 to $2.70 per share. To reach the upper end of the range, comp sales will need
to remain in the 4% growth area.

How have these high gas prices hurt consumer spending?
If the average car owner drives 12,000 miles a year and uses 600 gallons of gas
a year, the current high price of gas (being 67 cents a gallon higher than
this time last year) costs that driver about $8 more a week. With home prices having
risen substantially over the last few years, that $8 pales by comparison.

Jay London: "They asked me what I thought about euthanasia. I said I'm more
concerned about the adults."

Monday Musings

8/15/05 Monday Musings

Time spent in Chapter 11 can mean hemorrhaging money. In this year’s second quarter, UAL Corp. reported spending $1.4 billion on reorganization.

China’s July industrial production rose 16.1%.

As some of the troubled refiners return operationally, the crude market has cooled somewhat with prices drifting back towards the $66 per barrel level. Meanwhile, over this weekend, prices at the pump averaged $2.50 per gallon nationally.

Lowe’s expects to open a total of 150 stores this year with annual sales growth of 17% and an earnings per share range of $3.31 to $3.37. Lowe’s, like Walgreen’s, remains a choice for long-term investors. The stock rarely looks undervalued, but the annual consistency makes up for any valuation questions.

It is quite amazing that so few investors know much about Kazakhstan. This Republic, with 15 million people living in an area almost 4 times the size of Texas, is the largest of the former Soviet republics in territory, excluding Russia. It borders the Aral Sea and the Caspian Sea, and is rich in natural resources, such as, major deposits of petroleum, natural gas, coal, iron ore, and manganese.

Agilent unveiled a restructuring designed to cut 1,300 jobs and lower costs by $450 million, under which it will sell its chip unit for $2.66 billion and spin off two other businesses.

Work on a pipeline designed to transport natural gas from the Caspian region and the Middle East to the European Union (EU) has begun, a Romanian newspaper reported Friday.

China's second-biggest steelmaker, Anshan Iron and Steel Group, said today that it has merged with smaller competitor Benxi Iron and Steel Group, creating a rival for the nation's No. 1 steelmaker, Baosteel. China is the world’s biggest steel producer. It consumes about one-third of global steel output.

The President of India Dr APJ Abdul Kalam suggested that the Oil and Natural Gas Company(ONGC) should jump into the production of the alternative sources of energy and should make India an independent energy country by the year 2030. He hoped that ONGC would become a global energy giant in the years to come.

The average forecast for the July CPI is a rise of 0.4%. The government will emphasize the inflation rate ex food and energy. This implies that filling up your car with $2.50 a gallon gas is not materially different than it was in July 2004. If you believe that, then you probably believe we invaded Iraq over WMD. Is there any reason to believe that inflation has not invaded your household’s cash flow? Many say inflation is a hidden tax. I don’t find it so hidden. If there is inflation, and if you believe inflation will continue into at least the near-term future, then there is no justification for the spread between 2-year and 10-year Treasury bonds being a mere 21 basis points. That, to me, is an accident waiting to happen. Others probably disagree. Time will tell the real story.

Trends In The Making

8/14/05 Trends In The Making

The yen had its biggest weekly gain against the dollar since January.

Over this weekend, it has been reported that Delta Airlines is seeking bankruptcy financing from GE and others.

Josiah Royce: “Unless you can find some sort of loyalty, you cannot find unity and peace in your active being.”

According to the National Association of Realtors' statistics, 960,000 condos sold this year as of June, 12.4 percent, more than in all of 2004 and up 46.1 percent from all of 2002. The average condo price was $223,500 in June, up 14.8 percent from last year and 57.1 percent from three years ago.

Paul Krugman: “These days, Americans make a living selling each other houses, paid for with money borrowed from the Chinese."

Last year, foreign nationals earned almost 60% of American engineering doctorates. According to Engineering Trends, the U.S. ranked 16th per capita in the number of doctoral candidates and 25th in engineering undergraduates per million citizens.

On July 2, the "Joint Statement of the People's Republic of China and the Russian Federation Regarding the International Order of the 21st Century" sent a message to Washington stating that "the peoples of all countries should be allowed to decide the affairs of their own countries, and world affairs should be decided through dialogue and consultation on a multilateral and collective basis. The international community should thoroughly renounce the mentality of confrontation and alignment, should not pursue the right to monopolize or dominate world affairs, and should not divide countries into a leading camp and a subordinate camp..."

With regard to Iran, Bush stated he is keeping “all options open.” Russia and China have supplied Iran with arms, and stand ready to support that nation militarily. Both have kept all their options open. Hopefully, this will remain simply a war of words.

P.J. O’Rourke: “War is a great asshole magnet.”

Sol Palha: “Lumber prices topped out in July 2004 (over 1 year ago), experienced a sharp correction and then attempted to rally again but failed to take out their July 2004 highs. In contrast the Housing index (which is more or less a reflection of the housing markets) continued to rally and put in a new high in July exactly 12 months after the lumber market topped. This is a huge form of inter market negative divergence in action.”

As long as the yearly money supply growth exceeds GDP growth by 50 to 100%, the future path of the dollar will be down. There are too many dollars placed in circulation looking for a home, and there are too many alternative and available places for countries like China to park their growing hoard of free cash flow.

P.J. O’Rourke: "Every government is a parliament of whores. The trouble is, in a democracy, the whores are us."

In the past, I have discussed the Baltic Dry Index (BDI), a worldwide compilation of rates to book cargoes of raw materials on shipping routes around the globe. The index does not count ships carrying finished goods. From spring 2004 towards the end of 2004, a blow-off move carried the index from roughly 2650 to 6250. It has since plunged to roughly 2000. Only 3 years ago, the index stood at 1000. The real estate market is tame compared to the BDI. If expectations for future worldwide GDP growth were rosy, the BDI would not be in a funk.

Terence ( Publius Terentius Afer): “When the mind is in a state of uncertainty, the smallest impulse directs it to either side.”

The National Guard and Reserve have suffered more combat deaths in Iraq during the first 2 weeks of August than in any full month of the entire war.

Confusion

8/13/05 Confusion

Despite the price of crude reaching $67 a barrel, PetroKazakhstan shares declined on Friday. I had mentioned earlier in the week that PetroChina had an important meeting set for yesterday. That did not mean a bid for PKZ would materialize on the same day. Interestingly, Xinhua Finance cited a report by Fitch analyst Ma Shang that stated “they (PetroChina) are expected to announce a bid on Monday, the deadline set by Goldman Sachs.” Further, Ma stated only India’s ONGC Videsh and PetroChina are expected to bid on Monday, and he expects a bidding war between those two parties. It will be interesting to see whether Sinopec enters the process.

Anthony de Mello: “An Italian poet said, "We live in a flash of light; evening comes and it is night forever." It’s only a flash and we waste it. We waste it with our anxiety, our worries, our concerns, our burdens.”

This week the U.S. Treasury had a successful auction for its 10-year bonds. Over the last two trading days, government bond yields declined despite the CRB Index reaching its highest level since December 1980 and the Goldman Sachs Commodity Index surging to an all-time high. Year-to-date it has jumped 42.3%. In addition, copper prices traded at record high levels. Gold rallied to $451.40 an ounce. Equity investors ignored the dollar index declining 1.3% this week.

When discussing fair value for the S&P 500, it might be helpful to differentiate between the historical breakdown of earnings with the present. Clearly, normalized levels do not resemble today’s reliance on the financial/real estate services sector, and in particular, the relationship between the debt/income levels ascribed to the borrowers and the quality of risk in derivative exposure assumed by the lenders.

Our June trade gap rose to $58.8 billion, and we are headed for a $700 + billion annual trade deficit. Combine that with the projected $300 + billion budget deficit, and you have twin tower deficits amounting to about 9% of our GDP. Interestingly, that same 9% equates to the real unemployment rate in our country.

For the fourth consecutive month, the CPI in China in July was less than 2%. In July 2004 it was 5.3%. Because of overproduction in most manufacturing sectors since 1998 and the to-be-overcapacity from over-investment in 2003 and 2004, some Chinese economists warn that the country’s economy could see deflation in the near future. I find this view quite unusual given the fact that, during the January-July period, China’s imports of iron ore rose 31.9%, coal imports surged 55.4%, and soybean imports jumped 38.4%. Imported crude oil was up 5.5% but refined oil was down 20% year on year. On the other hand, car imports were down 29.4% and imported rolled steel dropped 24.4%.

