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Arizona Funds Might Belong to Bayou

More leads in the case of the Bayou hedge fund. Investigators have located $101 million in Arizona that might belong to Bayou. It’s hard to say because no one exactly knows. The hedge partners aren’t talking and their lawyer just quit. Gretchen Morgenson has more.

Posted by edelfenbein at 11:17 PM

Yum! Brands

The Economist has an article about Yum! Brands, the fast food restaurant that’s as successful as it is unknown.

China might seem an exotic market for an American fast-food firm, but it is a logical one. Yum!'s core business is not really making food, but feeding people, and China is where the people are. Yum! gives them what they appear to want, repackaging it often enough to keep it interesting. Yum! is, in its way, as plain and simple as a huge company could be. Its key values are persistence, ingenuity and good humour. It is living proof that in the food industry, as in the newspaper business, you will never go bust by under-estimating the public taste. But you have to do it cheaply, efficiently and on a very large scale.

Posted by edelfenbein at 11:03 PM

Hurricane Katrina

The damage from Hurricane Katrina is simply overwhelming. Communities on the Gulf Coast have been wiped out. Thousands of people have been evacuated, and no one can say when power will be restored. Insurance companies estimate the losses at $26 billion.

The mayor of New Orleans said thousands might be dead, and President Bush said it could take years to recover. Just by looking at today’s big winners (ExxonMobil, Home Depot), you could tell what was on Wall Street’s mind. Yesterday, gasoline futures soared 20%, the biggest move ever. And today, all 29 energy stocks in the S&P 500 went up.

At times like this, it seems almost callous to talk about investments and financial markets. But markets are the medium of investment, and that’s what will help rebuild the Gulf Coast.

The investing landscape has changed. Before, I was convinced that long-term interest rates were headed higher. No longer. In the last two days, long-term rates have plunged. The yield on the 10-year Treasury bond came within a hair of falling below 4% today. The Federal Reserve will probably raise interest rates one more time, but after that, the outlook is unclear.

The economy had been strong. Up till now, consumers have been able to withstand higher energy prices. Could this simply be too much to bear? My initial feeling is to be optimistic. The S&P 500 held above 1,200 and saw a nice rally today. The market is still well above where it was in April and May. I’m still a bull, but Katrina’s reminds why it’s important to be conservative because risk is the event you never saw coming.

Posted by edelfenbein at 10:58 PM

White House to Open Strategic Reserve

Today, the White House announced that it will open the Strategic Petroleum Reserve in order to cushion the oil market in the aftermath of Hurricane Katrina. I doubt this will have much of an impact outside of the very near term. For now, crude oil fell below $70 a barrel.

The government also reported the economy grew by 3.3% for the second quarter, slightly below its original forecast of 3.4%. There will be one more update to this number at the end of September. I wouldn’t be surprised to see second-quarter growth revised higher.

Economists that the economy will grow by 4.1% for this quarter but that’s before the impact of Katrina is taken into account.

Posted by edelfenbein at 8:50 AM

The Onion: Google Announces Plan To Destroy All Information It Can't Index

MOUNTAIN VIEW, CA—Executives at Google, the rapidly growing online-search company that promises to "organize the world's information," announced Monday the latest step in their expansion effort: a far-reaching plan to destroy all the information it is unable to index.

"Our users want the world to be as simple, clean, and accessible as the Google home page itself," said Google CEO Eric Schmidt at a press conference held in their corporate offices. "Soon, it will be."

The new project, dubbed Google Purge, will join such popular services as Google Images, Google News, and Google Maps, which catalogs the entire surface of the Earth using high-resolution satellites.

As a part of Purge's first phase, executives will destroy all copyrighted materials that cannot be searched by Google.

"A year ago, Google offered to scan every book on the planet for its Google Print project. Now, they are promising to burn the rest," John Battelle wrote in his widely read "Searchblog." "Thanks to Google Purge, you'll never have to worry that your search has missed some obscure book, because that book will no longer exist. And the same goes for movies, art, and music."

"Book burning is just the beginning," said Google co-founder Larry Page. "This fall, we'll unveil Google Sound, which will record and index all the noise on Earth. Is your baby sleeping soundly? Does your high-school sweetheart still talk about you? Google will have the answers."

Page added: "And thanks to Google Purge, anything our global microphone network can't pick up will be silenced by noise-cancellation machines in low-Earth orbit."

As a part of Phase One operations, Google executives will permanently erase the hard drive of any computer that is not already indexed by the Google Desktop Search.

"We believe that Google Desktop Search is the best way to unlock the information hidden on your hard drive," Schmidt said. "If you haven't given it a try, now's the time. In one week, the deleting begins."

Although Google executives are keeping many details about Google Purge under wraps, some analysts speculate that the categories of information Google will eventually index or destroy include handwritten correspondence, buried fossils, and private thoughts and feelings.

The company's new directive may explain its recent acquisition of Celera Genomics, the company that mapped the human genome, and its buildup of a vast army of laser-equipped robots.

"Google finally has what it needs to catalog the DNA of every organism on Earth," said analyst Imran Kahn of J.P. Morgan Chase. "Of course, some people might not want their DNA indexed. Hence, the robot army. It's crazy, it's brilliant—typical Google."

Google's robot army is rumored to include some 4 million cybernetic search-and-destroy units, each capable of capturing and scanning up to 100 humans per day. Said co-founder Sergey Brin: "The scanning will be relatively painless. Hey, it's Google. It'll be fun to be scanned by a Googlebot. But in the event people resist, the robots are programmed to liquify the brain."

Markets responded favorably to the announcement of Google Purge, with traders bidding up Google's share price by $1.24, to $285.92, in late trading after the announcement. But some critics of the company have found cause for complaint.

"This announcement is a red flag," said Daniel Brandt, founder of Google-Watch.org. "I certainly don't want to accuse of them having bad intentions. But this campaign of destruction and genocide raises some potential privacy concerns."

Brandt also expressed reservations about the company's new motto. Until yesterday's news conference, the company's unofficial slogan had been "Don't be evil." The slogan has now been expanded to "Don't be evil, unless it's necessary for the greater good."

Co-founders Page and Brin dismiss their critics.

"A lot of companies are so worried about short-term reactions that they ignore the long view," Page said. "Not us. Our team is focused on something more than just making money. At Google, we're using technology to make dreams come true."

"Soon," Brin added, "we'll make dreams clickable, or destroy them forever."

Posted by edelfenbein at 7:21 AM

Citi Slickers

So many Citigroup execs are jumping ship, you’d think the bank was Hewlett-Packard. That’s not quite fair—the Hewlett-Packard employees are getting laid off. The Citigroup folks are voluntarily leaving en masse. Funny, I’d think it’d be a good joint to work for. Huge salary, nice office, no heavy lifting. Be that as it may, the top brass is rushing for the exits.

The latest is Marjorie Magner, the consumer banking chief. She got nailed by a taxi in New York. While recovering, she decided what she wanted to do with her life and apparently it has little to do with being one of the most powerful women in world finance. Her unit (think credit cards) makes more money than Wal-Mart. What could be more powerful than that? Well, she’s considering a career in the entertainment industry (I’m not making this up). The stock sold off on the news. It’s kinda hard to analyze that one.

Then there’s Robert Willumstead. Remember him. Me neither. Anyway, he was the guy Sandy Weill brought in to quiet down the “Sandy has no heir” choir. Well, Willumstead is out too. And by “out” I mean, “an office, car and driver until he finds a job.” Oh, and did I mention the $18 million? That too.

Wall Street wants to know what’s going on. The answer is that Citigroup is being de-Sandyfied. All the negative karma is fleeing and taking its money with it. Ironically, when Weill chose Chuck Prince to be the new CEO, the Street thought it was because Sandy would still be in charge. He’d be the bank’s Dick Cheney to Chuck Prince’s George Bush. Few people thought that Prince would ever be king. But now Prince is in charge and he’s giving the bank an extreme makeover.

Firstly, Citigroup needs to change its strategy of aggressive growth through mergers. Actually, that’s not a choice. The Federal Reserve put Citigroup on Double Secret Probation—no mergers until they’re clean. During the Sandy Years, Citigroup was the banker of choice to all the all future members of Cell Block D—Enron, Parmalat, WorldCom, Adelphia. I think they even did a few deals with Suge Knight. It’s all a little hard to remember.

The big difference now is that Prince is a lawyer. His top priority is cleaning up Citigroup’s regulatory reputation as a bank of easy virtue. One of the moves he’s made is that he’s hired more lawyers. In fact, Willumstead complained of too many Indians in the head office. Magner also complained of micro-managing. Sandy used to let them do whatever they wanted.

Perhaps the biggest surprise was when CNBC reported that Sandy was bolting as chairman of the board. The board told him that if he walked, he’d have to give up his lifetime perks. Sandy backed down.

Today, Citigroup’s stock is barely above its 52-week low. The shares are down 17.3% since April 1, 2004.Obviously, the flattening yield curve hurts the bank, but Wall Street wants to see what Prince can do. I won’t go near this stock until it can prove its turned around.

Posted by edelfenbein at 6:17 AM

Hope for Dell

Daniel Gross has more on the recent anti-Dell noises. I still think it’s a thesis looking for a story.

Despite this rash of bad news, it's too early to write either the Dell-is-doomed or Dell-is-back story. Dell's business model isn't broken, and it's not fundamentally challenged. No, for every trend, there comes a time when you can no longer simply extrapolate the results of the past into the future. It happens to every great company and to every great brand. Dell's stock still trades at a significant premium to the market. Investors are willing to pay far more for a dollar of Michael Dell's earnings than they are for a dollar of the S&P 500's earnings today because they think his will grow faster. To a degree, Dell has finally fallen victim to the same malaise that has affected the other gigantic stock stars of the 1990s: Wal-Mart, General Electric, Microsoft, and Citigroup. They have undergone ungainly transitions from supercharged growth to merely impressive growth. At 21, Dell has belatedly entered its awkward adolescence.

That’s an important reminder, but I disagree. Dell is still able to deliver astonishing growth. The company’s sales growth rate has actually accelerated in the past few years (13.6% in 2002, 17.1% in 2003, 18.7% in 2004; although just l5.3% YTD).

Here’s more on the falling prices in the PC industry.

Posted by edelfenbein at 11:15 PM

Spitzer's Settlement Two Years On

Eliot Spitzer made quite a name for himself taking on Wall Street. Two years ago, he forced the biggest firms on Wall Street into a global settlement due to conflicts of interest between research and investment banking. The firms had to pay over $1.4 billion. The money was supposed to go to investor education, independent research and investors who were harmed. Instead, it’s turned into a money grab among competing federal and government agencies.

