Risk And Sweet Luck

8/23/05 Risk And Sweet Luck

Whether a purchase was made of PKZ shares at $38 or whether one contemplates a purchase at $53.75, the first consideration is risk. An amateur might conclude that the risk is less at $38 than at $53.75. Actually, that would not be the case. At $38 there was speculation that at least two buyers, ONGC and Petrochina were interested in acquiring the company. At this point in time, we have an announced and approved deal at $55 with CNPC and the possibility of ONGC returning with a higher offer. The Kazakh government is supportive of the deal. Lukoil is supportive of the deal. The shareholders will vote in October. By then, a majority of the shares will be owned by risk arbitrageurs and they certainly will vote for the deal. In my view, at $53.75, PKZ represents an outstanding risk/reward. If ONGC/Mittal eventually outbid CNPC, they will need to provide a break up fee that approximates $2 a share, not an overwhelming obstacle. If ONGC/Mittal were to win the battle at $58 per share, for example, the total cost would come to approximately $4.4 billion (with the break up fee) and this is roughly 10% higher than the bid they submitted on August 19. We know that ONGC/Mittal had stated they were willing to improve their bid if certain PKZ operating information was provided. In sum, maybe you will get lucky. The cost to get lucky is only time. At $53.75, your investment will be returned to you in October, and that gives no value to the one share in a new company to be received, and that is being valued at $1. It should not be forgotten that Mittal has business interests in 14 countries, and in roughly half of them there are oil and gas opportunities. Mittal has considerable experience and influence in Kazakhstan.

The Energy Department reported that the retail price of gasoline rose more than 6 cents last week to an average of $2.61 a gallon nationwide, or 73 cents a gallon higher than the same time a year ago. Despite soaring fuel prices, AAA expects an increase in the number of Americans taking road trips over the upcoming Labor Day holiday weekend.
They estimate that 34.5 million Americans will travel 50 miles or more from home, an increase of about 1 percent from last year. More than 80 percent of those trips will be by motor vehicle.

Crude oil is holding above the $65 a barrel level and natural gas jumped to $9.56. We are approaching the peak season for hurricanes. At present, there are worries about a developing storm in the Bay of Campeche. The largest oil field region in Mexico is the Gulf of Campeche.

Ron Kirby made an interesting observation. He alludes to China’s limited refining capacity to process larger amounts of heavier sour grades of crude oil (high-sulfur crude from Saudi Arabia, Iran, and other Middle East producers.) Hence, the reason for recent supertanker bookings for oil exports from the Middle East falling below the monthly average for 2005 might be the lack of China’s heavy crude refining capacity. If Ron Kirby’s analysis is correct, and I believe it is, then PetroKazakhstan’s reserves should be valued at a premium by China and India. Why? PKZ is a low-cost producer of sweet light crude oil. In addition, the company’s refinery combines efficiently with the new pipeline going to China that opens for business in January 2006. In view of these factors, I am raising my estimate for PKZ’s fair value from $58 a share to $62.

Close Call

8/22/05 Close Call

Recently, I raised my buyout estimate for PetroKazakhstan to $58 a share. It turned out to be a close call. China's CNPC International, the parent of PetroChina, has offered $4.18 billion, or $55 a share, for PetroKazakhstan (PKZ), a premium of 21.1% to Friday's close. PetroKazakhstan agreed to a $125 million break-up fee. The transaction is expected to close in October. The Boards of Directors of PKZ and CNPCI approved the agreement, and PKZ’s board of directors has recommended that its shareholders accept CNPCI’s offer. CNPCI has further agreed to consider a proposal (which is also subject tothe approval of the PetroKazakhstan Board), whereby PetroKazakhstan will incorporate a newly formed oil and gas company ("Newco") and capitalize it with approximately US$76 million in cash (representing US$1.00 per
PetroKazakhstan common share) to be spun out to PetroKazakhstan shareholders. If CNPCI accepts the proposal, CNPCI will pay PetroKazakhstan shareholdersUS$54.00 in cash and one share of Newco per PetroKazakhstan common share. A mix and match facility will be created matching, on a proportionate basis,
PetroKazakhstan shareholders who elect to receive US$1.00 in cash rather thanone Newco share with PetroKazakhstan shareholders who elect to receive additional Newco shares rather than an amount of US$1.00 per additional Newco share. If the new company is created and spun out, Bernard Isautier will act
as Chairman of its Board of Directors. If the Newco proposal is implemented, Newco will be listed on a
securities exchange and will seek oil and gas development opportunities in Central Asia (other than Kazakhstan), including with co-venturers having good relationships with one or more Central Asian governments.

