The Destroyer of Finance

 We’re close to many things!

 We’re getting close to 100 firearms per 100 people in the US!  You know, if we could reduce the number of guns, maybe we could cut the crime rate to around the same level as South Africa, Colombia, or Pakistan.  Peace and harmony.

 We’re close to agreeing on doing something stupid!  It’s a stupid article, also, but…

Sen. John McCain (R-Ariz.) unveiled his nonsensical solution to $4-a-gallon gasoline two weeks ago when he proposed suspending the federal excise tax on gas during the peak-travel summer months.

 Stupid.

Sen. Hillary Rodham Clinton (D-N.Y.) seconded McCain’s motion and spiced it up with a proposal to tax windfall profits of oil companies to make up for the lost gas-tax revenues.

 So, stupid and stupider?  Windfall profits?  Damn, that’s irritating.  Stupid.

McCain’s gas-tax gimmick is about what one would expect from a Republican candidate, given that his party’s shortsighted energy policies are partly to blame for the fix we’re in today. Rather than supporting conservation measures, such as tougher vehicle fuel standards, the Republicans wasted years fighting a pointless battle to open the Arctic National Wildlife Refuge to oil drilling. President Bush continued to hammer on this tired theme Tuesday, as if unaware that it would take about a decade to extract a drop of oil from the refuge and that doing so would have a negligible effect on prices.

 What happened to the bi-partisan spirit?  During the years of cheap oil, let’s be honest, the Democrats weren’t really all that excited about pushing through higher MPG standards.  However, the point about ANWR is true.  Stupid and stupid.

Any economist could have predicted this: If you lower the price of gas without increasing the supply, it will only raise demand and thus boost prices.

 Ah!  Smart!

 In other political news, Obama’s former pastor loves him some spite/scorched earth and, no, we’re not done with election season yet.  Sorry

 Subjective?  That is what the market is, right?

 So to all the angry hornets that swarmed out after I tossed rocks at their ISRG hive, well, I’m sorry.

 Ok, so not really.  I’m not sorry.  I think ISRG is poorly managed.  They have what seems to be a great product that is in demand, and if you are a shareholder you ought to be disappointed that management isn’t using the opportunity to build something more.

 And no, I don’t think the treasure trove is OK.  I don’t think its OK for management to be bunkering down just in case the next Great Depression is around the corner.  I don’t think it’s ok for any company, not to mention a TECH company, to have enough cash/near cash on hand to fully fund 11 QUARTERS of operations without bringing in ANY operational income.  I don’t think it’s OK to have cash/near cash make up over 60% of the asset base or over 56% of Equity AFTER netting out liabilities (Cash/near-cash – ALL Liabilities / Equity).  Find me another company with such a conservative balance sheet.  I defy you.  Not even Microsoft or Berkshire Hathaway (both criticized for being too conservative with the balance sheet… and one of them an INSURANCE company) are in such a state.

 Should.  Not.  Be.  Acceptable.  That’s not even good management of anyone’s PERSONAL finances.  But it’s yourcompany, and if that’s ok with you, then so be it.

 By the way, ISRG does have only ONE product.  If all Microsoft did was Windows, they would only have one product.  If they customize it to be in spanish, german, and chinese… it’s still the same base product.  If a competitor makes the base product obsolete, then all the of the related customizations are also obsolete.  And ISRG is no MSFT when it comes to claiming a monopoly. 

 Do what you will with your stock, I care not.  I stand by my review.  I would suggest that, if hearing a critique of your investment makes you upset or angry, then you’ve become too attached to your investment and you need to back away.

 Onto the events of the day:

 The Fed will speak at about 1:30 Central.  Expected is a .25% cut in the rate, although there has been enough dissent on the Committee recently, and the GDP results for the first quarter were good enough, that an announcement of “no change” is a very real possibility.  5 of the 10 voting members have argued against cutting rates at various times in the last 5 rate cuts, and on the most recent cut 2 voted against (including your man from the Big D, Fisher).  How will the market react to a “no change”?  Extremely tough to tell.  From a stimulus perspective, it would be very disappointing.  However, not cutting the rates would help the dollar regain some strength and help reduce the upward pressure of oil prices.  Given the recent comments from the Fed on inflation, and the better than expected GDP in the first quarter, the Fed might just be willing to risk not cutting rates.