Most of the $413 million that went to the states, based on population, went to help balance state budgets (or close big gaps). California had the largest share--$43 million. It put $40 million into its general fund and reserved $3 million for investor education. So far, it has spent $150,000 on a campaign to teach military personnel and their families how to avoid financial scam artists.

Posted by edelfenbein at 12:04 PM

More on Bayou

The New York Times has more on the fall the Bayou hedge fund.

"It's not logical to me," said Leon Meyers, an investor in Bayou who is still baffled by the indications of possible fraud at the firm. "If this was a Ponzi scheme, why would the firm go through a voluntary liquidation, when all this would come to light?"

Posted by edelfenbein at 10:14 AM

The Collateralized Debt Obligations Market

The market for collateralized debt obligations, or CDOs, is the fastest-growing business on Wall Street.

Banks create CDOs by bundling together assets ranging from mortgages to loans to high-yield bonds, with income from those assets used to repay investors. The securities are divided into pieces, or tranches, that can offer yields as high as 14 percent, said Nestor Dominguez, 48, co-head of Citigroup's North American CDO group in New York. Average investment-grade bonds yield 5.1 percent and junk bonds yield 7.5 percent, according to Merrill.

``The high yields have created great demand for CDOs from hedge fund managers and arbitrageurs,'' said Thomas Eggenschwiler, 47, co-head of fixed-income research at Aladdin Capital Management LLC in Stamford, Connecticut, which oversees about $3.5 billion and buys the securities.

CDO fees usually equal about 1.5 percent to 1.75 percent of the size of a deal, bankers who arrange such sales say. That's more than triple the average 0.4 percent that banks charge to sell investment-grade bonds and about the same as fees on junk bonds, traditionally the most lucrative, Bloomberg data show.

Many CDOs are “synthetic,” meaning they’re backed by credit default swaps. Although Greenspan has spoken favorably of credit default swaps, the growth of this market has led to meeting to a meeting of top Wall Street firms next month at the New York Fed to discuss credit derivatives.

Posted by edelfenbein at 9:53 AM

Reuters: China Defends Yuan Policy

China defended its currency regime on Tuesday ahead of a visit to the United States by President Hu Jintao, but hinted at possible future changes by saying it would "develop and perfect" the exchange rate.

Some U.S. politicians and industry groups complain that the yuan's small revaluation last month will do little to address the yawning U.S. trade deficit, and hope President Bush will press Hu on the matter when they meet next week.

In a briefing about Hu's trip, He Yafei, director-general of the Foreign Ministry's department of North American and Oceanian affairs, said the reforms to the yuan, also known as the renminbi, fit China's reality.

"We will further develop and perfect the renminbi exchange system with a firm heart," He said.

He said that currency issues were a matter of national sovereignty and that Beijing had always taken a responsible attitude toward the exchange rate.

"We have taken into consideration the practical situation of China's economic development and how to maintain the financial and economic stability of the region and the world," He said.

Critics accuse Beijing of keeping the yuan undervalued so as to make its exports cheaper on the world market.

On July 21, the central bank revalued the yuan by 2.1 percent and dropped the dollar peg in favor of managing the exchange rate with reference to a basket of currencies.

Hu visits the United States from September 5 for talks also expected to feature concerns over Taiwan and the trade deficit.

Posted by edelfenbein at 9:37 AM

Greenspan Warns

Financial Times

Greenspan Warns Successor

The Telegraph

Greenspan Warns of the Dangers from Capital Gains

NewsHour

Greenspan Warns of Growing Risks to U.S. Economy

Smart Money

Greenspan Warns of Rise in Risk Tolerance

Myrtle Beach Sun News

Greenspan Warns Homeowners

BBC News

Greenspan Warns on Protectionism

The Washington Post

Greenspan Warns End of US Housing Boom Inevitable

Globe and Mail

Greenspan Warns on Deficits

Financial Times

Greenspan Warns on Dangers in US Housing Market

The Spoof

Alan Greenspan and Jessica Simpson Burned in Effigy After Warning of House Price Crash

Posted by edelfenbein at 8:58 AM

Police Arrest NYSE Member for Death Threat Against Fellow Member

Wall Street can be a tough place. According to police, Edward A. Reiss made a death threat against William Higgins. Higgins has been opposed to the New York Stock Exchange’s plan to buy Archipelago.

Here’s more on Reiss:

“In the past 10 years, electronic technology has transformed the Exchange at lightening speed,” says Ed.

Although Ed marvels at the computerization of the floor, there have been no advances in saving shoe leather. He’s in constant motion, running from the Main Room to the Garage and back, shouting and gesticulating in a lingo unique to the Exchange.

Posted by edelfenbein at 2:40 PM

Bayou Hedge Fund

Two weeks ago, Eric Dillon went to the offices of Bayou Management. He’s a money manager and he wanted to find out what was happening at the hedge fund. The fund had abruptly shut down, and despite promising to return everyone’s money, no money had been dispersed. Also, no phone calls were being returned. Dillon knocked on the Bayou’s front door, but no one came. He came in through an unlocked back door, and on the CFO’s desk, he found a letter that began, “This is my suicide note and confession.”

The Wall Street Journal has the whole story. Also, Gretchen Morgenson wrote about Bayou on Sunday.

Posted by edelfenbein at 10:17 AM

Foreigners are Pouring Cash into Emerging Markets

The Economist has an interesting article on the sudden interest in emerging markets.

Between the beginning of June and the week ending August 17th, emerging-market equity funds took in a net $6.94 billion. That brings the year’s total to $8.74 billion, nearly three times 2004’s level and more than the previous high of $8.6 billion for all of 2003. Bond funds tell the same story, with total net inflows this year of $4.74 billion, a record.

Posted by edelfenbein at 9:48 AM

Google Watch

UBS lowers its earnings estimate due to the secondary stock offering.

For 2006 and 2007, UBS lowered the earnings-per-share estimates on Google to $7.57 and $9.30, respectively, down from $7.60 and $9.43, citing the impact of an offering of about 14 million shares expected in the third quarter.

Posted by edelfenbein at 9:19 AM

Bankruptcy Abuse Prevention and Consumer Protection Act

There’s another hurricane headed towards Wall Street. On October 17, the new bankruptcy law goes into effect. The old law is considerably more liberal, so many companies are expected to file before the deadline. Both Northwest Airlines and Delphi have said that they’re contemplating filing under the old law. The new law is aimed at reducing abuses of bankruptcy proceedings and it makes declaring bankruptcy more difficult. But like all laws, there will be unexpected side effects.

Certain provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act will give airlines and other troubled companies less breathing room than in the past to settle their debts and continue in business, rather than liquidate. Among other things, they will have a harder time deferring payment of utility bills to conserve cash. In addition, new restrictions on executive compensation will make it tougher to retain or hire the top-notch managers required to pull off a corporate turnaround.

Some of the provisions may seem esoteric, but they are sweeping in their implications. For instance, the law imposes an 18-month limit on the incumbent management's exclusive right to propose a reorganization plan. This ability to control the ball is the debtor's most powerful means of persuading contending groups of creditors to compromise. Under the new arrangement, one faction might obstruct negotiations until it gets a shot at proposing its own, self-serving plan.

The new law's consumer-related provisions stirred considerable controversy. The no-less-important corporate rule changes received negligible attention, outside the circle of bankruptcy specialists. Now investors must live with the consequences. That will mean dealing with dramatically increased uncertainty, at least until the bankruptcy courts handle a fair number of cases under the new rules.

Posted by edelfenbein at 9:05 AM

Katrina Slams Louisiana

Hurricane Katrina has made landfall in Louisiana and it’s already causing damage on Wall Street. For the first time ever, crude oil futures soared over $70 a barrel. More than 40% of U.S. oil production operations were closed down this weekend. The stock futures are currently pointing to a weak open today.

Before Katrina is done, she could cost insurers $30 billion. Several of the major insurance companies should open lower today.

The big concern right now is that Katrina is heading towards refining operations. Not only are operations shut, but we also expect to see a lot of damage. Naturally, gas prices could go even higher.

If that isn't enough, remember that September is historically, the market's worst month. Septembers in post-election years are particularly bad.

Posted by edelfenbein at 8:42 AM

A-Rod

Alex Rodriguez has the best shot of anyone to break Hank Aaron’s all-time home run record. In 23 seasons, Hammerin Hank hit 755 home runs. A-Rod is already up to 38 this season which gives him a lifetime total of 419. Even though he’s only slightly more than halfway to Aaron, his start is pretty amazing. Earlier this year, Rodriguez became the youngest player to hit his 400th home run. On his 30th birthday last month, A-Rod had more home runs, runs batted in, runs scored and hits than the respective all-time leaders did by their 30th birthdays.

Since the all-star break, A-Rod has actually picked up the pace. At this rate, he could hit another 10 home runs before the end of the season. If he then added another 46 next year, he’d move into a three-way tie with Willie Stargell and Stan Musial at 475. To be very optimistic, he could get his 500th homer before his 32nd birthday on July 27, 2007. Jimmie Foxx currently holds the mark for youngest to 500. Double-X did it just one month before his 33rd birthday. But Foxx’s career is a good reminder against projecting too optimistically into the future. Foxx’s home run output quickly dwindled and he ended with 534.

When A-Rod only hit 36 home runs last year, I thought that was only natural because Yankee Stadium is so much bigger than the Ballpark in Arlington. But this year, A-Rod has adjusted very well to the Bronx. He’s currently hitting .360 at home with 23 home runs. If he stays healthy (that’s a big if), Rodriguez could hold several all-time marks before his career is done.

Posted by edelfenbein at 10:39 PM

Be Warned: Mr. Bubble's Worried Again

Robert Shiller is worried about a housing bubble. I also think the housing market is overheated, but Shiller is far too much of a bear for me. He gets a lot of credit for “predicting” the stock market crash in his book “Irrational Exuberance,” but Shiller had been bearish since 1996. He’s a bear who’s always warning about a bubble.

The problem I have with Shiller’s real estate analysis is that he’s compiled a chart going back to the 19th century. It’s very unfair to compare today’s prices to prices so long ago. Today, we have a very mature and sophisticated financial marketplace. There are countless regulations, plus, believe it or not, we have smarter consumers. Borrowers have dozens of options, and the mortgage market is gigantic. The old real estate industry was supported by thousands of tiny George Bailey-type savings and loans. To compare today’s prices to the real estate market of so long ago, ignores the huge advances that have been made.

In Shiller’s world, it’s nothing but boom and bust. But you can have an asset soar and not always have a bubble. The stock market soared in the 1950’s. In fact, the period from 1949 to 1956 was probably one of the greatest bull markets of all-time. But people don’t think of it as a bull market because it never crashed. Also, just because an asset is overpriced, doesn’t mean it’s about to crash. Prices can stay high for a long time.

