Warren Buffett stepped in on a critical financing of a merger of Mars and Wrigley corporations.  The two produce very distinct lines of candy, Mars producing nearly every candy bar under the sun and Wrigley with the lions share of gum.  This opportunity is great for both candy producers and Buffett as well.  Any investment good enough for Buffett is good enough for the rest of the market.

Buffett’s interest would only go as far as a $2.1 Billion minority stake in Wrigley after the companies are merged.  Warren Buffett is known for buying only the most simple of companies, those that are easily understood and have a great long term perspective.  He holds huge stakes in companies like Coca-Cola, American Express, Budweiser and many other corporations that market products directly to consumers.  This is the perfect business to fit in with the many different positions he currently owns.  Eventually it seems as though Berkshire will have a horizontal monopoly on the consumer goods market.

Privately held Mars posted a serious offer for Wrigley that amounted to $80 per share, a huge premium even over today’s closing price of $76.91.  The deal will be done entirely with cash as Mars is still family owned and operated, Buffett’s investment is merely for a small stake as an investment rather than a controlling partner.

While Mars is fronting some serious cash for Wrigley with a bid that is equal to a price earnings multiple of 35, the company hopes a merger will allow the two to operate a more simpler marketing budget while competing with other confectioners.  Wrigley also gives Mars a leg up on the gum industry, one product that is absent from the Mars line.

One interesting note from the transaction is the Wrigley will take on Mars’ nonchocolate confections such as Skittles and Starburst.  The specialization of the two companies promises a better product and a better ability to grow.  Wrigley’s huge exposure to developing markets is another key marker for Mar’s which has huge success in the US but limited growth overseas.

In almost all cases this is a great deal.  Buffett wins out by taking a good position in a reputable company, shareholders get a huge premium and the deal should go through without delay to be completed entirely in less than 12 months.

The market showed is weakness when oil rose $3 on news that a US ship had fired warning shots at Iranian boats.  Investors are worried that a new war with Iran may disrupt supply and drive the price up even higher,  Oil closed up $2.46 to $118.52 per barrel.  Military action is disliked by traders who fear a weakening US dollar and supply troubles.

The rise in prices was due to a possibility of supply loss, not an actual decline in supply.  This tells us that if a supply drop would occur, prices would be likely to rise by $5 to $10 just on news.  Who knows how much past that, when the numbers are finally released.  Oil prices are very sensitive to a small disruption in supply, all of the worlds oil is purchased almost as soon as its produced.  Thus there is little room for comfort in a serious supply squeeze.

Oil prices have started affecting the commercial sector.  FedEx and UPS are positing lower earnings due to high fuel costs, foreign manufacturers spend more and more to import/export goods, airlines lost $10 Billion mostly from fuel.  As the price of oil makes its way down the chain, the end consumer is starting to pay higher and higher prices for almost anything.  Gas alone is $3.69, cutting heavily into the pocketbooks of American Citizens.

Relief is out of sight for now.  The economic stimulus package promises more inflation and a weaker dollar, eventually raising the price for commodities such as oil.  Fed plans to boost the lending industry have also pumped hundreds of billions in fresh credit to the market.  Oil prices have no where to go but up, usage will not fall but instead increase as the summer driving season heats up.

At this point its time to pay very careful attention to the price of oil.  Manage your portfolio around those companies that are the least negatively exposed to oil, it’s a terrible time to be holding a transportation company but a great time to own a refinery.

While we don’t hear much as for figures on the current real estate mess, there is much to worry about. News agencies and media have taken notice to a growing number of foreclosures, but very few of the times are actual statistics shown. The best projections have now put California real estate foreclosures at 9 times what they were in 2003-2004 when them market was booming. Even in 2007, with foreclosures numbering 250,000 the figure is almost doubled year to year with an estimated 450,000 homes going under in 2008.

This is a very sobering look at how the housing bubble is coming to an end. Foreclosures mean that houses will be taken by their owners (the banks) and readily resold on the market. If this holds true, California is going to see an additional 450,000 homes on the market in 2008-2009 due entirely to foreclosures. The balance of real estate will quickly turn to the buyer from the seller. In the days of the real estate boom, a house could be bought and sold for a tidy profit in under a month. Now it takes several months to sell a home even at a depressed price.

