Tuesday, September 13, 2005

“Scouring the Globe to Find Raw Materials…”

Hands down the most interesting piece of research I’ve come across this morning is a Bear Stearns comment that management of Proctor & Gamble “is scouring the globe to find raw materials” in the wake of rising energy prices and the disruptive impact of Hurricane Katrina.

(While the Bear analyst is lowering P&G estimates all of a penny per share owing to said cost pressures, keep in mind this is a company with 2.5 billion shares outstanding.)

According to the report, P&G management—which I think anybody on Wall Street would rank up there with the best in the world—“has been working for quite a while at insuring an ability to use a variety of input costs [sic]. Nonetheless, we think that the recent announcements by chemical companies that they could be declaring force majeure on key inputs could limit supply and raise costs.”

Somebody ought to tell the bond market what one of the world’s biggest, and best, companies is seeing out in the real world.

Jeff Matthews
I Am Not Making This Up

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.


tahoe kid said...

Copper Drops in London as Inventory Rises to an 11-Month High
2005-09-13 06:16 (New York)

By Simon Casey
Sept. 13 (Bloomberg) -- Copper fell in London after
stockpiles rose to their highest in 11 months, increasing the
supply of the metal used in wiring and plumbing and prompting
consumers to delay purchases.
Inventory tracked by the London Metal Exchange in warehouses
across three continents grew 6 percent to 75,100 metric tons, the
exchange said today in a daily report. The total has doubled in
the past six weeks as producers and traders deliver excess metal.
``Today's 4,250-ton rise is likely to damp sentiment,'' said
William Adams, an analyst at Saffron Walden, England-based
Basemetals.com, in an e-mailed note.
Copper for delivery in three months on the London Metal
Exchange dropped $12, or 0.3 percent, to $3,593 a metric ton as of
10:46 a.m. local time. The decline erased earlier gains of as much
as $30. Copper traded on Sept. 2 at a record $3,725.1.
Copper production may not meet demand this year, forcing
consumers to use inventory. The shortfall might total 85,000 tons
in 2005, Morgan Stanley said in a report last month.
Copper consumers may be delaying purchases because of high
prices, analysts said. Belgian copper producer Cumerio said last
month some pipe and cable manufacturers are trying to reduce
copper use in favor of plastics and aluminum.
``Manufacturers are hoping prices will fall,'' said John
Meyer, an analyst at Numis Securities, in an interview today.
Workers and management at Asarco LLC yesterday failed to end
a 10-week strike at the company. The stoppage has curbed
production at the second-largest U.S. copper producer, a unit of
Grupo Mexico SA.
Both sides failed to agree whether labor contracts should
include a guarantee that any change in Asarco's ownership would
require a new owner to negotiate with the union, Asarco Chief
Executive Daniel Tellechea said in an e-mailed statement

Supply Disruption

Labor disputes have limited the supply of copper in the past
two months. In July, Asarco invoked a ``force majeure'' clause in
its supply contracts, allowing it to default on deliveries to
customers because of the strike. Protests in July at Zambia's
Konkola Copper Mines Plc and a Chilean mine operated by Vancouver-
based Placer Dome Inc. also reduced output.
``The market remains vulnerable to any supply disruption,''
said Antofagasta Plc, a London-based owner of three Chilean copper
mines, in a Regulatory News Service statement today.
The company reported today a record fist-half net income of
$367.5 million, compared with $207.5 million a year earlier, due
to higher copper prices.
Stockpiles tracked by the LME have more than doubled from a
31-year low in July. They're still less than two days' global
copper usage.
The inventory level ``still leaves the market vulnerable as
we head towards the end of the summer, particularly as there seems
no end it sight for the strikes at Asarco,'' said Angus MacMillan,
an analyst at Bache Financial in London, in an e-mailed report
Among other metals for delivery in three months on the LME,
aluminum was down $7 to $1,853 a ton. Zinc declined $8 to $1,411,
lead was unchanged at $870 and tin gained $40 to $6,900.

DaleW said...

Somebody ought to tell the bond market what one of the world’s biggest, and best, companies is seeing out in the real world.

I really don't understand this comment. Which bond market? The corporate bond market? Treasurys? If you're talking about the bond market at large, I still don't get how a market representing tens of trillions of dollars of obligations, with good information flow, deep daily liquidity, and a diversity of particpants doesn't get something ONE company sees as interpreted by one investment manager. I think the bond market gets it and if it's not discounting it, it's probably not a big deal for manufacturing costs and end-market inflation. But that's just me -- I believe markets are genrally efficient and competitive.

AA said...

DaleW, was this also the case with the Nasdaq in 2000? Was the market discounting properly then?

"Respect the price action, but do not defer to it"

The markets get it right in the long run, not necessarily the short run. Hence, Jeff's view is legitimate (whether right or wrong, only time will tell).

DaleW said...

I take it as efficient because few people beat the market over time. You can pick any one point in time and say "see, it was overvalued," but that doesn't mean the market is not generally, over time, efficient.

I disagree with your premises on market efficiency, but this is hardly the place and I would guess neither of us has the time or inclination to hash out a subject of interminable debate.