Today, Google will launch an upgrade to “Desktop”, its freeware that mirrors Microsoft Windows. Wall Street needs to grasp that Google is a great deal more than merely a search engine company with growing advertising revenues.

Richard Benson: “Home sales run about 9 million a year (this includes housing starts of 2 million and existing home sales of 7 million). If over 20 percent of homes purchased are investor properties, it appears that practically all new housing starts in America are accounted for by speculative buying. If second home buyers are added into the equation, speculative and investment buying of real estate (not owning to live in) actually exceeds total housing starts!”

China's central bank said today it would raise interest rates on deposits of U.S. and Hong Kong dollars by 0.375 percentage point. The increases, effective from Tuesday, would raise the one-year rate for U.S. dollar deposits to 2 percent and that for Hong Kong dollar deposits to 1.875 percent, the People's Bank of China said in a statement.

According to Korea's Ministry of Foreign Affairs and Trade, Chinese Premier Wen Jiabao expressed interest in a free trade agreement between the two countries when he met with Prime Minister Lee Hae-chan in June. China overtook the United States as Korea's largest trading partner in 2004, accounting for more than 20 percent of the country's exports. Additionally, more than one-third of foreign direct investment by Korean companies has been going to China since 2003.

According to CNPC, the corporation produced 65.45 million tons of crude oil in the first six months, up 3.9 percent, and 18.4 billion cubic meters of natural gas, up 20.1 percent. CNPC has reported a newly proven geological reserve of natural gas that will account for 60 percent of this year's plan while itsdomestic natural gas output reached 17.2 billion cubic meters, up 21.6 percent year on year. In the last ten years, China saw its proven reserve of natural gas grow by over 120 billion cubic meters annually and annual output grow by over 10 percent.

Today's Dallas Morning News provided this information on trade with China:

Last year, imports from China reached $197 billion, higher than any other U.S. trading partner except Canada. The largest imports were:

1. Furniture

2. Toys

3. Footwear

4. Plastic products

5. Computers

6. Tools, screws, latches, etc.

7. Sporting goods

8. Cooking, ironing, heat appliances

9. Kitchenware

10. Electrical and electronic products

Meanwhile, U.S. exports to China totaled only $35 billion last year, but they have been growing.

TOP 10 EXPORTS TO CHINA IN 2004

1. Paper and paper waste

2. Mixed metal scrap

3. Fabrics and raw cotton

4. Newspapers

5. Foam waste and scrap

6. Logs and lumber

7. Wood pulp

8. Plastics

9. Frozen fish

10. Other synthetic resins

SOURCE: PIERS Maritime Research

John P. Hussman: "The relationship we've observed since 1965 between stock valuations and interest rates has not been a “fair value” relationship. To the contrary, stock valuations during this period have substantially “overshot” fair value in both directions, becoming substantially overvalued when interest rates were low, and becoming substantially undervalued when interest rates were high. Interest rates may have been correlated with stock valuations, but they haven't “justified” them."

I would like to make a closing remark on the PKZ deal. The agreement contains customary provisions prohibiting PKZ from soliciting any other acquisition proposal but allows the Board of Directors of PKZ to accept and recommend a superior proposal if it is required to do so to avoid breaching its fiduciary duties and upon payment of a termination fee of US$125 million. Under the agreement, CNPCI has the right to match any such superior proposal. It is possible that the last chapter has not been written on PKZ.

The Dumb Dumb Award

8/21/05 The Dumb Dumb Award

In yesterday’s radio Address, Bush stated “we have combated terrorists on the home front by disrupting terror cells and their financial support networks. We're fighting the terrorists in Afghanistan, Iraq, and around the world, striking them in foreign lands before they can attack us here at home. And we're spreading the hope of freedom across the broader Middle East.” Anyone who buys this message gets the dumb dumb award for 2005.

Robert J. Shiller is arguing that the housing craze is another bubble destined to end badly, just as every other real-estate boom on record has.

Adam Hamilton: “Believe it or not, today the Gold/Oil Ratio is at its lowest level in history by far. Prior to this summer the average GOR extreme low, of which there had only been five in three decades, was 9.3. Today the GOR is at 6.6, a whopping 30% below previous historical average extreme levels!”

The Army is planning for the possibility of keeping the current number of soldiers in Iraq -- more than 100,000 -- for four more years, the Army's chief of staff said Saturday.

