Monthly Archives: May 2008

Ford Motor Credit Hurts Recovery, Independence

VW says it want a bigger market share in the US. Much bigger. With the tremendous competition in the world’s largest car market, it may not get there, unless it can buy its way in.

Ford (F) is starting to look better and better as an M&A target. The company said yesterday that it was having significant trouble at its lending unit. At Ford Credit "Delinquencies are rising on its loans — especially those for big trucks — and some of its borrowers owe more than their vehicles are worth," according to The Wall Street Journal.

Ford faces huge losses in it North American operation. Management had hoped for operating profits in 2009 and then backed down on that prediction. It now seems almost certain that Ford will have to cut more workers, idle more plants, and squeeze more suppliers. At some point all of that reaches a limit.

Ford still does well overseas. Its Latin America, Europe, and Asia divisions all posted operating profits in the last quarter. But, if red ink in the US keeps moving up, Ford may have no alternative other than to sell stock or borrow money to underwrite its prolonged recovery. The cost of debt to a company like Ford which carries a "junk" rating, will be dear.

Ford cannot support huge losses and substantial debt service forever. At some point, perhaps toward the end of this year, the Ford family, which has a large portion of the company’s voting shares, will have to pick Chapter 11 or sales to a foreign buyer.

Douglas A. McIntyre

Posted on: May 30, 2008 – 4:27 am in Autos,

Media Digest 5/30/2008 Reuters, WSJ, NYTimes, FT, Bloomberg

According to Reuters, merger talks between United (UAUA) and US Air (LCC) has been halted.

Reuters reports that a US oil probe is focusing on price manipulation.

Reuters writes that April insured mortgage defaults rose.

Reuters reports that Ford (F) is preparing white collar lay-offs.

Reuters writes that Dell (DELL) is targeting two-third of its sales outside the US in five years.

Reuters writes that gas from coal may be supply significant energy in Asia.

Reuters writes that consumer sentiment stayed stuck at a 28-year low in late May.

The Wall Street Journal reports that the Fed’s New York chief faces criticism over his role in the Bear Stearns rescue.

The Wall Street Journal writes that Ford (F) faces big problems in its credit unit.

The Wall Street Journal reports that falling sales pushed Sears (SHLD) to a loss.

The Wall Street Journal writes that clicks on ads at Google (GOOG) are rising while dropping at rivals.

The Wall Street Journal writes that pension funds defended their investment in commodities.

The Wall Street Journal writes that 19,000 employees are leaving GM, mostly through buy-outs.

The New York Times writes that rising costs are slowing mining and development of clean coal.

The New York Times writes that the US will be faulted by the US for a policy to push biofuels and drive up corn prices.

The New York Times reports that US policy makers are pushing for more regulation of the energy markets.

The FT writes that more US banks are likely to fail due to rising bad loans.

Bloomberg writes that Nokia’s (NOK) next big push will be into Africa.

Douglas A. NOMcIntyre

Read More »

Posted on: May 30, 2008 – 2:49 am in Press Digest, , , , , , ,

Asia Markets 5/30/2008 (SNP)(PTR)

Markets in Asia were mixed

The Nikkei rose 1.5% to 14,339. Honda was up 5.1% to 3530. Sony (SNE) was up 3.9% to 5280.

The Hang Seng was up .4% to 24,291. China Petro (SNP),eum was up 4.7% to 7.8. PetroChina (PTR) was up 3.1% to 19.34.

The Shanghai Composite wasup .9% to 3,434.

Data from Reuters.

Douglas A. McIntyre

Posted on: May 30, 2008 – 2:26 am in International Markets, ,

Lehman Ponders Wind & Solar Alternatives (LEH)

Lehman Brothers Holdings Inc. (NYSE: LEH) has announced that it is "considering" strategic alternatives for its SkyPower Corp. unit in Canada to augment its growing capital base and accelerate development of its wind and solar pipelines.

SkyPower’s portfolio of wind and solar projects are in various stages of development and construction, but the release said that these combined represent more than 10,000 MW of potential renewable energy.  It also says that SkyPower "intends to strengthen its position as the supplier of choice for large renewable energy projects…. and plans to continue its investment program in order to meet the growing demand of utilities in North America and selected countries across the globe."