It is quite true that, in June, the U.S. imported $21 billion in goods from China. However, during the January-July period, the EU continued to be China’s largest trading partner. The U.S. was number 2, Japan number 3, and ASEAN number 4.

Beijing reported that the Russian and Chinese prime ministers will sign a mid-term cooperation program in the fall of 2005. Next week China and the U.S. launch a new round of negotiations over the textile conflicts. Talks will resume in San Francisco.

John Williams wrote an updated report on the July nonfarm payrolls. He maintains that, if June and July 2005 numbers are recast on a largely consistent basis with last year’s seasonal factors, then the gain in July payrolls would only amount to 44,000.

An AP-AOL poll of 1,000 adults found that 64% say gas prices will cause money problems for them in the next six months, and that is up from 51% in April.

I don’t put much stock in the University of Michigan Consumer Sentiment Index, but many others do. For August, it declined to 92.7 from July’s 96.5.

On Friday, Apple Computer closed at a new all-time high. It’s market cap now exceeds $38 billion.

The Tarim Basin is northwest China’s Xinjiang Uygur Autonomous Region. The Tarim Oilfield Company expects to produce 11 million tons of oil and natural gas this year. Last year, the Tarim Basin yielded 8.86 million tons. Estimated reserves are 10.7 billion tons of crude oil and 8.39 trillion cubic meters of natural gas, while its proven geological reserves stand at 440 million tons of oil and 664 billion cubic meters of natural gas.

On this Saturday morning is a passage for a friend from My Antonia: “I tried to go to sleep, but the jolting made me bite my tongue, and I soon began to ache all over. When the straw settled down, I had a hard bed. Cautiously I slipped from under the buffalo hide, got up on my knees and peered over the side of the wagon. There seemed to be nothing to see; no fences, no creeks or trees, no hills or fields. If there was a road, I could not make it out in the faint starlight There was nothing but land: not a country at all, but the material out of which countries are made. No, there was nothing but land--slightly undulating, I knew, because often our wheels ground against the brake as we went down into a hollow and lurched up again on the other side. I had the feeling that the world was left behind, that we had got over the edge of it, and were outside man's jurisdiction. I had never before looked up at the sky when there was not a familiar mountain ridge against it. But this was the complete dome of heaven all there was of it. I did not believe that my dead father and mother were watching me from up there; they would still be looking for me at the sheep-fold down by the creek or along the white road that lead to the mountain pastures. I had left even their spirits behind me. The wagon jolted on, carrying me I knew not wither. I don't think I was homesick. If we never arrived anywhere, it did not matter. Between that earth and that sky I felt erased, blotted out. I did not say my prayers that night: here, I felt, what would be would be.”

Looking Ahead

8/12/05 Looking Ahead

Jesse Livermore: “The desire for constant action irrespective of underlying conditions is responsible for many losses in Wall Street even among the professionals, who feel that they must take home some money every day, as though they were working for regular wages.”

For the bulls, where do we go from here? At the moment, it doesn’t appear that Dell, Cisco, Intel, Microsoft, and Oracle will power the Nasdaq much higher. Between July 7 and August 11 shares in McDonald’s moved 7 points higher to $34+. The rise can’t be based simply on salads. Has MCD become the newest real estate play? I doubt MCD is enough to power the Dow much higher. Boeing already sports a hefty P/E. Do we go higher because of more buybacks, cash and stock acquisitions, or possibly P/E expansion? What do you pay for 11% quarterly earnings growth? If the earnings for Dell and Cisco are not satisfying, what does that say about the rest of the market that is growing more slowly? You can’t have it both ways. Consumer companies have to fight $3 a gallon gas at the pump paid by our nation of SUV owners. Housing companies are battling higher mortgage rates and the rising inventory of unsold homes. Believe it or not, when house flipping becomes more difficult, rising prices do become a problem.

For the bears, where do we go from here? Goldcorp traded at a new all-time high yesterday. Gold futures rose 2% to close at $450 an ounce, its highest close since March 18 and nearing a 17-year high. Over the last few years, gold has risen $200 an ounce. Oil is trading at $66 a barrel. Yesterday, the Amex Oil Index traded above 1,000 for the first time.How much higher can it go in the near term? Heating oil is $1.89 a gallon. It is almost mid-August. The weather has not turned cold. Gasoline futures are nearing $2 a gallon. The peak-driving season is coming to a close.

The idea is to be flexible. Don’t be too set in your ways. There are too many variables that can make one look stupid. It’s costly to be wrong. Pick your spots. It’s important to realize that making money every day sounds great but the likelihood is truly slim. When in doubt, sit on your hands. It's not a shameful act.

According to the International Energy Agency, hurricanes in the U.S. Gulf of Mexico alongside unscheduled summer stoppages elsewhere are set to have a major impact this year on oil output from producers outside OPEC.

The dollar dropped to a 10-week low versus the euro.

July retail sales in China rose 12.7% from a year earlier.

Fred Cooper, head of investor relations at Toll Brothers: “Four months ago, we could sell a new home in 2 hours. Now it takes a week or two.” How long will it take come December?

Are some MBS having delinquency problems?

Ford stated it may need to cut more than the previously-mentioned number of 2,750 of its 35,000 North American white-collar workers. Since not enough employees have quit through early retirement, buyouts, and letting positions go unfilled, the company has resorted to firing employees and immediately escorting them from corporate buildings. The problem is that some of those fired have been with the company for decades.

China’s GDP is doubling every 8 years. By comparison, India’s GDP is doubling every 12 years.

How long can China’s growth rate in exports, investments, and savings exceed its GDP growth rate?

According to yesterday’s Federal Reserve data, foreign central banks purchased $12.749 billion of Treasury and agency debt in the week ended August 10. It was the biggest week of buying by central banks since the week ended May 25.

Venezuela’s Hugo Chavez: “For no one should it be a secret, neither is it a secret, that the greatest threat that the world faces today is the government of Mr. Danger, Mr. George Bush. That is the biggest threat that the planet faces today.”

Pork spending is alive and well in the Bush administration. The highway bill contains 6,300 special projects that total $24 billion in pork or 8.4% of the total bill signed by the president.

India's industrial production expanded 11.7% in June, the fastest pace in 9 years.

Jesse Livermore: "Markets are never wrong, opinions are."

Energy and Mineral Resources Minister Vladimir Shkolnik stated Kazakhstan may join the Baku-Tbilisi-Ceyhan oil pipeline project within the next two months.

When will U.S. corporations accelerate capital expenditures within our borders?

In the latest edition of Business Week, according to SMR Research Corp. of Hackettstown, N.J., this debt-research firm collected data nationally on 2 million debt-financed purchases of owner-occupied homes from 2004 and more than 600,000 through roughly May of this year. It found that 95.1% or more of the purchase price was borrowed in 38% of all transactions so far this year. That was up from 34% of sales in all of 2004. Leverage is not a one-way street.

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

Unstable

8/11/05 Unstable

Governor Zhou Xiaochuan, The People’s Bank of China: “In comparison with an exchange rate regime of pegging to the US dollar solely, it can better reflect the competitiveness of RMB against major currencies, better absorb the impact generated by an unstable US dollar and moderate the fluctuations of RMB exchange rates at the multilateral level, safeguard the overall stability of China's foreign economic and trade environment and consequently promote the basic equilibrium of balance of payments as well as the sustained, coordinated and healthy growth of the Chinese economy.” This statement was part of a speech delivered yesterday. I view the word “unstable” to describe our dollar as being highly significant.

Dr. Franz Pick: "The fate of the nation and the fate of the currency are one and the same... It is the greenback which is unstable, and not bullion."

An explosion and fire at British Petroleum’s Chocolate Bayou petrochemical plant shook the Alvin area Wednesday night, the second incident to strike one of the company's Gulf Coast facilities in 24 hours. Earlier Wednesday, a unit at BP's Texas City refinery sprung a leak, causing the company to shut down parts of the plant for inspection. Crude remains above $64 a barrel.

If Fed Funds reach 4.25% by 2005 year-end, what will be the yield on 10-year Treasury bonds? What will be the rate on a 15-year fixed rate mortgage?

