Commentary: EDA Industry Update May 2006 -- What did the Last Quarter Bring?
by Dr. Russ Henke and Dr. Jack Horgan
November 2005 and
February 2006 EDA Commentaries by the authors (published on EDACafe.com), the then-current yearly and quarterly financial performances of a selected group of publicly traded Electronic Design Automation (EDA) companies were analyzed and compared. Expectations regarding the future financial performances of these same EDA entities were documented as well. The originally selected companies were Altium, Ansoft, Cadence, Magma, Mentor Graphics, Nassda, Synopsys, Synplicity and Verisity. .
Note: As part of continuing EDA industry consolidation, two previously-selected EDA vendors, namely Verisity and Nassda, have been acquired by others and hence have been dropped from the quarterly report.
This May 2006 report covers the performances of the remaining seven for the nominal First Quarter of 2006.
In this issue, EDA News Highlights are followed by the revenue & earnings performances of the selected group of EDA players for Q1 2006, and then EDA vendor by vendor details. EDA Vendor stock prices are discussed. Finally, individual EDA vendor forecasts for Q2 2006 are provided. Enjoy!
EDA News Highlights
On May 1, 2006 the Semiconductor Industry Association (SIA) reported that worldwide sales of semiconductors of $59.1 billion in the first quarter of 2006 were 7.3% higher than first quarter of 2005, when global sales were $55.1 billion. First-quarter sales declined slightly (by 1.3%) from the fourth quarter of 2005, when sales were $59.9 billion. The SIA said the sequential decline reflected normal seasonal patterns.
On May 16, 2006 Synopsys announced it is expanding its presence in ESL design by acquiring Virtio Corporation, creator of virtual platforms for embedded software development. The combination of Synopsys' System Studio solution with Virtio's virtual prototyping technology could help accelerate systems to market by giving software developers the ability to begin code development much earlier than with prevailing methods. The acquisition is also said to put Synopsys in a unique position to provide an integrated implementation, verification and IP solution to speed up hardware and software development.
How did the Seven EDA Vendors fair during the First Quarter of 2006?
As shown in Table 1, the combined revenue performance of the seven EDA vendors was $869 million, a healthy increase of 11.6% from the $780 million in the first quarter of 2005, but a decrease of 8% from the $946 million in the just prior quarter. Year-over-year, all the EDA firms reported Q1 revenue increases except for Synplicity, which experienced a slight dip. Magma sported the largest year-over-year percentage growth at 23%. All the others, save Mentor Graphics, enjoyed double-digit % growth. On a sequential basis, Ansoft led the pack with 26% growth. Magma and Synopsys also registered reasonable growth at 6.5% and 5.6%, respectively. All the other firms suffered sequential quarter double-digit % declines.
Figures 1 and 2 above provide additional revenue comparisons among vendors. In Q1 2006, Cadence was number one at 37%, Synopsys number two at 32%, and Mentor Graphics number three at 20%. The top three combined accounted for 89% of total revenue for the group of seven. Magma was a distant fourth at 5%.
Turning to earnings performances in Q1 2006, Table 2 shows that the EDA group of six (Altium did not report earnings) reported a combined net income of $24.5 million. This was a substantial increase from a combined net loss of $8.7 million a year earlier, but it represented a significant drop from the $44 million in the just prior quarter. Cadence and Synopsys had the largest $ earnings growth year-over-year. Magma and Mentor had net losses in the 2006 first quarter and also declined relative to the same quarter a year ago. On a sequential basis, Mentor had the largest decline going from a net gain of $15.4 million in Q4 2005 to a net loss of $5.8 million in Q1 2006. Mentor loss alone accounted for the group-of-seven's combined sequential quarterly decline. Ansoft and Cadence had good sequential earnings growth.
Company by Company Q1 2006 details:
On April 4, 2006 Altium Limited reported financial results for its third quarter of fiscal 2006, the period ended March 31, 2006. Revenue was $7.46 million in Q1 2006. This represents an increase of approximately 10% in on the results reported for the corresponding March quarter in the previous year, and a drop of 16% in US$ from the just prior quarter. The most notable results for the most recent quarter were in Altium's two largest markets, the United States and Europe, where sales were up 36% and 37%, respectively. However both territories had less revenue than the previous quarter.
Nick Martin, Founder and CEO, said, "Altium has delivered a solid finish to the quarter, with increased customer demand and strong sales growth in key regions for the third consecutive quarter. Based on these early signs of a sustained recovery and steady growth, we remain confident about the future. We are relentlessly continuing the hard work of the past six years to ensure we have the products, the infrastructure and the sales strategies in place to transform our technology leadership position into increased shareholder value over the longer term."
Table 3 below shows the revenue breakdown by geography in local currencies as reported by Altium.
On May 23, 2006 Ansoft Corporation reported impressive financial results for the fourth quarter of its fiscal year the period ended April 30, 2006. Total revenue for the quarter was $24.7 million, a 14% increase over the $21.7 million in the same quarter a year earlier and a 26% increase over the $19.7 million in the previous quarter. License revenue was $15.7 million, accounting for 63% of total revenue. This was a 9.4% increase year-over-year and a 39% increase sequentially. Service revenue was $9 million, accounting for 37% of total revenue. This was a 23% increase year-over-year and an 8% increase sequentially.
North American revenue accounted for 42% of total revenue, European revenue 16% and Asia Pacific revenue was also 42%. North American revenue increased 11.5%, European revenue 7.5% and Asia Pacific revenue increased 17%. On a percent of total revenue basis, North America and Europe were down one percent while Asia was up 2%. Revenue from EM was 17% of total revenue and revenue from High Performance was 83% of total revenue. The top three customers in the quarter were Intel, Fujitsu and Northrop Grumman.
For the fiscal year 2006, total revenue was $77 million, an increase of 14% from the $68 million in fiscal 2005. License revenue was $43 million, an increase of 9%. Service revenue was $34 million, an increase of 21%. Geographic and product segments for the year were very close to the percentage breakdown in the last quarter.
Net income for the quarter was $8.3 million. This was 75% more than the $4.7 million a year ago and a 94% increase form the $4.3 million in the just prior quarter. The results for the quarter included a $1.0 million income tax benefit associated with the reversal of the Company's remaining valuation allowance for certain U.S. Federal net deferred tax assets.
Nicholas Csendes, Ansoft's President and CEO, said, "We are pleased to report record revenue and earnings for the fourth quarter. For the next fiscal year, we anticipate continued revenue growth of around 10-15%."
On April 26, 2006 Cadence Design Systems, Inc. reported results for the first quarter, the period ended March 31, 2006. Total revenue for the quarter was $328 million, an increase of 12% over the $292 million in the first quarter of 2005, but a decrease of 13% from the $378 million in the fourth quarter of 2005. Product revenue was $208 million, accounting for 63% of total revenue. This was an increase of 20% year-over-year, but a decrease of 19% sequentially. Maintenance revenue was $88 million, accounting for 27% of total revenue. This was an increase of 1.1% year-over-year and a decrease of 0.4% sequentially. Service revenue was $32 million, accounting for 10% of total revenue. This was flat year-over-year and deceased less than 1% sequentially.
Table 4 below presents the breakdown by product segment. The original data provided by Cadence was in terms of percentages of total revenue. Functional Verification and Custom IC Design had solid growth year-over-year. Sequentially, only Custom IC Design and System Interconnect experienced growth. For the quarter, Function Verification accounted for 26% of total revenue, Digital IC Design 20% and Custom IC Design for 27%.
On a geographic basis, North America accounted for 51% of total revenue, Europe 19%, Japan 21% and Asia 9%. On a year-over-year basis, NA was up 24%, Europe up 33%, Japan down 22% and Asia up 26%. All but NA (which grew 5%) had double-digit % declines sequentially.