Before you get overly excited about "strategic alternatives" pleasekeep in mind that considering options and exploring options are twoentirely different issues in the investment banking world.  It’s nodifferent than sitting in the park think about hating your boss andthen just going home, while "exploring" is you calling a head hunter,sharpening your resume, and gearing up for interviews.

While you got the lecture over "considering versus exploring" the company does note at the end of the release that it "looks forward to the coming months as we explore alternatives with our partners to take the company to the next stage of its growth trajectory."  So for now it is "considering" and it "plans to explore" in the coming months.

Lehman says that this is Canada’s largest renewable energy developer with interests in over 100 wind and solar projects at various stages of construction and development with represents more than 10,000 MW of potential capacity.

The good news is that if it can’t find anyone to run with this, they can probably turn to Jim Cramer to throw together some ideas for them.

Jon C. Ogg
May 29, 2008

Posted on: May 29, 2008 – 6:32 pm in Alternative Energy,

Capital Senior Living Farther On Strategic Review (CSU)

Capital Senior Living Corp. (NYSE:CSU) has announced that a Special Committee of its Board of Directors has engaged Banc of America Securities, part of Bank of America (NYSE: BAC), as its financial advisor.    B of A will assist in actively exploring and considering what it calls "a range of strategic alternatives" as it is prominent in both healthcare and real estate.

Capital Senior is among the larger operators of senior living communities in the U.S. and it is one we have referred to as one of the "entrance stages" or even the "training wheels" stage of the senior care field.  That pertains to the stage of the industry it serves as the majority part of its business rather than an emerging stage company.

The company formed a Special Committee back in March and this one has been thought of as a potential takeout candidate or merger candidate as a result.  The company even states its goal is to maximize shareholder value and it believes it is well-positioned to benefit from attractive demographics and strong industry fundamentals.

We just featured Capital Senior Living two weeks ago in our weekly "10 STOCKS UNDER $10" newsletter as "one we think you can hang out in for a couple weeks since we are nearly 60-days into its review of whether or  not it can be bought.  But after the next week or two if no word has come, then take you gain or your loss and we’ll look elsewhere." 

Shares had closed at $8.36 before that and ran up to $8.95 before todays $8.39 close.  Shares are up about 2.5% in after-hours trading at $8.60.  With a $223 million market cap, even a credit crunch and even tighter credit standards allow this one to fall into the "easy realm" of acquisitions for any larger group.  Th real trick will be in making it more profitable.

You can join our open email distribution list to hear about other stories on mergers, reorganizations, IPO’s, secondary offerings, and other key special situations.

Jon C. Ogg
May 29, 2008

Jon Ogg produces and edits the SPECIAL SITUATIONS newsletter; he does not own securities in the companies he covers.

Posted on: May 29, 2008 – 4:56 pm in Healthcare, Mergers and Buy Outs, Turnarounds,

J. Crew Falls Off Rowboat (JCG)

Shares of J. Crew Group, Inc. (NYSE: JCG) are drowning in after-hours trading.  The apparel retailer posted over 20% gains to $0.48 EPS on a 15% rise in revenues to $340.6 million.  First Call had estimates at $0.47 EPS and $334.6 revenues.  Unfortunately, its guidance is less than good. 

It expects Q2 EPS on a range of $0.31 to $0.33 and for fiscal 2008 it sees an EPS range of $1.70 to $1.75.  First Call has estimates at $0.40 EPS next quarter and $1.86 for the year.  It previously offered a range of $1.85 to $1.87.

The new lower revised expectations put comparable store sales as "flat to low single-digits."  It sees direct sales growth in the high single-digits and net square footage expansion of about 11%.

While the stock was still in the middle of its 52-week trading range, shares were up considerably from the March lows around $40.00.  It looks like that may be the new resistance on the chart rater than support.  This was not expected, and its forward earnings multiple is still nowhere near "cheap" levels that would force investors to feel they have to own the stock.

J. Crew stock was down 1.5% at $46.91 in regular trading, and shares are down almost 17% at $39.00 in after-hours trading.  Its 52-week trading range is $33.69 to $57.17.