Chad Hudson: “The 8.3% annualized appreciation for the home refinanced during the second quarter experienced the highest annualized appreciation since at least 1996. The average annualized increase has been only 4.4% over the past 9 years.”

Alan Greenspan: "Deficit spending is simply a scheme for the 'hidden' confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights."

Richard Russell: "Gold will be around, gold will be money when the dollar and the euro and the yuan and the ringgitt are mere memories."

The Nikkei rallied to its highest level since August 2001.

China’s July trade surplus widened to $10.4 billion from $1.97 billion a year earlier.

Lakshmi Mittal, CEO of Mittal Steel: “ Looking ahead to the third quarter, we are expecting conditions to remain difficult."

How is it possible that Fannie Mae needs to “verify some 20,000 derivative prices” before it can file a re-stated 2004 annual report? That report will not be available until the second half of 2006. How many other public companies need to verify past derivative prices?

The Treasury Department and the CBO boasted that the U.S. federal budget deficit had declined to $52.8 billion in July from $69 billion a year ago. Through the first 10 months of 2005, the federal deficit is only $302.6 billion. How many times has our federal deficit exceeded this figure for 10 months? How many billions of dollars have been excluded from this year’s deficit number? In other words, what’s the real cash flow picture? In what way does our twin tower deficit picture make our dollar appear “unstable” to the Chinese government? When you purchase U.S. Treasury debt instruments, you are blessing our growing deficit position. Maybe you should check your mental faculties.

Turkish president Ahmet Necdet Sezer called the May 25, 2005 opening of the1768 km long Baku-Tbilissi-Ceyhan (BTC) pipeline connecting the Caspian and the Mediterranean Sea the new “Silk Road of the 21st century.” It has the capability to transport over 1 million barrels of oil a day. The biggest investor in the project is British Petroleum, and the U.S. provided substantial support. The project bypassed Russia. Soon thereafter, Uzbekistan gave notice to the U.S. to move out of the Karshi-Khanabad air base (K2) serving Afghanistan. The U.S. forces will continue to use Manas air base in Kyrgyzstan to back up its efforts in Afghanistan.

Today’s investor would be wise to become familiar with the oil-rich Eurasian crescent area. It comprises the Caspian Sea basin of Russia, Turkmenistan, Kazakhstan, Azerbaijan, and Georgia. In addition, knowledge of Kosovo’s mineral resources are a must. Specifically, the Trepca mining complex produces gold, silver, lead, zinc, and cadmium. In addition, Kosovo has 17 billion tons of coal reserves and 335 million barrels of oil reserves. Serbia and Albania also have resource potential. As the maximum oil extraction potential of Saudi Arabia is attained, the world’s focus will turn to the Eurasian crescent area. In place, is a strong alliance between China and Russia and between China and Kazakhstan. I should mention that tomorrow PetroChina has an important meeting.

While a report from the CommerceDepartment this week showed the national savings rate at 0%, EARN (EarnedAssets Resource Network), a San Francisco-based non-profit, shows that over 700 of the Bay Area's poorest households are saving at rates consistently
above 5%. EARN's mission is to demonstrate how better access to financial services and more equitable asset-building policy could permanently reduce rates of poverty. EARN offers its clients 401k-like matched savings accounts, used to save for a first home, higher education or a small business. EARN's clients, called Savers, are working-poor families in the Bay Area with an average household income of $17,000 who save on average $75 per month. EARN CEO Ben Mangan explained, "Our findings show that financial institutions regularly underestimate the capacity of the working poor to save and the
demand for financial services from this market."

Asarco LLC, a copper mining company hampered by a 40-day strike, filed for bankruptcy protection Wednesday, saying its decision was at least partially driven by environmental and other claims. Asarco, a subsidiary of the Mexican company Grupo Mexico SA, said Wednesday it filed for Chapter 11 protection in U.S. Bankruptcy Court in Corpus Christi, Texas, although its operations are headquartered in Tucson.
In addition to the strike, the company is facing about 95,000 asbestos-related personal injury claims. Two non-operating subsidiaries filed for Chapter 11 protection in April in Corpus Christi under special provisions of the bankruptcy code for asbestos-related liabilities, the company said.

Statistics

8/10/05 Statistics

The Bureau of Labor Statistics of the U.S. Department of Labor
reported preliminary productivity data--as measured by output per hour of
all persons--for the second quarter of 2005. The preliminary seasonally
adjusted annual rates of productivity change in the second quarter were:


1.2 percent in the business sector and
2.2 percent in the nonfarm business sector.


Productivity growth in the business sector reflected increases of 4.2
percent in output and 3.0 percent in hours. Output per hour increased
more in the nonfarm business sector because output grew more, 4.4
percent, and hours rose less, 2.1 percent, than in the business sector.

In manufacturing, the preliminary productivity changes in the second
quarter were:

4.1 percent in manufacturing,
3.8 percent in durable goods manufacturing, and
5.0 percent in nondurable goods manufacturing.

Manufacturing productivity grew 4.1 percent in the second quarter as
output increased 1.2 percent and hours declined 2.8 percent (seasonally
adjusted annual rates). Output and hours in manufacturing, which
includes about 13 percent of U.S. business-sector employment, tend to
vary more from quarter to quarter than data for the aggregate business
and nonfarm business sectors.

Unit labor costs rose 1.3% in the second quarter after a 3.6% rise in the first quarter. More importantly, real hourly compensation fell 0.6%, and that fact bodes poorly for buoyant consumer spending in coming months.

Ursula K. Le Guin: “Legends of prediction are common throughout the whole Household of Man. Gods speak, spirits speak, computers speak. Oracular ambiguity or statistical probability provides loopholes, and discrepancies are expunged by Faith.”

According to the Financial Times, the basket of currencies to which the yuan is now pegged include the U.S. dollar, the yen, the euro, and the South Korean won as the dominant currencies as well as the Singapore dollar, U.K.'s sterling, the Malaysian ringgit, the Russian rouble, the Australian dollar, the Thai baht and the Canadian dollar.

According to Bloomberg, Japan's currency is up 2.3 percent from a 14-month low on July 20 as reports show rising factory production, a seventh week of net purchases of Japanese equities by foreigners and higher government forecasts for investment and consumer spending. The Nikkei 225 Stock Average rose to a 15-month high today.

The Economic Fractalist: “The higher order multi-yearly fractals represent very
fundamental and powerful macroeconomic consumer saturation levels- too
much debt, too much forward consumption, paying relatively too high a
price for assets based on weekly wages and no real long term job
guarantee in a world replete with overcapacity.”

Before investing in the U.S. auto parts sector, one might consider a statement reported by Dow Jones. GM is slated to buy $1 billion worth of auto parts from India in 2008, up from $120 million this year. The company anticipates savings ranging from 15% to 30% with quality on a par.

The new bankruptcy law takes effect October 17. How many public companies will file for Chapter 11 over the next 9 ½ weeks?

David Lerach, chief economist at the National Association of Realtors: “The housing market is probably close to a peak right now in terms of sales activity, but there is tremendous momentum. Sales are expected to coast at historically high levels into next year, but they will trend slightly downward.” Lerach might take a closer look at the advertising commitments now being prepared by companies within the industry, such as, Countrywide. Those commitments for 2006 are being cut by 20% or more. I pay more attention to what people do rather than what is said.

It has been suggested by some oil economists that China’s demand for oil is on the downswing. If that were the case, then China’s long-term energy expansion plans would be in a cooling period. Let’s take a closer look. Calgary-based Enbridge operates the longest crude oil pipeline in the world from Alberta to Illinois. The company proposed a $2.5 billion oil pipeline across the Rockies to a deep-water port on the West Coast. This would enable oilsands crude to be exported to a variety of new Asian markets. The new pipeline would transport 400,000 barrels per day of which PetroChina would take 200,000. Extracting crude from oilsands and then transporting that crude is an expensive proposition. It gives a clue as to where companies believe the price of crude is headed over time. It gives a further clue as to the extent a country will go to in order to satisfy long-term crude needs.

According to Coordinating Minister for the Economy Aburizal Bakrie, Indonesia, Southeast Asia's sole member of OPEC, will be a net oil importer in 2005.