For the quarter Cadence reported net income of $21.8 million, way up from the $1 million in the same quarter a year ago, but down 18% from the $26.6 million in the just prior quarter. In the first 2006 quarter, Cadence enjpyed $25 million in net other income versus $4.5 million a year earlier, and $3.7 million in the previous quarter. This quarter's charges were $30 million in stock based compensation (versus $0 a year earlier) and restructuring of $0.5 million (versus $17.5 million).
Mike Fister, president and CEO of Cadence Design Systems, Inc., said, "Consumer electronics, wireless and networking are driving the market. All of these require our customers to rapidly develop analog mixed-signal and system validation expertise. The performance of our custom IC and verification businesses this quarter clearly demonstrates our market leadership."
Bill Porter, executive vice president and chief financial officer, added, "We had a good quarter across all geographies, especially in Japan, and we continued to make progress on our objectives to demonstrate growth, execute consistently and achieve our operating targets."
On April 27, 2006 Magma Design Automation Inc. reported record results for its fourth quarter and fiscal year 2006, the period ended April 2, 2006. Total revenue for the quarter was $44 million, an increase of 23.3% over the $35.7 million reported for the year-ago quarter, and an increase of 6.5% over the $41.3 million in the just previous quarter. License revenue was $37.8 million, accounting for 86% of total revenue. This was a 25% increase year-over-year and a 8% increase sequentially. Services revenue was $6.3 million accounting, for 14% of total revenue. This was an increase of 13% year-over-year, but a 2.7% decrease sequentially. Backlog accounted for 64% of total revenue. North American revenue accounted for 70% of total revenue and increased roughly 50% both year-over-year and sequentially. Europe accounted for 8% of total revenue, Japan 8% and Asia Pacific 14%. European revenue fell 41% year-over-year and 77% sequentially.
Net loss for the most recent quarter was $6.2 million, compared to net losses of $5.6 million and $6.6 million a year ago and a quarter ago, respectively.
For the fiscal year Magma reported revenue of $164 million, an increase of 12% from the $146 million in fiscal 2005. License revenue was $139 million, accounting for 85% of total revenue and up 12%. Services revenue was $24.8 million, accounting for 15% of total revenue and up 13%.
Net loss of the year was $21 million, compared to a net loss of $8.6 million in fiscal 2005. G&A expense for fiscal 2006 was $20 million more than fiscal 2005. Litigation expense accounted for $16 million in fiscal 2006.
On April 27, 2006 Magma announced it has appointed Pete Teshima as the company's new chief financial officer. Teshima, who has served as the company's vice president, finance since joining Magma in 2004, will report to President and Chief Operating Officer Roy E. Jewell.
On April 17, 2006 Magma unveiled Talus, an all-new IC implementation product line. The Talus LX and Talus PX products are said to provide the foundation of the Automated Chip Creation methodology for logic and physical design engineers. Both are built on Magma's unified data model architecture. Talus LX synthesizes chip RTL for given timing, power and placement constraints and automatically generates physical partitions and power and clock prototypes. Talus PX provides complete physical implementation of the design including near abutment layout, final physical partitions, power and signal routing, and chip-level clock tree synthesis. Both products are currently in limited release.
On May 24, 2006 Magma announced it had repurchased, in privately negotiated transactions, $40.3 million face amount (or approximately 38% of the total) of the company's zero coupon convertible subordinated notes due May 2008 at an average discount to face value of 13.25%. Magma spent an aggregate of approximately $35.0 million on the repurchases. The resulting net pre-tax gain of approximately $4.8 million from the repurchase of the convertible subordinated notes will be reported in Magma's GAAP financial statements for the first quarter of fiscal 2007.
Rajeev Madhavan, chairman and CEO of Magma, said, "We made significant accomplishments in the fourth quarter and fiscal 2006 as a whole. We achieved record revenue in each of the last four quarters and all key financial metrics finished within or above our target ranges. More and more customers are finding Magma to be the best software for designing large, complex and high-performance designs, and many have expressed a great deal of early interest in our recently announced Talus product line. We enter fiscal 2007 with a great deal of momentum."
On April 26, 2006 Mentor Graphics Corporation announced its financial results for the first quarter of 2006, the period ended March 31, 2006. Total revenue for the quarter was $176 million, an increase of over 7% from the $164 million in the same quarter last year, but a decrease of 20% from the $221 million in the fourth quarter of 2005. Revenue from Systems and Software was $102 million, accounting for 58% of total revenue. This was an increase of 12% year-over-year but a decrease of 29% sequentially. Revenue from Service and Support was $73 million accounting, for 42% of total revenue. This was an increase of less than 1% year-over-year and a decrease of almost 3% sequentially.
The year-over-year increase in Systems and Software was due primarily to strength in IC Design to Silicon and Integrated System Design, partially offset by weakness in Emulation product revenues. Revenue strength in IC Design to Silicon was led by Calibre RET (Resolution Enhancement Technology). Revenue strength in Integrated Systems Design was primarily concentrated in the Company's Board Station product line (way to go, guys!). The increase in revenue was partially offset by an unfavorable currency impact of approximately 3% due to the strengthening of the dollar for the period.
In the quarter revenue from the Americas accounted for 36% of total revenue, revenue from Europe 28%, from Japan 22% and from Pac Rim 14%.
Compared to the first quarter of 2005, bookings grew nearly 250% in IC Design to Silicon and 20% in Scalable Verification, while Integrated Systems Design was flat and New and Emerging was down 15%. Strength in IC Design to Silicon was driven by the production rollouts of 65nm processes, as well as 45nm prototyping, with significant purchases of Calibre DFM products.
Net loss for the quarter was $5.8 million, compared to a net loss of $4.4 million a year earlier, and a net gain of $15 million in the just prior quarter. In the last quarter, there was a $5.2 million tax benefit that was cancelled out by $5.2 million in special charges.
Walden C. Rhines, chairman and CEO of Mentor Graphics, said, "Results in the first quarter were driven by customer ramp-up of advanced semiconductor designs at 90nm and 65nm, plus initial prototyping at 45nm. Semiconductor companies are expanding leading-edge capacity, which is good news, especially for Calibre® design-for-manufacturing products. Customer adoption of new products was evident in the quarter, as two-thirds of the value of our top ten orders was from the addition of new products to existing contracts."
On May 17, 2006 Synopsys, Inc. reported the financial results for its second quarter, the period ended April 30, 2006. Total revenue for the quarter was $275 million, an increase of 12.5% over the $244 million in the same period a year ago, and an increase of 5.5% from the $260 million in the previous quarter. Time Based License revenue was $209 million, accounting for 76% of total revenue. This was an increase of 19% year-over-year, but a slight decrease of almost 1% sequentially. Revenue form up front licenses was $25 million, or 9.4% of total revenue. This was an increase of 51% year-over-year, and a 210% increase sequentially. Revenue from Maintenance and Service was $39 million, accounting for 14% of total revenue. This was a drop of 23% year-over-year and a drop of over 3% sequentially.
From a product perspective, 75% of revenue came from core Galaxy design and Discovery verification solutions, 20% came from IP and manufacturing businesses, and 5% came from professional services.
Geographically, Japan and North America were the strongest regions in the quarter in terms of orders. Revenue distribution reflected the very strong business in Japan, which came in at 18% of revenue. North America was 54%, Europe was 15%, and Asia Pacific came in at 13% of revenue. Year-over-year NA revenue was up 14%, Europe 5.5%, Japan 20% and AP 4.4%.
One Synopsys customer accounted for more than 10% of revenue in its second quarter.
Vicki Andrews, Synopsys' head of Sales, will be leaving the company next month to spend time with her family. Best wishes, Vicki!
