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Too Cute

Washington's newest panda cub. Wook at dat face.

Watch out for the claws...

Posted by edelfenbein at 10:07 PM

Google Watch

The Google Dolls never tire of telling us how they’re not focused on share price. Apparently, some one is taking notice. Larry Page has filed to dump another batch of shares.

Google Inc. co-founder Larry Page filed this week to sell 1.2 million shares, setting him up to collect $370 million and pushing his sales to more than $1 billion since the company went public last year.

The stock sales by Page, and similar sales by partner Sergey Brin, have helped drive Google insider stock trades to almost $3 billion this year, the most for any U.S. company, according to the Washington Service, a research firm that keeps track of sales by company executives.

Page and Brin, both 32, benefited as the stock surged to a record $320.95 this week from an $85 initial public offering price in August 2004. The two, each with a net worth of about $11 billion, raised more money on insider sales this year than any corporate executive except Microsoft Corp. Chairman Bill Gates, who has sold $1.58 billion in Microsoft stock. Mountain View, California-based Google raised $1.67 billion at its IPO and this month sold an additional $4.18 billion of stock.

"I'm not aware of any other companies that have had massive insider selling like this,” said Richard Howe, a lawyer at Sullivan & Cromwell LLP in New York, who advises on insider stock sales. "This is amazing for the people who started the company from nothing and turned it into this amazing profit-making machine."

Posted by edelfenbein at 1:05 PM

The Last Day of the Third Quarter

Today is the final day of the third quarter, which is also the end of the fiscal year for many companies, plus the federal government. Today is also the last day at Disney for Michael Eisner. After 21 years at the helm, Eisner is moving on. I’m curious if Roy Disney will make it over to the retirement party. After looking over his resignation letter, I’d lean towards the doubtful camp.

Also, GM will end its employee-pricing discount today. Considering the state of GM’s pension plan, I’m a little worried that a GM employee would even consider buying a GM car. As a taxpayer, I might have to bail those folks out pretty soon. If this is going to involve me, I’d much rather have them buy a reliable car. Rich Aristotle Munarriz at the Motley Fool has more.

GM's Employee Discount pitch is seen by many as a rousing success. I think history will reveal the move as a colossal failure. The marketing resonated with car owners right away. June deliveries were up 41%, the company's strongest showing since September of 1986. It bled into July, where GM saw a 20% spike. By August, the public had already had their fill. US deliveries were off by 16%.

However, I don't think the promotion was a mistake based on how it grew stale last month. No, I think it was a failure because it was a success. Let me explain: The "employee pricing" approach was so effective because it gave the perception that consumers were getting a great insider deal. GM started. Ford followed. DaimlerChrysler's Chrysler tweaked the marketing with its Employee Pricing Plus approach, which offered smaller discounts but padded them with more conventional rebates.

The end result is the same in all three cases. How are these companies going to move their 2006 models? Some have already turned to offering lower prices on the 2006 models, but consumers now expect employee pricing. They were trained to forget the fluctuating cash rebates of the past. This one, they remember.

Posted by edelfenbein at 11:59 AM

E*Trade to Buy BrownCo

E*Trade Financial said that it’s going to buy BrownCo from J.P. Morgan Chase. This is good news, and I expect to see more mergers in the future. This comes on the heels of E*Trade buying Harrisdirect. Also, Ameritrade is merging with TD Waterhouse.

BrownCo is famous for its rock-bottom fees. The company’s average account size is $146,247, compared with $31,663 for E*Trade. I think we’ll see more of the big boys on Wall Street pick up niche brokers.

Posted by edelfenbein at 11:17 AM

Google May Be Bad for You?

John Battelle, one of the founders of Wired, has a warning for avid Googleholics:

Next time you tap a phrase into the Google toolbar on your Internet browser, think about what you're revealing to one of the America's biggest corporations.

Whether you "googled" for Paris Hilton, a stock tip or a gift for Mom, you've opened a window on your life to a company with a market value of $92 billion, the 22nd largest in the U.S.

He takes a close look at the search engine in his new book, "The Search: How Google and Its Rivals Rewrote the Rules of Business and Transformed Our Culture."

Posted by edelfenbein at 3:47 PM

Bayou’s Marino and Israel Plead Guilty to Fraud

This is hardly a surprise. Samuel Israel and Daniel Marino have pleaded guilty to fraud charges in relation to the Bayous hedge fund. The fund has, or at least had, $300 million.

Israel, who rents a Tudor house with enclosed grounds in Westchester County, north of New York City, said in July that he would shut Bayou's four hedge funds, which he managed, and return investors' money in August. That didn't happen, triggering investigations by Connecticut banking regulators, the U.S. Securities and Exchange Commission and the Federal Bureau of Investigation. Marino wrote a six-page suicide note with details of the alleged fraud that was recovered by police at Bayou's office in Stamford, Connecticut, police said. Marino, who didn't take his life, grew up in Staten Island, New York, before relocating to Westport, Connecticut. He earned a Certified Public Accountant's license in 1990, according to New York records.

The confession in the suicide note may have made a defense by Marino and Israel difficult had they gone to trial.

Yes, that would hurt your defense a tad.

Posted by edelfenbein at 3:35 PM

Today’s GDP Report

The government revised the GDP report for the second quarter. Before, the government said that the economy grew by 3.285% for April to June quarter. Now it turns out the economy really grew by 3.307%.

To some people what I have to say will be heresy, but economic growth is surprisingly stable. By listening to political rhetoric, you’d think the economy gyrates wildly, usually corresponding to policy changes in Washington. But the facts say otherwise.

Since March 1966, the economy has grown by 3.0792% a year.
Since December 1997, the economy has grown by 3.0798% a year.
Since June 1986, the economy has grown by 3.0795% a year.
Since December 1997, the economy has grown by 3.0710% a year.

Looks like a trend to me.

Posted by edelfenbein at 10:29 AM

Europe’s Economy

Daimler Chrysler just announced that it will cut 8,500 jobs in Germany over the next year.

The world's fifth-biggest carmaker said the move would cost 950 million euros, to be offset by extraordinary income and efficiency gains.

It reiterated its forecast for a slight rise in 2005 operating profit excluding charges to restructure its Smart minicar business.
The Mercedes division employed around 105,000 staff at the end of last year, of which some 94,000 were in Germany.

"These headcount reductions are indispensable. They will contribute to significant improvements in the competitiveness of Mercedes-Benz through an increase in productivity," it said in a statement. "The measures will also contribute to the sustained safeguarding of production (in) Germany."

So if all lost for Europe’s economy? Matthew Lynn says, "Don't Blame Oil for Europe's Economic Slowdown."

If oil is so deadly to Europe's economic prospects, then why is it that Japan appears to be emerging from a recession, when Europe is still stuck with miserable growth? Japan isn't exactly famous for its oil wells.

Likewise, the U.S. Because taxes on pump prices are so much lower there than they are in Europe, the impact that an increase in oil prices has on consumers is proportionately much greater. And yet, U.S. growth rates remain significantly higher than Europe's. The U.S. economy expanded an annual 3.3 percent in the second quarter, compared with 1.1 percent for the euro area.

The reasons why Europe's economy is growing so slowly are familiar: high taxes, dysfunctional labor markets, and restrictive monetary policy. The first step toward fixing those is honesty. Right now, that appears to be a commodity in shorter supply than oil.

Posted by edelfenbein at 1:17 PM

Fair Isaac Hits New All-Time High

Fair Isaac finally hit a new all-time high today. It took nearly two years for the company to break into record territory.

J.P. Morgan upgraded Fair Isaac today to overweight from neutral. I’m not a big fan of following analyst upgrades or downgrades, but this one is nice to see. Fair Isaac has a very strong business. I especially like the fact that its gross margins come to about 70% of sales. That’s the sign of a well-run business.

The company will report its fiscal fourth-quarter earnings in late-October. The current estimate is for 49 cents a share. This means that although FIC’s stock is roughly where it was two years ago, its profits are nearly 30% higher. This is a solid stock to own.

You can see my complete Buy List here.

Posted by edelfenbein at 12:55 PM

Warren Buffett's Shareholder Letters

If you're new to the world of investing, I recommend reading some of Warren Buffett's annual shareholder letters. You can find a complete collection here.

The letters have a folksy style and Buffett always makes a good point. This is the best way to get a nice summary of Buffett's investing philosophy, and you can see how little it has changed over the years.

Posted by edelfenbein at 8:35 PM

Google Watch

If you go to Google today, you'll see that today is the search engine's 7th birthday. Happy Birthday!!

Wait a minute! Didn't they just celebrate their 7th birthday three weeks ago? It turns out, Google has a few birthdays. Search Engine Watch is on the case.

Posted by edelfenbein at 11:38 AM

Frontier Airlines

One of the best ways to look for a good stock to buy is to find the most-unloved industry, and pick out that sector's best stock. It’s no secret that airlines stocks have performed horribly. Make no mistake, the industry is in rough shape, but there are good stocks out there. For example, I think the industry’s woes have given us a good opportunity in Frontier Airlines. The stock is now below $10.

Frontier has a lot going for it. For one, it’s an airline that’s not in bankruptcy. That right there is a big advantage over it competitors. Frontier is small regional airline based in Denver with a solid balance sheet. The company has switched to using all Airbuses. Frontier has slowly expanded its market share.

The airline is popular with its passengers. The company is ranked near the top in customer satisfaction surveys. The downside is rising fuel costs. Frontier is one of the least efficient airlines in handling higher fuel prices. The company should post third-quarter profits in late October. Frontier has posted better-than-expected earnings for the last two quarters.

Frontier was originally based in Denver, one of United’s hubs, to piggyback on their business. Now that United is doing so poorly, Frontier can actually take some of United’s core business.

Today, the Wall Street Journal highlights Frontier’s growing service to Mexico. Two years ago, Frontier flew 33,000 passengers to Mexico. Last year, it flew nearly 100,000, and this year it will fly over 200,000 people to Mexico.

Posted by edelfenbein at 10:01 AM

GM’s Debt Downgraded Again

GM's outlook is actually getting worse. I didn't think that could even happen. Its debt is already rated as "junk." Today, Fitch lowered its rating to even junkier junk (double-B). The Delphi story is going to end soon and it's not going to end well.