According to MarketWatch, with interest rates again moving higher, the volume of mortgage applications as tracked by the Mortgage Bankers Association slipped 0.9% in the week ended Aug. 5 compared to the prior week. The seasonally adjusted decrease reflected a 3.3% drop in refinancing applications, with the number of applications for mortgages to purchase homes gaining by 0.9%. Refinancings accounted for 40.9% of total applications last week, down from 41.7% a week earlier, while the proportion of adjustable-rate mortgages rose to 29.7% from 28.5%.

Herbert Asquith: “The War Office kept three sets of figures - one to mislead the public, another to mislead the Cabinet and the third to mislead itself.”

The United States relies on foreign oil to meet 60 percent of its daily demand of almost 21 million barrels. Gasoline use accounts for 2 out of every 5 barrels consumed. With China, India, and Japan competing for foreign oil, the chances are more than remote that the U.S. can depend on foreign oil reserves in the future to the extent that it does in the present. As the transportation of oil from distant lands becomes more affordable for developing nations, competition for reserves intensifies. As the value of the yuan increases, China's ability to cushion added costs of transportation becomes a reality. It’s more than a matter of price. Focus on potential supply as well as the currency accepted for payment.

Auto Manufacturers And Airlines

8/9/05 Auto Manufacturers And Airlines

There is a revised economic forecast making the rounds. It goes like this. Recent auto incentives are driving consumer spending. Auto manufacturers sold vehicles at a 20.9 million annual rate in July, and this spurt in sales will drive inventory rebuilding and the latter will create more GDP growth. More growth will generate higher interest rates. Goldman Sachs stated the FOMC will raise Fed Funds to 5% by the middle of 2006. Freddie Mac is forecasting 30-year mortgages to carry a 6.30% interest rate next year. Meanwhile, unit labor costs and inflation are both estimated to approximate 2.9%.

In my view, it would be nonsense to simply focus on auto incentives and to ignore the troubles confronting the airline industry. There are large airlines, such as, Delta and Northwest, suggesting they might need to file for bankruptcy protection. Let’s examine the Northwest situation and its impact on their employees. A government order keeping 900 Detroit area Northwest Airlines employees on the job expires at 12:01 a.m. on August 20. Northwest is Michigan’s most important airline, with 8,800 employees and nearly 1,200 flights per day in and out of Detroit Metro Airport. According to the Aircraft Fraternal Association, the state of Michigan, and Northwest Airlines, company-paid health care for striking employees lasts until the end of August. Striking employees are not eligible for unemployment in Michigan. Neither are employees who are locked out of their jobs. Workers would be eligible if Northwest permanently hires its replacement workers and terminates employment for its union mechanics. In that case, Northwest employees lose the right to their jobs but could be reinstated as vacancies are available, if there is an agreement that ends the strike. Northwest proposes to cut nearly half of its more than 4,000 mechanics, nearly all aircraft cleaners, and ask the mechanics to take a 25.7% cut on their average $70,000 annual salary. In all, the airline wants the mechanics union to give up $176 million a year.

Escalating jet fuel prices have taken a heavy toll on the airline industry. Escalating diesel fuel prices are impacting the trucking companies and the ability of truck stops to retain their profitability. The media pretty much focuses on record gas prices at the pump. There is no question that record crude prices are leading the way to higher inflation and to higher trade deficit numbers. This winter consumers will be complaining about the pump prices as well as heating oil prices and the cost of natural gas.

It’s the little guy who gets hurt the most. Sure, the value of the average individual’s home has risen sharply over the past five years; however, salary and wages have risen at a most disappointing rate during this same time period. It has been shown that most jobs in our country are generated by small businesses. The SurePayroll Small Business Scorecard tracks the health of small businesses. There has been only one down month in hiring in the past 16 months. That fact is quite misleading. As of the end of July, the SurePayroll Hiring Index showed annual growth in small-business hiring at just under 0.6% for all of 2005. In fact, the Midwest is down 2.5%, and that’s after the auto incentives.

Crude is trading around a record $64 a barrel.

The 10-year Treasury bond is yielding about 4.42%.

The Xinhua News Agency reported that 4 Chinese airline companies have agreed to buy 42 Boeing 787 jets for a total of $5.04 billion.

The dollar traded at a 2-month low versus the euro and the Swiss franc.

Whirlpool is bidding $20 a share for Maytag.

According to the AP, as of Monday, at least 1,834 members of the U.S. military have died in Iraq since March 2003.

There is increasing concern about a possible attack on Saudi Arabia as well as Iran’s nuclear program.

Women's Wear Daily cited unnamed sources in reporting that Bon-Ton Stores and Cerberus Capital Management might team up on a possible bid for Saks. The stock rose almost 10% to close at $22.10. The paper mentioned that other interested parties have also been meeting with managment.

According to the Wall Street Journal, Ford could cut 20% to 25% of its current sales and marketing staff in North America.

Signposts

8/8/05 Signposts

The number of listings of single-family houses in 17 towns in Greater Boston was up 25 percent or more last week compared with one year ago. And those houses are taking longer to sell. In four towns, listings increased 50 percent or more. Needham, Framingham and Milton are among the towns with the highest increase in listings that have also been seeing longer sales times, according to the Multiple Listing Service Property Information Network Inc. of Shrewsbury. Of the towns included in MLSPIN's Greater Boston data, 24 towns that have seen the time it takes for a house to sell increase also have seen the number of listings jump.

Nearly 3,000 home and condo owners in Santa Clara County, most of whom bought in 2000 and 2001, are holding properties not worth what they paid -- all during what is likely the nation's most robust housing boom with home prices leveraged by historically low interest rates and liberal mortgage-lending practices. The overwhelming majority of Santa Clara County homes that lost value this year are those whose owners paid well more than $1 million. But that is not universally true. Homes sold to people considered middle-income buyers in the South Bay -- those with purchase prices well below $1 million -- show up in sizable numbers on the assessor's list from every city from Morgan Hill to tony Monte Sereno. It's impossible to know if buyers today, especially those outbidding others and forking over well more than list price, are setting themselves up for the same kind of correction in the future. But the data is a grim reminder that Silicon Valley home values are not immune from the forces of economic reality. Even years after purchase, many valley home values rest hundreds of thousands of dollars and even millions of dollars below what their owners paid. The findings are based on a Business Journal analysis of more than 3,200 public records from the Santa Clara County assessor's office. The records reflect all of the single-family homes and condos in the county where the assessor believes current market value is less than what a homeowner paid.

Steven Rattner: "Over the past 30 years, the share of income going to the highest-earning Americans has risen steadily to levels not seen since shortly before the Great Depression."

In midyear 2000, U.S. corporate profits were 7% of GDP. In midyear 2005, they had risen to 11%.

Over the weekend, a British newspaper suggested that Cisco was considering the purchase of Nokia. I am far from being an expert in telephony, but I don't see the rationale for such a move. Cisco's presence is in the area of IP communications, and they have more than 20,000 customers worldwide within this arena. On the other hand, Nokia is the world's largest manufacturer of mobile phones, and the 2005 market volume for such devices is estimated at 760 million.

Denmark's A.P Moeller-Maersk and UK utility Centrico Plc purchased the North Sea oil and gas interests of Kerr-McGee for $3.5 billion. The price equates to $10.70 per barrel. I raise this point because a couple of weeks ago I did an anlaysis of a projected buyout price for PetroKazakhstan. You might recall that I took discounts off a price of $10 per barrel for PKZ's reserves. Using this latest price of $10.70 per barrel, I am raising my estimated buyout value for PKZ to $58 a share.

Crude hit an intraday record of $62.90 a barrel.

In the correction department, I stated that, in the Spring of 2000, EPNY traded for $220 million per share. It
should have read $220 per share.

According to Forbes.com, Yahoo Inc. is in advanced talks to buy about 35% of Alibaba.com, China's biggest homegrown e-commerce company, for almost $1 billion. Alibaba operates Taobao.com, an online auction site, and Alibaba.com, an online trading site.

John Hussman: "The 3.5% annual growth in employee wages and salaries over the past 5 years is the lowest on record since 1947. That containment of labor compensation has been the primary force behind the recent growth of corporate profits... the ratio of corporate profits to employee wages and salaries has never been higher."