The boom in real estate has been driven by important changes. We’ve had the lowest interest rates in decades, plus housing prices were cheap due to the surge in tech stocks. I don’t believe that everyone in American woke up one day and suddenly became “irrational.” I saw Shiller on the news today and he claimed the public’s opinion was one great big, “don’t worry, housing prices will go up for ever!” Bears always do this. I don’t know one person in 10,000 who would say that.

We know housing prices have gone up a lot. They certainly can’t keep up this growth rate, and prices are probably due to fall (Shiller expects a 40% correction). But there are several ways out of a bull market besides a bursting bubble.

Posted by edelfenbein at 1:18 PM

Petrokaz Bid May Face Kazakh Opposition

CNPC's buyout of PetroKaz might not go so smoothly. The Kazakh government is not too pleased.

Posted by edelfenbein at 10:36 AM

Walking on Sunshine

New York Sun

Tropical Storm Katrina Brings Her Waves Closer to Florida

Investors Business Daily

Katrina and the Waves Set Oil on Course for $70

KARE 11

Katrina Bringing Her Waves to Southeast Florida

Elites TV

Tropical Storm Katrina Brings the Waves as It Nears Florida

EITB

Katrina and Its Waves Spread Across Southeast Florida

Posted by edelfenbein at 8:03 AM

Dell on the Defensive

Everyone seems to be attacking Dell lately. Business Week, in particular, has taken a strong anti-Dell stance. They have a story now on how HP is outmaneuvering Dell.

Few investors would dispute the notion that Dell is one of the great companies in tech. The world's largest computer maker's earnings jumped more than 25% last year, outpacing a nearly 19% rise in sales. It has a clear playbook to push into higher-margin products and new geographic markets. So why are Dell shares down 16% since the end of last year, while those of rival Hewlett-Packard have soared more than 27%?

HP is simply beating Dell hands down in managing Wall Street's expectations. HP was long one of tech's most mediocre performers -- famous for big earnings disappointments and unfulfilled ambitions. But the stock lost its "Carly discount" after the divisive Carleton S. Fiorina was shown the door in April, and the new chief executive, Mark Hurd, began doing the right things.

Please. HP has huge problems of its own. The company is laying off 15,000 employees, and it’ll be lucky if sales rise 5% this year. True, the stock is up this year in the sense that it’s less sharply off its high. Wall Street is applauding HP’s cost-cutting initiative. But Dell never implements one because it never has bloated costs.

By contrast, Dell is becoming a victim of its own success. On Aug. 11 the company announced a second-quarter sales increase of 14.7%, far outpacing HP's 10% rise. The Round Rock (Tex.)-based Dell said it cut prices too much and didn't sell as much as it hoped to the federal government.

Trouble is, the sales number was below its own earlier forecast of a 16% to 18% increase. Worse yet, Dell also ratcheted down its revenue projections for the current quarter ending in October. Dell's stock immediately tanked 7.4%.

This story is searching for a theme that doesn’t exist. Dell could have made up the sales shortfall with a minor price increase on each of its units sold.

On Aug. 12, high profile Goldman Sachs analyst Laura Conigliaro downgraded Dell to "market perform" from "outperform" because of the lower estimate for future sales growth.

That’s for people who haven’t gotten the hint. On the day of its earnings report, Business Week ran another anti-Dell story quoting, again, Laura Conigliaro.

Clearly, Dell is still a fabulously successful company. It's earnings grew 28%, and sales--while slightly low of expectations--still grew a brisk 15%. But the specter of slower revenue growth in the future has analysts worried that even Dell is running out of easy pickings--that even it will have to break a sweat to find customers willing to pay enough for plain old PCs to keep its financial formula in good working order.

As with almost everything these days, there may be a "rise of Asia" component to this story. Laura Conigliaro, Goldman Sachs' excellent hardware analyst, points out in a report titled "A Miss With Much Wider Implications," that rivals such as Acer, Lenovo and BenQ are pushing prices down farther than even Dell may care to match. What's more, much of Dell's growth is coming from Asian customers, who typically buy cheaper configurations.

A more serious problem that Dell is facing is a massive attack from blogs. Jeff Jarvis wrote about his experience with a new Dell and the company’s lousy customer service. Again, Business Week reports the gory details:

The Jarvis affair seems to have struck a chord with other Dell customers. Daily visits to BuzzMachine have doubled, to more than 10,000, estimates research firm Intelliseek. Among the responses: "Dude, get an Apple."

This comes on the heels of a University of Michigan report showing that Apple creamed Dell in a customer survey.

Customer satisfaction at Dell, the world's largest personal- computer maker, declined 6.3 percent, based on the University of Michigan's American Customer Satisfaction Index. Dell fell further behind Apple Computer Inc., which grabbed the top spot in 2004.

I’d be much more concerned with a reputation for poor customer service. Initial reports show that Dell is taking this very seriously. I’m not so worried about Dell’s revenue shortfall. AMR Research rises to Dell’s defense:

Wall Street is punishing Dell for missing its revenue target last quarter, but a closer look reveals a price management strategy in play, writes Laura Preslan and Mark Hillman of AMR Research.

Dell has long been the poster child for using price to shape demand and keep the supply chain running smoothly.

The ability to match available configurations to consumer discounts has set the company apart from its competitors. Look back to when Dell made headlines during the 2002 dock strike, offering flat screen monitors for a nominal price increase because they could be shipped via plane more easily than traditional monitors.
Dell knows how to use price to shape demand.

Nonetheless, doomsayers have claimed that Dell's revenue miss signals its demise. Faced with a shrinking market, Dell, the only PC maker that has generated consistent revenue and profit growth for several years, is no longer able to keep up.

Except for one thing: profits are up. In fact, profits are up by 28 percent to $1.02 billion in quarterly net income, and Dell took market share in every region. Clearly revenue growth is important, but in a rapidly commoditising business, profit is king. The less popular, but more accurate interpretation of Dell's miss is that it bought customers with lower prices, but was able to increase profits, only cementing its leadership in price management.

The effective application of price management discipline can create several outcomes, from higher revenue, to more customers, to increased profits. Dell grew quarterly revenue by 15% and net income by 28 percent. Add the marketing perspective of cementing loyalty with price and that buyers today become less price-sensitive over time, and Dell reveals itself to still be on top of its price management game.

Posted by edelfenbein at 12:50 PM

Boom and Bust at Sea

The Economist looks at the shipping industry, at the outlooks is not good:

The uninspiring track record of some shipowners is but a squall compared with the storms that may be gathering over the horizon. The recent bumper returns from shipping have prompted a ship-building boom. As a result, an armada of new ships is joining the world's fleets just as the rate of growth of world trade may be slowing. According to the Economist Intelligence Unit, a sister company of The Economist, the rate of growth of world trade in goods is set to slow, albeit to a still respectable 6.6% this year and 7.0% in 2006.

And Slate asks, “What’s with the Greek Shipping Magnates?"

On Tuesday, indicted lobbyist Jack Abramoff agreed to answer questions about the murder of a Greek business contact named Konstantinos Boulis. Boulis was shot to death a few months after he sold 11 casino ships to Abramoff and a partner. Meanwhile, Paris Hilton continues to plan her marriage to Greek shipping heir Paris Latsis, and Mary-Kate Olsen has been seen around town with Greek shipping scion Stavros Niarchos III. What's with all the Greek shipping magnates?

Posted by edelfenbein at 10:54 AM

Financial Times: Google's Wake-Up Call

An editorial in today's Financial Times:

What should you do when Google parks its tanks on your lawn? The temptation is to panic. Having rapidly established itself as the world's largest search engine, the group has breezily upturned industries as diverse as academic publishing and map-making. Now it is the turn of telecoms.

Google's decision to establish an online voice calling service, Google Talk, is a vivid illustration of a young technology coming of age. A decade after the first commercial Voice over Internet Protocol services launched, Voip's growing popularity is beginning to threaten traditional carriers.

The promise of free, or dramatically discounted, calls via personal computers attracted an estimated 3m people in the US to internet telephone services last year. IDC, an IT and telecoms consultancy, predicts that will rise to 27m by 2009. An estimated two thirds of large US businesses are using Voip for all or some of their telecoms needs.

Google is entering a crowded field, but some early leaders are emerging. Vonage, which charges $24.99 (£13.89) a month for unlimited calls, has signed up 700,000 people in three years. Skype, which has grown through word of mouth, has signed up 2m paying customers before its second birthday.

As an OECD report published yesterday spelled out, the march of internet telephony threatens traditional, fixed-line revenues, particularly for lucrative international calls, where online upstarts can offer the steepest discounts. Revenues from fixed-line voice traffic account for 70 to 90 per cent of the typical incumbent's total income, and are already under pressure.

Mobile operators are similarly vulnerable, as Skype and others develop dedicated WiFi phones.

The industry has begun to respond. AT&T has declared its intention to be the market leader in Voip services, BT group is offering cheap international calls through BTCommunicator, and Comcast is plugging the "triple-play" attractions of voice, video and data services over its cable network.

Yet some still seem reluctant to promote Voip, for fear of eroding their traditional businesses. They have comforted themselves with the thought that Voip will encourage wider adoption of broadband services. But broadband prices are already under pressure.

Early problems with Voip's reliability have largely been sorted out, but Google, Vonage and Skype do not yet have services that will appeal to everyone. Google Talk, for example, will only allow calls between PCs. This is unlikely to be the case for long.

Traditional providers can respond by offering higher value services, such as voicemail and call forwarding, and by bundling voice and broadband services. The future of the industry may yet be an integrated one. But incumbents must face the need to cannibalise old revenue streams, which means cutting costs further. It is time for them to walk the talk.

Posted by edelfenbein at 10:26 AM

Happy Birthday, Julio Franco

Atlanta’s first baseman, Julio Franco, turns 47 today. Dear lord. I can’t even imagine what that’s like.

Franco was drafted by Philadelphia in June 1978. I bet half the league wasn’t even born then. He debuted for Phillies as a shortstop in 1982. To put that in perspective, also on that Phillies team were Pete Rose (born 1941), Mike Schmidt (born 1949) and Steve Carlton (born 1944).

Then next year, Franco was traded to Cleveland. Ironically, the Phillies’ manager, Pat Corrales, also went to the Indians. At this time, the Indians weren’t very good, but they had some top-notch players like Franco and Joe Carter, who later became break out stars. In 1984, Franco led the league in at bats, and came in fifth in hits. In 1986, he batted .306, then .319 in 1987. In 1988, he moved to second base, and even got a tiny smattering of MVP votes.