Here's a short history of GM's debt rating. It wasn't that long ago that GM was one of the bluest blue chips on Wall Street. Last quarter, GM lost over $250 million, and over $1 billion in the quarter before that.

Posted by edelfenbein at 9:34 AM

SEC Investigating Taser

The SEC said it’s expanding its investigation into Taser.

The U.S. Securities and Exchange Commission has now upgraded its probe to a formal investigation, allowing it to subpoena documents. The SEC had opened an informal probe of the company over statements about the safety of its stun guns and a distribution deal struck in December 2004.

Taser also said it understands the SEC is looking into the possible unauthorized acquisition of material nonpublic information by individuals outside the company in an effort to manipulate Taser’s stock price.

Taser shares were down 8.6 percent to $6.68 Tuesday in premarket trading on the Inet electronic brokerage system.

Taser has stood by the safety of its weapons, saying the stun guns have never been named as the primary cause of death when suspects were in custody.

Taser Chief Executive Rick Smith said in a statement that he hoped the SEC probe would address “all pertinent issues,” including what he said was data indicating that “there may be a large, improper, naked short position” in the stock.

The stock is down sharply in the pre-market. The stock is down over 75% since the beginning of the year. However, Rich Smith, at the Motley Fool is still bullish on Taser.

Posted by edelfenbein at 9:19 AM

Citi Ungrouped

Tom Brown has a "modest proposal" to increase Citigroup's value. Break it up.

I should say up front I was never a big fan of the supermarket strategy that was behind the 1998 creation of the Citi monolith in the first place. Huge scale doesn’t count for much in financial services, for one thing. And in financial services, smaller, focused players tend to outcompete large, diversified ones. That’s why, for instance, community banks reliably take deposit market share from the large national banks. And it’s why the monoline card industry was able to drive all but a handful of players out of the card business. The idea behind Citi was flawed from the beginning—which is one reason the stock’s P/E has eroded steadily for the past seven years.

By contrast, a breakup of the company would be a great strategic move and profound gesture to shareholders and competitors. In our view, a leaner, more focused group of legacy Citi businesses would emerge and be vastly preferable to the current bureaucratic Byzantium. The units would be much more effective competitors as smaller, focused players than they are now. So management can and should admit the obvious: the company is so big that, strictly by the law of large numbers, it can no longer generate meaningful company-wide organic growth. To put matters in perspective, if the company were to grow by 9% annually, net income would have to rise by $1.6 billion in 2006, which is roughly the equivalent of creating a brand-new BB&T. Incremental acquisitions, meanwhile, would have to be huge to make a meaningful difference, and would be tough to execute well (as management has publicly conceded).

Posted by edelfenbein at 11:50 AM

Reuters Vs. Bloomberg

The same speech on the same day is covered by different journalists.

Bloomberg:

U.S.’s Bernanke Is ‘Pretty Optimistic’ About Economy

Reuters:

Energy prices risk to US economy—Bernanke

Posted by edelfenbein at 8:52 AM

Wall Street Art

Four years ago, the stock exchange repealed its requirement for engravings on stock certificates. To some poeple, this is a lost art.

Posted by edelfenbein at 5:58 PM

What Consistent Performance Can Tell Us

Haywood Kelly at Morningstar has an interesting article on corporate consistency. He found that companies with high sales growth rates tend to revert to the mean fairly quickly. But companies that are able to maintain high returns-on-equity tend to maintain them. This makes sense since sales growth can simply be a part of luck, but ROE is a better measure of management. A skilled management is likely to stay skilled.

Posted by edelfenbein at 2:03 PM

Boring Insurance Stocks?

I often hear people say that insurance stocks are “boring.” That may be true, but it doesn’t mean that they’re not profitable. Despite the recent devastation from Hurricane Katrina, two of our insurance stocks (Brown & Brown and Progressive) are at new highs today.

Posted by edelfenbein at 12:34 PM

Oracle’s Earnings

After yesterday’s close, Oracle reported earnings of 14 cents a share. That was in line with expectations, although sales were slightly below forecasts. The company expects to earn 80 cents a share for the next fiscal year, which means the stock is going for about 16 times next year’s earnings. Don’t be fooled, I still think Oracle is overpriced. When you get right down to it, the company’s core business is not growing.

But the sluggish sales of Oracle’s flagship database systems, which had been a mainstay of the company's growth, surprised analysts. Oracle reported $502 million in combined sales of its database software and "middleware," additional software used to deliver Internet-based applications. That compared with $494 million in the year-earlier period.

That translates to a growth rate of 1.6%. What does Larry have to say?

Oracle Chief Executive Larry Ellison said he didn't think "flattish" database results were "indicative of anything," and primarily were the result of a tough comparison with last year's results, when database sales grew 20%. "It's going to be very, very difficult for us to sustain that the following year," he said.

I'm not sure if the earnings isn't "indicative of anything." It may not be indicative of future "flattish" growth. But it's absolutely not indicative of future strong earnings growth.

I'm also concerned about Oracle's massive buying spree. The company is going to Seibel, plus it also bought PeopleSoft recently. Oracle has also bought Retek, ProfitLogic and I-Flex, plus several smaller firms. That's a lot for a company to manage, and I'm generally not a big fan of mergers anyway (Morgan Stanly for more). I would stay away from Oracle until the company shows that it can grow its core business again.

Posted by edelfenbein at 11:54 AM

Aloca’s Cuts Its Profit Outlook

The third-quarter earnings season will begin in a few weeks. Alcoa is usually one of the first, is not the first Dow component to report. As such, it becomes the "New Hampshire Primary" of earnings season. And like the Granite State, Alcoa is not a very good representation of the entire market.

In July, Alcoa reported strong earnings and that was a positive—and accurate—indicator for the rest of the earnings season. Also, Alcoa’s seconcd-quarter earnings report came at a very good time, one day after the terrorist attack in London. The market clearly wanted to see some good news.

But I remember being struck by Morgan Stanley’s comments. The firm was nearly alone in being unimpressed with Alcoa’s earnings, and it reiterated it “equal-weighting” rating. Now it seems they were on to something. Today, Alcoa cut its profit outlook for the third quarter.

Alcoa said it expects earnings from continuing operations to be between 27 cents and 31 cents a share for the third quarter, well below the current Thomson First Call average estimate of 43 cents a share. A year earlier, the company earned 34 cents a share from continuing operations.

Aluminum prices have rebounded 10% on the London Metal Exchange during the third quarter to about $1,858 a metric ton of aluminum, up from less than $1,700 a ton in early July. However, Lloyd O’Carroll, chief economist and metals analyst at BB&T Capital Markets in Richmond, Va., says part of the problem for Alcoa is the lag between when contracts were signed in the second quarter—when aluminum prices were lower—and when the sales were finalized in the third period.

Indeed, the company said that while aluminum prices have strengthened recently, those improvements won't fully be felt until the fourth quarter.

The company said demand was weaker in Europe and also in the North American automotive market, which has seen auto production slow in recent months amid higher gas prices. Alcoa also said that its results could be affected by the recent hurricanes. The company has temporarily closed its alumina refinery in Point Comfort, Texas, as well as its anode plant in Lake Charles, La. “You would think one of them would get hit,” Mr. O'Carroll said. “They are at risk. How much damage and how big a deal this is, it’s too early to know.”

That’s a pretty hefty cut in earnings. Again, I wouldn’t say that Alcoa is a good indicator for the rest of the economy, but it does tell me that there are some soft spots out there.

Posted by edelfenbein at 11:27 AM

WorldCom Investors to Get $6 billion and Bernie's House

This is good. A judge has just approved a legal settlement for World Com investors.

Under the settlement, Ebbers will give up many of his personal assets, including a multimillion-dollar home in Mississippi and his interests in a lumber company, a marina, a golf course, a hotel and several thousand acres of timberland. The Wall Street Journal estimated that the sale of Ebbers's assets could generate up to $28m for the investors.

Update: Ebbers couldn’t be reached for comment.

Posted by edelfenbein at 5:25 PM

Katrita

I think CNBC is slowly becoming the Weather Channel. Now we get updates on stocks, bond, futures and the latest movements of Hurricane Rita. The storm is now a Category 5 monster with 170 mile-per-hour winds. Thankfully, the local government officials seem to be on top of things this time. Houston has been evacuated, and many of these poor folks are already evacuees from New Orleans.

According to the latest estimates, Rita will hit land somewhere in Texas sometime late Friday. The bad news for Wall Street is that it will have to wait over the weekend to access how bad the damage is. The good news is that Wall Street will have to wait over the weekend to access how bad the damage is.

Update: CNBC’s noted meteorologist Bill Griffeth just said that Rita is now a Category 4 storm.

Posted by edelfenbein at 1:36 PM

Small Health Care Stocks

Barron’s has a good article on small health care companies. The article focuses on two stocks, Kyphon and IntraLase, however the entire sector has a lot going for it. The Centers for Medicare and Medicaid Services expect health care spending to climb 7.3% annually, through 2013. Also, Standard & Poor's expects small-cap health stocks to see their earnings grow by 20% a year for the next five years, compared with 12% for large-cap health care stocks.

Posted by edelfenbein at 1:25 PM

The iPod Nano

From initial reviews, Apple’s new iPod Nano is another home run for Jobs & Co. The new device even got a big fat orange circle from Consumer Reports. And you know it’s a true sign of success when the BBC argues that the iPod’s design is really over 50 years old.

The iPod Nano was released just in time for the Christmas shopping season. Given iPod’s initial success, there’s an important question that Wall Street had: How big is Apple’s profit margin? One research firm had an idea. They bought an iPod Nano, broke it open, and tried to figure out the cost:

The verdict? It costs Apple $90.18 in materials to build the unit and $8 to assemble it, leaving a profit margin before marketing and distribution costs of about 50%. That's consistent with the margins on earlier iPod versions and serves as a reminder of what a profit machine the iPod family of products has become for Apple since it was introduced in 2001.

Fifty percent! Wow. I’m running out of adjectives to describe the success of the iPod. It now represents one-quarter of all Apple’s business. The company has sold 21 million iPods, most of them in the first nine months of this year.

Now Apple’s competitors are desperately trying to catch up but Nokia says that its iPod phone won’t ship until 2006, after the important Christmas shopping season. Dell just launched its horribly named DJ Ditty.