 In profit news, Time Warner sucks, but all of us customers already knew that.  General Motors, in a perhaps “taking it too far” attempt to distinguish themselves from Ford, turns up with another $3.3B loss.

GM’s loss included a $1.45 billion charge to reflect a change in the value of GM’s interest in GMAC Financial Services and $731 million to increase GM’s liability in Delphi Corp.’s ongoing bankruptcy.

Excluding the one-time items, GM lost $350 million, or 62 cents per share, beating Wall Street’s expectations. Analysts surveyed by Thomson Financial had expected a loss of $1.60 per share.

 I didn’t dig into to figure out the variance, but to me 3.3 – 1.45 – .731 = $1.12B.  I guess GM has another $700M or so in one time charges that the article doesn’t mention?  Well, either way it was better than expected, and expectations are pretty much all that matter.

 Also, Proctor & Gamble makes shareholders horny with a very successful quarter.  They cite big growth in foreign markets as driving their success.  You could certainly be citing worse things.  I think if you invested in PG (Proctor Gamble), GE (General Electric), and Johnson & Johnson you’d pretty much have created your own mutual fund.

 Also Kraft and Kellogg got hammered by food costs.  Related to this is was the close call I had when a Howie Long/GM commercial extolling the benefits of ethanol ALMOST sent me into a coma last night.

 Oil is back down to $113, so maybe we should party to celebrate how ethanol is going to save us from big mean oil.

 Oh, also thinks in banking news:  Citi to raise $4.5B more cash.  I’d like to have that ATM machine.  And german bank WestLB (a very unstable name… should seek merger with Fifth Third) get’s bailed out by EU to the tune of $7.8B.  I would expect the senior leadership to get das boot.

 Get it?  Funny?  No?  Das boot?  The german, the funny… I… fine.

 Make sure all the girls get the invite to the oil party,

 Dave Meggett

 I’m a big baseball guy.  Huge.  Not historical stuff necessarily: I can’t answer all your trivia questions.  When it comes to present day baseball, both major and minor leagues, I’m a ferocious devourer of baseball knowledge.  So if you toss up some bad baseball opinions, I’m going to chew them up and spit them back on yo’ face.  It’s nothing personal, just an instinctive reaction… like a dog marking a fire hydrant.  So, I apologize in advance and arrears.

 There is, however, no baseball in the blog… partly because it wouldn’t fit (thematically) and partly because there’s no Major League baseball in Texas to talk about these days.

 And I have a meeting at 10, so I’m going to go speed round style.  Welcome to all those reading my opinions on Intuitive Surgical.  I’ve got nothing against the company, and if you are invested in ISRG I wish you well.  I also recommend that you encourage the management to actually… oh, manage?  Just a thought.

 In oil news, the shit is expensive, and heres an interesting excercise in the dangers of investing in China:

PetroChina Ltd., China’s biggest oil company, said Monday its first-quarter profit plunged 31.5 percent and it cited government controls that bar it from passing on record crude costs to consumers.

 Whoops?  Or hooray government controlled enterprise?

 The New York Sun has some sensationalism, offers the possibility that gas could cost $10 a gallon.  If I wrote for a paper, I’d write about the possibility that a bag of popcorn could soon cost $100.  After all, I’m apparently not expected to reveal any of my assumptions or, more importantly, my TIMELINE.  I figure if I’m allowed to skate without a timeline, eventually a bag of popcorn WILL cost 100 of today’s dollars.  For what it’s worth:

While Mr. Gaines thinks there could be a temporary decline in the oil price, he’s convinced an overall uptrend is unstoppable. In fact, he thinks his $200 forecast could be conservative, and that perhaps $250 could be reached. His reasoning: a combination of shrinking supply and increasing demand, especially from China, India, and America.

Mr. Brodrick’s $200 oil forecast is largely predicated on a combination of pretty flat supply and rip-roaring demand. Other key catalysts include surging demand in China and India, where auto sales are booming, and major supply disruptions in Nigeria and also in Mexico, our second-largest source of oil imports, where oil production has fallen off a cliff.

More factors include the ever-present danger of additional supply disruptions from volatile countries in the Middle East that are not our allies, and the unwillingness of SUV-loving Americans to trim their unquenchable thirst for foreign oil. Likewise, for the first time, emerging markets this year will use more oil than America.