Aart de Geus, chairman and CEO of Synopsys, said, "Q2 was yet another very solid quarter. For the third quarter in a row, business came in notably above our targets, and our technology continues to demonstrate strong momentum. This outstanding performance was driven by all our product groups, but especially implementation, analog and digital verification, and design for manufacturing. We also executed very well against our financial goals, meeting or exceeding all our financial targets and making good progress on our operating margin."
On April 25, 2006 Synplicity, Inc. reported results for the first quarter, the period ended March 31, 2006. Total revenue was $14.5 million, a slight decrease from the $14.6 million in the first quarter of last year, and an 11% decrease from the $16.3 million in the just prior quarter. License revenue was $7.1 million, accounting for 49% of total revenue. This was a decrease of 11% from the $8 million in the same quarter a year ago, and a 20% decrease sequentially from $8.9 million. Maintenance revenue was $7.4 million, accounting for 51% of total revenue. This was an 11% increase year-over year, and essentially flat compared to the previous quarter.
Net income for the quarter was $1.2 million, up 129% from the $515,000 in the year ago quarter, and a 55% decrease form the $2.6 million in the just prior quarter. Charges against earnings included $854,000 in restructuring charges and stock-based compensation expense of $961,000.
Gary Meyers, president and CEO of Synplicity, said, "During Q1 we made important progress in several areas. We are confident that our decision to withdraw from the cell-based and structured ASIC markets will produce greater returns in our core areas of business. Synplicity has been the leading provider of FPGA synthesis tools for the past five years and by redeploying our R&D investments, we will strengthen our core products and enable long term growth and increased shareholder value. Additionally, I am pleased to report that we experienced strong order growth during the quarter, including several large multi-year customer agreements. We believe this is an indication of a growing perception of our product leadership within the customer base."
EDA versus MCAD
The detailed quarterly performances of a selected group of public MCAD Vendors has been provided in the authors' May 2006 MCAD Commentary recently published on MCADCafe.
The three top mechanical CAD companies (Autodesk, Dassault Systemes and UGS) sported revenues of $1,017 million in Q1 2006, 30% more than the $779 million in revenue for the top three EDA companies (Cadence, Synopsys and Mentor Graphics). The MCAD vendors also generated 3 times the amount of earnings. MCAD earnings were 6.6% of revenues, compared to 2.7% for the EDA vendors. See Table 7 below.
Keep in mind that Autodesk sells its products predominantly through valued added resellers and distributors. Dassault Systemes sells predominantly through IBM and its Business Partners and in some instances, notably SolidWorks, through VARs. Thus, if one were to count actual end user purchases of the latter MCAD products, the combined MCAD revenue total would raise the Big 3 MCAD dollar total substantially. On the other hand, Autodesk has not-insignificant revenue outside MCAD in AEC, GIS and Media/Entertainment.
The comparison of earnings across the two industries is also difficult general due to a plethora of one-time charges associated with acquisitions. The earnings comparison for UGS is further complicated by purchase accounting adjustments related to its Venture Capital buyout from EDS.
EDA Vendor Group & Individual Stock Performance in Q1 2006
As shown in Tables 7 and 8 and Figure 3 below, the combined quarterly stock prices for the EDA vendors were up 13% year-over-year in absolute dollars and 0.6% in average percentage change. This is only slightly ahead of the 11% rise in average price for the three leading stock indexes. Ansoft is the growth leader at +54%. Cadence and Synopsys had over 20% year-over-year growth. LogicVision and Mentor Graphics had significant declines of 27% and 19%, respectively.
The combined stock prices on a sequential basis rose 0.6% in absolute dollars, an average price increase of about 0.1%. Cadence was the biggest gainer at 34%. Synopsys was a distant second at 14%. LogicVision and Mentor had about a 30% sequential decline in stock price. The three major stock indexes rose an average of just under 6% from the prior quarter.
Forecast Guidance from Individual EDA Providers
The combined forecast for the next quarter is $868 million, an increased of 8% year-over-year, but less than 1% increase sequentially. Ansoft is the only firm to forecast a year-over-year quarterly drop. Mentor is the most optimistic, with 14% year-over-year projected growth. On a sequential basis, Synplicity and Synopsys expect more than 5% growth. Ansoft and Magma forecast significant declines relative to the quarter just reported.
Individual Company by Company Guidance
Altium gave no guidance.
For guidance Ansoft expects revenue on the next quarter to be between $16.5 million and $17 million, compared to the $24.7 million in the quarter just completed and $22 million in the same quarter last year. However, Nicholas Csendes, Ansoft's President and CEO, said, "For the next fiscal year, we anticipate continued revenue growth of around 10-15%."
For the second quarter of 2006, Cadence expects total revenue in the range of $340 million to $350 million. This compares to $328 million in the quarter just completed and $321 million in the same quarter a year earlier. For the full year 2006, the company expects total revenue in the range of $1.41 billion to $1.46 billion, a rise of almost 8% compared to $1.33 billion in 2005.
For Magma's fiscal 2007 first quarter, ending July 2, 2006, the company expects total revenue in the range of $38 million to $42 million. This compares to $44 million in the quarter just completed, and to $39 million in the same quarter last year.
For the second quarter, Mentor Graphics expects revenue of approximately $177 million. This is slightly above the $176 million in revenue for the quarter just completed, and 14% above the same quarter a year ago. For full year 2006, the company expects revenue of about $762 million, compared to $705 million in fiscal 2005.
As guidance Synopsys expects revenue in the next quarter to be in the range of $270 million to $278 million. This compares with revenue of $275 million in the quarter just completed, and to $252 million a year earlier. More than 90% of revenue will come from backlog. The firm expects revenue for the full fiscal year to be in the range of $1,075 million and $1,090 million.
For guidance Synplicity expects revenue for the next quarter to be in the range of $15.1 million to $15.6 million. This compares to $14.5 million in the quarter just completed. Revenue for 2006 is expected to be in the range of $63 to $65 million, a decrease from prior guidance, as a result of the business refocus on FPGA synthesis tools. This compares to $61.9 million in 2005.
EDA Consortium's Market Statistics
On April 6, 2006, the EDA Consortium's Market Statistics Service (MSS) announced that total EDA industry revenue for Q4 of 2005 was $1,253 million versus $1,191 million in the fourth quarter of 2004, an increase of 5%.
During Q4 2005, CAE accounted for 43% of the total revenue, IC Design and Verification for 28%, PCB and MCM for 7%, Semiconductor IP for 17% and Services for 5.5%.
During Q4 of 2005, North America accounted for 45% of total revenue, Europe for 22%, Japan for 20% and ROW for 12.5%.
Walden C. Rhines, chairman of the EDA Consortium and chairman and CEO of Mentor Graphics Corporation "The EDA industry continued to strengthen in the fourth quarter. Revenues were up in all regions and most product lines."
For the year 2005 CAE accounted for 42% of the total EDA market, IC Design & Verification 26%, PCB + MCM 7.5%, Semiconductor IP 18% and Services 6%.
The EDA Consortium is the international association of companies that provide tools and services that enable engineers to create the world's electronic products. EDA is the critical technology used to design electronics for the communications, computer, space technology, medical and industrial equipment and consumer electronics markets among others.
Economic & Geopolitical Factors
Frequent readers of the authors' Commentaries will recall our quarterly discussions of economic and geopolitical factors that we believe have been causing high-anxiety in high technology industries in the United States and elsewhere around the world. We have often noted that, after eight years of an improving technology environment, the last five years have moved the country in the wrong direction.