There is one thing for certain, California real estate will soon be sold on the cheap. Investors and homeowners take notice, an influx of homes for sale will again drop prices. This cycle will put even more homeowners in distress as their HELOC and other mortgage loan debt will be higher than the value of the house. This is known as being upside down, where the amount of debt does not equal the amount of equity in the home.

If real estate prices continue to drop, as they should with the growing supply, more homeowners will have to foreclose. This is a deadly cycle that will repeat itself until the houses find a reasonable market value or until the investment days of real estate come back around. Either way, the market value should be much lower than current value. Selling a home takes much longer now than it did in the boom days, which means more mortgage payments in between sales and more debt for homeowners.

For the seasoned investor, times like this should call for a prudent but optimistic look at buying real estate in hot markets like California. While things don’t look great right now, there will be a sizeable amount to make when real estate hits its lows and supply ebbs. But for now, its best to take a pessimistic look at buying a second home. Until this new supply of foreclosed homes is sold, there isn’t much stopping real estate prices from falling.

Banks typically sell foreclosed homes on auction, which can mean discounts as high as 50% for luxury housing. When people start getting word that homes are selling for $400,000 on a typically $750,000+ block of homes, the rest of the real estate will assume a similar price point.

The worries of the housing sector are starting to show overseas.  Today the Bank of England announced a package very similar to the Federal Reserve’s action to swap treasuries for mortgage debt.  The BoE acted to fund up to $100 Billion of government bonds for trade with mortgage backed securities.  This comes just weeks after Northern Rock was absorbed by the English government and the Federal Reserve’s actions for swap plan.

The Bank of England has been resetting rates alongside the Federal Reserve.  Since December, the Bank of England has lowered rates 3 times in an effort to spur borrowing and cut into liquidity problems that are plaguing banks and borrowers alike.  The Federal Reserve offered $200 Billion in guaranteed loans which is double the amount the BoE is currently offering, though there are many more houses and thus owners who are upside-down on loans in the US than in the UK.

This is comparatively good news for the United States.  As we’ve seen in recent weeks, the stock market has rallied on comparative news, that the market has gotten better though still doing worse than the long term average.  While we’re much better off now than in late 2007, many lenders are still writing off huge amounts of debt and assuming large losses.

It is hard to say how this will affect things in the UK.  The Pound has favored well against the other currencies, trading at nearly twice the value of the USD but losing much of its value to the Euro.  Investors who sought protection from a fallout in the US markets fled to Europe, many into the Eurozone and a few into the UK.  If housing problems persist in England, the chance of a drop in the value of the GBP becomes even more likely.

A quick fix of $100 Billion will help English lenders, but at the cost of inflation.  US consumers have already seen the cost of high inflation on the price of commodities such as food and oil but also on consumer goods which require more and more money to ship and produce.  The new funds will be made available to banks who want to temporarily “loan” the government their bad loans while using the new funds for further investment or to ease negative liquidity.

The US dollar has been strong, very strong up until the last five years.  Now that the US dollar is making new lows, trade has increased for many US based companies that can now compete with foreign manufacturers.  The low value of the US dollar is great for many industries, automakers, travel and resort companies and now chipmakers.

IBM released very promising news today that their first quarter earnings jumped 26 percent from a year ago.  The higher sales are attributed to a weak dollar which allows IBM to compete with countries like Japan and China which have enjoyed devalued currencies to grow their tech industry.

Automakers
Automakers are the companies that can benefit most from a cheap dollar.  GM and Ford sell many of their compact cars in Europe, now that the Euro is worth twice as many dollars as it was just a few years ago, more orders are likely to flood these US based businesses.   Even after pension costs of over $1000 per car for General Motors, the currency market should bring more business from foreigners.  This turnaround of trade certainly helps these two businesses, but the US economy as a whole.  Devalued currency brings more trade to the United States.

Travel and resorts
Travel companies also benefit from a weak dollar.  Europeans are quick to take advantage of cheaper US vacations.  Popular travel sites in the United States are bringing in less Americans but more travelors from Europe and Asia.  While a hotel room might have cost 100 Euro in 2003, that price is now down to 50 Euro.

A weak dollar is not entirely bad.  Although domestic inflation might worry some Americans, its helping US exports gain an advantage against cheaper nations.  We might finally see a shift from made in China to made in the USA.  This can be nothing but good.

The merger between Delta and Northwest will create the largest airline in the world.  Both companies are struggling financially and through a steady loss of customers and government security, but will the two companies be allowed to merge and create one large, super airline?

