Category: Articles

Abdalla El-Badri, Secretary-General of the Organization of the Petroleum Exporting Countries (OPEC) said the biofuel strategy being pushed by President Bush and European leaders would backfire because “you don’t get the incremental oil and you don’t get the ethanol”. In this scenario, he warned, oil prices would go “through the roof”.

He said OPEC members had so far maintained their investment plans but he warned: “If we are unable to see a security of demand…we may revisit investment in the long-term.” Why the change? In the past OPEC had all but mocked biofuel’s potential. This is the first public expression of concern.

“They are really concerned,” said Julian Lee of the Center for Global Energy Studies in London. “Opec will continue investing, but with biofuels on the horizon, they may not invest enough.”

OPEC is caught between a rock and hard place. On the one hand,if they keep prices high like they have become accustomed to, the rest of the world will continue it’s quest for alternative sources. Should they ramp up production to bring prices down in an attempt to make biofuels cost prohibitive, their wallets suffer. What to do?

I think if anything this is proof positive that oil production is currently at a peak level. If OPEC could, it would flush the world with oil and dampen it’s desire for alternative sources and make them less profitable. The fact that they haven’t means they can’t.

Here is another odd point. With OPEC clearly scared about both the current reality and the future surrounding ethanol, why are US ethanol makers currently nowhere near 52 week highs? When you have the US and Brazil, who between them produce over 10 billion gallons a year of the stuff rushing to partner production practices, shouldn’t that excite us? When the world’s #1 producer of biodiesel, ADM (ADM) has set up shop in Brazil, will produce biodiesel there in August and is aggressively seeking an ethanol partnership, ought we not be more positive about the future of these companies?

Let’s not forget other US Agribusiness companies like Bunge (BG) and Corn Products (CPO) are in the process of producing from South America also.

Here is another miscellaneous thought. If the Dems take the White House (and even possibly if they do not) oil companies like Exxon (XOM), Chevron (CVR), and BP (BP) will once again find them selves in front of congress answering for record profits and high gas prices. Dems have wanted to grab some of these profits for years and may soon be in a position to actually do it. Can you think of anything that would get anyone of them off the hook faster than being able to say “We are also the #1 (or #2) ethanol producer in the US”? With half the ethanol sector near 52 week lows, valuations are ripe for buyouts by big oil flush with cash, looking for some real nice PR in their commercials and as a way to protect their profits from congress’s hands.

When you have the organization that controls 40% of the world’s oil publicly worried about ethanol, I find the current apathy towards companies that produce it odd. Maybe that is what a value investor is, finding the value in what others overlook.

Time for an update of the various lead paint suits winding their way to obscurity throughout the US.
The main defendants are Sherwin Williams (SHW) and NL Inustries (NL). I have taken this post in it’s entirety from Jane Genova’s Law and More since, as I have said here numerous times before, investigating the legal aspect of lead paint litigation begins and ends with Jane’s blog.

“These updates come by way of the monitoring, research and interpretation of LexisNexis [TM] Mealey’s Litigation Report. This Mealey’s briefing is focused totally on the lead issue. I have radically downsized the content of the original report. Also I have added my own commentary.

Documents associated with these developments are available from Mealey’s at www.lexisnexis.com/mealeys or James.Cordrey@lexisnexis.com

RHODE ISLAND:

Abatement:

1. Defendants Sherwin-Williams, NL Industries and Millennium Holdings filed a joint objection to the state’s recommendation for special master of Mary Jean Brown, MD of the U.S. Centers for Disease Control and Prevention. The reason, say the defendants, is that it appears “from available information [Brown] has had from any years been involved in reviewing (and to some extent shaping) the evidentiary facts regarding childhood lead poisoning and lead abatement in Rhode Island.” The person functioning as special master, of course, should have no ties to any one party in an adversary proceeding.

2. On June 4, Superior Court Judge Michael Silverstein heard from plaintiff and defendants about their recommendations for a special master. He did not indicate when he would rule on this.

3. On May 16, plaintiff filed proposed abatement schedule indicating it would file a detailed plan by Sept. 15. Defendants have 60 days to file objections to the plan. The plaintiff also proposes defendants shall pay all fees and costs incurred by the function of special master.

