teknobucks
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Spaf is on vacation....so here we go!
Short trading week ahead...mon is presidents day.
tekno
Spaf is on vacation....so here we go!
Short trading week ahead...mon is presidents day.
tekno
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teknobucks
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From Briefing.com: 4:23PM Weekly Wrap: The word of the week was "conundrum," and it went to the critical issue for the stock market.
On Wednesday, Federal Reserve Chairman Greenspan testified on monetary policy before the Senate Banking Committee. He said the economy is on a firm path, and that conclusion is widely accepted. He also suggested that inflation is "well anchored" but that the Fed needed to remain vigilant. Most of the headlines were about his statement that "the broadly unanticipated behavior of world bond markets remains a conundrum." By that he meant that long-term interest rates have remained surprisingly low even as the economy has strengthened, inflation has firmed, and short-term rates have gone up sharply.
The surprisingly low long-term interest rates have been of critical support to the stock market. If long rates start rising, that would affect valuation models and create a more attractive investment alternative to stocks. By the end of the week, the risk of higher rates started weighing on stocks.
The 10-year note yield reacted almost immediately. The yield ended last week at 4.09%. After Greenspan's comments, the yield rose to 4.15% and ended the week at 4.25%. There is reason to believe that the rate will keep rising.
First, Greenspan made it clear that the Fed will continue to raise short-term rates. Second, inflation may be picking up, or at least inflation concerns that could drive rates higher. On Friday, the January core PPI number came in at a surprisingly strong +0.8%. The gain reflected widespread price increases that suggest companies have greater pricing power than in the past. If so, overall inflation could inch higher in 2005. That would be a negative for financial markets.
Meanwhile, the fourth quarter earnings numbers continued to be very good. In fact, the aggregate increase for operating earnings for the S&P 500 now looks to come in near 20%. That is on top of a 28% gain in the fourth quarter last year. Applied Materials, Nordstrom, Coca-Cola, Hewlett-Packard, Target, and Wal-Mart were among the companies with good reports.
The market got no boost from the reports, however. Instead, this "old" news from the fourth quarter took a back seat to indications of an earnings slowdown in the first quarter. The number of companies guiding earnings estimates lower increased significantly from recent quarters. This has the market concerned that earnings growth will slow to 5% to 7% in the first quarter.
The economic reports this past week were mixed, but did not undermine expectations of 3% or greater real GDP growth in the first quarter. January retail sales were down 0.4% because of a 3.3% drop in auto sales. Excluding autos, sales were up a good 0.6%. January industrial production was unchanged, but that was due to a 3% drop in utility output, as manufacturing output was up 0.4%. New claims fell to the lowest level in four years. Housing starts reached record levels. None of the reports had much impact, however, as they did not alter economic expectations. The PPI report on Friday was far more important.
In terms of stock sectors, energy and materials companies continued to do well. Financial and healthcare stocks, the traditional leaders for the market, continued to struggle.
The market got a bounce in recent weeks after it became apparent that the fourth quarter earnings reports were excellent. That largely erased the early January weakness. Now the focus is shifting to interest rates and inflation. That creates some risk. There is little doubt about the economic and earnings outlook. It is the puzzle of interest rates and inflation that has to be solved. The market started to show concern about those issues this week, and a continued focus on those factors could hamper enthusiasm for stocks in the weeks ahead. --Dick Green, Briefing.com
Close Dow +30.96 at 10785.22, S&P +0.84 at 1201.59, Nasdaq -2.72 at 2058.62: PPI and FDA were the acronyms of the day... The former contained bad news for the market while the latter contained good news... With a long weekend ahead of us, we'll start with the bad and end with the good... With respect to the January PPI report, the bad was its core component (excludes food and energy), which showed a surprising 0.8% increase versus the consensus estimate that called for a more modest 0.2% increase...
A big spike in tobacco prices (+3.4%) had something to do with the surprise, but nontheless, in light of Greenspan's recent testimony, the market wasn't inclined to dismiss the spike as an aberration... The concern about rising inflation, and the angst ahead of Wednesday's Consumer Price Index report, was palpable in the Treasury market where the yield on the benchmark 10-yr note jumped 8 basis points to 4.26% and the yield on the 30-yr bond rose 7 basis points to 4.65%... This jump in rates had the stock market on edge throughout the session, especially the financial sector (-0.98%), which held the broader market back all day...
To few people's surprise, rate-sensitive areas like homebuilding, utilities, brokerage, consumer finance, thrifts & mortgage, and diversified banks populated the list of worst-performing S&P industry groups... Per usual, the energy sector (+2.23%) bucked the broader trend and turned in a strong performance that was paced by the exploration and production group (+2.96%) and was highlighted by a gain in ExxonMobil (XOM 59.41, +1.28) that catapulted the oil company into the position of biggest company by market cap at approx. $384 bln...
Separately, the FDA's positive impact on the market stemmed from an advisory panel's recommendation that Merck's (MRK 32.61, +3.76) Vioxx drug should be reintroduced to the market and that Pfizer's (PFE 26.80, +1.74) Celebrex and Bextra drugs should remain on the market... This affirmation gave a material boost to both stocks on the primary belief that it should help their defense with associated litigation... In turn, their gains enabled the Dow to end the week on an upbeat note, even though it suffered a slight loss (-0.1%) for the entire week... Sticking with the good, bear in mind that Monday is Presidents' Day and that all U.S. markets will be closed for trading... NYSE Adv/Dec 1237/2131, Nasdaq Adv/Dec 1352/1714
2:32PM New 52-Week Highs: Oil and steel: Oil and steel stocks dominate the new 52-week high list. Tallies so far today for new highs vs lows are 152-17 (NYSE) and 65-38 (Nasdaq)... Sectors with good representation on the new high list today include Steel (CAS, CGA, CMC, LSS, MTL, MTLM, NSS, NUE, PKX, RESC, RS, SID, STLD, TONS, X), Integrated Oil (BP, COP, CVX, IMO, MRO, PTR, RD, TOT, XOM), Oil & Gas Exploration (ATPG, BR, CHK, DVN, EOG, NBL, NFX, OXY, UCL, VPI, XTO), Oil Services (BHI, CDIS, DO, DRQ, ESV, GRP, GSF, NBR, NOI, RDC, SII, VRCWFT), Cargo Ships (ATB, TRMD).
2:02PM QLT Inc: Aczone data demonstrates reduction in number & severity of acne lesions (QLTI) 15.42 +0.03: Co announces data from three clinical studies presented at the American Academy of Dermatology conference in New Orleans demonstrating that the Company's acne product Aczone (5% dapsone topical gel) reduces the number and severity of all lesion types in acne patients with no significant safety issues.Results from this study demonstrate a significant reduction in all lesion types (inflammatory, noninflammatory and total lesion counts) in patients using dapsone topical gel compared to the vehicle control group. An FDA decision on the new drug application seeking marketing approval (filed in 3Q04) is expected in 2H05.
1:04PM Treasuries close early and lower : The treasury market will close the shortened trading session lower with the yield curve tilting steeper. The long end of the curve extended overnight declines on the surprising surge in core PPI. The long bond came under pressure overnight as the market began speculating that US pension rules may force the Treasury to issue new 30-year bonds. Long-dated debt maturities are gaining popularity and speculation on the possibility of new supply hitting the market, in the form on brand new 30-year bonds, provided selling pressure. Treasuries will close the week lower with Greenspan's comments and inflation fears grabbing the credit for the sell off (see 9:33ET comment on bond tic). Despite the selling this week, some are calling for the long end of the curve to remain firmly supported due to the structural imbalance in supply and demand. Since the Treasury stopped issuing the 30-year bond in 2001, the long end has missed over $100B long bonds, which has shortened the treasury universe by year in aggregated duration. Asset/liability managers may continue to purchase 10- and 30-years as long duration remains scarce. Supply remains the key issue and the severe shortage in long duration securities has the potential to keep the long end of the curve at relatively low yields given the current state of the economy. Highlighting the economic calendar next week will be consumer confidence, CPI, durable orders, Q4 GDP-Prel, and existing home sales. The 10-years are -20/32nds yielding 4.258%
10:01AM Metrologic Inst receives additional contract modification of approx. $850,000 (MTLG) 20.50 +0.50:
9:16AM Gapping Down : Gapping down on disappointing earnings/guidance: NTGR -9.6%, ADIC -9.3% (also Bear Stearns downgrade), RAE -7%, ISNS -7%, INTU -1.9%, Other News: NTEC -7.6% (prices offering at $4/sh), DSCO -5.2% (stock offering), LGF -3.7% (announces convertible offering), CTIC -2.5% (profit taking from 12% move yesterday), BBY -1.1% (Goldman downgrade).
9:09AM Gapping Up : Gapping up on strong earnings/guidance: CRM +10.7%, NVDA +8.5%, AEIS +10.3% (also CIBC upgrade), AKAM +10%, CRYP +8.6%, TOPT +7.6%, VCLK +7.1%, MDRX +6.5%, PCLN +5.3%.... Other News: TIVO +10.8% (reaches 3 mln subs), PRM +8.6% (co's about.com to be sold to NYT), PKZ +6.6% (CIBC says co could have nearly $10/sh in cash by year-end), MAY +5.5% (FD resumes its takeover talks with May - WSJ), GRU +5.5%, SIGM +5% (started with an Outperform at Baird; tgt $20), MCIP +4.3% (Qwest plans revised offer for MCIP), MRK +3.8% (may return Vioxx to market), SINA +3.7%, FWHT +3.5% (London's The Sun newspaper chooses co's espotting.com over Google for paid listings - Forbes), TZOO +2.9%, SNIC +2.7% (added to JP Morgan's Focus List; tgt $21)... Under $3: SYNC +12.3% (posts largest non-GAAP profit in over 5 yrs).
12:22PM Campbell Soup Co (CPB) 28.39 -1.10: Soup's on! Well actually not really. Campbell Soup's Q2 disappointed the market with earnings of $0.57 per share - two cents below estimates. Considering the recent share action, the market was clearly expecting an upside beat. Revenues for the quarter rose 5.9% year/year to $2.22 bln actually ahead of estimates, yet declining earnings in its Soup, Sauces and Beverages division accounted for the bottom line miss.
The top line was driven by volume and mix adding 4% with price increases adding 1%. With 36% of sales coming from overseas, CPB enjoyed the benefits of a weaker dollar adding 2% to net sales. Its mainstay, the Soup, Sauces & Beverage segment saw sales up only 1%, as soup sales dropped 1% along with a 9% decline in the ready-to-serve segment, which faced stiff y/y comps. On the flip side was condensed soup sales up 4% and broth sales soaring 15%. Lower revenue growth, combined with higher operating costs including promotion spending and commodity costs, sent operating income sharply lower by 12% y/y.
It Baking & Snacking segment continues to perform well generating revenue growth of 9% and earnings of 12% due to favorable volume/mix and pricing gains. Co introduced new sugar free cookies and pot pies both adding to the unit's performance. However, this segment only accounts for 11% of total earnings. Intl Soup & Sauces (17% of total earnings) rose 10% in sales and 8% in profits with currency accounting for most of the upside. A bright spot was Asia showing strong volume growth during the quarter.
The guidance provided no relief with the co providing estimates that are in-line with consensus. For the full year, CPB reaffirmed earnings growth of 5-7%, which equates to EPS in the range of $1.66-1.69, versus consensus of $1.69.
The market did not take kindly to the report sending shares considerably lower. Overall, earnings quality was quite poor for the quarter. As such, we recommend investors let the dust settle and for the company to get a couple positive quarters under its belt before revisiting the name. As for now, the downward pressure is likely to remain. The one bright spot is its dividend yield of 3.82%. The stock is trading at 16.8x forward earnings compared to its peers General Mills (GIS) at 17.7x and ConAgra Foods (00C) at 18.0x. --Kimberly DuBord, Briefing.com
12:05PM Abbott Laboratories (ABT) $46.19 -0.37 (-0.8%) Abbott Labs raised its dividend this morning, to $0.275 per share, or an annual payment of $1.10 per share. At today's price of $46, this is equal to a yield of 2.4%. This puts it right in the middle of the yield range of the major drug companies. Merck and Johnson & Johnson have yields of 1.5% and 1.7%, respectively, while Pfizer and Bristol-Meyers have yields of 3.1% and 4.2%. However, ABT's stock performance over the past year has been much stronger than most other drug stocks, with JNJ a notable exception. This makes Abbott's yield an even more impressive number.
Ironically, the calculations for total returns on Abbott in 2004 will probably not include the total value of the spinoff of Hospira, which occurred in the spring of 2004. That spinoff, which initially had an approximately 10% immediate return to ABT returns, has been even larger, as HSP stock has risen an additional 15% since the spinoff in May of 2004.
Abbott has now raised its annual dividend every year for more than 30 years. This track record also ensures that Abbott will remain one of the select stocks that constitute the Mergent Dividend Achievers list. To be maintained on this list, a company must have continually increased its dividend continually for at least ten years. (For more on the Mergent Dividend Achievers list and index, see the Ahead of the Curve column of 23-Jun-04 "Book Review: Mergent's Dividend Achievers").
Dividends are slowly becoming more important to investors. The preferential tax treatment can be given only partial credit, however, as dividend stocks did not immediately respond to the preferential treatment, somewhat to our surprise. Now we think that dividend stocks are becoming more prominent in investors' focus because the traditional "growth stock superiority" paradigm is weakening. With Microsoft and Intel, once the crown-kings of "growth," both having been very poor investments over the past three years, the presumption that "growth trumps income" is no longer a given. In fact, Microsoft and Intel have both moved towards dividend payouts as a way to reward shareholders, in a tacit admission that keeping all earnings for reinvestment is not the "no-brainer" it used to be. Even KLA-Tencor, the semiconductor equipment company, is now paying a dividend. Are we seeing a gradual return to the old fashioned idea that the purpose of owning stock in a company is to get paid a share of the profits every year? That does seems to be happening, despite the strong disincentive of the double-taxation of a corporate dividend payment.
What this "slow shift in sentiment" towards a higher preference for dividends means is that companies like Abbott, that have a long history of both paying dividends and increasing them, are likely to become even more favored over time. Particularly if they keep increasing the dividend amount every year. Robert V. Green, Briefing.com
12:01PM Goldman Sachs (GS) 108.73 -1.87: There has been a rumor lately that makes sense but probably won't happen: Citigroup is said to be eyeing an acquistion of Goldman Sachs. That is a deal that would reshape the financial sector and make everyone else just a player.
Citigroup is already among the leaders in the financial services sector and owns Smith Barney. Goldman Sachs is one of the very best in terms of investment banking and trading; The combination of these strengths would be very powerful. The idea sprung up after Citigroup sold its insurance business to MetLife for $11.5 billion. That sounds like a healthy amount of cash, but remember that Goldman Sachs carries a $53 billion market cap, so the price tag would probably be north of $60 billion.
Goldman Sachs has long been an investment bank with a first rate trading house. The company also posted some solid results in 2004 with revenues topping the $29 billion mark, the highest since 2001. Earnings of $8.91 a share in 2004 were up significantly from $5.86 in the prior year, and the white-hot M&A market is driving speculation that the growth in earnings will continue.
While M&A is blistering, a market that is stuck in a trading range could prove troublesome for the company that has long been known for its trading expertise. Being a top notch shop, the company would still be able to garner a tidy sum from trading operations, but it is much easier to trade when the market is moving a particular direction. There is also the potential for the firm to participate in what is shaping up to be an improving IPO market, which should be a large EPS driver.
What investors should be focusing on is the earnings growth from Goldman Sachs. Earnings per share jumped 51% in 2004 and have grown at a rate of 27% over the last three years. This suggests a forward multiple that should be expanding, but has not. Trading at 11.7x next years earnings, the company is cheap compared to the market multiple that is generally in the high teens, but generally in line with peer valuations (Lehman Brothers and Merrill Lynch are both at 11x next year estimates).
A buyout would certainly be big news, but news that should not really be expected. The Citigroup rumor should eventually run its course. Investors should instead focus on the idea that Goldman will probably have even better earnings in 2005 as investment banking (M&A and IPO markets) picks up steam. Its not a law of physics, but better earnings tend to lead to better multiples and higher stock prices.
11:46AM Priceline.com Inc. (PCLN) 22.65 +1.09: It must be those hilarious Shatner and Nimoy commercials that turned what typically is a seasonally slow quarter for Priceline.com into a upside surprise. Co reported earnings after Thurs close of $8.8 mln, or $0.22 per share up 267% y/y and six cents ahead of estimates. Revenues for the quarter rose 8.2% year/year to $195 mln driven by retail airline tickets and Active Hotels acquisition.
The fourth quarter is typically slower as many consumers choose published fares over the Name Your Own Price® option during the holiday season. However, last Jan PCLN launched a new airline ticket product giving consumers the choice to shop around and compare published fares. Airline ticket unit bookings, which include both options, grew 61% y/y in-line with guidance. Hotel room night unit bookings including retail and opaque rose 51% y/y, while rental car booking gained 16% due to more inventory.
Overall, gross bookings rose 61% y/y to $413.5 mln with agency bookings of $196 mln. This is a highly profitable business. For the quarter stronger topline growth and lower cost of sales resulted in record gross margins of 26.4% due to higher hotel ASPs, Active Hotels acquisition, and opaque air sales. But growth came at a price as operating expenses rose 50% y/y mostly due to significant spending on advertising +44% and sales and marketing +54% and increased depreciation expense. Yet the pace of spending is still lower than revenues and bookings resulting in an operating margin of 23%.
Company expects Q1 EPS in the $0.18-0.22 range vs consensus of $0.23. For the full year it sees EPS of $1.18 vs consensus of $1.18. Co sees Q1 gross travel bookings growth of 30-35%. For the year, co expects ticket growth to come down with leisure fares remaining at low levels. Advertising spending will increase this year due to the launch of new products.
Priceline aims at being your full service online travel company. The departure away from a purely opaque service has paid off as the realization set in that customers prefer the choice. As Captain Kirk and Spock do their jobs increasing the retail option awareness, PCLN should continue to show positive momentum in this segment. Co is taking it one step further during second quarter launching a retail hotel product, which is sure to be the next growth driver. The one caveat being the retail business is less profitable than the opaque service, something to consider as co becomes more heavily retail weighted.
Going forward, Priceline is well positioned as a leader in online travel to leverage the longer term growth prospects as the world migrates more and more to the benefits of cyber travel. Stock is trading at a forward P/E of 19.2x with an earnings growth rate of 20%. --Kimberly DuBord, Briefing.com
9:48AM Page One - Focus Shifts from Earnings to Rates : The market sell-off yesterday reflected concerns over rising interest rates. Federal Reserve Chairman Greenspan had mentioned that risk on Wednesday, but the market held firm. Yesterday, the concerns justifiably broke through. Today, there are additional concerns.
The S&P 500 index enters today's trading down 5 points for the week. The 10-year note yield, meanwhile, had gone from 4.09% to 4.20% yesterday. This morning, it has jumped further to 4.24%. This isn't exactly dramatic, but it is a significant increase from the 3.97% hit on February 9. If the trend in the 10-year note yield keeps rising, it will not only solve the good Doctor Greenspan's conundrum, it very well may knock the stock market back.
There is little doubt that real GDP is on track for 3% or more growth. Earnings momentum is very strong. The uncertain variable for stock market valuation is interest rates. If rates remain as low as they are, then stocks may very well have a good year. But, with economic demand picking up, and with the slack in the economy slowing disappearing, long-term interest rates are likely to rise. That is likely whether or not inflation picks up.
This morning, there are also signs that inflation is picking up. January PPI was up a tame 0.3% after a similar drop in December. No problem there. Unfortunately, the core rate of PPI was up a huge, and unexpected, 0.8%. In 2004, the largest monthly gain was 0.3% and the entire year the core rate was up only 2.4%. This pop in pricing had some aberrant boosts, but even stable capital equipment prices were up 0.6%. It seems as if some pricing power has returned for producers. The bond market got whacked on the report. This one report doesn't mean inflation is back full force, but it legitimately raises a big red flag.
The corporate news is very light, but consistent with recent trends that have provided a boost to stocks. Qwest has indicated they will make a modified offer for MCI. Intuit and NVIDIA had good earnings reports, but Campbell Soup missed by 2 cents. Federated as renewed talks to acquire May Department Stores. Yesterday, Coke announced a 12% increase in their dividend. Thus, there is continued merger activity, good earnings, and dividend increases.
The question is whether those factors can produce a rising stock market. The answer depends largely on whether long-term rates rise significantly. The Fed looks likely to raise short-term rates to 3 1/2% or higher by the end of this year. If so, the 10-year note yield could rise to 4 3/4% or 5%. That seems likely to us, and that would limit stock market gains for the year. The prospect of firming inflation and rising rates is the reason our Market View is neutral. Dick Green, Briefing.com
http://biz.yahoo.com/mu/story.html
From Briefing.com: 4:23PM Weekly Wrap: The word of the week was "conundrum," and it went to the critical issue for the stock market.
On Wednesday, Federal Reserve Chairman Greenspan testified on monetary policy before the Senate Banking Committee. He said the economy is on a firm path, and that conclusion is widely accepted. He also suggested that inflation is "well anchored" but that the Fed needed to remain vigilant. Most of the headlines were about his statement that "the broadly unanticipated behavior of world bond markets remains a conundrum." By that he meant that long-term interest rates have remained surprisingly low even as the economy has strengthened, inflation has firmed, and short-term rates have gone up sharply.
The surprisingly low long-term interest rates have been of critical support to the stock market. If long rates start rising, that would affect valuation models and create a more attractive investment alternative to stocks. By the end of the week, the risk of higher rates started weighing on stocks.
The 10-year note yield reacted almost immediately. The yield ended last week at 4.09%. After Greenspan's comments, the yield rose to 4.15% and ended the week at 4.25%. There is reason to believe that the rate will keep rising.
First, Greenspan made it clear that the Fed will continue to raise short-term rates. Second, inflation may be picking up, or at least inflation concerns that could drive rates higher. On Friday, the January core PPI number came in at a surprisingly strong +0.8%. The gain reflected widespread price increases that suggest companies have greater pricing power than in the past. If so, overall inflation could inch higher in 2005. That would be a negative for financial markets.
Meanwhile, the fourth quarter earnings numbers continued to be very good. In fact, the aggregate increase for operating earnings for the S&P 500 now looks to come in near 20%. That is on top of a 28% gain in the fourth quarter last year. Applied Materials, Nordstrom, Coca-Cola, Hewlett-Packard, Target, and Wal-Mart were among the companies with good reports.
The market got no boost from the reports, however. Instead, this "old" news from the fourth quarter took a back seat to indications of an earnings slowdown in the first quarter. The number of companies guiding earnings estimates lower increased significantly from recent quarters. This has the market concerned that earnings growth will slow to 5% to 7% in the first quarter.
The economic reports this past week were mixed, but did not undermine expectations of 3% or greater real GDP growth in the first quarter. January retail sales were down 0.4% because of a 3.3% drop in auto sales. Excluding autos, sales were up a good 0.6%. January industrial production was unchanged, but that was due to a 3% drop in utility output, as manufacturing output was up 0.4%. New claims fell to the lowest level in four years. Housing starts reached record levels. None of the reports had much impact, however, as they did not alter economic expectations. The PPI report on Friday was far more important.