Apple reports its next earnings on October 11, which is at the very beginning of earnings season. The current estimate is for 35 cents a share. This will be Apple’s fiscal fourth quarter. For the next fiscal year, Wall Street expects earnings of $1.42 a share, which means that Apple is going for a pricey 36 times expected earnings.

Posted by edelfenbein at 1:13 PM

Think You Can Time the Market?

Here’s a fact that ought to make you think twice before trying to "time" the stock market. Since 1950, the S&P 500 is up over 73-fold (excluding dividends). That’s a period of over 14,000 trading days. However, when you isolate the best 133 days, you get a combined total return of 74-fold. That means that the stock market is flat for 99.05% of the time. The market’s entire profit has been made in just one day in 105, or roughly one day every five months. To time the market profitably, an investor has to hit that bulls eye without ever missing a beat. That’s why the best strategy to buy and hold and never worry about missing that home run day.

Posted by edelfenbein at 4:01 PM

Hurricane Rita

Wall Street is bracing for Hurricane Rita which is headed right for the Texas coast.

Texas is home to the biggest concentration of U.S. refineries, accounting for 26 percent of the nation's total capacity. BP Plc and Valero Energy Corp. are evacuating workers and slowing output at three Houston area refineries. Rita, a Category 4 storm, may hit the Texas coast on Sept. 24. Four refineries in Louisiana and Mississippi, representing 5 percent of U.S. capacity, remain shut because of Katrina.

Gasoline for October delivery surged 8.34 cents, or 4.2 percent, to $2.06 a gallon at 1:30 p.m. on the New York Mercantile Exchange. Gasoline futures reached $2.92 a gallon on Aug. 31, the highest since trading began in 1984. Futures are 60 percent higher than a year ago.

Crude oil for November delivery rose 92 cents, or 1.4 percent, to $67.15 a barrel in New York. Futures touched $68.27, the highest since Sept. 2. Oil has declined 5.2 percent since touching a record $70.85 a barrel on Aug. 30. Prices are 43 percent higher than a year ago.

Posted by edelfenbein at 2:49 PM

Morgan Stanley’s Profits Plunge 83%

Apparently, no one invited Morgan Stanley to Wall Street’s summer beach party. All the brokers reported blow-out earnings until Morgan Stanley dropped the ball this morning.

I should say that if you ignore the “charges,” Morgan’s earnings really weren’t that bad. The problem is, you can’t ignore these charges. The company took a $1 beeellion charge for the sale of its aircraft-leasing business. On top of that, the company has had its costly boardroom drama. Earlier this year, the Group of Eight angry executives finally succeeded in getting rid of CEO Philip Purcell. He left but he took a lot of money with him. Last quarter, Morgan’s compensation charges increased by $178 million.

There was also bad news from Discover. Morgan’s credit card business saw its profits drop 28%. The company’s retail brokerage division managed pre-tax margins of just 2%, one-tenth of its rivals. Morgan has a long way to go to getting back to a healthy company. These earnings tell me that it’s going to get worse before it gets better.

Posted by edelfenbein at 2:22 PM

Biomet’s Earnings

Biomet, one of the stocks on my Buy List, reported very strong earnings today, although it was one penny per share below Wall Street’s forecast. Still, the company’s profits jumped 66% over last year’s fiscal first quarter. By any standard, that’s impressive growth.

Sales rose 11% and Biomet earned 40 cents a share compared with 24 cents last year. Wall Street was looking for 41 cents. The company also said it’s expecting earnings of 42 to 44 cents a share for next quarter. The stock is still well below its highs of last year.

The trouble spot in the industry has been Zimmer, which is another one of my favorites. The stock is down about 20% in the last two weeks. There seems to be concern—and a lot of confusion—over pricing pressures. Katherine Martinelli, an analyst at Merrill Lynch, said that the pricing fears are overblown. She actually sees Zimmer topping its own forecasts on foreign sales. Zimmer will report earnings in late October.

Posted by edelfenbein at 10:55 AM

Greenspan Strikes Again

No surprise. The Fed raised rates by 25 basis points.

The Fed raised the overnight bank lending rate a quarter point to 3.75 percent after meeting today in Washington. Fed Governor Mark Olson voted against his nine colleagues to argue that the rate should be held steady, marking the first dissent in a decision since June 2003.

"Widespread devastation in the Gulf region, the associated dislocation of economic activity, and the boost to energy prices imply that spending, production and employment will be set back in the near term," the central bankers said in a statement after the meeting. "It is the committee's view that they do not pose a more persistent threat."

The decision shows the Fed remains concerned about potential inflation from energy prices. About 20 percent of the 111 economists in a Bloomberg News survey predicted the Fed might skip an increase today because of risks the economy would slow.

"The bottom line: The strategy of gradually raising interest rates is not over, and unless the economy softens materially, more quarter-point hikes can be expected," said Lynn Reaser, chief economist of the Investment Strategies Group at Bank of America in New York, after the decision.

Treasuries fell, pushing the benchmark 10-year note's yield up 1 basis point, or 0.01 percentage point, to 4.25 percent at 2:49 p.m. in New York. The Standard & Poor's 500 Stock Index was little changed.

The biggest change is that the Fed slightly altered its language. Before, the central bank had always said that inflation was “well contained.” Now the Fed says that “with underlying inflation expected to be contained, the committee believes that policy accommodation can be removed at a pace that is likely to be measured.”

”Measured” doesn’t mean fast or slow. It’s basically a weak word for “limited.” But I already knew that “accommodation” was eventually coming to end. That’s all the Fed said today. The market expects two more rate increases, and possibly a third. I think we’ll see at least three more rate hikes.

Posted by edelfenbein at 3:44 PM

The Flattening Yield Curve

The Federal Reserve is about to raise interest rates by 0.25%. This will be the eleventh straight rate increase from the Fed. Since banks make much of their money from the difference between long-term and short-term interest rates, the narrowing yield curve is hurting the earnings outlook for many banks. This has hurt smaller regional banks in particular because they tend to be more dependent on the yield curve for their profits.

One of my favorite banks, Commerce Bancorp, saw its shares take a big hit last Monday. The company said that earnings over the next two quarters will be below expectations. I still like the stock and I think market grossly overreacted. Commerce said it will only be two pennies a share below expectations. But this shows you that some investors are already afraid of the yield curve. The New York Times notes that in the past year, the yield spread between the two-year note the 10-year bond has closed from 168 basis points to just 26 basis points.

Here’s a chart showing the banking sector (black line) against the S&P 500 (gold line). While the banking sector has beaten the broad market over the past few years, the banks have started to lag the S&P 500 over the past few months. Once the Fed stops raising interest rates, and the yield curve widens, the banking sector could stage an impressive rally.

Posted by edelfenbein at 1:48 PM

Baidu Loses Important Court Case

More bad news for Baidu. First, the company’s stock valuation gets slammed by two Wall Street firms. Now, the Chinese search engine loses an important legal battle. The company must pay a small fine and it can no longer direct Web surfers to sites where they can download music illegally. This is particularly sensitive because the Chinese government hasn’t been very good on protecting patents. This has been a sore spot in East/West business dealings and hopefully, this case may signal a change.

Baidu’s stock has been incredibly popular and the site is a big hit in China, especially among the country's youth. Google owns 2.6% of Baidu’s stock and some people think that Google’s follow-on offering is designed to raise money for a Baidu buyout. Baidu plans to appeal the court’s ruling.

Posted by edelfenbein at 10:54 AM

Blame Katrina Part II

Hurricane Katrina is being blamed for even more earnings shortfalls. It’s not so much the insurance companies that are using the “blame Katrina” excuse, but it’s coming from some unlikely sources. Earlier, Books-A-Million blamed Katrina for its earnings (although the company is based in Alabama and doesn’t have any stores in New Orleans). Now, a mattress company and a cosmetics company are blaming Katrina for their poor earnings.

Posted by edelfenbein at 10:22 AM

Brokers on a Roll

First, Lehman Brothers had a great quarter. Then Bear Stearns delivered impressive results. Now, Goldman Sachs reports strong earnings.

Posted by edelfenbein at 9:55 AM

No Housing Bubble

In today’s Wall Street Journal, Chris Mayer and Todd Sinai argue that there’s no housing bubble.

We, along with Charles Himmelberg, a research economist at the Federal Reserve Bank of New York, computed annual housing costs for 46 housing markets from 1980 to 2004 in a study due to be published this fall in the Journal of Economic Perspectives. Our findings are striking. In none of the hottest housing markets did the ratio of the cost of owning to rent in 2004 exceed the average over the sample period in their own market by more than 13%. The highest was in Portland, Ore. Miami's ratio was 12% above average. But the ratios in the other oft-cited "bubble" cities such as Boston, L.A., New York and San Francisco were no more than 3% above their long-run averages. A similar pattern arises when we compare a city's cost of housing to its mean family income.

By contrast, in the late '80s, immediately prior to the large house-price declines of the early '90s, the ratio of the annual cost of owning to rent peaked 52% above the long-run average in San Francisco and New York. Boston and L.A. topped out, respectively, at 37% and 42% above the long-run average. Even allowing for growth in house prices during 2005, it is clear that while owning a house is not cheap, it is not inordinately expensive by historical standards.

Posted by edelfenbein at 2:50 PM

Google's $10 Million Man

The New York Times has more on Kai-Fu Lee, the man at the center of the Google/Microsoft battle.

Posted by edelfenbein at 2:26 PM

Kozlowski Gets 8-1/3 to 25 Years

Bernie Ebbers got 25 years. Rigas got 15 years. Now Denny Kozlowski is getting 8-1/3 to 25 years.

L. Dennis Kozlowski, whose $6,000 shower curtain and $15,000 umbrella stand made him a symbol of corporate greed, and his former top deputy Mark Swartz were sentenced to 8 1/3 to 25 years in prison for looting Tyco International Ltd.

Justice Michael Obus sentenced the pair today in state Supreme Court in New York and rejected their request to remain free pending appeals. He ordered them to pay a total of $134.3 million in restitution.