Mike Burk: “Seasonally the week following the 3rd Friday in August during the 1st year of the presidential cycle has been modestly positive. Since 1965 both the OTC and S&P 500 (SPX) have been up 70% of the time.”

China's total volume of automobile imports dropped by one-third in the first half of this year, according to Beijing-based Economic Information Daily. In the latter half of this year, China's car imports are expected to exceed that in the first half year, Ding Hongxiang, general manager of China Trading Center for Automobile Import said. The car import decrease in the period was related to the growing investment and production of Toyota, Nissan and Honda.

Prime Minister Paul Martin will meet with Chinese President Hu Jintao in Canada next month as part of the Chinese leader's first North American tour, the Vancouver Sun reported.

According to a recent report issued by the Peoples Bank of China, the country faces a potential property bubble whose bursting could leave banks with huge losses. Average real estate prices in China rose by 14.4 percent in 2004 over the previous year, and they rose by 12.5 percent in the first quarter of 2005, the report said. "Property price inflation can easily result in prices soaring out of line with real values and thus cause a bubble," said the report. "Once the bubble bursts, it can cause a contraction in the real estate sector and significant losses for banks." Housing loans, including those to property developers, stood at 2.6 trillion yuan ($310 billion) at the end of 2004, accounting for about 15 percent of all yuan-denominated loans, the report said.

“China and India together are a third of humanity, and they don’t want to ride bicycles anymore,” said Anne Korin, the co-director of the Institute for the Analysis of Global Security, a Washington think tank. “Their transportation demand, which is to say their oil consumption, is growing at a phenomenal rate.”

Google has initiated an advertising campaign in China by holding a thousand-people promotion meeting with its partner Hotsales Network Information Technology Company in Shanghai to introduce the Google AdWords service to various companies.

“The supply of oil has been growing all these years in approximate consonance with demand,” said Michael Klare, professor of peace and world security studies at Hampshire College. “Now it appears that the historical trend is changing. Demand is galloping ahead of supply,” said Klare, author of “Blood and Oil: The Dangers and Consequences of America’s Growing Dependency on Imported Petroleum.” “You’re going to see more competition because demand around the world is increasing faster than supply.”

This month, Russia and China have put their armies together for the first time in military exercises on the Shandong peninsula, in the Yellow Sea about 275 miles southeast of Beijing.

Venera Galyamova, a researcher at the Kazakhstan Institute for Strategic Studies, sees Central Asia becoming "the arena for the battle between the United States on one side and China and Russia on the other side. For China, influence in the region also means asserting itself as a global power to rival the United States." China's exploding economy thirsts for oil, and within two decades Kazakhstan is expected to be a leading oil exporter. In my opinion, the battle for control of PetroKazakhstan is much more significant than the CNOOC’s proposal to buy Unocal.

From Current Opinion in the June 2005 Endocrinology & Diabetes: “Summary: Recent studies have reiterated the critical role the central melanocortin pathway plays in the control of energy balance. Given the public health challenge that obesity presents, the potential attractiveness of the melanocortin system as a therapeutic target only grows as knowledge of its molecular physiology increases.” I continue to believe that Palatin Technologies, a leader in the melanocortin system, offers outstanding potential for the long-term investor in the areas of obesity, sexual dysfunction, and others.

According to Reuters and the AP, German travel company TUI AG said today it has agreed to buy Canadian firm CP Ships for $2 billion in a deal aimed at strengthening its container shipping business. Hanover-based TUI stated the Canadian company's board of directors unanimously recommended that its shareholders accept the all-cash offer of $21.50 per share -- a premium of 9.7 percent over CP Ships' closing share price on Friday. TUI mentioned the acquisition would accelerate the growth of its Hapag-Lloyd container shipping business -- putting the combined company in the world's top five in terms of capacity. Between them, the companies currently operate 139 ships, with another 17 on order.

The dollar had its biggest weekly gain against the euro in more than two months.