Ed said...
This comment has been removed by a blog administrator.
Jeff Matthews said...

Markets can be highly efficient and it can be highly inefficient.

Best Buy is today's example of the latter.

gvtucker said...

Best Buy is not necessarily an example of inefficiency. It is quite probable that the price action in Best Buy is an abrupt adjustment by the market to new information.

If you could somehow prove that this information had been publicly available information before today and the stock was just now reacting, then it would be an example of inefficiency.

tahoe kid said...

Financial markets are a reflection of crowd psychology. The crowd can be right simply because it is so large. The danger develops when the crowd embraces false assumptions as truths. That's when a critical evaluation of the 'facts' can be most rewarding. In the end, crowds tend to eventually overprice market opportunities.

whydibuy said...

We must be close to an inflection point because I'm beginning to feel totally stupid again. The last time I felt this way about an economic situation weas in '99-00 when co's with no assets and a business model that lost money in perpetuity were being valued in the 10's and sometimes 100's of billions of dollars. I finally resigned myself to being totally ignorant on valuing a business. Then WHOOSH. -75% in two yrs. This 4% 10 yr bond has once again convinced me of my stupidity, except in assessing inflationary conditions.

whydibuy said...

And speaking of P&G. Ya'know, the bellwether stock concept has totally died out on wall street since the days of GM which to me is a reason it may actually begin working again. Look at the big names like WMT, GM, F, CAG, KO. All are citing cost pressures but is anyone listening? Wall street sure isn't but then again, they have the always accurate and concise gov numbers to guide them. LOL.

Its_strange said...

Wallstreet and Washington always make me feel stupid ..Its a cabal

Chris Fischer said...

whydibuy and Jeff,

I couldn't agree more.

Maybe someone can shed some light on this for me, but exactly who is buying 30 year bonds at 4.4% when most money market accounts are paying ~3.5% (INGDirect is paying 3.3%)? I don't get it. That's a tiny increase in return for what seems like a ton of risk. I forget which newsletter wrote it (because I'd love to take credit for it) but to me, it does seem like the bond market is offering Return-Free risk.

AA said...

That question is easily answered. If you believed that a asset price deflation was likely, that rates of return on most assets would go to zero or become negative, you would buy long bonds at or below the yield of the short end.

Think Japan 10 years ago.

Alex Khenkin said...

Chris, I once asked Dr. William Bernstein of the Efficient Frontier the same question - his response was that a lot of buying was by insurance companies and pension funds who simply match their long-term liabilities with long-term assets (not verbatim, but the gist). For them, it makes perfect sense - you see, the 4.4% nominal return is guaranteed for 30 years once you bought a 30-y. bond. The ING account pays 3.3% TODAY, and it may pay more or less next year - they can't stand that, this would be a "classical" error of funding long-term liabilities with short-term assets. Not to mention that the ING Savings is not exactly a vehicle they can use due to their sheer size.
Another buyer, according to Gave-Kal, is Japanese Private Investor desperately seeking to maximize his/her income and not particularly caring about safety of the principle.
Small Investor Chronicles

Alex Khenkin said...

by "safety" I ment the USD/JPY exchange rate, of course.

William said...

Who really knows anymore? Some trades are "put-on" or "taken-off" based on news/noise, and other trades are made as a function of relative pricing/arb/liquidity "semi-fluid mechanic" reasons. Often the accounting for certain vehicles in the transactions figure into the mix, and sometimes you get situations that would normally face forced liquidations that do not. So, do markets communicate a picture of the "news world" when there is some mammoth position being defended by an institution with virtually unlimited funds, and/or the ability to create money, whether it is direct defense or through entity structure?

Of course, this is only my perception, and "it" probably doesn't work like this.

Aaron Koral said...

"Somebody ought to tell the bond market what one of the world’s biggest, and best, companies is seeing out in the real world."

Here's my take on Jeff's comment (and I could be wrong...)

Investors in the US Treasury bond market are anticipating low inflation at the long end of the Treasury yield curve. Inflation is a reflection of rising prices for goods and services.

If a company like P&G however is having to "scour the globe to find raw materials" for its health care and beauty products, one can then infer that P&G may have to raise prices on those goods at the retail level because of P&G's inability to contain higher costs for "key inputs" from chemical companies.

Thus, the input-cost situation becomes inflationary. I agree with Tahoe Kid's opinion in that "financial markets are reflective of crowd psychology".

I wonder if Jeff is trying to say that investors in the US Treasury Bond Market are in danger of developing a "false assumption" about low inflation as gospel based on one company's problems in containing input costs for its product lines?

Just my two cents...

Alonso said...

In response to the recent dramatic gas price increases, IRS has announced that the optional standard mileage rate has increased 8¢ to 48.5¢ a mile for all business miles driven between Sept. 1 and Dec. 31, 2005, up from 40.5¢ for the first eight months of 2005. The rate for computing deductible medical or moving expenses between Sept. 1 and Dec. 31, 2005 is boosted to 22¢ a mile, up from 15¢ for the first eight months of 2005.

EricBrock said...

