Main | August 2005 »

Baidu Set to Go Public

Shares of Baidu, the Chinese search engine, are set to go public this Thursday. The company will trade on the NASDAQ under the symbol BIDU.

As you might expect, Baidu's IPO is getting a great deal of buzz. The company is being touted as the Chinese version Google. In fact, Google has invested in the company, and some observers think Google will eventually buy the whole thing. Google’s influence is clear as Baidu’s site mimics Google’s minimalist design.

According to Francis Gaskins, an IPO expert, Baidu will carry a price/earnings ratio of 528. I think I know how this story will end.

Posted by edelfenbein at 3:58 PM

NYT: Utilities Are Great Investments, Or Possibly Not

Conrad de Aenlle writes on the utilities sector in today’s New York Times. His thesis is that some people like utilities, while others don’t.

Posted by edelfenbein at 1:40 PM

Listen to Alan

Channel News Asia

Greenspan warns over oil, housing markets

Reuters

Greenspan warns of "speculative fervor" in housing

BBC

Greenspan warns on rising rates

CNN

Greenspan warns on fuel, housing

Forbes

Greenspan warns China currency peg causes 'very serious' problems

Globe and Mail

Greenspan warns good times won't last forever

MSN Money

Greenspan warns of 'significant uncertainties'

The Orange County Register

Greenspan warns of pension pressure

Conspiracy Planet

London Bombings: Alan Greenspan Knew 2 Days Before

Sheesh. He could have told us.

Posted by edelfenbein at 12:58 PM

The Government Cracks Down on Poor Accounting Standards

This time, it’s the SEC that’s up to no good.

Posted by edelfenbein at 12:30 PM

Requiem for the Researchers?

The New York Times has an interesting story about layoffs on Wall Street. I was stunned to learn that since 2001, Wall Street has shed 55,000 jobs. Read the whole thing.

Posted by edelfenbein at 9:57 PM

Report: CNOOC Set to Dump Bid for Unocal

It looks like CNOOC is giving up its plans for buying Unocal. The Chinese have said that there’s too much political pressure. That’ll teach the communists to mess with big government.

Posted by edelfenbein at 6:17 AM

Tomorrow’s GDP Report

Wall Street is waiting tomorrow’s GDP report. This will be the first report on how well the economy did for the second quarter. The government reports each quarter’s GDP growth three times, at the end of the each month following the quarter.

The initial estimate is usually pretty far off the mark. Three months ago, Wall Street got nervous when the initial estimate for the first quarter was just 3.1%. It was later revised to 3.5%, then again to 3.8%.

I find this very annoying. Look at this AP story from three months, and bear in mind that the entire “back story” is wrong. The economy wasn’t hitting a “soft patch,” and the economy’s performance actually exceeded expectations. Investors didn’t know the whole story until the GDP report was revised.

These revisions can be pretty big. I’d prefer to see the government hold off on any economic report until it has a good number. Even if it takes several weeks, the market needs to trust this information.

My guess is that the economy grew by 3.7% for the second quarter. That's just a guess of a hunch of a prediction. Even if I’m wrong, it won’t change my investment strategy at all. The only important aspect of a GDP report is its trend. The economy has expanded above its long-term trend of 3% for eight straight quarters. This will probably be the ninth.

If not, we still need more data to confirm a trend. My advice is to watch tomorrow's GDP report, but don't act on it.

Posted by edelfenbein at 9:35 PM

The Most Underrated Stock on the Market

Without a doubt, UnitedHealth Group (UNH) is the most underrated stock on the market. Not only does it grow, but it grows consistently. The company just posted its 23rd straight quarter of earnings growth over 30%. That's amazing. I’ll be impressed with Google once it can say the same.

UnitedHealth’s stock is up 17% this year, and that’s after coming off a great last year when it soared over 50%. The shares were up another 39% in 2003. In fact, the stock almost never goes down. For this entire decade, UNH has gained over 670%. Not bad, considering the bear market.

The company went public in October 1984. It closed its first day of trading at $4-5/8. Adjusted for five 2-for-1 splits, those shares are now worth about $1,700. Owning the stock is like buying a bond with a 20% coupon.

Despite these great results, many investors overlook UnitedHealth. I guess it’s not as exciting as Google or Amazon, but I’m worried about UnitedHealth’s future. The company just snagged PacifiCare Health Systems for a cool $8 billion, and it raised guidance for the rest of this year. UNH now expects to earn $2.45 to $2.47 a share this year. That still gives the stock a reasonable P/E ratio. This is a stock to buy and hold for the long-term.

Posted by edelfenbein at 2:27 PM

The Plunging VIX

Do you realize that it’s been nearly two years since we’ve had a 2% move on the S&P 500? That’s the longest streak since the mid-90s. With so little action out there, the day-traders must be pulling their hair out!

Volatility is closely watched on Wall Street. Many options investors ignore stocks all together and solely play volatility. The Chicago Board Options Exchange has its own volatility index, which is better known as the VIX. Real estate and oil may be bubbles, but the VIX is in the clutches of a ferocious bear. Today, the VIX closed at 10.36, which is just above an 11-year low.

We used to have wild moves all the time. There were 41 days of 2% or more moves from July to November of 2002. That’s about two a week. Back then, the VIX soared above 40. But not anymore. We haven’t even had a 1.2% day in nearly three months. There’s just no volatility out there.

What does it all mean? It’s hard to say. Volatility is often misunderstood. It’s not necessarily a bad thing to have rising volatility. The media loves to wag its finger at an erratic market, but there isn’t a strong correlation between current volatility and future return. There’s a slight—and I mean very slight—relationship between rising volatility and a turn in the market. But it’s too small to be a viable indicator.

