Category: Articles

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.

The USDA released it’s Sweetener Outlook yesterday at 4pm and if you are an investor at ADM (ADM), The Andersons (ANDE), Corn Products (CPO) or other HFCS producers, the news was indeed good.

Expect profits from HFCs to continue to rise. The Renewable Energy Act was signed in November 2005. I will be looking at it’s effect on HFCS since them and take into account recent events in Mexico.

The Details

– Total deliveries of all corn sweeteners (HFCS & Dextrose) rose from 9,004,000 tonnes in 2005 to 9,084,000 tonnes in 2006.
– Percentage of total corn crop acreage dedicated to corn sweeteners dropped from 6.8% to 6%
– Total acres dedicated to corn sweeteners was flat at 758,000 acres
– Price of HFCS rose 32% from 11/2005 to 5/2007

Let’s take a visit down memory lane to Econ 101. When you have decreasing supply of a product and increasing demand, what has to happen to price? It goes up. That has been precisely what has happened to date. Now we need to gaze into our crystal ball.

Mexico

In July 2006 the US and Mexico settled a NAFTA dispute over sugar and HFCS. Under the agreement, Mecixo dropped an 20% tariff on all products made with US HFCS . From July to December 2007 US HFCS makers may export 500,000 tonnes of syrup to Mexico and in January of 2008, all restrictions are lifted. What does all this mean? First we need to look at HFCS demand in Mexico, since 2005, demand for the syrup has risen 112% to 750,000 tonnes a year. What has held back a further increase? Supply. With the new agreement that supply problem in now cured allowing this market to expand even faster.

When US producers export the 500,000 tonnes allotted this years that equates to an almost 6% decrease in available supplies in the US. Back to Econ 101, when you have stagnant levels of production inputs, decreasing supply of the finished product and constant or increasing demand you inevitably have? Increasing prices!

Expect more price increases for HFCS for the coming years and with the USDA projecting corn prices to begin a steady decline after 2008, HFCS production will become very profitable (I should say even more profitable that it is now). Now this also assumes no increase in the renewable fuels standard that I think we all know is coming which will further restrict corn available for HFCS production pushing prices higher. The also means investors in Coke (KO) and Pepsi (PEP) are looking at substantial cost increases without any real way to offset them.

More Good News?

The USDA also released the Crop Progress report yesterday and the corn progress (emerged) was at 94%, ahead of last years 93% and well ahead of the 2002-2006 average of 88%. What is important is that this is 94% of the largest corn crop since 1944. Even better news is that 78% of the crop is rated “good ” to “excellent”, well ahead of last years 71%.

All the economic and political factor are lining up perfectly for ethanol and HFCS producers. When you add the fact that many of these companies are currently selling at bargain valuations, the upside for shares is tremendous.

Expect corn prices to begin to fall as the record crop comes in and syrup and ethanol makers profits to expand further.

Portions of an interview between Jim Cramer and Aaron Task of “Wall Street Confidential” (a video feature on TheStreet.com) have been published in the June 2007 issue of Harper’s Magazine. Many folks will be furious at what Jim reveals, but I think from a pragmatic view, this is a wonderful learning lesson

“You’ve really got to control the market. You can’t let it life. When you get a Research in Motion (RIMM), it’s really important to use a lot of your firepower to knock that down, because it’s the fulcrum of the market today. You can’t create, yourself, an impression that a stock’s down. But you do it anyway, because the SEC doesn’t understand it… This is just blatantly illegal.

But when your company may be in doubt because you’re down, I think it’s really important to foment an impression that Research in Motion isn’t any good, because Research in Motion is the key today. When your company is in survival mode, it’s really important to get the people talking as if there’s something wrong with RIM. Then you would call the Journal and you would get the bozo reporter on Research in Motion. And you would feed him a rumor that Palm’s got a killer it’s going to give away. Theses are all the things you must do on a day like today, and if you’re not doing it, maybe you shouldn’t be in the game.

What’s important when you’re in hedge-fund mode is to not do anything remotely truthful, because the truth is so against your view that it’s important to create a new truth, to develop a fiction… The great thing about the stock market is that it has nothing to do with the actual stocks… It’s just fiction and fiction and fiction”.