Toyota sold more than 50,000 hybrids in the United States last year and expects to sell 600,000 early in the next decade.

Since invading Iraq in March 2003, at least 1,825 members of our U.S. military have been killed.

The yield on the benchmark 10-year note may reach 4.63 percent by year-end from 4.39 percent last week, according to the median estimate of the 22 firms that trade U.S. government securities with the Fed.

Rep. Ron Paul: " The president’s press secretary called the CAFTA vote “a real victory for the American people.” The problem is the vast majority of Americans have not even heard of CAFTA, and those who have overwhelmingly oppose it. CAFTA was conceived and created by corporate interests, and to claim otherwise is preposterous. The CAFTA vote had nothing to do with the American public, or even trade policy per se. CAFTA was driven by politics and nothing more. Multinational corporations and political globalists share the same goals, namely the centralization of political power in international bodies and the diminution of national sovereignty. What we witnessed last week was not just the selling of votes, but also a sellout of American control over our own trade regulations."

About 100,000 South African gold miners launched their first industrywide strike in 18 years Sunday to demand higher wages, the country's main mining union said.

The yield on the benchmark 10-year note may reach 4.63 percent by year-end from 4.39 percent last week, according to the median estimate of the 22 firms that trade U.S. government securities with the Fed.

Looking Back And Looking Forward

8/7/05 Looking Back And Looking Forward
Last week brought back memories. Many of you might not know a small company called E.Piphany of San Mateo, California. A few days ago, the company agreed to be purchased for about $4.20 in cash or approximately $329 million by SSA Global Technologies. In the Spring of 2000, this same stock sold for about $220 million per share. Why do I bring this up? Sometimes I suggest investing in a company for as much as a five-year period, and in the first few years, the movement of the stock can be as exciting as watching paint dry.
I lived in Jackson, Wyoming for several years. It’s not too close to anything but moose and buffalo and the Tetons and Yellowstone. If you are willing to drive some mountainous terrain, then you arrive at a thriving metropolis called Pinedale. It’s in the middle of nowhere--- except the Pinedale Anticline area. That is the heart of Wyoming’s Green River Basin and its oil and gas reserves. That brings me to the Spring of 2001. I suggested a 5-year investment in Ultra Petroleum, a company with large holdings in the Pinedale Anticline area. The stock traded on the American Stock Exchange for $3. In the Spring of 2003, it was trading at $4. My friends were growing tired of watching paint dry. I reminded them this was only 2 years in a 5-year period. Oil and gas are now in the headlines and prices have improved quite a bit over the last few years. So has the stock. It’s now $38.
Why do I bring that up? Palatin trades on the American Stock Exchange for $2+. I suggested it for a 3 to 5 year investment. It’s market cap is only $100 million but its NeutraSpec, which diagnoses equivocal appendicitis, is marketed and distributed by Mallinkrodt and has seen increasing acceptance with rising yearly revenues and cash flow. Palatin is in phase 2 clinical trials with PT-141 for the treatment of male and female sexual dysfunction. The company has a potential drug discovery platform based on protein conformation. In the background, is a drug to assist in weight loss. All of these medical advances have been with little or no side effects. I don’t know where Palatin will trade in 2008 or 2010. I felt confident in Ultra’s management and I feel the same way with Palatin’s. Maybe the next two years will be like watching paint dry. That’s okay with me. As an investor, I believe time is on my side.

Barbara Johnson: "Patience is the ability to idle your motor when you feel like stripping your gears."
On Friday, the contract for delivery of natural gas in January closed at $9.917 per million Btu.
According to Mike Burk, August is typically weak during the first year of the presidential cycle.
Julian D.W. Philips: "The use of the $ as a global reserve currency is falling and may well prove to be a heavy source of inflation inside the States in the future. For this reason the Fed will likely keep increasing interest rates."
In the last two weeks, OPEC increased oil production by 300,000 barrels a day to around 30.4 million barrels per day. During this same time period, there have been operating problems at a number of refineries.
According to the most recent AP-Ipsos poll, only 48% of Americans surveyed now say they think President Bush is honest, while 50% say he is not. Bush’s job approval rating is 42% and his approval on handling Iraq is at 38%. The poll of 1,000 adults was conducted August 1-3. Bush maintains "we are at war." If that is so, why would the commander-in-chief go on a 5-week vacation while troops are fighting in a foreign land and a growing number are killed each week?
When making investments, nuances can prove significant. In the case of CNOOC and Unocal, the heads of the Chinese government never fully endorsed the acquisition proposal and never came out in print with an endorsement. Now let’s turn to Chinese-Kazakhstan relations. Kazakhstan has remained the largest border trade partner of China’s Xinjiang Uygur Autonomous Region for a continuous 12 years. Helgus, the biggest land port in West China, is also China’s largest land port to countries of Central Asia and Europe. According to an official with the Helgus port, construction of a Sino-Kazakhstan international trade center kicked off Friday in the Helgus port, signaling a new era in bilateral trade between China and Kazakhstan. It represents a free port city with functions of investment, trade, financial service and tourism. In my view, this is further evidence of the growing likelihood that PetroChina will be the winning bidder for PetroKazakhstan. The Chinese government is very much in favor of advancing bilateral trade with Kazakhstan. The new pipeline will further that endeavor.

You Tell Me

8/6/05 You Tell Me

During the last three months, the equity indices have had a respectable rally. During this timeframe, the yield on 10-year Treasury bonds has risen from 3.88% to 4.39%, a jump of 13%. Any way you cut it, an increase of 51 basis points or one-half a percentage point is not something to ignore. It's not chopped liver. Higher interest rates do not provide ham sandwiches and they are quicksand to both the housing industry and equities. Maybe Fed Funds will rise to 4.25% by year-end, as suggested by Lehman. The point is they are going higher, and looking back, you will realize the Fed broke the back of the housing mania. Rather than hiring in home construction, there will be layoffs. There will be layoffs in the mortgage lending business. Real estate brokers will leave because it will become more difficult to earn a living. Rather than focus on payrolls in July, look out six months. Look out nine months. If you look past your nose, the thinking gets clearer.

Let's look at the gains in the services sector for July: retail 50,000; professional and technical 23,000; financial 21,000; food services 30,000; healthcare 29,000; and construction 21,000. Wait just a minute. Are these gains for real? Are they simply seasonally adjusted job gains? The BLS wouldn't pull a stunt like that. Or would they?

Let's take a closer look at the gains over the past 12 to 24 months. Over the past 12 months: credit intermediation 93,000; real estate 54,000; food services 262,000; and healthcare 256,000. Over the past two years retail has gained 352,000 jobs. You tell me. If the economy slows to 2% growth or less, how many of these seasonally adjusted added jobs will be flushed down the toilet?

Morgan Stanley's Richard Berner: "Flow of funds data from the Fed show that property values for the household and non-profit sector increased by 14.4% in the first quarter of 2005 from last year. If the current price is sustained for the year, the value of these properties will have risen by $2.7 trillion this year, more than 20% of U.S. GDP." Might we consider that real estate prices did in fact peak in this year's first quarter? Looking back in a few months, I believe we will find that this is exactly what has taken place. According to data from the California Association of Realtors, the unsold inventory index stands at 2.7 months versus 1.7 months in the year-ago period.

The EquiTrend tool measured overall brand equity for more than 1,100 brands in 35 categories based on five key measures: familiarity, quality,purchase intent, brand expectations and distinctiveness. In 2005, ReynoldsWrap(R) Aluminum Foil was ranked as the No. 1 brand in overall brand equity,followed by Ziploc(R) Food Bags, Heinz(R) Ketchup, Hershey's(R) Milk ChocolateCandy Bars and Chiquita(R) Bananas.

U.S. consumer credit rose in June at an annual rate of 8.2% or $14.5 billion. This represented a sharp reversal from May's revised drop of $1.2 billion.

The oil business is changing in Venezuela. Companies will be required to create joint ventures where state-owned Petroleos de Venezuela SA. has majority ownership or else. The 2001 Hydrocarbons Law decreed by Chavez will go into effect-- finally.

Amazon.com is exploring a possible entry into the music and video download business, music industry executives said Friday.