Kozlowski, 58, the former Tyco chief executive, and Swartz, 45, the former chief financial officer, were convicted in June of 22 felonies each. Their crimes included a dozen counts each of grand larceny, the most serious crime, for awarding themselves and others more than $150 million in unauthorized bonuses and misusing Tyco loan programs.

``The heart of this case is basic larceny,'' Obus said. He called the crimes ``extremely serious charges.'' Kozlowski and Swartz were also convicted of defrauding shareholders of more than $400 million.
Obus distinguished the case from those involving corporate scandals at Enron Corp. and WorldCom Inc. ``This is not about any other case,'' he said.

WorldCom and Enron filed and largest and second-largest bankruptcies in U.S. history, respectively, after their CEOs were ousted amid claims of accounting fraud. Tyco averted bankruptcy and has a market value of $59.3 billion.

Next up, Lay and Skilling.

Posted by edelfenbein at 2:22 PM

Oil above $66 Per Barrel

Oil is much higher today due to Tropical Storm Rita which passing above Cuba. The storm could do more damage to the oil-producing infrastructure, not mention the already devastated areas of the Gulf Coast.

In Florida, thousands began evacuating the Florida Keys as Rita built up speed off the Bahamas, about 430 miles from Key West. Rita, which strengthened Sunday into a tropical storm, had sustained winds of 60 mph and was forecast to be in the Straits of Florida between the Keys and northern Cuba on Monday, possibly as a Category 1 hurricane with winds of at least 74 mph, forecasters said. Long-range forecasts showed the system moving into the Gulf of Mexico late in the week as a hurricane, then possibly approaching Mexico or Texas. But forecasters warned those across the U.S. southern coast, which is still recovering from the impact of Hurricane Katrina, that long-term predictions are subject to large errors.

If Rita strikes Texas, the biggest oil refiner in the country, it could spell serious disruption to the industry. Texas has 26 petroleum refineries with the capacity to pump a total of 4.6 million barrels a day, according to the U.S. Department of Energy.

About half of oil production and 35 percent of gasoline production in the Gulf remains blocked in the wake of Hurricane Katrina, according to the Minerals Management Service.

Posted by edelfenbein at 1:41 PM

Airline Bankruptcies

Since 1978, over 100 airlines have filed for Chapter 11. Continental filed twice, and TWA did it three times. Here's a list of airline bankruptcies over the years.

Posted by edelfenbein at 3:51 PM

Consumer Confidence Plunges

The big story today is the drop in consumer confidence. However, it didn’t merely drop, it plunged. The University of Michigan index fell from 89.1 in August to 76.9 for September. That’s larger than the drop after 9/11. The index is now at its lowest level since 1992. Nevertheless, I’m not too concerned. Katrina is still on everyone’s mind and I think it’s having a disproportionate impact. The real story, and the one that fewer people are talking about, is that the cleanup is moving along very well, and there’s even talk of Mardi Grad going off on time.

At the UN today, Venezuela’s President Hugo Chavez, said that oil could rise to $100. BA! Even for Chavez, that’s pitiful. First off, Venezuela can’t even produce enough to meet its own quota. Venezuela must be the only country that lies about its production on the high side. On top of that, OPEC, of which Venezuela is a member, just lowered its demand forecast. Apparently, the OPEC boys didn’t “cc” Hugo.

The good news is that oil is moving lower, so gasoline prices should follow. The market had a nice late rally today on very heavy volume. Who’s opinion do you want to take? The market’s or Hugo’s.

Posted by edelfenbein at 3:33 PM

News from France

Shares of French yogurt company, Danone, jumped on takeover rumors. This is the same company that caused national panic in France when there rumors that Pepsi was thinking of buying it. Pepsi denied the rumors but it didn’t stop Thierry Breton, the finance minister, from warning Pepsi that “this is not the Wild West.” (Pepsi is based in New York.) For good measure, Le Figaro described Pepsi as “the American Ogre.” Now, it seems that Switzerland’s Nestle might be interested in Danone. The French don’t seem so worried now.

Also, it looks like Hewlett-Packard’s French workers are ready to strike for one day. I’m not sure what that’s supposed to prove. HP is a company with lots of problems. The company is slashing thousands of jobs, and I wouldn’t be surprised to see even more job cuts.

Posted by edelfenbein at 1:47 PM

Gold at 17-Year High

The gold bugs must be happy. Gold just reached a 17-year high.

The yellow metal finally broke the $460/oz. barrier. Some analysts think it will go even higher.

Citigroup analyst John Hill said he was bullish on gold due to investors' jitters over oil, inflation and the greenback.

"We expect gold to work higher, and fully expect a test of $500 in the coming months," Hill said in a report. Citigroup also forecast gold will average at least $450 in 2006/07.

Gold may indeed go higher, but I wouldn't bet on it. The long-term trend is still down. All gold rallies start differently, but they all end the same way.

Posted by edelfenbein at 1:24 PM

The New Earnings Excuse: Don't Blame Us, Blame Katrina

Expect to hear a lot companies saying, “We missed earnings. Don’t blame. It's all Katrina’s fault.”

Some analysts say companies can be too eager to blame their poor performances on exogenous shocks, such as wars and the weather, in hopes that investors will overlook other problems they are confronting.

But as long as these companies provide assurance that the slide will be only short term, some analysts say investors could give a "free pass" to a number of companies that blame Katrina for various earnings shortfalls. The trick in the weeks ahead will be divining those companies with businesses that truly are being hurt by the damage to the New Orleans region, and those companies only somewhat affected but dealing with troubles in their operations elsewhere.

Some unusual suspects like Cendant, Knight Ridder, Tyson Foods and Books-A-Million have already blamed Katrina for their troubles.

Posted by edelfenbein at 4:19 PM

Merrill Lynch’s Analysts Will Expense for Options

More good news for investors. Merrill Lynch will now require all of its analysts to include options expensing in their earnings estimates. This is a very good move. Since Merrill is so large, this will have a big impact on Wall Street.

Posted by edelfenbein at 1:59 PM

A Screwy Idea?

The simply screw has been around forever. Sure, there are lots of drawbacks: “Concrete cracks when it is punctured by a screw. Plastic creeps away from the pressure, sliding down the threads so that even a tightened screw loosens almost instantly.” But Kenneth LeVey, a product development director at Illinois Tool Works, has come up with a new twist on the 2,000-year-old screw.

Posted by edelfenbein at 1:44 PM

The Onion Scoops Wall Street

The Onion
February 18, 2004

Fuck Everything, We're Doing Five Blades

CNN/Money
September 14, 2005

Gillette unveils 5-bladed razor

Posted by edelfenbein at 12:23 PM

Google Prices Shares at $295

Google priced its follow-on offering at $295. The 14-million-share offering raises over $4 billion for the search engine. This is larger than its IPO last year which raised $1.7 billion on 19.6 million shares. Impressively, the stock is up since the follow-on offering was announced.

Google hasn’t given specific plans for the money. Since the company is cash-flow positive and it already has a sizable cash position, I assume Google will use the money for acquisitions. Yahoo and eBay have been busy on the acquisition front. Microsoft has $38 billion in cash, while eBay, Google and Yahoo all have about $3 billion. A lot of people think Google will now buy Baidu. Google already owns a small stake of Baidu.

Posted by edelfenbein at 9:40 AM

Delta and Northwest File for Bankruptcy

It finally happened. Delta and Northwest have filed for bankruptcy. Both companies said the timing was a coincidence. Now, four of the seven largest airlines are in bankruptcy protection. In the last four years, the big airlines have lost $30 billion.

What does this mean for ticket holders? Edward Hasbrouck’s Practical Nomad blog has advice for travelers, including an “FAQ about Airline Bankruptcies.”

Posted by edelfenbein at 9:20 AM

Rating Brokers

Smart Money recently had a review of online brokers. I use Ameritrade (soon to become TD Ameritrade) which is pretty good for my needs, although the “account” screen is a bit confusing.

For premium discounters, Smart Money likes Fidelity. Harrisdirect was their top basic discount broker. They also give high marks to OptionsXpress.

About full-service firms, Smart Money said:

Whether you are thinking about making the move to a full-service broker or are frustrated with the one you have because he doesn't return your calls, it helps to understand the economics of the business. "If the account is not more than $250,000, it becomes difficult for the brokerage to make money," says Brad Hintz, a brokerage analyst at Sanford C. Bernstein. Accounts below that level get "generic support" from a call center, he says. And when it comes to the big firms, say, UBS or Smith Barney, Hintz is probably lowballing that estimate. Some brokers we spoke with said their services are aimed at clients who bring half a million dollars to the table. Of course, if you want your broker to join you on the beach, it'll take a bit more.

Of the full-service firms, Smart Money gives its highest rating to Edward Jones.

Posted by edelfenbein at 9:03 AM

Banks Vs. Brokers

I thought summer was supposed to be a slow time on Wall Street. Apparently, no one told Lehman Brothers. The company reported great earnings today. Profits jumped 74%. Lehman earned $2.94 a share, well above Wall Street’s estimate of $2.37. The company sees its earnings growing 10% next year, and 8% in the year after that. With the new results, the stock is going for about 11 times earnings.

To be sure, this is the latest in a string of good quarters for Lehman, which has benefited from a robust bond environment in recent years, combined with a decision by management to further diversify its business into areas such as stock trading and investment banking. David Goldfarb, Lehman's chief administrative officer, told analysts that the market environment was favorable in the third quarter, which helped boost the firm's earnings.

It will be interesting to see how well the other big brokers do when they report their earnings. What I find interesting is how much better the brokers are doing than the major banks. These stocks usually track each other pretty closely, but the brokers have taken a solid lead in the past few months.

This chart shows how the brokers (the gold line) have climbed higher since May, while the banks (the black line) have barely moved.

Posted by edelfenbein at 3:19 PM

Writing a Check

Here’s an odd fact for you. Did you know that you can write a legal check on any old piece of paper?

According to the Uniform Commercial Code, the body of law that governs these things, all you have to include are the name of the payee, the dollar amount, the name of your bank, your signature, the date, and some suitable words of conveyance, such as "pay to the order of." You don't need the account number or the bank ID number you find on preprinted checks.

The trick is that you have to find somebody willing to accept such a check. Merchants and the like are free to reject any sort of payment they don't cotton to, checks included. Needless to say, if you try to write a check on the back of an old grocery list, the average checkout clerk is going to tell you to take a hike. However, if the clerk does accept it, the bank will honor it.