These last five years have resulted in far more than a baker's dozen enervating political and economic factors here in the US: (1) unremitting extravagance and unwarranted tax cuts in the face of the shift from US federal budget surplus to deep deficit, (2) the definite long-term trend of a rich-get-richer, poor-get-poorer US income distribution, (3) sluggish net job growth below the requirements of US population increases, (4) a net US disadvantage in globalization, (5) weakened US environmental stewardship and deteriorating US infrastructure, (6) the ballooning real and psychic costs of war, in lives and treasure, (7) reduced worldwide and domestic admiration for US leadership, with an astonishing lack of accountability, (8) the weaker US dollar, (9) elevated energy, oil & gas prices, (10) a deteriorated domestic NASDAQ market that has never returned to 2001 levels, (11) ongoing corporate fraud, (12) indictments and criminal investigations in both the White House and Congress, (13) double-digit rises in the cost of US health care and ongoing increases in the number of US uninsured, (14) stunning US federal incompetence (cronyism, disaster relief, Medicare drug plan, nation building, ), (15) reduced US civil liberties and personal privacy, (16) unrelenting illegal immigration, and (17) record US trade deficits growing each year, requiring the US to borrow billions of dollars every week from abroad.
Alas, recent developments have not improved the situation.
Let's just consider Items (1) and (2) above. Worsening inflation in the US continues to steal US consumers' purchasing power and mocks the stagnant multi-year flatness of US workers' compensation. The Fed is so worried about inflation in the US, that for the 16th time in two years it raised interest rates, this time to 5% on May 10, 2006. Yet average Americans must react to their own paychecks and benefits, weighed against highly-volatile costs, like housing (higher mortgage rates), health care (Item (13) above) and gasoline (Item (9) above). For all but the wealthiest Americans, the latter volatile costs have outpaced paychecks since 2001.
Then inflation news got worse a few days later. On May 16, the government reported that wholesale prices jumped 0.9% in April, the most in seven months. Then the Labor Department reported on May 17 that the consumer price index swelled 0.6% in April, topping all forecasts. More importantly, the "core CPI" without food and energy also gained 0.3%.
Although the "recovery" from the 2001 recession is now nearly four and a half years old, the average wage in the US has nevertheless lost ground to inflation since 2001. So despite big statistics such as, "The US Gross Domestic Product advanced at a 4.8% pace in the January-to-March 2006 quarter, marking a rebound from the feeble 1.7% rate in the final quarter of 2005", we simultaneously realize that people's wages are not keeping up with inflation. No wonder the president's polls (see Item (7) above) are now at their lowest level of his tenure (31% approval = to his Daddy's lowest number, with some other fresh polls now at 29%). Some 69% of the people polled now say the nation is off track. Op-Ed columnist Thomas L. Friedman made this comment in the May 17 New York Times, "Those polls can't possibly be accurate. I mean, really, ask yourself: How could there still be 29% percent of the people who approve of this presidency?"
Well, at least the government is acting to get that ballooning federal deficit under control! (Item (1) again!). What's that you say? Congress agreed on May 12 to a five-year, $70 billion tax package that would extend deep cuts to US tax rates on dividends and capital gains, effectively locking in all the president's first-term tax cuts through the end of the decade? And Bush said he signed it enthusiastically once it reached his desk on May 17, 2006?
"We have a train wreck waiting to happen," said C. Clint Stretch, director of tax policy at the accounting giant Deloitte & Touche. "You cannot grow your way out of these (federal) deficits," said Senate Budget Committee Chairman Judd Gregg (R- NH).
Oh well, everyone benefits from tax cuts, what the heck! What's that you say? Most Americans will not benefit? Most of the cuts go to a tiny minority of wealthy Americans? Yep, the Center on Budget and Policy Priorities says the average middle- income household will get a $20 cut, while those making more than $1 million a year will get nearly $42,000. (See the red bars of the graph below to learn who benefits).
As Molly Ivins of the Creator's Syndicate said on May 18, "The $70 billion tax cut is part of a continuing right-wing fantasy going back to the Laffer Curve (circa 1981). Of course, clinging to demonstrably false economic precepts is understandable when you (stand to) benefit from them, but at some point reality does intervene."
Oh by the way, the latest tax cut bill also commits an estimated $53 billion through the middle of the 21st century to help those same high earners shift their existing savings into tax shelters. This foreshadows big federal deficits far into the future.
Let's turn to enervating Item (3) above. Alas, the pace of adding new US jobs continues lukewarm at best (see graph below). California's economy posted a net loss of 2,600 payroll jobs in April. Even after the recession of 2001 ended, with the millions of jobs lost in the US in 2001, 2002, and 2003, it took till part-way into 2005 before a single net new job was added in the US, the slowest post-recession jobs' recovery by far since WW II. Over the last year, the monthly job additions are still tepid, compared to the eight-year period of 1993-2000, when 230,000 jobs were added on average every month for 96 months! That's like an NBA star averaging a "triple-double" every year for 8 straight years!
Outsourcing of US jobs continues unabated (Item (4) above). While outsourcing to Asia still tops the list (India, China, Philippines, Singapore and Malaysia), lately Eastern European countries such as Bulgaria, Romania, Slovakia and the Czech Republic are getting into the act, shifting work from both the US and Western Europe. A low-cost, highly educated workforce, combined with solid infrastructure, economic and political stability, geographic proximity and fewer security concerns are just some of the factors helping Eastern Europe. For example, Bulgaria's educational system ranks fifth in the world and 11th in mathematics, with one of the highest numbers of information technology-certified professionals per capita. General Motors, Capital One, Ford Motor Co. and Lockheed Martin, have already outsourced information technology work to Bulgaria. In early 2006, Hewlett-Packard announced plans to open a global delivery service center in the Bulgarian capital to provide remote infrastructure management assistance to HP clientele in Europe, the Middle East and Africa. Expected to be fully operational next year, the center will employ about 1,000 Bulgarians, primarily multilingual engineers and programmers. Outsourced jobs in Bulgaria provide average base salaries of about $373 per month, well above the Bulgarian average monthly salary of $190.
Another sure sign of worsening US economic trouble is the recent surge in gold prices and other precious metals. The price of gold rose to a fresh 25-year high on May 10, 2006 as investors sought a safe haven amid a weakening US dollar (item (8) above) and worries over the administration's most-recent sword-rattling confrontation this time with Iran. Historically, gold is considered a truly desperate refuge against serious currency weakness, inflation and financial instability. Gold is trading now at levels not seen since the Reagan era. Many investors are now turning to gold; they don't think US inflation is under control, because the US economy is now much more leveraged (i.e. debt-ridden) than it has been in the past (items (1) and (17) above).
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.
Former Enron chiefs Kenneth Lay and Jeffrey Skilling were convicted on May 25 of conspiracy to commit securities and wire fraud. The verdict put the blame for the 2001 demise of the high-profile energy trader, once the nation's seventh-largest company, squarely on its top two executives. It came in the sixth day of deliberations following a federal criminal trial that finally got underway after 4 years lasted nearly four months. Enron founder Ken Lay and former Chief Executive Jeff Skilling defrauded 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.
Finally, three makers of computer memory chips just agreed on May 12, 2006 to pay $161 million to settle a class action lawsuit accusing them of conspiring to hike prices. Apparently, all three semiconductor companies have pleaded guilty to felony price-fixing charges in federal court as part of an antitrust case that has netted more than $731 million in fines.
Hmmm - guess corporate fraud continues after all -
Well, at least Congress is getting a handle on the president's authorization of warrantless domestic wiretapping, which sidestepped the lawful albeit secret court set up by the 1978 Foreign Intelligence Surveillance Act (FISA) you know, the story that leaked to the public in December 2005 (Item (15) above). What's that you say? There's more? On May 11, 2006, USA Today disclosed the apparent existence of an even more massive domestic intelligence-gathering program? Approved by the president, the effort seemingly began in secret soon after the 9/11 terrorist attacks. Since then, the National Security Agency is said to have been collecting call records on tens of millions of personal and business telephone calls made in the United States. Apparently, Qwest, the nation's fourth-largest phone company, was the only one of four telephone companies that rebuffed US government requests for the company's calling records, because of "a disinclination on the part of the authorities to use any legal process." The three other big phone AT&T, BellSouth and may have secretly complied with the National Security Agency to build a vast database of calling records, without warrants, to increase NSA surveillance capabilities. A few days later, Verizon Communications Inc. and BellSouth Corp. began denying key points of the USA Today story. The denials leave open the possibility that the NSA directed its requests to long-distance companies, or that call data was collected by other means. The NSA program is so classified that the American people may never know the truth. We also learned recently that a little-known US government spy agency that analyzes imagery taken from the skies has been spending significantly more time watching US soil (The National Geospatial-Intelligence Agency).
