Friday, June 24, 2005

Morning Update

"To venture causes anxiety, but not to venture is to lose one's self." - Soren Kierkegaard

Morning News of Note:

  • Chinese Aquisitions: Heard on the Street: Meet China Inc.: Topping Japan Inc. of 1980s Corporate China Shows Muscle As Host of Global Bids Emerge, Marking Only Start of Deal Flow Four years ago, Goldman Sachs Group was trying to help PetroChina, a Chinese energy company, buy the Indonesian assets of Devon Energy. "At the time, nobody thought we were serious," recalls Johan Levin, co-head of mergers and acquisitions for Goldman Sachs in Hong Kong. Today, by contrast, "the first people on any buy list will be Chinese." In the past week, as two Chinese bids have emerged for companies in the U.S., one in manufacturing and one in energy, everyone is taking Chinese interest seriously. (Full Story) WSJ
  • ELY: Callaway Golf Mulls Strategy Shots Amid Industry Downturn, Firm Gets a Buyout Offer; Shares Climb 15% on News Callaway Golf Co. said it is considering "strategic alternatives" for its future as insurance executive William Foley II said that he and a group including buyout firm Thomas H. Lee Partners had proposed taking over the golf-equipment maker. The value of the bid was put at $1.2 billion, according to a person familiar with the matter. Shares of Callaway, which has fallen on hard times amid a downturn in the golf industry and escalating competition, jumped 15% on the news in trading yesterday. (Full Story) WSJ
  • 60 Dollar Oil: Oil, Pushing $60, May Rise Further on Fuel Demand Crude oil prices, which rose to $60 a barrel in New York this week for the first time, are more likely to rise than fall next week on speculation increasing fuel demand will drain U.S. inventories, a Bloomberg survey shows. Twenty-four of 50 analysts and strategists surveyed, or 48 percent, said oil prices will advance next week. Sixteen, or 32 percent said they will fall, and 10 forecast little change. (Full Story) Bloomberg
  • ENER: Business Week reports that demand for hybrid vehicles is surging and the pros are buying stock in Energy Conversion Devices (ENER), the No. 1 U.S. maker of the nickel metal hydride (NiMH) batteries used in hybrids. ENER stock has soared from $10 in August to $19.69 on June 22. "We see it at 45 in a year,'' says Brion Tanous of Merriman Curhan Ford (MEM ), which has done banking for the battery maker. ENER will "dominate the market for years". Chevron (CVX), through a joint venture with ENER, is bankrolling production and marketing of the NiMH battery, notes Tanous. General Motors (GM) has placed orders for its Chevy Malibu and Saturn Vu hybrids, and by 2007, Tanous expects GM's order to soar. Also, Toyota (TM) plans to produce a Camry hybrid. Under a recent settlement of a patent lawsuit brought by ENER against Matsushita, which makes the battery for Toyota, hybrids made or shipped to America must use U.S. batteries. A special boost for hybrids: the new energy bill's $4,000 tax deduction for a hybrid purchase, up from $500 currently.
  • LM C: Citigroup (C) announced that it has signed a definitive agreement under which it will sell substantially all of its Asset Management business in exchange for the broker-dealer business of Legg Mason, approx $1.5 bln of Legg Mason's common and convertible preferred shares, and approx $550 mln in the form of a 5-yr loan facility provided by Citigroup Corporate and Investment Banking. The total value of the transaction is approx $3.7 bln and will result in an after-tax gain to Citigroup upon closing of approx $1.6 bln, both of which are subject to adjustment. Citigroup will hold a conference call and audio Webcast to discuss the transaction at 8:30 ET.

Market Comments: The market is set for a slightly down open, on the heels of yesterday's weak close. This morning's economic reports included a strong durable goods report (+5.5% vs. +1.5% consensus) and the new home sales report (1298k vs. 1320k consensus). I am not expecting a heavy wave of buying ahead of the weekend, and would be happy to see the market just hang in there today.


At 10:38 PM, Blogger Rabmanducky said...

I wonder how the markets would react to if 60$ oil is now the new equilibrium price. What if 60$ will be the cheapest it will be in a long time.

