Archive for July, 2005

  • Schoolgirls Beat the Pros
    , July 26th, 2005 at 4:05 pm

    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….

  • Ignore the NASDAQ Composite
    , July 26th, 2005 at 2:59 pm

    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.

  • Viva le Resistance!
    , July 26th, 2005 at 9:49 am

    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.

  • Teva and Ivax to Get Hitched
    , July 25th, 2005 at 9:56 am

    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.

  • I See Fed People
    , July 24th, 2005 at 10:10 pm

    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!

  • AP: Real Estate Market a Gamble
    , July 24th, 2005 at 10:00 pm

    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 or XO Communications, a lot of would-be real estate tycoons may soon rue the day they started buying property.

  • China signals bigger yuan rise unlikely
    , July 23rd, 2005 at 9:31 pm

    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.

  • Two Cheers for Microsoft
    , July 23rd, 2005 at 9:11 pm

    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.

  • Google Watch
    , July 21st, 2005 at 5:55 pm

    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.

  • Greenspan on the Hill
    , July 21st, 2005 at 2:31 pm

    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.