Worse, Americans who raise legitimate questions about secret and/or warrantless invasions of privacy find their patriotism impugned. Hey, FISA is neither quaint nor irrelevant; it's the law! And anyhow, under FISA, the government can eavesdrop for 72 hours before seeking a warrant (which is almost always granted). So why do it illegally?
Rather than accept blame itself for the illegal surveillance, the administration is seeking to prosecute the journalists who reported it! Attorney General Alberto R. Gonzales raised the possibility on May 21, 2006 that New York Times reporters could be prosecuted for publishing the existence of the warrantless surveillance in December 2005.
Meanwhile, the Department of Homeland Security is late on releasing to Congress reports on 118 security plans for mass transit, rail, aviation, ports and borders. One late report assesses the impact on travelers' privacy and civil liberties from the Transportation Security Administration's proposed Secure Flight program, which would pre-screen passengers by computer. That report was due March 13, 2004. Another late report focuses on threats from international air cargo; it was due June 15, 2005. Congress also wanted an update on the criteria to be used to consolidate names on the terrorist watch list; that report was due in June 2005.
We need to recall the words of Benjamin Franklin, "Those who can give up essential liberty to obtain a little temporary safety deserve neither liberty nor safety." This line is frequently quoted these days by Richard Ben-Veniste, a member of the 9/11 Commission. You remember the 9/11 Commission: the distinguished bipartisan panel that the administration stonewalled for months until the 9/11 families intervened? The 9/11 Commission finally issued its full report in July 2004; its report became a best-seller. Among its 41 recommendations to the administration was to set up a civil liberties board as a watchdog to oversee privacy and civil rights compliance within the executive branch. And then 17 months later in December 2005, the 9/11 Commission issued a public report card on the government's response to the entire 41 recommendations. The average grade assigned to the government -- was a "D".
Update on Item (3) -- Sluggish net job growth below the requirements of US population increases:
On June 2, 2006, the Labor Department released the latest US job numbers. It turns out that May.s lackluster results further confirmed the downward trend discussed in the foregoing paragraphs on Economic and Geopolitical Factors. Payrolls only increased by a measly 75,000 in May, well below the 174,000 expected by economists. Worse, the latest revisions also reduced job gains previously stated in the past two months -- by some 37,000. April's payroll gains were revised lower to a subpar 126,000 from 138,000 initially reported. See the graph below that shows the unmistakable downward slope of net US job creation for the past four months:
The retail sector shed 27,100 jobs in May. Analysts said the combination of rising gas prices and slowing home appreciation made consumers rein in spending. Manufacturing lost 14,000 jobs. US wage growth was again soft, with average hourly wages for May up just 0.1% from April (while the consumer price index swelled 0.6%).
Nasdaq Update (Item (10) above):
On June 12, 2006 the tech-heavy Nasdaq lost 44 more points and closed down another 2% at 2091. The Nasdaq has now (in just one month) lost more than 10% of its recent .local. high on May 08, 2006. Market-savvy analysts call a drop of 10% percent or more a full-fledged .correction., not just a momentary aberration. The Nasdaq is now 24% below where it stood on January 22, 2001, a level to which it has never come close since. Do readers think that this latest June 12 Nasdaq level does not affect/reflect the economic prospects for the tech-heavy EDA Industry?
Update July 6, 2006:
Over the last month or so, more information has become available that reinforces the geopolitical and economic commentary in the foregoing:
Good work if you can get it: Former Goldman Sachs CEO Henry Paulson filed to sell about $500 million worth of Goldman Sachs stock shortly after the US Senate voted to confirm his appointment as Bush's Treasury Secretary number three. Moreover, a generous government rule also makes Paulson exempt from paying taxes on any capital gains on the stock sale, eliminating a tax liability of up to about $200 million for Paulson.
In an ongoing crusade to control incessant inflation in the US, the Fed put in place its 17th consecutive quarter-point rate hike since June 2004, lifting the overnight interest rate to 5.25%.
In Q2 2006, the S&P 500 and the Nasdaq fell 1.9% and 7.2%, respectively. The Dow barely broke even. The Nasdaq is also down for 2006 six-months-year-to-date. The National Association of Purchasing Managers' Chicago group said its index of regional business activity slowed to 56.5% in June from 61.5% in May. Moreover, the prices-paid component of the index leapt to 89% from 76.9%, indicating sharply higher costs for manufacturers. Consumer spending slowed sharply in May as the continuing rise in gasoline prices left Americans with less to spend on other items. A barrel of light crude stood at a remarkably expensive $73.93 to end the quarter. Durable goods orders dropped 0.3% in May after a sharp 4.7% drop the month before, according to the Commerce Department, the first back-to-back declines in two years.
The Republican-dominated US Supreme Court today struck down the military tribunals set up the Bush administration to try the detainees being held in Guantanamo Bay. More than a narrow ruling, the decision is a reaffirmation that the law is what the US Constitution, the statute books and the Geneva Conventions say it is - not what the president wants it to be.
Federal prosecutors want Enron founder Kenneth Lay and former Chief Executive Jeffrey Skilling to fork over nearly $183 million in light of their convictions for perpetuating one of the biggest corporate frauds in US history. In a court filing, prosecutors asked US District Judge Sim Lake to order the newly-convicted felons to turn over that amount "in proceeds of the fraud conspiracy," which includes bonuses, Skilling's gains from stock sales, and Lay's use of loans from Enron to pay down much of his $100 million in personal debt in 2001. Lay, 64, and Skilling, 52, were convicted of defrauding investors and employees by repeatedly lying about Enron's financial strength in the months before the company plummeted into bankruptcy protection in December 2001.
Meanwhile, Richard Scrushy was handed felony convictions today in a state bribery scheme linked to his days as chief executive of HealthSouth Corporation. Acquitted last year of directing the HealthSouth fraud, Scrushy remains a defendant in major civil cases involving allegations of a $2.7 billion accounting scam at the rehabilitation chain he once ran.
A bevy of studies was released today that reveal the state of retirement across America as bleak in the best case and depressing in the worst case. For examples: more than 43% of Americans are not saving at all, and only a third of Americans are saving enough to maintain their standards of living in retirement; 28% of current workers and 12% of retirees are not confident about having enough money in retirement even to pay for their medical expenses; a vast majority of US employers are planning to curtail their retiree medical plans for current and future retirees in the next five years; regardless of their ages, genders, household incomes and education, 38% of surveyed Americans say they expect their retirement to be "financially difficult."
Things are not as bleak for most CEO's, such as Pfizer CEO Hank McKinnell for example. Since taking over Pfizer in 2001, he has been paid $79 million in salary and also paid pension benefits worth an estimated $83 million. Yet the drug giant's stock has fallen by more than 40%. "Corporate compensation in America is now offending a lot of people needlessly and it ought to be fixed," Berkshire Hathaway Vice Chairman Charles Munger said recently. "CEOs and boards should be a lot more sensitive to the current [economic] environment, and not have the wretched excesses of executive compensation hitting the headlines at the same time they are laying off 50,000 people."
