Three year revenue growth of 47.6% and three year EPS growth of 76.3%.    That’s the story of the numbers at DXP Enterprises (DXPE).

This 100 year old Houston-based distribution company is engaged in the unsexy areas of the oil and energy markets; the design, repair and sale of thousands of industrial products.   Things like salt water injection skids.    Their customers run the gamut of the energy business, with the largest customer being Shell.   Schlumberger and Chevron are also on the top 10 customer list.

On the show I spoke with CEO David Little, who was surprising in his candor that oil prices are too high.   It’s refreshing to hear a CEO of an oil-related company suggest that the very commodity that is helping drive his business is too pricey.   His rationale was that overly high prices hinder new production, hurting growth in DXP’s markets.   The interview can be seen here.

The stock made a huge run from 2004 when it was in the mid-single digits.  From $5 to over $50.   The momentum has slowed lately and shares are actually fractionally down in the past year.  

There are 4 analysts covering the stock and the average rating is a “buy.”

File this entry under, “it must not be the act, it must be the market” that matters.  

Two distinct stories in the Wall St. Journal today opposing Congressional views on forms of speculation.   The first deals with oil and is simply titled “Oil Speculation Draws Scrutiny.”  It discusses hearings in Congress suggesting oil prices could fall if bills were passed to curb speculation, perhaps by imposing higher margin requirements on futures (basically the money down to cover the contract): 

House Energy and Commerce Committee Chairman Rep. John Dingell, (D., Mich.), said lawmakers should set firm limits on the size of energy speculators’ positions, require full disclosure of all energy trading from investment banks; and prevent pension funds from investing in commodities as they seek to diversify their holdings.

Mr. Dingell and others at the subcommittee meeting said Congress should consider forcing speculators to put up margin, or collateral, worth 50% of the value of energy futures in which they seek to trade [emphasis mine].  Today margins requirements for most traders in oil futures are often in single-digit percentages of the value of their commodity holdings.

I found it interesting that his news is out the same day as anoher story in the Journal today called “Mortgage Program Fuels Risks.”   This excellent story by Nick Timiraos details how a government-backed program has largely replaced the private subprime loan market in allowing buyers to get into homes with little to no money down  [emphasis mine]:

Mortgages that allow consumers to put little if any money down when buying a home have largely disappeared as a financing option available from private lenders. But they are still available — and growing more popular — through a government-backed program.

Supporters of the down-payment programs say they help the FHA fulfill its goal of assisting first-time home buyers. But critics say the programs will burden the government agency, and taxpayers, with bad loans. The FHA, which essentially is filling the void left by the collapse of the subprime market, renewed a push to eliminate the programs this month, after warning that above-average default rates for seller-assisted down-payment programs will force the agency to request a government subsidy for the first time in its 74-year history. The agency says it will need $1.4 billion next year.

“I just smell a massive taxpayer burden coming,” says Sen. Christopher Bond (R., Mo.), who calls the programs “too good to be true.”

The story continues, outlining the potential risk:

To critics, mortgages with down-payment assistance are similar to no-money-down subprime loans, which have triggered a wave of foreclosures. Most bankers believe defaults are so high because borrowers who encounter financial difficulties are more willing to walk away from a home when they didn’t put much of their own money into the purchase.

So let’s get this straight; oil speculators are bad for the market because they 1) drive prices up by putting very little money down, 2) with little concern about the market’s overall health and 3) have no vested interest in the underlying asset.

But yet the government is promoting and backing programs that allow homebuyers to get into homes they may not be able to afford and 1) can walk away from 2) without much risk and 3) the added new buyers in the market contribute to altering prices or driving them up by creating artificial demand.

Housing and mortgage speculators have been widely blamed for contributing to the home bubble’s burst.   In the once red-hot housing markets of Phoenix, Las Vegas, Miami and parts of California speculators - or ‘flippers’, people with no interest in living in the home - are estimated to be as much as 30% of the homebuying activity.   My question then is this: how much is home flipping different from oil speculation?   Isn’t the incentive and goal the same: use little to no capital to ride a hot market higher purely for profit?