In terms of stock sectors, energy and materials companies continued to do well. Financial and healthcare stocks, the traditional leaders for the market, continued to struggle.
The market got a bounce in recent weeks after it became apparent that the fourth quarter earnings reports were excellent. That largely erased the early January weakness. Now the focus is shifting to interest rates and inflation. That creates some risk. There is little doubt about the economic and earnings outlook. It is the puzzle of interest rates and inflation that has to be solved. The market started to show concern about those issues this week, and a continued focus on those factors could hamper enthusiasm for stocks in the weeks ahead. --Dick Green, Briefing.com
Code:
Index Started Week Ended Week Change %Change YTD
DJIA 10796.01 10785.22 -10.79 -0.1 % 0 %
Nasdaq 2076.66 2058.62 -18.04 -0.9 % -5.4 %
S&P 500 1205.30 1201.59 -3.71 -0.3 % -0.9 %
Russell 2000 634.76 630.13 -4.63 -0.7 % -3.3 %Close Dow +30.96 at 10785.22, S&P +0.84 at 1201.59, Nasdaq -2.72 at 2058.62: PPI and FDA were the acronyms of the day... The former contained bad news for the market while the latter contained good news... With a long weekend ahead of us, we'll start with the bad and end with the good... With respect to the January PPI report, the bad was its core component (excludes food and energy), which showed a surprising 0.8% increase versus the consensus estimate that called for a more modest 0.2% increase...
A big spike in tobacco prices (+3.4%) had something to do with the surprise, but nontheless, in light of Greenspan's recent testimony, the market wasn't inclined to dismiss the spike as an aberration... The concern about rising inflation, and the angst ahead of Wednesday's Consumer Price Index report, was palpable in the Treasury market where the yield on the benchmark 10-yr note jumped 8 basis points to 4.26% and the yield on the 30-yr bond rose 7 basis points to 4.65%... This jump in rates had the stock market on edge throughout the session, especially the financial sector (-0.98%), which held the broader market back all day...
To few people's surprise, rate-sensitive areas like homebuilding, utilities, brokerage, consumer finance, thrifts & mortgage, and diversified banks populated the list of worst-performing S&P industry groups... Per usual, the energy sector (+2.23%) bucked the broader trend and turned in a strong performance that was paced by the exploration and production group (+2.96%) and was highlighted by a gain in ExxonMobil (XOM 59.41, +1.28) that catapulted the oil company into the position of biggest company by market cap at approx. $384 bln...
Separately, the FDA's positive impact on the market stemmed from an advisory panel's recommendation that Merck's (MRK 32.61, +3.76) Vioxx drug should be reintroduced to the market and that Pfizer's (PFE 26.80, +1.74) Celebrex and Bextra drugs should remain on the market... This affirmation gave a material boost to both stocks on the primary belief that it should help their defense with associated litigation... In turn, their gains enabled the Dow to end the week on an upbeat note, even though it suffered a slight loss (-0.1%) for the entire week... Sticking with the good, bear in mind that Monday is Presidents' Day and that all U.S. markets will be closed for trading... NYSE Adv/Dec 1237/2131, Nasdaq Adv/Dec 1352/1714
2:32PM New 52-Week Highs: Oil and steel: Oil and steel stocks dominate the new 52-week high list. Tallies so far today for new highs vs lows are 152-17 (NYSE) and 65-38 (Nasdaq)... Sectors with good representation on the new high list today include Steel (CAS, CGA, CMC, LSS, MTL, MTLM, NSS, NUE, PKX, RESC, RS, SID, STLD, TONS, X), Integrated Oil (BP, COP, CVX, IMO, MRO, PTR, RD, TOT, XOM), Oil & Gas Exploration (ATPG, BR, CHK, DVN, EOG, NBL, NFX, OXY, UCL, VPI, XTO), Oil Services (BHI, CDIS, DO, DRQ, ESV, GRP, GSF, NBR, NOI, RDC, SII, VRCWFT), Cargo Ships (ATB, TRMD).
2:02PM QLT Inc: Aczone data demonstrates reduction in number & severity of acne lesions (QLTI) 15.42 +0.03: Co announces data from three clinical studies presented at the American Academy of Dermatology conference in New Orleans demonstrating that the Company's acne product Aczone (5% dapsone topical gel) reduces the number and severity of all lesion types in acne patients with no significant safety issues.Results from this study demonstrate a significant reduction in all lesion types (inflammatory, noninflammatory and total lesion counts) in patients using dapsone topical gel compared to the vehicle control group. An FDA decision on the new drug application seeking marketing approval (filed in 3Q04) is expected in 2H05.
1:04PM Treasuries close early and lower : The treasury market will close the shortened trading session lower with the yield curve tilting steeper. The long end of the curve extended overnight declines on the surprising surge in core PPI. The long bond came under pressure overnight as the market began speculating that US pension rules may force the Treasury to issue new 30-year bonds. Long-dated debt maturities are gaining popularity and speculation on the possibility of new supply hitting the market, in the form on brand new 30-year bonds, provided selling pressure. Treasuries will close the week lower with Greenspan's comments and inflation fears grabbing the credit for the sell off (see 9:33ET comment on bond tic). Despite the selling this week, some are calling for the long end of the curve to remain firmly supported due to the structural imbalance in supply and demand. Since the Treasury stopped issuing the 30-year bond in 2001, the long end has missed over $100B long bonds, which has shortened the treasury universe by year in aggregated duration. Asset/liability managers may continue to purchase 10- and 30-years as long duration remains scarce. Supply remains the key issue and the severe shortage in long duration securities has the potential to keep the long end of the curve at relatively low yields given the current state of the economy. Highlighting the economic calendar next week will be consumer confidence, CPI, durable orders, Q4 GDP-Prel, and existing home sales. The 10-years are -20/32nds yielding 4.258%
10:01AM Metrologic Inst receives additional contract modification of approx. $850,000 (MTLG) 20.50 +0.50:
9:16AM Gapping Down : Gapping down on disappointing earnings/guidance: NTGR -9.6%, ADIC -9.3% (also Bear Stearns downgrade), RAE -7%, ISNS -7%, INTU -1.9%, Other News: NTEC -7.6% (prices offering at $4/sh), DSCO -5.2% (stock offering), LGF -3.7% (announces convertible offering), CTIC -2.5% (profit taking from 12% move yesterday), BBY -1.1% (Goldman downgrade).
9:09AM Gapping Up : Gapping up on strong earnings/guidance: CRM +10.7%, NVDA +8.5%, AEIS +10.3% (also CIBC upgrade), AKAM +10%, CRYP +8.6%, TOPT +7.6%, VCLK +7.1%, MDRX +6.5%, PCLN +5.3%.... Other News: TIVO +10.8% (reaches 3 mln subs), PRM +8.6% (co's about.com to be sold to NYT), PKZ +6.6% (CIBC says co could have nearly $10/sh in cash by year-end), MAY +5.5% (FD resumes its takeover talks with May - WSJ), GRU +5.5%, SIGM +5% (started with an Outperform at Baird; tgt $20), MCIP +4.3% (Qwest plans revised offer for MCIP), MRK +3.8% (may return Vioxx to market), SINA +3.7%, FWHT +3.5% (London's The Sun newspaper chooses co's espotting.com over Google for paid listings - Forbes), TZOO +2.9%, SNIC +2.7% (added to JP Morgan's Focus List; tgt $21)... Under $3: SYNC +12.3% (posts largest non-GAAP profit in over 5 yrs).
12:22PM Campbell Soup Co (CPB) 28.39 -1.10: Soup's on! Well actually not really. Campbell Soup's Q2 disappointed the market with earnings of $0.57 per share - two cents below estimates. Considering the recent share action, the market was clearly expecting an upside beat. Revenues for the quarter rose 5.9% year/year to $2.22 bln actually ahead of estimates, yet declining earnings in its Soup, Sauces and Beverages division accounted for the bottom line miss.
The top line was driven by volume and mix adding 4% with price increases adding 1%. With 36% of sales coming from overseas, CPB enjoyed the benefits of a weaker dollar adding 2% to net sales. Its mainstay, the Soup, Sauces & Beverage segment saw sales up only 1%, as soup sales dropped 1% along with a 9% decline in the ready-to-serve segment, which faced stiff y/y comps. On the flip side was condensed soup sales up 4% and broth sales soaring 15%. Lower revenue growth, combined with higher operating costs including promotion spending and commodity costs, sent operating income sharply lower by 12% y/y.
It Baking & Snacking segment continues to perform well generating revenue growth of 9% and earnings of 12% due to favorable volume/mix and pricing gains. Co introduced new sugar free cookies and pot pies both adding to the unit's performance. However, this segment only accounts for 11% of total earnings. Intl Soup & Sauces (17% of total earnings) rose 10% in sales and 8% in profits with currency accounting for most of the upside. A bright spot was Asia showing strong volume growth during the quarter.
The guidance provided no relief with the co providing estimates that are in-line with consensus. For the full year, CPB reaffirmed earnings growth of 5-7%, which equates to EPS in the range of $1.66-1.69, versus consensus of $1.69.
The market did not take kindly to the report sending shares considerably lower. Overall, earnings quality was quite poor for the quarter. As such, we recommend investors let the dust settle and for the company to get a couple positive quarters under its belt before revisiting the name. As for now, the downward pressure is likely to remain. The one bright spot is its dividend yield of 3.82%. The stock is trading at 16.8x forward earnings compared to its peers General Mills (GIS) at 17.7x and ConAgra Foods (00C) at 18.0x. --Kimberly DuBord, Briefing.com
12:05PM Abbott Laboratories (ABT) $46.19 -0.37 (-0.8%) Abbott Labs raised its dividend this morning, to $0.275 per share, or an annual payment of $1.10 per share. At today's price of $46, this is equal to a yield of 2.4%. This puts it right in the middle of the yield range of the major drug companies. Merck and Johnson & Johnson have yields of 1.5% and 1.7%, respectively, while Pfizer and Bristol-Meyers have yields of 3.1% and 4.2%. However, ABT's stock performance over the past year has been much stronger than most other drug stocks, with JNJ a notable exception. This makes Abbott's yield an even more impressive number.
Ironically, the calculations for total returns on Abbott in 2004 will probably not include the total value of the spinoff of Hospira, which occurred in the spring of 2004. That spinoff, which initially had an approximately 10% immediate return to ABT returns, has been even larger, as HSP stock has risen an additional 15% since the spinoff in May of 2004.
Abbott has now raised its annual dividend every year for more than 30 years. This track record also ensures that Abbott will remain one of the select stocks that constitute the Mergent Dividend Achievers list. To be maintained on this list, a company must have continually increased its dividend continually for at least ten years. (For more on the Mergent Dividend Achievers list and index, see the Ahead of the Curve column of 23-Jun-04 "Book Review: Mergent's Dividend Achievers").
Dividends are slowly becoming more important to investors. The preferential tax treatment can be given only partial credit, however, as dividend stocks did not immediately respond to the preferential treatment, somewhat to our surprise. Now we think that dividend stocks are becoming more prominent in investors' focus because the traditional "growth stock superiority" paradigm is weakening. With Microsoft and Intel, once the crown-kings of "growth," both having been very poor investments over the past three years, the presumption that "growth trumps income" is no longer a given. In fact, Microsoft and Intel have both moved towards dividend payouts as a way to reward shareholders, in a tacit admission that keeping all earnings for reinvestment is not the "no-brainer" it used to be. Even KLA-Tencor, the semiconductor equipment company, is now paying a dividend. Are we seeing a gradual return to the old fashioned idea that the purpose of owning stock in a company is to get paid a share of the profits every year? That does seems to be happening, despite the strong disincentive of the double-taxation of a corporate dividend payment.
What this "slow shift in sentiment" towards a higher preference for dividends means is that companies like Abbott, that have a long history of both paying dividends and increasing them, are likely to become even more favored over time. Particularly if they keep increasing the dividend amount every year. Robert V. Green, Briefing.com
12:01PM Goldman Sachs (GS) 108.73 -1.87: There has been a rumor lately that makes sense but probably won't happen: Citigroup is said to be eyeing an acquistion of Goldman Sachs. That is a deal that would reshape the financial sector and make everyone else just a player.
Citigroup is already among the leaders in the financial services sector and owns Smith Barney. Goldman Sachs is one of the very best in terms of investment banking and trading; The combination of these strengths would be very powerful. The idea sprung up after Citigroup sold its insurance business to MetLife for $11.5 billion. That sounds like a healthy amount of cash, but remember that Goldman Sachs carries a $53 billion market cap, so the price tag would probably be north of $60 billion.
Goldman Sachs has long been an investment bank with a first rate trading house. The company also posted some solid results in 2004 with revenues topping the $29 billion mark, the highest since 2001. Earnings of $8.91 a share in 2004 were up significantly from $5.86 in the prior year, and the white-hot M&A market is driving speculation that the growth in earnings will continue.
While M&A is blistering, a market that is stuck in a trading range could prove troublesome for the company that has long been known for its trading expertise. Being a top notch shop, the company would still be able to garner a tidy sum from trading operations, but it is much easier to trade when the market is moving a particular direction. There is also the potential for the firm to participate in what is shaping up to be an improving IPO market, which should be a large EPS driver.
What investors should be focusing on is the earnings growth from Goldman Sachs. Earnings per share jumped 51% in 2004 and have grown at a rate of 27% over the last three years. This suggests a forward multiple that should be expanding, but has not. Trading at 11.7x next years earnings, the company is cheap compared to the market multiple that is generally in the high teens, but generally in line with peer valuations (Lehman Brothers and Merrill Lynch are both at 11x next year estimates).
A buyout would certainly be big news, but news that should not really be expected. The Citigroup rumor should eventually run its course. Investors should instead focus on the idea that Goldman will probably have even better earnings in 2005 as investment banking (M&A and IPO markets) picks up steam. Its not a law of physics, but better earnings tend to lead to better multiples and higher stock prices.
11:46AM Priceline.com Inc. (PCLN) 22.65 +1.09: It must be those hilarious Shatner and Nimoy commercials that turned what typically is a seasonally slow quarter for Priceline.com into a upside surprise. Co reported earnings after Thurs close of $8.8 mln, or $0.22 per share up 267% y/y and six cents ahead of estimates. Revenues for the quarter rose 8.2% year/year to $195 mln driven by retail airline tickets and Active Hotels acquisition.
The fourth quarter is typically slower as many consumers choose published fares over the Name Your Own Price® option during the holiday season. However, last Jan PCLN launched a new airline ticket product giving consumers the choice to shop around and compare published fares. Airline ticket unit bookings, which include both options, grew 61% y/y in-line with guidance. Hotel room night unit bookings including retail and opaque rose 51% y/y, while rental car booking gained 16% due to more inventory.
Overall, gross bookings rose 61% y/y to $413.5 mln with agency bookings of $196 mln. This is a highly profitable business. For the quarter stronger topline growth and lower cost of sales resulted in record gross margins of 26.4% due to higher hotel ASPs, Active Hotels acquisition, and opaque air sales. But growth came at a price as operating expenses rose 50% y/y mostly due to significant spending on advertising +44% and sales and marketing +54% and increased depreciation expense. Yet the pace of spending is still lower than revenues and bookings resulting in an operating margin of 23%.
Company expects Q1 EPS in the $0.18-0.22 range vs consensus of $0.23. For the full year it sees EPS of $1.18 vs consensus of $1.18. Co sees Q1 gross travel bookings growth of 30-35%. For the year, co expects ticket growth to come down with leisure fares remaining at low levels. Advertising spending will increase this year due to the launch of new products.
Priceline aims at being your full service online travel company. The departure away from a purely opaque service has paid off as the realization set in that customers prefer the choice. As Captain Kirk and Spock do their jobs increasing the retail option awareness, PCLN should continue to show positive momentum in this segment. Co is taking it one step further during second quarter launching a retail hotel product, which is sure to be the next growth driver. The one caveat being the retail business is less profitable than the opaque service, something to consider as co becomes more heavily retail weighted.
Going forward, Priceline is well positioned as a leader in online travel to leverage the longer term growth prospects as the world migrates more and more to the benefits of cyber travel. Stock is trading at a forward P/E of 19.2x with an earnings growth rate of 20%. --Kimberly DuBord, Briefing.com
9:48AM Page One - Focus Shifts from Earnings to Rates : The market sell-off yesterday reflected concerns over rising interest rates. Federal Reserve Chairman Greenspan had mentioned that risk on Wednesday, but the market held firm. Yesterday, the concerns justifiably broke through. Today, there are additional concerns.
The S&P 500 index enters today's trading down 5 points for the week. The 10-year note yield, meanwhile, had gone from 4.09% to 4.20% yesterday. This morning, it has jumped further to 4.24%. This isn't exactly dramatic, but it is a significant increase from the 3.97% hit on February 9. If the trend in the 10-year note yield keeps rising, it will not only solve the good Doctor Greenspan's conundrum, it very well may knock the stock market back.
There is little doubt that real GDP is on track for 3% or more growth. Earnings momentum is very strong. The uncertain variable for stock market valuation is interest rates. If rates remain as low as they are, then stocks may very well have a good year. But, with economic demand picking up, and with the slack in the economy slowing disappearing, long-term interest rates are likely to rise. That is likely whether or not inflation picks up.
This morning, there are also signs that inflation is picking up. January PPI was up a tame 0.3% after a similar drop in December. No problem there. Unfortunately, the core rate of PPI was up a huge, and unexpected, 0.8%. In 2004, the largest monthly gain was 0.3% and the entire year the core rate was up only 2.4%. This pop in pricing had some aberrant boosts, but even stable capital equipment prices were up 0.6%. It seems as if some pricing power has returned for producers. The bond market got whacked on the report. This one report doesn't mean inflation is back full force, but it legitimately raises a big red flag.
The corporate news is very light, but consistent with recent trends that have provided a boost to stocks. Qwest has indicated they will make a modified offer for MCI. Intuit and NVIDIA had good earnings reports, but Campbell Soup missed by 2 cents. Federated as renewed talks to acquire May Department Stores. Yesterday, Coke announced a 12% increase in their dividend. Thus, there is continued merger activity, good earnings, and dividend increases.
The question is whether those factors can produce a rising stock market. The answer depends largely on whether long-term rates rise significantly. The Fed looks likely to raise short-term rates to 3 1/2% or higher by the end of this year. If so, the 10-year note yield could rise to 4 3/4% or 5%. That seems likely to us, and that would limit stock market gains for the year. The prospect of firming inflation and rising rates is the reason our Market View is neutral. Dick Green, Briefing.com
http://biz.yahoo.com/mu/story.html
teknobucks
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semi's :shock:
semi's :shock:
teknobucks
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China cars start at $7,000
The models, ranging from compact coupes to upscale sedans, will be sold at 250 dealers.
By Ed Garsten / The Detroit News
Related links
Malcolm Bricklin, the man behind the Yugo, to lead new import wave in 2007
Chinese carmaker ambitious, controversial
The Road to China: Big rewards, big risks
CHICAGO -- Malcolm Bricklin, the man who brought the notorious Yugo to America in the 1980s, will sell a line of Chinese-built cars beginning in 2007 with starting prices as low as $6,900, the entrepreneur said Wednesday.
The cars, which range from compact coupes to upscale sedans, will be sold through a network of 250 dealerships that will feature test tracks, customer lounges and a jumbo video screen that will double as a drive-in movie theater, Bricklin said
Each dealership, located far from rivals, will be 20,000 square feet. About 1,000 people already have inquired about buying a franchise, he said.
"If I can get enough people looking at my car and driving my car at these prices, people are going to be buying," Bricklin said in an interview at the Chicago Auto Show.
Under an exclusive deal, the cars will be built by Chinese automaker Chery Automobile Co. and distributed by Bricklin's new company, New York-based Visionary Vehicles LLC. Top-end models will sell for between $20,000 and $25,000.
Bricklin expects to introduce one new model every two months for three years -- for a total of 20 new vehicles. He has set a sales target of 250,000 units in 2007, and sales of 1 million a year within four years.
Production for each model will be limited to 50,000 vehicles and product line will include vehicles with four, six-, and eight-cylinder engines.
Bricklin, who has had moments of spectacular success and failure in the auto business over the years, insists the Chery-built cars will be free of the horrid quality problems that plagued the Yugo when it was introduced in the 1980. The Yugo, Bricklin said, was built in an old factory by untrained workers in a war-torn country.
"This is a company that has quality," Bricklin said of Chery, which sold slightly less than 90,000 vehicles last year. Chery is one of China's second-tier automakers, and the eighth-biggest in the country.
As a hedge, however, the Chinese cars will carry a warranty good for 100,000 miles or 10 years from purchase. Hyundai Motor Co. and other automakers have offered similar warranties in the U.S. market to overcome customer concerns about quality.
Value is the hook, however. Prototypes of the models have been designed by renowned Italian designer Bertone. The curvy, sleek vehicles are aimed at going head-to-head with every major automaker -- from Subaru to BMW -- at a fraction of the price.
For example, Bricklin said a Chery-made car aimed at BMW AG's 6-series would be priced at less than $20,000 and include a V-8 turbocharged engine.
The first models to be sold here will be unveiled next year at auto shows in Detroit, Chicago and New York.
Visionary Vehicles is receiving financial backing from New York investment firm Allen & Co.
Privately held Visionary Vehicles has committed to invest $200 million in the product program at Chery for the U.S. market.
Visionary Vehicles hasn't decided what brand will be used to market the Chery-built vehicles, but make no mistake, says Bricklin, sales will begin in 2007.
"We're committed," he said. "This is in fast gear."
You can reach Ed Garsten at (313) 223-3217 or egarsten@detnews.com.
http://www.detnews.com/2005/autosinsider/0502/10/C01-85880.htm
China cars start at $7,000
The models, ranging from compact coupes to upscale sedans, will be sold at 250 dealers.
By Ed Garsten / The Detroit News
Related links
CHICAGO -- Malcolm Bricklin, the man who brought the notorious Yugo to America in the 1980s, will sell a line of Chinese-built cars beginning in 2007 with starting prices as low as $6,900, the entrepreneur said Wednesday.
The cars, which range from compact coupes to upscale sedans, will be sold through a network of 250 dealerships that will feature test tracks, customer lounges and a jumbo video screen that will double as a drive-in movie theater, Bricklin said
Each dealership, located far from rivals, will be 20,000 square feet. About 1,000 people already have inquired about buying a franchise, he said.
"If I can get enough people looking at my car and driving my car at these prices, people are going to be buying," Bricklin said in an interview at the Chicago Auto Show.
Under an exclusive deal, the cars will be built by Chinese automaker Chery Automobile Co. and distributed by Bricklin's new company, New York-based Visionary Vehicles LLC. Top-end models will sell for between $20,000 and $25,000.
Bricklin expects to introduce one new model every two months for three years -- for a total of 20 new vehicles. He has set a sales target of 250,000 units in 2007, and sales of 1 million a year within four years.
Production for each model will be limited to 50,000 vehicles and product line will include vehicles with four, six-, and eight-cylinder engines.