As if the overwhelming oil oligarchy is not enough: Water is "the first and last great commodity," said Phil Flynn, a senior analyst at Alaron Trading in Chicago. Water still doesn't have a publicly-traded market -- nothing similar to the oil futures which help dictate market prices. But with the US population headed for the 300 million mark later this year, and the world figure above 6.5 billion, "people theorize that the next great competition over supplies will be for fresh water," said Flynn, adding that the supply of drinkable water is becoming tighter and tighter. At some point, "it's going to be the oil market of the future," he said.
General Motors' largest shareholder is pressing the troubled American auto giant to speed up its turnaround effort by forming an alliance with two foreign car companies, Nissan and Renault, which would pay $3 billion for a 20% stake in GM. On its own, GM is in the midst of closing all or part of a dozen plants and cutting 30,000 jobs as part of its restructuring effort.
The Commerce Department said spending on construction projects fell 0.4% in May, marking the biggest decline since September 2004. The drop was unexpected; economists had forecast a 0.2% gain in construction spending. April outlays were also revised lower to a 0.2% drop from the 0.1% decrease previously estimated. Also, the Institute for Supply Management's June survey showed that the index fell to 53.8% in June from 54.4% in May.
Enron founder Ken Lay passed away today, while vacationing in Aspen. He was 64. Facing decades in prison, Lay had displayed no signs of ill health throughout his four-month fraud trial. Just before Enron became a scandal-tainted punchline, the company was the single largest contributor to President Bush, who nicknamed Lay "Kenny Boy." But White House press secretary Tony Snow said today that he hadn't discussed Lay's death with the president. "The president has described Ken Lay as an acquaintance", said Snow. Some legal experts said that Lay's death may render the government's criminal victory null. Regardless, his estate apparently remains the subject of civil lawsuits by the Securities and Exchange Commission and former investors and Enron employees, which could still proceed. Unless, of course, someone issues a posthumous pardon.
Dow Closes Down 76, Nasdaq Closes Down 37 -- Concerns over North Korea's nuclear ambitions and a new record for oil prices ($75.19 per barrel) sent stocks lower today and added to Wall Street's ongoing worries about the economy and interest rates. North Korea defied .stern warnings. from the US to launch seven missiles on July 4, including a long-range Taepodong-2. Since January 2001, this US administration has consistently refused to conduct 1:1 talks with North Korea. Gasoline futures also jumped 6 cents on July 5 to settle at $2.28 a gallon. With refiners fetching the equivalent of $95 a barrel or more for gasoline, "A refiner doesn't have to be disciplined in the buying of crude," explained Tom Kloza, an oil analyst at Oil Price Information Service in Wall, NJ.
July 7, 2006
US employers increased payrolls by a tepid 121,000 in June, providing ongoing evidence that companies are reluctant to bulk up their work forces in the face of high energy prices and slowing economic growth. The count of new US jobs added in June fell well short of economists' forecasts for an increase of around 175,000 new positions. "When you only have 121,000 jobs being added, that sounds pretty puny," said Ken Mayland, economist at ClearView Economics. "On the face of it, this is somewhat disappointing; the job picture is consistent with other barometers that suggest economic growth is slowing," he said.
Stocks plunged for a second straight session today as Wall Street battled a storm of negative factors - soaring oil prices, interest rate jitters and the slowing US economy. The Dow Jones industrial average dropped almost 167 points, bringing its two-day loss to 288. The Nasdaq Composite finished the day at a nine-month low.
Escalating violence in the Middle East carried oil to near $77 a barrel, a new record high, following a fresh escalation in Middle East tensions. US gasoline prices are also setting new records. Bogged down in Iraq and having neglected the Middle East peace process for five and a half years, the current US administration appears powerless to help ameliorate the situation there. The same may be said of increasing belligerence by Iran and North Korea.
Surging oil prices pulled stocks sharply lower for a third straight session today, with bland corporate earnings and weak consumer data further dampening the economic outlook. The Dow Jones industrial average shed 396 points in the past three days. The Dow tumbled 107, or 1% today, to 10,739. The blue-chip index fell more than 121 points July 12 and lost almost 167 points July 13, and after today is just 21 points from turning negative for the entire year-to-date 2006.
The Nasdaq composite index declined another 17 points today to 2,037, down 4.35% for the week, and now stands at a 14-month low.
Crude oil futures reached an intraday record of $78.40 a barrel today as Israel intensified its attacks on Lebanon, further raising concerns about potential supply disruptions throughout the Middle East. Crude eventually settled at $77.03 a barrel, up 33 cents, another record close.
Retail sales fell in June, as did consumer confidence for July. Moreover, investors are increasingly concerned that the recent spate of corporate Q2 profit warnings is still another indication that the US economy is headed for a downturn.
Posting a loss for the third straight week, the tech-laden Nasdaq dropped 19 points to 2,020 today after plunging over 41 points on July 20. The 2,020 level was the lowest finish for the Nasdaq since May 17, 2005, when it closed at 2,004.
Dell Computer Corporation stock tumbled $2.19 today, or 10%, to $19.91 after it said aggressive price cuts in the personal computer market would cause the company to miss forecasts. Dell has approximately 26,000 employees in the US these days; over the last three years, Dell has created nearly 40,000 offshore jobs.
The Dow Jones industrials ended the week up only 129 points, despite a one-day surge of 212 points on July 19 solely due to investor optimism that long string of Fed interest rate hikes may soon be nearing an end. Federal Reserve Chairman Ben Bernanke predicted that the US economic slowdown would help ease inflation pressures in coming months. Oh, great! Some observers felt the market was hearing everything positive Bernanke said on the 19th and ignoring his many caveats.
On July 20, Ford reported a second-quarter loss of $123 million, or 7 cents a share, down from a year-ago profit of $946 million, or 51 cents a share. In June, Ford's worldwide sales dropped 6.9% even as passenger car sales rose from a year ago. The truck side, which is key to profit, fell 14%, with the F-series pickups, the best-selling vehicle in the US, off nearly 10%. The month was even more difficult for Ford rival General Motors, which reported a 26% decline in June in US sales alone.
In the first actual charges to come out of the widening stock-options scandal, criminal and civil actions were filed July 20 against two former executives of San Jose CA Brocade Communications Systems for securities fraud. The two were charged with concealing millions of dollars in expenses, overstating the company's income and falsifying records of stock options grants. A third Brocade executive faces civil charges. The SEC and US Justice Department are now investigating at least 80 companies for backdating options and failing to properly account for them. The count was only 17 companies being investigated as recently as May 19, 2006.
The United Nations reported on July 18 that an average of more than 100 civilians per day were killed in Iraq during June 2006, registering the highest official monthly tally of violent deaths since the fall of Baghdad in 2003. Meanwhile, the new war among Israel, Lebanon and Hezbollah widened unchecked during the last 10 days. There could hardly have been a better moment for the annual meeting of the Group of 8 to prove its worth. Instead, it showed how pointless these \.leaders\. are. It did not take Bush's unwanted shoulder massage of Germany's Angela Merkel or his awkwardly open microphone to display the huge gap between the summit meeting and political reality. The entire G8 Meeting was a useless exercise.
Confirmation arrived today of the relentless slowdown in the US economy that we've been commenting on for months. The US Commerce Department officially reported that the nation's gross domestic product grew only 2.5% in the second quarter, less than half than in the first three months of 2006. Q2 growth in consumer spending halved, and Q2 residential investment suffered its steepest decline in six years. Meanwhile, the Commerce Department also reported that the core price index for personal consumer expenditures, which measures the price of consumer goods and services, excluding food and energy, surged at an annual rate of 2.9% in the second quarter, up 38% from the first quarter. Add in food and energy costs, and inflation is even worse. Perversely, the GNP news bolstered today's prices of stocks, as it raised investors' myopic hopes that the Federal Reserve will stop raising interest rates, never mind the declining GNP's enervating impacts on jobs and inflation. Along with the latest GDP report, the government also issued annual revisions today that showed the GNP was less than previously estimated for 2003, 2004 and 2005. The main reason for the downgrade: business investment in computer equipment and software was less than previously reported.