After five years in Cleveland, Franco was traded to the Texas Rangers right as the George W. Bush era was beginning. Julio had his best years in Texas. He made the all-star team for three straight years. In 1990, the all-star game in Wrigley Field was scoreless through six innings. Sandy Alomar led off the AL seventh with a single, followed by another single from Lamar Parrish. Franco was due up next, but the game was halted for a 68-minute rain delay. When play resumed, Franco smacked a double scoring both Alomar and Parrish. He won MVP honors as that was the only scoring of the game.

Franco’s best year was 1991. He won the batting crown with a .341 average. He collected 201 hits, and stole 36 bases. In 1994, Franco was traded to the White Sox. He was probably on his way to a better year than 1991, but the players strike put an end to that. When the season ended, Franco was batting .319 and he had 20 home runs, the most in his career.

Then Julio’s career started to hit some snags. He missed 1995, and in 1996 went back to Cleveland where he hit .322 in just 112 games. That also marked his first post-season appearance, but the Indians were bounced in the ALDS by the Orioles. In the middle of the 1997 season, he was traded to Milwaukee. He missed all of 1998, had one at bat for Tampa Bay in 1999 and then missed all of 2000.

Most players would hang it up, but not Julio Franco. On August 31, 2001, the Atlanta Braves bought him from the Mexico City Tigers. The Braves used him at first base and in 25 games, he batted .300. Atlanta won the division title, and knocked off Houston in the ALDS, but lost to Arizona in the NLCS. Franco hit home runs in both series.

The Braves decided to keep Franco at first base. He played 125 games in 2002, 103 in 2003 and 125 in 2004. Each year, he’s raised his batting average. Last year, Franco batted an amazing .309. This year, he’s hitting .298 in 84 games. He went 0-for-4 today against the Cubs, but he’ll certainly be playing in this year’s post-season.

All told, Franco has 2,513 hits in 21 major league seasons through Tuesday. He also has 3,833 hits in 29 seasons in the minors, majors, Japan, Korea and Mexico. Happy Birthday, Julio!

Posted by edelfenbein at 8:51 PM

Today’s Market

This is a frustrating market. Every time stocks start to rally, they quickly run out of steam. Earlier, I mentioned how the market was stuck in a tight 2% trading range—not anymore. The S&P 500 is now below its March high. The index has fallen in five of the last six sessions. The market is up today, led by a big surge in the homebuilders. The automakers are also having a good day. General Motors is up about 4%, and Ford is up 1.7%.

What’s unusual now is that stocks and bonds are completely “delinked.” When stocks are up, bonds are down. When bonds rally, bonds lose ground. In July, the 10-year T-bond tanked. In just six weeks, long-term yields jumped 30 basis points, but stocks were doing well. But now, the yield is back below 4.2% and stocks can’t get a footing.

Posted by edelfenbein at 1:57 PM

Betting on Oil

This is good. John Tierney is betting Matthew Simmons on the price of oil. Simmons thinks oil is headed to $200 a barrel by 2010. He’s the author of the latest oil scare book, Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy. Tierney isn’t so worried, but it doesn’t have much to do with Saudi Arabia.

I didn’t try to argue with him about Saudi Arabia because I know next to nothing about oil production there or anywhere else. I’m just following the advice of a mentor and friend, the economist Julian Simon: If you find anyone willing to bet that natural resource prices are going up, take him for all you can.

Julian took up gambling during the last end-of-oil crisis, in 1980, when experts were predicting a new age of scarcity as the planet’s resources were depleted by the growing population. Julian had debunked these fears in The Ultimate Resource, which showed how human ingenuity had kept driving down the price of energy and other natural resources for centuries.

This is exactly right. The price of nearly every commodity has declined almost continuously for centuries. There are occasional price spikes, but they’re all temporary. I won’t guess where this top will be, but the price of oil will certainly fall.

Posted by edelfenbein at 10:19 AM

How Much Would You Pay?

How much would you pay for a company that made $100 last quarter? I’ll give you some more details. The company had sales of $527, and it’s expecting sales of $640 to $660 next quarter.

Maybe $2,000? How about $3,000? Or you can be crazy and pay $10,000? If this company were Baidu, the market is offering $180,000. When you put financial numbers in smaller terms, it’s easier to see how crazy Baidu’s valuation is. All I’m doing is dividing Baidu’s real numbers by 15,000. Of course, on the bright side, Baidu used to be worth $350,000 just two weeks ago.

Posted by edelfenbein at 9:48 AM

Fall of the Homebuilders

After a tremendous rally, the homebuilders have been selling off recently. The industry group peaked on July 28. Then on August 5, Carl Reichardt of Wachovia downgraded Toll Brothers due to a perceived housing slowdown in the Washington, DC market. Several stocks followed Toll Brothers lowered. Since July 28, the group is down well over 10%.

The news isn’t getting better. Yesterday, the National Association of Realtors reported that existing home sales dropped 2.6% last month. Also, the number of homes for sale on the market increased. Overall, the median home price is now $218,000, a 14.1% increase over last year. Condo sales dropped 5%, compared to a 2.3% drop for single-family homes.

The market’s concern is if this is a minor pullback or the beginning of a long-term trend. Picking a change of direction of a long-term trend is always a dangerous undertaking. Trends can last much longer than you think. However, I think the best and safest assumption is that the homebuilders are due to head lower.

D.R. Horton, the largest homebuilder by market value, is down over 17% since July 28. Toll Brothers and KB Home are both down 15.4% (the homebuilders favor names with initials). M.D.C. Holdings is off 14.9%. Lennar and Centex are both off about 13.6%. Pulte is down 12.9%. The best performers are Champion Enterprises, which is down just 10%, and NVR which is down 9.5%.

Posted by edelfenbein at 9:27 AM

Dividend Aristocrats

Standard & Poor’s keeps and index of “Dividend Aristocrats.” These are stocks that have raised their dividend for 25 straight years. Here’s the current list:

Abbott Labs
Archer-Daniels-Midland
Automatic Data Processing Inc.
AmSouth Bancorporation
ALLTEL Corp.
Avery Dennison Corp.
Bank of America Corp.
Bard (C.R.) Inc.
Becton, Dickinson
Anheuser-Busch
ConAgra Foods, Inc.
Chubb Corp.
Clorox Co.
Comerica Inc.
Century Telephone
Dover Corp.
Consolidated Edison
Emerson Electric
Family Dollar Stores
First Horizon National
Gannett Co.
General Electric
Grainger (W.W.) Inc.
Johnson Controls
Johnson & Johnson
Jefferson-Pilot
KeyCorp
Kimberly-Clark
Coca Cola Co.
Leggett & Platt
Lilly (Eli) & Co.
Lowe's Cos.
May Dept. Stores
McDonald's Corp.
McGraw-Hill
3M Company
Altria Group, Inc.
Merck & Co.
Nucor Corp.
PepsiCo Inc.
Pfizer, Inc.
Procter & Gamble
Progressive Corp.
PPG Industries
Regions Financial Corp.
Rohm & Haas
Donnelley (R.R.) & Sons
Sherwin-Williams
Sigma-Aldrich
State Street Corp.
Supervalu Inc.
Stanley Works
Target Corp.
U.S. Bancorp
V.F. Corp.
Walgreen Co.
Wal-Mart Stores

The Aristocrats have outperformed the S&P by over 2% a year for the past 15 years. There’s also a list of European Aristocrats. These stocks have raised their dividends for 10 straight years.

Atlas Copco AB - A Shares
Barclays
Capita Group
Cobham
Daily Mail & General Trust 'A'
FirstGroup
Legal & General Group
Misys
Morrison Supermarkets
Novartis AG
Orkla ASA
Rentokil Initial
Roche Holding AG
Roche Holding AG - Bearer Share
Royal Bank of Scotland Group
SCA - Svenska Cellulosa AB - B Shares
Scottish & Southern Energy
Svenska Handelsbanken AB - A Shares
WPP Group

Posted by edelfenbein at 5:44 PM

Google to Start IM Service

Expect Google Talk to be out tomorrow. A new toolbar is coming as well.

Posted by edelfenbein at 5:36 PM

China National Petroleum to Acquire PetroKazakhstan

The Chinese aren’t slowing down. Now, China National Petroleum is buying PetroKazakhstan. This is a Canadian company that does business in Kazakhstan a country that has more oil than the U.S. On his TV show, Jim Cramer thought it was Russian.

Kazakhstan held 3.3 percent of the world's oil reserves at the end of 2004, according to data compiled by BP Plc. The country's 39.6 billion barrels of oil reserves were 35 percent greater than the U.S. total. Kazakhstan produced 1.3 million barrels of oil a day last year.

The country, which is adjacent to the Caspian Sea, is almost quadruple the size of Texas. About one of every five of the 15.2 million Kazakhs lives below the poverty line, according to U.S. government estimates.

Posted by edelfenbein at 2:30 PM

More on the VIX

Mark Hulbert had a good article on the VIX in the New York Times. I’m glad to see we agree that the VIX is not a good market predictor.

Posted by edelfenbein at 2:07 PM

The Soap Opera at MassMutual

The Wall Street Journal has the details on the great plot at MassMutual. Misuse of the company airplane, charges of padding a retirement account, and it all started with an angry wife nearly barging in on a board meeting.

Posted by edelfenbein at 1:58 PM

Brokers in Sheep's Clothing

I’ve always noticed that a stockbroker is never just a stockbroker. They’re “financial advisors,” or “account executives” or “investment consultants,” anything but a measly old broker. Barron’s has a good article by a broker on how to do business with one:

If you do choose to deal with a broker, request a full accounting of how much you are paying in fees -- and try to negotiate them lower. Point out that E*Trade offers to rebate 50% of your mutual funds' 12b-1 fees, which are recurring commissions. If your broker suggests moving you into a fee-based account, ask for a comparison based on past and proposed commission activity to see if it's right for you. Insist that any wrap fee be lowered by at least 15% to 20%. Most brokers can afford that in order to keep a good customer, since the fees are so high to begin with. If your broker suggests mutual funds with loads, ask about lower-cost exchange-traded funds. If he recommends a variable annuity, request a comparison with a no-load fund.

Posted by edelfenbein at 3:13 PM

The Fall of the Big Drug Stocks

One of the most surprising developments in recent years has been the market-lagging behavior of the major drug stocks. The pharmaceutical industry is dominated by a small number of very large companies. For years, these stocks have been outstanding performers. They’ve been steady growers with fairly predictable earnings growth.

In short, there are eight major American drug companies: Merck, Pfizer, Bristol Myers, Johnson & Johnson, Eli Lily, Wyeth, Schering Plough and Abbott Labs. Four of the eight are based in New Jersey.