Appeal to RI Supreme Court:

Both the plaintiff and the defendants had filed an appeal. On May 21, the RI Supreme Court issued an order and briefing protocol for the defendant paint companies.

The schedule requires the completion of the official transcript, certification of the original papers and exhibits and docketing of the matter in the RI Supreme Court. As we have been informed previously, this could take months. Sources predict this might not be done until early 2008.

After that, there will be a conference with plaintiff and defendants to work up a schedule for filing briefs. When that date is set and the briefs have been actually filed, then a date will be made for oral arguments before the Court.

Since the contingency issue has already been fully briefed, there is no additional filing related to this one matter. The other issues will be briefed in five phases:

* Appellants’ briefs
* Appellees’ briefs
* Amicus briefs
* Reply briefs
* Replies to amicus briefs.

WISCONSIN:

City of Milwaukee v NL Industries. Plaintiff rested its case on June 6. The jury returns June 8. Then the defendant will present its case. Since as part of the defense teams in the RI lead paint trial, NL Industries lead attorney Donald Scott didn’t present a defense, lead-paint watchers are curious who he will call as witnesses and what strategies he will use.

Steven Thomas et al. v. [Many]. On May 10, the judge ruled the defendants could compel Steven Thomas’ guardian ad litem to provide deposition testimony, subject to limitations. Defendants argue exculpation defense should be allowed. Atlantic-Richfield claims no liability since its lead carbonate was not sold in Milwaukee.

Called for short “The Thomas Case,” this upcoming trial is viewed as the most severe test the former lead paint industry and its former trade association Lead Industries Association (LIA) have encountered. Part of the challenge is how the legal concept of liability is being approached because of a WI Supreme Court ruling.

CALIFORNIA:

In County of Santa Clara, et al. v Atlantic Richfield Co, et al. the judge issued an order staying the case until the appellate review.

MISSISSIPPI:

The state Supreme Court denied Sherwin-Williams’ motion for a rehearing and the case [a personal injury one] will go to trial.

OHIO:

SS 117 Veto. The state Supreme Court, which heard oral arguments on May 1 regarding if Senate SS Bill 117 had become a law because of the former Governor’s not vetoing it, will probably rule by the end of June.

Preemptive Strike by Sherwin-Williams. On May 14, the city of Columbus and other cities in OH filed a brief seeking to prevent Sherwin-Williams from being allowed to take “the extraordinary step of prohibiting the defendants from engaging legal counsel of their choosing in pending state court claims.” It also requested a dismissal of Sherwin-Williams’ request for a preliminary injunction against litigation. The cities contend that this filing by Sherwin-Williams represents an attempt to evade responsibility for creating a public nuisance.”

Here are the top 5 sectors YTD ranked by return.

1- Chemicals / Fertilizers +68% (13 stocks)

2- Steel Producers +30% (22 stocks)

3- Trucks & Parts Heavy +45% (13 stocks)

4- Food- Dairy Producers +30% (9 stocks)

5- Transportation / Ships +20% (49 stocks)

Rankings are done by price performance of all stocks in the group. So, a sector that has 5 stocks, one up 100% and 4 up 1% will not be ranked as high as a sector that has 5 stocks all up 15%, thus the differential in rankings vs return.

Here are the top 5 sectors ranked by the percentage of the group reaching new highs

1- Retail- 25%

2- Chemicals / fertilizers- 17%

3- Internet-isp- 13%

4- Apparel-shoes- 12%

5- Electrical, military systems- 12%

Here is a great post that can be found at the blog The Mess That Greenspan Made. I take no credit for this, it is the authors in it’s entirety and it is very good.

The Post:

If you’ve been wondering why gasoline prices have been so high lately with crude oil trading at only $66 per barrel, the answer can be found at the refineries.

This week’s TWIP (This Week in Petroleum) from the Energy Information Administration has some interesting commentary and, as always, abundant charts to tell the story of how retail gasoline prices have fallen for the second consecutive week, down five cents to $3.16 per gallon.

First, it should be clear that this is not an oil problem. U.S. oil inventories, the biggest raw material cost for gasoline (duh!) have been at or above the range considered normal for this time of year. There is no oil problem – that will occur sometime in the future, maybe soon, we’ll see.