It is interesting that tax revenues are rising in 2005. It is even more compelling that interest on the U.S. debt has risen 13% over the past year, and this is during a period of historically low interest rates. Should rates rise another 75 basis points by year-end, interest on the U.S. debt will become a significant stumbling block. It is not a coincidence that the U.S. dollar index has resumed its decline. Even though the rate on 2-year Treasury bonds reached their highest yield since July 2001, the U.S. dollar index declined 1.4% this week. This should be highlighted by investors.

Leveraged speculation can lead to unalterable and dire consequences.

Doug Noland on April 20, 2001: "For the Greenspan Fed, it has come down to one simple (John Law-style) objective: at all costs, entice the speculative "Hot Money" to remain in "The Game," while attempting to encourage enough additional financial sector leveraging to maintain general systemic liquidity. The truth of the matter is that a system of "managed liquidity" functions with all the appearances of a miracle throughout the credit-induced bubble expansions, while instilling great (albeit, false) and increasingly entrenched confidence in both the system and monetary authority (as well as silly notions of New Paradigms). The menace of illiquidity, however, is always lurking around the bend as the downside brings the harsh reality of faltering asset markets, collapsing leverage, unavoidable illiquidity, and a wrecking ball process of shattering confidence."

Late Friday, Berkshire Hathaway released its second quarter results. The release indicates a marked-to-the-market loss of $600+ million in currency transactions. There are always little pricks who attempt to take cheap shots at Buffett. My memory is pretty fair. Buffett is the only investor who has produced 20%+ annualized returns for 40 years. Over the long-term, I would not want to place my money on the dollar. When the final tally is announced, I predict Buffett's Berkshire Hathaway will generate a handsome return on its currency transactions.

With crude closing at $62.31 a barrel, we can expect to pay record prices at the pump for the remainder of August. Before you know it, we will be going into winter. Heating oil is at $1.73. We can expect to pay record prices for heating oil in the coming months. Of course, the Fed is not concerned about inflation. Then again, maybe their heads are in an undesirable place.

Yesterday, China exported Baidu.com, a search engine company, to our financial market. I thought China was exporting deflation. Baidu's IPO was priced at $27. It closed the day at $122.54. Now that's a ham sandwich!

John Hussman: "Maybe the strong advance-decline line isn't a picture of uniformity at all, but is being driven higher because investors and institutions are chasing performance in speculative stocks. Maybe the behavior of the A-D line has gotten mixed up with a small-cap “blowoff.” "

As interest rates rise, P/E ratios decline.

For its first 30 years, Microsoft has been highly successful and has grown to the world's number one software company. Considering their product lines lack innovation and basically are clones of products produced by other companies, such as, Apple (Windows), Netscape (browser), Lotus (office notes), Sony (X-box), Oracle (database), Google (search) and others, I find it amazing that Microsoft is feverishly filing patent applications. So far, 4,000 patents have been received and another 3,300 are pending. Meanwhile, its shares traded at a nine-month high on Friday.

Bill Gates: "I think blogging is super-important, and we've got to do a lot more software. The phenomena for us is we've got in beta this MSN Spaces thing, and it lets you leverage everything you do around Messenger - that's your buddy lists and those relationships - to set up blogs, and who has access, and who gets notified." I guess we should add Google's blogger software to the growing clone list.

Rep. Ron Paul: “I’m very concerned that the Patriot Act could be used to justify surveillance or intimidation of individuals solely because of their lawful political activities,” Paul stated. “The Act defines terrorism so broadly that legitimate protest or other political action could be chilled. For example, a scuffle at an otherwise peaceful pro-life demonstration might allow the federal government to label the sponsoring organization and its members as terrorists. Similarly, you could be placed under federal surveillance if you belong to a gun rights group that a future administration doesn’t like.”

Ring The Register

8/5/05 Ring The Register

Puru Saxena: "America's economy is now worth US$ 11.2 trillion. Over the past 5 years only US$ 1.6 trillion was added to the economy while credit market debt rose sharply by US$ 7.6 trillion! In summary, it now takes a record amount of debt to produce one dollar of economic growth. America's debt to GDP ratio has ballooned to over 350% when compared to "just" 120% in the 1970's."

Microsoft Corp. said after Thursday's closing bell that it has named Kevin Turner as chief operating officer, effective Sept. 8. Turner previously served as president and chief executive of Sam's Club, a division of Wal-Mart Stores Inc. Turner, 40, will lead the company's sales, marketing and internal information-systems groups and report to Chief Executive Steve Ballmer. He's getting a pay package worth up to $33.4 million.

A slight downturn in economic expectations and a drop in the strength of personal finances has American consumers continuing to be unenthusiastic about the economy, among those surveyed by the August RBC CASH (Consumer Attitudes and Spending by Household)Index. The telephone survey of 1,000 individuals taken across the U.S. this week reflected increasing pessimism about the economy and investing, which first surfaced in the July RBC CASH index. The RBC CASH Index for August dropped again to a new low following a drop in July that seemed triggered by the London bomb attacks and increasing oilprices. But, there is a bright spot: consumers feel good about their jobs. Confidence in job security, traditionally one of the most robust and resilient indicators of consumer confidence, rebounded from a sharp drop in July. The RBC Jobs Index stands at 114.6, up significantly from last month's 109.6 and, looking forward to the next six months, a majority (52%) now feel it is unlikely that they, someone in their family or someone they know personally will lose a job as a result of economic conditions. "If people feel good about their jobs, they will feel good about theireconomic futures," said Vince Boberski, chief economist for RBC Dain Rauscher."I see hope in this job index and I think this confidence in jobs could begin to translate into general consumer confidence later in the year." "But, the continued weakness in the RBC CASH Index makes us more cautious about projections for the economy into 2006 and beyond," Boberski said. Outside of jobs, the RBC CASH Index survey found consumers feeling pessimistic for the second month in a row. The index for August stands at 72.6, roughly unchanged from July's 20-month low. While opinions about the current strength of local economies are unchanged from July, expectations for the next six months declined somewhat in August; the RBC Expectations Index declined marginally in August, and now stands at 32.2 (compared to 34.4 inJuly). Fifteen percent now feel their local economy will be somewhat weakersix months from now, compared to 11% in July. Overall, one-in-five (20%)believe their local economy will be weaker in the future. In addition, Americans now rate their current personal financial situationas significantly weaker than one month ago. One-in-five (21%) rate theircurrent finances as strong (compared to 24% in July). Coupled with this is a slight increase in the percentage of Americans who rate their personalfinances as weak (28% in August, compared to 26% in July). This trend in personal finances is clearly felt in the RBC Current Conditions Index, which stands at 85.8 (down from 87.0 in July) and the RBC Investment Index, which stands at 78.2 (down from 81.3 in July). The decline in personal financial strength is substantial enough to offset slight gains among those comfortable with making household purchases (major and otherwise), increased feelings of job security, and a small rise ininvesting confidence.

The UK cut their ST benchmark rate a quarter percentage point from 4.75% to 4.5%. Meanwhile, the country's broad money supply growth was a year-over-year rate of 11% during June of this year.

"So far this [oil] market resembles kids taking a dare to walk through a cemetery at night," said James Williams, an economist at WTRG Economics.
"Every sound is blown out of proportion and the crack from someone stepping on a twig can send the whole group running for the safety of a street lamp," he said. Crude is once again approaching the $62 a barrel level.

Would there be a large outcry if a state-controlled Chinese company made a proposal to buy a U.S. tobacco company?

At $8.65, September natural gas is trading at its highest price since November 2004.

Earlier in the week, I suggested a hedge ratio of going long 1.3 shares of Chevron and shorting 1 share of PetroChina. The disparity of the two market caps has narrowed to Chevron's $127 billion and PetroChina's $154 billion. I believe, in time, that ratio will move in favor of Chevron. Meanwhile, there are some who may wish to ring the register. Currently, the hedge trade is + 2 1/2 points in the Chevron long position and + 6 1/2 points on the PetroChina short sale.

According to SDI/Weather Trends Inc., this July was among the 14 hottest Julys since 1985. Meanwhile, yesterday it was 90 degrees in Bellevue, Washington.

Did you read the August 1 online edition of the journal Proceedings of the National Academy of Sciences where a carbon nanotech-laser treatment destroyed cancer cells without damaging healthy tissue? Stanford University scientists developed the treatment.