Jon C. Ogg
May 29, 2008

Posted on: May 29, 2008 – 3:37 pm in Apparel, Earnings Warning,

Dell Sails Past Estimates (DELL)

Dell, Inc. (NASDAQ: DELL) came out with a solid quarter today after the close, and shares are seeing some after-hours love.  The company showed $0.38 EPS on $16.08 Billion in revenues.  First Call had already slightly lifted its numbers, but estimates were $0.34 EPS on $15.68 Billion in revenues.

The company said it still continues realigning its business and still expects a headcount reduction with a $3 Billion savings target by 2011.  It has cut 7,000 jobs over the last year, and about 3,700 of those were in the first quarter.

Dell did issue $1.5 billion in private placement and medium-term and long-term notes for general corporate purposes. The company spent over $1 billion to repurchase some 52 million shares of stock and the company noted that plans to spend at least $1 billion on additional share buybacks in the second quarter as well.  The company ended the quarter with $9.8 billion in cash and equivalents and its weighted average shares were 2.04 billion.

Leading the charge were the following gains:

  • Product shipments rose 22%, with servers growing 3-times the industry rate at 21%.
  • Storage revenue rose some 15% and enhanced services revenue was up 13%.
  • Notebook unit growth rose a whopping 43%, up about 1.2-times the industry growth rate.

Shares of Dell are up $1.50 in after hours trading at $23.31, and that is after a regular close of up 0.55% at $21.81.

 

Jon C. Ogg
May 29, 2008

Posted on: May 29, 2008 – 3:12 pm in Earnings, PC Companies,

The 52-Week Low Club (TTM)(RBS)

Tata Motos (TTM) Concern about company taking on financial obligationt to buy Jaguar and Rover. Falls to $13.62 from 52-week high of $21.30.

Royal Bank of Scotland (RBS) Bank cannot sell its insurance unit. Sells off to $4.55 from 52-week high of $11.50.

Favrille (FVRL) Lays off most of staff after failure of drug trial. Hits bottom at $.08 from 52-week high of $4.08.

Zvue Corp (ZVUE) Keeps dropping after bad quarter. Down to $.24 from 52-week high of $3.70.

Douglas A. McIntyre

Posted on: May 29, 2008 – 2:45 pm in HI/LOW, , , ,

UN Wants Genetic Crops (MON)

The UN sees food prices staying high for years.That not only undermines much of the global economy, it means a great many people don’t eat at all.

The UN’s solutions are to kill bio-fuel programs, wipe out ethanol for all time, and begin "wider deployment of genetically modified crops," according to Reuters.

A year or two ago, no one wanted to touch seeds which were cloned from sheep. Now, the demand is becoming spectacular.

A chance for Monsanto (MON) to save the world.

Douglas A. McIntyre

Posted on: May 29, 2008 – 1:22 pm in Agriculture,

Estimates Crept Up Ahead of Dell Earnings (DELL, HPQ, EDS)

After today’s close, we’ll get to see earnings out of Dell, Inc. (NASDAQ: DELL).  First Call shows that the computer giant’s earnings estimates have changed slightly since our post over the holiday weekend.  It now shows that estimates are $0.34 EPS on $15.68 Billion in revenues, both are slightly higher than over the weekend. 

Estimates for next quarter are still $0.34 EPS and are still $15.59 Billion in revenues, and estimates for fiscal January 2009 are up a penny to $1.51 EPS on a slightly higher $64.62 Billion in revenues.

Analysts have a price target average north of $25.00, which is lower than targets had been on previous reports.  The stock has performed poorly since topping out at over $30.00 last year, but the good news is that the stock has also come back rather well off its lows.  At $21.69, it is still in the lower-end of its 52-week trading range of $18.13 to $30.77.

Hewlett-Packard (NYSE: HPQ) has already given the "all-clear" sign and it has made a huge game changing offer to buy EDS (NYSE: EDS).  You have to wonder if things are going to stay status quo at Dell, or if the company would consider a game-changing deal.  The truth is that Dell could do a game-changing deal if it wants to.  But this is a huge unknown, and the company may want to get its entire restructuring plan more than half-way through before it would even consider such a plan.