The market started becoming more erratic in mid-1985, but was actually cooling off just before the crash in October 1987. Rising volatility did coincide with bull market of the late-90s. But volatility stayed high through the market crash, and it didn’t start calming down until the market hit rock bottom in October 2002.

If anything, volatility represents how “content” the market is right now. That’s unlikely to change until events change. As long as volatility is falling, the market is happy to continue doing what it's doing.

Posted by edelfenbein at 6:15 PM

Amazon Goes Google

It seems like my local bookstore is about to give up selling books. Whenever I go there, they’ve added a new category of merchandise. You can now get lattes, DVDs, CDs, t-shirts, Winnebagos, you name it. If you want to pick up the latest John Grisham AND a blender, this bookstore’s got you covered.

That’s why I love Amazon. It’s easy. It’s clean. I don’t have to speak with anyone. That’s about all I ask from a bookstore.

But for the life of me, I don’t get Amazon’s stock. As a business, the company simply ain’t that great. Amazon just reported earnings, and their profits dropped by 32%. Youch! But Wall Street is partying like it’s 1999 because AMZN beat expectations. Sorry, fells but I’m not impressed. Expectations are already so low, it’s like being surprised by the crisp cinematography of the latest Ben Stiller movie.

The problem I have with Amazon is that they rely too much on gimmicks. Businesses can use gimmicks, but they can’t live off them. Amazon’s sales were up 26% last quarter. That’s not bad, but a lot of it was due to aggressive discounting. They can't do that forever.

Their new Amazon Prime program gives you unlimited two-day delivery for $79 a year. Again, that’s nice, but that’s all that Bezos & Co. want to talk about. I’m suspicious of any company that tries to discount its way to profitability. To win in the long run, a company needs to have something that sets them apart. Something that their competitors can’t do.

The biggest problem that Amazon faces is that its profit margins are shrinking. In fact, Wall Street is celebrating today because overall margins widened by a tad. But let’s add some perspective, their margins have, for now, briefly stopped falling. That’s not the same thing as growing. Amazon’s margins are still lower than they were one year ago.

Where are the future sales going to come from? Foreign sales were up 50% last quarter, but in North America, sales were up just 21%. It won’t take long for foreign sales growth to level off. Plus, North American operating profits were only up 9%. Once again, shrinking margins.

Future revenue could come from "third-party sales." In essence, Amazon is slowing becoming “Googlized.” Third-party sales are when other companies rent space on Amazon’s site, or Amazon gets a commission of other company's sales. It’s a fast-growing part of Amazon’s business. This is intriguing and certainly worth paying attention to, but Amazon’s core business is not growing like it should. Either Amazon will prove it can grow without discounting, or its stock will be the one that’s discounted.

My advice is to enjoy the service, but steer clear of Amazon's stock.

Posted by edelfenbein at 2:27 PM

Schoolgirls Beat the Pros

This is a fun story. A British investing contest is won by four Scottish schoolgirls.

None of the Scots pupils had any knowledge of the stock market before embarking on the contest, entered by 33 UK schools.

They should start their own fund. Or their own blog! Unfortunately, the contest was only eight months long, so the test is constrained by insufficient data. In other words, they got lucky.

Which reminds me of another Scot:

If you can look into the seeds of time,
And say which grain will grow and which will not,
Speak to me....

Posted by edelfenbein at 4:05 PM

Ignore the NASDAQ Composite

Of all the major indexes, the NASDAQ is the worst. I don’t mean that the NASDAQ market is overpriced. I mean that, as an index, it’s horrible. It tells us almost nothing. An index should be an accurate reflection of what the market, or a sector, is doing. In this regard, the NASDAQ is lousy.

The NASDAQ Composite is a capitalization-weighted index of about 3,200 stocks. That sounds like a lot, but it doesn’t do the job. The problem is that the largest stocks are gigantic, while the vast majority of the stocks are puny. This is true for the market as a whole, but it’s far worse on the NASDAQ.

The seven largest stocks on the NASDAQ are (in order) Microsoft, Intel, Cisco, Amgen, Dell, Google and Oracle. Together, they make up about 25% of the index. Compounding the problem is that many of these stocks overlap. Not that they own each other’s shares, but their businesses are heavily tied to one another. Every time Dell makes a sale, Microsoft and Intel aren’t far behind. So you basically have a few highly correlated Gullivers drowning out three thousand Lilliputians. Outside of these behemoths, there are very few blue chip stocks on the NASDAQ. Of the S&P 100, just eight stocks trade on the NASDAQ.

I understand why the NASDAQ likes to tout their index. They’re proud of their exchange, and they want more business. That’s great, but I don’t see why so many investors slavishly monitor the index. It doesn’t help anyone. I’d particularly like to see the media stop giving it such a prominent place in the news.

If you want to see how the market is doing, look at the S&P 500. That’s 70% of the market. The S&P 500 is nearly five times the size of the NASDAQ Composite, even though it has one-sixth the number of stocks. The Russell 3000 is even broader. The Wilshire 5000 is broadest of all. These indexes aren’t hard to find, yet the NASDAQ is omnipresent, and it’s only about 15% of the market.

Let’s say you want to know how tech stocks are doing. Look at the S&P 500 tech index. Or trade the tech spyders. But if you want to know how well the market is doing today, the NASDAQ is about the last place to look.

Posted by edelfenbein at 2:59 PM

Viva le Resistance!

After losing the 2012 Olympics and having the EU Constitution shot down, France finally won a big victory. The ugly American invaders have been repulsed. The object of their desire—yogurt.