 More deflation on the Brazilian oil find hype:

Brazil’s plan to become one of the world’s biggest oil exporters hinges on exploiting crude 6 miles below the ocean surface in deposits so hot they can melt the metal used to carry uranium to nuclear plants.

Tapping what may be the biggest oil finds in the Western Hemisphere in three decades will require equipment that can withstand 18,000 pounds per square inch of pressure, enough to crush a pickup truck, pipes that can carry oil at temperatures above 500 degrees Fahrenheit (260 Celsius) and drill bits that can penetrate layers of salt more than one mile thick.

“This is a very, very technically challenging environment where no one’s ever done this,” Cline, who tracks the Latin American oil industry, said in a telephone interview from Washington. “These discoveries are in very deep water, and once you get to the seabed they are very deep under the floor, with a layer of salt that is definitely a difficult barrier.”

Brazil’s oil will be harder to develop than the Gulf of Mexico, where the deepest wells are now in production, Cline said. Exxon Mobil Corp. and Chevron Corp., the two biggest U.S. oil companies, saw diamond-crusted drill bits disintegrate and steel pipes crumple when they attempted to tap deposits beneath the Gulf’s seafloor two years ago.

Pumping oil from the Brazilian finds, parts of which are 32,000 feet (10,000 meters) below the ocean’s surface, will require boring almost twice as far down as the world’s deepest producing offshore well.

Petrobras hasn’t said how much it spent to sink wells at Tupi and Carioca. Similar drilling by Exxon and Chevron Corp. in the Gulf of Mexico cost $180 million to $200 million for each well.

Chevron, which has the deepest Gulf of Mexico exploration well, including distance below the seafloor, destroyed as many as a dozen $50,000 drill bits at each of the 14 wells in its $4.7 billion Tahiti project.

Exxon Mobil abandoned a Gulf project that would have been the deepest well after pressure and heat shut down the venture in August 2006. The Irving, Texas-based company developed pipes tough enough to withstand temperatures that would shatter regular steel at its Sakhalin-1 project in Russia. The metal may help make Brazil’s offshore fields accessible, Vital said.

“These challenges in the Brazilian offshore area are too great for any one company or even country to be able to digest themselves,” Vital said.

 So, if you’re wondering, for it to be worth it to bring the new Brazilian fields on line, assuming they have as much oil as advertised, you pretty much have to have the situation from the Sun article be true.  Just sayin’.

 Onto depressing economic news:

 Warren Buffett thinks the recession gunna be bad, buys chewing gum.

 And consumers are sad.  Not as sad as predicted, but the recent stock market run up probably helped a little.  And home prices are still falling.  And banks DO still do this foreclosure thing, it turns out.

 9 more minutes…

 OH!  Our favorite fallen star, Countrywide racks up another $893M loss thanks to big time losses on their… mortgages, of course.

 And Deuche Bank loses money too!!

 Maybe I’ll do another company write up tomorrow, since ISRG has proven to be so popular.

 Guten TAAAAAAAAAAAAAAAAAG!!!!!!

 Jean-Baptiste Jourdan

 Depends on your definition of “important,” I suppose.

 So, nothing much important is happening out there right now (other than a strike at a Scottish oil facility), so I’ll do something a little different.

 Company: Intuitive Surgical, Inc. (NASDAQ: ISRG)

 Industry: Medical Appliances/Equipment

 2007 Profit: $144.5M

 Current Market Capitalization: ~ $11B

 Current Price/Earnings: ~ 68

 Industry Avg. P/E: ~37

 ISRG is the producer of what sounds like a very nifty surgical system called “da Vinci” that really looks like some sort of Star Wars set up.  Am I kidding?  You decide.

 Wiggle your fingers over here, and over there the multi armed android picks up Luke and throws him in the bacta tank.  Unfortunately, ISRG seems to suffer from a few flaws as a company: It’s expensive (PE), it seems to be a one trick pony, and I question its management real hard.