The industry has occasionally faltered. Once in the early 1970’s and again after Bill Clinton was elected in the early 1990’s. Once the Clinton health care plan was defeated, the industry hit bottom and started to rally very strongly. But this recent downdraft seems quite different. I’m afraid it might not be a transient sell-off, but a larger trend against drug stocks.

For 15 years, Schering-Plough was the best-performing drug stock, but it started trailing the market in 1998. The company lost money in 2003 and 2004, and the stock is now lower than it was eight years ago.

Pound-for-pound, Bristol Myers has been the weakest-performing major drug stock. Still, it’s done very well for investors. The stock started underperforming the market only four years ago. Since 1982, BMY is up over 1,400% including dividends (according to Yahoo’s very unreliable numbers).

Wyeth, which used to be American Home Products, has performed remarkably similar to Bristol Myers. The stock has trailed the broader market over the past four years, but not as sharply as BMY. The stock is up over 2,100% since 1982.

Merck’s performance is probably the most surprising. The company was the gold standard of the drug companies. It was conservative and consistent. The company lost some glamour as it was overtaken by Pfizer in recent years. The worst news of late has been Vioxx. Last year, Merck took a massive hit when it decided to stop selling the drug. On September 30, the day of the announcement, the stock dropped 27%. Over 145 million shares were traded that day.

Up until late-2000, Merck had been a constant market beater. The stock was a huge winner in the 1980’s. It fell sharply in 1992-94 period, but it turned around impressively. Since 1982, shares of Merck are up over 2,000%.

Pfizer was actually the worst stock in the bunch until 1990. By worst, I mean it merely kept pace with the S&P 500, it didn’t dramatically beat it. Then, in 1990 Pfizer suddenly became a market star. It fell during the 1992-94 period, but not as bad as the others. Once the dust settled, Pfizer took off. Thanks to Viagra, Pfizer soared over 1,000% in just five years.

Pfzier started trailing the market four years ago, but it’s gotten much worse in the past 15 months. The stock is down over 33% since last year’s high. Since 1982, Pfizer is up over 3,600%.

Eli Lilly is the toughest stock to figure out. The stock was a big winner in the 1980’s, but it was hit hard in the 1992-94 sell-off. The stock recovered and started to lead the market again. Since 1997, however, Lily hasn’t has any real trend. Over the last few years, the stock has been very volatile and the market doesn’t seem to know what to make of it.

Johnson & Johnson and Abbott Labs have performed remarkably the same. The stocks track each other like waltzing partners. The big difference is that they’re both involved in other health care markets. That’s why they’re the most stable of the drug stocks and these two are the only ones that have done well in recent years. JNJ has actually beaten the market over the past year. It’s also the biggest winner since 1982. Shares of JNJ have gained over 4,000%.

Analysts expect JNJ, Lily and Abbott Labs to grow their earnings at a 10% rate for the next five years. That strikes me a very subdued. But the other stocks are even worse. Analysts expect 8% growth from Merck, 6.5% from Pfizer and just 4.5% from Bristol Myers. Schering Plough has the highest at 20.5%, but I suspect that’s because its earnings have been so poor lately.

Even after the lousy stock performances, I still think that many of these stocks are simply too expensive. This is still very baffling to me. I like to think that stocks can stay big winners for several years, but all things must change. For now, I’d steer clear of the entire sector.

Posted by edelfenbein at 9:10 PM

Investors Want Dividends

With all this cash building up, investors are demanding higher dividends. Personally, I’d like to see higher dividend payments. The reason is very simple: Give investors the decision to buy back stock, don’t do it automatically.

Dividend payments do fluctuate over time, but today's dividend yields are weak by historical standards. The historical dividend yield for the Standard & Poor's 500 is roughly 4 percent; the yield in July was a pale 1.70 percent. Justifying such a low yield isn't easy when companies in the index are sitting on a near-record $621.7 billion in cash.

Investors used to count on dividends for much of their returns. In the 1930s through the '50s, dividends were 60 percent to 80 percent of investors' returns, Eby said. In the 1970s, dividends were 70 percent of stocks' total return, Irving said.

Dividends waned in the 1990s when upstart companies with no profits couldn't afford to pay them, and growing technology companies argued that their money was better spent investing in the business or buying competitors.

There are many benefits of higher dividends. Higher dividends reduce a stock’s volatility and make it easier to value the stock.

Posted by edelfenbein at 5:00 PM

Not All Index Funds are Equal

Here's a good point to remember: Not all index funds are alike.

Posted by edelfenbein at 3:05 PM

Fair Isaac

One of my favorite stocks is Fair Isaac (FIC). Although most people have never heard of this company, they live in dreaded fear of them. Have you wondered about your “credit score”? Fair Isaac is the company that keeps watch over you and your borrowing habits. The company’s FICO score is the dominant credit-rating formula used by lenders. If you want, you can find out your score at www.myfico.com.

Since Fair Isaac is so dominant in its industry, it can maintain a pretty high profit margin. About 15 cents of every sale makes its way to the bottom line. Fair Isaac said it expects to earning $1.83 a share for its fiscal year, which ends in September. That means that FIC is trading for about 21 times earnings.

I’m exactly sure how to categorize Fair Isaac. It’s not really a tech stock, nor is it financial services. The stock struggled last year, but seems to be back on track. The company has a market value of about $2.5 billion and it’s a member of the S&P 400 Mid-Cap Index.

Posted by edelfenbein at 2:57 PM

RBS to Invest in the Bank of China

Americans may freak out that the Chinese want to buy American companies, but the Chinese don’t seem so bothered by foreign investment. The Royal Bank of Scotland is leading a group of investors that’s buying a 10% stake of the Bank of China. RBS is taking 5%, and they’ll manage another 5% on behalf of their partners, Merrill Lynch and Li Ka-shing.

The deal, which is subject to regulatory approval, will give RBS access to a bank with 11,307 branches, a 12 percent share of the loans market in mainland China and 14 percent of the savings market.

I’m glad to see some countries embrace capitalism, even if they’re Communist.

Posted by edelfenbein at 2:18 PM

A Micro-cap Exchange Traded Fund

Shares of PowerShares Zacks Micro Cap Portfolio, the first micro-cap ETF, made their market debut today. The ETF trades under the symbol PZI. The index is made up of over 300 stocks with very low market values. Micro-caps are historically the best-performing sector of the market. The problem with small issues is diversity and liquidity. That’s why I like this ETF. Here's the press release.

Posted by edelfenbein at 10:39 AM

India’s New Worldly Women

Business Week has an interesting article about the changing status of women in India. A research survey found surprising attitudes among younger women:

Now many women say they'll marry when ready -- not when their parents decide to marry them off. Sixty-five percent say dating is essential, and they also want to become financially independent before they marry. More than three-quarters -- 76% -- say they want to maintain that independence afterward. Sixty percent say they'll decide how to spend their own salaries.

I think this is very encouraging. India’s path to economic integration will probably be much smoother than many other countries, particularly China.

Posted by edelfenbein at 10:26 AM

Google Watch

One year after raising a truckload of money in their IPO, Google is going back for more. The company just filed to sell 14.1 million shares of stock. At today’s price, that’s over $4 billion.

This time, the Google Dolls are going the conventional route. Instead of a Dutch auction, the offering is going to be headed by Morgan Stanley and Credit Suisse First Boston, with Allen & Co. along for the ride. The companies will probably rake in about $150 million from the deal. The underwriters also have the option of buying up 600,000 shares to cover over-allotments.

I was impressed by this quote:

“It's something I wasn't anticipating,'' said Jeffrey Matthews, a partner at Ram Partners LP in Greenwich, Connecticut. The firm owns the shares. “They don't need the money. Apparently they want more. Fourteen million shares will depress the price.”

That’s right—they don’t need the money. It’s simply a money grab. At a certain level, I’m a bit impressed. But what will they do with the money? Are they planning a major buyout? Google already has $3 billion in cash. Who knows what they’ll do. Google already owns a nice chunk of Baidu. They could buy the rest without dipping into cash flow. Maybe they’ll bid for Unocal!

What bothers me is that I never have any idea what they’re doing. The company treats its shareholders horribly. Instead of the being vanguards of the new economy, Google is weird and overly secretive which hints at paranoia.

Institutional Shareholder Services has a corporate governance rating system. Google got one of the lowest scores ever, just 4.2 on a scale of 1 to 100. Google has a two-tiered share structure, no outside directors and offers no guidance. I’m sure after the stock plunges, some retiree will tearfully tell a Senate subcommittee that they had no idea how Google treated its owners.

Posted by edelfenbein at 9:49 AM

A Turnaround at HP?

I’m not particularly impressed with Hewlett-Packard’s earnings. The company earned 36 cents a share last quarter, five cents more than expectations.

The company's personal computer division, which had lost money in the not-so-distant past, earned $163 million in the third quarter - "despite the fact that this is our seasonally weakest quarter," Mr. Hurd said. The company reported a profit margin of 2.6 percent in its personal computer division, its best in years.

That’s still not too good. Some on the Street seem impressed that HP’s earnings grew five times faster than its sales. Yes, that’s true, but only because the company has undertaken dramatic cost-cutting measures. Do you ever notice that Dell never announces a “major cost-cutting initiative”? It’s because they’re always looking out for ways to keep costs down.

HP still has a long way to go. Dell is the best PC-maker in the business.

Posted by edelfenbein at 7:03 PM

Mr. Housing Bubble

Mr. Housing Bubble to the rescue. Although, he has enemies!

Posted by edelfenbein at 6:35 PM

Unconventional Success: A Fundamental Approach to Personal Investment

For the last 20 years, David Swensen has been the manager of Yale’s endowment. And the ol’ chappy has done the Eli proud. The Yalie fund has grown from a measly from $1.3 billion to a respectable UT-like $15 billion. Zounds and Huzzah for the money people!

Swensen then took pen to paper and was set to let all the wee widdle investors know how to invest just like Yale. But then, a funny thing happened on the way to Easy Street. The book’s thesis took a bit of a detour. I’ll let the Times take over (that’s The New York Times dear heart, not El Paso):

Instead, it shows why the little guy will never be able to invest the way Yale does. For all the "democratization" that has taken place in the world of personal investing the deck is still stacked against the individual. That was Mr. Swensen's fundamental discovery. And his willingness to change course and turn "Unconventional Success" into a polemic aimed primarily at mutual fund companies, but also at other Wall Street types who fleece the little guy, is to his everlasting credit. After all, he could have told us to buy stocks in companies whose products we buy at the supermarket, like a certain investment genius of a previous era. Any regrets about that advice, Peter Lynch?

Oh lord. Where to start? First, we take a shot at Peter Lynch! I’ve re-read this a few times, and it still comes out of nowhere. Why is Peter Lynch the bad guy? His style of investing hasn’t been shown up at all. In fact, it’s as relevant as ever.