The high price of oil and gas is often referred to as a tax on American drivers and families.   Whatever you want to call it, high commodity prices leave us with less in our wallets at the end of the month.   Just like subprime bailouts.   By some accounts, 90% of new homes purchased recently are using loans guaranteed by the FHA, Fannie Mae or Freddie Mac.   Basically, the government is putting its credit up to allow buyers to find low-or-no money down loans.  

So if the buyer defaults on the home and walks away, who holds the note?  The government.  Pay attention to the part in the housing story that says: “The agency says it will need $1.4 billion next year.”  Who then covers the potential losses in the housing market if government-backed subprime borrowers default and walk away?   You do.   Sounds a lot like a tax.

I understand the difference between the markets.   Congress has zero incentive to stabilize gas and oil prices.    Just the opposite, the incentive is to keep them lower.   Higher commodity prices benefit few save for the producer of the commodity.   Higher home prices meantime help drive the American economy.   Home ownership is proven to provide both economic and social benefits to communities.   However, there is a big difference between helping out those who were misled on their mortgages stay in their current homes versus promoting government-backed programs that not only enable further speculation in the housing market, but also help to drive the sales of private-sector companies like the homebuilders.  If I were Ford, GM or Chrysler I would read Nick’s story and ask: where are our government loan programs to push the sale of cars and trucks using taxpayer money?

Regardless of the market, to me an extra $200 bucks a month in gas or an extra $200 bucks a month in taxes to bailout defaulting government-backed homebuyers is no different.  I’m still out of the money.

Listening to “Bulls & Bears” on Fox News on XM Satellite Radio this weekend (note: Fox Business will get its own XM channel, 128, as of July 14th) I listened a debate about oil prices and the gas tax.     It was a discussion about whether McCain’s idea to cut the gas tax for the summer is a good idea and what any economic benefit may be.

My co-anchor Dagen took the unpopular side that the tax should not be cut, correctly noting that the overall benefit to America of the 18.4 cent tax far outweighs any economic relief it may provide.   She was the only one of the panel on this side of the issue.  

The Federal Government collects about $38 billion per year for this tax, with states and localities about double that.   In total it’s more than $100 billion per year in combined government revenues.   Certainly no small number.   But consider this: most of that money goes toward much needed road and infrastructure improvements.   This is one of the few taxes we pay that actually goes toward funding the underlying basis of the revenue.   Drivers need roads.  Drivers need gas.  Drivers help pay for their roads by buying gas.   Those who drive more, and thus benefit more from those roads, bridges and infrastructure, pay more.   Its a usage tax. 

Take note of this recent article in the Wall Street Journal:

Governments depend on tax revenue from gas purchases to fill the Highway Trust Fund, the main mechanism used to pay for public highway, mass transit and other transportation projects. While a prolonged dip in driving may eventually bring lower gas prices and other benefits, it is also creating a dilemma for policy makers.

Trust-fund revenue is projected to run a shortfall of at least $3 billion next year, meaning Congress faces a choice between cutting transportation funding and coming up with a fix. Many lawmakers have seen this problem coming, with oil prices rising and consumers increasingly opting for fuel-efficient vehicles, but no consensus approach has emerged.

I highlighted “coming up with a fix” for a reason.    Most of these highway improvements are non-negotiable.   Americans cannot have major transportation arteries shut due to lack of funding for improvements.   If encountering a bridge found to be questionable, inspectors will simply shut it down.   They cannot risk another Minneapolis disaster.   Thus, they must do the necessary improvements.   Expensive improvements.   The “fix” the article speaks of is clear: if the Highway Trust Fund doesn’t secure enough money from gas tax revenue, it will have to come from another source.   Perhaps higher income, state or local taxes.   But it will come, and it will come from somewhere.  You simply cannot indefinitely delay needed infrastructure projects. 