Let me explain. Yesterday, Pepsi said that it’s not interested in buying Danone. Big whoop, right? Well, to the French, it is.

Danone’s stock started to rally a few weeks ago on rumors that Pepsi was interested in buying them. The company is one of the world’s largest dairy and water companies. Danone is very profitable and owns several well-known brands. In America, they sell Evian water and Dannon yogurt.

While most people would welcome an interest in buying them, the French had their berets in an uproar. The thought of losing Danone to a foreign company, especially an American company, was simply too much to bear. Sacre bleu!

The French political establishment jumped (or hopped) into action and rallied around Danone. Several prominent political figures promised that they would do whatever needed to be done to protect French industry from a hostile takeover. All the while, neither Danone nor Pepsi confirmed the rumors.

The French media had a field day. Le Figaro described Pepsi as "the American Ogre." (L’ogre Américain!) Thierry Breton, the finance minister, warned Pepsi that “this is not the Wild West.” I'm curious how many cowboys live in Pepsi's hometown of Purchase, NY. The prime minister, Dominique de Villepin, went on to talk about “defending France’s interests.” He even called Danone, “a flower of our industry.” (Monsieur de Villepin is also the author of four books of poetry.)

How times have changed! Only four years ago, Danone was considering downsizing. In France, the company became public enemy #1. People boycotted their products. Today, the company is a “flower.” Well, it turns out that Danone isn’t exactly French either. It was started in Spain in 1919. Danone gradually became "French" through mergers. Ironic, non?

Some people think that L'affaire D’Pepsi was started by Danone itself to win political favor. If that’s true, maybe they’re more American than they realize.

Posted by edelfenbein at 9:49 AM

Teva and Ivax to Get Hitched

Generic drug companies are some of the best investments in the world. I think this sector will continue to grow in profitability. Everyone needs drugs, and everyone wants to keep health care costs down. Generic drugs are one of the most effective ways of controlling costs.

If you’re not familiar with generic drugs, it’s very simple. Once a major drug company loses its patent on a drug, a generic can make a cheap knock-off. For example, Ivax just started selling a version of OxyContin, which is also known as Hillbilly Heroin. No word if they’ll use Courtney Love or Rush Limbaugh in their ads. If it were up to me, I’d go for it.

The pressure on prices is intense. Whenever there’s pricing pressure in an industry, there’s “consolidation.” In English, this means that everyone is merging with everyone else. Novartis, a Swiss company, bought Hexal and Eon Labs. Last year, Teva bought Sicor. Mylan Labs made a play for King Pharmaceuticals. One small problem. King restated their financials and Mylan got cold feet. But you get the idea.

Now Teva is going to buy Ivax. This is a huge deal. It will make Israel-based Teva the largest generic drug company in the world. It’ll also be one of the largest stocks on the NASDAQ. I think Teva is probably paying too much ($7.5 billion, about a 14% premium), but the payoff could be enormous. Teva is definitely worth owning.

Posted by edelfenbein at 9:56 AM

I See Fed People

Here’s a dirty little secret about Wall Street. The Federal Reserve isn’t nearly as powerful as most people think. There, I've said it. I now expect Federal agents to bang down my door any second. Jack-booted goons will rip my keyboard from my cold dead hands. (First, they came for the bloggers....). I'm sorry, but it’s true. The Fed ain't that big a deal.

The real power is in the hands of the currency and bond markets. Don't piss them off. They own the place. They rest of us just pay rent. The Federal Reserve is simply another bank trying to make a profit. If you understand that, you understand the Fed. Outside that, they give speeches. That's it.

I often hear people say that the Fed created the tech bubble, or the housing bubble. No, wait--it burst the tech bubble. It's actually kinda hard to keep up with these theories, but they always rely on two crucial facts. The Federal Reserve is incredibly evil and incredibly efficient. I doubt the former, and I'm pretty convinced against the latter.

In reality, the markets created those bubbles. By their nature, markets are composed of countless variables, all acting on each other at once. No one “controls” the market, especially not a committee.

At the June Fed meeting, the central bank said that it won’t use interest rates to try and slow down the housing market. That’s good to hear, but it really won’t make a big difference anyway. Of course, I’d be much happier when the Fed tells us that it won’t use interest rates to control interest rates. Now that'd be progress!

Posted by edelfenbein at 10:10 PM

AP: Real Estate Market a Gamble

One sure sign that we’re in an investment bubble: the media turns against it.

Real estate mania is this decade's version of the irrational exuberance that pushed Internet stocks to ridiculous heights during the last decade, only to come crashing down at the beginning of this one. And just as many investors wish they'd never heard of etoys.com or XO Communications, a lot of would-be real estate tycoons may soon rue the day they started buying property.

Posted by edelfenbein at 10:00 PM

China signals bigger yuan rise unlikely

The Chinese are now saying that they don’t see more revisions to their yuan policy. I have to say that I’m very skeptical. The fact is that China now has a lot more flexibility in managing the yuan. They bought themselves some time, but the monetary realities are still the same. Our Treasury debt just doesn’t pay very much. If I had to guess, I’d say that this is an empty gesture to prevent yuan speculation. Good luck.

Posted by edelfenbein at 9:31 PM

Two Cheers for Microsoft

I think I’m the only person who was impressed with Microsoft’s earnings. Why is everyone so upset? Profits were up 37%. The company beat the Street by two cents a share, and the stock is down. What I saw was a pretty decent report.

Yes, I know. They warned about big investments for the new versions of Xbox and Windows (Windows Vista). But so what? Those are going to hugely profitable, and not in the distant future either. We’ll start seeing the payoffs next year.