At 12:30 PM, Blogger J. Kahn said...

Some sectors of the economy obviously are hurting with $60 oil. But I think the consumer doesn't start getting hurt until gas at the pump exceeds $3/gallon.

I think oil is a demand-driven story right now. I don't see a lot of new supply coming on market. So if the global economy slows in the near-term, then I think oil prices could fall back below $50.

At 7:26 AM, Anonymous Anonymous said...

How can you say that the consumer doesn't get hurt until gas exceeds $3/gallon? The consumer feels the effects of higher oil prices in many more ways than just at the pump (and just for the record, the futures markets predict $60 oil for as far as the eye can see). $60 oil will feed into consumer prices all over the place--heating/cooling their McMansions, travel, food prices, transporting goods, etc. Heating oil is 60% higher than it was at this time last year. All those people who "stretched" to get into bigger homes have to feel the effects of that. Wage growth has been stagnant so unless there's another round of asset inflation, I don't see how consumers won't be effected by $60 oil (unless of course they all own XOM, CVX and VLO). When people are using debt to spend in excess of their incomes then I don't see how they can avoid decreased spending in some areas to make up for the extra energy costs. On top of it all, Congress is pushing for tariffs on China which would remove the one source of price deflation for consumers. Leave it to the government to solve all the problems.

At 8:19 AM, Blogger J. Kahn said...

Eric, I hear what you are saying, but I don't think that oil will really start to impact consumer spending behavior until there is some type of sticker shock like $3 gas.

I am not saying that $60 oil doesn't hurt at all, just that I think that the consumer (and the economy) has adjusted to these levels. I am still forecasting an economic slowdown, but that involves many other factors as well.

At 8:49 AM, Anonymous Anonymous said...

There are obviously many other factors besides oil that can (and most likely will) contribute to an economic slowdown. The effect of oil is a simple matter of personal balance sheets though. $60 oil (as opposed to $30 or $40 oil) affects the liabilities side in a significant way. There are first order effects (ie gasoline, heating oil, etc prices) that will have an obvious impact. There haven't been as many second order effects yet, but they can't be all that far away. More and more companies are talking about lower profit margins due to high oil prices. At some point, they will either pass on the costs to consumers or they will start cutting costs (ie jobs) on their end. How many people fly on passenger planes or use Fed-Ex? Those prices are going up.

On another note, I'd love to hear what Greenspan's comments are now about oil. Does he still thinks that these prices are "transitory."

At 7:22 AM, Anonymous Anonymous said...

I think it is an extremely important point you make, Mr. Kahn, about oil being a demand driven story here. I think we forget the other side of the supply/demand equation. When we experience any sort of extended supply issues moving forward (say, >two weeks), the second derivative will be a larger positive number than we've seen and the price of oil will rise much faster than it has as a function of perceived demand alone. It also seems to me the gals/guys in the futures pits are much more paranoid about ANY potential chink in the supply armor (i.e. hurricane season, terrorist attacks on mid-east pipelines, CNOOC bid for UCL, Bobby Fischer moving to Iceland) such that any news item with even a seemingly tertiary connection (again, perceived) to oil is justification for a 4-5% run. So far, we haven't had much difficulty procuring the stuff. Eventually, a supply problem will emerge and then the price increases we've seen to date will seem like the loose change I would (foolishly) throw away as a much younger person.
Additionally, in the vein Eric mentions about service providers (FDX, UPS, DAL, and others) or food producers (DLM, see Jeff Matthews' latest blog post on this) and their inability to pass on these higher costs for production and transportation, I believe this could lead to a stagflationary environment (higher producer costs/unchanged to slightly lower consumer costs)which is potentially just a pit stop to deflation (please see Scott Reamer/Kevin Depew/John Succo at Minyanville). Eric states, incorrectly I believe, we haven't seen many secondary effects yet when, in fact, these companies' inability to pass on their higher costs to the consumer is exactly that. It simply manifest itself differently in the form of cost cutting (job losses) at the corporate level, as you have pointed out. Just my $0.02. Peace.

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