Yet, prices at the pump remain near record highs, particularly here on the West Coast where special formulation requirements and higher taxes almost always result in higher prices.

Lucky us – at least there’s no big brown cloud hanging over the Western U.S. (except sometimes in Phoenix) like the one hanging over parts of developing Asia .

Gasoline stocks are way down, though they’ve been recovering dramatically in recent weeks as indicated by the current slope of the red-dotted line below. It turned ultra-steep last week in an attempt to make up for lost time and keep up with demand from the summer driving season that just started.

Have the refineries suddenly finished all their yearly maintenance work and flipped all the right switches to boost production?

Production has improved in recent weeks but it remains below levels from December of last year – refinery utilization for this time of the year is still below the levels of the last three years.

The downward price pressure (if you can call retail prices falling from $3.30 per gallon to $3.16 per gallon price pressure) comes largely from an increase in gasoline imports which have reached new multi-year highs.

And of course demand continues to increase, current levels of consumption for this time of year again at all time highs despite the higher prices.

Remember what a big deal it was a couple years ago when when gasoline stations couldn’t find enough number 3s to put up on their signs out at the curb?

With the precarious balance between the supply and demand for crude oil combined with aging refineries, it seems only a matter of time before there is a new crisis – finding enough number 4s.

Procter & Gamble (PG) was downgraded to equal-weight from overweight at Lehman Brothers, which said it will be “tough” for the Dow industrials component to deliver above-average returns. “As we see it, P&G’s business is healthy, but without much upside to fiscal 2008 margins versus our estimates nor likelihood of sustained re-acceleration in revenue growth,” the broker said. On Monday

I posted the very same sentiment is less esoteric terms. It is simple, huge discounts are a sign of slowing sales. If the discounting produces the sales, it does so at the expense of margins. Either scenario mean profits will come under pressure..

And yes that makes it “tough”, although I did not know it is usually “easy”

You have probably heard the saying before that high tax rates cause people to engage in behavior that enables them to avoid paying those taxes. Some of it illegal, some legal. When you do business in the US, with our 40% average corporate tax rate being the world’s second highest, those efforts become pervasive. Take the recent case of IBM (IBM).

Why?:

It involves “Repatriation” of profits. The simplest way to describe that is foreign subsidiaries of US companies, if their earning are included in the results of the parent company, have profits taxed here is the US at US corporate tax rates in addition to taxes they may be paying in the country they are based.

To Avoid This:

IBM formed a new IBM subsidiary in the Netherlands. The unit spent $1 billion in cash and $11.5 billion in borrowed funds to buy 118.8 million shares — 8% of shares outstanding. They did this from a group of investment banks that had borrowed the shares from institutional investors. The investment banks will then return the borrowed shares with shares they buy on the open market over the next nine months. If its stock rises and the investment banks suffer losses, IBM will cover them.

The transaction was structured to let IBM buy back stock without repatriating retained earnings from its foreign units to the U.S.

IBM does not have cash hidden overseas. It plans to repay the loans to the banks used for the stock repurchase with future earnings from international subsidiaries in different countries. The estimated tax rate after various credits would be 22%. That would result in saving about $1.6 billion, compared to the taxes it would have incurred by repatriating the sums to the U.S. the person said.

Very sneaky, and until the IRS caught on and issued a notice on May 31st, very legal. Now let’s not get all upset at IBM. People behave in ways based on the conditions they find themselves in. Now, had we had the EU taxes rate of 26%, IBM may not have even investigated this. Were we in the US taxed at the 12.5% those companies in Ireland are, the topic would not have come up. When you tax folks the most, they will find ways around it. Management at IBM has a fiduciary responsibility to their shareholder and a move like this only show they take that seriously.

Rather than giving IBM a “tisk-tisk”, I am trying to find out if the multinationals in my portfolio have done the same thing and if not, ask, “who was sleeping in accounting?”

The Federal Trade Commission said it will block the company’s pending $565 million takeover of competitor Wild Oats Markets (OATS). The companies plan to challenge the FTC’s suit, which follows a request in March for additional information on the $18.50 per-share deal. The FTC claims the transaction will result in an unacceptable limitation on competition in the natural and organic food market. Are they kidding?