Let’s look at all the pluses. Xbox is still selling like a champ, and the Server Division is a big moneymaker. As much as people talk about Xboxes, servers are a much bigger business for Microsoft. In the Servers Division, sales were up 16%, and operating profit jumped 32%. On top of that, deferred revenue, which is a sneak peak at future sales, is running very strong.

I haven’t seen Microsoft this cheap in years. For FY 20006, the company expects EPS of $1.27–$1.32. That gives them a P/E of about 20, or an earnings yield of 5%--which is higher than any point on the yield curve.

I’m not going to pretend that MSFT is the earnings juggernaut it once was. But at this price, the shares are a solid value.

Posted by edelfenbein at 9:11 PM

Google Watch

Google reported its earnings after today’s close. Because it’s Google, and they have to do everything differently, there are several earnings figures you can choose from. For example, the company had net income of $1.19 a share. But it doesn’t end there. If you take out the stock options, Google earned $1.35 a share. Or—depending on taxes—$1.29 a share.

Wall Street’s consensus was $1.21 a share, but I have no idea which figure that was for. There was a consensus; we just don’t what was consented to. Last quarter, it took the wire services several hours to figure out what the earnings report meant. Since the stock is getting creamed in the after-hours market, I’m assuming the company missed their earnings.

Sell this stock now.

Posted by edelfenbein at 5:55 PM

Greenspan on the Hill

I was surprised to hear Alan Greenspan spend so much time yesterday talking about long-term interest rates. He seems puzzled why long-term rates are still so low.

This decline in long-term rates has occurred against the backdrop of generally firm U.S. economic growth, a continued boost to inflation from higher energy prices, and fiscal pressures associated with the fast approaching retirement of the baby-boom generation. The drop in long-term rates is especially surprising given the increase in the federal funds rate over the same period. Such a pattern is clearly without precedent in our recent experience.

He thinks the reason is that, across the world, people are saving too much and not investing enough. The clearly wants high rates, and I think the market will oblige.

Posted by edelfenbein at 2:31 PM

eBay Keeps Going

eBay had a great earnings report. I’m simply amazed at how well this company performs.

Sales jumped 40%, and net income rose by 53%. All told, eBay took in 22 cents a share, which was four cents higher than forecasts. The company also raised its full-year forecast to a range of 82 cents to 83 cents a share. Was it just six months ago that eBay warned of slowing growth, and full-year earnings of 74 cents to 76 cents a share?

Let’s put today in perspective. Last year, eBay earned 57 cents a share, and the year before that, it made 33 cents a share. So in the last three months, it earned two-thirds of 2003’s profit. The stock is up about 20% higher today.

Posted by edelfenbein at 1:30 PM

Free the Yuan (and Katie too!)

It finally happened: The Yuan is free!

Well, not entirely free. But more free, nonetheless.

The Chinese government officially ditched its peg to the U.S. dollar. It’s not a big move. The yuan is only 2.1% higher against the dollar.

The Chinese central bank will now keep to a tight 0.3% band against a basket of currencies. They won’t say what those currencies are, but I assume it includes the dollar, yen and euro, plus a smattering of other Asian currencies.

Even though the timing was a surprise, this move is hardly big news. I’d have to agree with one analyst who said that this reform is the tiniest thing China could have done. But it does give the Bank of China more flexibility in the future.

The problem with currency pegs is that they’re simply price-fixing, and price-fixing screws up the normal ebb and flow of capital markets. If you wait long enough, you’ll start to see weird side effects.

For example, Americans have been gobbling up goods made in China. If it were a country, Wal-Mart would be China’s eighth-largest trading partner. I also think that a lot of the huge demand we’ve seen for things like steel is a consequence of yuan. Also, the Baltic Dry Index, which is a barometer of shipping costs, plunged today to it lowest level in two years. This could be a freefall.

What happens next is a big mystery. Right now, gold is up and bonds are down. I suspect that long-term bond yields will continue to rise, perhaps to 5%.

Posted by edelfenbein at 1:05 PM

Lucent’s Word of the Day

The Newark Star Ledger:

Generally speaking, we had a good, solid quarter. This is a tough industry," Lucent Chairman and Chief Executive Patricia Russo said in an interview.

The Wall Street Journal:

"We continue to make progress," said Patricia Russo, chairman and chief executive officer of the Murray Hill, N.J., company. "It was another solid quarter of us doing the things we said we would do."

Reuters:

Lucent Technologies Inc., one of the world's largest makers of telecommunications equipment, on Tuesday said its quarterly net income fell from a year-ago, but beat Wall Street estimates driven by solid demand for wireless equipment.

Telephony Online:

Lehman Brothers analyst Steve Levy called Lucent’s results “solid” in a research note issued before the earnings call.

Reuters II: Lucent's quarter seen solid, wireless a concern

Lucent’s Press Release:

Over the last 90 days, we have made solid progress building on the collaboration that was already taking place in the business," said Russo.

Posted by edelfenbein at 5:01 PM

Tom Brown on BofA

I always enjoy reading Tom Brown. He’s one of the sharpest banking analysts around. Here’s a sample of his feelings about the Bank of America/MBNA deal.

In my opinion, Ken Lewis has morphed into a terrible CEO, and has turned Bank of America into a huge, mediocre financial services conglomerate. My small contribution to the betterment of corporate governance over the next few years will be to work ceaselessly to see to it that Ken Lewis is ousted from his job (without a big severance package) and to see that significant turnover of the board occurs, as well. The best thing that can happen for BofA shareholders, in my view, is that the company be broken up. That is the way to create shareholder value—not by paying an outlandish price for a broken growth company!