Ufosnw.com recounts the 50th anniversary of the incident in Kelly, KY (20 miles from the Tenn. border):
"Shortly after sunset on Sunday August 21, 1955 a flying saucer landed in a field outside of a farmhouse near Kelly, Kentucky. For the next three or four hours a farm family was terrorized by beings who approached the farmhouse. Several members of the family fired rifles and shotguns at the creatures. Some of the shots hit the creatures, but had no effect. The creatures were described as about 3 feet tall with oversized heads, huge luminous yellow eyes, big ears, long arms, and big hands ending in "talon". The beings glowed all over with a silvery luminescence. and they seemed to float rather than walk. (See drawing above made by one of the witnesses.) The family finally made a run for their car and drove to Hopkinsville, Kentucky and reported the incident to the sheriff. The sheriff and other law enforcement personnel then went out to the farmhouse with the family. They found nothing. (Some witnesses have noted that a green luminous substance was seen in the grass in the yard.) The law enforcement personnel then left after completing their investigation. The family then decided to go to bed. Almost immediately the creatures returned and more shots were fired. The creatures again were not affected by the bullets. Finally near dawn the creatures left and never returned. Articles were written in several newspapers the next days and onlookers flocked to the farmhouse after hearing of the incident." Which rings clearer to you--- this incident in Kelly, KY or Bush's August 20, 2005 radio address?

Clyde Francis Lytle: " Unless we know the difference between flowers and weeds, we are not fit to take care of a garden. It is not enough to have truth planted in our minds. We must learn and labor to keep the ground clear of thorns and briars, follies and perversities, which have a wicked propensity to choke the word of life."

Tea Leaves

8/20/05 Tea Leaves

Henry K. To: "Given that the economic recovery since 2001 has mostly been about the housing industry (including mortgage consulting and financing) and the financial services industry, I would definitely pay heed to the breakdown of both the Philadelphia Bank Index, the recent explosion of insider selling in the financial sector, and the continuing decline in M-3 growth in the United States. Moreover, on a more micro level, the liquidity in both cash and margin accounts are now getting dangerously low - a red flag that is further exacerbated by the amount of leverage now "in the system." It is now not a good time to go long - let alone go long on margin."

American consumers will pay more for orange juice because of a U.S. Commerce Department ruling ordering penalty tariffs of up to 60 percent on orange juice concentrate from Brazil, Brazilian growers said Thursday.

Yesterday, crude oil jumped back to the $65 barrel level. The price of ethylene, a petrochemical that's a key building block in everything from plastics to antifreeze, has jumped 29 percent in the past two weeks. At 44.5 cents per pound, it's just pennies below a five-year high hit last December, according to Bloomberg News data.

For 60 years, truckers could drive for 10 consecutive hours. On Jan. 1, 2004, the Federal Motor Carrier Safety Administration changed the rule to allow them another hour behind the wheel. A federal court, however, threw out the changes. On Friday, the truck-safety agency announced that a revision to the rule would still allow the big rigs to roll for 11 hours, three hours more than safety advocates say they should. The Advocates for Highway and Auto Safety said the Bush administration had simply repackaged an unsafe rule. Studies show the risk of deadly crashes significantly rises after the 10th and 11th hours of driving, said Joan Claybrook, president of the safety group Public Citizen. "Trucks are going to continue to be rolling time bombs on the highway," Claybrook said. "So many drivers are tired, and that's what causes so many crashes." More than a year ago, a federal court struck down the rule, saying it was "arbitrary and capricious" and failed to consider truckers' health. The Bush administration was left to revise it. Just think. The next time the danger level is raised from yellow to orange, it might signify an overtired truck drive on the highway.

North American chip equipment suppliers booked $1.02 billion worth of orders in July, down 36% from a year-ago, trade group SEMI said Friday. That equates to a book-to-bill ratio of 0.93.

Kazakhstan has doubled oil production to 1.2 million barrels per day since the Soviet Union collapsed, putting it in the world's top 20 oil producers. It plans to triple production by 2015 thanks to new oilfields.

Russian President Vladimir Putin called Thursday for an international conference on Iraq by year's end and a timetable for withdrawal of foreign troops from the country, saying they were considered "occupying forces" by many Iraqis. "We deem it necessary to work out a schedule for the staged withdrawal of foreign troops" in Iraq, Putin told reporters following talks with Jordan's King Abdullah II in the Black Sea resort of Sochi.

4400 Northwest Airlines machinists went out on strike.

MCI cut 600 workers in Alpharetta, GA.

As we approach the month of September, one must keep in mind that historically September is the worst month for the Dow with a decline 70% of the time.

The football season will soon officially begin. Frequently, the talk turns to defense, and that has provided impetus to investment pundits to issue a warning for investors to become more defensive in the management of their portfolios. From my perspective, defense begins and ends by buying right and knowing what you are buying. You increase the opportunity to generate profits by buying when the risk/reward ratio is strongly in your favor. There needs to be demonstrated value and adept management. That combination is the best defense. In addition, do not let greed and/or ego enter into a buy or sell decision. Investing is not about you. The stock you buy does not know your name.