Bricklin, who has had moments of spectacular success and failure in the auto business over the years, insists the Chery-built cars will be free of the horrid quality problems that plagued the Yugo when it was introduced in the 1980. The Yugo, Bricklin said, was built in an old factory by untrained workers in a war-torn country.
"This is a company that has quality," Bricklin said of Chery, which sold slightly less than 90,000 vehicles last year. Chery is one of China's second-tier automakers, and the eighth-biggest in the country.
As a hedge, however, the Chinese cars will carry a warranty good for 100,000 miles or 10 years from purchase. Hyundai Motor Co. and other automakers have offered similar warranties in the U.S. market to overcome customer concerns about quality.
Value is the hook, however. Prototypes of the models have been designed by renowned Italian designer Bertone. The curvy, sleek vehicles are aimed at going head-to-head with every major automaker -- from Subaru to BMW -- at a fraction of the price.
For example, Bricklin said a Chery-made car aimed at BMW AG's 6-series would be priced at less than $20,000 and include a V-8 turbocharged engine.
The first models to be sold here will be unveiled next year at auto shows in Detroit, Chicago and New York.
Visionary Vehicles is receiving financial backing from New York investment firm Allen & Co.
Privately held Visionary Vehicles has committed to invest $200 million in the product program at Chery for the U.S. market.
Visionary Vehicles hasn't decided what brand will be used to market the Chery-built vehicles, but make no mistake, says Bricklin, sales will begin in 2007.
"We're committed," he said. "This is in fast gear."
You can reach Ed Garsten at (313) 223-3217 or egarsten@detnews.com.
http://www.detnews.com/2005/autosinsider/0502/10/C01-85880.htm
teknobucks
Active member
imported post
Producer Price Jump, Biggest in 6 Years
Friday February 18, 5:13 PM EST
By Tim Ahmann
WASHINGTON (Reuters) - U.S. producer prices, excluding food and energy, shot up at their fastest pace in six years in January as tobacco, auto and alcohol costs spiked, the government said on Friday in a report that fanned inflation fears.
A separate report showing U.S. consumer sentiment softened this month failed to ease financial market worries on inflation and profits, fueled by the broad-based price gains, which also raised expectations for Federal Reserve interest-rate hikes.
Overall, the producer price index, which measures prices received by farms, factories and refineries, rose just 0.3 percent last month as energy prices tumbled 1 percent and food costs slipped 0.2 percent, the Labor Department said.
But the core index, which strips out volatile food and energy prices, shot up 0.8 percent, the biggest gain since December 1998. Over the past year, core producer prices climbed 2.7 percent -- the largest 12-month gain in nine years.
Wall Street had expected core prices to rise just 0.2 percent and the surprisingly big jump weighed on markets.
U.S. government bond prices plunged and the dollar initially rose, although it ended even against the euro. Stocks also struggled but the blue chip Dow Jones industrial average (DJI) managed a 30 point gain on favorable regulatory news for drugmakers Merck & Co. Inc. (MRK) and Pfizer Inc. (PFE).
"An exceptionally strong month in the core reading is likely overstating the inflation threat, but a threat is building," Stephen Gallagher, chief U.S. economist at SG Corporate & Investment Banking, said in a note to clients.
Fed Chairman Alan Greenspan told Congress this week the U.S. economy seemed to have kicked off 2005 "with inflation and inflation expectations well anchored."
Some analysts said the Fed might have to re-evaluate the inflation outlook. "A number like this does not look well contained to the market," said John Caldwell, chief investment strategist at McDonald Financial Group.
LESS MEASURED?
The Fed has raised overnight interest rates by a quarter-percentage point at each of its last six policy meetings -- to 2.5 percent from a historically low 1 percent.
The producer price report, however, led markets to brace for the possibility of a less "measured" campaign, with futures markets pricing in a slight chance of a half-point rate rise at the Fed's next meeting in March. They also fully priced in three consecutive rate hikes in March, May and June.
The market moves suggested traders were discounting a University of Michigan report showing consumer confidence edged lower this month. The index slipped to 94.2 from January's 95.5, sources who receive the subscription-only report said.
Instead, the producer price report grabbed the spotlight.
Prices received for cigarettes jumped 3.4 percent, the biggest gain since April 2002 and one a department analyst pinned partly on a shift to industry from government in the cost of maintaining price supports for tobacco farmers.
Auto costs, which had dropped in December, rose 1.2 percent, while light truck and SUV prices climbed 0.9 percent, as automakers scaled back sales incentives in an effort to recoup rising production costs.
However, vehicles and cigarettes went only a bit of the way in explaining the jump in core prices.
"The increases in prices were all across the board," said economist Joel Naroff of Naroff Economic Advisors.
A department analyst said the core rate still would have advanced 0.8 percent with car and light truck costs stripped out. Similarly, he said the core index excluding cigarettes would have risen 0.7 percent, just a touch milder.
The department said prices for alcoholic beverages and sporting goods turned up after December drops, while the pace of increase in drug prices accelerated.
Further back in the production pipeline, cost pressures were mixed. Prices for goods at intermediate stages of production rose 0.4 percent and were up 0.8 percent outside of food and energy. But crude goods prices dropped 2 percent with the core crude goods index down 2.5 percent.
Peter Frank, senior currency strategist at ABN Amro in Chicago, said it was not clear if rising costs at the producer level would prove more troublesome for inflation or profits.
"The chances of a pass-through to (consumer) prices is only theoretical at this stage," he said.
©2005 Reuters Limited.
markets
Producer Price Jump, Biggest in 6 Years
Friday February 18, 5:13 PM EST
By Tim Ahmann
WASHINGTON (Reuters) - U.S. producer prices, excluding food and energy, shot up at their fastest pace in six years in January as tobacco, auto and alcohol costs spiked, the government said on Friday in a report that fanned inflation fears.
A separate report showing U.S. consumer sentiment softened this month failed to ease financial market worries on inflation and profits, fueled by the broad-based price gains, which also raised expectations for Federal Reserve interest-rate hikes.
Overall, the producer price index, which measures prices received by farms, factories and refineries, rose just 0.3 percent last month as energy prices tumbled 1 percent and food costs slipped 0.2 percent, the Labor Department said.
But the core index, which strips out volatile food and energy prices, shot up 0.8 percent, the biggest gain since December 1998. Over the past year, core producer prices climbed 2.7 percent -- the largest 12-month gain in nine years.
Wall Street had expected core prices to rise just 0.2 percent and the surprisingly big jump weighed on markets.
U.S. government bond prices plunged and the dollar initially rose, although it ended even against the euro. Stocks also struggled but the blue chip Dow Jones industrial average (DJI) managed a 30 point gain on favorable regulatory news for drugmakers Merck & Co. Inc. (MRK) and Pfizer Inc. (PFE).
"An exceptionally strong month in the core reading is likely overstating the inflation threat, but a threat is building," Stephen Gallagher, chief U.S. economist at SG Corporate & Investment Banking, said in a note to clients.
Fed Chairman Alan Greenspan told Congress this week the U.S. economy seemed to have kicked off 2005 "with inflation and inflation expectations well anchored."
Some analysts said the Fed might have to re-evaluate the inflation outlook. "A number like this does not look well contained to the market," said John Caldwell, chief investment strategist at McDonald Financial Group.
LESS MEASURED?
The Fed has raised overnight interest rates by a quarter-percentage point at each of its last six policy meetings -- to 2.5 percent from a historically low 1 percent.
The producer price report, however, led markets to brace for the possibility of a less "measured" campaign, with futures markets pricing in a slight chance of a half-point rate rise at the Fed's next meeting in March. They also fully priced in three consecutive rate hikes in March, May and June.
The market moves suggested traders were discounting a University of Michigan report showing consumer confidence edged lower this month. The index slipped to 94.2 from January's 95.5, sources who receive the subscription-only report said.
Instead, the producer price report grabbed the spotlight.
Prices received for cigarettes jumped 3.4 percent, the biggest gain since April 2002 and one a department analyst pinned partly on a shift to industry from government in the cost of maintaining price supports for tobacco farmers.
Auto costs, which had dropped in December, rose 1.2 percent, while light truck and SUV prices climbed 0.9 percent, as automakers scaled back sales incentives in an effort to recoup rising production costs.
However, vehicles and cigarettes went only a bit of the way in explaining the jump in core prices.
"The increases in prices were all across the board," said economist Joel Naroff of Naroff Economic Advisors.
A department analyst said the core rate still would have advanced 0.8 percent with car and light truck costs stripped out. Similarly, he said the core index excluding cigarettes would have risen 0.7 percent, just a touch milder.
The department said prices for alcoholic beverages and sporting goods turned up after December drops, while the pace of increase in drug prices accelerated.
Further back in the production pipeline, cost pressures were mixed. Prices for goods at intermediate stages of production rose 0.4 percent and were up 0.8 percent outside of food and energy. But crude goods prices dropped 2 percent with the core crude goods index down 2.5 percent.
Peter Frank, senior currency strategist at ABN Amro in Chicago, said it was not clear if rising costs at the producer level would prove more troublesome for inflation or profits.
"The chances of a pass-through to (consumer) prices is only theoretical at this stage," he said.
©2005 Reuters Limited.
markets
teknobucks
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imported post
John Mauldin-Bretton Woods, Part Two
A Beautiful Equilibrium
Staying Vigilant Against Complacency
Things Fall Apart; the Center Cannot Hold
Stability Breeds Instability
Why Long Term Rates Are So Low
Connecticut, Florida and Guacamole
By John Mauldin
February 18, 2004
"Another G-7 meeting has come and gone. And what has been accomplished? Next to
nothing, in my view. The club of the world's wealthiest nations has punted on
the big issues facing the global economy - namely, unprecedented current-account
imbalances, currency misalignments, mounting trade tensions, and the liquidity-
prone biases of central banks. The G-7's latest communique is emblematic
of the increasingly vacuous rhetoric of globalization. This is a perilous course
of inaction for a global economy beset with record imbalances." (Stephen Roach,
Chief Economist, Morgan Stanley)
In his talks to Congress this week, Chairman Greenspan dropped in these words,
which did not make the highlight reels, but nonetheless should be listened to:
"People experiencing long periods of relative stability are prone to excess. We
must thus remain vigilant against complacency."
The record imbalances which Roach alluded to are inherently unstable. They are
the proverbial unsustainable trend. Yet things seem to be rocking along just
fine. One of America's finest theoretical economists, Hyman Minsky, gave us this
great quote, "Stability is unstable." What he meant by that is that the longer
things remain the same, the more we expect them to remain the same and the more
complacent we get. Thus, when things actually do change, the shock is much
greater. Few have "remained vigilant." The long-term stability of trends is the
seedbed for asset and credit bubbles of all types.
This week, we begin a multi-part series on that most unsustainable of all
trends, the US trade balance. While the game can go on for much longer than
reason would dictate, there will be an end to it. Will it be the soft landing
with nations agreeing to work together to find a sort of Nash equilibrium; or,
the hard landing where the "vacuous rhetoric of globalization" masks the reality
of each nation going its own way, in a kind of "devil take the hindmost" world?
A Beautiful Equilibrium
In game theory, the Nash equilibrium (named after John Nash) is a kind of
optimal strategy for games involving two or more players, whereby the players
reach an outcome to mutual advantage. If there is a set of strategies for a game
with the property that no player can benefit by changing his strategy while (if)
the other players keep their strategies unchanged, then that set of strategies
and the corresponding payoffs constitute a Nash equilibrium. John Nash, the
Nobel laureate in mathematics was featured in the movie "A Beautiful Mind."
(Highly recommended, by the way.)
The US is living, many say, on the kindness of strangers. If it were not for the
willingness of Chinese and Japanese central banks, along with their smaller
Asian counterparts, to finance our trade deficit, we would be in perilous
circumstances. If Asian currencies saw the dollar fall by 33%, they stand to
lose over $600 billion in buying power due to their massive $1.8 trillion US
dollar reserves. That is a massive amount of confidence.
Yet it works both ways. Exports to the US alone accounted for about 12% of
China's GDP, and that was up from 9% in 2000. At current growth rates, US
imports could be responsible for 20% of China's GDP by 2008. It may be that
China is depending upon the kindness of strangers, in this case US consumers.
Other Asian countries have similar, if not as dramatic, dependence upon US
consumers. And many of them ship materials to China which eventually find their
way to the US.
The elephant in the world economic room is the now $660 billion US current
account deficit. At least $465 billion of that comes from foreign central banks.
It is an odd Nash equilibrium. They take our paper, which they know will one day
be worth less than it is today, in order to be able to sell us products which
keeps factories growing. How long can the game continue? In the case of China,
it may continue until the have established their own internal equilibrium of
jobs for the hundreds of millions of peasants moving from the farms looking for
a better life.
It is not a matter of things staying the same. There is in fact no Nash
equilibrium into which the world has settled. We are still "playing the game"
and some players may be opting to take advantage of others. The system itself is
inherently unstable, as we will see. And if you have trouble understanding how
the game is played, then take comfort in the fact that a US Senator, whose staff
at least should know better, clearly does not understand the basics of how the
economy works. I quote this from good friend Dennis Gartman:
"Secondly, we are now firmly convinced that Sen. 'Debbie' Stabenow (D-Michigan)
is an utter and complete idiot. Why mince words, for clarity is what we are
after here, and in her questioning of Mr. Greenspan yesterday Sen. Stabenow
removed any and all possibilities that she is not an idiot. Taking a page from
the manners of H. Ross Perot and waving a piece of paper upon which one of her
staff had obviously listed the foreign buyers of US treasury securities, Sen.
Stabenow roared before the television audience and wondered aloud what Mr.
Greenspan was going to do about this problem!
"Sen. Stabenow was indignant that so many 'foreigners' owned US treasury
securities, and she hoped that Mr. Greenspan would somehow come to his sense and
prohibit them from doing so in the future... or at least expose this as a
problem that must needs be addressed immediately.
"Mr. Greenspan, visibly torn between laughing aloud at the Senator's idiocy and
between disdain, but summoning up all of the will power necessary to answer her
properly, said that he knew of no laws that these 'foreigners' had broken; that
he knew of nothing he could do to stop them from making investments that they
thought were well advised and reasonable; that without their purchases US
interest rates might well have been a good deal higher than they are, and that
there seems to be no movement on their part to create an untoward market
circumstance by selling those securities presently. The only comment he missed
making and one we wish he had made is that their purchases are a huge 'vote of
confidence' in the US economy, not an indictment of same. Sen. Stabenow proved
the wisdom of the old aphorism that it is far better to remain silent and
thought of as an idiot than to say something and remove all doubts. In her case,
there were few doubts before her appearance; now there are none."
As a prelude to a paper we are going to examine in detail in the next few weeks,
there is reason to believe that long term interest rates might be at least 1%
higher and perhaps as much as 2% without foreign buying of US government debt.
10 year treasuries at 6% would mean that 30-year mortgages would be well over
7%. That would create quite a slowdown in housing construction and at least put
a lid on the rise in home values, if not reverse the trend. That would certainly
slow the economy down.
While it is doubtful the Senator would wish for such an economic slowdown, this
illustrates that there are consequences for individual investors to the
"international trade game" that we will be discussing. It is not played in a
vacuum.
Staying Vigilant Against Complacency
What I want to do over the next few weeks is to show you why Greenspan is right.
You must remain vigilant against complacency. The last "Big Thing" to come upon
the world was the bursting of the stock market bubble in 2000-2002. There was a
new paradigm. The next Big Thing is likely to be the fallout from the
rebalancing of global trade. You do NOT want to be on the wrong side of that
trade. The good news is that we will muddle through. It is not the end of the
world. However, the transition will not be fun. It will affect your bonds, your
stocks, your home values and maybe your job. Assuming that tomorrow will be like
today is a complacency that you cannot afford.
To start us off, I want to quote a few paragraphs about what Hyman Minsky wrote
about financial balance.
"...Minsky characterized the financial balance along a scale of running from
'fragile' to robust.' 'Fragile finance' refers to states in which cash
commitments are relatively heavy compared to cash flows, so that there is some
danger of widespread failure to meet commitments, failure that might cause
general breakdown in coherence. 'Robust finance' refers to states in which
commitments are relatively light compared to cash flows, so that the danger of
incoherence is relatively remote. The emphasis on the threat of incoherence is
one way of reading the scale.
"Viewed more positively, what is so appealing about a state of 'robust finance'
is that it leaves open many different possible future paths for subsequent
social freedom. What is so tragic about a state of 'fragile finance' is that
previous commitments leave open only very few possibilities for the future, and
maybe no possibilities at all that are consistent with existing commitments.
Fragile finance is a state of social constraint. The degree of fragility or
robustness in the economy as a whole ultimately depends on the fragility or
robustness of financing arrangements at the level of the constituent economic
units." (Perry Mehrling, The Vision of Hyman P. Minsky, 1998)
Or put more simply, if you have cash, you have more options. It would seem that
the United States has fewer options, as we are the borrower, not the lender. But
that is not entirely the case. While Europe does not feel the need to build up
dollar reserves, thus lowering the values of their currency and financing our
trade deficit, clearly Asia does. While they may have "cash." They also have
"existing commitments," as Minsky put it, to support export growth as a way to
increase employment and improve their national well-being.
What would happen, do you think, if China were to see their exports to the US
decrease? What about all the spare capacity and who would use it? What about the
bank loans made that are predicated on the kindness of US consumers being
willing to forego savings and purchase Chinese goods? What about the
expectations of the masses of poor who are looking for jobs, not to mention the
loss of jobs from those currently employed? The Chinese must feel an existing
commitment to be willing to take dollars that they surely must know will not be
worth as much in the future.
Things Fall Apart; the Center Cannot Hold
"Things fall apart; the center cannot hold; mere anarchy is loosed upon the
world, the blood-dimmed tide is loosed, and everywhere the ceremony of innocence
is drowned." - William Butler Yeats
Yeats was not describing what has come to be called Bretton Woods 2, but it
seems apropos to start with that quote. The first Bretton Woods system came
about when representatives of most of the world's leading nations met at Bretton
Woods, New Hampshire, in 1944 to create a new international monetary system.
Because the US at the time accounted for over half of the world's manufacturing
capacity and held most of the world's gold, the leaders decided to tie world
currencies to the dollar, which, in turn, they agreed should be convertible into
gold at $35 per ounce.
Under the Bretton Woods system, central banks of countries other than the US
were given the task of maintaining fixed exchange rates between their currencies
and the dollar. They did this by intervening in foreign exchange markets. If a
country's currency was too high relative to the dollar, its central bank would
sell its currency in exchange for dollars, driving down the value of its
currency. Conversely, if the value of a country's money was too low, the country
would buy its own currency, thereby driving up the price.
The dollar became the world's reserve currency. Yet there were limits. Each
country had to police its own reserves and currency or be forced to revalue. And
the US was constrained because the dollar was fully convertible into gold. This
changed in 1971 when Nixon closed the gold window.
Now we have what many are coming to call a Bretton Woods 2 system. That is where
much of the world, but primarily the Asian countries, have more or less
informally agreed to peg their currencies to the dollar. They do this in order
to maintain their relative competitive ability to sell their products to the
world and specifically to the US.
But this system is inherently more unstable than the first Bretton Woods. There
is no gold conversion constraint upon the reserve currency. The US has few
reasons to protect the value of the currency, and many reasons why they should
want it to drop. And there is no formal agreement among the nations. Any nation
at any time could begin to act unilaterally to change. Russia has specifically
said they would start to have a larger euro component to their growing national
reserves. Thailand has said the same, and indications are that they are putting
actions behind their words.
For the rest of today's letter, and probably much of next week's, we are going
to look at a rather remarkable paper called: "Will the Bretton Woods 2 Regime
Unravel Soon? The Risk of a Hard Landing in 2005-2006" It is by Nouriel Roubini
of the Stern School of Business at New York University and Brad Setser, Research
Associate Global Economic Governance Programme at University College, Oxford
University. It was done for a symposium held this month in San Francisco
sponsored by the Federal Reserve Bank of San Francisco and University of
California - Berkley. The symposium was called "Revived Bretton Woods System: A
New Paradigm for Asian Development?"
Let's look at a few paragraphs from the introduction that helps us get our
bearings to the problems that Roubini and Setser want to point out:
"The defining feature of the global economy right now is the $660 billion US
current account deficit. The world's largest economy - and the world's
preeminent military and geo-strategic power - is also the world's largest
debtor. The current account surpluses of most other regions of the world are the
mirror image of the US deficit. The US absorbs at least 80% of the savings that
the rest of the world does not invest at home. Barring an economic slump in the
US or a major fall in the dollar, the US current account deficit looks set to
expand significantly in 2005 and 2006.
"The defining feature of the current international financial and monetary system
is that it finances the United States' enormous external deficit - and the
associated fiscal deficit -- at low interest rates. The world's central banks,
not private investors, provide the bulk of the financing the United States needs
to sustain its deficits.
"...Michael Dooley, David Folkerts-Landau and Peter Garber, in a series of
influential papers, have argued that the nations of the Pacific have constituted
a new Bretton Woods system. In the original Bretton Woods system, Europe and
Japan tied their currencies to the dollar; today the industrialized - and
rapidly industrializing - Asian economies formally or informally tie their
currencies to the dollar. Dooley, Folkerts-Landau and Garber, argue that this
system of fixed and heavily managed exchange rates is fundamentally stable, and
the intervention required to prevent Asian currencies from appreciating will
continue to provide the bulk of the financing the US needs to run ongoing
current account deficits.
"For countries on the periphery, the benefits of stable, weak exchange rates
exceed the costs of reserve accumulation. China relies on rapid export-led
growth to absorb surplus labor of hundreds of millions of low-skill poor workers
from its vast agricultural sector into the modern, industrial and traded sector.
Continued reserve accumulation by Asian - and other - central banks, in turn,
allows the US to continue to rely on domestic demand to drive its growth, and to
run the resulting large current account deficits. Indeed, the external deficits
financed through a new renminbi-dollar standard are far larger than any deficits
associated with the original gold-dollar standard or the original Bretton Woods
system.
"Initially, Garber, Dooley and Folkerts-Landau suggested the new system of fixed
and quasi-fixed exchange rates would last a generation, until China's
agricultural labor surplus was absorbed in a new urban industrial sector. More
recently, Peter Garber backed off a bit, but he still maintained that the new
Bretton Woods system would last another eight years. Michael Mussa has suggested
it will not last another four years. We believe it may have difficulty lasting
for another two years.
"...we argue that there is a meaningful risk the Bretton Woods 2 system will
unravel before the end of 2006."
Stability Breeds Instability
They find several sources of instability. Let's look at a few of them briefly.
(I will try to find a web link for the paper by next week.)
First, as alluded to above, they see a tension between the growing need for
financing by the US and the "large losses that those lending to the US in
dollars are almost certain to incur as part of the adjustment needed to reduce
the US trade deficit."
The world's central banks hold roughly $2.5 trillion of the $3.8 trillion worth
of reserves in dollars. Asian central banks have roughly $1.8 trillion in
dollars. If Asian currencies were to depreciate by 33%, that means Asian central
banks would lose $600 billion, which is not a small sum. And it cannot be
dismissed as merely a paper loss.