Posted by edelfenbein at 9:25 AM

Jaffray and Goldman Rate Baidu as Underperform

Two of Baidu.com’s underwriters, Goldman Sachs and Piper Jaffray, have rated the stock as “underperform” today. Goldman even said that the company is worth just $27, which is the same as its IPO price. Yesterday, shares of Baidu closed at $113, and it’s been as high as $153. On its first day of trading, the stock jumped 345%.

Anthony Noto, the Goldman analyst, said that at the most extreme, Baidu could be worth $45 a share.

Noto's forecasting growth rates of 35% for revenue and 40% for earnings per share between 2006 and 2009. In 2006 alone, the Goldman Sachs analyst estimates Baidu.com will see earnings-per-share growth of 106% on a 71% jump in revenue.

Noto bases his forecast on the company's solid results to date and on an exploding Chinese market.

"By 2008, the number of Internet users in China should reach 252 million, surpassing that of the U.S. despite only representing 19% of the expected population at that time vs. 71% for the U.S," said Noto. "These strong secular growth trends provide a positive backdrop for Baidu."

Baidu’s stock is currently down about 24% in pre-market trading.

Posted by edelfenbein at 9:13 AM

The S&P Since 2004

This has not been an equal-opportunity market. Since the beginning of 2004, the S&P 500 is up 10.73%. However, it's been largely led by two sectors--the Energy Sector is up 72.8% and the Utilities Sector is up 41.06%. The rest of the market has been pretty much flat.

Energy 72.80%
Utilities 41.06%
Industrials 11.75%
Telecom 7.28%
Staples 6.35%
Discretionary 6.07%
Healthcare 5.58%
Financials 4.79%
Materials 2.91%
Tech 2.59%

Posted by edelfenbein at 5:21 PM

Reuters: Northwest shares plunge as bankruptcy looms

The end may be near for Northwest.

Shares of Northwest Airlines plunged 58 percent on Tuesday following a press report that the No. 4 U.S. carrier could file for Chapter 11 bankruptcy protection as early as Wednesday.

The New York Times, citing anonymous sources, said both Northwest and No. 3 carrier Delta Air Lines were very close to filing.

"The shares are down obviously on the New York Times article. That's the only news that came out before the stock before the stock began to fall," said Helane Becker, an analyst at Benchmark Cos.

"I think that they will file before October 17 for sure. With oil prices where they are and big pension contributions due, and without higher airfares, Northwest had no choice," Becker said.

Shares of Northwest were down 57.7 percent, or $1.91, to $1.40 in afternoon trade on Nasdaq.

Posted by edelfenbein at 4:02 PM

Replay of 10 Years Ago?

I normally don’t pay attention to these kinds of historical parallels, but there’s a strong similarity between today’s market and the market of 10 years ago. Both markets are stuck in trading ranges and both have very low volatilities.

Here's the S&P 500 from November 1992 to February 1995:

And here's the S&P 500 since December 2003:

I keep thinking that the market will break out of its trading range, but it never seems to. Each time we get close to a new high, the market backs off. What turned the market around in 1995 was a rally in the bond market. I don't think we'll get that again, but stranger things have happened.

Posted by edelfenbein at 3:48 PM

Get into Google before Wednesday, Ski Daddy!

Jim Cramer is telling you to “get into Google before Wednesday.”

What happens when the best story on earth goes on the road to tell itself to dozens of the largest accounts in the world? I think it goes higher, especially when it dawns on people that there may not be enough Google to go around.

All last week I watched in amazement as Google acted terrifically in the face of a mountain of supply. I know, from my sources, that much of this massive secondary offering deal is already taken.

But now the company is going on the road to tell its story, including a boffo Wednesday lunch in New York. Can you imagine? It's like spraying lighter fluid on general alarm fire! I mean, this thing might be priced at a premium to where it is right now.

Google lacks in many things, but outstanding shares is certainly not one. This is the same company that forgot to register nearly 30 million shares and options it had issued before it went public. There are now nearly 280 million shares of Google. If you want one, just buy it. You don’t have to be on the “in” of its next offering. Boffo lunches don’t drive the market, earning do.

We’re now a little more than a month away from Google’s next earnings announcement. Wall Street’s current estimate is for $1.35 a share, however there’s a pretty wide spread among the forecasts. Current projections range from $1.14 to $1.44 a share.

The best thing about a Google income statement is that if you don’t like one result, you can simply choose another number. There are several to chose from. When, say, GE reports its bottom line number, investors are basically stuck with it. Not so for Google. Take last quarter. Google earned $476 million. Easy, right? But that includes the “non-cash, stock-based compensation charge” of $47 million. You don’t want that, do you? And don’t forget traffic acquisition costs (or TAC if you’re cool) of $494 million. So Google’s bottom line was $1.19 a share. Or if you go by diluted shares, it’s $1.27. Or you can include the “non-cash, stock-based compensation charge” and get $1.36. Take your pick, it's all good.

For next year, Wall Street expects at least one earnings result of $7.33 a share. This means that Google is worth about 43 times next year’s earnings. A bargain, right? Not exactly. A better estimate was recently done by Professor Aswath Damodaran of NYU. His research shows a valuation for Google at $110.13 a share. Click here for details. (Warning: link contains math).

However, I'm assuming Dr. Damodaran wasn't invited to the boffo lunch.

Posted by edelfenbein at 3:11 PM

Today’s Market

For a very brief period last week, traders weren’t sure if the Federal Reserve was going to raise rates at its next meeting. The futures market was split 50/50, but now the market is pretty much convinced that the Fed will raise the Fed Funds rate for an 11th straight time.

Today, the government reported that producer prices rose 0.6% in August, which is slightly less than what economists were expecting. The core rate, which excludes volatile food and energy prices, was unchanged, however this data does not include the effects of Hurricane Katrina. We’ll have to wait until next month to see how broad an impact the hurricane had on prices.

The Commerce Department reported that the trade deficit narrowed to $57.9 billion in July. I doubt that trend will last very long. The reason is oil. As oil heads higher, Americans send more money overseas. For the year, the trade deficit will probably be close to $700 billion, which is a big increase over last year’s record of $617 billion.

This is also the time when companies guide their earnings higher or lower in time for earnings season which kicks off next month. Nokia, the world’s largest cell phone company, raised its earnings estimate today. Nokia is a great company, but I’m a little suspicious of this earnings guidance. Not that Nokia won’t make it, but because Nokia was so gloomy beforehand. In July, Nokia shocked Wall Street when it missed its earnings then it said that third-quarter earnings will be no higher than 21 cents a share. Now it sees profits coming in at 22 or 23 cents a share. Still, Nokia is an excellent company and I expect it will rally over the next few months.

Shares of Best Buy are taking a big hit today on the company’s lower guidance for next quarter. Best Buy reported earnings of 37 cents a share, which is one penny below estimates. However, the electronics chain sees earnings of just 28 to 32 cents a share for next quarter, where Wall Street was expecting earnings of 34 cents a share. I would never count Best Buy out. The company is still very strong and it had an amazing May quarter when it topped Wall Street’s estimates by 70%. For this quarter, sales were up 10% and profits were up 25%. The stock is trading for about 20 times this year’s earnings.

Posted by edelfenbein at 10:37 AM

Electronic Arts Upgraded

Electronic Arts jumped nearly $3 yesterday on an analyst upgrade. Wedbrush Morgan raised ERTS to a “buy” from a “hold,” and analyst Michael Pachter set a price target of $66 which seems pretty conservative. Earlier this year, the stock got as high as $71 (pre-split), but it plunged 17% in March after it warned of lower earnings growth.

Looking ahead, Pachter said video game publishers should see expansion during the next three months as excitement builds toward the release of the new Xbox from Microsoft Corp. Electronic Arts has also invested heavily in research and development -- which now stands at about 22 percent of annual sales -- to meet demand for next generation games.

Electronic Arts also is expected to benefit from games it makes for the Sony Corp.'s new PlayStation Portable. In addition, the company is seen benefiting from a potential price cut in the PlayStation 2 console.

Another key selling point for the stock is that rival Take-Two Interactive Software Inc. has been having problems. Earlier this month, Take-Two said its loss doubled in the fiscal third quarter, hurt mostly by reserves set aside for returned copies of "Grand Theft Auto: San Andreas," the hit game that came under intense scrutiny for a downloadable hack that unlocked sexually explicit material.

The stock is pretty pricey. The company has forecast earnings of $1.45 to $1.60 a share, which comes to a p/e ratio of 37 to 41. Electronic Arts is a great company, but I don’t see it growing its earnings that fast to justify the current price.

Posted by edelfenbein at 6:53 AM

SEC Block’s Cisco Options-Expensing Plan

Good news for investors. Companies will soon be required to expense stock options in their income statements. This will take a huge bite out of earnings, especially at a lot of tech stocks. It’s no wonder that Silicon Valley fought the new regulation very hard. The loudest voice came from Cisco Systems. If it had expensed stock options, Cisco’s earnings would be 18% lower for the first nine months of this fiscal year.

Cisco had a plan to circumvent the new regulation by creating financial contracts that would value employee stock options. The SEC just said that the plan was insufficient. It could have cut the cost of expensing options by 90%.

Posted by edelfenbein at 2:30 PM

Hewlett-Packard Is Cutting 6,000 Jobs in Europe

HP is going to cut 6,000 jobs in Europe. In July, the company said it was cutting 14,500 jobs and it was going to restructure its retirement plan. About 20% of the job losses will be in France. The French Deputy Labor Minister Gerard Larcher has asked for a meeting with HP to discuss the layoffs

Posted by edelfenbein at 1:53 PM

Does Wall Street Have Zero Intelligence?

According to an article from New Scientist magazine:

A model that assumes stock market traders have zero intelligence has been found to mimic the behaviour of the London Stock Exchange very closely.

You can read the research paper here.