Minnesota alone is planning 11 bridge overhauls at a cost in the billions.    Other states need even more work.  The loss of life and economic injury resulting from infrastructure destruction does a greater harm to economies than the benefit of a few more dollars in consumers’ wallets.   A 15 gallon gas tank will save consumer just $2.75 when they fill up.   Does that balance against the time cost of money when you discover the bridge you use every morning to go to work is closed for a year because they’ve found structural problems they can’t afford to repair?   Your detour would probably result in the same cost at the pump from using more gas stuck in traffic idling or taking a longer route to the office.

I am all for lower taxes.   I am also all for providing much-needed relief for Americans.  Congress and the candidates though need to find other ways to help the country and the economy.   One idea would be a lower sales and food tax.   Most families spend just as much or more on food they do on gas.   And every family eats.  Not all drive, or drive that much, especially in urban areas.  

Congess needs to cut taxes.   But they should not be eliminating one of the few taxes we pay that actually provides us with a direct benefit to our infrastructure and our safety.

Dagen took the hard line, one that’s likely unpopular, but kudos to her especially when we all know there are no easy answers and likely face some tough choices ahead.

The big question asked by economists these days is simple: how much will the jump in gas prices impact consumer spending and thus the American economy?   

Daily we hear estimates, varying from “some” to “very much.”   It got me thinking about the math behind the numbers.     Certainly the higher price of gas is hitting many families hard.    However, based on some standard figures for miles driven and mpg statistics, the real size of the figures are not as bad as perhaps we think,  and there may be ways to help manage through these increases.

If you drive 12,000 miles per year (the average lease term) and your car gets 25 miles per gallon, you use 480 gallons of gas per year, or 40 gallons per month.  At a national average price of around $4.10/gallon the average American driver will spend roughtly $164 per month on gas.    That’s $84 per month more than what they spent with gas at the now bargain basement price of $2.10/gallon.   Clearly the cost is higher for two-driver families, though they would also presumably enjoy the benefits of two salaries.

I know that an extra $84 per month can really hit some family budgets.  Ialso understand my gasoline analysis leaves out the economic impact of higher food prices, medical costs and other inflationary factors we deal with daily.   My point is that perhaps we need to focus less just on gasoline, and more on ways to help with the other cost increases we face.   Ones we may be able to greater control.

Yesterday the President discussed a proposal to increase oil supplies via drilling more offshore, in the Arctic and by extracting oil from shale.   The discussion of whether this will bring down prices is for another day, as this is the 10-plus year plan and oil’s non-reaction to the news indicates no one believes these moves (if they happen) will help in the near-term.  

What can we do then to perhaps help the sting of higher gas prices?

Think of credit card debt.   If you owe $6,000 on credit cards with an average APR of 18%, you are paying roughly $1,080 per year in interest.   Thats $90 per month.    You should call your credit card company and try to negotiate a lower rate.    The card companies are struggling now just as many other creditors and may be willing to lower your rate rather than lose you to a new, 0% APR card.  If you can negotiate your rate down just 5% to 13% APR, you would save $25/month on that same balance.  

I recently received an offer from Discover Card to transfer balances for 1.99% APR for the life of the balance transfer (so long as I dont pay even a day late, at which time the APR goes up - be careful of that).   With a similar offer, the $6,000 balance now becomes roughly just $120 per year in interest, or $10 per month.  

You have just taken your previous $90 per month credit card minimum payment down to $10 dollars, saving $80.   The net result?   A near elimination of the extra $84 per month you are paying for gasoline.

I know somewhere Fox Business’ Dave Ramsey is squirming, as he smartly advocates having no credit cards and thus paying zero per month in interest.  That’s clearly the best policy, and if you can do it it would even greater mitigate the impact of high gas prices.    I’m merely saying that while there is very little each of us can do to bring down the global run in gas prices, there may be ways to impact individual economic behavior to at least help reduce some of the sting.

I know this is an incredibly simplistic analysis.   My point though in doing the math on these figures is simply to remind consumer that it is easy to focus on what we see more often (filling up with gas a few times per week) than what we don’t see often (the monthly credit card bill that likely comes via email) but its no less important to try to adjust the infrequent costs. 

Own an offshore oil rig or jack-up and need to get men and materials to it?   You may be calling Gulfmark Offshore (NYSE: GLF).