 A) It’s expensive.  I’ve stated before than P/E isn’t everything.  It’s commonly calculated based on historical profit levels, which can be a mistake because you aren’t investing for what a company HAS done, but what it might DO (and if you are investing in the past, then you might be used to investing in dot coms in 2000 and homebuilders just last year).  A stock with very high growth expectations can support a high PE because such great things are expected going forward.  ISRG is one such company with high expectations, yet even then the stock seems over priced.  While ISRG’s PE is a steep 68 using historical profits, its a still pricey 56.8 using average estimates for 2008 profits.  Even taking the estimated 2009 profits, we still come out with a P/E of about 41.  Further, this with large increases in profits built into the estimates… and a recent history of beating estimates.  I have a strong feeling that this is a company that will be punished for failing to outperform expectations.  Merely having as great a year as expected will probably cause the stock price to drop, bringing the PE more in line with its expected growth.

 Adding more cause for concern, of the 11 analysts covering the company (as listed by Yahoo), 6 have lowered their expectations for 2nd quarter earnings in the last month (4 have increased), and 10 have lowered their forecasts for the 3rd quarter.  So given that the current future earnings estimates are accurate, the stock seems expensive, but factoring in that their seems to be some softness in the future earnings expectations….

B) One trick pony.  ISRG has the da Vinci and… and… well, a different configuation of the da Vinci.  This one comes with a bacta tank, this other one has welder arms to fix up your droids.  In a world of wild, wild technological innovation, being a one trick pony carries a high level of risk (polaroid?).  Sure, sure… patents, I know.  Patents won’t keep GE, Hitachi, or some other company from coming up with the new things that makes your ass obsolete, patents or not.  The best way to fend that off is to do the hard R&D to keep yourself at the forefront or to use your piles of profit to acquire promising rivals/complementary companies that might both enhance and diversify your product offering.  Sadly, ISRG doesn’t appear to be spending enough money in R&D to protect their advantage, as to the second point…

C) Bad management.  Why do I point the bad management finger at ISRG?  As a medical equipment and technology company, you’d think their business arena is fairly well defined.  Why, then, is this company sitting on almost $700 million in cash and conservative bond investments?  $101M in MONEY MARKET accounts?  Another $101 in US government debt??  What the hell?  On top of that, the company has very little in the way of liabilities (about 5x as much cash and investments as liabilities).

 So, maybe this just sounds prudent to you, and if we were talking about personal finances I’d agree.  This is a company, however.  They have R&D they could be spending money on.  They have competitors that they could be buying controlling stakes in (and with such a strong balance sheet, finding financing to leverage the buyout would be easy).  They have shareholders they need to be delivering value to (read: stock buy backs).

 No no no!  We need to put out money in safe, low return investments.  We don’t need to expand our product line or do R&D.  Our product will live FOREVER!!

 I’d like to point out, also, that this company would rather put $100M in bonds and government debt and collect a fully taxable 4-6% return than to spend money buying back stock from the open market.  Most companies, when sitting on a treasure chest of money and nothing else to do (since a tech company clearly doesn’t need to invest in itself), will usually either pay a dividend or buy back a ton of stock (which is a different way of distributing returns to shareholders).  Look at Exxon: ton of cash, not much to do with it, so they A) pay a dividend ($1.40/share right now) AND B) fund a massive stock buyback program (buying up $78 BILLION in company stock in since Jan 1, 2005).

 Maybe ISRG management considers a cash a better investment that company stock?  Either way, their balance sheet management doesn’t impress me.  In fact, ISRG has been too busy issuing new stock to buy back any… and for what are they issuing this new stock?  To buy more bonds?  It’s hardly like they need to raise more funding.

 To conclude, if you couldn’t guess: Thumbs down on ISRG.  Their product seems great, but the stock is overvalued even assuming the ability to reach lofty earnings goals.  In addition, I am clearly not impressed by the strategic direction (or lack thereof) that has been imparted by the company management.  IF, suddenly, management showed some sack and started building a company that appeared to be durable (and not a one ring circus) by putting some of the lazy cash sitting around to good work, then maybe – MAYBE – it’s worth investing in.

 Enjoy your tasty treat,

 Oskar Schindler

 Given that I was so overrun by meetings and budget transfers yesterday that I didn’t eat lunch, and given that lunch > blog… well, you get the idea.

 In the end, the biggest week for first quarter earnings was probably a lot better than hoped for.  Even though many, many companies saw their profit drop from this time last year, a lot of them still did better than expected.