Following on the heels of the reports in the original May Commentary regarding the oil industry's first quarter's results, Exxon Mobil, the world's largest publicly traded oil company, reported a 36% gain in second-quarter earnings this week, bolstered by outrageous oil and gas prices in the United States, China and India. Net income for the quarter rose to $10.36 billion, from $7.64 billion a year earlier. The only time Exxon's quarterly profit was higher was the fourth quarter of last year (after Katrina). Exxon revenue climbed only 12% in Q2 2006, to $99 billion, yet yielded a 36% increase in profits - hmmm . good business if you can get it! The $99 billion in revenue was second only to Exxon's third quarter of last year.
Combined, the top five oil companies, Exxon Mobil Corp., BP PLC, Chevron ConocoPhillips and Royal Dutch Shell PLC, "earned" $34.6 billion in the second quarter, also 36% more than the same period last year. Through the first half of 2006, the five companies have "earned" $62.8 billion, demonstrating the industry's current moneymaking prowess now that energy prices and profit margins appear likely to remain at heights that truly seemed far-fetched as the Clinton years ended.
Since oil prices have climbed even higher in July, peaking at $78.40 per barrel, Q3 2006 probably will be even more prosperous for the oil companies than Q2. Remember all that talk in the Republican-laden Congress in recent times about a windfall profits tax? Ha-Ha. The US Senate held hearings with oil company executives last year without taking any action against the industry. While these executives repeatedly point out that "they don't set the price for crude oil", they nevertheless continue to accept larger and larger bonuses as their companies reap the benefits of the ballooning profits at the expense of hapless drivers everywhere. One more item for US voters to remember in November.
Well, Wall Street traders got their wish Friday when the US labor Department issued its payroll report for July. US job growth in July was again way below expectations. Employers added jobs in July at a miserably slow pace for the fourth consecutive month, providing the strongest evidence yet of the country's weakening economy. "I would be absolutely astonished if the Fed raised rates next week," said chief US economist for High Frequency Economics Ian Shepherdson hopefully. "The loss of momentum in the economy is all too evident." But investors nevertheless pushed stocks lower on Friday after all, unwilling to trust that the labor report was enough to keep the Federal Reserve from again raising interest rates.
Of course, stock market players' concerns pale in comparison to the ongoing dispair of millions of US workers lucklessly seeking jobs during the last five and a half years. And those who have jobs have seen their weak earnings growth continuously fall behind increasing inflation.
July's bad news continued. The unemployment rate, which usually moves in tenth-of-a-point increments, when it moves at all, jumped two-tenths in July, to 4.8%, the highest level in five months. Indeed, for the unemployed, finding another job is getting harder. The average number of weeks spent looking for a job grew by more than a week in July, to 17.3 weeks, the largest monthly jump since last August. At the same time, 1.3 million of the unemployed, or more than 18%, were out of work for 27 weeks or longer, an increase of 200,000 since June.
While the US economy deteriorates, while the federal deficit balloons, and while many parts of the world are in flames, the Republican-laden Congress again focuses on, you guessed it, repeal of the estate tax for the richest Americans!
For his part, Dick Cheney is inappropriately butting into Alaskan state politics, urging legislative leaders there to approve a controversial bill to allow three of the top five oil companies to build a new $20 billion natural gas pipeline. Of course, the oil companies are demanding billions in tax breaks, even though these same oil companies are swimming in profits (see the July 28 update above).
Amid all these troubles, George W. Bush left Washington today for another Texas vacation. You know - like the past vacations in Texas when he ignored the briefing that "Osama Bin Laden is determined to strike in the United States" (August 6, 2001), or like when he ignored Cindy Sheehan's protests about IRAQ, or like when he ignored the threat and subsequent devastation of KATRINA - that kind of Texas vacation. He'd better watch out this year; he may just miss the approaching end of the world, as many Christian "end-times believers" think the current Middle East wars are definite signs of the coming Armageddon.
As many predicted, the Federal Reserve on August 8 suspended its two-year crusade of raising interest rates, a policy shift based on the investment community's astonishing "hope" that a painful US economic slowdown will eventually subdue inflation. After 17 consecutive increases at every Fed meeting since mid- 2004, the central bank voted this week to hold its benchmark interest rate steady at 5.25%. In a rare display of uncertainty, the Fed committee was not unanimous in its decision. One reason is that today, inflation is still far from subdued. Core inflation is running about 2.9% higher than one year ago, the biggest year-over-year jump in 11 years (and core inflation excludes rising food & energy costs!).
Speaking of pain, Laurence H. Meyer, a former Fed governor and now an economic forecaster at Macroeconomic Advisers, predicted that it would take a truly significant economic slowdown to actually reduce inflation. For that to happen, he said, unemployment would have to rise for a sustained period. For example, to reduce inflation by one percentage point, the US unemployment rate would to rise by about two percentage points for a full year. Too bad for those laid off!
Indeed, if the Fed cracks down harder on inflation, it risks throwing the US economy into an actual recession, not just a slowdown, which would leave workers whose wages have hardly kept up with price increases in still worse shape. And with energy prices up sharply, many workers, whose pay increases have lagged far behind productivity gains, already have far less disposable income for other purposes.
And, as the Labor Department also reported on August 8, productivity already slowed to an annual rate of increase of 1.1% in the April-June 2006 quarter. Productivity is the key factor determining living standards. Strong growth in worker productivity, which occurred often during the last five years, should allow businesses to pay their workers more (although businesses seldom did so in the last five years; most of the benefit went to corporate profits) without raising the prices of business products (which they have been doing, especially recently, causing inflation).
Meanwhile, on August 10 Wall Street withstood the news of a terror plot targeting commercial airlines. But European markets tumbled as British authorities said 24 people were arrested in a widespread plan to destroy numerous international flights, and reacting, the US raised its terror alert to the highest levels ever for air travelers.
While airline stocks fell on August 10, overall US stock averages nonetheless went up that day! Wall Street also benefited from lower crude prices, which fell on the belief that reduced travel in the coming months might curtail demand for fuels. A barrel of light crude settled at $74 on August 10, down $2.35.
Of course, that was just a day after the oil company BP announced that a corrosion problem was forcing a shutdown of its pipelines serving Alaska's Prudhoe Bay. Oil prices immediately shot up, with oil temporarily gaining more than $2 a barrel, to nearly $77, and gasoline rising five cents a gallon in some cities. Why BP was so negligent in its inspection protocol is not yet revealed. Not surprisingly, Republicans were quick to use BP's travails as yet another reason to whip up hysteria to drill more in the US. But of course, everyone but the right wing knows that even all-out drilling everywhere in the US and off our coasts would never dent America's oil appetite. The US has only 3% of global oil reserves, yet we consume 25% of the world's oil. Only alternatives to fossil fuel will save us.
But maybe most Americans don't, in fact, know facts. A large number of Americans remain apathetic or just plain ignorant about geopolitical issues, and these sad-for-democracy conditions do not seem to be getting better. As recent as late July 2006, a Harris Poll reported that 50% of Americans now seem to believe that Iraq had weapons of mass destruction after all when the US preemptively invaded over 1200 days ago, up from 36% who thought so in February 2005. Meanwhile, 64% still believe that Saddam had strong links with Al Qaeda. Part of the reason, of course, is the current administration's incessant propaganda. In many cases, facts are either labeled "junk" science or simply lied about: stem cells, global warming, tax cuts, income inequality, Iraq, etc.
