17 Products That Were Invented By Accident

This article discusses seventeen products that were invented by accident -- ranging from the microwave to Kellogg's Corn Flakes and chocolate chip cookies.

http://www.thestreet.com/story/11122700/1/17-products-that-were-invented-by-accident.html

Is the US Falling Behind on Quality of Infrastructure?

The answer to this question depends on who you ask.  In one article, published by the Washington Post, the thrust of the story is that the U. S. is falling behind dramatically vs. the major emerging market countries such as China, India and Brazil.  The Urban Land Institute published a report indicating that the U. S. should invest $2 trillion in rebuilding its transportation network in order for it to continue to drive efficiency and global economic leadership.

The Washington Post story can be read at the following link:

http://www.washingtonpost.com/local/study-2-trillion-needed-for-us-infrastructure/2011/05/16/AFyppB5G_story.html?hpid=z3

This piece from the Wall Street Journal paints a different picture, albeit solely related to China:

http://online.wsj.com/article/SB10001424052748703421204576328640297396406.html?KEYWORDS=heard+on+the+street

The Wall Street Journal article suggests that China's infrastructure is so inefficient that logistics costs are around 21% of GDP (total economic output), compared to 10% for the U. S. and 13% for India.  The piece blames China's focus on manufacturing, a fragmented transportation system, high tariffs for road transport, and multiple providers "piling on fees."

The truth is probably somewhere in between these two vastly differing views.  

Transportation infrastructure is one key area that helps the U. S. maintain its global economic dominance and its ability to a maintain higher-than-average standard of living for its residents.

Transportation infrastructure is a natural place for government and private industry to work together for the betterment of U. S. residents and business interests.

Three Million Job Openings

There were 3 million job openings available at the end of March, according to this short piece from a Wall St. Journal blog that focuses on economics.

http://blogs.wsj.com/economics/2011/05/11/more-than-3-million-job-openings-in-march/?mod=djemRTE_h




United States Oil Fund (USO)

This article from the Wall Street Journal discusses how poorly the United States Oil Fund has performed (up 19%) versus the commodity it is supposed to track, the price of a barrel of West Texas Intermediate crude oil (up 123%) since the beginning of 2009.  It just goes to show you that you can try to use ETFs (exchange traded funds) to attempt to track the performance of an actual commodity, but the performance results that you receive may not be what you expected.


http://online.wsj.com/article/SB10001424052748703864204576317481454589652.html?mod=djemheard_t

Exchange traded funds are mutual funds that trade on an organized stock exchange, such as the American Stock Exchange.  Unlike regular mutual funds, whose prices are established at the end of each trading day, and which can only be traded once per day, ETF prices float throughout the day and can be traded during normal business hours for the stock exchanges.

Oil and Gasoline Inventories Above Expectations

As this article in the Wall Street Journal explains, oil prices and prices of oil stocks are declining today on reports that inventories of crude oil and gasoline are above expectations heading into the summer vacation/driving season.  This correction in commodity prices is healthy.  With gasoline prices hovering around $4/gallon, a decline in the price at the pump would be a welcome relief to cash-strapped consumers.

http://online.wsj.com/article/SB10001424052748703864204576316830036397882.html?mod=djemTAR_h

Commodities Prices Take a Tumble

As I wrote in a previous blog post about the price of gold, gold appears to be a crowded trade.  The following quote from a Bloomberg article today confirms my suspicions, and generalizes the notion to take in other commodities as well, such as oil and silver:

“It’s panic,” said Michael Shaoul, chairman of Marketfield Asset Management, which oversees $1 billion in New York. 'You have those super crowded trades. Now you’re in liquidation mode. There’s nothing to do with weak U.S. economic data. It’s not a global financial crisis. It’s a classic liquidation move in a crowded trade.' "

The full article is on Bloomberg, a free Internet web site devoted to investments:

http://www.bloomberg.com/news/2011-05-05/oil-metals-fall-as-slowing-global-growth-drags-down-stocks-euro-climbs.html

As I have mentioned to clients many times, "the cure for high prices is high prices".  The meaning:  when prices get too high, counterbalancing takes place.  In the case of commodity price inflation, the following tends to occur:  (1.) economies slow down as commodity prices cause businesses and consumers/employees to cut back on purchases of other goods and services reducing overall demand, (2.) consumers of the commodity will try to find substitutes for the commodity whose price has risen (again, reducing demand), (3.) consumers of the commodity will cut back on their purchases, since their dollars only stretch so far (reducing demand yet again), and (4.)  as the price of the commodity goes up, producers of that commodity tend to produce more to take advantage of the price spike.  In other words, high prices cause an increase in supply of the "hot commodity", alleviating the imbalance between those who would like to buy the commodity, and those who sell the commodity.