 The disconnect between tthe reported corporate performance and what we sense about the US economy is due, almost inevitabley, to the increasingly international operations of even moderately sized companies.

 But Dow Chemical did well (fertilizer being big business these days), as did 3M, EDS, Ford, and Goodyear.  Among the laggards we found surprises like Coke, Exelon (which is a $57B company most people probably haven’t heard of), The Hershey Company (an $8B company that everyone HAS heard of), and Wendy’s.

 Oh, yes, and Arby’s is buying Wendy’s.  Hopefully this doesn’t mean that Wendy’s prices will start reflecting Arby’s.

 The AP reports that in a stunning reversal, drivers are trading in huge SUV’s to buy smaller cars.  Who could have seen this coming, as I kid you not I saw unleaded for $3.70 yesterday.

 Granted, it was at one of the most expensive stations in town, but still….

 Using gas prices as an indirect linkage, I’ll mention that there is now the possibility that the Fed won’t cut rates this next week, although traders still think a 25 point cut is likely.  Inflation fears are the primary mitigating factor.  The increasing sentiment that the rate cut will be only 25 points at most has probably helped strengthen the buying power of the dollar recently, although it hasn’t necessarily done too much to back oil away from $120.

 Here’s a guy at the Canadian Imperial Bank of Commerce (CIBC) that agrees with me on oil, by the way.

The price of oil is likely to hit 150 dollars (Canadian, US) a barrel by 2010 and soar to 225 dollars a barrel by 2012 as supply becomes increasingly tight, a Canadian bank said Thursday.

Analyst Jeff Rubin in his report noted accelerating depletion rates in many of the world’s largest and most mature oil fields. He estimates oil production will hardly grow at all, with average daily production between now and 2012 rising by barely a million barrels per day.

An expected drop in demand in the United States due to higher prices and a weak economy will be more than offset by demand growth in developing nations, it says.

Rubin cites, for example, the recent launch of Tata’s 2,500-dollar car that will allow millions of households in India to soon own automobiles.

 Well… tata for now.

Alfred Krupp

 And yes, this question was actually posed to a co-worker this morning.

 In the realm of maple syrup, I feel lethargic this morning.  I’m probably depressed by the lack of apocalyptic economic news.  What’s exciting about a “not that bad” report?  Nothing, that’s what.  All this “showing signs of leveling off” crap sucks.  Come on!  I want to see some despair, baby!

 Loads of pretty good earnings this morning/yesterday afternoon.  Ford made money, so the world must be close to ending.  Here’s some more roundup, but in general it’s mostly positive results or only just as bad as expected.

 It is worth noting that these results don’t necessarily reflect the current environment for business.  Janurary and February were wrought with fears about housing, but gas was cheaper and more people had jobs.  Speaking of…

 New jobless claims fell (an unexpected development) and orders for durable goods fell as well (but more than expected) providing a somewhat conflicted view of the state of the economy.

 And new homes sales… ehhh…

The Commerce Department reported Thursday that sales of new homes dropped by 8.5 percent last month to a seasonally adjusted annual rate of 526,000 units, the slowest sales pace since October 1991.

The median price of a home sold in March dropped by 13.3 percent compared to March 2007, the biggest year-over-year price decline since a 14.6 percent plunge in July 1970.

 I would be remiss if I didn’t point out Credit Suisse’s big day in the write-down sun.

 Credit Suisse Group, Switzerland’s second-biggest bank, reported its first loss in almost five years on 5.3 billion Swiss francs ($5.2 billion) of writedowns linked to deteriorating credit markets.

 It’s a good thing bloomberg translated from francs to dollars, but I wouldn’t have bothered to do it for you.

 More hype from Brazil’s oil potential.  I love how when this stuff comes up everyone assumes that all other production holds steady and that the new finds will be incremental gains.  Replace-ment-Re-Source (chanted to pace of “o-ver-rate-ed”).  New Brazil + New Saudi + expanded Canadian Tar Sands – Alaskan decline – Mexican decline – North Sea decline – Russian decline – old Saudi decline = Even, at best.

Brazil’s discoveries of what may be two of the world’s three biggest oil finds in the past 30 years could help end the Western Hemisphere’s reliance on Middle East crude, Strategic Forecasting Inc. said.