Most of the countries "sterilize" their dollar holdings in order to maintain the
relative value of their currency and maintain control of their money supply and
thus inflation. "To the extent that central banks have to sterilize their
reserve accumulation, their dollar assets are offset by local currency
liabilities that have to be paid. Central banks can always be recapitalized by
taxpayers, but the new government bonds given to the central bank to make up for
exchange rate losses have to be serviced out of the government's budget. That is
a real cost."
Let's see if I can explain this. A business sells $ billion dollars worth of
widgets to the US. When it comes back to the country, the business needs local
currency to pay suppliers and employees, so they convert it to the local
currency. This increases the money supply. At some point, that is inflationary,
so the local central banks issues government debt to soak up the excess cash and
try and maintain a stable money supply. That local debt has to eventually be
paid. It is a real cost. If the dollar goes down, so does the value of its
reserves, yet its debt in local currency has stayed the same. Someone (read
taxpayer) has to make up the local currency losses.
For some smaller economies, these losses can be significant. As they point out
in a footnote: "As Higgins and Klitgaard (2004) note, reserve holdings of some
Asian economies are so large that the losses for some central banks from even
small moves in their exchange rate as significant: a 10% appreciation of the
Singapore dollar might reduce the local currency value of Singapore's reserves
by 10% of GDP; a 10% move in the Taiwanese dollar would generate local currency
losses of 8% of Taiwan's GDP." This is just one more reason why central banks
would be reluctant to see the dollar drop.
Of course, that could change. What if Singapore started to move it reserves out
of the dollar and into yen and euros? At some point, it makes sense to do so.
But when? And if one country starts, do others follow? Is there some new Nash
equilibrium out there?
Why Long Term Rates Are So Low
"Developing a clean test of the impact of central bank demand on interest rates
is hard, and estimates of the impact vary substantially. Goldman Sachs (2004)
has presented an analysis suggesting that central banks intervention is
narrowing Treasury yields by only 40bps; Sack (2004) provides a similar
estimate.13 Truman (2005) notes that sustained intervention from central banks
is similar to a sustained reduction in the fiscal deficit: his ballpark estimate
suggests a $300 billion in central bank intervention might have a 75 bp impact.
Research from Federal Reserve suggests a 50 to 100 bps impact (see Bernanke,
Reinhart and Sack (2004)); PIMCO's Bill Gross puts it at closer to 100 bps, and
Morgan Stanley's Stephen Roach puts it at between 100 and 150 bps."
Since 2000, Roubini and Setser tell us that all of the net new supply of
Treasuries has been bought by non-residents, and that between 80-90% has been by
central banks. One last quote and then I will wrap up for this week:
"Central bank demand made it easier for the US Treasury to shorten the maturity
of the US debt stock, and thus to reduce relative supply of long term US
Treasuries. By eliminating the 30 year bond and supplying very little of the 10
year bond, the US reduced the share of ten year and longer Treasuries in the
overall marketable stock from 40% in 2001 to 31% at the end of fiscal 2004. The
overall stock of marketable treasuries went up by $931 billion in FY 2002-04,
but the stock of ten-year notes and longer-term bonds went up only by $35
billion. Had the share of longer term Treasuries in stock stayed constant, the
increase would have been closer to $365 billion. Central banks clearly are not
just buying short-dated bills and two and three year Treasury notes: US data
indicates that they have been important participants in the five and ten year
note auctions. Consequently, the stock of ten-year notes in private US hands has
presumably gone down over the past few years despite the large increase in the
overall Treasury stock. Treasuries of different maturities are a close
substitutes, but the relative scarcity of the ten-year note and other longer
dated Treasuries could nonetheless have had an impact on its yield.
"Consequently, the 40bp [basis point] Goldman estimate seriously understates the
effects of the Asian intervention on the market. Considering the size of recent
central bank purchases, the indirect impact of central bank intervention on
private demand for Treasuries, the interaction between central bank reserve
accumulation and Treasury debt management policy and the effects of Asian
reserve accumulation on inflation and growth (general equilibrium effects), we
would bet the overall impact would be closer to 200bps."
Part of the reason they think the affect is higher is that such large purchases
by foreign central banks distorts the value of the dollar and inflation, as well
as US GDP and trade. These all have an impact on interest rates, and are usually
not taken into account by those who look at the impact of foreign currency
buying upon US interest rates.
Yes, with a much lower dollar, the trade deficit would be lower. We would be
investing in industry which would make things for trade, as we would be more
competitive. Fewer jobs would go offshore.
But we would also be paying much higher prices for nearly everything. Inflation
would be a problem, or the Fed would be fighting it with higher interest rates.
That means a much slower economy, and the increase in value in your house?
Forget about it.
There are no economic free lunches. There is a trade-off for everything. I
prefer the market to make those decisions, but we do not have a free market in
currencies. It is manipulated by Asian central banks, and that distortion is
going to cause pain down the road.
The interesting exercise for us is to try and understand how all the "players"
in the game will act. What kind of odd Nash equilibrium will they settle into?
Will they all share some pain so as to lessen the total amount of pain, or will
they seek to avoid as much personal pain as possible thereby causing more pain
for everyone else? I am not entirely optimistic, given the current level of the
"vacuous rhetoric of globalization." But one can always hope. It will take more
than a few beautiful minds to work this equilibrium equation out.
But that's enough for this week. There is a lot more to come the next few weeks
on this topic.
And just for fun and a little surprise, next week I will tell you why the Bush
administration and Congressional Republicans are making the problem worse. It is
not a pretty picture.
Connecticut, Florida and Guacamole
Puerto Vallarta was just what the doctor ordered. What a beautiful place. Sun,
margaritas and guacamole. Normally, I come back a few pounds heavier from eating
massive quantities of guacamole and chips. This trip, we told them to bring us
lettuce leaves instead of chips with the guac. Combined with a lot of fresh
fish, I somehow came back the same weight, but got to eat a lot of guacamole.
I live in Texas, where there is no shortage of Mexican restaurants and
guacamole. But there is simply no comparison. The Mexican version is far
superior. Perhaps it is the avocado and fresher ingredients. Yet I can't get
Mexican avocadoes, which cost a fraction of the California version. I wonder why
the US government needs to protect me from Mexican avocadoes? Perhaps, as Gary
North suggested, to help me enjoy paying twice the world price to protect
Florida sugar growers.
I am in Connecticut and New York for the first part of next week, and then I go
to Tampa and Orlando for a series of meetings and a private speaking engagement.
Then I come back home where right now it looks like I will be home for the
entire month of March. April is looking ugly, because I have to go to London for
a course on English security law and then take a test 8 days later, so that
means the first 13 days I will be in Europe. My partners there are already
planning to move me through a few countries, but all in all it should be fun.
Except for that test. I hate regulatory exams. I have taken over half a dozen,
and always done quite well, but they do put stress into one's life. And if I
fail this one, I have to go back the next month and try it again.
Enjoy your week. I will be having brunch with my new daughter-in-law and some of
the kids for her birthday tomorrow morning. Being with family is always a good
way to spend a weekend. Even if there is no guacamole.
Your wishing his mind was more beautiful analyst,
John Mauldin
John Mauldin-Bretton Woods, Part Two
A Beautiful Equilibrium
Staying Vigilant Against Complacency
Things Fall Apart; the Center Cannot Hold
Stability Breeds Instability
Why Long Term Rates Are So Low
Connecticut, Florida and Guacamole
By John Mauldin
February 18, 2004
"Another G-7 meeting has come and gone. And what has been accomplished? Next to
nothing, in my view. The club of the world's wealthiest nations has punted on
the big issues facing the global economy - namely, unprecedented current-account
imbalances, currency misalignments, mounting trade tensions, and the liquidity-
prone biases of central banks. The G-7's latest communique is emblematic
of the increasingly vacuous rhetoric of globalization. This is a perilous course
of inaction for a global economy beset with record imbalances." (Stephen Roach,
Chief Economist, Morgan Stanley)
In his talks to Congress this week, Chairman Greenspan dropped in these words,
which did not make the highlight reels, but nonetheless should be listened to:
"People experiencing long periods of relative stability are prone to excess. We
must thus remain vigilant against complacency."
The record imbalances which Roach alluded to are inherently unstable. They are
the proverbial unsustainable trend. Yet things seem to be rocking along just
fine. One of America's finest theoretical economists, Hyman Minsky, gave us this
great quote, "Stability is unstable." What he meant by that is that the longer
things remain the same, the more we expect them to remain the same and the more
complacent we get. Thus, when things actually do change, the shock is much
greater. Few have "remained vigilant." The long-term stability of trends is the
seedbed for asset and credit bubbles of all types.
This week, we begin a multi-part series on that most unsustainable of all
trends, the US trade balance. While the game can go on for much longer than
reason would dictate, there will be an end to it. Will it be the soft landing
with nations agreeing to work together to find a sort of Nash equilibrium; or,
the hard landing where the "vacuous rhetoric of globalization" masks the reality
of each nation going its own way, in a kind of "devil take the hindmost" world?
A Beautiful Equilibrium
In game theory, the Nash equilibrium (named after John Nash) is a kind of
optimal strategy for games involving two or more players, whereby the players
reach an outcome to mutual advantage. If there is a set of strategies for a game
with the property that no player can benefit by changing his strategy while (if)
the other players keep their strategies unchanged, then that set of strategies
and the corresponding payoffs constitute a Nash equilibrium. John Nash, the
Nobel laureate in mathematics was featured in the movie "A Beautiful Mind."
(Highly recommended, by the way.)
The US is living, many say, on the kindness of strangers. If it were not for the
willingness of Chinese and Japanese central banks, along with their smaller
Asian counterparts, to finance our trade deficit, we would be in perilous
circumstances. If Asian currencies saw the dollar fall by 33%, they stand to
lose over $600 billion in buying power due to their massive $1.8 trillion US
dollar reserves. That is a massive amount of confidence.
Yet it works both ways. Exports to the US alone accounted for about 12% of
China's GDP, and that was up from 9% in 2000. At current growth rates, US
imports could be responsible for 20% of China's GDP by 2008. It may be that
China is depending upon the kindness of strangers, in this case US consumers.
Other Asian countries have similar, if not as dramatic, dependence upon US
consumers. And many of them ship materials to China which eventually find their
way to the US.
The elephant in the world economic room is the now $660 billion US current
account deficit. At least $465 billion of that comes from foreign central banks.
It is an odd Nash equilibrium. They take our paper, which they know will one day
be worth less than it is today, in order to be able to sell us products which
keeps factories growing. How long can the game continue? In the case of China,
it may continue until the have established their own internal equilibrium of
jobs for the hundreds of millions of peasants moving from the farms looking for
a better life.
It is not a matter of things staying the same. There is in fact no Nash
equilibrium into which the world has settled. We are still "playing the game"
and some players may be opting to take advantage of others. The system itself is
inherently unstable, as we will see. And if you have trouble understanding how
the game is played, then take comfort in the fact that a US Senator, whose staff
at least should know better, clearly does not understand the basics of how the
economy works. I quote this from good friend Dennis Gartman:
"Secondly, we are now firmly convinced that Sen. 'Debbie' Stabenow (D-Michigan)
is an utter and complete idiot. Why mince words, for clarity is what we are
after here, and in her questioning of Mr. Greenspan yesterday Sen. Stabenow
removed any and all possibilities that she is not an idiot. Taking a page from
the manners of H. Ross Perot and waving a piece of paper upon which one of her
staff had obviously listed the foreign buyers of US treasury securities, Sen.
Stabenow roared before the television audience and wondered aloud what Mr.
Greenspan was going to do about this problem!
"Sen. Stabenow was indignant that so many 'foreigners' owned US treasury
securities, and she hoped that Mr. Greenspan would somehow come to his sense and
prohibit them from doing so in the future... or at least expose this as a
problem that must needs be addressed immediately.
"Mr. Greenspan, visibly torn between laughing aloud at the Senator's idiocy and
between disdain, but summoning up all of the will power necessary to answer her
properly, said that he knew of no laws that these 'foreigners' had broken; that
he knew of nothing he could do to stop them from making investments that they
thought were well advised and reasonable; that without their purchases US
interest rates might well have been a good deal higher than they are, and that
there seems to be no movement on their part to create an untoward market
circumstance by selling those securities presently. The only comment he missed
making and one we wish he had made is that their purchases are a huge 'vote of
confidence' in the US economy, not an indictment of same. Sen. Stabenow proved
the wisdom of the old aphorism that it is far better to remain silent and
thought of as an idiot than to say something and remove all doubts. In her case,
there were few doubts before her appearance; now there are none."
As a prelude to a paper we are going to examine in detail in the next few weeks,
there is reason to believe that long term interest rates might be at least 1%
higher and perhaps as much as 2% without foreign buying of US government debt.
10 year treasuries at 6% would mean that 30-year mortgages would be well over
7%. That would create quite a slowdown in housing construction and at least put
a lid on the rise in home values, if not reverse the trend. That would certainly
slow the economy down.
While it is doubtful the Senator would wish for such an economic slowdown, this
illustrates that there are consequences for individual investors to the
"international trade game" that we will be discussing. It is not played in a
vacuum.
Staying Vigilant Against Complacency
What I want to do over the next few weeks is to show you why Greenspan is right.
You must remain vigilant against complacency. The last "Big Thing" to come upon
the world was the bursting of the stock market bubble in 2000-2002. There was a
new paradigm. The next Big Thing is likely to be the fallout from the
rebalancing of global trade. You do NOT want to be on the wrong side of that
trade. The good news is that we will muddle through. It is not the end of the
world. However, the transition will not be fun. It will affect your bonds, your
stocks, your home values and maybe your job. Assuming that tomorrow will be like
today is a complacency that you cannot afford.
To start us off, I want to quote a few paragraphs about what Hyman Minsky wrote
about financial balance.
"...Minsky characterized the financial balance along a scale of running from
'fragile' to robust.' 'Fragile finance' refers to states in which cash
commitments are relatively heavy compared to cash flows, so that there is some
danger of widespread failure to meet commitments, failure that might cause
general breakdown in coherence. 'Robust finance' refers to states in which
commitments are relatively light compared to cash flows, so that the danger of
incoherence is relatively remote. The emphasis on the threat of incoherence is
one way of reading the scale.
"Viewed more positively, what is so appealing about a state of 'robust finance'
is that it leaves open many different possible future paths for subsequent
social freedom. What is so tragic about a state of 'fragile finance' is that
previous commitments leave open only very few possibilities for the future, and
maybe no possibilities at all that are consistent with existing commitments.
Fragile finance is a state of social constraint. The degree of fragility or
robustness in the economy as a whole ultimately depends on the fragility or
robustness of financing arrangements at the level of the constituent economic
units." (Perry Mehrling, The Vision of Hyman P. Minsky, 1998)
Or put more simply, if you have cash, you have more options. It would seem that
the United States has fewer options, as we are the borrower, not the lender. But
that is not entirely the case. While Europe does not feel the need to build up
dollar reserves, thus lowering the values of their currency and financing our
trade deficit, clearly Asia does. While they may have "cash." They also have
"existing commitments," as Minsky put it, to support export growth as a way to
increase employment and improve their national well-being.
What would happen, do you think, if China were to see their exports to the US
decrease? What about all the spare capacity and who would use it? What about the
bank loans made that are predicated on the kindness of US consumers being
willing to forego savings and purchase Chinese goods? What about the
expectations of the masses of poor who are looking for jobs, not to mention the
loss of jobs from those currently employed? The Chinese must feel an existing
commitment to be willing to take dollars that they surely must know will not be
worth as much in the future.
Things Fall Apart; the Center Cannot Hold
"Things fall apart; the center cannot hold; mere anarchy is loosed upon the
world, the blood-dimmed tide is loosed, and everywhere the ceremony of innocence
is drowned." - William Butler Yeats
Yeats was not describing what has come to be called Bretton Woods 2, but it
seems apropos to start with that quote. The first Bretton Woods system came
about when representatives of most of the world's leading nations met at Bretton
Woods, New Hampshire, in 1944 to create a new international monetary system.
Because the US at the time accounted for over half of the world's manufacturing
capacity and held most of the world's gold, the leaders decided to tie world
currencies to the dollar, which, in turn, they agreed should be convertible into
gold at $35 per ounce.
Under the Bretton Woods system, central banks of countries other than the US
were given the task of maintaining fixed exchange rates between their currencies
and the dollar. They did this by intervening in foreign exchange markets. If a
country's currency was too high relative to the dollar, its central bank would
sell its currency in exchange for dollars, driving down the value of its
currency. Conversely, if the value of a country's money was too low, the country
would buy its own currency, thereby driving up the price.
The dollar became the world's reserve currency. Yet there were limits. Each
country had to police its own reserves and currency or be forced to revalue. And
the US was constrained because the dollar was fully convertible into gold. This
changed in 1971 when Nixon closed the gold window.
Now we have what many are coming to call a Bretton Woods 2 system. That is where
much of the world, but primarily the Asian countries, have more or less
informally agreed to peg their currencies to the dollar. They do this in order
to maintain their relative competitive ability to sell their products to the
world and specifically to the US.
But this system is inherently more unstable than the first Bretton Woods. There
is no gold conversion constraint upon the reserve currency. The US has few
reasons to protect the value of the currency, and many reasons why they should
want it to drop. And there is no formal agreement among the nations. Any nation
at any time could begin to act unilaterally to change. Russia has specifically
said they would start to have a larger euro component to their growing national
reserves. Thailand has said the same, and indications are that they are putting
actions behind their words.
For the rest of today's letter, and probably much of next week's, we are going
to look at a rather remarkable paper called: "Will the Bretton Woods 2 Regime
Unravel Soon? The Risk of a Hard Landing in 2005-2006" It is by Nouriel Roubini
of the Stern School of Business at New York University and Brad Setser, Research
Associate Global Economic Governance Programme at University College, Oxford
University. It was done for a symposium held this month in San Francisco
sponsored by the Federal Reserve Bank of San Francisco and University of
California - Berkley. The symposium was called "Revived Bretton Woods System: A
New Paradigm for Asian Development?"
Let's look at a few paragraphs from the introduction that helps us get our
bearings to the problems that Roubini and Setser want to point out:
"The defining feature of the global economy right now is the $660 billion US
current account deficit. The world's largest economy - and the world's
preeminent military and geo-strategic power - is also the world's largest
debtor. The current account surpluses of most other regions of the world are the
mirror image of the US deficit. The US absorbs at least 80% of the savings that
the rest of the world does not invest at home. Barring an economic slump in the
US or a major fall in the dollar, the US current account deficit looks set to
expand significantly in 2005 and 2006.
"The defining feature of the current international financial and monetary system
is that it finances the United States' enormous external deficit - and the
associated fiscal deficit -- at low interest rates. The world's central banks,
not private investors, provide the bulk of the financing the United States needs
to sustain its deficits.
"...Michael Dooley, David Folkerts-Landau and Peter Garber, in a series of
influential papers, have argued that the nations of the Pacific have constituted
a new Bretton Woods system. In the original Bretton Woods system, Europe and
Japan tied their currencies to the dollar; today the industrialized - and
rapidly industrializing - Asian economies formally or informally tie their
currencies to the dollar. Dooley, Folkerts-Landau and Garber, argue that this
system of fixed and heavily managed exchange rates is fundamentally stable, and
the intervention required to prevent Asian currencies from appreciating will
continue to provide the bulk of the financing the US needs to run ongoing
current account deficits.
"For countries on the periphery, the benefits of stable, weak exchange rates
exceed the costs of reserve accumulation. China relies on rapid export-led
growth to absorb surplus labor of hundreds of millions of low-skill poor workers
from its vast agricultural sector into the modern, industrial and traded sector.
Continued reserve accumulation by Asian - and other - central banks, in turn,
allows the US to continue to rely on domestic demand to drive its growth, and to
run the resulting large current account deficits. Indeed, the external deficits
financed through a new renminbi-dollar standard are far larger than any deficits
associated with the original gold-dollar standard or the original Bretton Woods
system.
"Initially, Garber, Dooley and Folkerts-Landau suggested the new system of fixed
and quasi-fixed exchange rates would last a generation, until China's
agricultural labor surplus was absorbed in a new urban industrial sector. More
recently, Peter Garber backed off a bit, but he still maintained that the new
Bretton Woods system would last another eight years. Michael Mussa has suggested
it will not last another four years. We believe it may have difficulty lasting
for another two years.
"...we argue that there is a meaningful risk the Bretton Woods 2 system will
unravel before the end of 2006."
Stability Breeds Instability
They find several sources of instability. Let's look at a few of them briefly.
(I will try to find a web link for the paper by next week.)
First, as alluded to above, they see a tension between the growing need for
financing by the US and the "large losses that those lending to the US in
dollars are almost certain to incur as part of the adjustment needed to reduce
the US trade deficit."
The world's central banks hold roughly $2.5 trillion of the $3.8 trillion worth
of reserves in dollars. Asian central banks have roughly $1.8 trillion in
dollars. If Asian currencies were to depreciate by 33%, that means Asian central
banks would lose $600 billion, which is not a small sum. And it cannot be
dismissed as merely a paper loss.
Most of the countries "sterilize" their dollar holdings in order to maintain the
relative value of their currency and maintain control of their money supply and
thus inflation. "To the extent that central banks have to sterilize their
reserve accumulation, their dollar assets are offset by local currency
liabilities that have to be paid. Central banks can always be recapitalized by
taxpayers, but the new government bonds given to the central bank to make up for
exchange rate losses have to be serviced out of the government's budget. That is
a real cost."
Let's see if I can explain this. A business sells $ billion dollars worth of
widgets to the US. When it comes back to the country, the business needs local
currency to pay suppliers and employees, so they convert it to the local
currency. This increases the money supply. At some point, that is inflationary,
so the local central banks issues government debt to soak up the excess cash and
try and maintain a stable money supply. That local debt has to eventually be
paid. It is a real cost. If the dollar goes down, so does the value of its
reserves, yet its debt in local currency has stayed the same. Someone (read
taxpayer) has to make up the local currency losses.
For some smaller economies, these losses can be significant. As they point out
in a footnote: "As Higgins and Klitgaard (2004) note, reserve holdings of some
Asian economies are so large that the losses for some central banks from even
small moves in their exchange rate as significant: a 10% appreciation of the
Singapore dollar might reduce the local currency value of Singapore's reserves
by 10% of GDP; a 10% move in the Taiwanese dollar would generate local currency
losses of 8% of Taiwan's GDP." This is just one more reason why central banks
would be reluctant to see the dollar drop.
Of course, that could change. What if Singapore started to move it reserves out
of the dollar and into yen and euros? At some point, it makes sense to do so.
But when? And if one country starts, do others follow? Is there some new Nash
equilibrium out there?
Why Long Term Rates Are So Low
"Developing a clean test of the impact of central bank demand on interest rates
is hard, and estimates of the impact vary substantially. Goldman Sachs (2004)
has presented an analysis suggesting that central banks intervention is
narrowing Treasury yields by only 40bps; Sack (2004) provides a similar
estimate.13 Truman (2005) notes that sustained intervention from central banks
is similar to a sustained reduction in the fiscal deficit: his ballpark estimate
suggests a $300 billion in central bank intervention might have a 75 bp impact.