He also mentions ways in which someone could affect Apple’s (AAPL) stock via iPhone rumors.

Now the moralists out there are seething. “This is pure manipulation!” They are screaming. Yeah, and the sun will rise today also. This stuff has and will happen for ever. The moralist out there will throw up their hands in disgust and walk away from the game, the pragmatist will profit from it. An unexplained drop in a stock is now explained, a run with no news now make sense. In the past where you may have hopefully panicked and sold, you now will hold on and eventually profit.

I have said many times before that I am not a fan of Jim’s bipolar trading style but I do think when he takes off the “tv persona” and calmly talks about the markets and their machinations, no one is better. You can call it bragging, honesty or manipulation if you want, but the guy has been at the center of the game and anytime anyone from there “spills the beans”, learn from it.

CNBC’s Jim Cramer was interviewed yesterday on his TheStreet.com video. He had a take on the iPhone that struck me as familiar.

Now, he was talking about the Apple (AAPL) trade before the release of the iPhone. I am going to skip the “trade” part of his talk because that is not what I do. As for his analysis, he specualted that Apple’s stock is priced for perfection of the phone meeting or esceeding the hype surrounding it and said that if the phone fails to meet the hype, the “stock gets crushed”. The chance of the iPhone exceeding expectations was only 20% which meant there was an 80% change the phone meets or fails to meet the hype, either of which will not benefit the stock at it’s current levels. He then speculated that people will not want to switch carriers to AT&T, which he claimed “is an inferior network” as easily and as fast as many people seem to beleive they will. He also said that many people have cell calling plans currently that “are not easily undone” and that will slow sales.

Now, where have we heard those arguments before?

One also has to take into account that in the NY Times reported yesterday “The anticipation, which is intense even by Jobsian standards, has led to some quiet, behind-the-scenes anxiety at Apple. Some Apple executives worry privately that expectations for the one-button phones may be too high and that first-generation buyers will end up disappointed.”

I said before that Apple shares are “priced for perfection” and it would seem at least seem that Jim Cramer agrees.

The USDA released it’s Sweetener Outlook yesterday at 4pm and if you are an investor at ADM (ADM), The Andersons (ANDE), Corn Products (CPO) or other HFCS producers, the news was indeed good.

Expect profits from HFCs to continue to rise. The Renewable Energy Act was signed in November 2005. I will be looking at it’s effect on HFCS since them and take into account recent events in Mexico.

The Details

– Total deliveries of all corn sweeteners (HFCS & Dextrose) rose from 9,004,000 tonnes in 2005 to 9,084,000 tonnes in 2006.
– Percentage of total corn crop acreage dedicated to corn sweeteners dropped from 6.8% to 6%
– Total acres dedicated to corn sweeteners was flat at 758,000 acres
– Price of HFCS rose 32% from 11/2005 to 5/2007

Let’s take a visit down memory lane to Econ 101. When you have decreasing supply and increasing demand, what has to happen to price? It goes up. That has been precisely what has happened to date. Now we need to gaze into our crystal ball.

Mexico

In July 2006 the US and Mexico settled a NAFTA dispute over sugar and HFCS. Under the agreement, Mecixo dropped an 20% tariff on all products made with US HFCS . From July to December 2007 US HFCS makers may export 500,000 tonnes of syrup to Mexico and in January of 2008, all restrictions are lifted. What does all this mean? First we need to look at HFCS demand in Mexico, since 2005, demand for the syrup has risen 112% to 750,000 tonnes a year. What has held back a further increase? Supply. With the new agreement that supply problem in now cured allowing this market to expand even faster.

When US producers export the 500,000 tonnes allotted this years that equates to an almost 6% decrease in supplies in the US. Econ 101, when you have stagnant production inputs, decreasing supply and constant or increasing demand you have? Increasing prices!

Expect more price increasing for HFCS for the coming years and with the USDA projecting corn prices to begin a steady decline after 2008, HFCS production will become very profitable. Now this also assume no increase in the renewable fuels standard that I think we all know is coming which will further restrict corn available for HFCS production pushing prices higher.