 Sounds good, right?

Zeihan said that beyond supply gains from Brazil, it will take a tripling of Canadian oil-sands output and greater fuel efficiency to end Western reliance on Middle East oil.

 Tripling the tar sands?  Seriously doubt it unless the price of oil gets WAY higher than it is right now.

“Hemispheric energy independence sounds a little pie-in- the-sky given that this hemisphere already is generating one- third of overall global demand,” said Jason Gammel, an oil analyst at Macquarie Bank Ltd. in New York. “It’s pretty tough to talk about self-sufficiency unless we were to see food-based biofuels taking an even bigger role in the next five to 10 years than is already mandated.”

 That sounds do-able.

Zeihan predicts a 2012 start to production at Tupi. Technology needed to tap fields like Tupi, which sit hundreds of miles offshore beneath thousands of feet of rock, sand and salt, hasn’t been developed, he said.

 What?

hasn’t been developed

 So combine that with all the other great energy technologies that haven’t been developed yet and are already being counted on to save us.  Although I think much of this particular challenge in brazil is more figuring out how to use existing technology that creating new stuff.

 Ok, I’m done with you.

 John Graunt

 Not a dentist reference, I promise.

 Hillary whipped ass in Pennsylvania!

 What does this mean?

1. More money for Clinton.
2. More time for Clinton.
3. More pain for us.

 Next up is Guam on May 3rd, but the next date of any importance (look, if you want to live in political relevance, don’t live on Guam) is May 6th when North Carolina (big for Obama) and Indiana (Toss up) vote.

 If you live in Indiana, accept my condolences.  I suspect Clinton will be spending lots of time there, since she’ll know the best she can do in NC is keep it close.

 After that we only have to wait a week for the white people of West Virginia to vote, and then just another week for Oregano and the metropolitan state of Kentucky.  If the issue is still in suspense, which all partizan Republicans will hope for and all normal citizenry will be lighting votive candles to avoid, we can wait with baited breath for the demographically diverse strongholds of Puerto Rico (6/1), Montana (6/3), and South Dakota (6/3).

 Good times!

 The high court of dentistry finds in favor of T. Chip and sentences #10 tooth to… a crown and a big dental bill!

 Kill me.  Maybe the dentist can put a huge diamond in the thing.

 Well, we went on a nice little trip through happy land where the roads are made from sugar and the trees are made of… more sugar.  However, you’ve always got to worry about taking a detour through the place where people remind you that sugar causes cavities so that later in life your dental repair will break on a tortilla chip and force you to get a crown.  I’m not disgruntled.  Really.

 Insuring giant Ambac did much worse than expected (loss of $6.93/share v. loss of $1.51/share… so… errr), while Delta and Northwest, soon to be wed, both bleed money out the anus.

Delta Air Lines Inc., the nation’s third-largest carrier, said Wednesday its loss widened in the first quarter to a whopping $6.39 billion because of soaring fuel prices and the steep decline in the company’s market value.

Northwest Airlines, which will combine with Delta to create the world’s largest airline, reported a $4.1 billion loss in the first quarter.

 To be fair, of the $10.5B loss, about $10B is in non-cash accounting bullshit from “impairment charges” relating to an odd duck of an account called “goodwill”.  Goodwill, in accounting terms, is basically how much you overpaid for something in the past.  Companies used to fiddle with goodwill impairments about like banks fiddle with Loan Loss Reserves (except you can’t put goodwill back on the books after you take it off), but the government recently really clamped down on when and how much you can “impair” your goodwill so you don’t see it so often any more.  Anyway, even without the $10B, they still lost $500M.

 Oh, the airlines blamed it on higher fuel costs.  Is that an excuse?  Isn’t buying fuel and burning it sort of an intregral part of your business plan?  Are you trying to tell us that your business plan is flawed?  Or is it that your management is such a collection of helpless babies that they’d rather cry to the world about how unfair fuel prices are rather than to figure out how to alter their operations to be able to profit no matter what?

 The earnings aren’t all bad, though: Boeing is strong, Phillip Morris proves that people like to smoke when they’re stressed, and Volkswagen is both profitable and optimistic.  VW must know that I am looking forward to the return of their diesels… and their diesel hybrid.