Research from Federal Reserve suggests a 50 to 100 bps impact (see Bernanke,
Reinhart and Sack (2004)); PIMCO's Bill Gross puts it at closer to 100 bps, and
Morgan Stanley's Stephen Roach puts it at between 100 and 150 bps."
Since 2000, Roubini and Setser tell us that all of the net new supply of
Treasuries has been bought by non-residents, and that between 80-90% has been by
central banks. One last quote and then I will wrap up for this week:
"Central bank demand made it easier for the US Treasury to shorten the maturity
of the US debt stock, and thus to reduce relative supply of long term US
Treasuries. By eliminating the 30 year bond and supplying very little of the 10
year bond, the US reduced the share of ten year and longer Treasuries in the
overall marketable stock from 40% in 2001 to 31% at the end of fiscal 2004. The
overall stock of marketable treasuries went up by $931 billion in FY 2002-04,
but the stock of ten-year notes and longer-term bonds went up only by $35
billion. Had the share of longer term Treasuries in stock stayed constant, the
increase would have been closer to $365 billion. Central banks clearly are not
just buying short-dated bills and two and three year Treasury notes: US data
indicates that they have been important participants in the five and ten year
note auctions. Consequently, the stock of ten-year notes in private US hands has
presumably gone down over the past few years despite the large increase in the
overall Treasury stock. Treasuries of different maturities are a close
substitutes, but the relative scarcity of the ten-year note and other longer
dated Treasuries could nonetheless have had an impact on its yield.
"Consequently, the 40bp [basis point] Goldman estimate seriously understates the
effects of the Asian intervention on the market. Considering the size of recent
central bank purchases, the indirect impact of central bank intervention on
private demand for Treasuries, the interaction between central bank reserve
accumulation and Treasury debt management policy and the effects of Asian
reserve accumulation on inflation and growth (general equilibrium effects), we
would bet the overall impact would be closer to 200bps."
Part of the reason they think the affect is higher is that such large purchases
by foreign central banks distorts the value of the dollar and inflation, as well
as US GDP and trade. These all have an impact on interest rates, and are usually
not taken into account by those who look at the impact of foreign currency
buying upon US interest rates.
Yes, with a much lower dollar, the trade deficit would be lower. We would be
investing in industry which would make things for trade, as we would be more
competitive. Fewer jobs would go offshore.
But we would also be paying much higher prices for nearly everything. Inflation
would be a problem, or the Fed would be fighting it with higher interest rates.
That means a much slower economy, and the increase in value in your house?
Forget about it.
There are no economic free lunches. There is a trade-off for everything. I
prefer the market to make those decisions, but we do not have a free market in
currencies. It is manipulated by Asian central banks, and that distortion is
going to cause pain down the road.
The interesting exercise for us is to try and understand how all the "players"
in the game will act. What kind of odd Nash equilibrium will they settle into?
Will they all share some pain so as to lessen the total amount of pain, or will
they seek to avoid as much personal pain as possible thereby causing more pain
for everyone else? I am not entirely optimistic, given the current level of the
"vacuous rhetoric of globalization." But one can always hope. It will take more
than a few beautiful minds to work this equilibrium equation out.
But that's enough for this week. There is a lot more to come the next few weeks
on this topic.
And just for fun and a little surprise, next week I will tell you why the Bush
administration and Congressional Republicans are making the problem worse. It is
not a pretty picture.
Connecticut, Florida and Guacamole
Puerto Vallarta was just what the doctor ordered. What a beautiful place. Sun,
margaritas and guacamole. Normally, I come back a few pounds heavier from eating
massive quantities of guacamole and chips. This trip, we told them to bring us
lettuce leaves instead of chips with the guac. Combined with a lot of fresh
fish, I somehow came back the same weight, but got to eat a lot of guacamole.
I live in Texas, where there is no shortage of Mexican restaurants and
guacamole. But there is simply no comparison. The Mexican version is far
superior. Perhaps it is the avocado and fresher ingredients. Yet I can't get
Mexican avocadoes, which cost a fraction of the California version. I wonder why
the US government needs to protect me from Mexican avocadoes? Perhaps, as Gary
North suggested, to help me enjoy paying twice the world price to protect
Florida sugar growers.
I am in Connecticut and New York for the first part of next week, and then I go
to Tampa and Orlando for a series of meetings and a private speaking engagement.
Then I come back home where right now it looks like I will be home for the
entire month of March. April is looking ugly, because I have to go to London for
a course on English security law and then take a test 8 days later, so that
means the first 13 days I will be in Europe. My partners there are already
planning to move me through a few countries, but all in all it should be fun.
Except for that test. I hate regulatory exams. I have taken over half a dozen,
and always done quite well, but they do put stress into one's life. And if I
fail this one, I have to go back the next month and try it again.
Enjoy your week. I will be having brunch with my new daughter-in-law and some of
the kids for her birthday tomorrow morning. Being with family is always a good
way to spend a weekend. Even if there is no guacamole.
Your wishing his mind was more beautiful analyst,
John Mauldin
teknobucks
Active member
imported post
Worrying about inflation
Bigger-than-expected jump in PPI is worrisome, but may not change the Fed's thinking -- yet.
February 18, 2005: 11:49 AM EST
By Paul R. La Monica, CNN/Money senior writer
NEW YORK (CNN/Money) - Investors hoping the Federal Reserve might slow the rate of its interest rate hikes soon got an unwelcome shock Friday: prices at the wholesale level showed a surprising jump in January.
Fed Chairman Alan Greenspan and other inflation watchers have more reason to worry now after a bigger-than-expected increase in the government's producer price index (PPI) last month.
What's even more worrisome was that the so-called core PPI, which excludes often volatile energy and food prices, jumped 0.8 percent, much higher than economists' forecasts and the biggest increase in just over six years.
For quite some time, many investors and analysts have been able to discount fears of inflation by saying that the only real inflationary pressures were coming from rising oil prices. But Friday's PPI report seemed to debunk that notion.
"This number clearly is going to be upsetting to the Fed. If it repeats itself next month, they may have to change their stance. The disturbing thing is that it's in the core," said Craig Coats, co-head of fixed income at Keefe, Bruyette & Woods.
But will this report spark the Fed into a more aggressive stance? The central bank raised the target for its key short-term interest rate for the sixth consecutive time earlier this month but maintained that it could keep a "measured" pace, since inflation still appeared to be relatively benign -- a comment that Greenspan echoed in his testimony to Congress this week.
One month doesn't make a trend...
Steven Wieting, senior economist with Citigroup Global Markets, said the report is not too alarming since some of the bigger factors behind the spike in wholesale prices were big jumps in tobacco, alcohol and auto prices. Those are unlikely to be repeated, he said, noting that as such the Fed won't put too much credence in them.
"This is not entirely comforting but you'd need a lot more information than one month's PPI at the turn of the year to worry about inflation," Wieting said.
Still, there was more to the unexpected rise in the "core" PPI than just cigarettes, booze and cars. Communications and related equipment prices rose 0.5 percent while construction machinery and equipment costs jumped 0.9 percent.
So there is a case to be made that the steady increase in energy costs may finally be having a broader impact on overall prices.
"It was a matter of time before the core rate started feeling the effects of increased energy and commodity prices," said Barry Ritholtz, chief market strategist with Maxim Group. "Maybe it's aberrational but maybe it's the start of something more significant."
As a result of the PPI reading, investors are likely to focus even more intently on next week's consumer price index (CPI) report for January. Economists are forecasting that overall CPI and core CPI each rose 0.2 percent.
Greenspan has long maintained that he and other members of the Fed look more closely at what's happening with consumer prices when judging inflation, as opposed to the PPI, which measures prices paid by producers and wholesalers.
And in his semiannual report to Congress this week, Greenspan reiterated that he's not overly concerned about inflation at the consumer level.
"Despite the combination of somewhat slower growth of productivity in recent quarters, higher energy prices, and a decline in the exchange rate for the dollar, core measures of consumer prices have registered only modest increases," Greenspan said in his testimony to Congress.
...but don't expect the Fed to pause soon
But the unexpected jump in wholesale prices could mean that consumer prices for January will be higher than forecast as well. And if that trend continues, this could lead to a more aggressive Fed.
"There is a good chance that CPI will be higher than expected. But the question is not only will the CPI reflect the increase in wholesale inflation but whether it will be carried into subsequent months," said Ashraf Laidi, chief currency analyst with MG Financial Group.
Still, when push comes to shove, there are other things for the Fed to worry about. So even if inflation starts to pick up, it's highly unlikely that the central bank will abandon its measured stance of rate hikes, some analysts said.
"The Fed doesn't have to jack up rates really quickly since other economic indicators are softening," said Maxim's Ritholtz. "Capital expenditures are modest and employment figures are anemic, so the biggest danger the Fed faces is smothering the recovery."
To that end, Jeffrey Saut, chief market strategist with Raymond James, agreed that it's tough to justify bigger rate hikes until there is a sustained improvement in the job market. Only then, he argues, would inflation become a major worry.
"The big concern is future inflation and the Fed is viewing that through the labor market. Wage growth continues to be muted," said Saut.
Most market observers expect another quarter-point hike in the fed funds fate in March and quarter-point boosts by Fed policy-makers in May and June as well.
If that happens, the fed funds rate would be at 3.25 percent, closer to the so-called "neutral" rate, believed to be between 3.5 percent and 4 percent, that should discourage inflation while still stimulating economic growth.
But given the heightened inflation fears, it's looking less likely that the Fed will pause in the summer, as some were hoping it would.
"People had thought the Fed could go to 3.25 percent in June and hold but increased inflation pressures would change their thinking," said Keefe, Bruyette & Woods' Coats.
Worrying about inflation
Bigger-than-expected jump in PPI is worrisome, but may not change the Fed's thinking -- yet.
February 18, 2005: 11:49 AM EST
By Paul R. La Monica, CNN/Money senior writer
NEW YORK (CNN/Money) - Investors hoping the Federal Reserve might slow the rate of its interest rate hikes soon got an unwelcome shock Friday: prices at the wholesale level showed a surprising jump in January.
Fed Chairman Alan Greenspan and other inflation watchers have more reason to worry now after a bigger-than-expected increase in the government's producer price index (PPI) last month.
What's even more worrisome was that the so-called core PPI, which excludes often volatile energy and food prices, jumped 0.8 percent, much higher than economists' forecasts and the biggest increase in just over six years.
For quite some time, many investors and analysts have been able to discount fears of inflation by saying that the only real inflationary pressures were coming from rising oil prices. But Friday's PPI report seemed to debunk that notion.
"This number clearly is going to be upsetting to the Fed. If it repeats itself next month, they may have to change their stance. The disturbing thing is that it's in the core," said Craig Coats, co-head of fixed income at Keefe, Bruyette & Woods.
But will this report spark the Fed into a more aggressive stance? The central bank raised the target for its key short-term interest rate for the sixth consecutive time earlier this month but maintained that it could keep a "measured" pace, since inflation still appeared to be relatively benign -- a comment that Greenspan echoed in his testimony to Congress this week.
One month doesn't make a trend...
Steven Wieting, senior economist with Citigroup Global Markets, said the report is not too alarming since some of the bigger factors behind the spike in wholesale prices were big jumps in tobacco, alcohol and auto prices. Those are unlikely to be repeated, he said, noting that as such the Fed won't put too much credence in them.
"This is not entirely comforting but you'd need a lot more information than one month's PPI at the turn of the year to worry about inflation," Wieting said.
Still, there was more to the unexpected rise in the "core" PPI than just cigarettes, booze and cars. Communications and related equipment prices rose 0.5 percent while construction machinery and equipment costs jumped 0.9 percent.
So there is a case to be made that the steady increase in energy costs may finally be having a broader impact on overall prices.
"It was a matter of time before the core rate started feeling the effects of increased energy and commodity prices," said Barry Ritholtz, chief market strategist with Maxim Group. "Maybe it's aberrational but maybe it's the start of something more significant."
As a result of the PPI reading, investors are likely to focus even more intently on next week's consumer price index (CPI) report for January. Economists are forecasting that overall CPI and core CPI each rose 0.2 percent.
Greenspan has long maintained that he and other members of the Fed look more closely at what's happening with consumer prices when judging inflation, as opposed to the PPI, which measures prices paid by producers and wholesalers.
And in his semiannual report to Congress this week, Greenspan reiterated that he's not overly concerned about inflation at the consumer level.
"Despite the combination of somewhat slower growth of productivity in recent quarters, higher energy prices, and a decline in the exchange rate for the dollar, core measures of consumer prices have registered only modest increases," Greenspan said in his testimony to Congress.
...but don't expect the Fed to pause soon
But the unexpected jump in wholesale prices could mean that consumer prices for January will be higher than forecast as well. And if that trend continues, this could lead to a more aggressive Fed.
"There is a good chance that CPI will be higher than expected. But the question is not only will the CPI reflect the increase in wholesale inflation but whether it will be carried into subsequent months," said Ashraf Laidi, chief currency analyst with MG Financial Group.
Still, when push comes to shove, there are other things for the Fed to worry about. So even if inflation starts to pick up, it's highly unlikely that the central bank will abandon its measured stance of rate hikes, some analysts said.
"The Fed doesn't have to jack up rates really quickly since other economic indicators are softening," said Maxim's Ritholtz. "Capital expenditures are modest and employment figures are anemic, so the biggest danger the Fed faces is smothering the recovery."
To that end, Jeffrey Saut, chief market strategist with Raymond James, agreed that it's tough to justify bigger rate hikes until there is a sustained improvement in the job market. Only then, he argues, would inflation become a major worry.
"The big concern is future inflation and the Fed is viewing that through the labor market. Wage growth continues to be muted," said Saut.
Most market observers expect another quarter-point hike in the fed funds fate in March and quarter-point boosts by Fed policy-makers in May and June as well.
If that happens, the fed funds rate would be at 3.25 percent, closer to the so-called "neutral" rate, believed to be between 3.5 percent and 4 percent, that should discourage inflation while still stimulating economic growth.
But given the heightened inflation fears, it's looking less likely that the Fed will pause in the summer, as some were hoping it would.
"People had thought the Fed could go to 3.25 percent in June and hold but increased inflation pressures would change their thinking," said Keefe, Bruyette & Woods' Coats.
teknobucks
Active member
imported post
Week in Review
2/19/2005
For the week 2/14-2/18
[Posted 7:00 AM ET]
The War on Terror
It’s incredible how irresponsible Wall Street strategists are. I’ve
been pounding the table the last few weeks in particular, let alone
the last six years, not to ignore the geopolitical scene. But since
our election in November and even through the Iraqi vote, Wall
Street hasn’t let any such concerns get in the way of its bullish
outlook. Complacency has been the watchword.
No doubt, my own tone last week was especially somber but I
imagine most of you saw the news of the past few days and
thought, that editor may not be so crazy after all. While no one
foresaw the horrific assassination of former Lebanese Prime
Minister Rafik Hariri, it certainly wasn’t surprising. And long-
time readers shouldn’t have been surprised at the congressional
testimony of the likes of CIA Director Porter Goss or FBI
Director Robert Mueller, though it was nonetheless disturbing.
Regarding the latter, yes, Goss, Mueller et al were engaged in a
bit of cover your butt rhetoric, but when Goss says “There is
sufficient (weapons-grade nuclear) material unaccounted for” in
Russia “so that it would be possible for those with know-how to
construct a nuclear weapon,” it’s a stark reminder of the world
we live in, even as some of us have been arguing for years that
there was no more important challenge in the world today than to
secure Russia’s weapons stockpiles. But let’s run through other
key developments on the week.
Iraq: The certified final tally on the election reveals the United
Iraqi Alliance (Ayatollah al-Sistani’s coalition) took 48% of the
vote and 140 of 275 seats in the national assembly. The Kurds
won a strong 26% and interim Prime Minister Ayad Allawi
captured a disappointing 14%. The assembly is charged with
writing a new constitution by August, a referendum on same is
held in October and general elections to select a permanent
government are to be in December. It’s an aggressive timetable
and for now Ibrahim al-Jaafari and Ahmad Chalabi are the
leading candidates to be prime minister, while the Kurds feel
they are entitled to the presidency. [Prime minister is #1 in
importance, followed by the president and his two vice-
presidents.]
Compromise is going to be the order of the day and as I wrote
last week, those assuming it’s a done deal that the new
government will be an Islamic toady of Iran are sadly mistaken.
Robert Kagan wrote the following in the Washington Post.
“Yes, the monolithically inclined journalists say, but didn’t a lot
of these (new) Iraqi leaders once live in Iran and seek Iranian
support? Indeed they did. When Saddam Hussein was in power,
murdering the Shiites by the tens of thousands and using
chemical weapons against the Kurds, while the United States,
Europe and the rest of the Arab world stood by and did nothing,
many Iraqis looked for help from the only nation that would
provide it. Does that mean now that Hussein is gone and they
have a chance to take part in governing their country that they
are stooges of Iran? Was George Washington a stooge of
France? Some may retain ties to onetime Iranian supporters, but
a better bet is that Iraqi Shiites will want to be just that: Iraqi
Shiites. Remember nationalism? And as scholars of Islam such
as Reuel Marc Gerecht point out, it’s probably the Iranian Shiite
leaders who are now worrying. In the end, Grand Ayatollah Ali
Sistani and his allies may prove to have more influence in Iran
than Iran does in Iraq.
“No one can know for sure, of course. But now is the time for a
little subtlety, a little discernment and a little patience. Above
all, it is time to abandon our inordinate fear of the Shiites.”
As for the post-election violence, I don’t mean to ignore it and
we all pray for the safety of our men and women in uniform in
Iraq, but the country is now taking two steps forward for every
one back, or better. I agree with Allawi, though, who told the
Post’s David Ignatius that his main fear is the country turns to
retribution and revenge instead of moving on. That’s what we
need to watch.
Syria / Lebanon: Rafik Hariri was prime minister of Lebanon 10
of the past 14 years following the end of the 1975-90 civil war.
A business tycoon, he was beloved by large segments of the
population and almost single-handedly rebuilt Beirut. But Hariri
resigned from government in October of last year over the policy
of pro-Syrian President Emile Lahoud, Damascus’ puppet.
Hariri was pushing to have Syria withdraw its 15,000 troops and
let Lebanon be Lebanon when he was assassinated.
While it’s not certain who perpetrated the act, I’ll go with a
combination of Syrian and Lebanese intelligence and not
necessarily the direct work of Syrian President Bashar Assad,
who isn’t the brightest bulb on the planet. Of course if it wasn’t
Assad’s doing, that’s almost as worrisome because who then is in
control?
Regardless of who did it, the killing of Hariri was one dumb
move. French President Jacques Chirac was a close friend of his
and Chirac attended the funeral, a risky gesture given the
explosive climate. While Washington continues to have major
problems with the French leader, including on the issue of
Hizbollah, there is a chance that the U.S. and France could reach
some real accommodation in helping get Syria out of Lebanon.
For starters, it’s time the UN Security Council showed some
backbone and forced Syria to comply with Security Council
Resolution 1559 which demanded last fall that all foreign troops,
read Syria, exit Lebanon immediately. Syria hasn’t budged. The
U.S. may be currently preoccupied militarily, but others could
help enforce 1559. As it is today, we are heading towards a new
Lebanese civil war as Hariri’s supporters seek revenge.
Iran: By mid-week Syria and Iran had announced the formation
of a “common front” to address mutual threats and challenges.
Earlier, an Iranian foreign ministry spokesman addressed the
assassination of Hariri.
“An organized terrorist structure such as the Zionist regime has
the capacity for such an operation whose aim is to undermine the
unity of Lebanon. Iran vigorously condemns the terrorist action
…which cost the life of Rafik Hariri. (Lebanon should be
vigilant) to prevent the Zionist regime from carrying out its
sinister and expansionist projects in the region.” [BBC News]
Yes, I think that sums up why we need regime change in Tehran.
On the nuclear weapons front, the mullahs once again thumbed
their nose at the Euro-3, Britain, France and Germany, which had
demanded Iran trade in its heavy-water nuclear reactor for a
light-water one, the latter less conducive to bomb-making.
But then our good friend Russian President Vladimir Putin,
feeling snubbed, said Russia would start shipping nuclear fuel to
Iran in three months. The U.S. has been vehement Russia not do
this as the fuel can be used for both the making of dirty bombs as
well as nukes.
As for its existing nuclear capability, I have been saying Iran
would test by mid-year. This week Israeli Foreign Minister
Silvan Shalom said “The question is not if the Iranians will have
a nuclear bomb in 2009, 10 or 11, the main question is when are
they going to have the knowledge to do it. We believe that in six
months from today they will end all the tests and experiments
they are doing to have that knowledge.” [Reuters]
North Korea: Here, with the North refusing to re-enter the six-
party talks, the U.S. refuses to engage in direct dialogue,
continuing to rely on China to exert its weight. In the meantime,
the Bush administration is looking to choke off any remaining
sources of income. But one move that is really going to have an
impact on the North economically comes from Japan. The
Japanese are imposing an embargo on all fishing vessels, North
Korean or otherwise, that don’t have insurance. Last year just
2.5% of the North’s boats had it and this is a huge blow to
Pyongyang.
Meanwhile, deputy secretary of state nominee Robert Zoellick
said it’s possible the North Koreans are bluffing, thereby backing
the position of South Korea. No way. Kim Jong Il has the
bomb. But what Zoellick’s statement does point out is the bind
the U.S. finds itself in on the credibility front thanks to our
failure to properly identify the WMD threat in Iraq. As for
China, they don’t want any problems in their backyard, but they
also don’t mind seeing the U.S. sweat a little.
Wall Street
Despite a hiccup this week owing to tensions in the Middle East,
the complacency I wrote of above is still rampant on the Street.
At least Federal Reserve Chairman Alan Greenspan, in his semi-
annual testimony to Congress, ratcheted up the level of debate
even if the congressmen questioning him were a total
embarrassment (the senators behaved more admirably).
Greenspan said he remained sanguine on inflation and that the
economy would grow at a solid 3.5-4% clip for 2005. He saw
“lingering caution” on behalf of CEOs and capital spending and
offered there was a need to “remain vigilant against
complacency” in the financial markets overall. Ah ha!
Greenspan also weighed in on Social Security (that’s all
Congress really wanted to discuss), saying he was in favor of
private accounts but the amount of debt that would be required to
fund the transition was potentially destabilizing. Medicare, he
added, is “several levels more difficult than Social Security.”
I’m not going to say anymore on this topic (if you’re new to the
site, trust me, I wore it out long ago) only to add that in an NBC
News / Wall Street Journal survey, by a 51-40 margin Americans
believe it is a “bad idea” to change Social Security.
Instead, let’s focus on Greenspan’s labeling recent bond market
behavior a “conundrum.” This reminded me of Winston
Churchill, speaking of the Soviet Union in October 1939.
“I cannot forecast to you the action of Russia. It is a riddle
wrapped in a mystery inside an enigma.”
But I digress. Greenspan’s own bemusement is quite simple.
The Fed has been steadily raising short-term interest rates and
the long end of the yield curve has been coming down; opposite
of what you’d expect and, no, Greenspan is not smart enough to
have foreseen this as one or two pundits idiotically offered up
this week.