The Houston-based company hit my stock screener with 3 year EPS growth of 78.6% and 3 year revenue growth of 27.6%.    That’s according to Thomson Reuters data.    It compares to 3 year revenue growth for the S&P 500 of just 10.6%.   It also has a net profit margin of 33%.

The company is all international.   They do have two ships on the Mexico side of the Gulf of Mexico, but it primarily operates 200+ foot transport ships in the North Sea,  Southeast Asia and Brazil.  

Interviewing CEO Bruce Streeter today on the show he highlighted that new finds such as the Petrobras field off of Brazil should help drive demand.    The big issue for Gulfmark is lack of availability of new ships.    Streeter noted there is a deep backlog at the ship building firms.  

Seven analysts cover the stock.  Four have a ‘buy’ or ’strong buy.’   Analysts aren’t all bullish though.    JPMorgan has a ‘hold’ on the stock, citing valuation. 

The stock has had a heck of a run.     Coming from the mid-teens to the mid-$60s in a few years.    It also has a nearly 10% short interest level, meaning nearly 10% of outstanding shares are being bet they will fall.

Reminder we do this segment every Tuesday.   Next week: an industrial company whose stock is up 45% this year and has profit margins greater than its peers.   One of its biggest shareholders is noted value investing firm Mairs & Power.  The name and CEO interview next Tuesday.   

Something on the lighter side this morning, courtesy of a Wired blog:

http://blog.wired.com/business/2008/06/the-google-of-t.html

This is more than a bit truthful.  I am sure that small tech firms are interesting in selling to “Mr Bigbyte” and entering the world of “Google high finance.

Sitting here at Pittsburgh Airport waiting to fly home (delayed, natch) and looking around realizing it seems the airport(s) are as crowded as before gas surged to $4/gallon and jet fuel spiked.  

When I left from Newark Airport on Friday the security lines snaked through the entire roped area and down into the gate area.   In fact, I have never seen a line that long in 15 years using the airport.   The lines at Pittsburgh today weren’t that long, but there were plenty of people around.

Maybe Pittsburgh is different.  At roughly 400 miles from my home in New Jersey and at 25 mpg in my car, it would run me roughly 32 gallons of gas to get here, or about $150 bucks.   There would also be about $30 in tolls.  My flight was $258 bucks.   Even with airport parking, it was a small premium to pay over driving to save me 4-5 hours of drive time.   Perhaps my fellow air travelers have done the same math.

Eating dinner in Monaca, PA Saturday night I first tried a place called the Texas Roadhouse.  When I drove up, there were at least 30 people waiting outside, clearly on hold for a table.  I kept driving.   I ended up at an Applebees.   It was nearly as crowded.   I sat at the bar and looked around.  Every table was full and people seemed to be enjoying themselves.

I am not denying there isn’t a slowdown in the economy.  As many of you who have watched for a while know, I’ve been calling for a downturn for two years.   All I’m saying is that I was (pleasantly) surprised by what I found on this trip.  Slowdown or no, people are still flying and still eating out.  Perhaps proof you can’t keep the American consumer down. 

A guest today on the 10am show discusses the difference between being “green” and actually being “clean.”

Woody Clark PhD of Clark Strategic Partners (and one of the Nobel Prize winning group of Al Gore)  makes the point that while many companies are seizing the national mood and marketing themselves as environmentally sensitive “green” companies, not much has really changed in the impact to the planet.   In fact, Woody’s view is that many of the so-called “green” initiatves are actually worse for the environment.