Maytag stated that 200 employees at their Newton plant would be cut on Sept. 2 and the workforce at that facility would be reduced to 1,000.

As short-term and long-term rates converge and credit spreads narrow, it will become more difficult for banks to generate positive results. A greater emphasis must be placed on management skills and depth of management. As such, I am suggesting a hedge transaction that may not be to everyone's liking. Wells Fargo has increased the dividend for 18 consecutive years and the return on equity is just below 20%. The bank's market cap is $102.5 billion. The combined market cap for Citigroup, Bank of America, and JP Morgan Chase is $525 billion. I suggest buying 5 shares of WFC and shorting 1 share of C, BAC, and JPM.

Shares of Wal-Mart traded at slightly above $46 in February 2003, April 2005, and on Friday. The last time the stock dipped below $45 was in mid-2002. Unfortunately, when Wal-Mart ads state "everyday low prices," they were not intended to describe the price for its own shares.

A Clearer Picture

8/19/05 A Clearer Picture

Marsoft Incorporated: “After remaining very strong through the first four months of 2005, the dry bulk market weakened significantly from May through July. The decline was broad-based, with spot rates and one-year time charter rates falling by an average of 15-20% during the second quarter. Although this left most rates at levels similar to where they were a year ago, the market slumped further in July, with the Baltic Dry Index falling to its lowest level since April 2003, nearly 6 months prior to the start of the shipping market boom.”

The Financial Times reported that the new issuance of asset-backed securities is on course to top $1 trillion for the first time in 2005 as the number of auto, student, and home equity loans continue to increase. In 2004, total ABS issuance was $896.6 billion, up 53.2% from 2003. Home equity loans grew by 10% in the first half of 2005 and accounted for about 40% of the ABS market during this time period.

According to a study by the Public Policy Institute of California, 20% of home buyers in California plow more than half their monthly income into their mortgages. Affordability rates have dropped to 16% statewide and to 9% in San Diego, according to the CAR. For moderate-income Californians—those earning $30,000 to $60,000—almost a third are spending more than half their income on housing, according to the study. In San Diego, 62% of home buyers opted for interest-only loans in 2004, according to First American/Loan Performance. In my view, there may be isolated pockets in the U.S. where home prices are still rising, but as a generalization, I strongly believe the fizzle is out of the housing market sizzle.

GeorgeOrwell: "In times of universal deceit, telling the truth will be a revolutionary act."

The Philly Fed Index had some interesting points. Despite continued cost pressures, prices for firms’ own manufactured goods were essentially steady in July. Only slightly more firms reported higher prices for their own manufactured goods than reported lower prices, and 78% of the firms indicated steady prices. The current prices received index fell from 12.0 to 3.0, its lowest reading since August 2003. Despite the moderation in the prices received for their own manufactured goods, firms reported higher production costs. Thirty-three percent of firms reported higher inputs costs in July. It should be noted that, going forward, 76% of the manufacturers expect further increases in energy costs, 65% expect price increases for raw materials, and 52% expect increases for intermediate goods. To me, this means lower profit margins, and lower profit margins are a prelude to less hiring and more layoffs.

George Washington: "Guard against the postures of pretended patriotism."

The Conference Board reported that, during the six-month span through July, the leading index increased 1.1%, the coincident index increased 1.1%, and the lagging index rose 1.7%. Ken Goldstein, the Conference Board’s chief economist stated “the leading economic indicators suggest moderate growth into the fall. The spike in energy prices is one factor in this outlook, which mirrors the economic situation in much of the rest of the industrialized world. Of more concern is the level of business and executive confidence. Both investment and hiring intentions reflect a level of caution over both pricing and profit strategies.”

There is a story from AFX News out of Hong Kong that Buffett is considering selling Berkshire’s stake in PetroChina. This rumor has contributed to the sharp decline in PTR stock. However, it does not explain away that, on a relative basis with Chevron, PetroChina’s market cap was way out of line when the shares were at $95 just a short time ago. On a full disclosure basis, I did write Buffett and pointed out PTR’s market cap as well as my view that PKZ was significantly undervalued. I doubt whether he even read my note. With ONGC/Mittal and PetroChina vying for PetroKazakhstan, shares of PKZ have awakened to the tune of 8 points, but I still believe it is a sleeper.