Michael Dell has already greatly expanded its retail distribution channels to major retailers in the U.S. and abroad.  He’s also announced a restructuring and layoffs.  Dell also noted that it wasn’t to expand upon its company-owned store initiatives in comments yesterday.

Today we’ll also get to see how much cash the company has really used for its monster share buyback plan it previously announced.  If it bought a lot of stock, the slide abatement has only been seen in May.  That major slide started in November and didn’t end until last month.

Dell still has some problems, much of which may be tied to shareholder pressure to do more.  But if the company can maintain estimates or outperform on estimates it looks more than fairly priced for a value stock or for GARP investors.

As a reminder, Dell’s annual shareholder meeting is about six weeks away and scheduled for July 18, 2008.

Jon C. Ogg
May 29, 2008

Posted on: May 29, 2008 – 11:26 am in Earnings, PC Companies, , ,

Legislation and Risks To Natural Gas Development (CHK, WMB, XTO, OXY, APA, EP, DVN)

The American Exploration and Production Council (AXPC) today released a study by Wood Mackenzie, an energy consulting firm, claiming that costs to the natural gas industry associated with the pending alterations to the Lieberman/Warner Climate Security Act of 2007 put at risk the development of US natural gas resources. The 25-member council includes Chesapeake (NYSE:CHK), Williams (NYSE:WMB), XTO Energy (NYSE:XTO), Occidental (NYSE:OXY), Apache (NYSE:APA), El Paso (NYSE:EP), and Devon (NYSE:DVN).

Here’s the money quote from the AXPC press release: "…it is likely that a significant share of
government-imposed consumer emission allowance costs assessed on processors would actually be paid by exploration and production companies in the near term as funds are diverted, contracts are renegotiated, and the market adjusts to this new commodity burden." The conclusion is that if E&P companies must pay for carbon allowances, they will spend less on production, prices for natural gas will rise, and consumers will face higher prices due to limited availability on natural gas.

Well, you can’t blame gas producers for trying, but this is akin to yelling "Boo!" during a horror movie: who cares? What the producers are probably really upset about is the Act’s restriction on how much the cost of the allowances they will be allowed to recover from customers. If emission costs are borne 100% by producers, the Wood Mackenzie study estimates that nearly 50% of projected production for 2012-2017 becomes uneconomic to produce. If 50% of emissions costs are forced on producers, up to 14% of production becomes uneconomic.

The price of natural gas for US consumers is likely to depend far more on the spot price of LNG than it is on the cost of carbon allowances. If LNG prices are high (and there’s every reason to believe they will be), the price of US-produced natural gas will also be high. The AXPC may be fighting an unnecessary battle on this issue. Congress has determined that the best way to assess carbon allowances is at the wellhead or the point of import. Once that’s done, producers, processors, and consumers are treated the same. The producers might not like it, but they may just have to deal with it.

George Soros noted that speculation is driving up energy prices, and we also saw T. Boone Pickens call for $150 per barrel for oil by the end of this year.

Paul Ausick
May 29, 2008

Posted on: May 29, 2008 – 10:31 am in Oil & Gas, Politics, , , , , , ,

Rating The Online Financial Sections At The Top 25 Newspapers

The war for newspapers to stay profitable, and, perhaps long-term, to stay viable has become a race between the fall-off in their print advertising and the increase of their online sales. Based on a look at the numbers from publicly traded companies in the industry, things are going badly. The sole exception may be The New York Times Company, where online revenue is now well over 10% of the total.

One of the critical sections of most online newspaper sites is the financial and business area. Marketers tend to be willing to spend higher rates on business readers because they have money that the readers of the sports sections may not.

24/7 Wall St. looked at the business and finance sections of the online editions of the top 25 newspapers in the US based on their circulation as of March 31, 2007 taken from the Audit Bureau of Circulations.
The sites got ratings of “A” through “F” based on:  1) strength of content, 2) ease of use and navigation, 3) use of new web technology including comments sections, message boards, and multimedia 4) lay-out, and 5) presence of a strong set of current advertisers.