Lynch’s main point over the years is to ignore professional investors. He even calls them an oxymoron. Lynch never said to buy stocks in companies whose products we buy at the supermarket. He says that “the amateur investor has numerous built-in advantages that, if exploited, should result in his or her outperforming the experts, and also the market in general.” He’s exactly right. But that’s only half of Lynch’s argument. He also takes down the pros. Lynch criticizes the group-think mentality of institutional investors who often have to clear their buys and sells past a committee. Lynch said that some of his best investments ideas have come from the power of common knowledge. That makes perfect sense, and I doubt Mr. Lynch has any regrets.

Secondly, we learn that despite the democratization that’s taken place, “the deck is still stack against the little guy.” Democratization is even placed in scare quotes as if it’s been a scam from the get go. Oh, please. Yes, Wall Street is being run by the evil plutocrats who are stomping on the throat of the little guy. Just the other day, I saw a phalanx of Morgan bankers marching down Broad Street, “Ooo - eeeee - hoo! Yooo - ho!” To be honest, they didn’t look that scary, but you get the idea.

Let’s be clear: The sole driver of Wall Street’s history for the last few decades has been the democratization of investing. This has been nothing short of a revolution. The changes have been stunning. Only 30 years ago there used to be fixed commission rates, no discount brokers, no decimal pricing, no IRAs, no 401k’s, no ETFs, no Reg FD, little of any disclose, no Sarbanes-Oxley. Ok, I could do without the last one, but at least they’re trying. In fact, one of the best books on the subject is “A Piece of the Action: How the Middle Class Joined the Money Class,” written by Joseph Nocera, the freakin’ author of this Times’ article (New York Times, not Northwest Indiana).

The article (Mr. Nocera) continues:

When Mr. Swensen first took over, Yale's portfolio held stocks and bonds, period. Like most institutional portfolios of that time, "it was neither diversified nor particularly equity-oriented," Mr. Swensen recalled. Today, the endowment has barely 5 percent in bond holdings. "The other 95 percent," he said, "are in places that we think will provide 'equity like' returns." Which is not to say it is all in equities. On the contrary, the Yale portfolio is extraordinarily diversified, which both lifts returns and protects against disaster.

No! No! A thousand times no! Diversification does not in and of itself increase your return. The whole idea of Modern Portfolio Theory is that you can use diversification to lower your risk (protect against disaster) without impacting your return. I’m not being pedantic here. This is the entire foundation of modern financial economics.

In just a few paragraphs, we’ve taken on a straw man and lost, and now we’ve bravely flattened the efficient frontier.

Let’s read on, shall we?

At the end of the 2004 fiscal year, Yale had a mere 15 percent of its assets in domestic equities, and another 15 percent in foreign stocks. It had 15 percent in private equity, and 18 percent in "real assets," which includes investments in timber and energy. But its biggest percentage, 26 percent, was in something called "absolute return." That is a category invented by Mr. Swensen in 1990. It means hedge funds.

This guy owns hedge funds and he’s complaining about how mutual funds fleece the little guy. Does he have any idea how much hedge funds charge? Also, is this guy a manager or does he just pick other managers?

His new book has given Mr. Swensen a greater appreciation of the enormous advantages he has as an institutional money manager, starting with the obvious fact that he has a staff that spends full-time researching investment possibilities. Thus, he takes it as a given that individuals shouldn't pick stocks themselves. "I see every day how competitive the markets are, and how tough. So the idea that you can do this yourself, that's out the window."

He’s confusing cause and effect. The markets are competitive precisely because people are picking their own stocks. Yes, it’s hard to beat the market. Very hard. But if you’re well-diversified, it’s hard to lose to the market too. We never hear that part. For books like this, there are only victims. Wall Street is an unending drama of victims and exploitation, us against them. (Duck, I hear more guards coming!)

This is where the book drowns in its own conventionality. I’m sure the author believes he’s advocating self-denial and conservatism. Swensen indeed picks the right (and easiest) targets, but his entire view of the markets is wrong, wrong and wrong.

The financial markets are not a game of one side opposite another. That’s simply a metaphor that people use to understand how the market operates. It’s easy to understand. If you wanted to write a stock market book at any time for the last 70 years, just throw the words “big shot,” “fleeced,” “screwed,” and “little guy” in the title and off you go.

Just in the past few years, we’ve seen dozens of these types of books. The former head of the SEC even jumped in with “Take On the Street: What Wall Street and Corporate American Don’t Want You to Know.” See. You’re the victim of “them.” Never of the SEC of course. Another one is “You got Screwed! Why Wall Street Tanked and How You Can Prosper,” by someone calling himself James Cramer. I’m sure he means well.

This us-against-them view is just a metaphor and nothing else. Thanks to democratization, this metaphor is like some cartoon cat getting clanged on the head by the frying pan of reality. I guess that’s actually a simile, but you see where I’m going. I hate to break it to some people, but there’s no one “in charge” of the economy, or Wall Street. There’s no board room with a dozen fat bald white guys sitting around conspiring against you, and perhaps ruling the world during their breaks.

Financial markets are hugely decentralized structures with countless participants who aren’t coordinating with another, but they influence each other nonetheless. In fact, understanding this is one of the best arguments in favor of free enterprise. (James Surowiecki’s “The Wisdom of Crowds” is a good book on this subject.) Looking for Wall Street experts is like asking who’s the king of a traffic jam. It just doesn’t exist.

What is it about mutual funds Mr. Swensen finds offensive? Just about everything. He hates the way the loads and all the hidden fees mean that the investor is always behind the eight ball. (When I asked him about hedge fund fees, which are much higher, Mr. Swensen replied: "I don't mind paying a lot for actual performance. Besides, when we negotiate fees, it's sophisticated investor versus fund manager. It's a fair fight.")

So does Mr. Swensen offer any hope at all? Some. He thinks we'd all be better off sticking with index funds, instead of trying to beat the market. He thinks we should get our index funds from Vanguard, with its rock-bottom fees. (As a not-for-profit company, Vanguard also doesn't have the central conflict of interest.) We should have a diversified portfolio of index funds, for the same reason Yale does. We should be disciplined in our approach, especially in rebalancing our portfolio to stick to our diversification targets. Of course, this invariably means paring back on winners and increasing our investment in laggards.

We should be unconventional by investing in index funds. The very idea of an index fund is that you’re following everybody else. Yet Swensen constantly wants to portray himself as some brave non-conformist standing against the herds of Wall Street sheeple. This is the most synthetic dissent possible. Swensen wants to inherit the moral glamour of being a maverick, while not actually doing anything to depart from the conventional wisdom.

There’s nothing wrong with being conventional. Swensen is from the very heart of the Wall Street establishment. He’s the manager of Yale’s endowment! Christ, they’re not going to turn that over to Nelly.

That’s fine being a member of the establishment. Just don’t tell me how unconventional you are. People who are truly unconventional usually have no clue how marginal they are. It just doesn’t occur to them. They’re not self-conscious because they don’t friggin care. That’s part of the unconventionality. But Swensen insists on telling us how different he is. In fact, this is second book, and the second one with the “unconventional” in the title (Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment and Unconventional Success: A Fundamental Approach to Personal Investment).

Swensen makes several references to his contrarian strategy of investing in a passively managed index fund. First off, there’s no such thing as a passive fund. Every fund, index or not, have a built-in bias. If you’re investing in an S&P 500 index fund, you’re inherently buying dollar futures. That’s an active investment. You’re also skipping small-cap stocks. Even if you get a total market index fund, you’re still skipping bonds and commodities. You can never escape making an active decision with any fund. And by the way, an index fund by definition doesn’t pare back on winners and lean towards laggards. Since the indexes are weighted by market value, the index funds do just the opposite.

I don’t much like index funds, but they’re not the worst thing out there. Some people simply don’t have the time of inclination. That’s fine, but they’re probably not going to read Swensen’s book anyway.

But don’t tell me that the market can’t be beaten. It can be beaten, it’s just very, very hard. This isn’t just a hope of mine either. The economy runs on the fact of its inefficiency. People find innovations and new ways of doing things. If regular people can do that every day, there’s no reason why they can’t beat the market.

There is a reason we as a culture have accorded hero-like status to great investors like Warren E. Buffett and Peter Lynch. For all the cultural reinforcement we get that investing is something anybody ought to be able to master, we know in our bones it's not true. Mr. Buffett and Mr. Lynch are like great athletes, who have the skill and the emotional makeup to do something well that the rest of us can only dream about. That describes David Swensen, too. What he has to say is worth listening to. But will we ever truly hear it?

Buffett and Lynch are not at all like great athletes. I believe anyone can do what they’ve done and Buffett and Lynch have repeatedly said so. Another successful manager of a college endowment was John Maynard Keynes. He multiplied the wealth of King’s College, Cambridge from 30,000 pounds to 380,000 pounds. Keynes felt he didn’t need to put much effort into the job. Each morning, he got his investing work out of the way before breakfast so he could get on with more important work. I doubt he ever used a hedge fund either!

If I thought investing for the masses was a lousy idea, I’d say so. I’m not interested in being a populist for the sake of populism. The reason everyone can invest for themselves is because that’s what free enterprise is. Mr. Swensen’s worldview is so wrong, he doesn’t realize how wrong he is. His concern for the welfare of average investors is admirable, but he ought to care a lot less. I wish he understood that his concern isn’t helping. This worldview has outright contempt for individual investors. Swensen feels that investors simply can’t be trusted. For example, he also writes about Social Security reform, and to little surprise, he’s against it.

Another point that bugs me is that if this is what he really believes, then he should give us some strategy to change the landscape. But Swensen just wants individual investors to accept their lot in life.

This book was written with one thing in mind—to get good reviews. It sounds like it’s judicious. He uses lots of jargon. It sounds like it’s focuses on self-denial. It sounds like it’s unconventional (after all, it tells us many times). I have no doubt this book will get many positive reviews. But it gives the wrong message to investors.

Posted by edelfenbein at 4:34 PM

Stuck in a Trading Range

If the S&P 500 closes above 1,221.13 today, which looks very likely, that will mean that the index has been in a 2% trading range for 26 straight trading days. Since July 12, the S&P has closed as high as 1245.04, and as low as 1221.13. The rest of the time, the index has bounced between those bands (I’m only going by daily closes).

The market hasn’t been in a trading range this narrow for nearly 10 years. The S&P was caught in a range trading in October 1995, which was just a brief pause during its rally.

Perhaps the longest trading range in modern market history was in 1963. For 62 straight sessions, between April 15 and July 16, the S&P never closed above 71 or below 69. Although it’s hard to picture a market more dull than this one.