Case in point those energy-efficient fluorescent light bulbs that retailers like Wal-Mart are heavily marketing.  Those bulbs do use far less energy than a regular incandescent light bulb.    That’s the positive - less energy use, less need for power generation and pollution.  Just don’t drop them.  They contain a small amount of mercury, a scourge to you and the environment.  In fact, the U.S. Environmental Protection Agency, while noting the risk to your family is small, lists the following guidelines should you drop one:

1. Open a window and leave the room (restrict access) for at least 15 minutes. If you have fans, place the fans in the windows and blow the air out of the room. Note: If the room has no windows, open all doors to the room and windows outside the room and use fans to move the air out of the room and to the open windows.
2. Remove all materials you can without using a vacuum cleaner.
   • Wear disposable rubber gloves, if available (do not use your bare hands).
   • Carefully scoop up the fragments and powder with stiff paper or cardboard.
   • Wipe the area clean with a damp paper towel or disposable wet wipe.
   • Sticky tape (such as duct tape) can be used to pick up small pieces and powder.
3. Place all cleanup materials in a plastic bag and seal it, and then place in a second sealed plastic bag.
   • If no other disposal or recycling options are available, private residents may dispose of the CFL in residential garbage. Be sure to seal the CFL in two plastic bags and put into the outside trash.
   • Wash your hands after disposing of the bags.
4. The first time you vacuum the area where the bulb was broken, remove the vacuum bag once done cleaning the area (or empty and wipe the canister) and put the bag and/or vacuum debris, as well as the cleaning materials, in two sealed plastic bags in the outdoor trash or protected outdoor location for normal disposal.

Leave the room?  Use two plastic bags?  (isn’t it ironic that the EPA recommends using a plastic bag at a time when many retailers, recognizing the huge pile up of these bags in landfills, are eliminating their use or charging more for them?)   There have even been reports of people forced to call professional clean up crews to dispose of one broken CFL bulb, costing them thousands of dollars.

Next up, the Toyota Prius.   This hybrid car is beloved by those looking to reduce carbon emissions and save gas.   The problem: while the driver of the Prius is saving gas with its energy-efficient 55mpg, the total cost to the environment is much greater.   The reason?  The massive amount of energy it takes to mine and transport the 30lbs of nickel that are found in the Prius’ batteries.

From this month’s Wired magazine: 

Pound for pound, making a Prius contributes more carbon to the atmosphere than making a Hummer, largely due to the environmental cost of the 30 pounds of nickel in the hybrid’s battery. Of course, the hybrid quickly erases that carbon deficit on the road, thanks to its vastly superior fuel economy.  Still, the comparison suggests a more sensible question. If a new Prius were placed head-to-head with a used car, would the Prius win? Don’t bet on it. Making a Prius consumes 113 million BTUs, according to sustainability engineer Pablo Päster. A single gallon of gas contains about 113,000 Btus, so Toyota’s green wonder guzzles the equivalent of 1,000 gallons before it clocks its first mile. A used car, on the other hand, starts with a significant advantage: The first owner has already paid off its carbon debt. Buy a decade-old Toyota Tercel, which gets a respectable 35 mpg, and the Prius will have to drive 100,000 miles to catch up.

One study actually found that because of this, its actually nearly as ‘green’ to buy a Hummer than a Prius!

While that may be the extreme, the point is clear: if you want to be more environmentally conscious, make sure that “green” product you are buying really does have an overall benefit to the planet.   Doing your part is key, but if you are simply transferring the impact to another the net result is neutral. 

We should place a bet on how many times the terms “tax” and “middle class” and uttered in the same sentence by Barack Obama and John McCain ahead of the November election.    My under/over on each would probably fall somewhere around 1,000.  That’s 1,000 times each word is uttered, not combined.

While I know what the word “tax” means (believe me, living in New Jersey you do), the problem is that I have no idea what being “middle class” means.  For that matter, I also don’t know what it means to be “rich.”  I’m not sure the candidates do.  I’m not sure Americans do.

I’m not trying to be obtuse.  Let me explain.

I found this on factcheck.org: An Oct. 2007 poll by the Kaiser Family Foundation, Harvard School of Public Health and National Public Radio asked 1,527 adults what income level makes a family of four middle class. About 60 percent said a family earning $50,000 or $60,000 fit that description. But 42 percent answered an income of $40,000 and 48 percent said $80,000 were both middle class 

Here’s what everyone - Presidential candidates included - is missing: the determination of any relative wealth level cannot be defined solely by income, it must also include cost of living.  We should analyze households and taxes the same way we look at companies, revenue (income) vs. expenses (cost of living).   