 There’s also this note from our favorite military-industrial machine:

WASHINGTON (AP) — Defense contractor Lockheed Martin Corp. said its first-quarter earnings rose 6 percent as higher sales of space equipment, missiles and other combat tools offset a dip in fighter jet sales.

 Space equipment = lasers and orbital ion cannons?

 United Parcel Service reports a first quarter in line with expectations, but casts a gloomy picture for the future.  If UPS and Fedex can still turn profits despite fuel costs, then I’d like to see the airlines shut up.

 Despite the mixed reviews on earnings, a overcast feeling seems to be approaching again, as once more reports start coming out the regulators (mount up) are worried about an increase in bank failures.

Mr Dugan’s Office of the Comptroller of the Currency is particularly worried about lending by smaller banks to commercial real estate developers for condominiums and other projects. More than a third of smaller community banks have made commercial property loans that exceed 300 per cent of their capital, the OCC says. By comparison, in 1987, when hundreds of banks failed amid a commercial property collapse, such banks had commercial property loans equal to 175 per cent of their capital.

Mr Dugan said he did not expect failures to rise as high as during the late 1980s and early 1990s – when 534 banks failed in 1989 alone – because banks are better capitalised, have better underwriting standards and did less speculative lending.

“Banks are better capitalised going into this…but the flip side is they are more concentrated,” he said. “Part of it depends on the depth of the downturn and duration of the downturn.”

 This is still really just referring to small banks, but it would still be unsettling for many if a rash a small community banks started closing their doors.

 In the realm of oil news I intended to talk about yesterday before I got a giant headache from having a tooth drilled all morning, Mexico announces that it’s oil industry is having big problems.

 Wait wait wait…  let’s go back to April 14th on this blog…

Sort of business, but PEMEX (Mexico’s national oil co) needs this is the WORST possible way.  PEMEX is dying trying to do stuff on its own.  It doesn’t have the equipment, people, or, yes, funding (since the government takes so much money away from PEMEX for the national budget) to do what needs to be done.  The national gov’t of Mexico has mismanaged this shit for so long, if they keep going it alone, they might as well just cut to the chase and shut everything down now.

 Not that that was the first time I’d lampooned Mexico and PEMEX, just the most recent.  Now we get this:

Mexico’s state-run oil company said Monday that oil production fell 7.8 percent to 2.91 million barrels a day in the first quarter as current reserves dwindle.

Petroleos Mexicanos, or Pemex, has struggled with falling reserves, especially at its main Cantarell oil field, and lacks the money and expertise to launch new drilling projects. Pemex only has enough proven oil reserves to last nine years at current production rates.

 The production decline is pretty much permanent, and will likely continue to decline every year as their reserves dwindle.  Even allowing for foreign investment, they likely won’t be able to recover to previous production levels from their existing fields… but they would be able to slow the decline with new technologies.  They could also step up looking for new fields or developing offshore possibilities… oh, but PEMEX doesn’t have the money, the expertise….  They need a partner like Shell or Exxon to do these things with them, but no Shell or Exxon is going to develop a new field without having a big stake in the reward.

 As it is you could easily see oil production in Mexico fall by 800,000 to 1,000,000 barrels a day by three years from now.  This will be offset by a couple new fields that are being brought online by Saudi Arabia, but then you get to the point that the new fields are only offsetting the declines in old fields (once you inlude declines in North Sea, US, and other existing fields), and never really expanding production despite continued growth in demand.  That’s what a peak oil theorist would call a “plateau”.  Not that such theories have ANY sort of validity.

 I’m not a fan of the curling offseason,

 Maarten Tromp

In the battle of Tooth v. Tortilla Chip, T. Chip won, so I am off to El Dentisto this morning.

 FD50?

 Monday blog leads off with what else but Bank of America!  BofA struggles in the first quarter and misses expected profit levels ($.23/share v. $.41/share).  Of course, this still means they pulled in $1.2B in profit, so no worries about bankruptcy.  Also, that includes $776 million from the VISA sale, so about 40% of the profit total has nothing to do with the bank’s operations.

 From FT.com, Bank of America looks for cash money to boost its balance sheet, elects to pull some cash out of their China Construction Bank investment.  See, that looks better in the press compared to getting money from a private equity group, but it’s still selling part of your assets for cash all the same.  Don’t delude yourself into thinking that BofA would be considering reducing their CCB position of they didn’t need to money for their capital ratios.

