• Jeff Matthews

OPEC to Fed: “Go Ahead, Make My Day”


The Fed should cut rates half a point next week.

At least, that’s what some big money manager is saying, according to my Bloomberg:

In order to reduce uncertainty, the Fed has to get ahead of market expectations and should cut by 50 basis points. Failure to do so will damage market sentiment and force even deeper cuts in December. Now, I just so happened to be reading those words while listening to the Rohm & Hass earnings call.

Rohm & Haas, in case you never heard of it, is as plain-vanilla a company as they come. By “plain vanilla,” I don’t mean “low-tech” or “mediocre.” It’s just a low-profile specialty chemicals company that makes stuff you use every day—the computer you’re using to read this, for example, is using semiconductors packaged in Rohm & Haas materials—yet never think about.

Furthermore, the company’s chemicals are at the heart of not only the U.S. manufacturing economy, but the world’s economy as well, with half its business coming from overseas.

And what Rohm & Haas was saying while the aforesaid Bloomberg article scrolled across my machine, was this:

Now, as we speak, we are seeing dramatic increases with no seasonal easing in key raw materials… We now expect to see an increase in the total raw material cost for Q4 on the order of $50 million…. This is a development of the last two or three weeks.

In other words, since the surprise Fed rate cut in late September, prices of the company’s key raw material have spiked.

How is Rohm & Haas planning to deal with this?

Well, don’t tell the Fed, but Rohm & Haas is already raising prices. That’s right:

As you know, we announced yesterday our intention to increase pricing in the 5% to 15% range effective November 1 of this year.

Now, the spike in raw materials prices at Rohm & Haas wasn’t a big surprise to listeners on the Whirlpool earnings call earlier in the morning.

After all, Whirlpool’s management complained not only about the downside of having Sears as a large customer, but also the upside to their cost structure from the half-billion dollars of extra raw materials prices the appliance maker has had to absorb this year:

This is the first year ever where we have seen a significant decline in demand in the U.S. and significant raw material inflation. In essence, we have had both a demand decline and a cost spike at the same time. Nor were the Rohm & Haas comments a surprise to listeners of the Schlumberger earnings call the day before, when the subject of tight labor markets and rising costs was most emphatically on the minds of one of the world’s all-time great straight-shooting management teams, as was another, equally troubling issue that makes me think the folks at OPEC would love nothing more than another larger-than-expected Fed rate cut next week.

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Here’s what Schlumberger said:

Global demand for oil remains strong, while non-OPEC production continues to disappoint. Production decline rates in mature area and continuing project delays will inhibit non-OPEC supply increases, while personnel and equipment shortages will restrict the industry’s ability to respond.

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There you have it: on top of “cost spikes,” “personnel and equipment shortages” and “dramatic” raw material cost increases, add the declining non-OPEC oil supply to the list of problems next week’s Fed rate will exacerbate, as Bernanke continues his apparently ceaseless efforts to rescue Wall Street’s banking goliaths from their self-created CDO tar pits.

Go ahead Ben,” the folks in Riyadh, who’ve been watching the Saudi Light crude chart spike to new highs, must be saying to themselves, “make my day.”

Jeff Matthews I Am Not Making This Up

© 2007 NotMakingThisUp, LLC

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

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The content contained in this blog represents only the opinions of Mr. Matthews. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. The content herein is intended solely for the entertainment of the reader, and the author.

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