Ouch! Read the whole thing.

Posted by edelfenbein at 3:32 PM

Your Guide to Earnings Season

I know earnings season can be a bit confusing for investors, so here's my effort to make this trying time a little less confusing.

First, Advanced Micro Devices led off earnings season when it said that its profits dropped by 65%, but—and this is crucial—those profits were above Wall Street’s expectations, so the stock went up.

See? It’s all about expectations.

Intel’s earnings, on the other hand, were exactly in line with Wall Street’s expectations and the stock went down. So it’s not all about expectations per se. You’re not expected to do what’s expected, but you’re expected to beat expectations. That’s the key. If not, people will expect that other people will sell your stock. So those first people will sell, and you don’t want that.

Are you following this? Good.

Now Ford’s earnings dropped by 19%, but it beat expectations by 14 cents. So the stock went down by nine cents. Now an amateur investor might think that Wall Street is simply out of its mind. Not true. The reason Ford why dropped: profit-taking. Some people said it was a correction, but it wasn't. It was profit-taking. Just trust me on this.

Now Jamie Dimon of JPMorgan Chase is a very smart CEO. On June 1, he said that their earnings were going to be bad: “Absent any improvements in June, we expect our trading results to be worse this quarter than they were in the third quarter last year, which was a terrible quarter.” Pretty scary. Wall Street took the bait and dropped its expectations. The day of that announcement, the stock went up by a penny. And today, JPMorgan Chase reported that it beat those lowered expectations by two pennies.

Of course, the stock is down today, but that was unexpected.

Posted by edelfenbein at 12:15 PM

The Bond Bubble

How come we never hear about a Bond Bubble? I’m always being told that we’re in a housing bubble. You certainly don’t have to look hard to find someone who’ll tell you that so-and-so stock is “due for a correction.” But everyone seems terrified to criticize the bond market.

When the Fed lowered rates, bonds did well. When the Fed raised rates, bonds did well. Alan Greenspan called it a “conundrum.” Don’t bond traders ever suffer from irrational exuberance? People just assume that the bond market is always right.

But now, bonds are falling. It’s only a minor leak so far. The yield on the 30-year T-bond (or at least, it was a 30-year bond when it was issued) reached 4.15% on June 3. The yield got down to 4.18% on June 27, but no lower. Since then, the bond market has backpedaled. Could this be a dreaded double top?

Posted by edelfenbein at 1:05 PM

China's Economy

Tomorrow, the Chinese government will report how well their economy did in the second quarter. We all know the economy in China is booming, but these government reports are wildly inaccurate. You can basically choose any number you want. Ten percent? Fine. Eleven point three? Sounds good to me.

The GDP reports from our own government are pretty bad. But this time, I think this Chinese GDP report is worth watching. It’ll be interesting to see what the government is willing to admit. I tend to think that the Chinese economy is a lot weaker than most people think.

You have to ignore what the government says, and look for other signs. For example, Huang Power, a huge Chinese power producer, said that profits are going to be down 30%–40% for the first half this year. Also, the cost of shipping goods like iron and coal has plunged recently.

The U.S. is putting a lot of pressure on China to revalue the yuan. If China doesn’t move, the Senate wants to slap a huge tariff on Chinese products. For now, Greenspan has gotten the Senate back off. Apparently, a revaluation is coming soon. But if the Chinese economy isn’t do well, that could put any monetary reform on hold.

Posted by edelfenbein at 10:04 AM

Google Watch

Isn’t Google just adorable? Those new fangled Web folks refuse to play by the Wall Street’s rules, and that’s why the Street doesn’t like them. Even though the stock has soared on a gazillion analyst upgrades, deep down, Wall Street isn’t happy. You see, those uptight East Coast squares don’t “dig” what Google is all about. Google does things their Own Way, and they’re not afraid who knows it.

Like when other companies go public, they’re supposed to use some stuffed-shirt investment bank crammed full of Skull n’ Boners. Not Google. They did their own IPO. You heard right. They used a Dutch auction. Cause it’s democratic. None of that screw-the-little-guy business-as-usual stuff. Yes, it’s true, Google did cut the size and price of the IPO (at the last minute), and it reserved $450 million for nine insiders. Also, the Gooligans made a special class of stock that has ten times the voting power of the common stock. But those are messy details. The larger point is about attitude, and Google’s got it.

For example, Google has broken Wall Street’s most sacred rule—they refuse to provide earnings guidance. Imagine that! They’re not afraid to stand up to those bullying Wall Street analysts. At their Analyst Day, Google said that their CFO would speak. But it turned out to be the company’s chef—the Chief Food Officer. Get it? The Chief Financial Officer didn’t even address the analysts. Investors have to understand that Google is an unconventional company. It’s like what Larry Page wrote, “Google is an unconventional company.”

When they had their first public earning report, the Googloids released it early on their Web site (www.google.com, incidentally). Youch! That must have infuriated those arrogant Wall Street sheeples. And after Google blew away analysts’ forecast for the fourth-quarter, you can just imagine how angry Douglas Anmuth of Lehman Brothers was when he had to raise his price target from $190 to $230. Or when Prudential raised their target to $260. Or Goldman Sachs raised theirs to $265. On the inside, it must have killed them.

But that’s ancient history. Now Google’s stock is up to $300—a 250% gain in less than a year. But don't worry, success hasn't changed them. The Google Dolls are still mavericks. They’ve said that they’re not going to split the stock. (Are they allowed to do that?) Anmuth is showing a brave front. Last week he raised his price target yet again (to $350 from $275). Smith Barney is up to $360. How high will they go? I’m sure Wall Street will give those nerdy whippersnappers their comeuppance. Until that time comes, Jim Cramer quietly tells us “Google’s still cheap!”