 In other earnings news, pharma drugs are really popular.  Really, really popular.  Consumers love them some chemically induced clear sinuses and rigid members.

 You might have noticed that gas is getting a little pricey.  Well, we should get used to it… oil hits $117 a barrel.  However, the more interesting oil news comes from the sandy sands of Saudi Arabia:  Productions increase?  Not so fast, my friend.

Saudi Arabia, the world’s biggest oil producer, has put on hold any plans to further increase long-term production capacity from its vast oil fields, its most powerful policymakers have said.

In a series of statements, including one by the king himself, the kingdom has warned consumers it does not reckon there is a need for further expansion, an assumption disputed by the world’s biggest developed countries.

Abdullah Jum’ah, chief executive of Saudi Aramco, the kingdom’s oil company, said in a closed door meeting with oil ministers and executives in Rome on Sunday that market signals were ’imperfect’ and that there were uncertainties created by the move away from oil, the world’s worsening economic outlook and the recent turbulance in the financial markets, according to one person who took notes at the discussions. This has impacted Saudi Arabia’s view on the profitability of investing billions of additional dollars into its industry at this point, Gulf sources said.

In a recent interview with Argus, an industry newsletter, Ali Naimi, Saudi Arabia’s energy minister, made clear Saudi Arabia had “no plans” to embark on its next phase of expansion. “We are idling at around 9m bpd and we will reach capacity of 12.5m bpd by 2009.”

Recent announcements will harden the view of those sceptics who argue the kingdom is unable to boost production because of the high decline rates at its fields – a view that is still in the minority among those in the industry and one Riyadh emphatically rejects.

 Count me in the minority.  The Kingdom is beholden to no one and it can tell the world anything it wants about its oil.  Almost everything the outside world knows about the Saudi oil industry is based on conjecture and hearsay.  No one outside of Saudi Arabia even knows for sure how much oil they ship out every month… they just count the ships leaving, look at how deep they are in the water, and then make an educated guess as to how much oil is inside.  No, I am actually serious.

 Imperfect signals or no, their excuses reek of bovine manure.  When these expansion plans were originally laid, years ago, oil was trading for far less than it is now.  Even if oil were to fall back to the bargain basement price of $60 a barrel, it would probably be no less than what they expected when the plans were drawn up.  The cost of oil field development has increased significantly since then (whenever “then” was), but so has the price of oil.

 In the end, I believe this is as clear a signal that they can send about their production capacity.  They are telling the world: “Look, busters, we think we can get up to 12.5mbpd, but 15 ain’t happening, so you better start figuring out how to deal with it.”  I also think they’re still going to spend the money, and I think they’ll actually move forward with the projects they are talking about, but the message here, in my opinion, is that these projects won’t be “Expansion” projects but they will be “replacement” projects.

 Why don’t they come out and say this straight up?  Two things: 1) can you being to imagine the panic it would cause?  At least this way the populace remains in the dark while the people who need to know get the message; 2) In my second hand study of the Middle East, I have been given the impression that straight up rejection is something that is not natural to the culture in the Kingdom.  Excuses, reasons, and delays, yes.  They’ll delay you for so long you give up.  Getting them to tell you “no” is more difficult.  This fits in well with the current oil announcements: delay, rationalize, excuse… just don’t give a straight rejection of “we can’t”.

 In the end we won’t know the truth of the matter until it happens either way.  The Kingdom can say whatever it wants, and it is under no obligation to give out any information about anything it does.  (As a further example, when I reference increases in Saudi well drilling activity, that’s based largely on second hand accounts and cobbled together info on how many drilling rigs Saudi-Aramco is leasing.)  If, in 2012 (or whatever) they say “we’ve changed out mind, and now we’ll restart the projects” then fine.  I’ll be wrong then, but until that point I’ll stand by my intuition.

 By the way, these projects are like high school science fair homework assignments.  This crap takes years (3-5 or more) to complete, so that decisions have to be made far in advance for the impact of the additional oil to be timely.  Take that into consideration when weighing the veracity of the Kingdom’s rationalization.

 L33t,

 John Law