What does give then? Since I forecast a 10-year yield of 4.30%
myself for year end, it really isn’t much of a mystery or enigma
to me. Forget Friday’s producer price index core reading of
0.8% for January, to me an anomaly. I just believe inflation, the
official variety the Fed watches, is not an issue and I still
maintain we will be talking deflation by December (for 2006 and
beyond).
Speaking of my own forecast, every 6-8 weeks I feel compelled
to lay it out for the new readers, from my 12/31/04 review. Sure,
much of it will prove embarrassing as the year unfolds but,
unlike the Street’s strategists who just keep changing their tune,
mine goes into the archives, to torment me until the end of time.
So I am looking for the China bubble to burst by 12/05, along
with the bubble in real estate, though on this second point I have
been saying it’s going to be more of a stagnating market than a
collapsing one because historically low mortgage rates continue
to buck it up.
I see the rate of consumer spending falling due to excessive
personal debt levels and capital spending remaining punk.
I also see earnings decelerating at a faster pace than expected…
and this market is not cheap to begin with.
I said the major equity indexes would be down 5% for the year.
The wild cards are the geopolitical hot spots, energy prices and
the dollar. On the greenback I said there will be “no dollar
crisis” in 2005. The hot spots you should know about by now,
let alone the impact of a terror attack on U.S. soil or a major
world capital. As for energy, if we stay at or above existing
levels on the price of crude (I don’t think we will), it has to limit
growth worldwide. It already has in many spots. Heck, I just
received my gas bill for January and it had to be an all-time high,
even though I have the thermostat way down the 12 hours I’m
normally not at home. I mean for crying out loud, no premium
beer for this guy. I’m pinching pennies.
Bottom line, I have my doubts on the economy, worldwide. Just
last week I questioned Japan’s recovery and sure enough the
government announced it was back in recession (though it
remains optimistic on 2005). Germany and Italy exhibited
negative growth rates in the fourth quarter. But on the plus side
the Bank of England upped its ’05 forecast to 2.7% for GDP and
China appears to be at least another few quarters from tipping
over. Australian resource giant BHP, the leading supplier to
China, said this week it remains very optimistic.
Here in the U.S. this week, housing starts in January hit a 21-year
high. Stupendous. And retail sales, ex-autos, were up a solid
0.6%.
Overall, however, consumer spending continues to rise far more
than wages and that trend not only can’t continue much longer,
in this increasingly levered economy of ours it’s outright
dangerous.
Leverage and debt are clearly on Alan Greenspan’s mind, too.
Last week I mentioned the $7 trillion+ national debt and how it
represented about 70% of the overall economy. I want to take a
moment to tighten this up.
The national debt, what you and I in effect owe as citizens, is
over $7.65 trillion while the total size of the U.S. economy is
$11.97 trillion, so the debt is 64%, not 70% of GDP. Frankly, I
was relying on memory and not factoring in the better than
expected economic growth of the past few quarters, thus that part
of the equation leads to a lower figure.
But in discussing the federal budget deficit, to be fair I should be
talking about “on-budget deficit” and “off-budget surplus;” the
latter, for now, meaning the Social Security surplus that is
promptly spent by Congress.
For example, in fiscal 2005 the on-budget deficit was actually
$589 billion and the off-budget surplus $162 billion. Ergo, 589 –
162 equals the $427 billion deficit we all hear bandied about.
But, again, the deficit was really $589 billion. Confused? The
White House sure hopes so. Optimistic about our financial
future? If you are, you’ll be in an increasing minority. Pin Alan
Greenspan down and I can virtually guarantee he’s not as
sanguine as he attempts to appear to be. Finally, aside from the
potential for a currency crisis down the road because we rely to
an increasing extent on foreigners to finance this ballooning load,
when you hear that the interest expense on the national debt will
be in the neighborhood of $315 billion by 2010, is this the best
use of our capital, our resources? Of course not. If you earn
$50,000 in income but you pay $2,000 in credit card interest, is
that the most efficient use of those dollars? Bottom line, we
could be headed towards a long era of Japan-like stagnation.
Street Bytes
--The major averages finished fractionally lower with the Dow
Jones losing just 11 points, 0.1%, to close at 10785. The S&P
500 lost 0.3% to 1201 and Nasdaq had its second straight
decline, 0.9% to 2058. The markets are closed Monday for
Presidents Day.
The big story on the week, aside from Greenspan’s testimony
and market reaction to it, was Friday’s late-breaking news that a
FDA panel of advisers favored keeping the popular Cox-2
inhibitor pain killers, Celebrex, Bextra and Vioxx on the market,
though with severe warning labels addressing the very real risks
of heart trouble. Shares in Merck and Pfizer surged with Merck
tacking on $3.75 to $32.60. Merck had taken Vioxx off the
market last fall and will most likely bring it back. Don’t expect a
lot of frilly advertising from the manufacturers, though. That’s
out of the question. As for the class-action lawsuits making their
way into the courts, these will be exceedingly difficult to win
with the FDA panel’s ruling. All in all, it appears the medical
folks did a thorough and thoughtful job. But given the lack of
time to research the decision thoroughly, I reserve the right to
revise and extend my remarks next week.
--U.S. Treasury Yields
6-mo. 2.89% 2-yr. 3.43% 10-yr. 4.27% 30-yr. 4.65%
Before we begin, let me throw out the following weekly closes
for the yield on the 10-year Treasury.
11/12…4.19…11/19…4.20…11/26…4.24…12/3…4.25
12/10…4.15…12/17…4.20…12/24…4.22…12/31…4.22
1/7…4.27…1/14…4.21…1/21…4.14…1/28…4.13
2/4…4.08…2/11…4.09…2/18…4.27
In other words, I hope you understand why I haven’t felt
compelled to comment extensively the past few months, other
than to state the obvious. These low rates have been great for
housing and it’s a big reason why the U.S. economy continues to
perform better than many expected a few quarters ago.
The question now is what does the Fed do in terms of further rate
increases? The bond market finally lost some steam the second
half of the week and it’s telling you that there are at least two
more rate hikes in the offing. The inflation numbers will supply
the final answer.
--In his congressional testimony, Fed Chairman Greenspan
warned again on the size of government-sponsored mortgage
giants Fannie Mae and Freddie Mac. The two now pose a
“substantial risk” to the economy. The chairman added:
“Given no limits on what they can put in their portfolios, they
can, by merely their initiative, create an ever larger increase in
portfolio, which, given the low levels of capital, means they have
to engage in very significant dynamic hedging to hedge interest
rate risks.” [Edmund L. Andrews / New York Times]
In other words, it’s all about Fannie and Freddie’s derivatives;
ticking time bombs.
--In a huge victory for the Bush administration, the House
approved a measure previously passed by the Senate that would
transfer most large, multi-state class action lawsuits to federal
court; thus helping prevent lawyers from targeting friendly state
courts as they have in the past. The act, signed by the president
on Friday, should cut back significantly on frivolous claims.
This is a great start on the tort reform front, though I can’t help
but add, ‘It’s about time!’
Of course many Democrats aren’t too fired up by the action as
they receive a large portion of their campaign dollars from trial
lawyers.
[For the record, if fewer than one-third of the plaintiffs are from
the same state as the primary defendant, the case would be
handled in the federal system.]
--Energy: It’s estimated the oil industry needs to spend $3 trillion
by 2030 on exploration and development to meet future demand,
or $105 billion a year. Non-conventional sources such as
Canada’s tar sands will be a big beneficiary though the oil
companies probably need prices consistently above $30 (which it
certainly appears they will be) before sinking a ton of money into
these kinds of projects that, today, remain far costlier than
deepwater drilling, for example.
Meanwhile, in the shorter-term, Saudi Arabia said it would
address the capacity issue by doubling the # of rigs operating in
the country, with a goal of lifting output to 12.5 million barrels
per day from its current 10-11 figure. The announcement was
greeted with skepticism by some who believe Saudi Arabia is
already largely tapped out in terms of what it can squeeze out.
--Russian energy giant Gazprom is looking to cut some deals on
the liquefied natural gas front with American companies. This is
good, assuming political relations between the two countries are
passable.
--Exxon Mobil surpassed G.E. on Friday as the largest stock in
terms of market value, $383 billion to $379 billion.
--The Euro-12 nations saw growth of just 0.2% in the fourth
quarter of 2004.
--Consumer spending in China was up a whopping 16% from last
year’s pace for the Lunar New Year.
--According to Jim Hopkins of USA Today, Google employees
gave $207,000 to federal candidates in 2004, 98% of which went
to Democrats. [Microsoft workers, by contrast, sent 60% of their
contributions to Dems.] What the Google data shows is that with
all the newfound wealth on its campus, the Democratic Party has
a significant future source of donations that one would expect
will increase exponentially.
--Mexico’s economy grew at a 4.4% clip in 2004, same as the
U.S.
--Verizon will acquire MCI for $6.7 billion, thus beating out
Qwest, though the latter is still submitting a sweetened offer.
This marks the 3rd monster telecom deal in the past six months,
the others being SBC / AT&T and Sprint / Nextel. Verizon said
7,000 jobs would be cut from the combined workforce of
250,000. I would venture to guess it will be more like 25,000
over the next three years. [Yes, I’m assuming the Qwest
proposal is turned down.]
--Nice going, AIG. Last Friday it announced on a conference
call with analysts that an internal probe looking into
improprieties beyond the insurance bid-rigging scandal found
nothing. Then we learn later the company was served with
subpoenas from the SEC and New York Attorney General’s
office the same day because of an ongoing investigation into
insurance products AIG created for others with the sole purpose
of manipulating earnings.
--Moody’s placed General Motors on “negative” outlook because
of costs associated with GM’s ending of its alliance with Fiat,
about $2 billion. GM’s healthcare costs, like that of all of
Corporate America, are skyrocketing; in 2004 some $5.2 billion
or, get this, $1,525 per vehicle.
However, when one looks at GM’s balance sheet you can’t
ignore its cash hoard of $23 billion. It’s just that this could be
whittled down quickly in a recession, thus Moody’s concern.
--Office Max’s accounting scandal continued to claim more
victims; this time it was the CEO himself. The CFO had
previously been canned, along with others, following claims
Office Max falsified vendor documents and rebates.
--A few weeks ago I reported on the proposed merger between
Federated Department Stores and May, assuming it would go
through. Talks then broke off (I was remiss in not reporting this
at the time), but now they are evidently back on.
--Mutual fund giant American Funds has been charged by the
NASD with offering illegal kickbacks to a slew of brokerage
firms; $100 million worth in directed commissions over a
number of years in exchange for promoting its products.
This has always been American’s modus operandi since I got
into the fund business eons ago and for its part they claim
everything was properly disclosed. One thing you can’t argue
about is the fact any long-term investor has generally been well-
served in these investments.
--The Wall Street Journal reports that the CEOs of Merrill
Lynch, Goldman Sachs, Morgan Stanley and Lehman Brothers
saw their compensation for 2004 increase 33% on average
(a range of $22mm to $33mm for each), far in excess of the
return on the company stock.
--The fiasco involving information broker ChoicePoint Inc. is
unbelievable. In case you didn’t know, and hopefully you
haven’t received a letter, scammers opened up 50 bogus accounts
with ChoicePoint, allowing them to then access data, including
Social Security #s, on up to 500,000 individuals. As of this
writing, at least 700 have had their identity stolen. [The
information ChoicePoint collects is used for pre-employment
background checks and public records searches.]
--Inflation Watch: This one comes from John K. Tuition at
Lehigh University is going up another 7% for the 2005-2006
academic year. Poor John has two daughters there right now,
gulp, at $40,000+ each.
--Kentucky Fried Chicken continues to be the target of protests
by both PETA and some African-American groups over the
company’s treatment of its birds that are supposedly “often fully
conscious when their throats are cut.” [Chicken Jack: “Gee, I
wonder whose home I’m going to…doh!”] McDonald’s, fearful
of a consumer attack on it, agreed to increase the living space for
its chickens. Haven’t heard if this includes flat panel screens and
free cable.
--The NFL now has its first African-American owner. The
Minnesota Vikings are being sold by Red McCombs for about
$600 million to Reggie Fowler. McCombs purchased the
Vikings in 1998 for $246 million, a nice investment.
As for Fowler, he played briefly in both the USFL and NFL in
the early 1980s before founding Spiral Inc., a company that
sells food containers to buyers like supermarkets. You’ve gotta
love it, a classic American success story.
--This week marked the start of the Kyoto Treaty for those
nations that are signatories, so to mark the occasion a number of
Greenpeace protesters decided to pay the International Petroleum
Exchange in London a visit. I appreciate those of you who
passed the Times of London account on to me.
As it turns out, the Greenpeace folks “bit off more than we could
chew,” in the words of one. “They were just Cockney barrow
boy spivs. Total thugs. I’ve never seen anyone less amenable to
listening to our point of view.”
Basically, they had the crap beat out of them. But before you
feel sympathy for the Greenpeace victims, and before you write
me, understand the following as reported by Laura Peek and Liz
Chong.
“When a trader left the building shortly before 2pm, using a
security swipe card, a protester dropped some coins on the floor
and, as he bent down to pick them up, put his boot in the door to
keep it open.
“Two minutes later, three Greenpeace vans pulled up and another
30 protesters leapt out and were let in by the others.
“They made their way to the trading floor, blowing whistles and
sounding fog horns, encountering little resistance from security
guards. Rape alarms were tied to helium balloons to float to the
ceiling and create noise out of reach. [Ed. that’s clever!] By
making so much noise, the protesters hoped to paralyze trading.”
The traders then entered the fray. Now discuss amongst
yourselves.
--My portfolio: I purchased a little more of my carbon fiber play.
Speaking of greenies, this is really my “Clear Skies” investment.
A large application of carbon fiber is for windmills. And for
those of you following along at home, and knowing I can’t
identify individual positions for legal and ethical reasons, of the
five stocks I sold off over the past three months, three are down
from where I exited, one is about flat, and the other is way up
(the Aussie resources play). And yes, I’m still kicking myself for
not having more in the energy sector as these stocks continue to
rocket higher.
Foreign Affairs
Israel: Palestinian President Mahmoud Abbas declared that the
war is effectively over and, for now, he believes Hamas and
Islamic Jihad will respect the truce. For his part Israeli Prime
Minister Sharon reiterated he would crack down on his own
extremists. And if you thought my assassination talk of last
week was a bit over the top, NBC News had the same type of
story on Tuesday.
China: The FBI estimates that 3,000 companies in the United
States are collecting information for China, particularly in
Silicon Valley, with emphasis on acquiring military technology.
[Time magazine] Meanwhile, CIA Director Porter Goss is
increasingly concerned over China’s growing military and the
threats posed to both its neighbors and U.S. interests; Taiwan
obviously being the first and foremost potential target.
[While the China threat to the entire region should have already
been apparent to any educated person on the planet, the fact Goss
spoke of it so publicly is significant.]
And on the topic of Taiwan, over the weekend the U.S. and
Japan are going to formalize a joint agreement that makes
Taiwan a mutual security concern; another move by Japan to
counter China’s influence. [Remember my long sought supra-
alliance between the U.S., Britain, Australia, Japan and India? It
doesn’t look so far-fetched anymore, does it?]
But wait, there’s more. A bipartisan resolution was introduced in
the House this week demanding the resumption of diplomatic ties
between Washington and Taipei, cut off back in 1979 as the U.S.
opted to recognize the mainland instead.
Representative Tom Tancredo (CO) said “Our current ‘One
China’ policy is a fiction. Taiwan is a free, sovereign and
independent country that elects its own leaders. It is not, nor has
it ever been a local government of communist China – and
everyone knows that.”
Tancredo added it is time “to scrap this intellectually dishonest
and antiquated policy in favor of a little consistency and
honesty.”
“There is absolutely no good reason that the United States cannot
maintain the same kind of normal relationship with the
democratically elected government on Taiwan that it maintains
with the autocratic regime in Beijing.” [South China Morning
Post]
This resolution won’t get far but you can imagine how upset the
White House is, let alone Beijing. Good. I toast Congressman
Tancredo and the co-sponsors.
On the mainland this week, over 210 perished in the worst
mining disaster since 1949. Over 6,000 were killed in accidents
here in all of 2004.
Finally, the Communists arrested 5 Tibetan monks for writing
“political poems” in their newsletter.
Russia: 257,000 protesters in 70 cities took to the streets last
Saturday but this included 40,000 in Moscow marching in
support of President Putin. The rest were aligned against Putin’s
economic reforms and the benefits cuts.
As for those supporting the president, talk about a farce. Most
were bused in from the suburbs, strongly encouraged to
participate if you catch my drift, and many told reporters this was
the last thing they wanted to do on a Saturday. Of course only
this march received play on state television. None of the true
protest rallies were covered. But as I noted last week, watch
February 23, the day the Communists are trying to organize a
massive demonstration in support of the military but against
Putin.
Egypt: Two weeks ago, Egyptian President Hosni Mubarak was
in all his glory as he hosted the Sharm el-Sheikh summit between
Abbas and Sharon. But Mubarak is running unopposed for a
sixth term this fall and his son Gamal is the hand-picked
successor for when Mubarak finally exits stage left. So I can’t
help but note the following comment by Jackson Diehl in the
Washington Post.
“Bush, who in his State of the Union speech called on Egypt to
‘show the way’ toward democracy in the Middle East, will look
feckless and foolish if a regime so deeply dependent on U.S.
military and economic aid (up to $2 billion a year) stages another
fraudulent election while jailing the very politicians who support
his vision. But Mubarak is betting that this U.S. president, like
those who preceded him, won’t seriously confront him or
threaten his economic lifeline at a sensitive moment in the ‘peace
process.’”
Philippines: Al Qaeda surrogate Abu Sayef exploded three
bombs across the country on Monday, killing at least 7 while
announcing the attacks were a “Valentine’s gift” to President
Gloria Arroyo. Lovely.
Ukraine: In an interesting move bound to rile up the Kremlin
even further, President Viktor Yushchenko picked Russian
opposition figure and former Kremlin advisor Boris Nemtsov to
be an unpaid member of his staff with the mission of being a go-
between between Kiev and Moscow as well as to attract
investment. [This is more than I imagine 99% of you wanted to
know, but the reason Nemtsov is unpaid is because under
Ukraine’s constitution, a foreign national can’t be.]
Northern Ireland: The gig is up for Sinn Fein. As a series of
raids is conducted across the Irish Republic and Northern
Ireland, its fingerprints are all over the IRA’s December bank
robbery in Belfast. $4 million in cash was recovered at the home
of a prominent Cork businessman this week, and once the ties are
made, the world will know that Sinn Fein has been nothing more
than a front for criminal and terrorist activity.
Venezuela: The good news is the government of Hugo Chavez
resolved a dispute with ConocoPhillips. The bad news is it’s still
purchasing 100,000 Kalashnikovs, along with some military
helicopters, from Russia.
Paraguay: I can’t believe it was just two months ago I was down
here. It seems like a year in some respects. But there was an
interesting article in Thursday’s New York Times concerning
author Lily Tuck. Ms. Tuck won a 2004 National Book Award
for “The News From Paraguay” and I read it on my trip. It’s
basically about the horrific war Paraguay fought in the 1860s
against Brazil, Argentina and Uruguay that resulted in the deaths
of 90% of Paraguay’s adult males.
Well, it turns out Lily Tuck had never been to Paraguay before
she wrote the book and only in the last few weeks completed her
first trip there as the government feted her. Oh, but many in the
nation were not happy to see her. You see, “The News From
Paraguay” had a lot of plain old hard porn in it and I’m glad I
wasn’t the only one who felt that way. And even though the
dictator from that era, Francisco Solano Lopez, took the country
under and is portrayed as an idiot (it’s a little more complex than
that), many in Paraguay still worship the guy; granted, hard for
an outsider to understand.
But the Times report, as our own Dr. Bortrum pointed out to me,
said nothing about the crime wave I touched on while there.
Sadly, the topic is front and center again this week with the
discovery of the body of the 32-year-old daughter of a former
president, Raul Cubas. Cubas had paid $800,000 in ransom a
number of months ago and she was still killed (with signs of
torture). This is just the latest in a series of high-profile
kidnappings / killings of children of big politicos and
businessmen here.
What’s even more troubling in this particular case are the ties the
killers may have to FARC, the leftist militants fighting the
Colombian government for over 40 years. This is a first and an
incredibly dangerous development.
And who has been providing haven for FARC? Venezuela’s
Hugo Chavez. It’s easy to connect the dots, now let’s see if
Washington and its allies in the region do anything about it. One
thing is for sure, Colombia’s President Alvaro Uribe deserves
our unstinting support.
Random Musings
--Ambassador John Negroponte was named the first National
Director of Intelligence. Good luck, sir.
--According to the NBC News / Wall Street Journal survey,
President Bush’s overall job approval rating is still only 50%,
despite all the favorable press he’s received from the vote in Iraq
and being front and center at both his Inauguration and the State
of the Union. In other words, what bounce? His approval rating
was 49% last October, for example. [The highest of his
presidency is 88%, Nov. 2001, while the low is 45%, June 2004.]
--A Senate subcommittee now estimates that the head of the UN
oil-for-food program, Benon Sevan, not only blocked a UN audit
in 2001 but he may have siphoned off up to $1.2 million for his
own use, far more than originally estimated. Investigators are
still combing through Secretary General Kofi Annan’s
documents and e-mails to ascertain what he knew about son
Kojo’s involvement.
--Last Sunday was the 60th anniversary of the firebombing of
Dresden and to mark what was supposed to be a solemn occasion
and day of remembrance, 4,000 neo-Nazis assembled, the largest
such show of strength since World War II.
--Democratic gubernatorial candidate Eliot Spitzer’s approval
rating in New York is 59% vs. 43% for Governor George Pataki
who is contemplating a run for a fourth term in 2006. Pataki
would get creamed.
--The NHL became the first professional sports league to shut
down for an entire season. Blame global warming for melting
the ice…….but what’s this? There is another meeting today?
Does anyone really care?
--The “Today” show had a few segments on cleanliness this
week. Guess what? Wash your hands! At StocksandNews you
must do so at least ten times a day…it’s part of the employee
handbook, err, manual.
--The American Council on Education says twice as many black
women as black men now attend college.
--The gang violence exploding in our inner cities claimed another
high profile victim the other day. Fernando Correa was the star
of his Bronx high school football team but he refused to join the
Bloods. 16-year-old Quindel Francis, either a Blood or a Blood
wannabe, gunned Correa down to impress his buddies. This stuff
is sickening.
--In the latest development on the Jon Corzine for governor front,
the senator proposed “ethics reform,” saying the “state’s
reputation was at stake.” This from a man who outspent his
opponent in 2000 by $63.5 million to $6 million and who has
been plying every county and church leader with gobs of cash to
ensure their support this fall. Said New Jersey Republican
chairman Tom Wilson:
“Jon Corzine talking about reducing the influence of money in
politics is like Vito Corleone talking about reducing the influence
of the mob.” [Star-Ledger]
--A new virulent strain of the AIDS virus has been found in New
York City, one resistant to 19 of 20 drugs on the market,
combinations of which make up the successful drug cocktail. So
the region has to be concerned about a new epidemic, especially
since the man found to have had the new strain had “unprotected
sex with hundreds” of men. Unbelievable.