For example, according to the 2000 census, the median home price in Iowa was $82,500.   The median price in New Jersey that year was $170,000.

Of course, that data is old (though the newest we have from the census) and so less official but still relevant numbers show this: that the median home price in Iowa from 2006 to 2007 was around $145,000.   The median price of a home in New Jersey in 2007 was $196,300 and more strikingly the median home price for a home in all of the Northeast was $280,000.   Basically double that of Iowa.

And think of it this way.   At 6.25%, a $145,000 loan has a monthly payment of just under $900/month.   The monthly mortage for the average home in the Northeast is $1,700.   And that doesnt include both higher property taxes (guaranteed) and higher insurance costs (nearly guaranteed).  I know people who’s car payment and car insurance is more than $900 a month.

The point is clear: people define their own financial status based on where they live (i.e. their cost of living).  I’m pretty sure that those making $80,000 a year in Iowa are feeling pretty good, at least based on their average home price.   After all, if you make $80ks a year and all-in your taxes are about 40%, your net income is about $4,000 a month.   Not bad compared to the sub-$1,000 monthly mortage. 

To have the same income v. monthly mortgage payment on the average home (income 4x that of monthly payment), the “middle classer” in New England would have to earn about $135,000/year.

Of course, if you went to Iowa and told the person who made $80k that you made $135k, they would think you are rich.  In reality, you are living with the same take home income, and likely higher expenses.

Obama and McCain need to learn basic math.  More important, they should learn to use a basic cost of living index when they discuss the “middle class” and the “rich.”   Especially Mr. Obama.   I’m not making a political statement (I leave that to others) but Obama won’t exactly win the hearts and votes of New Englanders by telling those who make $80,000 a year that they are “rich.”   Tying terms like “middle class” and “rich” to a cost of living index will not only make sure that those who live in pricey costal areas dont get hit with an already higher tax burden, but also make sure that those who can’t play “geographical arbitrage” and move the family to lower cost areas aren’t unfairly labeled, and punished.

Author’s note: I’m not picking on Iowa.  Its a lovely state.   I’m just still bitter about losing every single hand at a Harrah’s in Cedar Rapids! 

Its a story that hasn’t gotten much attention but should.  

LandSource Development Communities, a California real estate partnership, filed for Chapter 11 bankruptcy protection this weekend.    The company was a real estate venture involving homebuilder Lennar (NYSE: LEN), a unit of private equity firm Cerberus, and MW Housing Partners.

The problem is that one of the major investors in LandSource is CalPers, the giant California pension fund that handles the investments of around 1.5 million state workers.   In a sign of terrible timing, CalPers invested nearly $1 billion dollars in the venture in February of last year.   The real estate bubble began to burst just weeks afterward.   According to the Wall Street Journal’s Matt Corkery, CalPers is likely to lose most of that investment.   Of course, CalPers itself really doesn’t have money.   CalPers invests the money of the state employees and retirees.

No one is suggesting this will be a serious hit to CalPers.  The fund runs $250 billion dollars, so this investment represents less than 1/2 of 1% of its capital.  Its the poor foresight and timing of the investment that raises eyebrows.  At the same time CalPers was no doubt negotiating its investment in the LandSource deal, hedge funds such as Paulson & Company were already not only avoiding real esate in February of 2007, but actively positioning itself to profit from real estates decline.

To be fair to CalPers, there was much misguided optimism from the investment.  Witness the comments from the head of the the firm that invested in LandSource:

“We are excited to be investing in such prime property in Los Angeles, a market that we have favored for its long-term growth prospects,” said Victor B. MacFarlane, founder and managing principal of MacFarlane Partners. “This is a once-in-a-lifetime opportunity (italics mine) that few pension managers and investors have the resources and the capabilities to participate in thanks in large part to the flexibility and vision of our long time partner, CalPERS.”

From “once in a lifetime” to Chapter 11 in less than two years.  While that type of rapid destruction of wealth is fairly common in get rich quick schemes profiled in pictureless ads in the back of magazine, its an amazing fall from grace for some of the most highly regarded investors in the country.

Brian