Much evidence suggests that the company will not be able to merge just because of the sheer size of the two companies.  If the merger were to go through, it would be like Pepsi and Coca-Cola merging only to leave the small independent soda makers to try to fight through a monopoly.  I doubt very seriously that the companies will be able to turn a profit even when working together, neither of them suffers severely from competition.

Other than the banking industry, no other industry besides airlines has seen this much consolidation.  After 9/11, new security measures and a scared public has sent people away from airlines and back to ground transportation.  High fuel costs disproportionally hit airlines which only make a few hundred dollars each flight from passengers, the majority of their income comes from extra services and mail carrying.

I see little to gain from a merger between these two mega giants other than less pilots with a job and higher ticket prices.  There will be little regional competition on other airliners as these two control much of the domestic flights in the United States.  At this rate, I don’t think this merger stands a chance with the monopoly regulations in place.

GEs report of lower earnings stunned the street but shouldn’t have surprised anyone familiar with the company.  Amongst light bulbs and appliances, GE has a huge credit portfolio from credit cards to car loans and even home loans.  GE money bank is one of the largest in the world and has huge exposure to the subprime industry.

Many store cards meant to be used in only one department store are issued by GEMB.  These cards generally have low limits (as low as $200) and issued to nearly anyone who applies.  Many of these card users are people without the credit to get an all purpose card or those who like to get the benefits of a store card.  Rarely do high credit score borrowers look for these kind of cards as they are known to lower the amounts you get from premium credit card issuers.   It is believed that American Express or other high end offerings don’t like to give cards to people with store card only experience.

While GE does lead the world in many different technologies, namely the compact fluorescent light bulb, the manufacturer has way too much exposure to the financial industry.  When most people think GE they don’t think banking, the stock was able to escape the financial sector bust but now the bill is coming due.

I wouldn’t consider owning GE for a variety of reasons, first and foremost being its exposure to the subprime lending industry.  If we do in fact go into a recessionary period, there are going to be even larger write-offs and lower expectations for the company.

Next is its huge market cap.  Even after shedding 12% of its value in just one day, GE trades at a market cap of $320 Billion.  To make any considerable amount of money, this stock has to build up a lot in equity.  A 10% gain would be a $32 Billion difference, to make 50% we’d have to see an increase in value of $160 billion.  As you can see, its just too hard to sustain such growth, especially when the stock already sells at a PE ratio of 14.   That’s a pretty high value for a company of this size.

In my opinion, GE has a lot more to lose at this point than it stands to gain.  Its likely that the subprime crisis will affect all parts of its business.  Lesser demand for its manufactured goods like refrigerators and air conditioners and failing payments in its credit division makes GE an even worse investment.  The worst part about the situation is that the company likely holds plenty of debt on its own products.

GE is a neither buy or sell at this point.  Economic outlook is rather bleak, so the company is unlikely to rebound any time soon.  Its credit division will certainly continue to take a beating, especially no secured credit cards and other personal loans.  If its manufacturing core does well, it will only help pare losses in the credit market.  No position, even at a 12% discount from yesterday.

Oil prices are soaring and its affecting every business.  Food prices are out of control as much of the worlds food supply is now being used to produce ethanol, rather than to food the world.  Energy prices affect the cot of nearly every commodity because it must first be shipped to market to be sold.

Many companies including UPS are now restating their earnings reports and forecasts to adjust for higher oil prices.  For a parcel service such as UPS, energy is one of the biggest expenses for shipping goods.  Corporations like UPS and Fedex will continue to get battered as the price of oil goes up.

Their main competitor, US Postal Service which is state owned, can be subsidized by tax dollars to keep the price low.  While the Federal government has always sought to run the postal service at a nominal profit, the losses continue to pile up.  Unlike Fedex and UPS, the postal service can subsidize fuel costs and keep prices low.  If fuel prices continue to rise, shipment through the two independents will be considerably more than USPS which can keep costs low by using tax dollars.

Airlines are also losing heavily on the higher oil prices.  Airline ticket prices have skyrocketed after September 11th and new security measures.  Now with high oil prices, the airlines must again raise ticket prices.  Loyal customers hate to see rate increases and the security and pricing troubles are certainly weighing down the whole industry.

The price of oil can affect nearly everything we buy.  Every item at the store will go up in price as oil costs rise, airline tickets are rising, and so is the cost to send a package cross country.  In this day and age its impossible for even the non-driver to avoid high oil costs.

