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Five Things You Need to Know for Friday


What you need to know (and what it means).


Five things you need to know to stay ahead of the pack on Wall Street.

1. Seismic Activity in the Oil Services Sector

Schlumberger (SLB) agreed to purchase Baker Hughes' (BHI) 30% stake in their WesternGeco venture for $2.4 billion in cash. Who is WesternGeco? Why does SLB want it? Why does BHI want to sell it?

  • WesternGeco provides seismic data to help energy companies assess the size of oil and gas reserves.
  • The company was formed in 2000 through the combination of SLB's Geco-Prakla unit and BHI's Western Atlas unit, with SLB owning 70% of the company and BHI owning 30%.
  • At the time of the joint venture, SLB paid BHI $500 million to compensate for the different ownership stakes since the 70/30 split did not reflect the full value of the business.
  • According to Minyanville Professor Neal Dingmann, among the best performing oil services and exploration businesses of late has been the seismic services segment, which is difficult to say three times in a row.
  • "When the two signed the deal there was a clause that at a certain date one or the other would buy the other guy out, which is what I called the Option Period," Professor Dingmann said.
  • "Because SLB already owned 70% it makes sense for them to buy BHI out. The price, $2.4 billion, is so good because the seismic business has been doing so well lately," he added.

2. Repeat after me. "There is No Inflation. There is No Inflation. There is No Inflation."

More U.S. companies reported rising materials and labor costs in the first quarter, a survey by the National Association for Business Economics showed.

  • Say again?
  • More U.S. companies reported rising materials and labor costs in the first quarter, a survey by the National Association for Business Economics showed.
  • Can't be true. Rising prices are associated with inflation.
  • Well, just follow along with us for a moment before jumping to conclusions.
  • According to the NABE survey, far more firms reported rising materials and labor costs than in January.
  • Interestingly, the Bloomberg headline reported "U.S. Companies Were More Successful Raising Prices, NABE Says."
  • While true, what we at Minyanville found most interesting is this little nugget in the NABE survey: "A smaller but growing percentage of companies has been raising prices. But fewer companies expect to be able to raise prices in the near future."
  • Also of note in the survey, "A substantial share of respondents reported a shortage of skilled labor, pointing to a tightening labor market."
  • Let's look at the parts.
    - Tightening labor market.
    - People demanding higher wages
    - Rising raw materials and energy costs for five consecutive years.
    - Inability to pass through rising raw materials and energy costs for five consecutive years.
  • That leads us to Number 3....

3. Deflation Lives?

No way. Look at commodities prices!

  • Ok, let's look at commodities prices. Did you know that during the years 1932-1934 commodities prices nearly doubled?
  • How can commodities prices double during a deflationary period? If the decline in the demand of commodities is met with a larger decline in the supply of commodities, commodity prices will then likely increase.
  • Ask yourself this. Which commodities have increased the least over the past five years? A look at the charts shows that if it can be ultimately depleted - oil, natural gas, gold, silver, copper, lead - it has grown faster than anything which can be grown - corn, wheat, oats.
  • While it is true that there are certain areas - raw materials, resources, certain services such as healthcare - where price increases dominate, there are deflation in many other areas (think everything China makes).
  • These price increases in raw materials will appear to be inflationary until credit expansion reaches full saturation (no one else wants to take on additional credit).
  • When companies say they have an inability to pass through rising raw materials costs, they are saying that consumers are highly sensitive to price increases and balk at higher prices.
  • The net result for companies is that they must cut costs elsewhere to absorb higher costs. Once those finite cost-cutting measures run their course, if customers are still unwilling to (or perhaps incapable of) paying higher prices, the company will have no choice but to reduce investment and spending.
  • A reduction in credit growth, corporate investment, spending, and consumer demand? Whatever that recipe makes, it is not inflation.

4. On the Margin

Yesterday afternoon the New York Mercantile Exchange announced margin increases for gold, silver, and copper futures beginning at the close of business today. What does this mean?

  • According to NYMEX, margins for the gold futures contract will increase to $2,250 from $1,750 for clearing and non–clearing members and to $3,038 from $2,363 for customers.
  • Margins for the silver futures contract will increase to $4,500 from $3,750 for clearing and non–clearing members and to $6,075 from $5,063 for customers.
  • Margins for the copper futures contract will increase to $4,000 from $3,750 for clearing and non–clearing members and to $5,400 from $5,063 for customers.
  • It has been suggested that an increase in margin for silver and gold implies somebody somewhere wishes to discourage speculation.
  • This is not exactly true. In the case of stocks, the Federal Reserve Board Regulation T sets margin requirements.
  • It is true that the Fed periodically adjusts the margin requirement to quell speculation in stocks.
  • However, for futures, the exchange sets margin, not the Federal Reserve, because the exchange acts as a counter-party to all trades.
  • Because futures are highly leveraged, periods of high volatility almost alway result in the exchange adjusting margin rates because, hey, as the song goes 8!#@h betta have my money.

    Ja Rule Adjusts Margin Rates When Necessary

5. Ice Cold Beer

There are few things we love more than ice cold beer. There are few things we dislike more than lukewarm cans of formerly ice cold beer. Therefore, we are watching with great interest a little outfit called Tempra Technology.

  • Who is Tempra Technology and why do we care?
  • Tempra Technology is a leader in the development of instant, self-heating and self-chilling product technology.
  • The company claims to have developed a self-chilling beverage can!
  • It is called the I.C. Can™ and reportedly can lower a beverages temperature by 30 degrees F in just three minutes.
  • The average American drinks 22 gallons of beer annually. (Lightweight).
  • Expect the first I-C Cans to show up in mid-2007.


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