--China has a big problem…a surging demand for toilet paper.
Wang Yuepin, vice-director of Shanghai Paper Trade
Association, said “I’m happy to see many young people adopt
paper tissues for the convenience.” [South China Morning Post]
Well, you know what I have to say to this. When traveling in
China as a tourist, wash your hands more than ten times a day.
--Finally, this week marks the 6th anniversary of StocksandNews.
Who wudda thunk it? I certainly didn’t expect to go this long.
When I left my cushy job at PIMCO Funds, and a ton of money
on the table, I thought this site would be a three year project.
Wrong. Within weeks I had created a monster and for six years,
seven days a week, I have striven to create the single best
archive in the world on the events of a must tumultuous period.
Thus far, mission accomplished.
So what will I do now? Beats the heck out of me. All I know is
I have thoroughly enjoyed the experience, though not always the
Fridays, and of course I’ve had the opportunity to travel the
world far more extensively than I ever thought I’d do. I’m
probably going to cut back on the international aspect this year,
by the way, but that is more a function of a new, golf-related
venture I’m going to be part of…and it’s not with Carlos Franco.
More late spring.
I was calculating how much I’ve written over the years, not just
for “Week in Review” but the other columns I’m responsible for
and, conservatively, it’s over 10,500 pages. Goodness gracious.
You want to know what my main fear is? That I forget how to
type. Seriously, I actually had my first nightmare to this effect
the other night.
I thought I’d take a moment to not only thank a few people but
also answer some questions you undoubtedly have.
Like why do I place the Nasdaq at the bottom of my tables down
below? Well, it’s because I thought it would stand out better and
I’ve been doing it that way for over 7 ½ years, including my stint
at PIMCO writing this piece, so why start now?
Why do I put “For the week 2/14-2/18” when a week is seven
days? Again, it started out that way and now I can’t change it.
You understand, don’t you?
How much time do I put into this column? A ton. After I go to
‘post’ on Saturday morning I take a brief break and literally
begin working on the next one. Sunday is a key day for me, not
just because of all the newspapers but I can’t miss some of the
talk shows, particularly “Meet the Press.” Nor “The Simpsons.”
I keep threatening to cut back some and I will need to with the
other links. Believe it or not, while I did extensive advertising
my first few years, including a radio blitz in the New York
market, I have done little since. I’ll be hitting the road shortly to
remedy this matter.
I would like to apologize to those I may have offended over the
years. This column is a one-man production…there is no
associate editor proofing my work. Invariably, about once a
quarter it seems, I cross the line. I lose readers each time I do
and I know immediately, within hours, I went too far.
Wrapping up, I want to thank Dr. Bortrum (aka my father…I
acknowledge this but once a year) for his terrific contributions
and my brother Harry for his brilliant cartooning, as well as the
support staff at Web Epoch.
I also have to thank a now defunct magazine, Online Investor, for
helping put me on the map when it named this site one of the top
picks for 1998-2000. It was quite an honor. And I want to thank
my friends at BuyandHold.com, with whom I now have a five-
year plus relationship. Many of you found me through this
Oppenheimer / Fahnestock-based operation. They’re good
people.
Finally, a little advice to those in college or just starting out in
the workplace who may entertain thoughts of a career on Wall
Street. Read, read, and read some more. Read as many good
newspapers as you can, read the op-ed pages, and read history.
During my career, particularly when I had to give a public
seminar, it was amazing how many little nuggets of information
you can cram into your brain and how you never know when
they may come in handy.
Thanks for sharing the ride with me, friends. If nothing else, I’ve
given you plenty to talk about at the dinner table. And that’s not
such a bad thing. God bless you all.
---
God bless the men and women of our armed forces. It was 60
years ago this day that the United States launched the battle for
Iwo Jima. Over 2,000 Marines were killed or wounded in just
the first 18 hours.
God bless America.
---
Gold closed at $428
Oil, $48.50
Returns for the week 2/14-2/18
Dow Jones -0.1% [10785]
S&P 500 -0.3% [1201]
S&P MidCap -0.2%
Russell 2000 -0.7%
Nasdaq -0.9% [2058]
Returns for the period 1/1/05-2/18/05
Dow Jones +0.02% [2 pts. above 12/31/04 close]
S&P 500 -0.9%
S&P MidCap -0.3%
Russell 2000 -3.3%
Nasdaq -5.4%
Bulls 56.6
Bears 21.2 [Source: Chartcraft / Investors Intelligence]
Have a great week. I appreciate your support.
Brian Trumbore
Week in Review
2/19/2005
For the week 2/14-2/18
[Posted 7:00 AM ET]
The War on Terror
It’s incredible how irresponsible Wall Street strategists are. I’ve
been pounding the table the last few weeks in particular, let alone
the last six years, not to ignore the geopolitical scene. But since
our election in November and even through the Iraqi vote, Wall
Street hasn’t let any such concerns get in the way of its bullish
outlook. Complacency has been the watchword.
No doubt, my own tone last week was especially somber but I
imagine most of you saw the news of the past few days and
thought, that editor may not be so crazy after all. While no one
foresaw the horrific assassination of former Lebanese Prime
Minister Rafik Hariri, it certainly wasn’t surprising. And long-
time readers shouldn’t have been surprised at the congressional
testimony of the likes of CIA Director Porter Goss or FBI
Director Robert Mueller, though it was nonetheless disturbing.
Regarding the latter, yes, Goss, Mueller et al were engaged in a
bit of cover your butt rhetoric, but when Goss says “There is
sufficient (weapons-grade nuclear) material unaccounted for” in
Russia “so that it would be possible for those with know-how to
construct a nuclear weapon,” it’s a stark reminder of the world
we live in, even as some of us have been arguing for years that
there was no more important challenge in the world today than to
secure Russia’s weapons stockpiles. But let’s run through other
key developments on the week.
Iraq: The certified final tally on the election reveals the United
Iraqi Alliance (Ayatollah al-Sistani’s coalition) took 48% of the
vote and 140 of 275 seats in the national assembly. The Kurds
won a strong 26% and interim Prime Minister Ayad Allawi
captured a disappointing 14%. The assembly is charged with
writing a new constitution by August, a referendum on same is
held in October and general elections to select a permanent
government are to be in December. It’s an aggressive timetable
and for now Ibrahim al-Jaafari and Ahmad Chalabi are the
leading candidates to be prime minister, while the Kurds feel
they are entitled to the presidency. [Prime minister is #1 in
importance, followed by the president and his two vice-
presidents.]
Compromise is going to be the order of the day and as I wrote
last week, those assuming it’s a done deal that the new
government will be an Islamic toady of Iran are sadly mistaken.
Robert Kagan wrote the following in the Washington Post.
“Yes, the monolithically inclined journalists say, but didn’t a lot
of these (new) Iraqi leaders once live in Iran and seek Iranian
support? Indeed they did. When Saddam Hussein was in power,
murdering the Shiites by the tens of thousands and using
chemical weapons against the Kurds, while the United States,
Europe and the rest of the Arab world stood by and did nothing,
many Iraqis looked for help from the only nation that would
provide it. Does that mean now that Hussein is gone and they
have a chance to take part in governing their country that they
are stooges of Iran? Was George Washington a stooge of
France? Some may retain ties to onetime Iranian supporters, but
a better bet is that Iraqi Shiites will want to be just that: Iraqi
Shiites. Remember nationalism? And as scholars of Islam such
as Reuel Marc Gerecht point out, it’s probably the Iranian Shiite
leaders who are now worrying. In the end, Grand Ayatollah Ali
Sistani and his allies may prove to have more influence in Iran
than Iran does in Iraq.
“No one can know for sure, of course. But now is the time for a
little subtlety, a little discernment and a little patience. Above
all, it is time to abandon our inordinate fear of the Shiites.”
As for the post-election violence, I don’t mean to ignore it and
we all pray for the safety of our men and women in uniform in
Iraq, but the country is now taking two steps forward for every
one back, or better. I agree with Allawi, though, who told the
Post’s David Ignatius that his main fear is the country turns to
retribution and revenge instead of moving on. That’s what we
need to watch.
Syria / Lebanon: Rafik Hariri was prime minister of Lebanon 10
of the past 14 years following the end of the 1975-90 civil war.
A business tycoon, he was beloved by large segments of the
population and almost single-handedly rebuilt Beirut. But Hariri
resigned from government in October of last year over the policy
of pro-Syrian President Emile Lahoud, Damascus’ puppet.
Hariri was pushing to have Syria withdraw its 15,000 troops and
let Lebanon be Lebanon when he was assassinated.
While it’s not certain who perpetrated the act, I’ll go with a
combination of Syrian and Lebanese intelligence and not
necessarily the direct work of Syrian President Bashar Assad,
who isn’t the brightest bulb on the planet. Of course if it wasn’t
Assad’s doing, that’s almost as worrisome because who then is in
control?
Regardless of who did it, the killing of Hariri was one dumb
move. French President Jacques Chirac was a close friend of his
and Chirac attended the funeral, a risky gesture given the
explosive climate. While Washington continues to have major
problems with the French leader, including on the issue of
Hizbollah, there is a chance that the U.S. and France could reach
some real accommodation in helping get Syria out of Lebanon.
For starters, it’s time the UN Security Council showed some
backbone and forced Syria to comply with Security Council
Resolution 1559 which demanded last fall that all foreign troops,
read Syria, exit Lebanon immediately. Syria hasn’t budged. The
U.S. may be currently preoccupied militarily, but others could
help enforce 1559. As it is today, we are heading towards a new
Lebanese civil war as Hariri’s supporters seek revenge.
Iran: By mid-week Syria and Iran had announced the formation
of a “common front” to address mutual threats and challenges.
Earlier, an Iranian foreign ministry spokesman addressed the
assassination of Hariri.
“An organized terrorist structure such as the Zionist regime has
the capacity for such an operation whose aim is to undermine the
unity of Lebanon. Iran vigorously condemns the terrorist action
…which cost the life of Rafik Hariri. (Lebanon should be
vigilant) to prevent the Zionist regime from carrying out its
sinister and expansionist projects in the region.” [BBC News]
Yes, I think that sums up why we need regime change in Tehran.
On the nuclear weapons front, the mullahs once again thumbed
their nose at the Euro-3, Britain, France and Germany, which had
demanded Iran trade in its heavy-water nuclear reactor for a
light-water one, the latter less conducive to bomb-making.
But then our good friend Russian President Vladimir Putin,
feeling snubbed, said Russia would start shipping nuclear fuel to
Iran in three months. The U.S. has been vehement Russia not do
this as the fuel can be used for both the making of dirty bombs as
well as nukes.
As for its existing nuclear capability, I have been saying Iran
would test by mid-year. This week Israeli Foreign Minister
Silvan Shalom said “The question is not if the Iranians will have
a nuclear bomb in 2009, 10 or 11, the main question is when are
they going to have the knowledge to do it. We believe that in six
months from today they will end all the tests and experiments
they are doing to have that knowledge.” [Reuters]
North Korea: Here, with the North refusing to re-enter the six-
party talks, the U.S. refuses to engage in direct dialogue,
continuing to rely on China to exert its weight. In the meantime,
the Bush administration is looking to choke off any remaining
sources of income. But one move that is really going to have an
impact on the North economically comes from Japan. The
Japanese are imposing an embargo on all fishing vessels, North
Korean or otherwise, that don’t have insurance. Last year just
2.5% of the North’s boats had it and this is a huge blow to
Pyongyang.
Meanwhile, deputy secretary of state nominee Robert Zoellick
said it’s possible the North Koreans are bluffing, thereby backing
the position of South Korea. No way. Kim Jong Il has the
bomb. But what Zoellick’s statement does point out is the bind
the U.S. finds itself in on the credibility front thanks to our
failure to properly identify the WMD threat in Iraq. As for
China, they don’t want any problems in their backyard, but they
also don’t mind seeing the U.S. sweat a little.
Wall Street
Despite a hiccup this week owing to tensions in the Middle East,
the complacency I wrote of above is still rampant on the Street.
At least Federal Reserve Chairman Alan Greenspan, in his semi-
annual testimony to Congress, ratcheted up the level of debate
even if the congressmen questioning him were a total
embarrassment (the senators behaved more admirably).
Greenspan said he remained sanguine on inflation and that the
economy would grow at a solid 3.5-4% clip for 2005. He saw
“lingering caution” on behalf of CEOs and capital spending and
offered there was a need to “remain vigilant against
complacency” in the financial markets overall. Ah ha!
Greenspan also weighed in on Social Security (that’s all
Congress really wanted to discuss), saying he was in favor of
private accounts but the amount of debt that would be required to
fund the transition was potentially destabilizing. Medicare, he
added, is “several levels more difficult than Social Security.”
I’m not going to say anymore on this topic (if you’re new to the
site, trust me, I wore it out long ago) only to add that in an NBC
News / Wall Street Journal survey, by a 51-40 margin Americans
believe it is a “bad idea” to change Social Security.
Instead, let’s focus on Greenspan’s labeling recent bond market
behavior a “conundrum.” This reminded me of Winston
Churchill, speaking of the Soviet Union in October 1939.
“I cannot forecast to you the action of Russia. It is a riddle
wrapped in a mystery inside an enigma.”
But I digress. Greenspan’s own bemusement is quite simple.
The Fed has been steadily raising short-term interest rates and
the long end of the yield curve has been coming down; opposite
of what you’d expect and, no, Greenspan is not smart enough to
have foreseen this as one or two pundits idiotically offered up
this week.
What does give then? Since I forecast a 10-year yield of 4.30%
myself for year end, it really isn’t much of a mystery or enigma
to me. Forget Friday’s producer price index core reading of
0.8% for January, to me an anomaly. I just believe inflation, the
official variety the Fed watches, is not an issue and I still
maintain we will be talking deflation by December (for 2006 and
beyond).
Speaking of my own forecast, every 6-8 weeks I feel compelled
to lay it out for the new readers, from my 12/31/04 review. Sure,
much of it will prove embarrassing as the year unfolds but,
unlike the Street’s strategists who just keep changing their tune,
mine goes into the archives, to torment me until the end of time.
So I am looking for the China bubble to burst by 12/05, along
with the bubble in real estate, though on this second point I have
been saying it’s going to be more of a stagnating market than a
collapsing one because historically low mortgage rates continue
to buck it up.
I see the rate of consumer spending falling due to excessive
personal debt levels and capital spending remaining punk.
I also see earnings decelerating at a faster pace than expected…
and this market is not cheap to begin with.
I said the major equity indexes would be down 5% for the year.
The wild cards are the geopolitical hot spots, energy prices and
the dollar. On the greenback I said there will be “no dollar
crisis” in 2005. The hot spots you should know about by now,
let alone the impact of a terror attack on U.S. soil or a major
world capital. As for energy, if we stay at or above existing
levels on the price of crude (I don’t think we will), it has to limit
growth worldwide. It already has in many spots. Heck, I just
received my gas bill for January and it had to be an all-time high,
even though I have the thermostat way down the 12 hours I’m
normally not at home. I mean for crying out loud, no premium
beer for this guy. I’m pinching pennies.
Bottom line, I have my doubts on the economy, worldwide. Just
last week I questioned Japan’s recovery and sure enough the
government announced it was back in recession (though it
remains optimistic on 2005). Germany and Italy exhibited
negative growth rates in the fourth quarter. But on the plus side
the Bank of England upped its ’05 forecast to 2.7% for GDP and
China appears to be at least another few quarters from tipping
over. Australian resource giant BHP, the leading supplier to
China, said this week it remains very optimistic.
Here in the U.S. this week, housing starts in January hit a 21-year
high. Stupendous. And retail sales, ex-autos, were up a solid
0.6%.
Overall, however, consumer spending continues to rise far more
than wages and that trend not only can’t continue much longer,
in this increasingly levered economy of ours it’s outright
dangerous.
Leverage and debt are clearly on Alan Greenspan’s mind, too.
Last week I mentioned the $7 trillion+ national debt and how it
represented about 70% of the overall economy. I want to take a
moment to tighten this up.
The national debt, what you and I in effect owe as citizens, is
over $7.65 trillion while the total size of the U.S. economy is
$11.97 trillion, so the debt is 64%, not 70% of GDP. Frankly, I
was relying on memory and not factoring in the better than
expected economic growth of the past few quarters, thus that part
of the equation leads to a lower figure.
But in discussing the federal budget deficit, to be fair I should be
talking about “on-budget deficit” and “off-budget surplus;” the
latter, for now, meaning the Social Security surplus that is
promptly spent by Congress.
For example, in fiscal 2005 the on-budget deficit was actually
$589 billion and the off-budget surplus $162 billion. Ergo, 589 –
162 equals the $427 billion deficit we all hear bandied about.
But, again, the deficit was really $589 billion. Confused? The
White House sure hopes so. Optimistic about our financial
future? If you are, you’ll be in an increasing minority. Pin Alan
Greenspan down and I can virtually guarantee he’s not as
sanguine as he attempts to appear to be. Finally, aside from the
potential for a currency crisis down the road because we rely to
an increasing extent on foreigners to finance this ballooning load,
when you hear that the interest expense on the national debt will
be in the neighborhood of $315 billion by 2010, is this the best
use of our capital, our resources? Of course not. If you earn
$50,000 in income but you pay $2,000 in credit card interest, is
that the most efficient use of those dollars? Bottom line, we
could be headed towards a long era of Japan-like stagnation.
Street Bytes
--The major averages finished fractionally lower with the Dow
Jones losing just 11 points, 0.1%, to close at 10785. The S&P
500 lost 0.3% to 1201 and Nasdaq had its second straight
decline, 0.9% to 2058. The markets are closed Monday for
Presidents Day.
The big story on the week, aside from Greenspan’s testimony
and market reaction to it, was Friday’s late-breaking news that a
FDA panel of advisers favored keeping the popular Cox-2
inhibitor pain killers, Celebrex, Bextra and Vioxx on the market,
though with severe warning labels addressing the very real risks
of heart trouble. Shares in Merck and Pfizer surged with Merck
tacking on $3.75 to $32.60. Merck had taken Vioxx off the
market last fall and will most likely bring it back. Don’t expect a
lot of frilly advertising from the manufacturers, though. That’s
out of the question. As for the class-action lawsuits making their
way into the courts, these will be exceedingly difficult to win
with the FDA panel’s ruling. All in all, it appears the medical
folks did a thorough and thoughtful job. But given the lack of
time to research the decision thoroughly, I reserve the right to
revise and extend my remarks next week.
--U.S. Treasury Yields
6-mo. 2.89% 2-yr. 3.43% 10-yr. 4.27% 30-yr. 4.65%
Before we begin, let me throw out the following weekly closes
for the yield on the 10-year Treasury.
11/12…4.19…11/19…4.20…11/26…4.24…12/3…4.25
12/10…4.15…12/17…4.20…12/24…4.22…12/31…4.22
1/7…4.27…1/14…4.21…1/21…4.14…1/28…4.13
2/4…4.08…2/11…4.09…2/18…4.27
In other words, I hope you understand why I haven’t felt
compelled to comment extensively the past few months, other
than to state the obvious. These low rates have been great for
housing and it’s a big reason why the U.S. economy continues to
perform better than many expected a few quarters ago.
The question now is what does the Fed do in terms of further rate
increases? The bond market finally lost some steam the second
half of the week and it’s telling you that there are at least two
more rate hikes in the offing. The inflation numbers will supply
the final answer.
--In his congressional testimony, Fed Chairman Greenspan
warned again on the size of government-sponsored mortgage
giants Fannie Mae and Freddie Mac. The two now pose a
“substantial risk” to the economy. The chairman added:
“Given no limits on what they can put in their portfolios, they
can, by merely their initiative, create an ever larger increase in
portfolio, which, given the low levels of capital, means they have
to engage in very significant dynamic hedging to hedge interest
rate risks.” [Edmund L. Andrews / New York Times]
In other words, it’s all about Fannie and Freddie’s derivatives;
ticking time bombs.
--In a huge victory for the Bush administration, the House
approved a measure previously passed by the Senate that would
transfer most large, multi-state class action lawsuits to federal
court; thus helping prevent lawyers from targeting friendly state
courts as they have in the past. The act, signed by the president
on Friday, should cut back significantly on frivolous claims.
This is a great start on the tort reform front, though I can’t help
but add, ‘It’s about time!’
Of course many Democrats aren’t too fired up by the action as
they receive a large portion of their campaign dollars from trial
lawyers.
[For the record, if fewer than one-third of the plaintiffs are from
the same state as the primary defendant, the case would be
handled in the federal system.]
--Energy: It’s estimated the oil industry needs to spend $3 trillion
by 2030 on exploration and development to meet future demand,
or $105 billion a year. Non-conventional sources such as
Canada’s tar sands will be a big beneficiary though the oil
companies probably need prices consistently above $30 (which it
certainly appears they will be) before sinking a ton of money into
these kinds of projects that, today, remain far costlier than
deepwater drilling, for example.
Meanwhile, in the shorter-term, Saudi Arabia said it would
address the capacity issue by doubling the # of rigs operating in
the country, with a goal of lifting output to 12.5 million barrels
per day from its current 10-11 figure. The announcement was
greeted with skepticism by some who believe Saudi Arabia is
already largely tapped out in terms of what it can squeeze out.
--Russian energy giant Gazprom is looking to cut some deals on
the liquefied natural gas front with American companies. This is
good, assuming political relations between the two countries are
passable.
--Exxon Mobil surpassed G.E. on Friday as the largest stock in
terms of market value, $383 billion to $379 billion.
--The Euro-12 nations saw growth of just 0.2% in the fourth
quarter of 2004.
--Consumer spending in China was up a whopping 16% from last
year’s pace for the Lunar New Year.
--According to Jim Hopkins of USA Today, Google employees
gave $207,000 to federal candidates in 2004, 98% of which went
to Democrats. [Microsoft workers, by contrast, sent 60% of their
contributions to Dems.] What the Google data shows is that with
all the newfound wealth on its campus, the Democratic Party has
a significant future source of donations that one would expect
will increase exponentially.
--Mexico’s economy grew at a 4.4% clip in 2004, same as the
U.S.
--Verizon will acquire MCI for $6.7 billion, thus beating out
Qwest, though the latter is still submitting a sweetened offer.
This marks the 3rd monster telecom deal in the past six months,
the others being SBC / AT&T and Sprint / Nextel. Verizon said
7,000 jobs would be cut from the combined workforce of
250,000. I would venture to guess it will be more like 25,000
over the next three years. [Yes, I’m assuming the Qwest
proposal is turned down.]
--Nice going, AIG. Last Friday it announced on a conference
call with analysts that an internal probe looking into
improprieties beyond the insurance bid-rigging scandal found
nothing. Then we learn later the company was served with
subpoenas from the SEC and New York Attorney General’s
office the same day because of an ongoing investigation into
insurance products AIG created for others with the sole purpose
of manipulating earnings.
--Moody’s placed General Motors on “negative” outlook because
of costs associated with GM’s ending of its alliance with Fiat,
about $2 billion. GM’s healthcare costs, like that of all of
Corporate America, are skyrocketing; in 2004 some $5.2 billion
or, get this, $1,525 per vehicle.
However, when one looks at GM’s balance sheet you can’t
ignore its cash hoard of $23 billion. It’s just that this could be
whittled down quickly in a recession, thus Moody’s concern.