The sentiment that the market always goes up has long been in play and is still the fact used by most professional money managers to assume positions in beaten down companies.  The average is about 10.5% a year for large cap stocks over the long run, some 100+ years.

Market timing is something that is critical for a short term trader and not so necessary to the retirement fund manager.  The short term trader needs to show huge daily profits from relatively small movements in price.  A move from $25 a share to $26 would be a gift from the heavens for most full time traders.  For the long term investor, that’s just a 4% return, very unlikely to make a considerable difference in the long run.

When the markets get beaten down, look at the last few months, the new favorite term is “timing the market.”  Many investors tried to time the real estate market only to get trounced, many ran out the commodity boom and the USDJPY carry trade watched their profits unravel as it broke down.  Market timing can be a difficult thing to learn but can bring huge gains for correct timing.  The losses can be huge as the gains, many investors lose big by chasing returns.

Short term traders do not profit from the difference in value in a company, they profit by merely buying X stock and selling it for more than they paid.  Traders, unlike investors, just want to flip their shares for a profit rather than hold on for the long term.  For this reason, data such as corporate earnings and economic outlooks play a very minor role in the short term trader.  Long term analysis is unlikely to affect a trader’s short term perspective.

For the rest of us, market timing really isn’t that critical.  As much as we’d like to follow the world’s best investments and be invested in each of them, its entirely impossible.  Most of us have our retirement portfolios invested into a series of profitable companies rather than the hot biotech down the street.

There is some role for market timing in a bear market, especially for the long term investor.  A bear market is likely to bring down the values of all stocks, even those with strong fundamentals.  A boring market in the US looks like a great opportunity for foreign countries.  Fundamentals remain strong even amongst this very technical-driven investment cycle.

As things weaken on the American front, there are still many great investments that have become oversold due to market sentiment rather than an actual difference in company quality.  Take for instance the deep-discounters, the fall in prices was due mostly to a market event than an internal event.  If anything, the balance sheets of deep-discounting corporations have never looked better.

And as much as the market hates the financial sector as a whole, there are still many great investments.  Firms with limited exposure to subprime mortgages have been hit just as hard as those with maximum exposure.  The rebound for these companies who managed their investments wisely will be huge, driven by profits rather than the rumor-mill.  Just by being in the financial industry it is likely to see a stock price tank by 20-30% without any hard evidence that the company will be doing worse.  This kind of sentiment is easy to beat with high quality, profitable stocks which are still lingering in the mess of illiquid lenders.

This past week produced economic data that looked bad to say the least.  Job losses are the highest since hurricane Katrina and the amount of people seeking benefits is actually higher than the months after the catastrophe.  Job losses are both a lagging and a future economic indicator as they judge how corporations are cutting back and also shows that the production of wealth is also limited.

Wealth can only be generated by producing more than you need.  In this case, lets take a lemonade stand as an example.  Sally has a lemonade stand, to do business she need her factors of production, lemons, water and sugar (promotion not included).  She buys $5 worth of lemons water and sugar which will produce 5 gallons of lemonade that she can sell for $3 per gallon.

Sally’s investment is a mere $5 but she is able to produce $15 worth of lemonade.  In this example she can sell her $15 in lemonade and produce a $10 profit, which is wealth.  She provides a good or service that people want (lemonade) for a higher price than it costs her to make.  Customers are happy because they have their lemonade and she is happy because she has produced a profit.

The job market slowdown shows either an increase in productivity, unlikely, or a decrease in overall business activity.  Workers are needed to produce goods and profit for a company, so when they are laid off, it appears that business activity and wealth creation are temporarily slowed.

A corporation could lay off workers for a variety of reasons, but it is usually to cut costs and limit the amount of one good they can produce.  Corporations would much rather have a smaller workforce work at 100% capacity than a much larger force work at 70% capacity.  The difference between 70% and 100% is waste to a company.

When the job market slumps it is indicative that the “wealth creators” are also taking a slump.  If this is the case, the overall size of an economy is shrinking because it is no longer producing as much as it once was.  In this case, 80,000 jobs were lost indicating that the economy will shrink as it produces less.

No wonder why job losses have Wall Street in an uproar.  A cut of 80,000 jobs means less is being produced.  The economy is by all definitions shrinking, or showing the effects of a recession.