The Wall Street Journal and USA Today were not rated. They are national newspapers. The business content of WSJ.com is well beyond the reach of any other daily. USA Today has a very modest business section based on its desire to keep the news hole of both the paper and the website small. These are two of the 25 on the list.

The list of websites below runs from largest to smallest based on print circulation:

1. The New York Times. It would be hard for any other metropolitan daily to compete with the Times. It has substantially larger editorial resources than any other metropolitan operation. Its most significant drawback is that it runs a reasonable amount of copy which is duplicated elsewhere, particularly by Reuters and The Wall Street Journal. NYT.com makes impressive use of blogs, charting, video, and other interactive features. Perhaps the best content run in the section on a regular basis are the “DealBook” area which covers the financial sector and “Bits” which covers technology.  Ideally, the NYT business section would not have to run such a large amount of copy which overlaps with other sources, but being complete trumps that.  Grade: A

2. Like most of the other online financial editions on this list, the LA Times runs a great deal of copy from sources like Bloomberg and the AP. As might be expected, entertainment and real estate news are overrepresented in the paper, but that is almost certainly in the interests of the readership. Except for the standard buttons for Digg and Facebook after each story, the section does a fairly poor job of engaging readers. The stock and investing tools portion of the site are weak. “The Biz” section on entertainment and “Money & Co.” parts of the site are very good. Grade: B-.

Read More »

Posted on: May 29, 2008 – 10:07 am in Internet, Media, , , , , , , , ,

A Dell (DELL) Buy-Out Of Sun (JAVA): Not Likely

There have been rumors that Dell (DELL) may feel it needs to do something with Sun (JAVA), now that Hewlett-Packard (HPQ) has cut a deal to buy EDS (EDS).

Dell may need to grow through M&A, but Sun will never be a target.

EDS helps build on a strength that HP was already expanding. Services are a large and growing portion of the HP revenue stream. In the last quarter, that operation brought in $4.4 billion of HP’s $28.8 billion in revenue. EDS augments that with another $5.5 billion to $6 billion a quarter. EDS runs an operating margin of about 6% on that.

Dell has a low-end server business and Sun markets more expensive servers. One of the troubles with buying out Sun is that companies are moving away from large and expensive servers and in the direction of the cheap servers marketed by Dell and HP. Sun’s products have become a part of a dying age of IT.

Sun also adds nothing to Dell’s operating income. The company only breaks even now, and revenue growth is at zero. Dell cannot take a lot of cost out of Sun. The operation is already cut to the bone.

Sun has enough trouble that it may not be an M&A target at all.

Douglas A. McIntyre

Posted on: May 29, 2008 – 9:12 am in Mergers and Buy Outs, , , ,

Claymore Converts Closed-End Fund to ETF (RYJ)

Claymore Advisors, LLC has announced that the Board of Trustees of the Claymore/Raymond James SB-1 Equity Fund (NYSE: RYJ), a diversified closed-end mutual fund, along with the Board of Trustees of the Claymore Exchange-Traded Fund Trust, have approved the conversion of the closed-end fund into an exchange-traded fund or ETF.

The conversion will occur through a reorganization of the closed-end fund into a newly created series of Claymore Exchange-Traded Fund Trust.

The reorganization is subject to approval by shareholders of the fund and other conditions.  A proposal will be submitted to a vote of shareholders at the fund’s 2008 annual shareholder meeting scheduled on August 28, 2008.  A similar announcement was made earlier this month.

The market cap of this fund appears to be $208.3 million with some 11.12 million shares outstanding.  The closed-end fund closed at $18.73 yesterday, and the 52-week trading range is $14.45 to $20.62.  This fund looks like it has only traded since 2006.

Jon C. Ogg
May 29, 2008

Posted on: May 29, 2008 – 8:26 am in ETF, Mutual Funds,

Premier Exhibitions Resolves NY A.G. Inquiry (PRXI)

Premier Exhibitions Inc. (NASDAQ: PRXI) has resolved its Attorney General inquiry with the State of New York.  This inquiry was a significant overhang on the company, which has been seen in its share prices.

The company will continue to operate the human anatomy exhibition called “Bodies . . .The Exhibition” in New York City. The company has also agreed to make certain disclosures in its exhibition, on its website, and in its New York area advertising regarding the sourcing of the specimens presented in the exhibition. 

