MCAD Industry View - A May 2006 Update

During the week of May 15-19, China slightly loosened the tether that binds the Chinese yuan to the US dollar. A stronger yuan implies a weaker dollar, as does the general strengthening so far in 2006 of the euro and the yen (see Item (8) above). But unless the falling US dollar is paired with reductions in the US federal budget deficit, more harm than good is done due to rising interest rates. That's because the foreign investors who finance the administration's "borrow as you go" budget (see Item (1) above) are likely to demand higher returns to invest in a depreciating US dollar. To keep interest rates in check as the US dollar falls, the administration tries to use smoke & mirrors to persuade investors not to believe what they see: a US dollar that is declining even as the US does nothing to curb its federal borrowing.

Meanwhile, the US housing market continues to slow. On May 16, 2006, the Commerce Department said US housing starts nationwide dropped 7% to 1.85 million in April, down for the third straight month, as rising mortgage rates showed signs of tempering demand. In the San Francisco Bay Area, home sales tumbled to their lowest level in five years in April as a chill continued to creep through the region's housing market. The Nasdaq Composite closed at its weakest level of the year on May 16, 2006. Then Wall Street skidded even lower on May 17, when the Dow Jones industrial average suffered its biggest one-day loss in three years, and the Nasdaq composite index turned negative for 2006. The Dow and Nasdaq lost another 77 and 15 points, respectively, on May 18. Then on May 22, the Nasdaq fell 21 points to 2,173, its weakest close in 6 and a half months.

The Nasdaq has really never recovered since 2001, despite claims of the "robust US economy" by administration spokesmen. It's still more than 15% below its level of January 21, 2001, just to choose a date (Item (10) above). The Nasdaq also remains 57% below its high water mark historically.

Of course, anyone who drives in the US has experienced the outrageous rise in gasoline prices in the US, exacerbated by the needless US conflicts with Iran and Iraq (items (6) and (9) above). Worse, Californians now pay 48 cents more for each gallon of regular than other Americans do, with the state's average reaching $3.37 on May 10, 2006. But the price of gasoline is way up across the US.

The latest New York Times/CBS News poll in mid-May showed that 63% of respondents had cut back on their driving because of the gas price increase, and 56% had cut back on other household spending. No wonder the University of Michigan's consumer-sentiment index for May 2006 plummeted 8.4 points to 79!

Meanwhile, big oil continues its grotesque march to record profits as it has for the last five years. Exxon recently reported first-quarter 2006 net income of $8.4 billion on sales of $89 billion. Chevron reported Q106 net income of $4 billion on sales of $54 billion. Oil execs always point out that the companies' profit margins are "only" in the 9% range, only "slightly higher" than the US corporate average. Of course they never mention to the public, except when touting their stock to their shareholders, that oil companies sport a return on capital employed more than double the average return on capital employed for all US industrial companies. In 2005, Exxon's ROCE was 31%. Collectively, the five largest oil companies (Exxon, Chevron, ConocoPhillips, Shell and BP) enjoyed an average ROCE of nearly 27% percent in 2005. Why not use some of this largess to build more refineries?

Crude oil -- gasoline's main ingredient -- has traded for more than $60 per barrel for most of 2006, reaching as high as $75.17 in April. Yet oil company profits have soared by a far greater percentage. Perversely, rising gas prices may also be shoring up crude prices. Although the cost of crude usually helps determine gasoline prices, and not the other way around, the two sometimes support each other, with each barrel of oil becoming more valuable as gas prices rise.

No wonder the administration wants to keep the vice president's 2001 energy policy conference an ongoing secret!

And talk about "unintended consequences." Due to the higher prices for fossil fuels, the US nuclear power industry now believes it has its best chance in years to come back to life and overcome skeptics to build new nuclear plants. Apparently the US nuclear industry already has as many as 20 nuclear plants planned across the country, worth upwards of $60 billion. Of course, the industry has a spotty past record at best of opening nuclear plants on time and on budget. And one other small consideration -- what to do with the nation's pesky radioactive waste -- a question that has dogged the US nuclear industry for decades.

Since the "peak" of the world's oil supply has probably already occurred, "big oil" also ought to be plowing most of its profits into developing and perfecting renewable energy sources, rather than focusing on exploiting the dwindling world oil supply. And the US government should insist on it, along with promoting conservation. In recent days, US Senate Democrats introduced new energy legislation to cut US oil consumption significantly by 2020 by boosting sales of alternative fuels, providing incentives for purchases of hybrid vehicles and researching next-generation energy technologies. It would create a national renewable portfolio standard for electric power requiring 10% of all electricity to come from renewable sources by 2020.

This "Clean Energy Development for a Growing Economy (EDGE) Act" is drafted around five core principles:
  • Transforming American's vehicles and infrastructure
  • Protecting American consumers and businesses
  • Leveling the playing field for clean energy technologies
  • Real government leadership for clean and secure energy
  • Diversifying American energy sources, investing in the future
Senator Maria Cantwell (D-WA), the lead sponsor of the bill stated, "It's time that we simply stop talking about energy independence and start running with a plan that also makes America more secure and more economically competitive." Senator Pete Domenic (R-NM), Chair of the Senate Energy Committee, criticized the plan for its "absence of any effort to increase American energy supply."