More Good News?

The USDA also release the Crop Progress report yesterday and the corn progress (emerged) was at 94%, ahead of last years 93% and well ahead of the 2002-2006 average of 88%. What is important is that this is 94% of the largest corn crop since 1944. Even better news is that 78% of the crop is rated “good ” to “excellent”, well ahead of last years 71%.

All the economic and political factor are lining up perfectly for ethanol and HFCS producers. When you add the fact that many of these companies are currently selling at bargain valuations, the upside for shares is tremendous.

Expect corn prices to begin to fall as the record crop comes in and syrup and ethanol makers profits to expand further.

I have been contacted and have agreed to be interveiwed for a Podcast (my first Podcast). I was contacted by Dennis Olson, the editor for Wall St. Radio.

Wall St. Radio is a part of WallSt.net. Dennis has been doing interviews of financial bloggers since April and has already interviewed some of my favorite bloggers like George at Fat Pitch and Paul Kedrosky at Infectious Greed. It is a great series as it gives insight into financial bloggers and their thought process.

The interveiw will take place tomorrow and I will post a link to it when I get an air date.

Here is hoping I do it justice.

Politics influences your investments. At the Democratic Debate in New Hampshire Sunday the candidates were united in their attacks on insurance companies, oil companies and pharmaceuticals. The notable quotes were:

Insurance and Pharmaceuticals:

EDWARDS: And I believe you cannot cover everybody in America, create a more efficient health care system, cover the cracks, you know, getting rid of things like pre-existing conditions and making sure that mental health is treated the same as physical health, I don’t think you can do all those things for nothing. That’s not the truth.

OBAMA: So my emphasis is on driving down the costs, taking on the insurance companies, making sure that they are limited in the ability to extract profits and deny coverage; that we make sure the drug companies have to do what’s right by their patients instead of simply hording their profits.

CLINTON: What’s important, and what I learned in the previous effort is you’ve got to have the political will — a broad coalition of business and labor, doctors, nurses, hospitals — everybody standing firm when the inevitable attacks come from the insurance companies and the pharmaceutical companies that don’t want to change the system because they make so much money out of it.

Oil:

DODD: Well, what we’ve offered already, in fact, and that is, of course, we ought to be saying here that when the price of a barrel of oil gets beyond $40 a barrel, where there’s plenty of profit here, that those dollars ought to be returned to the consumers in a rebate or plowed back into the research that would allow us to develop alternative technologies.

EDWARDS: The first thing we got to do is find out what’s happening with these oil and gas companies. Because we know they’re making record amounts of money. We know that the same people that are refining the oil are selling it at the gas pump. So there’s a huge vertical integration in this operation.

I think there ought to be an investigation of the oil and gas companies by the Justice Department. I think if the laws that presently exist don’t deal with this problem and price manipulation, there should be some change in the anti-trust laws. I think we need states to enforce clean air laws against these refineries.

BIDEN: Take away the subsidy which I’ve introduced legislation to do. It’s about $6 billion, $2.7 directly to the oil companies, number one.

Number two, investigate, as president of the United States; use the Justice Department to go in an investigate this whole issue of price-gouging.

RICHARDSON: Here’s my answer: What would help in the short term, give us — the states — the authority to engage in serious price-gouging investigation.

This means that if Dems take the White house your investment in Exxon (XOM), Chevron (CVX), Cigna (CI), Aetna (AET)), AIG (AIG), Pfizer (PFE), Merk (MRK) and other in their industries will be under attack. Whether you agree with these policies or not is irrelevant. The facts seem to remain that Dems have their eyes on oil profits and the regulation that have allowed insurance companies to realize record return the past few years. Pharma, already seeing margins being crushed by generics looks to have their pricing power further eroded if a Dem enters 1600 Pennsylvania Ave.

Now, this could also be just sound bites that play nice to the choir but once in office, the tune may change. One never really knows. But, if you are making investment decision for the next few years, you have to pay attention to what these folks are saying.

Most likely the only true statement of the night that we can be sure of?

CLINTON: … when I become president, Bill Clinton, my dear husband, will be one of the people who will be sent around the world…