I would agree that the bond market is usually pretty good at sniffing out inflation and it obviously doesn't see it. Actually, given the late cycle credit bubble, the bond market is good at stopping inflation, before it happens. Without arguing as to whether financial markets are efficient or not, I would suggest that the bond market is much more efficient than the equity market, if one were to compare the two.

P&G may have trouble finding raw materials, I would guess that General Motors and Budweiser see some of the same challenges. However, GM and BUD are both seeing significant pricing pressure in their markets.

If P&G raises prices for shampoo, people will buy less beer.

Stuck_in_Sarasota said...

Article in today's Las Vegas Review-Journal says that, due to natural gas prices, the "typical household's energy bill expected to rise by $70 a month" this winter.


A $70-per-month hike may not sound like much to some, but for the "average" WalMart shopper, it's a fairly good-sized chunk out of the family budget.

Chris Fischer said...

DuPont plans to increase prices


The decision, necessitated by rising energy costs, will affect about 35,000 of the firm's products.

By Bob Fernandez

Inquirer Staff Writer

Reeling from soaring energy costs, DuPont Co. said yesterday that it would increase prices on about 35,000 products that go into kitchen countertops, police safety vests, cell phones, and a host of other items.

The Wilmington company would not say how much prices will rise on specific products, but said the first of the increases could come as quickly as next week. DuPont's 80 business units will make the changes, the company said.

The announcement by DuPont, one of the nation's largest industrial companies, is evidence of inflationary pressure building from oil and natural-gas prices. Consumer-price inflation was running at an annual rate of 3.2 percent until this summer. In July it increased to an annualized rate of 6 percent because of higher energy prices, said Richard DeKaser, chief economist with National City Corp. in Cleveland. He said he expected the elevated inflation rate to remain for the next few months but then decline as energy prices do.

DuPont sells some of its products, such as Tyvek house wrap, to consumers in retail stores, but most of its products are distributed through other companies or sold as raw materials to manufacturers. DuPont also has a large biotech seed business in the heartland.

DuPont, which acknowledged this summer that it had underestimated how quickly crude-oil prices would rise, said higher prices for oil and natural gas could add $13.5 billion in raw-material costs to U.S. chemical companies for the year.

Even before Hurricane Katrina damaged production rigs in the Gulf of Mexico and refineries on the Gulf Coast, tight global supplies were pressuring energy prices.

"This is real, and it's here to stay," Diane H. Gulyas, DuPont's chief marketing officer, said yesterday in an interview. "It goes beyond Katrina. Katrina certainly exacerbated a bad situation."

DuPont has concluded that there is an imbalance between growing energy consumption worldwide and new energy supplies, and that this will keep prices high for some time, Gulyas said.

"We are just starting to see the tip of the iceberg, with people in different industries looking at the reality of the new energy situation and how to deal with it," she said.

Crude oil closed at $63.34 a barrel yesterday on the New York Mercantile Exchange, down 74 cents for the day but up 44 percent in the last year.

Evoking a phrase common in the 1970s, Kevin Swift, chief economist with the trade group American Chemistry Council, said yesterday: "This is a supply shock." The chemical industry "consumes an awful lot of energy," Swift said, and natural gas is a big concern to chemical companies.

"Oil and natural gas are pushing inflation on the chemical companies and the economy," said Frank Mitsch, chemicals analyst with Fulcrum Global Partners L.L.C. in New York.

DaleW said...

A $70-per-month hike may not sound like much to some, but for the "average" WalMart shopper, it's a fairly good-sized chunk out of the family budget.

Median household income is $3,667 per month in the US, so you're talking about 1.9% of that of that for the winter months assuming no one turns down the thermostat. That's about a year's increase in productivity and wages assuming no real growth in disposable household income.

Sith Lord said...

The Sith Lord would like to suggest that Proctor and Gamble can buy their raw materials at Overstock.com.


AA said...

I'm no expert on bonds...however, read the following from someone who might be an expert, and at the very least is putting their money into bonds at these supposedly low yields:


bsilly0 said...

Interesting stuff from Hoisington Management, thanks for the link.

I first saw the 'open' vrs 'closed' world economy theory of interest rates laid out at a presentation by Hamblin-Watsa, the in-house investment manager of insurer Fairfax Financial. I went back to look up the relevant slide. Lo & behold the source is credited as Hoisington. Fairfax held a large chunk of their portfolio well out on the yield curve for a number of years (and still do). So far the strategy has paid off.

The near universal view over the past few years seemed to be that interest rates would rise across the board. As I pointed out in response to Jeff's previous topic, long rates have demonstrated an ignorance of conventional wisdom for fairly long periods in the past.


erikpupo said...


Misleading statement on the 1.9%.

You have to factor in other costs as well, arising from the overall economic environment:

Higher housing costs over time (higher property taxes, higher home insurance premiums)

Higher gasoline cost

Effect on highly indebted businesses of higher heating costs.


You can't just ignore costs. You either have to pass them on to maintain profit or eat them and lose profit margin. Same for consumers; they basically have to eat the costs, as they cannot expect a corresponding increases in wage growth, and either cut somewhere else or take on more debt.