Posted by edelfenbein at 1:45 PM

Oracle Buys Siebel

Oracle said it will buy Siebel Systems for $10.66 a share in a deal that values Siebel at $5.85 billion. Thomas Siebel is a former Oracle executive who built Siebel into a software giant. This is a pretty good deal for Oracle--it’s just a 16% premium over Friday’s closing price. Five years ago, shares of Siebel were worth $120. Oracle has been aggressively buying other firms recently. The company recently completed its acquisition of PeopleSoft which was worth of $10 billion. The Siebel deal still needs to be approved by shareholders.

Posted by edelfenbein at 9:54 AM

Defensive Accounting

Hewlitt Heiserman Jr. has an interesting article in Barron’s on the limitations of GAAP accounting and traditional income statements. He advocates “defensive accounting.” He gives high marks to 3M, Dell, Blue Nile, Pepsi and UnitedHealth Group

Posted by edelfenbein at 7:43 AM

The Dell Bandwagon

Barron's Jay Palmer has more on Dell.

The pessimism about Dell has gone way too far. The company, despite its recent slip, still has an excellent strategy for personal computers -- an industry that itself is growing nicely -- and the company has been pushing forcefully into new regions, including Europe and Asia, and into new products, such as data storage for corporations and printers for businesses and consumers.

"While it's true that Dell can't hope to continue growing at the same pace it did in the 'Nineties, the growth that it can deliver will still be very respectable," says analyst Ted Moore, who advises portfolio managers in the private banking group of National City, based in Cleveland. "Reports of Dell's demise are premature."

In fact, he thinks the recent drop in Dell's stock presents a big buying opportunity. The stock, now just under 35, could well head to 50, Moore maintains.

The shares certainly don't look expensive: They're changing hands at 22 times the consensus earnings estimate of $1.59 a share for this fiscal year. That's higher than the broad market's multiple but low compared with Dell's recent earnings growth rate of 24% and its historical P/E of 27. Dell's multiple is well below Apple Computer's (AAPL) 35 and not that much above those of Gateway (GTW) and Hewlett-Packard (HPQ), computer rivals from which Dell continues to steal market share.

The most overlooked part of Dell's business is that it's no longer just a PC company.

Playing on its established corporate PC connections, Dell now sells and services the network servers, workstations and storage systems that power corporate back-office operations, taking on both Sun Microsystems and IBM. Using its expertise from making computer monitors, the company now offers a range of very competitive large-screen plasma and LCD televisions, challenging the likes of Sony and Panasonic. Building on its direct consumer sales link, its has come out with a digital music player to compete against Apple's iPod and a personal digital assistant that goes head to head with Palm.

Perhaps the most daring move of all has been Dell's decision to take on HP in printers. That move began after a market study convinced Michael Dell that HP was using its high-margin printer profits, which contribute about 70% of total operating profits on just 30% of revenue, to subsidize its ailing PC operations.

The method behind the diversification is clear. "We are PC-centric," says Rollins. "The idea was and is to look for synergies. The MP3 players uses PC components. The TVs are based on monitors, which we have long been making. The printers sell alongside our PCs, the servers go to existing corporate customers. We are looking a new areas of opportunity all the time, but you will not see Dell offer home electronic knickknacks."

The area of servers and storage for corporations has been a big winner, thanks in part to the fact that Dell has been able to apply its build-to-order model, allowing it to offer products that are highly competitive on both price and performance. The company makes its own servers and, for storage units, produces some of its products in partnership with industry leader EMC. Limiting its activities to the biggest market -- systems running on Windows and Intel chips -- Dell has become the No. 1 player in the U.S. and No. 2 worldwide in just five years, beating out the likes of HP, IBM, NEC and Fujitsu.

Posted by edelfenbein at 7:20 AM

NYT Profile of Dell’s CEO Kevin Rollins

The New York Times looks at Kevin Rollins, the CEO of Dell.

Mr. Rollins was living in Boston, a partner at Bain & Company, the management consulting firm, when he was asked to fly to Austin in 1993 to meet with executives at Dell. He readily acknowledges that he was hardly thrilled about the assignment. "Texas is a lo-o-o-ng way from Boston, in many ways," he said. He had worked primarily with aerospace companies before his partners asked him to help what was then a modest-size computer company on pace to lose $100 million that year.

Just before Mr. Rollins arrived, Dell announced that it would sell its computers at Wal-Mart stores, as well as continuing to sell directly to consumers over the Internet. Breaking into big-box retail outlets, Dell said, could bring in an additional $125 million in annual revenue - and rapidly build its brand name.

Mr. Rollins promptly suggested that Dell scuttle the deal, telling a meeting of top Dell executives that the arrangement, over time, would prove to be a money loser. He apparently made a persuasive case. Within days Mr. Dell said he asked Mr. Rollins to end the company's agreements with retail chains. After that, Mr. Dell added, "very rapidly Kevin became a critical part of the senior management team" - although he was still technically a consultant.

Largely, his work involved bringing a basic management discipline to a company that had been growing so fast that even Mr. Dell was inclined to acknowledge that things were something of a mess. Over the next several years, Mr. Rollins would spend weekends with his family in Massachusetts and his weekdays with Dell in Texas - essentially functioning as if he were a top executive working within Dell. "It was all extremely odd," Mr. Rollins said.

Rollins doesn’t seem particularly worried about Dell’s long-term outlook.

Among Mr. Rollins's gifts as chief executive, those around him say, is what Mr. Bell, head of Dell's European operations, calls his "tight messaging." So crisply does Mr. Rollins convey the Dell line, said Roger L. Kay, the founder of Endpoint Technologies Associates, a research firm that monitors the personal computer industry, that it is "a little bit scary how everyone from the highest to the lowest employee is on message."

Today Mr. Rollin's message is that everything is fine at Dell, despite a depressed stock price—now at $34.65, down 17 percent for the year. Dell may be the leading computer maker in the world, but it is No. 2 in Europe and No. 2 in Asia, leaving plenty of room for growth there.

There is also plenty of opportunity for growth in other product areas, like printers, which Dell has been selling for less than three years, and plasma televisions, which it has been selling for less than two years. The company is making progress in selling the more expensive equipment used in corporate data centers, and it is starting to do a brisk business in consulting. So what if its stock has fallen more than 12 percent since disappointing Wall Street last month?

"As our big strategic initiatives capture share and profits, the profits we deliver will go up and our stock price will naturally rise," Mr. Rollins said. "We have a lot of room for growth for a long time before we have to ask what's the next vision thing. It's really a matter of execution."

Posted by edelfenbein at 6:13 AM

Crossing Wall Street Four Years Ago

Posted by edelfenbein at 9:43 AM

Micro-Caps

There’s a lot to like in small-company stocks. I’m greatly indebted to Dr. Ken French of Dartmouth who keeps a terrific data library at his Web site. I downloaded some files and did a little research.

Over nearly eight decades, the smallest 10% of stocks—called micro-caps—have been the top-performing size category of all stocks. From mid-1927 to the end of 2004, micro-caps are up over 2,000,000%. That comes to 13.45% a year. The largest stocks have done the worst, up a measly 140,000% or 9.70% a year. Since the market’s low in 1932, micro-caps are up over 10,000,000%, or 17.35%. (If I had only known!)

The problem with micro-caps is that although the out-performance premium has been quite generous, it’s also been very volatile. Since July 1983, Micro-caps have underperformed the largest stocks. Micro-caps have had an amazing turnaround since March 1999. Since then, the small fries are up over 250%.

Posted by edelfenbein at 4:15 PM

Intel & Texas Instruments

As I expected, Intel narrowed its sales forecast for this quarter. The chipmaker now sees revenue of $9.8 billion to $10 billion. Last year, it had sales of $8.47 billion so this will be a good quarter. The company’s CFO said that gross margins will top 60%. Wall Street expects earnings of 36 cents a share. Right now, Intel has dropped about 80 cents in today's session. Texas Instruments raised its sales forecast to $3.48 billion to $3.62 billion. TXN is trading about 20 cents higher.

Posted by edelfenbein at 3:15 PM

American Technology Research on Dell

Not everyone hates Dell. Shawn Wu of American Technology Research sees a bargain:

We view the nearly 20% pullback in shares of Dell as overdone. We believe investors have turned overly bearish from overly bullish in an amazingly short period of time following Dell's disappointing July quarter results and guidance and as a result we are upgrading the stock to Buy.

We find the risk-reward ratio at current levels attractive trading at 18 times our 2006 earnings per share (EPS) of $1.90 (and 15x excluding $5.11 in net cash) and see more upside than downside.
Our $43 price-target implies 24% upside and assumes a 20x multiple, which we believe is reasonable for a company with a long-term EPS growth rate of 15% to 17%.

In our view, Dell's fundamentals have not changed that materially over the past few weeks. Dell remains among the best-positioned in hardware with its direct model, world-class low-cost supply chain, and broad product line.

Our checks with resellers/channel partners and Taiwanese motherboard manufacturers as well as recent commentary from PC food chain semiconductor suppliers give us confidence that the PC segment is positioned to grow at or above seasonal rates, particularly in mobile computing.

While it is early with nearly seven weeks left, we remain comfortable with our above consensus October quarter forecast of $14.5 billion in revenue and $0.41 in EPS (consensus at $14.3 billion and $0.40). We believe January quarter consensus revenue estimates may prove a tad too high, but we believe this concern is reflected in the pullback in Dell shares.

What could go wrong? On the macro level—if investors focus more on high energy and oil prices, Dell could fall with the broader market. At the company level if Dell may continue to not execute like in its July quarter.

We are, however, giving management the benefit of the doubt due to its relatively strong track record over a long period of time. We believe management is focused on fixing its miscues. In addition, we believe investor expectations have been reset with the pullback in shares.

Posted by edelfenbein at 3:04 PM

Favorite and Least Favorite Stocks

Mark Hulbert just came out with the September issue of the Hulbert Financial Digest. This is the newsletter that tracks other newsletters. My favorite part of each issue is where he lists the favorite and least favorite stock picks of newsletter editors. Usually, several stocks make both lists. This month is unusual because only three stocks are on both lists. The three stocks are Pfizer, ConocoPhillips and Toll Brothers.