Perhaps Google is changing their ways. Google’s CEO, Eric Schmidt said, “One of the great secrets of Google is that we are not quite as unconventional as we say we are.” Maybe so. As for me, I’m waiting for Thursday’s earnings report. The consensus estimate is for $1.20 a share. I have no idea what it will be, but whatever it is, I hope Wall Street won't be too angry.

Posted by edelfenbein at 8:46 AM

Idiot Award

If you plan to fax out bogus stocks tips to one million people, it’s a good rule to avoid faxing the Securities and Exchange Commission.

The SEC said that the original fax, handwritten by Yafa, appeared to be an urgent message from a financial planner intended for a client named "Dr. Mitchel." The fax, sent on Dec. 15, 2004, recommended the purchase of shares of AVL Global Inc., saying that the price was about to triple.

Among the fax recipients was the commission's San Francisco office, an apparently inadvertent slip, said Marc Fagel, the commission's head of enforcement in the city.

Posted by edelfenbein at 5:19 PM

Stocks Vs. Real Estate

The Apprentice #3, Kendra Todd, was on yesterday's Bulls & Bears. I admit, I was hoping to see her cry again, but alas, no such luck. Now loose in the real world, Kendra is a real estate agent in Florida. Her segment dealt with which is a better investment right now, stocks or bonds. In Kendra's opinion, it's real estate. Definitely, real estate.

Now, let’s make this clear. Real estate is a nice investment. I hope everyone owns their own home. But in the long run, real estate will never, ever, ever, ever outpace stocks. Never. This isn’t just my opinion, it’s reality. It won’t happen because it can’t happen.

A house is simply an asset. No matter how hard it tries, it will never be anything more than an asset. A house does its job by just sitting there. But a stock is different. A stock is part ownership in a corporation. A corporation is people using assets to create wealth. This ain’t just a matter of definitions.

You can buy a share of stock of a company that can buy a house. A house can’t invest in a corporation. You can form a corporation and issue stock. With the proceeds, you can do cool things, like…buy a house and rent it for profit. After a while, you’ll have enough money to buy another house. Then another and another. Soon, you’ll have a nice stable of houses. That’s what businesses do—they grow. If they don’t grow, they’re replaced by businesses that do. It’s that simple, and a house can never do that.

I know people treat stocks like lottery tickets. And sure, stocks often act like lottery tickets. But ultimately, stocks are claims on real assets. Stocks are a unique investment. No other investment offers you what stocks can do. That’s why every analysis of long-term returns shows that stocks always beat everything else. For the long run, stocks are the best investment to own. Period.

Posted by edelfenbein at 10:30 AM

CNOOC & Unocal

This is starting to look bad. Now, CNOOC is meeting with Unocal’s board to get them to change their mind and support CNOOC’s bid.

On Friday, Senator Dorgan said that he is going to introduce legislation that would block the deal no matter what. It’s hard to say how much support this bill would have.

What’s not being said is that CNOOC is simply offering too much for Unocal. This is a clear sign of two separate tops. One is that the oil market is too hot. The other is that China has way too many dollars. Bear in mind that CNOOC’s deal is all cash, while ChevronTexaco is offering stock and cash.

I fail to see how CNOOC’s ownership of Unocal is a threat to our national security? They can’t take the oil and run off. Most of Unocal’s oil is in Southeast Asia anyway. Why is Congress so worried now? For the last few years, the Chinese government has been gobbling up U.S. Treasuries. Perhaps they want a little more than 4%. Of course, paying $18 billion for Unocal, they’ll be lucky if they get 4%.

Posted by edelfenbein at 5:38 PM

Procter & Gamble Wins European Union Approval to Buy Gillette

The EU has approved the Gillette/P&G merger. It all came down to toothbrushes. To placate the Eurocrats, P&G decided to sell its SpinBrush line of battery toothbrushes. Otherwise, the combined P&G and Gillette would have over half the European toothbrush market.

The Europeans concern isn’t that consumers might be harmed, but that P&G/Gillette’s competitors will be harmed. We—meaning the U.S.—used to believe that “portfolio effects” were important, but we gradually learned that it simply doesn’t hurt consumers. The Europeans still hold to this theory, and it’s what led the EU to block the GE/Honeywell deal four years ago.

Posted by edelfenbein at 2:18 PM

Looking for a Bubble?

If you’re looking for an investment bubble, you might want to consider shipping stocks. The Holy Grail of the shipping industry is something called the Baltic Dry Index. Although most people have never heard of it, the index, which measures the cost of shipping goods by sea, is probably one of the world’s most-watched economic barometers.

Thanks to the China's insatiable demand for iron, the index has had an amazing rise since 9/11. The index rose from 900 in 2001 to over 6,200 last December. As you might expect, the shipping initial public offerings are coming fast and furious. There were three more in June alone. Earlier this year, a company went public with just two employees. As bubbles inflate, the quality of new offerings often tends to go down. The breaking point may be soon. The Baltic Dry Index has plunged over 60% lately. It’s now around 2,400.

The reason for the fall may be signs of a slowdown in China. The lower shipping costs are felt all over the world, and the late IPOs may be left holding the bag.

Posted by edelfenbein at 9:29 AM

S&P's Four-Year High

The S&P 500 closed at a four-year high yesterday. And why not? Earnings are up and bond yields are down. That’s your formula for higher stock prices.