Whole Foods Chairman and CEO John Mackey replied, “The FTC has failed to recognize the robust competition in the supermarket industry, which has grown more intense as competitors increase their offerings of natural, organic and fresh products, renovate their stores and open stores with new banners and formats resembling Whole Foods Markets (WFMI) .” Here is a quick quiz, do you know who the largest seller of organic milk is in the US today? The answer is below.

Organic food sales totaled nearly $17 billion in 2006 (22% growth), representing 3% of total retail sales of food and beverages in the United States, the Organic Trade Association announced at the All Things Organic show, citing findings from their 2007 Manufacturer Survey. Conventional supermarkets accounted for approximately 31% of total organic food sales, while leading natural food supermarkets — such as Whole Foods, Wild Oats and Trader Joe’s — accounted for 24%. Independent natural food stores netted 22% of organic sales. Another 20% growth is forecast for 2007 putting total sales at over $20 billion this year. With just over $1 billion in sales Wild Oats is only 5% of the market. That is 5% of a sub-market, that is only 3% of the whole retail food market. Why is the FTC even bothering with this? I posted in the past that the merger was almost insignificant to Whole Foods future
.
With news that Walmart (WMT),the #1 grocer in the US plans to double organic food offerings, the merger being attempted is not to dominate an industry, but to keep pace. Consider Walmart is already the #1 seller of organic milk in the US and recently Karen Burke, a Walmart spokesperson said “Organic apples are one of the top selling organic produce items at Wal-Mart, along with carrots, citrus, lettuce and packaged salads. Far from “backing off,” sales for Wal-Mart’s organic produce for 2006 were at a growth rate well above the industry average of 13.7 percent, based on data from the Organic Trade Association.

The FTC’s decision, should it stand all but assures Walmart will also dominate here very soon.

“On average over the coming quarters we expect the economy to advance at a moderate pace close to or slightly below the economies trend rate of expansion” Ben Bernanke 6/5/2007. On this speech the market sold off .5% today or about 80 points on the Dow and 8 points on the S&P. I guess I am confused because, how is this anything different than anything he has been saying for the last 6 moths?

Regarding housing he added “We have not seen major spillovers from housing onto other sectors of the economy,” he observed.

As for inflation, he said that underlying inflation, which excludes food and energy prices, still remains “somewhat elevated” despite some improvements. Bernanke again clung to the Fed’s forecast that underlying inflation seems likely to moderate gradually over time. Again, has he ever said anything different? If anything, this inflation talk has seemed to moderate fro earlier statements.

In February in testimony to congress he said “In the five policy meetings since the July report, the Federal Open Market Committee (FOMC) has maintained the federal funds rate at 5-1/4 percent. So far, the incoming data have supported the view that the current stance of policy is likely to foster sustainable economic growth and a gradual ebbing of core inflation. However, in the statement accompanying last month’s policy decision, the FOMC again indicated that its predominant policy concern is the risk that inflation will fail to ease as expected and that it is prepared to take action to address inflation risks if developments warrant”.

Later in the testimony he said “Overall, the U.S. economy seems likely to expand at a moderate pace this year and next, with growth strengthening somewhat as the drag from housing diminishes. Such an outlook is reflected in the projections that the members of the Board of Governors and presidents of the Federal Reserve Banks made around the time of the FOMC meeting late last month. The central tendency of those forecasts–which are based on the information available at that time and on the assumption of appropriate monetary policy–is for real GDP to increase about 2-1/2 to 3 percent in 2007…”

So, what is the problem? Why are we so caught up in potential rate cuts when the guy has never even alluded to one? If anything, we should be relived he is not raising them to crush inflation. Also, when did 5.25% become a high rate?

If he drops rates that’s bad because that means growth is slowing or unemployment is on the rise. The status quo right now is working just fine, no need to tweak things just to tweak them.

Regarding the state of US business he said “The business sector remains in excellent financial condition, with strong growth in profits, liquid balance sheets, and corporate leverage near historical lows. Last year, those factors helped to support continued advances in business capital expenditures.”

Still trying to find the problem here. This market is a bit masochistic as it takes good news and punishes itself… odd.