This was one of the investor issues hanging over the company regarding the cadaver sources or whose cadavers the company was using.  Part of the allegations from human rights groups were that the company was using cadavers of executed Chinese prisoners rather than cadavers that were from donors.

Premier has agreed to create an escrow fund of $50,000.00 to reimburse customers who establish that they would not have attended the New York City exhibition had they known the facts set forth. Monies remaining in the escrow account after 8 months that have not been paid to customers will revert back to the Premier.

The Company will retain an independent monitor to ensure compliance with the Assurance agreement and it will pay $15,000.00 to the Attorney General of the State of New York as part of the resolution.

You can read the full ASSURANCE OF DISCONTINUANCE at the company’s prxi.com site.

Shares closed at $4.69 yesterday, and the 52-week trading range is $4.27 to $18.62.

For whatever it is worth, if you haven’t seen this exhibit in New York or elsewhere it is worth seeing as one of the most unique exhibits available to the public that you will have ever seen.

Jon C. Ogg
May 29, 2008

Posted on: May 29, 2008 – 7:40 am in Entertainment,

Sears Earnings Smear (SHLD)

Sears Holdings Corporation (NASDAQ: SHLD) posted a loss this morning, and it is being reflected in the shares.  The retail giant controlled by Eddie Lampert saw a $56 million loss, which translated to -$0.43 EPS net and -$0.53 on an adjusted EPS basis on a 5.8% drop in revenues to $11.1 Billion.  First Call had expectations of $0.15 EPS on revenues of about $11.4 Billion.

K-Mart same store sales fell 7.1% and Sears same store sales fell 9.8%, with a total domestic same store sales result of -8.6%.  The only good news is that the CEO noted that since May 3 the sales declines have moderated.  Unfortunately, the company also expects sales and margins to decline for the remained of 2008 due to costs and weak economic conditions overall.  Sears also only repurchased 400,000 shares for some $40 million during the quarter.

Sears seems to have lost its way, which may come from the ‘Department of No Kidding.’  Shares are down over 50% from the 52-week high of $183.25, and shares have already recovered off of the pre-market lows.  At one point a few minutes ago it looked like shares were trading at $86.00 to $87.00 after an $89.36 close yesterday.  On last look shares were back up to $89.00.

It seems the time has come for Lampert to start looking at more brand financing and creative alternatives out there to unlock more value.  As far as a real or pure retail story, this just isn’t working.

Jon C. Ogg
May 29, 2008

Posted on: May 29, 2008 – 7:19 am in Earnings, Retail,

Top 10 Pre-Market Analyst Calls (ALU, CHS, LONG, IFX, JNPR, MAR, MFA, NSC, SNDA, VVUS)

These are ten of the analyst calls we are focusing on this Thursday morning:

  • Alcatel-Lucent (NYSE: ALU) Raised to Neutral from Sell at Goldman Sachs.
  • Chico’s FAS (NYSE: CHS) cut to Sell at Citigroup.
  • eLong (NASDAQ: LONG) Cut to Sell from Hold at Citigroup.
  • Infineon (NYSE: IFX) Cut to Reduce at Oppenheimer.
  • Juniper Networks (NASDAQ: JNPR) cut to Neutral at UBS; started as Hold at Lazard.
  • Marriott International (NYSE: MAR) Cut to Equalweight at Morgan Stanley.
  • MFA Mortgage (NYSE: MFA) raised to Outperform at Keefe Bruyette Woods.
  • Norfolk Southern (NYSE: NSC) Raised To Buy from Neutral at Merrill Lynch.
  • Shanda Interactive (NASDAQ: SNDA) Cut to Hold from Buy at Citigroup.
  • Vivus (NASDAQ: VVUS) cut to Market Perform at Wachovia.

Jon C. Ogg
May 29, 2008

Posted on: May 29, 2008 – 6:55 am in Analyst Calls, , , , , , , , , ,

FCC: Broadband And Socialism

The FCC will have another of its interminable airwaves auctions soon. Telecom and tech companies will run in to buy spectrum so that they can send voice, video, data, and junk without having to hang wires or bury wires in the ground.