In the case of commodities today, part of the price rise should be blamed on emerging market economies that are demanding more and more of everything, as their economies grow and develop.  The other part of the recent price spikes that we have seen in commodities is speculators driving up prices by buying commodities that they really do not need.  Instead, speculators are buying commodities because they believe that the price momentum will continue to rise.  Again, this is the bigger fool theory:  bigger fools buy a product not because they need it or because the price is a bargain; rather, they buy because they believe that there is a bigger fool out there who will buy the product at an even higher price.

Are Oil Industry Profits Really Excessive?

With gasoline prices at $4.15/gallon or so, politicians have been calling for investigations into the pricing of a barrel of oil, which feeds into the price of a gallon of gasoline.  But are the industry’s profits really excessive?

It is instructive to look at the revenues, expenses, taxes and profits of a variety of industries to determine whether or not “big oil” is, in fact, as profitable as the politicians seem to think. 

When reviewing the information below, it is helpful for the reader to understand the definition of each of the line items, so a definition of each is as follows: Revenues (also referred to as Sales) is defined as all sales to end customers.  Expenses includes all expenses of the company except for interest payments on debt and taxes.  Pre-tax Income is income after all Expenses are deducted from Revenues, except for taxes.  Taxes includes all income taxes plus any other taxes that might be charged (for example, taxes levied by political subdivisions that an oil company must pay for each barrel of oil extracted from oil fields located in each political subdivision).  Net Income is the income after all Expenses, Interest and Taxes are deducted from Revenue, and is the amount available for shareholders for dividends payments, stock buybacks and reinvestment into the business.

Take, for example, four well-established companies:  Exxon Mobil, Wal-Mart, Johnson & Johnson and Intel Corporation.  Revenues, taxes and profits for 2010 (and fiscal 2011 for Wal-Mart), are shown below (all amounts are in billions of dollars):

Wal-Mart: Revenues $421.8, Expenses $398.3, Pre-tax Income $23.5, Tax $7.6, Net Income $16.4.

Wal-Mart’s Expenses were 94.4% of Revenues, Pre-tax Income was 5.6% of Revenues, Taxes were 1.8% of Revenues, and Net Income was 3.9% of Revenues.  Wal-Mart’s tax rate was 31.7% of Pre-tax Income.

Johnson & Johnson:  Revenues $61.6, Expenses $44.6, Pre-tax Income $16.9, Income Taxes $3.6, Net Income $13.3.

Expenses represented 72.4% of Revenues, Pre-tax Income represented 27.4% of Revenues, Income Taxes represented 5.8% of Revenues and Net Income represented 21.6% of Revenues.  Johnson & Johnson’s tax rate was 21.3%.

Intel Corporation:  Revenues $43.6, Expenses $28.0, Pre-tax Income $16.0, Income Taxes $4.6, Net Income $11.5.

Expenses represented 64.2% of Revenues, Pre-tax Income represented 36.7% of Revenues, Income Taxes represented 10.6% of Revenues and Net Income represented 26.4% of Revenues.  Intel’s tax rate on Pre-tax income was 28.8%.

Exxon Mobil:  Revenues $383.2, Expenses $294.2, Other Taxes $36.1, Income Before Income Tax  $52.9 (which is after Other Taxes), Income Taxes $21.6 and Net Income $31.4.  Pre-tax income before any taxes are applied:  $89.1.

Exxon Mobil’s Expenses in 2010 were 76.8% of Revenues, its combined taxes (Other Taxes and Income Tax) represent 15.1% of revenues and its Net Income (the “bottom line” available to shareholders) is 8.2%.  Another way to look at this is that Taxes represent 64.8% the income before any taxes are applied!  It is hard to fathom how politicians can believe that Exxon Mobil is the one profiteering, when various governmental entities take almost 2/3 of the pre-tax profits!

So to summarize:  Wal-Mart’s Revenues exceed Exxon Mobil’s by $38.6 Billion. Wal-Mart’s Income Tax is 1.8% of Revenues as compared to Exxon Mobil’s 15.1%.  Johnson & Johnson’s tax rate on Pre-tax Income was 21.3% as compared to Exxon Mobil’s 64.8%.  Intel’s Net Income as a percentage of Revenues is 26.4% as compared to Exxon Mobil’s 8.2%.

Exxon Mobil’s Net Income figure seems large because it is a large company, not because it is gouging motorists at the pump.  Exxon Mobil needs large amounts of capital to drill oil wells, and the company spends many years developing these properties before it receives any payback in the form of oil and gas flowing from the completed wells.  Government’s take is extraordinarily large, which takes capital from the company when it could be reinvesting those dollars in finding more oil and gas to alleviate the supply and demand imbalance that is driving up gasoline prices.

Implications for your investments: If you own an S&P 500 index fund, Exxon Mobil represents 3.2% of your money invested, and Energy stocks (many of which are paying a similar percentage of their profits to the tax collectors), represent 11.8% of the S&P 500 index.  The taxes levied on these companies are being levied, indirectly, on you.