Frequently, bond mavens point out that U.S. Treasuries exceed Japan’s government debt in yield by roughly 2 ¾ percentage points and German debt by 1%. The reasoning goes that this differential in yield accounts in great part for foreigners purchasing our government debt. It might also explain arbitrageurs buying our debt and shorting Japan and Germany. In sum, our 10-year Treasury bonds yielding 4.21% might have little or nothing to do with our country being viewed as a safe haven. A country with twin tower debt exceeding $1 trillion in 2005 is, in my view, a country led by financial misfits. I wouldn’t care if the leaders shoot themselves in the foot, but spare the rest of the innocent taxpayers.

Today's Business Week had a list of 9 oil companies viewed favorably for portfolios. Included were PKZ and Ultra Petroleum.

Crude has rallied above $64 a barrel this morning with a greater focus on the problems in Ecuador.

TRW is closing a plant in Michigan and cutting 400 jobs.

Since we invaded Iraq in March 2003, at least 1,862 U.S. soldiers have died.

Rumsfeld: "Death has a tendency to encourage a depressing view of war."

Good News Bad News

8/18/05 Good News Bad News

8/18/05 Good News Bad News

Yesterday, crude declined $2.83 a barrel to close at $63.25. That’s the good news. With gasoline inventories 12% below last year’s levels, there are concerns about potential shortages. In addition, there are supply disruptions in Ecuador and Nigeria. Petroecuador
stated crude production had fallen 90% to 20,000 barrels. Shell Oil disclosed output disruptions at their flow station in Nigeria. To add a little more to the near-term direction of crude, Bloomberg reported Goldman Sachs Group Inc., the third- biggest U.S. securities firm by market value, raised its oil forecast for next year to $68 a barrel and said crude will stay at about $60 a barrel for years to come. Goldman's projection for New York crude prices for 2006 was boosted from $55 a barrel. The forecast for oil to stay at $60 after that was raised from $45 a barrel because cost uncertainties have delayed investment in new oil projects, according to the Aug. 17 report from the firm's Commodity Research analysts, including Steve Strongin and Jeffrey Currie.

Keep believing the figures on how great the employment picture is. Keep believing that Wal-Mart does not provide a decent wage and decent benefits. More than 11,000 people applied for 400 jobs at the company’s new 148,000 square foot store in Oakland, CA.

Keep believing that things are getting better in Iraq. More than 60 U.S. troops have been killed in Iraq this month.

The Wall Street Journal stated that Tommy Hilfinger is preparing to auction itself in the coming weeks. I hope the auction goes better than Hilfinger’s reality show. If you blinked, you missed it.

Barry Ritholtz: “Without energy, the SPX year-over-year quarterly earnings gains are a pathetic 4%.” The bulls had better root for Goldman Sachs’ new oil price projection to be correct. Of course, there is a downside to higher oil prices, such as, the PPI rising 1% in July. For math mavens, that’s an annual rate of 12% or surely enough for the Fed to continue raising rates high enough for the yield curve to invert.

According to the Economic Policy Institute, real hourly earnings fell in all but two out of the last 15 months. In fact, they reported that the real hourly wages of the workforce remain at almost the exact level as when the economic recovery began in November 2001. They stated “in July 2005 dollars, the wage was $16.15 in November 2001 but only $16.13 last month.” That being so, it is no wonder that we have reached the tipping point on housing prices as well as consumer spending. Those betting on a favorable Christmas season are in for an unwelcome surprise.

China will stop the alumina and iron alloy processing trade from August 22.The move is aimed at curbing exports of alumina and iron alloy which are high energy consuming products. According to the National Development and Reform Commission, China has already banned some iron and steel product exports, canceled export rebates of some products, and reduced the export rebate of steel and coal. The move will help control the processing of products that demand high energy consumption, high pollution and resources.

Trade between Iran and China came to some $7 billion in 2004, up 25 percent from $5.6 billion the previous year, with commercial exchanges projected to reach $10 billion a year by the end of 2010, according to Tehran's Iran-China Chamber of Commerce.
By comparison, Finance Ministry figures show Japan's trade with Iran came to 1.01 trillion yen in 2004, up just 2.3 percent from 991.3 billion yen in 2003.

Yesterday there was good news and bad news. For those long commodities and U.S. treasury bonds, you experienced some costly blows. For those long the dollar, you munched on a ham sandwich. For me, I lunched and heaved. That’s better than never having entered the ring. For those who can’t take a punch, I suggest you stay at the beach.

Michael Althsuler: “The bad news is time flies. The good news is you're the pilot.”

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.