Posted by edelfenbein at 1:00 PM

Inflation Is Still Tame

The government reported that consumer prices jumped 0.5% in July. But the “core rate,” which excludes volatile food and energy prices, was up just 0.1%. I think this is more evidence that inflation is not a problem.

For the last year, consumer inflation has been just 3.2%, and core inflation has been 2.1%. This means that in real terms, the Federal Reserve had interest rates slightly negative. They were handing out money for free. As Fed likes to point out, they’re not raising rates, they’re removing accommodation.

Despite the rise in oil prices, inflation has not reached the consumer level, and I don't suspect it will.

Posted by edelfenbein at 12:14 PM

Dell: The Best Horse

I’ve been meaning to get to Dell’s earnings report, which came out on Thursday. First, I have to say that Dell is one of my favorite stocks. The company is highly efficient. They know their market, and they rarely make mistakes. I should correct that. The company does make mistakes, but they handle their mistakes very well. In fact, I think that’s of the most important traits which separates a good company from a bad one.

Dell earned 38 cents for the quarter, which was up 23% from last year. Sales were up 15%, so their profit margins expanded. Dell has now earned 75 cents a share for the first half. Many people don’t realize this, but desktop PCs are just 37% of Dell’s business. The company is involved in several other markets. That’s part of the reason why it’s now “Dell Inc.” and no long “Dell Computer Inc.”

The stock took a big hit because it missed analyst sales projections. The Street was looking for a 17% rise in sales. The Street seems particularly troubled because Dell rarely misses a forecast. On Friday, Dell lost 7.4%, or roughly $8 billion in market value. The company blames itself. It said it was simply too aggressive with cost-cutting. Dell is selling PCs for as low as $299. The company also said that orders from the federal government have been weaker-than-expected.

Is this just spin? Or is it really a small glitch that Dell can easily handle.? The truth is that I simply don’t know. The difference with Dell is that I do know that its management has often had these kinds of challenges, and has met them head on. Kevin Rollins, the CFO, said that Dell could have made up for much of the shortfall if it had added $10-$15 to the price of each machine sold during the quarter. Well, that makes sense to me. He also made it clear that it was Dell’s fault but the problem is “one we feel we can fix fairly crisply. We think we can do it, we've been doing it now for 10 years.” That doesn’t sound like a company in trouble.

Why do I give Dell the benefit of the doubt? Let’s look at the big picture. Dell is still gaining market share. This quarter was the 18th straight quarter that Dell met or beat analyst estimates.

As can be expected, Goldman, Deutsche Bank and several other firms downgraded the stock. But I was pleased to see Lehman Brothers hold firm. The analyst there, Harry Blount, has been a consistent bull on Dell, and he’s been right. On CNBC, he called Dell, “the best horse in the sector.” Except for Apple, the rest of the competition is rough shape. IBM has left the business. Gateway is in trouble, and I don’t even want to go into Hewlett Packard.

Dell forecast revenue for the current quarter of $14.1 billion to $14.5 billion and earnings per share of 39 cents to 41 cents. Analysts had been expecting Dell to earn 41 cents per share, on average, in the third quarter, on revenue of $14.6 billion.

Dell is still an excellent company and I see no reason to sell.

Posted by edelfenbein at 7:11 PM

Sprint Nextel

Today is the day! Sprint & Nextel are now one. The new firm has 80,000 employees. I was glad to see Sprint Nextel get one of the single-letter ticker symbols. The company trades under S, the old symbol for Sears.

If you’re keeping score at home, the only other open single letters are H, I, J, M, P, U, and W. Presumably, the M and I are to tempt some unnamed NASDAQ stocks over to the dark side.

Posted by edelfenbein at 6:32 PM

Google Watch

Those wacky Google Dolls are at it again. The company has this really cool idea to scan books from five of the largest libraries in the world. Then people could search the book lines online. Cool, right? Except there’s a wee little problem. It’s called copyright law.

Publishers are majorly ticked, and Google seems to be genuinely puzzled by this. So Google tried to reach a compromise. At 11:53 p.m. on Thursday night, Google said on their blog that they won’t scan any book that publishers request. So the burden of protecting a copyright lies with the owner! Now, publishers are even angrier. Business Week has the 411.

Posted by edelfenbein at 10:09 AM

Monday Market Report

Oil seems to be slipping off the high prices it reached last week. The market’s big change of mind recently is that high oil prices are now seen as hurting the economy, not a reflection of a surging economy. As oil has raced higher, bond yields have fallen. On Friday, the yield on the 10-year T-bond dropped below 4.25%. Although, I’m very skeptical that this rally will last.

We’ve had some good earnings news this morning. Lowe’s earned $1.05 a share, three cents better than estimates. The company also said that third-quarter earnings should come in at or above expectations. Lowe’s is a wonderful company, and I like the stock a lot. However, I’m a bit concerned about a slowdown in the housing sector. It will be interesting to how well Home Depot did last quarter. HD’s earnings come out tomorrow.

Another stock I like a lot is Sysco. I always find it interesting that the other Cisco gets so much more attention. This Sysco is a major supplier to the food service industry. The company earned 44 cents which was inline with estimates. I’m also happy to see that Sysco is going to expense its stock options, something the other Cisco would never do. Still, Sysco is not growing as fast as I would like. Right now, the market only seems to be concerned with oil.

Posted by edelfenbein at 9:51 AM

Prices at the Pump

If you’re in Gustine, CA, feel free to stop by the Shell station on 32932 Sullivan Road. You can fill up your tank for just $3.19 a gallon.

If you have time, you can motor over to the Shell station in Alamogordo, NM (9th & White Sands). It’ll cost you just $2.18 a gallon.

According to Google, the gas stations are 1,104 miles apart. It should take you 18 hours and 55 minutes. Of course, you might have to stop for gas.

Thanks to GasBuddy.com.

Posted by edelfenbein at 1:02 PM

Sure Sign of a Top

Business Week is bullish on oil.

Is any relief in sight? Not really. Price drops would come only through one of two ways: Either demand falls or supplies increase. Neither is likely. The U.S. economy has proved to be remarkably resilient in the face of rising oil costs -- in large part because the oil shocks of the 1970s. Back then, oil reached its all time high of about $90 per barrel, in today's dollars.

Those high prices touched off major improvements in energy efficiency, making energy costs a smaller percentage of the cost of doing business today. That development decreases the chance that soaring prices will cause a recession.

Meanwhile, economic growth in places like China is fast enough to offset the dampening effect of higher energy prices. So the demand for oil isn't likely to be reduced -- especially when Americans are driving more than ever.

Neither are supplies going to increase anytime soon. While a debate is raging about how much oil is left in the ground, today's high prices should stimulate a boom in exploration and oil-field development. That will likely get an added boost from the just-signed energy bill, which offers new incentives for expanding supply. In a few years, therefore, the world will be able to pump more oil. But that's still years away.

Another added premium in today's oil prices comes from the threat of terrorism. With production capacity already nearing its limits, an attack that cut, say, Saudi oil production would send prices soaring. That's why the price of oil is higher in the futures market than it normally would be in a calmer world, where the chances of a supply disruption are smaller.

As I mentioned in an earlier post, it was 26 years ago tomorrow that Business Week ran it s famous “Death of Equities” cover. The rumors of their death were greatly exaggerated.

Posted by edelfenbein at 12:42 PM

Bubbling Crude

I have simple rule that I follow when looking at the oil market. Whatever the traders say, take the opposite view. It’s cheap, fun and easy. Plus, you’ll always find the most reasoned and rational take on the market.

For example, let’s say some sneezes at a refinery. This means that the traders think the refinery will shut down, so they’ll panic and buy. Oil will skyrocket and cause more panic buying.

By taking the opposite view, we find that a closed refinery will mean that they’ll buy less oil not more. See? It’s not that hard. Today, the WSJ says:

In recent weeks a number of refinery incidents have kept pressure on oil prices. The outages have involved units at more than a dozen refineries that together have the capacity to run 3.2 million barrels a day of oil, or roughly 19% of total U.S. capacity. But the actual amount of refinery capacity taken offline, while hard to gauge, is likely much less.

Likely much less? How about “a teeny tiny drop in the ocean?

The outages may be just a run of bad luck. But with refineries running near industry highs, analysts say the glitches also could be the result of a U.S. refining system being pushed too hard. "When you push that hard there appear to be a disproportionate number of surprises," says Mr. Goldstein. Valero says outages are more likely to occur during the summer months when temperatures are high and utilization rates are at their highest.

Of course, the refinery system is being pushed too hard. Obviously, we need more refineries. But I don’t get how that adds $20 to the price of oil.

BP said its Texas City outage would have a minimal impact. But analysts and refiners said in today's environment any development that rattles traders can result in short-term jumps. "There is no reason for crude oil to be at $65 a barrel other than hype in the market," said Mary Rose Brown, a Valero spokeswoman.

Thank you, Mary. I won’t predict when oil will fall, but this rally is running on emotions and nothing else.

Posted by edelfenbein at 11:21 AM

Economist Expect Rates at 4.5%

The Wall Street Journal reports that a survey of economists expects the Federal Reserve to raise interest rates to 4% by the end of the year, to 4.25% by the middle of next year and eventually to 4.5%. Goldman Sachs thinks that the Fed will go all the way to 5%.

Economists also expect the economy to grow by 4.2% this quarter and 3.6% next quarter. That’s really strong growth. But the real mystery is what will happen with interest rates, especially long-term rates.

While the Fed has been lifting short-term borrowing costs, longer-term interest rates, as measured by bond-market yields, have remained stubbornly low -- a development that Fed chairman Alan Greenspan famously described as a "conundrum." The problem is particularly vexing for what it might say about future economic conditions: as the spread between short- and long-term interest rates narrows, the prospect of an inverted yield curve – a phenomenon associated with recession -- grows.

But few of the economists surveyed say economic weakness is responsible for the lack of movement in long-term rates. About 43% of the economists say the main reason long-term interest rates have stayed low is because inflation is expected to remain low. A number of others say that foreign central bank demand for U.S. debt, or an excess of saving in the global economy, has tamped down long-term bond yields.

"It was difficult to see what would cause the economy to perform as weakly as long term yields would suggest," said Mr. Hooper. "It just didn't make sense in terms of the economic fundamentals."

Still, the economists don't expect the yield on the 10-year Treasury note to increase by much. They predict, on average, that the yield will reach 4.67% by the end of this year and climb to 4.90% by next summer. The 10-year note finished trading Wednesday at 4.398%.

Posted by edelfenbein at 10:43 AM

23 Years Ago Today

On August 12, 1982, the Dow fell 0.29 points to close at 776.92, marking a two-year low. At that time, stocks had been lousy investments for over a decade. In fact, this was only slightly above where the Dow was when President Kennedy was assassinated 19 years before.