The #1 favorite stock is Pfizer. This isn’t much of a surprise. There’s a lot like about Pfizer and the stock is down. I would stay away from the stock for now. Here are the top 10 favorite stocks of newsletter advisors and how many newsletters recommend them:

Pfizer 17
Bank of America 12
Johnson & Johnson 12
Microsoft 12
Newmont Mining 12
Berkshire Hthawy“B” 11
Citigroup 11
Home Depot 11
Intel 11
Unitedhealth Group 11

Here are some of the least favorite:

Cisco Systems 5
Nasdaq 100 5
S&P Spyders 5
Select Energy SPDR 5
Toll Brothers 5
Johnson & Johnson 4
Pfizer 4
Amerigroup 3
Bard CR 3
Conocophillips 3
Infosys 3
Ishares Biotech 3
Ishares Russell 2000 3
KB Home 3
Nordstrom 3
Nucor 3
SS&C Technologies 3
Seagate 3
Starbucks 3
Yellow Roadway 3

Posted by edelfenbein at 2:42 PM

S&P Nears Four-Year High

The stock market is recovering quite nicely from last week. Last Tuesday, the S&P 500 came very close to going below 1,200. Now the index is above 1,240 and is close to its recent high. On August 3, the index reached an intra-day high of 1245.86 and a closing high of 1245.04. That was the highest mark since 9/11. The previous high was on June 12, 2001 when the S&P closed at 1254.39. Since then, corporate profits are much higher.

Here’s a chart of the S&P over the past two weeks. View image

And here's the S&P 500 since June 2001. View image

Posted by edelfenbein at 1:14 PM

Brown & Brown

One of my favorite insurance stocks, Brown & Brown, was recently upgraded by Legg Mason. I like the stock anyway, but I think it’s especially good right now.

The company is extremely well run and has never had a lost in nearly 70 years of business. Operating margins are expanding, however legal expenses are weighing them down. Despite rising profits, the stock has been in a trading range for most of the past year.

The company had two offices in New Orleans. Obviously, they expect too many claims and Brown said that the first estimates will be probably be low. He also said that it probably won’t impact rates nationwide, but it will have a major impact in the south. In fact, Brown said that there will be big problems in Florida in November and December due to a lack of capacity. Firms will simply not underwrite policies. If this is true, it will certainly impact the real estate market. Officials now estimate that the damages of Katrina at $125 billion.

You can listen to J. Hyatt Brown at Keefe, Bruyette and Woods insurance conference. He’s a bit of a character. I could see him in talk radio. (Brown was actually speaker of Florida State House.) He said that his goal is to grow EPS by 15% ad infinitum. I was surprised to hear him say positive things about Sarbanes-Oxley.

Here’s a transcript of an interview from a few years ago.

Posted by edelfenbein at 12:50 PM

Delphi Drops Dividend

Things are going from bad to worse for Delphi. The company has already slashed its dividend twice, now it’s getting rid of it all together. The company should never have been spun-off by General Motors. Delphi is still hanging on to GM which remains its largest customer. The company is threatening to declare bankruptcy if it doesn’t get more concessions from its unions. Despite cutting its dividend, the stock is down today. I don't see this company lasting to the end of the year.

Posted by edelfenbein at 10:57 AM

Boom in Baton Rouge

One of the after effects of Hurricane Katrina is that it’s created a real estate boom in Baton Rouge. Local officials have estimated that the city's population has doubled.

Demand for residential and commercial property is so strong that rental vacancy is an oxymoron and buyers are bidding against each other for places to live. As available housing dwindles, buyers waive inspections and pay cash for properties they may not have even seen.

"It's crazy," said Herb Gomez, executive vice president of the Greater Baton Rouge Association of Realtors. "(Realtors) are busier now then they have been in their entire careers."

Stephen Moret, chief executive of the Chamber of Greater Baton Rouge, said his members are running at full tilt. But it is an unexpected prosperity that he and other merchants are trying to keep in perspective.

"Everything that's happening here is against the backdrop of the terrible devastation in New Orleans," Moret said. "I wouldn't even call it bittersweet. Awkward is more like it. We're trying to accommodate the needs of evacuees."

The real estate market is red hot, with both commercial and residential properties becoming increasingly scarce and valuable.
A normal, active month in Baton Rouge would be marked by about 900 existing home sales. In the past 13 days, even the most conservative estimates say inventory has dropped from 3,600 homes to less than 2,500.

Posted by edelfenbein at 10:45 AM

All-Time High for the DJUA

A lot of market technicians are in a tizzy because the Dow Jones Utility Average just hit an all-time high. In fact, Richard Russell, who is a follower of the Dow Theory, has moved from the bearish camp to the neutral camp. That may not sound like a big deal, but to a loooong-time bear like Russell, it’s an act of major significance.

Mark Hulbert notes the reason for Russell’s change in outlook.

The first thing is the new all-time high in the Dow Jones Utility Average. According to Russell, "Normally, the Utility Average will hit its highs well before the final high in a bull market, although there have been times when the Utility Average topped out simultaneously with the bull market high."

I think the market may move higher, but it won’t have much to do with the Dow Utility Average. The problem is that many public utilities have been too boring for too long. When some companies tried to break into new businesses, the results were a disaster. The whole industry tanked a few years ago thanks to headlines from the likes of Calpine and Enron. At one point in 2002, the Dow Utility Average was just 36% above its September high—its September 1929 high.

The good news is that many public utility are very sounds financially. They have strong balance sheet, and most importantly, lots of free cash flow. Since taxes were cut on dividends, utilities have become popular with income investors. Also, the recent Energy Bill loosens some of the heavy handed regulations. For example, the bill eliminates the Public Utility Holding Company Act of 1935 which makes mergers very difficult. The utilities sector has many good smaller companies that are being eyed by larger utes. Even Warren Buffett’s is getting in the act. I wouldn’t be surprised to see a large bank pick up a small utility.

Except for AES, none of the 15 stocks in the Dow Utility Average is expected to grow faster than the market over the next five years. Here are all stocks in the Dow Utility Average and Wall Street’s estimate for earnings growth over the next five years.

AES CP 18.0%
CENTERPOINT ENERGY 9.0%
TXU CORP 7.0%
EDISON INTL 6.5%
WILLIAMS COS 6.5%
EXELON 5.5%
DOMINION RES 5.0%
DUKE ENERGY 5.0%
PG&E 5.0%
SOUTHERN CO 5.0%
FIRSTENERGY 4.5%
PUB ENTRPR GP 4.0%
NISOURCE INC 3.5%
AMER ELECTRIC POWER 3.0%
CONS EDISON 3.0%

Here’s a chart of the Dow Utility Average going back to 1970.

You can see that the index is just above the high it hit four years ago. Although the index has grown steadily over the years, it has badly lagged the rest of the market, even adjusting for dividends. At some point, utilities may become attractive, but right now, I’d avoid the sector.

Posted by edelfenbein at 9:39 AM

Animal Rights Group Halts NYSE Listing

Life Sciences Research Inc. was all set to begin trading today on the New York Stock Exchange. But less than an hour before the opening bell, NYSE officials told them that the listing was going to be postponed. No reason was given.

LSR engages in animal testing, so the company is used to receiving hate mail and death threats. But the threat must have been very serious for the NYSE to halt a listing.

On the Web site of the activist group Win Animal Rights, or W.A.R., a link off of the camouflage-pattern home page led to a page entitled "Puppy Killers on the New York Stock Exchange." Readers are encouraged to write "polite letters and e-mails and make polite phone calls" to the exchange. The exchange's address and phone numbers are listed, along with the names and work numbers of two members of the public relations department.

W.A.R. founder Camille Hankins confirmed that an unknown number of W.A.R. supporters made calls to the exchange. Hankins said she does not advocate threats or violence, and she urged her members to be reasonable and make well-informed arguments against LSR. But she added that she had no control over what others might do.

The NY Post has more.

Posted by edelfenbein at 5:58 PM

BW: Chipmakers Face a Chilly Fall

Business Week takes a look at the chip sector and it doesn’t look so good. Intel and Texas Instruments will provide revenue guidance today. I’m guessing that Intel will tighten the high side of its guidance. TXN is at a 52-week high right now. However, Business Week has to take its mandatory shot at Dell.

"Dell's results demonstrated that the industry is in a phase of being unit-rich but revenue-poor," says Ashok Kumar, an analyst at Raymond James & Associates. "This isn't only specific to the PC industry but will also be apparent in handsets and in emerging markets as well. Price points will continue to drop."

Adding to Intel's woes, rival Advanced Micro Devices is forcing Intel to push down prices on its Xeon chips for servers, the computers that run Web sites and corporate data networks, notes JPMorgan analyst Chris Danely. Intel may tighten its revenue forecast to between $9.8 billion and $10 billion for the fiscal third quarter and maintain its forecast for gross margin, a yardstick of profit, of about 60%, Danely says. Intel now expects revenue to come in between $9.6 billion and $10.2 billion.

I think it’s a stretch to say that Dell is “revenue poor.” The company’s revenue shortfall could have been made up very easily last quarter. HP’s Douglas Hurd continues to be the media darling. WSJ has more on HP’s analyst meeting.

Posted by edelfenbein at 12:09 PM

Google Watch

Google just announced that it hired Vint Cerf, the "Father of the Internet." He's new position is Chief Internet Evangelist. Groan.

MOUNTAIN VIEW, Calif.--(BUSINESS WIRE)--Sept. 8, 2005--Google Inc. today announced that it hired Vinton (Vint) Cerf, the longtime technologist who is widely known as a "founding father" of the Internet, as Chief Internet Evangelist.

"Vint Cerf is clearly one of the great technology leaders of our time," said Google CEO Eric Schmidt of Cerf, who co-designed the TCP/IP protocols that were used to develop the Internet's underlying architecture. "His vision for technology helped create entire industries that have transformed many parts of our lives. We are honored to welcome him to Google."

Cerf will continue his leadership in the Internet community, and help Google build network infrastructure, architectures, systems, and standards for the next generation of Internet applications.

"Google has already made tremendous strides in making access to information on the web a reality for users across the globe, but we're still in the Internet's early innings," he said. "This medium will enjoy wider-spread use than television, radio or phones, and will ultimately expand beyond planet Earth. Google has always believed in doing things differently, and I believe that places us in a unique position to help bring even the wildest Internet visions into reality."

