Connecting The Dots

By: Tony Sagami | Wed, Jun 29, 2005
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Lear to cut 7,700 jobs, close 5 plants
Favorable WTO ruling gives Micron a temporary boost
"Energy prices are way too high. Clearly, it's hurting."

Chalk today up as a victory for the bulls.

The morning started off with a bang when the price of oil dropped below $60 a barrel. It appears that the bulls believe that $60 oil is a terrible problem for our economy, but $58 oil is no problem whatsoever.

The bulls then got a better-than-expected report from the Conference Board. According to the Conference Board, consumer confidence jumped from 103.1 in May to 105.8 in June, which is a three-year high. I guess the Conference Board must be polling Americans that belong to the don't-drive-don't-eat crowd.

The bullish spin on that news is that the high consumer confidence is PROOF POSITIVE that $60 oil doesn't matter.

Yeah, sure it doesn't matter.

The bond crowd didn't feel the same way and sent bond prices lower on that news.

The bulls, of course, weren't about to look a gift horse in the mouth and goosed stock prices higher. After spending the morning in the 70-80 point range, the bulls successfully attacked the 100-point mark.

No doubt about it -- the bulls had a great day. The Dow Jones closed essentially at the highs of the day with a 114-point gain. On a percentage basis, the Nasdaq was up slightly more with a 24-point gain.

It was also a good day for HealthSouth's Richard Scrushy, who was acquitted of all 36 fraud and conspiracy charges. I didn't attend the trial, so I won't criticize the decision, but it concerns the heck out of me that other corporate crooks will be emboldened by the acquittal.

The biggest fireworks, however, are reserved for the Thursday Fed announcement. One day -- even a big one like today -- does not make a trend.

Lear to cut 7,700 jobs, close 5 plants. Lear Corp. (NYSE:LEA) makes auto parts: interiors, seat systems, door panels, headliners, and instrument panels.

Given the problems that Ford and General Motors have been having, it should be no surprise to hear that Lear is suffering too, which is why it is about to lay off 7,700 of its 110,000 workers, close five of its North American and European manufacturing facilities, and outsource those jobs to Asia to cut costs.

You should listen to CEO Bob Rossiter.

"We are implementing this restructuring plan to improve our overall competitive position in light of extremely challenging industry conditions."

Extremely challenging? Does that sound like business is about to turn around any day now?

Both Moody's and Standard & Poor's put Lear debt on credit watch for a possible downgrade. Standard & Poor's was very clear.

"Even before Lear's announcement that it would restructure operations, Standard & Poor's was already concerned about the company's weakened financial performance due to lower production levels by its two largest customers."

By the way, you should add these 7,700 lost jobs to the 6,500 at Aloca, the 1,500 at Ameritrade, the 1,700 at Ford, and the 22,000 at Winn-Dixie.

And please don't forget to connect the dots to other auto parts suppliers, like Visteon (a Ford spin-off) and Delphi (a GM spin-off).

Favorable WTO ruling gives Micron a temporary boost. For the last two years, the U.S. has imposed a 44.7% tariff on chips that are imported from South Korea's Hynix. Today, the World Trade Organization upheld the validity of those steep tariffs against Hynix for unfair trade practices.

The reason for the stiff tariff, which have been in effect since June of 2004, are because South Korean government-controlled banks loaned billions of bailout dollars to Hynix when it was bankrupt. Those subsidized loans breached WTO regulations because they gave Hynix as an unfair advantage over Micron Technology.

Those subsidies have allowed Hynix to become the second largest DRAM chipmaker in the world and make life miserable for Micron.

Thanks to today's WTO ruling, Micron and the Micron bulls are jumping for joy. Micron CEO Steve Appleton said:

"Today's decision represents a tremendous victory!"

Anybody that believes that -- including the bulls that are dogpiling into Micron today -- just haven't done their homework.

1. First of all, the U.S. has been collecting those tariffs for the last two years and they done very, very little to help Micron become a profitable company. I say that because:

==> In 2000, Micron pulled in $7.3 billion of sales. In the last 12 months, Micron generated only $4.8 billion in sales.

==> During the height of the tech boom in 2000, Micron made $2.3 billion in profits. Just last Friday, I told you how Micron lost $127.9 million in the last quarter.

2. The tariffs only apply to Hynix chips made in South Korean. The clever Koreans have already outsmarted Micron and avoided the tariffs by building a chip plant in Eugene, Oregon. The chips made in Oregon are not subject to the tariffs.

"The company, however, believes it will not be hit by the tariffs as the company's U.S. plant in Eugene, Oregon, where the chips are not subject to U.S. tariffs, will cover the majority of the chip supply to the U.S."

Clearly, today's ruling from the WTO is only an important event to the Wall Street knuckleheads that are too lazy or too stupid to do their homework.

Anybody crazy enough to pay 45 times earnings for a company whose top line has shrunk from $7.3 to $4.8 billion and who has lost $2.6 billion in the last four years needs to get his head examined.

If you own Micron, I believe that today's rally may be the best opportunity to get out you'll see.

"Energy prices are way too high. Clearly, it's hurting." Who said that? Treasury Secretary John Snow on CNBC this morning.

Snow said several other things that you should pay careful attention to.

"Clearly, energy prices serve as a tax, they reduce the disposable income available to do other things and they take some oxygen out of the economy."

Where have you heard that before? From Wal-Mart.

"Energy is my concern. I think energy is the biggest concern."

Don't tell the bulls. They're too busy celebrating $58 oil.

"Unfortunately, there's very little that can be done in the short run to dramatically affect the price of oil."

How true! Politicians -- including the frauds running OPEC -- are powerless to affect prevent oil prices from rising even further. It won't be a straight line, but nothing short of a global recession will reverse oil prices.

Of course, stocks have somehow decoupled from oil prices. Since the spring of 2003, the price of oil has doubled yet the Russell 3000 jumped by almost 50% during the same time.

Does that giant disconnect bother you? If it doesn't, you'd make a great Wall Street portfolio manager.

If it does bother you, the right move is to make your portfolio very defensive.


 

Tony Sagami

Author: Tony Sagami

Tony Sagami
Harvest Advisors.

Tony Sagami

Tony Sagami is the owner and founder of Harvest Advisors, an investment research and money management company. Sagami has been managing money for more than 20 years and is one of the early pioneers in the application of technical and quantitative analysis to mutual funds and stocks.

Tony is a man that wears several hats. In addition to Harvest Advisors, he has launched several successful technology companies. Tony is the owner of Monocle Systems, a popular investment analytical software program that has been used by thousands of professional money managers and sophisticated individual investors. Tony is also co-owner of AdvisorSquare, one of the largest web design and hosting companies in the world.

Tony is a frequently quoted expert, appreciated for his frank and unconventional view. Tony has appeared in publications such as the Wall Street Jouranl, Barrons, Kiplingers, Smart Money, Business Week, New York Times, Washington Post, Investors Business Daily, Bloomberg, Financial Planning Times, Mutual Funds Magazine, Chicago Tribune, LA Times, and many others.

A graduate of the University of Washington, Tony enjoys coaching youth sports, serving his community as an active Rotarian, and exploring the all the beauty that Montana has to offer. Tony is a Paul Harris Fellow, an Eagle Scout, and married to his first-and-only wife and father of 4 wonderful kids.

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