According to J.P. Morgan, this year’s global issuance of collateralised debt obligations (CDOs) was running at $123 billion by late July, sharply up from last year’s total in the same period of $78 billion.

Commander Eileen Collins looking at Earth from Discovery:"The atmosphere almost looks like an eggshell on an egg, it's so very thin. We know that we don't have much
and we need to protect what we have."

Danny McGoorty Irish Pool Player: "I have never liked working. To me a job is an invasion of privacy."

My math skills need a refresher course. I was wrong about the July payrolls report. I wasn't even close as 207,000 jobs were added to nonfarm payrolls, the Labor Department said Friday. The unemployment rate remained at 5%. Payrolls in May and June were revised higher by a cumulative 42,000. Average hourly earnings rose by 6 cents, or 0.4%, to $16.13.The average workweek was steady at 33.7 hours in July. Service-producing jobs rose by 203,000, including 50,000 in retail, the most in more than five years. Factory jobs fell 4,000. How many retail jobs do you need to hold at one time to make the mortgage payment? I'll take a closer look at this report and maybe discuss it a bit more tomorrow. In the meantime, I suggest keeping cool and avoid the economic gibberish on the TV.

Trials And Tribulations

8/4/05 Trials And Tribulations

King Pharmaceuticals (KG) and Palatin Technologies, Inc. (PTN) announced yesterday that they have initiated patient enrollment in two double-blind, placebo-controlled Phase IIb clinical trials of PT-141 in patients with erectile dysfunction (ED). The main objectives of these studies are to further evaluate safety, treatment duration, patient populations and a range of doses that will be incorporated into Phase III pivotal trials. PT-141 is a melanocortin agonist that King and Palatin are jointly developing for the treatment of male and female sexual dysfunction. The first Phase IIb clinical trial will evaluate the safety and efficacy of PT-141 in 560 non-diabetic patients suffering from mild to severe ED. The second clinical trial will similarly evaluate 265 diabetic patients with ED. Both clinical trials will involve an "at home" three-month treatment period conducted at approximately 35 clinical trial sites throughout the United States. Additionally, the clinical trials will evaluate a range of PT-141 intranasal doses between 5 mg and 15 mg. "The initiation of these two double-blind, placebo-controlled Phase IIb clinical trials is a major milestone in the development of PT-141. We believe the data from this extensive Phase IIb program will allow us to confidently select doses, end points and treatment periods for use in the design of the pivotal Phase III trials," commented Dr. Carl Spana, CEO and President of Palatin Technologies. The non-diabetic Phase IIb clinical trial is scheduled to conclude in mid-2006, while the conclusion of the diabetic Phase IIb clinical is scheduled to follow in the second half of 2006.

Yesterday, the Institute for Supply Management reported that its index designed to measure the economy's service-sector activity fell to 60.5 in July. The consensus forecast was looking for something around 61.0, and the results compared with a June result of 62.2. One should keep in mind that our economy is essentially services based rather than manaufacturing based Importantly, there was a 10.5-point surge in the index's prices-paid component. It rose to 70.3, versus June's reading of 59.8.

David Taffi: "The next time you pull out a Federal Reserve Note with an incremental cost of production near zero and the electronic version cost of absolute zero, remember what side of the trade you are on. They want inflation. They need inflation. We will have inflation. "

Applications for U.S. home mortgages fell last week as interest rates on 30-year loans rose more than in any week since March, industry group figures showed on Wednesday. The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity fell 0.3 percent in the week ending July 29, adding to the previous week's 5.8 percent loss. The four-week moving average is down 3.2 percent.

General Glut: "Maybe making new houses and home improvements out of gingerbread is a good strategy going into the future. At least we'll be able to eat them then, because we might very well have to. There won't be any income sources left to buy food."

As a percentage of personal disposable income, household debt is at an all-time high, while the savings rate has dropped to 0%. That combination spells trouble.

Despite inventory of crude oil being 8% above year-ago levels, crude sits just above $61 a barrel this morning.

Since we invaded Iraq in March 2003, at least 1,821 members of our U.S. military have been killed.

India consumed about 33 billion cubic yards of natural gas in 2002, and consumption is forecast to rise to 44 billion in 2010 and 60 billion in 2015.

Almost unnoticed, France's Total announced Tuesday the purchase of a small Canadian oilsands company Deer Creek Energy Ltd for $1.35 billion. I wonder whether Total will be a bidder for PetroKazakhstan. On a comparable basis, PKZ offers much more value than does Deeer Creek Energy.

For August, Wal-Mart is projecting a 3 to 5 percent same-store sales increase.

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."

One Year Ago

8/3/05 One Year Ago

The July payroll numbers are released this Friday. The average estimate of economists is a gain of 180,000 jobs. Do you remember last July? The gain was 32,000, and it was the worst jobs report since December 2003. Services added a net 14,000 jobs, and this was after a gain of 14,000 in the health sector and a gain of 42,000 in the professional sector, of which most were administrative (low paying) and the remainder largely temp professional jobs. What happened was simple. The month was hit with negative bias factors mixed with negative revisions. Could this combo happen again this Friday? I wouldn't bet the ranch on 180,000 jobs and I wouldn't look for much improvement in wages and hours worked. Workers have been taking it on the chin for several years. So how is it that U.S. consumer spending grew 0.8% in June while incomes rose only 0.5% and the personal savings rate fell to 0%, the lowest since October 2001? Freddie Mac has the answer. U.S. homeowners took cash out of their equity in their homes in 74% of the mortgages refinanced in the second quarter, the highest percentage since the end of 2000. Equity cashed out rose to $59 billion in the second quarter from $43 billion in the first quarter. Freddie Mac expects homeowners to take out $162 billion in 2005 after cashing out $140 billion in 2004. Homeowners cash out equity when they take out a larger loan balance when they refinance. As home prices escalate and mortgage rates remain at historically low levels, the ability to cash out is enhanced.

David Campbell: "Discipline is remembering what you want."

In the June quarter, Delta Airlines experienced a $385 million increase in fuel expense over the prior year's quarter. This amounted to an increase of 57.5%. Interestingly, the company's market cap is $363 million. The company stated that "every 1 cent increase in the average annual cost per gallon of jet fuel results in approximately $25 million in additional mainline fuel expense per year." In sum, the price of fuel matters a great deal to stockholders in airline companies. You had better hope oil does not rise much higher than it is presently.

UTStarcom, a wireless and network supplier, is finding business conditions pretty rough in China. The company experienced a sharp second quarter decline in sales in China, incurred a loss, and stated that 3rd quarter sales would be approximately $100 million below Wall Street estimates.

With PetroChina stock gapping up to the $94-$95 level, what chance is there for ONGC to make PKZ an offer it can't refuse? Maybe with a little luck, PKZ holders will receive a healthy share exchange offer from PetroChina and then the arbitrageurs will be wanting to short PTR stock. We can make it on both sides-- with a little luck. I should also mention that Chevron should take a long look at buying PKZ. Chevron's joint venture in Kazakhstan would fit beautifully with PKZ's operations. Double digit free cash flow growth should make a healthy incentive for potential buyers.

I will ask this question once again. If housing is so strong, then why have lumber prices declined in 2005?

Will the UK lower interest rates this week?

Since we invaded Iraq in March 2003, over 1,800 members of our Armed Forces have been killed.

According to the Moscow Times, Google may open a center in St. Petersburg, Russia and hire 3,000 employees.

Crude is trading at $62 a barrel early Wednesday morning.

William James: "In the practical use of our intellect, forgetting is as important as remembering."

If corporate profits in the third and fourth quarter grow by double digits, then there is a great likelihood that the yield curve will cease being flat. That may prove a problem for the housing market.

Uncommon Comparative Values

8/2/05 Uncommon Comparative Values

Every year I mention a situation which holds, in my view, uncommon comparative value. In 2005, when Harley Davidson’s market cap exceeded GM’s, I suggested buying GM and shorting Harley. Then I suggested buying GM, Ford, and Harley Davidson and shorting DaimlerChrysler. Today, we have another uncommon comparative value. Chevron’s market cap is $123 billion and PetroChina’s is $163 billion. Chevron is more attractive based on its earnings per share, book value, depth of management experience, technology, diversified asset base, dividend yield, and the strength of its balance sheet. There are only 8 days left prior to the Aug. 10 vote on the Unocal merger. That represents 8 days for arbitrageurs to short Chevron prior to the merger becoming effective. I do not believe this uncommon comparative value will last for a long time. You might consider buying 1.3 shares of Chevron and shorting 1 share of PetroChina. This strategy is not for the faint of heart. Just because we normally do quite nicely on these relationship trades doesn’t mean this will work out. However, I wouldn’t bet against it. Value normally wins out.