There’s little reason to believe that bond yields are headed higher. That’s what ended the rally earlier this year, but now it’s clear that inflation has been tamed. Even though oil has headed up, it hasn’t translated into across-the-board higher prices for consumers. In fact, higher equity prices might be a sign that oil is headed lower.

What will be interesting to watch is the future of short-term interest rates. Although the Fed has raised rates nine times so far, the yield on three-month Treasury bills is lower than the Fed Funds rate. This may mean that the market is getting uncomfortable with these rate increases. The futures market expects two more rate increases this year.

Posted by edelfenbein at 8:56 AM

GE's Earnings

GE reported earnings of $4.65 billion, a 24% increase over the $3.75 billion it earned last year. The company’s sales increased 13% to $41.56 billion. That means the company took in average sales of over $450 million a day. That’s more than most companies have in an entire year.

The company reported strong growth in all of its sectors. GE is so big and so well-diversified, that any weakness in one area can be picked up in another. Last year, GE earned $1.59 a share. The company is exceedingly precise with its earnings forecasts. Today, GE narrowed its full-year forecast to a range of $1.80–$1.83 a share, instead of the old range of $1.78–$1.83 a share. Two cents may not sound like a lot, but when you have 10 billion shares, that comes to $200 million.

Posted by edelfenbein at 8:24 AM

Apple's Earnings Update

Apple Computer reported very strong earnings yesterday. Profits jumped fivefold, and sales rose by 75%. Apple earned 37 cents a share, six cents more than Wall Street’s expectations. The company’s strategy has been to sell its iPods aggressively and hope customers stay loyal to the Apple brand. That seems to be working. Mac sales jumped by 35%, which is about three times the rate of the global PC market. The number of iPods sold increased by 616% from last year’s second quarter.

Posted by edelfenbein at 1:04 PM

Jim Cramer's Geography

I saw Jim Cramer’s Mad Money TV show last night. During the “lightening round,” a caller asked him his thoughts on PetroKazakhstan (PKZ). The stock has been a huge winner for the past few years, but it’s fallen on hard times recently.

Cramer response was that he doesn’t trust the Russians. Hmmm...that’s all well and good, but PetroKazakhstan is based in Canada, and it does its business in Kazakhstan, which is not Russia.

Here’s a quick geography lesson: Russia is one separate country, Kazakhstan is another. That being said, they’re not the same. They're different. Yes, they’re near each other. They even share a border. But ultimately, they’re two separate, sovereign countries. Actually, the Kazaks are pretty insistent on this point.

I did a little research, and it turns out those spunky little Kazaks have their own country, language and currency. Imagine that! Kazakhstan has lots of cities, too. With cool names! (I looked it up.)

I can only hope that somewhere in, say, Astana—or maybe in Oskemen—some caller to a financial TV show asks the host about the Bank of New York. “Sell! I don’t trust those Mexicans!”

Posted by edelfenbein at 9:59 AM

Small-Caps Shine

What’s been the hottest sector on Wall Street? Small-cap stocks.

The Russell 2000 Index of small stocks has been outperforming the S&P 500 since April 8, 1999. Since then, the Russell 2000 is up over 67%, while the S&P 500 is down over 9%. Small stocks underperformed the S&P from March 25, 1994 to April 8, 1999.

The Russell 2000 closed at a new all-time high on Monday. It reached new a high on Tuesday, but has fallen some since then. There may be some more room to grow. On a relative-performance-basis, the Russell 2000 still has a ways to go to match the level from 1994.

Posted by edelfenbein at 3:10 PM

CNOOC's Bid for Unocal

There’s growing concern over CNOOC’s bid for Unocal. The problem is that CNOOC is 70%-owned by the Chinese government. ChevronTexaco is interested in Unocal as well, but they’ve only bid $16 billion compared with CNOOC’s $18.5 billion. Unocal’s board has recommended Chevron’s offer, but now CNOOC is fine-tuning their bid.

The House Armed Services Committee held hearings today on CNOOC’s offer. Some members of Congress think this is a national security. The House overwhelmingly passed a resolution saying that this deal “may threaten national security.”

I think this is greatly overstated. China is an oil importer, just like us. They want low prices too. Jerry Taylor, of the Cato Institute, testified that this isn’t a national security issue.

Posted by edelfenbein at 2:05 PM

Ebbers Gets 25 Years

See ya in 2030!

2027 for good behavior.

Posted by edelfenbein at 1:28 PM

Apple’s Earnings

Apple Computer is set to report its earnings today. This will be an interesting report to watch. Last quarter, Apple reported very strong earnings, beating Wall Street’s expectations by ten cents a share. But the stock took a hit because the company said that its revenue forecast was merely in line with Wall Street’s expectations. Wall Street had become so used to Apple beating expectations that anything less was seen as a big disappointment. The stock fell sharply on the day of the earnings announcement, and it’s been struggling ever since. Today's report will tell us if iPod sales are beginning to taper off.

Posted by edelfenbein at 9:48 AM

Gillette Votes to Merge

Gillette shareholders have approved the merger with Procter & Gamble. A total of 96% of votes were in favor of the deal. The EU anti-trust regulators are deciding if they need more time to examine the merger.

I was glad to see the famous shareholder activist, Evelyn Y. Davis, question James Kilts' outrageous $165 million compensation package. Ultimately, even Davis voted in favor of the deal.

For his part, Kilts defended his pay:

“If we would have performed like the rest of the industry, my compensation would have been like the rest of the industry, and I never feel good about apologizing for outperforming the industry and making a lot of money for shareholders and I have to make money as part of that," Kilts said. "When I joined the company, I knew I was taking a risk of joining a company that hadn't performed for five years.”

For each share of Gillette, shareholders will get 0.975 shares of P&G.