Cerf joins Google from MCI, where he led technology advancements since 1982, with a break to return to research at the Corporation for National Research Initiatives from 1986 to 1994. On his return to MCI in 1994, he helped to put MCI on the Internet map. With Robert Kahn, he recently received the ACM's A.M. Turing Award, considered "the Nobel Prize for computing," for his achievements in computer networking. Cerf is also working on the Interplanetary Network, a project of NASA's Jet Propulsion Lab, which aims to extend the Internet into outer space for planet-to-planet communications. He will also continue in his role as the Chairman of the Internet Corporation for Assigned Names and Numbers (ICANN).

Business Week has more on Cerf's role.

Cerf's hiring comes on the heels of several moves that suggest Google is encroaching on telecom turf. In the past year, the Internet giant has dipped its toe in the Wi-Fi market, sponsoring hot zones in San Francisco and New York City.

HIGH AMBITIONS. Also, Google has been reported to be buying up chunks of dark, or unused, fiber-optic capacity employed to transmit calls and data at high speeds. And in August it joined the stampede of Internet companies looking to provide voice-over-Internet phone calls when it launched a new instant-messaging tool.

Indeed, it's beginning to look like Google harbors ambitions to use the Internet and search tools for delivering everything from voice and data communications to audio and video files. This would resonate with Cerf, who has often predicted voice-over-Internet services will dramatically reshape the phone industry.

Posted by edelfenbein at 11:17 AM

The Fed’s Next Move

To raise of not to raise, that’s the question. After raising interest rates for 14 months, the Federal Reserve may temporarily hold off in the aftermath of Hurricane Katrina. I think that would be a mistake. The Fed needs to send a clear message to the market that it’s serious about attacking inflation.

The Fed meets again on September 20 and before Katrina, an 11th straight rate increase was basically a done deal. Now, it’s hard to say. The futures market puts the odds of another rate increase at 50%. After 9/11, the Fed cut rates by 50 basis points. The difference is that the economy was much weaker then. The Fed’s rate cut would have come about within a few months without 9/11.

The economic consequences of Katrina are still hard to gauge. The Congressional Budget Office said that the hurricane will cost 400,000 jobs and zap GDP growth by 0.5% to 1%. Then there’s the inflationary outlook, and that’s even murkier. The good news, however, is that oil prices finally seem to be pulling back.

I think the best move for the Fed would be to continue raising interest rates. Holding rates artificially low for too long won’t help Louisiana or the markets.

Posted by edelfenbein at 10:24 AM

Bayou Goes Hollywood

Here's a strange twist to the tale of Bayou Management. It seems that the fund's managers were trying to get in the movie business.

According to corporate filings with the secretary of state in Nevada, Paid Merchandising, Paid Movie I and Paid Movie II list as their principals IM Partners and Mathew Marino, the brother of Dan Marino, Bayou's chief financial officer. Both principals list their address as 40 Signal Road, Stamford, Conn., the same address where Bayou once lodged its various hedge funds.

Those entities agreed to finance a significant portion of "Yellow," a film produced by Yellow Production about a woman who is haunted by the death of her father, according to a London-based Web site called The Z Review. "They wanted to invest in movies," said Stephen Brown, the president of Yellow Production. But, he said, "Paid Movie I did not complete the financing of the movie. We took additional steps to secure the balance of the funding."

Posted by edelfenbein at 7:30 PM

Earnings Outlook

Nearly every stock in the S&P 500 has reported earnings for the second quarter, and the earnings growth has been fairly impressive. It looks like the final earnings growth number will be about 12.0%. For comparison, at the start of the second quarter, Wall Street was expecting just 8.8% earnings growth. The second quarter marks the eight straight quarter of double-digit earnings growth.

Nearly 70% of the companies in the S&P that have reported have beaten expectations. For a typical quarter, 59% of companies top expectations. Only 16% of companies have missed estimates compared with 20% for a typical quarter.

Earnings growth has been heavily tilted to the energy sector which saw its profits grow by 42%. If you take out energy, the rest of the S&P 500 grew its earnings by 8.5%. The earnings growth rate has been slowing dropping for the past quarters, but it should finally started expanding again. Earnings growth should pick up to about 17% for the third quarter. However, this earnings pick-up might be short-lived. For the fourth quarter, profit growth is expected to pull back to 14%. And for next year, earnings are expected to grow at 10.8%. I think Wall Street and the Federal Reserve are still trying to judge the impact of Hurricane Katrina.

The Consumer Discretionary group, which has seen its profits dip lately, is expected to lead the market next year. Here are the 2006 earnings growth expectations for the 10 major market sectors, note that Energy is last.

Consumer Discretionary 17.61%
Information Technology 16.85%
Health Care 14.89%
Industrials 14.41%
Utilities 10.60%
Materials 10.33%
Consumer Staples 8.38%
Financials 6.11%
Telecommunication Services 4.60%
Energy -0.50%

Posted by edelfenbein at 2:51 PM

NY Fed to hold meeting on derivatives with banks

Next week, the Federal Reserve Bank of New York will meet with several top Wall Street firms to discuss credit derivatives. This market has grown rapidly in recent years and there are fears that Wall Street’s paper work is very far behind.

The Counterparty Risk Management Policy Group recently released a study which highlighted the problem of Wall Street’s growing back log. Alan Greenspan has praised credit derivatives as a good way of controlling risk. The difficulty is that hedge funds have moved into this market. With the rapid trading, no one is sure who owes what to whom. In fact, what’s left of Enron and Citigroup are currently in court fighting over a credit derivative. My guess is that we’re going to hear more about this issue in the next few months.

Posted by edelfenbein at 12:52 PM

WSJ: Steel to Rise by 20%

Today, The Wall Street Journal reports that the price of steel could rise by up to 20% in the aftermath of Hurricane Katrina. This comes on top of another 20% price increase that came last week. The reason for the high prices is that there’s a limited supply of liquid hydrogen which is used to make higher-quality steel.

Air Products & Chemicals Inc., a major U.S. producer of hydrogen, says it can't deliver liquid hydrogen to customers because of damage to its plant in New Orleans. The Allentown, Pa., company is uncertain when it can restart production.

Steelmaker Steel Dynamics Inc., of Fort Wayne, Ind., told customers Friday it is suspending future orders of value-added products such as cold-rolled, galvanized and painted sheet-steel products because Air Products was its main hydrogen supplier. U.S. Steel, Nucor and Netherlands-based Mittal Steel Co. said they have alternate supplies of hydrogen and don't expect the shortage to affect them greatly.

The steel group had been a fairly poor industry over the past few decades. But the group has done extremely well is that last 2-1/2 years. Much of steel’s resurgence has been due to China’s insatiable appetite for steel.

The industry got a nice boost last week when Morgan Stanley reported a bright outlook for the sector. Morgan sees China being the critical factor which will help all metal stocks over the next five years.

Also, this weekend’s Barron’s noted that Congress will use a $100 million emergency relief fund to help rebuild Louisiana’s roads. That comes right after the huge highway bill that the president recently signed. Barron’s speculated that same of the big winners would include Texas Industries, Nucor and Caterpillar. The highway bill “guarantees a minimum of $227.6 billion for roads between now and 2009; the remaining $59 billion is for transit programs, such as commuter rail lines, and for pork projects, such as the Frank Sinatra waterfront walkway in Hoboken, N.J.”

The fall of the U.S. steel industry has been pretty dramatic. In fact, most of the major steel companies are no longer American. Mittal Steel is based in the Netherlands. Posco is based in Korea. Gerdau is Brazilian. The best U.S. steel stock is Nucor. Steel stocks are still well off their highs of six months ago, but it rally might not yet be over.

Posted by edelfenbein at 10:35 AM

Microsoft sues European Commission

Microsoft continues its long-running legal battle with the European Commission. Now, Redmond is striking back.

The Commission imposed sanctions against the software giant, including a record 497 million-euro fine, in March 2004 in a case which also covered the bundling of Microsoft's Media Player with Windows, but the company has not entirely carried them out.

Microsoft challenged the Commission's decision -- a case which has yet to go to hearing -- and, separately, tried without success to get the sanctions suspended by the court.
Competition Commissioner Neelie Kroes had warned Microsoft it had to comply by June 1, 2005, or face new enforcement action.

Microsoft filed a compliance agreement by the deadline.

But it managed to soften a remedy which required it to share communications protocols -- software rules of the road -- with all rival makers of server software for small offices.
Essentially, the Commission and Microsoft agreed that those who received the protocols could not make them public.

The makers of open-source server software, who publish the source codes for all products they issue, cried foul at this, however, and Microsoft and the Commission decided to leave the issue to the Court of First Instance.

Posted by edelfenbein at 9:54 AM

Seibel Beats the SEC

Good news for investors. The courts have thrown out a claim by the SEC that Siebel Systems violated Regulation FD. Adopted in 2000, Reg FD (for fair disclosure) requires companies to tell the public the same info as Wall Street.

Kenneth Goldman, Seibel’s CFO, told a private group that Siebel’s business was looking good. The stock jumped 8% the next day. The SEC went after Seibel although the company felt that this was an unreasonable interpretation of the regulation. In fact, this was the second time that the SEC went after Siebel on Reg FD. Judge George Daniels said that “the statements relied upon by the SEC in its complaint do not support an allegation of nonpublic material disclosure.”

In his decision, Judge Daniels wrote:

Such an approach places an unreasonable burden on a company's management and spokespersons to become linquistic experts, or otherwise live in fear of violating Regulation FD should the words they use later be interpreted by the SEC as connoting even the slightest variance from the company's public statements. Regulation FD does not require that corporate officials only utter verbatim statements that were previously publicly made.

Here’s more on the potential aftermath of this ruling.

Posted by edelfenbein at 9:23 PM

The PayPal Wars

What happens when entrepreneurs build a better mousetrap? The government and business team up to put it out of business.

Eric M. Jackson’s book, The PayPal Wars: Battles With eBay, the Media, the Mafia, and the Rest of Planet Earth, details the story of PayPal. The company was originally started with a vision of how technology could create an extra-governmental currency system. Soon, eBay and government regulators drove the company from its original goal. It’s a sad story and it ends when PayPal is ultimately bought out by eBay.

Posted by edelfenbein at 2:49 PM

Today's Market

The market is doing quite well today. The Dow is up over 100 points and crude oil has finally pulled back a few dollars. Right now, oil is going for less than $66 a barrel. T