John P. Hussman: “Large capitalization breadth has glaringly failed to confirm the recent advance. The apparent strength in market breadth is little more than a speculative chase after small-cap momentum.”

In the first six months of 2005, China imported a net 400,000 bpd of oil products, according to Customs data, compared to 700,000 bpd in the year earlier period. For all of 2005, China’s Commerce Minister is estimating China’s demand for crude oil will rise about 6% from last year’s 6.2 million bpd; however, this year’s second half consumption will be only 1.2% above last year’s comparable period. Have you considered that, over the short-term, demand for oil products could in fact be slowing? Maybe crude at $61 a barrel is overpriced. Maybe over the long-term, demand for natural gas will grow faster than crude, and maybe natural gas is the place to have your investment dollars. If the price of crude does decline in the short-term, there is no question that the hot money in PetroChina will get burned and that investors in Chevron will weather the storm quite nicely on a comparative basis.

The June pending existing home sales index rose 3.6% from June 2004.

The July ISM Manufacturing Index rose to 56.6% from 53.8% in June. The new orders index rose to 60.6% from 57.2% in June. The production index rose to 61.2% from 55.6%. The employment index rose to 53.2% from 49.9%. The prices paid index fell to 48.5% from 50.5%. The surprising strength in this report was unwelcome news to the bond market, and the yield on the 10-year Treasury bond rose to 4.32%. Does anyone believe the yield will rise above 5% before year-end?

Fool’s gold is the Russell 2000. The p/e on this index is 30 times plus.

Next month the acquisition of Western Wireless by Alltel will become effective. About 140 Western Wireless workers will lose their jobs.

June construction fell for the fourth consecutive month, but on an annualized basis, the value of construction came in at $1.1 trillion or about 10% of GDP.

One might keep an eye on the Rydex Cash Flow ratio. It tells you how much cash was actually moved in or out of the fund.

The U.S. population is 295 million. Australia’s is 20 million. In June, the economy in Australia created 41,700 new jobs, and in the last 10 months, a total of 362,000 new jobs. Before you get excited about job creation in the U.S., you might take a peek elsewhere. It’s no wonder that, over the past three years, the strength in the Australian dollar has overwhelmed the performance (or lack of) of our dollar.

Risk Arbitrage

8/1/05 Risk Arbitrage

According to the current issue of Newweek, the Pentagon has developed a detailed plan in recent months to scale down the U.S. troop presence in Iraq to about 80,000 by mid-2006 and down to 40,000 to 60,000 troops by the end of 2006, according to two Pentagon officials involved in the planning who asked not to be identified because of the sensitive nature of their work. Their account squares with a British memo leaked in mid-July, report Senior Editor Michael Hirsh and National Security Correspondent John Barry in the current issue of Newsweek. "Emerging U.S. plans assume that 14 out of 18 provinces could be handed over to Iraqi control by early 2006, allowing a reduction inoverall [U.S. and coalition forces] from 176,000 down to 66,000," says the Ministry of Defense memo.

Lloyd Douglas: "If a man harbors any sort of fear, it makes him landlord to a ghost."

According to the Financial Times, CNOOC is struggling to keep its attempt to buy Unocal alive amid mounting concerns that political opposition and the US group's backing for a $17.3bn bid by Chevron might force the Chinese company to withdraw its $18.5bn offer. The state-controlled Chinese company is likely to make a decision within the next 48 hours, with an announcement expected as early as Wednesday or one week prior to the shareholder vote on Chevron's acquisition of Unocal.

The battle for control of Unocal can serve as an excellent learning experience for those wishing to engage in risk arbitrage. The way the process begins is often the way it ends. CNOOC was the first company to express an interest in acquiring Unocal. That interest surfaced in the beginning of 2005. It is hard to imagine that CNOOC waited until June 23 to go public with a specific proposal, and even then, it had contingencies. It's not enough to talk and dangle an interest. Maybe that influenced millions of Unocal shares to be purchased, and maybe the loss on those shares will serve as a lesson. I doubt it though. Greed has a way of overpowering rationality and clear thinking. I have never seen a company with so many experienced advisors produce so much hot air. The handwriting was on the wall for months. So few bothered to look with a dispassionate eye. That's why Unocal has been trading at a premium to Chevron's bid for over 90 days. Risk arbitrage is a good deal more complicated and sophisticated than buying and selling shares of GE, for example. It's not for the faint of heart, but it can be most rewarding. Unfortunately, most get burned out after only a few years. That's life in the fast lane.

Doug Firebaugh: "Usually a person has more faith in their fear than faith in the future."

For shareholders of PetroKasakhstan, the ineptness exhibited by CNOOC may serve as a blessing. PetroChina will not make the same mistakes, and their effort to acquire PKZ should be aggressive, focused, and timely. I would be more than surprised if PetroChina did not come out a winner. It should be quite a battle with ONGC. China going head-to-head with India.

Andre Gratian: "The Decennial pattern has an unblemished history for the past 125 years, and if history repeats itself, the Dow Jones industrials and the S&P 500 will be higher on December 31st, 2005, than they were on January 1st."

Back in the latter part of 2004 and just before Microsoft paid a $3 dividend, I had recommended cutting back on holdings in the company at $30 per share and above. This weekend Barron's wrote a bullish piece on Microsoft. I would continue to reduce holdings at $28 and above, and this equates to $31 and above the pre-dividend payment.

Douglas V. Gnazzo: "The greater the debt, the greater the potential demand for dollars to pay off that debt. Which is why I said that massive debt amounts to a massive synthetic short position against the dollar."

Saudi's King Fahd died. Crude oil climbed above $61 a barrel this morning.

Atkins Nutritionals made a bankruptcy filing.

Governments

7/31/05 Governments

Edward R. Murrow: “A nation of sheep will beget a government of wolves.”

In 2004, the state of Illinois was the nation’s leading soybean producer and also the number 2 corn producer as it accounted for almost 20% of the corn crop. Maybe you have been reading about the lack of rain in Illinois. The dry spell is the worst in 20 years, and it is stunting the soybean and corn crops. So what do our elected politicians in the House and the Senate do? They pass the energy bill, and within that bill is a provision that 7.5 billion gallons of ethanol must be added to the fuel supply annually. It doesn’t matter that ethanol producers presently receive tax breaks worth more than 50 cents a gallon. These elected officials never gave a thought to the supply and demand situation of corn when the weather impacts the crop. Why? Because these same elected officials are intent on getting re-elected. It doesn’t concern our citizenry that they are voting for individuals who are dead from the neck up.

Thick Nhat Hanh: “In order to rally people, governments need enemies. They want us to be afraid, to hate, so we will rally behind them. And if they do not have a real enemy, they will invent one in order to mobilize us."

Japan’s June exports rose 3.6% from a year earlier. The June unemployment rate fell to a 7-year low. June industrial production rose 1.5% from May. The Japanese economy has improved for three consecutive quarters. The most glaring problem has been the lack of consumer spending, which rose but a mere 0.1% in June versus June 2004, but in fact, declined 1.4% from May 2005. This cautious consumer spending has not been lost on the currency market as the dollar stands at 112.42 versus the yen. One might ask whether Japan is making a turn for the better and, at the same time, whether the American consumer has spent his wad, so to speak. Saying it another way, at current levels, what is the risk/reward of going long the yen versus the dollar? I much prefer a creditor nation over a debtor nation. Long term the dynamics are in your favor.

Wayne Krauthramer: “Before the New Deal of the 1930s workers received their pay in cash in a pay envelope with no deductions. The income tax had been around for 23 years and the income tax did not tax wages. People were paid in cash in a pay envelope, not by paychecks!”

Woodrow Wilson: "We have come to be one of the worst ruled, one of the most completely controlled and dominated Governments in the world."