Posted by edelfenbein at 5:56 PM

The Oil Uproar That Isn't

The New York Times seems puzzled that there isn't a greater uproar over the high price of oil. The article does mention that, corrected for inflation, oil is still well below where it was 25 years ago. However, the article fails to mention that there hasn't been a domestic refinery built in 29 years. The reason for the high price for oil isn't greater demand; it's due to vast supplies being underneath corrupt governments.

Posted by edelfenbein at 1:50 PM

The EU Strikes Again

This time the Eurocrats have raided the offices of Intel. The raids drew praise from......Advanced Micro Devices!

"We welcome today's dawn raid concerning Intel's continuing infringement of European competition rules. AMD has worked with the EU Commission for years and submitted growing evidence of Intel's illegal activities, including materials from third parties."

This shows the difference between American and European anti-trust laws. Our laws are geared to protect consumers. In Europe, they’re less worried about protecting competition, but protecting competitors.

Posted by edelfenbein at 11:18 AM

P&G’s Shareholder Approve Gillette Merger

This wasn’t a big surprise—over 96% of Procter & Gamble’s shareholders approved the merger offer with Gillette. Later today, Gillette’s shareholders will vote to give their approval.

William Galvin, the Massachusetts Secretary of State, was on CNBC’s Squawkbox this morning. While there are a lot of things I don’t like about the merger, especially the outrageous $165 million payout that Gillette’s CEO is getting, I like even less how Galvin is going after them. He’s only recourse is to question the “fair opinion” that the companies got from their investment banks. So the government has to make its case that P&G’s offer, which was an 18% premium to the free market price, wasn’t a fair price. So what is a fair price? Galvin claims that P&G undervalued the deal by over $20 billion.

The market price of Gillette’s stock is determined the collective judgment of millions of investors. Yet this one person claims that they were all dramatically wrong. In fact, 18% more than that isn’t merely wrong—but unfair. Of course, it Gillette is such a bargain, why doesn’t the state buy it? By Mr. Galvin’s reasoning, this would be the best deal since the Louisiana Purchase.

Posted by edelfenbein at 10:55 AM

Pepsi’s Earnings

Pepsi reported strong second-quarter earnings today. What I find interesting is that the company is pretty weak domestically, but it’s doing very well overseas. By volume, soft drink sales in North America actually declined 0.5%. But Pepsi was bailed out by the rest of the world. International profits rose by 23%.

Posted by edelfenbein at 10:48 AM

Earnings Expectations

Wall Street is finally realizing that earnings for the second quarter will be better-than-expected. That’s hardly not to be expected. Earnings have now been better-than-expected for the last twelve quarters. Which leads one to wonder less about the earnings, and more about the expectations. Or perhaps, the expectations of expectations.

Nonetheless, things are looking good. Alcoa was the first major company to report earnings last week. The market liked what it saw, and Alcoa rallied sharply. This week, 24 S&P companies are due to report their earnings results. The biggest increase in earnings estimates is in the energy sector. At the beginning of the second quarter, Wall Street was expecting second-quarter’s energy profits to rise by 13%. Today, it looks like it will be about 33%. But if you take energy out of the equation, the earnings growth for the rest of the S&P 500 is likely to be less than 5%.

Posted by edelfenbein at 12:18 PM

Europe Vs. Gillette and P&G

The European Constitution finally ended its nasty losing streak yesterday when it was approved by voters in Luxembourg. Even if the good people of the Grand Duchy had voted against the referendum, the Eurocrats don’t seem terribly interested in losses at the polls. The Constitution is quite popular as long as no one actually has to vote on it. That’s why the Luxembourgian Yes vote (or Jo vote?) is so important. It keeps “the process” alive. And that’s the important thing—the process. The Constitution has already been shot down by voters in Holland and France, yet the EU leaders insist that “the process” continues, which I take to mean as “vote until you get it right.”

However, there’s another election coming this Tuesday that might similarly be ignored by the Brussels Busybodies. In Boston, Gillette’s shareholders will meet to vote to approve their merger with Procter & Gamble. The deal will almost certainly be approved. Warren Buffett, Gillette’s largest shareholder, has called it a “dream deal.” That’s a nice endorsement to have.

But the merger has hit an unexpected snag—the EU doesn’t like it. Now let’s recount the action: We have two U.S.-based businesses agreeing to a friendly merger. The deal has been approved by U.S. regulators, and it will certainly be approved by shareholders. But the regulars in another country (or entity, at least) object. And what’s the sticking point?

Toothbrushes.

I’m not making this up. Gillette owns the Oral-B brand of battery-powered toothbrushes, and P&G has its own Crest brand. The EU thinks that if the two are combined, the new cowboy superpower will have a competition-stifling command of the global toothbrush market. Think of the horror. Across the continent, mom-and-pop toothbrush makers will be driven out of business by uncouth Americans. Oral care has generally not been a major concern for Europeans, so I guess this is progress of some sort, but it’s a disturbing trend nonetheless.

This isn’t the first time Europe has interfered with American business. As the economy has gone global, so have the bureaucrats. Four years ago, the EU blocked General Electric’s merger with Honeywell. But the issue there was at least something cool, aircrafts. But toothbrushes?

If you had to sum up the pettiness of the European bureaucracy, this would be as good as any. But this is what the Global Economy looks like. Gillette and P&G will have no problem finishing their merger. The Europeans might delay it for a while, and the companies will probably have to sell off some units. But now, every time two businesses even think about merging, they’ll have to consider what might happen in Brussels, not to mention, Luxembourg.

Posted by edelfenbein at 9:22 AM