The agency may put a little twist into the next auction. According to The Wall Street Journal "The Federal Communications Commission is considering a plan that would require the winner of a planned airwaves auction to offer free wireless-Internet service to most Americans within the next few years."

Those receiving the "free" internet could not use it to look at porno or other nasty stuff. It would not be good for the FCC to help promote that kind of behavior.

The agency would like to have its cake and eat it, too. Private companies will pay the agency a ton for spectrum which they can use for commercial purposes. In exchange, they can give a part of that away and spend money helping to bring broadband to every man, woman, and child. Those airwaves cannot be used to support any bad behavior.

Someone needs to call a psychiatrist for Kevin Martin.

Douglas A. McIntyre

Posted on: May 29, 2008 – 5:50 am in Internet

A Conspiracy To Keep Oil Prices High

The latest theory about high oil prices is that net exporters of oil are shipping less crude while the world needs more. According to The Wall Street Journal, "Fresh data from the U.S. Department of Energy show the amount of petroleum products shipped by the world’s top oil exporters fell 2.5% last year, despite a 57% increase in prices."

The argument is supported by saying that oil fields are yielding less in countries like Mexico. And, Saudi Arabia is using more of its oil to build its internal infrastructure. There is nothing new about this line of reasoning, as a matter of fact, it is at least a year old.

What the argument does not take into account is the OPEC & Co. may not think that increasing shipments immediately and pushing down prices is in their best interests. Under this assumption, oil is not is short supply coming out of the ground. It is in short supply when tankers come to take it away.

No matter how much the West, China, and India cry about how their economies are being damaged by crude prices, OPEC members whisper to themselves that there is nothing wrong with making money on what they own. Increasing supply may bring in more gross proceeds for a year or two. Higher prices may yield a greater return for the next decade because there is no evidence that demand will fall.

The belief that there is a secular drop in oil supply is a good way to make a convincing case that oil suppliers are not sinister. But, they are. Making money often has a sinister side. Showing the other party in the game all of your cards usually does not work out well.

OPEC may have more crude than it is letting on.

Douglas A. McIntyre

Posted on: May 29, 2008 – 5:39 am in Oil & Gas

Interest Rates: Chaos Theory Seizes Economic Policy

According to chaos theory systems that exhibit mathematical chaos are deterministic and are therefore orderly in some sense. Interest rates share something in common with that definition.

Lowering interest rates is supposed to put more liquidity into the market. That does not really work if the banks taking the money do not spread it to their customers. The customers remain part of a much higher interest rate environment and the benefits are lost down the food chain.

The Fed has succeeded, at least for the time being, in quieting the banking crisis. But, it was Three Card Monte. Opening a special discount window to money center banks and then investment houses allowed these institution to trade toilet paper for cash. Overall lower rates had less to do with the institutional healing process.

Now, by many accounts, the Fed needs to raise rates to keep inflation, driven mostly by oil and commodities, down. Two members of the agency have said rates may have to move up. The FT reports that "A sell-off in the US bond market pushed the yield on 10-year Treasuries above 4 per cent on Wednesday for the first time since January, as investors bet that pressure from record oil prices would force the Federal Reserve to raise interest rates this year."

It sounds like a done deal.

But, because the man on the street did not benefit from interest rate cuts and interest rate increases are not likely to cut gas and food prices soon, where is he left? Mortgage rates did not come down. If anything, banks became more parsimonious for fear of taking on bad debt. Those out of work due to the slowdown cannot pay mortgages. Those who can may have to decide whether to keep their homes on the one hand or drive their cars and buy food on the other.

When Dow Chemical (DOW) raised prices on most of its products yesterday, it blamed the government for having a poor energy policy. There is a great deal of evidence that, short of building 50 nuclear power plants in the next two years, the Administration and Congress cannot do much. OPEC & Co. are not shipping enough oil.

Cutting interest rates was supposed to help the consumer. It does not appear that it happened. Raising interest rates will save the consumer from inflation. If the global supply and demand for food and fuel were in balance, that might be true. But, they aren’t.

Douglas A. McIntyre

Posted on: May 29, 2008 – 5:25 am in Economy