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BARRON'S ONLINE: A Sampling of Advisory Opinion: "While damage assessments are unknown at this time, companies we believe to be most operationally exposed to Hurricane Katrina are Murphy Oil, Royal Dutch Shell, Kerr-McGee, Marathon Oil and Chevron": Monday 12 September 2005

Cutting Into Crude
Analyst Actions
by Bear Stearns

50 Broad St., New York, N.Y. 10004
Sept. 7: We estimate approximately 19% of U.S. crude oil and natural-gas production and 12% of U.S. refining capacity were shut in as a result of Hurricane Katrina...[Strategic Petroleum Reserve]. While damage assessments are unknown at this time, companies we believe to be most operationally exposed to Hurricane Katrina are Murphy Oil, Royal Dutch Shell, Kerr-McGee, Marathon Oil and Chevron. We believe Total's and Occidental's operations are least exposed to storm damage. Valero Energy is the only independent refiner with assets in the area affected by Hurricane Katrina. Independent refiners with no exposure to the Gulf Coast are Sunoco and Tesoro.

We believe it is early to assess...impact. However, if the recovery process resembles that of Hurricane Ivan, we believe refined-product prices could trend lower.

-- Nicole Decker

A Still-Strong Balance Sheet
Asset Allocation & Portfolio Changes
by Lehman Brothers Equity Research

745 7th Ave., New York, N.Y. 10019
Sept. 7: We continue to remain overweight in equities because of their relative valuation versus bonds; history for last 15 years; high level of risk aversion; and strong balance-sheet condition of Corporate America. We are reducing our materials-sector portfolio weight to marketweight....We are increasing our exposure to utilities by 0.5% to 2.7%, but still maintaining our underweight position.

-- Henry Dickson, Charles Reinhard

Decelerating Productivity: A Natural Outcome
U.S. Productivity Report
by Maria Fiorini Ramirez

1 Liberty Plaza, New York, N.Y. 10006
Sept. 7: U.S. nonfarm productivity was revised to show a quarter-over-quarter annualized growth rate of 1.8% in the second quarter, [versus] a preliminary estimate of +2.2%...and 3.2% in Q1...Compensation per hour rose at a revised 4.4% q/q annual rate in Q2, [versus] a preliminarily reported 3.5% increase. Earlier results were +5.5% in Q1 (revised down from +6.9%), a 10.2% leap in Q4, a 6.1% rise in Q3, a 3.7% gain in Q2, and a 3.5% increase in Q1 of last year.

Unit labor costs, which are compensation gains less productivity gains, increased at a revised 2.5% q/q annual rate in Q2, [versus] a preliminarily reported 1.3% rise...Measured on a year-over-year basis, which smoothes out considerable quarterly volatility, productivity grew at a 2.2% rate in Q2 after increases of 2.9% in Q1...Compensation per hour increased by a y/y 6.5% in Q2 after a 6.3% gain in Q1....

Recent results on the productivity front are indicative of a situation where the harshest cost-cutting by the corporate sector has run its course and productivity growth is thus reverting to trend from earlier unsustainable rates of increase. With compensation gains sizeable on a y/y basis, this means that unit labor costs are beginning to move up in significant fashion -- a big difference from the outright declines or very small increases posted until the latter part of last year. Therefore, the boost to corporate profits from margin expansion on the back of rapid productivity growth and lower unit labor costs has likely run its course.

The big question now is how much companies will be able to raise prices for finished products to offset the hit to profits from higher unit-labor costs. If pricing power remains limited, owing to abundant spare capacity (which we believe to still be the case in most industries), the main effect of slower productivity growth will be to weigh on corporate profits. Therefore, our expectation is that the corporate sector will grow profits much more in line with nominal gross-domestic-product growth than has been the case in the recent past.

-- Joshua Shapiro

Jobs: Another Whirlwind Ahead?
Jumping to Conclusions
by Advisors Capital Management

W. 115 Century Rd., Paramus, N.J. 07652
Sept. 6: If the Fed ceases its rate hikes, as now expected by the market, more...might be necessary next year. Pre-hurricane, growth was unambiguously strong and unemployment declined to a cyclical low of 4.9%...Policymakers should keep rates unchanged if economic growth is likely to slow. The next employment report will reveal a very large decline that will be echoed by other monthly reports...the direct impact of the storm. Subsequent months will show government and insurance money for rescue, repair and rebuilding. As [after] 9/11, that increased spending might stoke an even stronger pace of growth.