Well, at least corporate fraud is starting to taper off, especially in high-tech (Item (11) above). What's that you say? Boeing just agreed on May 15, 2006 to pay $615 million to end a probe into alleged defense contracting scandals. A former high- level manager at Cisco Systems Inc. in San Jose CA, accused of insider trading for allegedly tipping off his two brothers to pending acquisitions, reached a settlement with SEC regulators on May 16, 2006. Hundreds of thousands of dollars in fines were levied. The Cisco manager apparently learned of five impending acquisitions and shared the information with his younger brothers before it was publicly released. The younger brothers bought shares in the targeted companies and sold them after Cisco announced the deals, reaping $400,000 in illegal profits. On May 18, Abbott Laboratories was accused of vastly inflating prices of its drugs as part of a fraudulent billing scheme alleged to have cost government health programs more than $175 million over 10 years. The lawsuit is the latest in a series of whistleblower claims against drug manufacturers. Settlements in other cases have totaled more than $3.1 billion in recent years.

The Enron trial grinds on; at press time, Enron founder Ken Lay and former Chief Executive Jeff Skilling are still accused of defrauding investors by concealing Enron's shaky finances while selling millions in company stock. The Enron defense attorney Daniel Petrocelli gave a worrisome quote at trial, "If Skilling and Lay weren't just using common, legal business practices, we might as well put every CEO in jail." Oh boy. Occurring early in the current administration's first term, Enron's bankruptcy was the biggest in US history at the time. It raised the curtain on a "pageant" of corporate greed led by the likes of Tyco's Dennis Kozlowski, and WorldCom's Bernard Ebbers, just to name two more notorious cases.

Meanwhile, some 17 public companies nationwide (many high tech) have been identified by the Securities & Exchange Commission as at risk for having backdated stock options, according to a report released May 19, 2006 by the Center for Financial Research and Analysis. Regulators are investigating whether companies broke securities and tax laws by backdating stock-option grants to coincide with the lowest possible price, thereby illegally maximizing the amount of money executives can make in exercising options. Another 3 companies were added to the list on May 22. If federal prosecutors find that executives illegally backdated grants so that the "strike" prices on their options were artificially low, those executives -- or board members who approved the practice -- could be charged with criminal fraud, an attorney said. "This has become the issue du jour for the SEC and federal prosecutors," said the securities lawyer, who spoke on condition of anonymity.

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Review Article
  • October 09, 2008
    Reviewed by 'Randy Bigs'
    I agree that the authors did not clearly tie in the overall state of the economy with the topic at hand: The MCAD industry. But, based on this week's Wall Street stock meltdown, and the worry about increased inflation, It's obivious that we've got big trouble right here in River City, and it will not only negatively impact our economy in general but the MCAD industry specifically. I applaud Russ and Jack for their in depth financial analysis, but I also would like to see their US and geopolitical comments weaved into the central theme, and I hope when things turn around they'll continue to present an objective viewpoint.

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  • October 09, 2008
    Reviewed by 'Mac'
    Where's the beef? As I read the article hoping to get an update on the MCAD industry, I quickly realized that this article was just another political aid without any data that could be interpreted without a secret MCAD decoder ring. I find it ridiculas that instead of giving us a real opinions on state things in the MCAD space, the authors just threw up graphs and charts and ambigious explantions about what those caharts and graphs meant. At the end of the article, I could only grin as I kept wating for some information that might actually provide me with some insight on the state of affairs in the MCAD space, but it didn't happen.
    I guess I will have to keep on collecting data myself and come up with my own opinions as I am not on someone's pay roll and have no political agenda. Here's a noval idea, lose the jibber jabber talk (Denny Crain) and call it like it is for once.

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  • October 09, 2008
    Reviewed by 'S. Wertel'
    This article is quite detailed and well written, but what does your political view on the current administration have anything to do with MCAD?
    The entire Economic & Geopolitical Factors section is filled with tripe and misleading statistics pulled from sources biased to anti-Bush sentiments. Is this the only medium Henke and Horgan have available to prevail themselves as some sort of economic masterminds? Please keep your political drivel to yourselves, or at least place them in a forum suited to that topic. If I were to have written something as perverse as this, my high school social studies teacher would have accused me of having diarrhea of the mouth and sent me back to perform an unbiased analysis showing both side of the story and how they relate to the topic at hand - the state of the MCAD industry. No where in the Economic & Geopolitical Factors section was there a tie between the rubbish on the page and how it relates to the topic of MCAD. Please go back to high school.
    In the future, please contain the Industry View to just an Industry View, or at least tie in the Economic and Political Factors with how they affect MCAD.

      One person found this review helpful.

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  • October 09, 2008
    Reviewed by 'Brian T.'
    What can I say, this article is not a News/Commentary article on MCAD. It is a Liberal Propaganda Tool which I will no longer subscribe to. This is my third comment on these out of place personal comments in a otherwise informative article. When the last article was being reviewed, the last I checked 6 out of 7 responses to that last article agreed with my review, then it was removed from the mcadcafe page. I guess this would be expected, that poll might not swing their way, so cut it short before it looks bad. I have never seen this report taken off this site before. These views are included in a bias manor. Some of the same information could be included with out the Liberal Bias View or the quotes from the Like Sources. Enough Said, another media tool that can't seem to go down the middle.

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