On February 9, 1966, the Dow reached 995.15. So in 16-1/2 years, the Dow fell 21.9%. By the summer of 1982, the country was sliding into the worst recession since the 1930s. Before the end of the year, the unemployment rate would reach 10.8%, more than twice what it is today. On August 13, 1979, Business Week published its famous "Death of Equities" cover.

Despite all the gloom, we now know that this was one of the greatest buying opportunities in history. With a few months, inflation would subside, and except for a few minor outbreaks, it hasn’t been a problem since.

On Friday, August 13, the Dow began its remarkable bull market by soaring 11 points. Believe it or not, 11 points was big money back then. In today’s terms, that’s over 150 points.

By the way, Fast Times at Ridgemont High opened in theaters that day. The movie made about $2.5 million dollars that weekend, one of the poorer showings that summer. Thanks to the miracle of movie rentals, it would become a cultural milestone for my generation.

The following Tuesday, the Fed cut interest rates to 10.5%. The Dow jumped nearly 40 points. Then on the following Friday, the Dow added another 30 points. The rally was on, and it would never look back.

Posted by edelfenbein at 10:05 AM

Will Cisco Pay a Dividend?

It’s almost hard to believe now, but Cisco Systems used to be the glamour stock. I’m not exaggerating when I say that people loved Cisco. Not matter how awful their own lives were, they always had Cisco. Spouses could leave them, jobs could suck, but Cisco was dependable. It was the one thing that never let us down. It was the financial North Star. It did its job simply by being there.

At one time, Cisco beat Wall Street’s expectations for 43 straight quarters. It was Cal Ripken in corporate form. The stock went up and up and up. It was (sniff) such a beautiful thing.

But now...it’s all gone. Cisco is no longer a star. It’s a wash-upped has-been. It’s fat and bald. It’s some guy wearing gold chains and driving a ’78 TransAm. It calls itself Cisco. It has the same symbol as Cisco, but it’s just not the same. I’m not ashamed to say that I (almost) cried at their latest earnings report. Not only was it a lousy report, but it gave a pretty bleak picture of the future.

The company’s sales grew by just 11%. And its earnings-per-share went from 21 cents to 25 cents. I’m not sure which is worse, the 25 cents or that 25 cents was inline with expectations. The old Cisco would have laughed at 25 cents. It would have grabbed that quarter, bit it, and spit it back in Wall Street’s face, and then, maybe eaten a light bulb. That was my Cisco.

Do you remember back in December when the CFO said he expected 12%-15% sales growth through 2008? Well, you can forget about that. Now the company says that sales will grow by 10%-12% next year. I get the feeling that John Chambers said to the Street “You want a forecast. Fine! Here’s a rotten forecast. Are you happy now?”

Well, no. We're not. I’m going to make a prediction. No, not like my other lousy predictions. This time, I’m nearly serious. I predict that Cisco will start paying a cash dividend. Really, it makes perfect sense. The company generates gobs of cash, but they waste it on buying their own stock (just like everyone else who buys Cisco’s stock).

There are two reasons why Cisco buys so much stock. They issue tons of stock, and they give out tons of options to their employees. They bought nearly $20 billion of stock in the last two years and the stock hasn’t done a thing. Forget fighting the market: Just give it to shareholders.

The market simply doesn’t trust Cisco to spend its own money wisely. Here’s a nice little factoid: If you adjust for stock-option expenses, Cisco’s 2004 earnings would have been 45 cents a share, not the 62 cents that the company reported. I think the rumor that Cisco was about to buy Nokia was started by the Street just to get Cisco thinking about how it invests its money. I knew there’s no way that Cisco would buy Nokia. Too much of their own cash flow is flowing down the drain. They don't seem to realize that that's not a good thing.

John Chambers & Co. must seem baffled by the market’s displeasure with Cisco. After all, the company has reported decent profit growth for the last two years, but the stock hasn’t done much of anything. Just pay a dividend, and the market will forgive you.

Posted by edelfenbein at 6:56 PM

Sullivan Gets 5 Years

The prisons are getting crowded with the WorldCom gang. Scott Sullivan, WorldCom's former CFO, was just sentenced to five years in the old gray bar hotel. He's the sixth WorldCom employee to be sent up river. Earlier, David Myers, the former controller, was sentenced to one year and one day. Have fun, fellas!

Posted by edelfenbein at 11:27 AM

Asia Rising

There’s been interesting news from Asian markets. The Japanese Nikkei hit a four-year high yesterday. China reported its second-largest trade surplus ever. For July, China’s trade surplus was over $10 billion. The trade surplus is growing by more than 50% this year. What I find interesting is that Beijing is slowing letting the yuan rise. Yesterday, it made another post-revaluation high. There’s clearly a desire to move the yuan higher, but I’m curious as to how much Beijing will fight it.

Posted by edelfenbein at 10:05 AM

The Biggest Surprise of 2005

Brad Setser has a good post today. He calls the U.S. economy’s resiliency to higher oil prices, “the biggest surprise of 2005.”

I suspect it also has to do with the fact that the US economy has become very credit-intensive and, at least for now, it seems that most of the petrostates' oil windfall is being recycled (one way or another) back into the US credit markets.

Posted by edelfenbein at 4:48 PM

Google Watch

The Googloids are at it again. Not only is the stock overpriced, but management is thin-skinned as well. It turns out that CNET posted some personal information on Google’s CEO, Eric Schmidt. How’d they get this top-secret info? They Googled him. Their product has become "verbed," which, you would think, is a good thing.

Well, the Google Dolls are not amused. The company has banned CNET from all official communication for one year.

If something this silly causes them to get all East German, I hate to see what a real controversy will do.

Posted by edelfenbein at 4:27 PM

Mmmm…Earnings Restatement

Last year, Krispy Kreme Doughnuts blamed a sales shortfall on the popularity of the Adkins Diet. That may be partially true, but it covers over another problem. That being, the stock is Krap.

Krispy was simply getting kreamed and it started playing fast and loose with the books to try and catch up. Krispy was trying to “manage” its earnings. It wanted to tell Wall Street what Wall Street wanted to hear. The accounting soon grew out of hand, and the company could never match the image they wanted to project.

So, they lied.

Today, Krispy Kreme said that it’s going to restate earnings for the last four years. The company overstated profits by about $22 million. A committee reporting to the board of directors found that the “number, nature and timing of the accounting errors strongly suggest that they resulted from an intent to manage earnings." The committee pinned the blame on former Chairman Scott Livengood, and former COO John Tate.

The company has hired Stephen Cooper as the new CEO. He’s made some dramatic moves so far, like firing one-quarter of the work force. He even sold the company jet. (Krispy Kreme had a jet?)

Posted by edelfenbein at 4:14 PM

Oil Over $65

The market is down again today thanks to oil fears. Oil is now over $65 a barrel. I just don’t get how oil can be this high.

Crude for September delivery touched $65 a barrel in New York, an all-time high. Oil futures have climbed more than 7 percent this month as the death of Saudi Arabia's King Fahd and a threat to the U.S. embassy there raised concern about supplies from the world's largest exporter.

I would definitely not be long oil right now.

Posted by edelfenbein at 3:35 PM

10-for-10

The Fed just raised interest rates for the 10th straight time. The fed funds rate is now up to 3.5%. It was 1% just last year. The central bank also restated its intention to increase rates at a “measured pace.”

According to a survey of economists, more rate increases are on the way.

The target for the benchmark overnight bank rate will climb to 4.25 percent by the end of next year's first quarter, a quarter percentage point more than predictions last month, and reach 4.5 percent by June, according to a Bloomberg monthly survey of economists. The overnight rate is forecast to reach 4 percent by the end of this year, the survey showed.

Economists at Goldman Sachs Group Inc. said yesterday the target rate may rise to 5 percent by the middle of next year.

The world's largest economy will grow at a 4.1 percent annual rate this quarter, the most since the first three months of 2004 and up from the 3.5 percent estimated last month, based on the median forecast in the monthly survey. Growth for October through December is predicted to reach a 3.5 percent pace, up from last month's prediction of 3.4 percent.

The other good news is that oil finally backed off some today. It reached an all-time of $64.27 a barrel. There are still worries about oil supply, but few traders seem interested in the fact that oil supplies are already above average.

U.S. oil inventories at 318 million barrels for the week ended July 29 are 7.3 percent higher than the five-year average, according to the Energy Department.

Domestic supplies of heating oil at 49.9 million barrels are up 4.9 percent from the five-year average, government figures show.

Long-dated bonds actually rallied this afternoon, and the major stock indexes are poised to closer higher for the first time in four sessions.

Posted by edelfenbein at 3:49 PM

Idiot Award

The week’s winner brings our Idiot Award to a whole new level. Not only was his goal idiotic, but so was his method and outcome. He nailed it all! It’s like a Triple Crown of stupidity.

C. Clive Munro, a Wyoming stock analyst, was arrested from trying to extort money from Hardee’s. If there’s anything I learned it high school, it’s that you don’t screw with Hardee’s.

Munro demanded that CKE Restaurants, the owner of Hardee’s, hire him as a consultant for $25,000 a month. Hardee’s declined, so Munro showed them. He put a sell on the stock and down it went.

Most idiots would simply end there, but not our Mr. Munro. When the stupid get angry, they become a lethal force of anger (and stupidity). So Munro sent Hardee’s an e-mail.

”Hi Andy,” prosecutors said it read. “If you were smart, you would hire me at $25K per month for 12 months (for half my time) and take me out of the game. Plus, you would have vastly improved your relations with investors, and you might have avoided some of the current problems with Hardee's. So far this year, this would have saved you $160 million in lost market value. That certainly beats shutting me out of asking questions on conference calls. You are getting some bad advice. Clive.”

Munro has been sentenced to a year and nine months in prison. I prefer to look on the bright side. He just might land that job in the fast food industry after all!

Posted by edelfenbein at 8:50 PM

Scary Thought for the Day

General Motors’ debt, most of which is rated as “junk,” is worth 4,000 Dow points.

Before 1997, it was accepted wisdom that nuclear powers simply “don’t go bankrupt.” Well, Russia changed all that. If you recall, when the ruble went under, it also took down the infamous hedge fund, Long-Term Capital Management. The world financial markets got a bit freaked for a few days.

History may be repeating itself, but this time the culprit is much more important that some has-been empire. General Motors could actually declare bankruptcy. One of the great American corporations could join the ranks of Willie Nelson, Hammer and Sherman Hemsley. Once again, the markets seem pretty nervous. Some hedge funds reportedly took big losses when GM’s debt was downgraded.

Consider the facts: GM has $284 billion in deb