--Office Max’s accounting scandal continued to claim more
victims; this time it was the CEO himself. The CFO had
previously been canned, along with others, following claims
Office Max falsified vendor documents and rebates.
--A few weeks ago I reported on the proposed merger between
Federated Department Stores and May, assuming it would go
through. Talks then broke off (I was remiss in not reporting this
at the time), but now they are evidently back on.
--Mutual fund giant American Funds has been charged by the
NASD with offering illegal kickbacks to a slew of brokerage
firms; $100 million worth in directed commissions over a
number of years in exchange for promoting its products.
This has always been American’s modus operandi since I got
into the fund business eons ago and for its part they claim
everything was properly disclosed. One thing you can’t argue
about is the fact any long-term investor has generally been well-
served in these investments.
--The Wall Street Journal reports that the CEOs of Merrill
Lynch, Goldman Sachs, Morgan Stanley and Lehman Brothers
saw their compensation for 2004 increase 33% on average
(a range of $22mm to $33mm for each), far in excess of the
return on the company stock.
--The fiasco involving information broker ChoicePoint Inc. is
unbelievable. In case you didn’t know, and hopefully you
haven’t received a letter, scammers opened up 50 bogus accounts
with ChoicePoint, allowing them to then access data, including
Social Security #s, on up to 500,000 individuals. As of this
writing, at least 700 have had their identity stolen. [The
information ChoicePoint collects is used for pre-employment
background checks and public records searches.]
--Inflation Watch: This one comes from John K. Tuition at
Lehigh University is going up another 7% for the 2005-2006
academic year. Poor John has two daughters there right now,
gulp, at $40,000+ each.
--Kentucky Fried Chicken continues to be the target of protests
by both PETA and some African-American groups over the
company’s treatment of its birds that are supposedly “often fully
conscious when their throats are cut.” [Chicken Jack: “Gee, I
wonder whose home I’m going to…doh!”] McDonald’s, fearful
of a consumer attack on it, agreed to increase the living space for
its chickens. Haven’t heard if this includes flat panel screens and
free cable.
--The NFL now has its first African-American owner. The
Minnesota Vikings are being sold by Red McCombs for about
$600 million to Reggie Fowler. McCombs purchased the
Vikings in 1998 for $246 million, a nice investment.
As for Fowler, he played briefly in both the USFL and NFL in
the early 1980s before founding Spiral Inc., a company that
sells food containers to buyers like supermarkets. You’ve gotta
love it, a classic American success story.
--This week marked the start of the Kyoto Treaty for those
nations that are signatories, so to mark the occasion a number of
Greenpeace protesters decided to pay the International Petroleum
Exchange in London a visit. I appreciate those of you who
passed the Times of London account on to me.
As it turns out, the Greenpeace folks “bit off more than we could
chew,” in the words of one. “They were just Cockney barrow
boy spivs. Total thugs. I’ve never seen anyone less amenable to
listening to our point of view.”
Basically, they had the crap beat out of them. But before you
feel sympathy for the Greenpeace victims, and before you write
me, understand the following as reported by Laura Peek and Liz
Chong.
“When a trader left the building shortly before 2pm, using a
security swipe card, a protester dropped some coins on the floor
and, as he bent down to pick them up, put his boot in the door to
keep it open.
“Two minutes later, three Greenpeace vans pulled up and another
30 protesters leapt out and were let in by the others.
“They made their way to the trading floor, blowing whistles and
sounding fog horns, encountering little resistance from security
guards. Rape alarms were tied to helium balloons to float to the
ceiling and create noise out of reach. [Ed. that’s clever!] By
making so much noise, the protesters hoped to paralyze trading.”
The traders then entered the fray. Now discuss amongst
yourselves.
--My portfolio: I purchased a little more of my carbon fiber play.
Speaking of greenies, this is really my “Clear Skies” investment.
A large application of carbon fiber is for windmills. And for
those of you following along at home, and knowing I can’t
identify individual positions for legal and ethical reasons, of the
five stocks I sold off over the past three months, three are down
from where I exited, one is about flat, and the other is way up
(the Aussie resources play). And yes, I’m still kicking myself for
not having more in the energy sector as these stocks continue to
rocket higher.
Foreign Affairs
Israel: Palestinian President Mahmoud Abbas declared that the
war is effectively over and, for now, he believes Hamas and
Islamic Jihad will respect the truce. For his part Israeli Prime
Minister Sharon reiterated he would crack down on his own
extremists. And if you thought my assassination talk of last
week was a bit over the top, NBC News had the same type of
story on Tuesday.
China: The FBI estimates that 3,000 companies in the United
States are collecting information for China, particularly in
Silicon Valley, with emphasis on acquiring military technology.
[Time magazine] Meanwhile, CIA Director Porter Goss is
increasingly concerned over China’s growing military and the
threats posed to both its neighbors and U.S. interests; Taiwan
obviously being the first and foremost potential target.
[While the China threat to the entire region should have already
been apparent to any educated person on the planet, the fact Goss
spoke of it so publicly is significant.]
And on the topic of Taiwan, over the weekend the U.S. and
Japan are going to formalize a joint agreement that makes
Taiwan a mutual security concern; another move by Japan to
counter China’s influence. [Remember my long sought supra-
alliance between the U.S., Britain, Australia, Japan and India? It
doesn’t look so far-fetched anymore, does it?]
But wait, there’s more. A bipartisan resolution was introduced in
the House this week demanding the resumption of diplomatic ties
between Washington and Taipei, cut off back in 1979 as the U.S.
opted to recognize the mainland instead.
Representative Tom Tancredo (CO) said “Our current ‘One
China’ policy is a fiction. Taiwan is a free, sovereign and
independent country that elects its own leaders. It is not, nor has
it ever been a local government of communist China – and
everyone knows that.”
Tancredo added it is time “to scrap this intellectually dishonest
and antiquated policy in favor of a little consistency and
honesty.”
“There is absolutely no good reason that the United States cannot
maintain the same kind of normal relationship with the
democratically elected government on Taiwan that it maintains
with the autocratic regime in Beijing.” [South China Morning
Post]
This resolution won’t get far but you can imagine how upset the
White House is, let alone Beijing. Good. I toast Congressman
Tancredo and the co-sponsors.
On the mainland this week, over 210 perished in the worst
mining disaster since 1949. Over 6,000 were killed in accidents
here in all of 2004.
Finally, the Communists arrested 5 Tibetan monks for writing
“political poems” in their newsletter.
Russia: 257,000 protesters in 70 cities took to the streets last
Saturday but this included 40,000 in Moscow marching in
support of President Putin. The rest were aligned against Putin’s
economic reforms and the benefits cuts.
As for those supporting the president, talk about a farce. Most
were bused in from the suburbs, strongly encouraged to
participate if you catch my drift, and many told reporters this was
the last thing they wanted to do on a Saturday. Of course only
this march received play on state television. None of the true
protest rallies were covered. But as I noted last week, watch
February 23, the day the Communists are trying to organize a
massive demonstration in support of the military but against
Putin.
Egypt: Two weeks ago, Egyptian President Hosni Mubarak was
in all his glory as he hosted the Sharm el-Sheikh summit between
Abbas and Sharon. But Mubarak is running unopposed for a
sixth term this fall and his son Gamal is the hand-picked
successor for when Mubarak finally exits stage left. So I can’t
help but note the following comment by Jackson Diehl in the
Washington Post.
“Bush, who in his State of the Union speech called on Egypt to
‘show the way’ toward democracy in the Middle East, will look
feckless and foolish if a regime so deeply dependent on U.S.
military and economic aid (up to $2 billion a year) stages another
fraudulent election while jailing the very politicians who support
his vision. But Mubarak is betting that this U.S. president, like
those who preceded him, won’t seriously confront him or
threaten his economic lifeline at a sensitive moment in the ‘peace
process.’”
Philippines: Al Qaeda surrogate Abu Sayef exploded three
bombs across the country on Monday, killing at least 7 while
announcing the attacks were a “Valentine’s gift” to President
Gloria Arroyo. Lovely.
Ukraine: In an interesting move bound to rile up the Kremlin
even further, President Viktor Yushchenko picked Russian
opposition figure and former Kremlin advisor Boris Nemtsov to
be an unpaid member of his staff with the mission of being a go-
between between Kiev and Moscow as well as to attract
investment. [This is more than I imagine 99% of you wanted to
know, but the reason Nemtsov is unpaid is because under
Ukraine’s constitution, a foreign national can’t be.]
Northern Ireland: The gig is up for Sinn Fein. As a series of
raids is conducted across the Irish Republic and Northern
Ireland, its fingerprints are all over the IRA’s December bank
robbery in Belfast. $4 million in cash was recovered at the home
of a prominent Cork businessman this week, and once the ties are
made, the world will know that Sinn Fein has been nothing more
than a front for criminal and terrorist activity.
Venezuela: The good news is the government of Hugo Chavez
resolved a dispute with ConocoPhillips. The bad news is it’s still
purchasing 100,000 Kalashnikovs, along with some military
helicopters, from Russia.
Paraguay: I can’t believe it was just two months ago I was down
here. It seems like a year in some respects. But there was an
interesting article in Thursday’s New York Times concerning
author Lily Tuck. Ms. Tuck won a 2004 National Book Award
for “The News From Paraguay” and I read it on my trip. It’s
basically about the horrific war Paraguay fought in the 1860s
against Brazil, Argentina and Uruguay that resulted in the deaths
of 90% of Paraguay’s adult males.
Well, it turns out Lily Tuck had never been to Paraguay before
she wrote the book and only in the last few weeks completed her
first trip there as the government feted her. Oh, but many in the
nation were not happy to see her. You see, “The News From
Paraguay” had a lot of plain old hard porn in it and I’m glad I
wasn’t the only one who felt that way. And even though the
dictator from that era, Francisco Solano Lopez, took the country
under and is portrayed as an idiot (it’s a little more complex than
that), many in Paraguay still worship the guy; granted, hard for
an outsider to understand.
But the Times report, as our own Dr. Bortrum pointed out to me,
said nothing about the crime wave I touched on while there.
Sadly, the topic is front and center again this week with the
discovery of the body of the 32-year-old daughter of a former
president, Raul Cubas. Cubas had paid $800,000 in ransom a
number of months ago and she was still killed (with signs of
torture). This is just the latest in a series of high-profile
kidnappings / killings of children of big politicos and
businessmen here.
What’s even more troubling in this particular case are the ties the
killers may have to FARC, the leftist militants fighting the
Colombian government for over 40 years. This is a first and an
incredibly dangerous development.
And who has been providing haven for FARC? Venezuela’s
Hugo Chavez. It’s easy to connect the dots, now let’s see if
Washington and its allies in the region do anything about it. One
thing is for sure, Colombia’s President Alvaro Uribe deserves
our unstinting support.
Random Musings
--Ambassador John Negroponte was named the first National
Director of Intelligence. Good luck, sir.
--According to the NBC News / Wall Street Journal survey,
President Bush’s overall job approval rating is still only 50%,
despite all the favorable press he’s received from the vote in Iraq
and being front and center at both his Inauguration and the State
of the Union. In other words, what bounce? His approval rating
was 49% last October, for example. [The highest of his
presidency is 88%, Nov. 2001, while the low is 45%, June 2004.]
--A Senate subcommittee now estimates that the head of the UN
oil-for-food program, Benon Sevan, not only blocked a UN audit
in 2001 but he may have siphoned off up to $1.2 million for his
own use, far more than originally estimated. Investigators are
still combing through Secretary General Kofi Annan’s
documents and e-mails to ascertain what he knew about son
Kojo’s involvement.
--Last Sunday was the 60th anniversary of the firebombing of
Dresden and to mark what was supposed to be a solemn occasion
and day of remembrance, 4,000 neo-Nazis assembled, the largest
such show of strength since World War II.
--Democratic gubernatorial candidate Eliot Spitzer’s approval
rating in New York is 59% vs. 43% for Governor George Pataki
who is contemplating a run for a fourth term in 2006. Pataki
would get creamed.
--The NHL became the first professional sports league to shut
down for an entire season. Blame global warming for melting
the ice…….but what’s this? There is another meeting today?
Does anyone really care?
--The “Today” show had a few segments on cleanliness this
week. Guess what? Wash your hands! At StocksandNews you
must do so at least ten times a day…it’s part of the employee
handbook, err, manual.
--The American Council on Education says twice as many black
women as black men now attend college.
--The gang violence exploding in our inner cities claimed another
high profile victim the other day. Fernando Correa was the star
of his Bronx high school football team but he refused to join the
Bloods. 16-year-old Quindel Francis, either a Blood or a Blood
wannabe, gunned Correa down to impress his buddies. This stuff
is sickening.
--In the latest development on the Jon Corzine for governor front,
the senator proposed “ethics reform,” saying the “state’s
reputation was at stake.” This from a man who outspent his
opponent in 2000 by $63.5 million to $6 million and who has
been plying every county and church leader with gobs of cash to
ensure their support this fall. Said New Jersey Republican
chairman Tom Wilson:
“Jon Corzine talking about reducing the influence of money in
politics is like Vito Corleone talking about reducing the influence
of the mob.” [Star-Ledger]
--A new virulent strain of the AIDS virus has been found in New
York City, one resistant to 19 of 20 drugs on the market,
combinations of which make up the successful drug cocktail. So
the region has to be concerned about a new epidemic, especially
since the man found to have had the new strain had “unprotected
sex with hundreds” of men. Unbelievable.
--China has a big problem…a surging demand for toilet paper.
Wang Yuepin, vice-director of Shanghai Paper Trade
Association, said “I’m happy to see many young people adopt
paper tissues for the convenience.” [South China Morning Post]
Well, you know what I have to say to this. When traveling in
China as a tourist, wash your hands more than ten times a day.
--Finally, this week marks the 6th anniversary of StocksandNews.
Who wudda thunk it? I certainly didn’t expect to go this long.
When I left my cushy job at PIMCO Funds, and a ton of money
on the table, I thought this site would be a three year project.
Wrong. Within weeks I had created a monster and for six years,
seven days a week, I have striven to create the single best
archive in the world on the events of a must tumultuous period.
Thus far, mission accomplished.
So what will I do now? Beats the heck out of me. All I know is
I have thoroughly enjoyed the experience, though not always the
Fridays, and of course I’ve had the opportunity to travel the
world far more extensively than I ever thought I’d do. I’m
probably going to cut back on the international aspect this year,
by the way, but that is more a function of a new, golf-related
venture I’m going to be part of…and it’s not with Carlos Franco.
More late spring.
I was calculating how much I’ve written over the years, not just
for “Week in Review” but the other columns I’m responsible for
and, conservatively, it’s over 10,500 pages. Goodness gracious.
You want to know what my main fear is? That I forget how to
type. Seriously, I actually had my first nightmare to this effect
the other night.
I thought I’d take a moment to not only thank a few people but
also answer some questions you undoubtedly have.
Like why do I place the Nasdaq at the bottom of my tables down
below? Well, it’s because I thought it would stand out better and
I’ve been doing it that way for over 7 ½ years, including my stint
at PIMCO writing this piece, so why start now?
Why do I put “For the week 2/14-2/18” when a week is seven
days? Again, it started out that way and now I can’t change it.
You understand, don’t you?
How much time do I put into this column? A ton. After I go to
‘post’ on Saturday morning I take a brief break and literally
begin working on the next one. Sunday is a key day for me, not
just because of all the newspapers but I can’t miss some of the
talk shows, particularly “Meet the Press.” Nor “The Simpsons.”
I keep threatening to cut back some and I will need to with the
other links. Believe it or not, while I did extensive advertising
my first few years, including a radio blitz in the New York
market, I have done little since. I’ll be hitting the road shortly to
remedy this matter.
I would like to apologize to those I may have offended over the
years. This column is a one-man production…there is no
associate editor proofing my work. Invariably, about once a
quarter it seems, I cross the line. I lose readers each time I do
and I know immediately, within hours, I went too far.
Wrapping up, I want to thank Dr. Bortrum (aka my father…I
acknowledge this but once a year) for his terrific contributions
and my brother Harry for his brilliant cartooning, as well as the
support staff at Web Epoch.
I also have to thank a now defunct magazine, Online Investor, for
helping put me on the map when it named this site one of the top
picks for 1998-2000. It was quite an honor. And I want to thank
my friends at BuyandHold.com, with whom I now have a five-
year plus relationship. Many of you found me through this
Oppenheimer / Fahnestock-based operation. They’re good
people.
Finally, a little advice to those in college or just starting out in
the workplace who may entertain thoughts of a career on Wall
Street. Read, read, and read some more. Read as many good
newspapers as you can, read the op-ed pages, and read history.
During my career, particularly when I had to give a public
seminar, it was amazing how many little nuggets of information
you can cram into your brain and how you never know when
they may come in handy.
Thanks for sharing the ride with me, friends. If nothing else, I’ve
given you plenty to talk about at the dinner table. And that’s not
such a bad thing. God bless you all.
---
God bless the men and women of our armed forces. It was 60
years ago this day that the United States launched the battle for
Iwo Jima. Over 2,000 Marines were killed or wounded in just
the first 18 hours.
God bless America.
---
Gold closed at $428
Oil, $48.50
Returns for the week 2/14-2/18
Dow Jones -0.1% [10785]
S&P 500 -0.3% [1201]
S&P MidCap -0.2%
Russell 2000 -0.7%
Nasdaq -0.9% [2058]
Returns for the period 1/1/05-2/18/05
Dow Jones +0.02% [2 pts. above 12/31/04 close]
S&P 500 -0.9%
S&P MidCap -0.3%
Russell 2000 -3.3%
Nasdaq -5.4%
Bulls 56.6
Bears 21.2 [Source: Chartcraft / Investors Intelligence]
Have a great week. I appreciate your support.
Brian Trumbore
FundSurfer
Well-known member
imported post
Yeah, I had to fight to stay awake through the first post...'yawn'....
%7K for a car??!? Is it made of cardboard? Hard to believe...
Disposable auto?
Yeah, I had to fight to stay awake through the first post...'yawn'....
%7K for a car??!? Is it made of cardboard? Hard to believe...
Disposable auto?
teknobucks
Active member
imported post
Rolo wrote:
[/quote]
Rolo wrote:
Holy crap, tekno, how do you have the attention span to read all of this!? (seriously?)
[align=center]
haha, does this look like a VW bug-turned-van?
Must be for the soccer-hippie-moms.[/align]
this stuff 4 me.
[/quote]
teknobucks
Active member
imported post
FundSurfer wrote:
of course thats what my dad said about nissan and toyota...LOL
FundSurfer wrote:
yeah...wait until the kiddy market becomes saturated with these POS's.
of course thats what my dad said about nissan and toyota...LOL
teknobucks
Active member
imported post
A huge explosion halfway across the galaxy packed so much power it briefly altered Earth's upper atmosphere in December, astronomers said Friday.
No known eruption beyond our solar system has ever appeared as bright upon arrival.
But you could not have seen it, unless you can top the X-ray vision of Superman: In gamma rays, the event equaled the brightness of the full Moon's reflected visible light.
The blast originated about 50,000 light-years away and was detected Dec. 27. A light-year is the distance light travels in a year, about 6 trillion miles (10 trillion kilometers).
*****detected one day before the tsunami.....HMMMMMMMM wonder if there is any conection??
A huge explosion halfway across the galaxy packed so much power it briefly altered Earth's upper atmosphere in December, astronomers said Friday.
No known eruption beyond our solar system has ever appeared as bright upon arrival.
But you could not have seen it, unless you can top the X-ray vision of Superman: In gamma rays, the event equaled the brightness of the full Moon's reflected visible light.
The blast originated about 50,000 light-years away and was detected Dec. 27. A light-year is the distance light travels in a year, about 6 trillion miles (10 trillion kilometers).
*****detected one day before the tsunami.....HMMMMMMMM wonder if there is any conection??
G
Guest
Guest
imported post
teknobucks wrote:
teknobucks wrote:
My dad keeps telling me that his first new car was $1,650. It was a Datsun (Nissan) I think, and he says that it was the same price as the VW beetle at the time. (1971?) He said that it cost $1,730 cause he added an AM radio for $80. *LOL*
blueskys4ever
Member
imported post
I would not underestimate the impact that Chinese made automobiles will have on the U.S new car market. The competion is already stiff. While we may balk at the quality, remember that pricemay well be the largest driver in cars priced below 15,000 dollars.
Did anyone notice that this announcement comes on the heals of the Presidents recent victory concerning tort reform? Is this an accident?
I would not underestimate the impact that Chinese made automobiles will have on the U.S new car market. The competion is already stiff. While we may balk at the quality, remember that pricemay well be the largest driver in cars priced below 15,000 dollars.
Did anyone notice that this announcement comes on the heals of the Presidents recent victory concerning tort reform? Is this an accident?
imported post
Welcome, BlueSky!
competition: agreed. At least the other 'cheap' crappy car makers might go back to being cheap again. (KIA, Hyundai, they both got trashed on quality and they aren't inexpensive for what you are getting...ten year warranty..baha yeah yer gonna need it!)
Welcome, BlueSky!
competition: agreed. At least the other 'cheap' crappy car makers might go back to being cheap again. (KIA, Hyundai, they both got trashed on quality and they aren't inexpensive for what you are getting...ten year warranty..baha yeah yer gonna need it!)
G
Guest
Guest
imported post
blueskys4ever wrote:
blueskys4ever wrote:
It's not necessarily that easy to enter the US car market successfully. There was the Yugo from Yugoslavia. There was the Lada from Russia. Both bombed.
blueskys4ever
Member
imported post
Thanks Rolo!
Back in 95', when I was still married, my wife andI bought a Hyandai Accent just before we went to Germany for a year. We paid about 12,000, I think.
One morning we stopped for breakfast near the Rhine and parked the car on the curb, next to what I thought was a car lot. When we returned to the car , twenty Germans were standing around my "not so special " Accent looking in the windows. They thought our car was part of a big car show. Parked near our car, were the export Hyandais ment for the German market. My car had the US trim and their German offering looked sick in comparison. They paid about 6 thosand more for less of a product.
What this all illustrates is that the Chinese can tailor the offerings to suite the US market. And I think that they will make ton of money in that the wages they pay in China are small compared to the rest of the world.
Thanks Rolo!
Back in 95', when I was still married, my wife andI bought a Hyandai Accent just before we went to Germany for a year. We paid about 12,000, I think.
One morning we stopped for breakfast near the Rhine and parked the car on the curb, next to what I thought was a car lot. When we returned to the car , twenty Germans were standing around my "not so special " Accent looking in the windows. They thought our car was part of a big car show. Parked near our car, were the export Hyandais ment for the German market. My car had the US trim and their German offering looked sick in comparison. They paid about 6 thosand more for less of a product.
What this all illustrates is that the Chinese can tailor the offerings to suite the US market. And I think that they will make ton of money in that the wages they pay in China are small compared to the rest of the world.
G
Guest
Guest
imported post
blueskys4ever wrote:
blueskys4ever wrote:
When the Yuan is no longer tied to the Dollar, it ain't gonna be that cheap! *LOL* A Chevy could be cheaper, bluesky. (I'm serious)