Alas, there was some good news this past week. The defeat of Senator Joe Lieberman at the hands of Connecticut businessman Ned Lamont should send a message that voters are at long last angry and frustrated over the US presence in Iraq. Lamont said he ran against Lieberman because he was offended by Lieberman's continuously cheerful (and inaccurate) descriptions of what was happening in Iraq and Lieberman's sanctimonious denunciations of Democrats who have criticized the administration's handling of the Iraq war.
And other good news: the unlikely duo of Tony Blair and Arnold Schwarzenegger this week agreed to collaborate on cleaner-burning technologies and to explore an emissions-reduction program to attack global warming that would combine mandatory controls on greenhouse gases with market incentives. For his part, Blair claimed he was not really defying his good friend George Bush. The "governator" was more forceful, saying that the Bush administration and Republican Congress have shown no leadership on the issue (gee, there just might be an election coming up in CA). The Blair/Schwarzenegger agreement again dramatizes how badly the current administration in Washington lags both Britain and California with Bush's lame program of "voluntary pollution reductions".
And finally some good news regarding Israel, Lebanon and Hezbolla: late in the week, the United Nations Security Council finally produced a formula to end the fighting in Lebanon. Of course, while the diplomats dithered, hundreds of Lebanese and Israelis died, one-third of Lebanon's population was uprooted, and new layers of anger and fear were sown on both sides of the border. (Remarkably, after Bush initially gave Israel the green light to keep attacking, and later supplied additional smart bombs to the Israeli air force, Bush didn't even speak on the phone to the Israeli prime minister till August 11, more than a month after hostilities began).
On August 17, the Congressional Budget Office said that unanticipated tax receipts so far this year will likely allow the 2006 federal deficit to come in at ... hold on ... "only $260 billion". But the deficit will begin to rise again next year and will continue to balloon further unless Bush's string of past tax cuts for the wealthy is allowed to expire on schedule. Otherwise, even the most optimistic assumptions, including no more major disasters and reductions of US forces in Iraq and Afghanistan -- reveal a stream of red ink that would create still another $2.5 trillion of debt (above the current debt of $8 trillion) over the next 10 years and average at least $254 billion a year, according to budget office calculations. (Recall that when Bush first took office in 2001, the US was running yearly fiscal surpluses). Indeed, budget office figures showed that the administration's spending is increasing by 7.7% this year alone, easily outstripping US economic growth. In fact, even in the best case, the federal budget will likely hang around 20% of the country's gross domestic product through the bitter end of the Bush presidency, up from 18.5% of GDP when Bush first came to office. Some conservative!
Also on August 17, a federal judge ruled the Bush eavesdropping agenda to be both illegal and unconstitutional. She wrote that Bush has violated the 1978 Foreign Intelligence Surveillance Act (FISA) when he told the NSA to spy without a warrant on international phone calls. She offered a cutting condemnation of Bush's attempt to place himself beyond the reach of Congress, judges or the Constitution. "There are no hereditary kings in America and no powers not created by the Constitution," wrote Judge Anna Diggs Taylor of the United States District Court in Detroit. She noted that the 1978 FISA law was passed to disallow this type of abuse of power and provided ample flexibility for collecting intelligence. Instead of simply abiding by the 1978 law after this ruling, Bush's lawyers are now trying to have the suit thrown out on national security grounds. In this case, the administration told Judge Taylor that merely arguing its case would expose secret information. The Judge said this argument was "disingenuous and without merit." No sooner had her ruling been issued, than Bush's crowd in Congress began calling for new laws to defeat the Judge's objections. Republicans pointed out that Judge Taylor was appointed by Jimmy Carter. (Judge Taylor's decision was a sequel to the Supreme Court's decision in June 2006 in Hamdan v. Rumsfeld that struck down the administration's plans to try detainees held in Guantanamo Bay, Cuba, for war crimes). The Republicans' ridiculous efforts to undermine the August 17 eavesdropping ruling will unquestionably proceed, but for now, one solitary judge has done what the US Congress has studiously avoided doing.
And also on August 17, another federal judge ordered strict new limitations on tobacco after finding that cigarette makers engaged in a decades-old conspiracy to deceive the public about the dangers of smoking. The deception, Judge Gladys Kessler of Federal District Court for the District of Columbia said, resulted in "an immeasurable amount of human suffering." Judge Kessler ordered the companies to stop labeling cigarettes as "low tar" or "light" or "natural" or with other "deceptive brand descriptors which implicitly or explicitly convey to the smoker and potential smoker that they are less hazardous to health than full-flavor cigarettes." The judge said she regretted not being able to punish the companies further. Cigarette makers, the judge said, profit from "selling a highly addictive product which causes diseases that lead to a staggering number of deaths per year, an immeasurable amount of human suffering and economic loss and a profound burden our national health care system."
More bad news for workers. On August 18 Boeing said it must begin shutting down production of its C-17 cargo plane, because the US Congress has not funded new purchases. The decision may ultimately affect 5,500 Boeing employees in Arizona, California, Georgia and Missouri who are directly tied to the C-17 program. But the result will first hit the 25,000 employees of the nearly 700 companies in 42 states that supply parts and systems for the plane, Boeing said. "The C-17 is one of the Defense Department's most successful acquisition programs ever," said Ron Marcotte, vice president and general manager of Boeing Global Mobility Systems. "But we can't continue carrying the program without additional orders from the US Government."
Even though the UN Truce in Lebanon is less than a week old, helicopter-borne Israeli commandos landed near the Hezbollah stronghold of Baalbek over the August 19-20 weekend and engaged in a lengthy firefight in what the Lebanese prime minister, Fouad Siniora, called a "flagrant violation" of the cease-fire. The United Nations issued a statement that Secretary General Kofi Annan also considered the raid a violation and was "deeply concerned." The Israelis said "the aim of the operation was to disrupt terrorist activities against Israel and to prevent arms from being transported to Hezbollah from Iran and Syria." Moreover, Israel still intends to try to kill the Hezbollah leader, Sheik Hassan Nasrallah, according to an anonymous senior Israeli commander.
And the last news item for August 18: In each poll released since the Brits foiled the alleged Trans-Atlantic terror plot - CBS, Gallup, Newsweek, Pew, Zogby - Bush's approval rating remains mired in the 30's. Apparently the incessant terror fear mongering doesn't work anymore, no doubt due to the fact that the administration has squandered billions of dollars and thousands of lives on IRAQ while neglecting critical security enhancements within the US.
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About the Authors:
Since 1996, Dr. Russ Henke has been president of HENKE ASSOCIATES, a San Francisco Bay Area high-tech business & management consulting firm. The number of client companies for Henke Associates now numbers more than three dozen. During his corporate career, Henke operated sequentially on "both sides" of MCAD and EDA, as a user and as a vendor. He's a veteran corporate executive from Cincinnati Milacron, SDRC, Schlumberger Applicon, Gould Electronics, Automation Technology Products, and Mentor Graphics. Henke is a Fellow of the Society of Manufacturing Engineers (SME) and served on the SME International Board of Directors. He is also a member of the IEEE and a Fellow of ASME International. In April 2006, Dr. Henke received the 2006 Lifetime Achievement Award from The CAD Society, presented by CAD Society president Jeff Rowe at COFES2006 in Scottsdale, AZ (see photo).
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An affiliate of the HENKE ASSOCIATES team since 2001, LA-based Dr. John R. (Jack) Horgan co-authored this May 2006 EDA Commentary. Dr. Horgan's prior corporate career has included executive positions at Applicon, Aries Technology, CADAM and MICROCADAM, as well as a stint at IBM. Dr. Horgan is also an editor of EDAcafe Weekly.
Since May 2003 the authors have now published a total of forty-two (42) independent articles on MCAD, PLM, EDA and Electronics IP on IBSystems' MCADCafe and EDACafe. Further information on HENKE ASSOCIATES, and URL's for past Commentaries, are available at http://www.henkeassociates.net.