-- Charles Lieberman

Gold Not Shining
Market Update
by Weekly Technical Rap

119 Grant Blvd., Dundas, Ont. Canada L9H 4L9
Sept. 4: The gold market continues to disappoint and frustrate, judging by the action in the gold stocks, with the HUI Index trading as low as 200 [recently]. It seems the breakout we saw a few weeks ago was a false breakout.

-- Dave Skarica

Supply-Side Trouble Spots
Monthly Newsletter
by Aden Forecast

P.O. Box 790260, St. Louis, Mo. 63179
Sept.: [High-priced] oil will increasingly hurt more consumers, who will likely cut back on spending. Since consumers account for two-thirds of economic growth and nine out of the past 10 recessions have coincided with rising oil prices, it could also trigger a recession [and] affect the housing boom.

Oil has already soared nearly 550% over the past six years and it's up 65% so far this year. Normally, when any market rises this far, so fast, it eventually exhausts itself and turns down. But oil is in a different category...demand keeps growing, and could soon outpace production supplies.

So let's review the supply side first. OPEC produces most of the world's oil, which primarily comes from the Middle East, and the three largest oil countries have nearly half of the world's proven oil reserves. These are Saudi Arabia, by far the biggest, followed by Iran and Iraq. If you add Venezuela, No. 5 on the list, then four out of the top-five oil countries, or 80%, are currently or potentially trouble spots.

-- Mary Anne and Pamela Aden

Disposable-Income Pinch
Blue Chip Economic Forecast
by Arizona State U./Carey School of Business

P.O. Box 874011, Tempe, Ariz.
Sept: As the government's debt grows and consumers increase their debt-service ratios, the question looms: How long can the spending continue without severe consequences?

A quick look at household debt-service payments as a percent of disposable personal income reveals that consumers are feeling a much harder pinch in the budget than they have during past recoveries.

While rising housing-price valuations may offset some of the uneasy feeling about these debt burdens, there is widespread uncertainty about the exuberance in the real-estate market limits.

Mortgage-debt payments as a percent of disposable personal income also have risen sharply over the last two years. The last time such a ratio of mortgage-debt payments occurred was in the second quarter of 1991. [the economy remains in a growth cycle]

-- Dawn McLaren

Eating Away at the Expansion
Technical and Fundamental Analysis
by the Konlin Letter

5 Water Rd., Rocky Point, N.Y. 11778
Sept: Last month's economic data were [weaker] than economists expected...The ISM index dropped in August, to 53.6. Durable-goods orders plunged 6.5% in July, the largest decline since Jan. '04...Energy costs have been slowing eating away at the expansion...Negative data mount, with inventories of unsold homes at a 17-year high. Foreclosures in the property sector leaped 4.7% in July, a monthly record year-to-date, and existing-home sales declined 2.6%, with the red-hot condo market leading the drop...

The U.S. economic expansion was based on affordable oil and dependent on consumer spending. It was enhanced further by borrowing against the No. 1 soaring asset -- home value...[With] interest rates raised for the tenth time to 3.5%, a four-year high and the longest tightening cycle ever...the economy has been on course for another shameful Fed-induced recession, confirmed by the flattening yield-curve, about to invert.

....Thanks to the Bush supply-side tax cuts, this economy has absorbed one blow after another. Now, the devastating...blow by Katrina has exposed our vulnerability to energy-supply disruption. The gasoline-price spike is critical, and, if continued, will dramatically slow the economy.

-- Konrad Kuhn

Underweighting Financials
The Global Spin
by Hahn Investment

1800-130 King St. W., Toronto, Ont. Canada M5X 1E3
August 15: Financial-service stocks in North America have been on an upward tear for years -- in fact, for around two decades...Debt relative to income, gross mispricing of risk and rising interest rates are the main factors that have played a role in every ensuing financial crisis of downturn of past history.

Critically, all of these factors are now in play. Credit is easy, debt is booming, and lending standards are near rock-bottom, investor are reaching for higher yield regardless of quality and risk, and interest rates are clearly rising in North America. Given all that, it is not untimely to at least think about underweighting financial stocks.

-- William Hahn


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