Archive for October, 2005
Dell: The True Hollywood Story
Eddy Elfenbein, October 31st, 2005 at 5:43 pm
Heavens to Murgatroyd! What’s wrong with Dell (DELL) now? I still like Dell, but warnings like this aren’t making it easy.
After the bell, Dell just said that its earnings will be around 39 cents a share, which is at the low-end of expectations. No one ever really means to come in at the low-end of expectations. This is bad. Dell also said that sales will come in at $13.9 billion, which is below the low-end of their previous guidance of $14.1 million to $14.5 million.
Dell said it will also take a charge of 14 cents a share. I really don’t need this. The stock is down in after-hours trading. Dell will report earnings next Thursday.
The Market Today
Eddy Elfenbein, October 31st, 2005 at 4:30 pm
The stock market finished a lousy October on a positive note today. The S&P 500 rose by 0.72%, while our Buy List increased by 1.33%. For the month, S&P 500 lost 1.75% and our Buy List dropped 1.03%. This doesn’t include dividends. For our tracking purposes, I rebalance the portfolio at the end of each month.
Of our 25 stocks, 21 closed higher today. The best performer was Frontier Airlines (FRNT) which is still doing well after its great earnings report. The stock briefly touched $9.50 a share today. Expeditors (EXPD) hit a new high today ahead of tomorrow’s earnings report. AFLAC (AFL) also hit a new high.
Today saw an unusual split between “early” cyclical stocks and “late” cyclical stocks. Merrill Lynch maintains an index for each group. Today, the early index was up 2.75% (led by retailers) while the late index was up just 0.34% (held back by basic materials). You rarely see a gap that wide. It may be a one-day event, but it fits with our theme that the economy is getting stronger.
There were two contrasting stories today that caught my eye. The first is that oil continues to fall. Oil is now down about 15% from its peak. Here’s a little fact you don’t often here: Oil peaked before Katrina made landfall. The man-made storm has been far worse. It was seven months ago today that Goldman Sachs said that oil could spike to $105 a barrel. Despite all the hysterics, that storm has passed.
The other story was Valero Energy’s (VLO) earnings, and the retirement announcement of its CEO, Bill Greehey. Valero is Bill Greehey. He’s been the top dog there for 30 years. One of the many things I’ve liked about Greehey is that he’s unafraid to criticize analyst estimates. When he thinks they’re too low, he’s says so.
I have to give him a lot of credit. A few years ago, he went around buying refiners on pennies to the dollar. People must have thought he was nuts. Then, all the variables swung his way. For the third quarter, Valero netted $4.37 a share, compared with estimates of $4.23. The company also said that estimates were too low for the fourth quarter. Cramer will go nuts tonight.
Congratulations to Greehey and Valero, but don’t go anywhere near this stock. Oil and energy stocks are going down.
For reasons I’ll never get, today General Motors (GM) said it will keep its quarterly dividend at 50 cents a share. This makes no sense to me. Kellogg (K) got nailed today for its worst loss in three years. The stock dropped 4.9% today as it guided lower.
In other news, Apple (AAPL) said that iTunes users have downloaded more than 1 million videos since October 12. Also, Google (GOOG) came within inches of $375.
Researchers at the University of Massachusetts rank Delaware as the best state to work in. Louisiana is last. The SEC now says it will randomly check up on investment advisors instead of regular five-year visits.
Did you know Barbados has a Fed? Me neither.
Expeditors (EXPD) reports tomorrow (forecast: 46 cents a share) and we have the Fed tribal council meeting (forecast: dark suits, jargon).
And finally, Jeff Matthews has some thoughts on Octobers 1987 and 2005.
King Win Bids for ExxonMobil?
Eddy Elfenbein, October 31st, 2005 at 12:47 pm
This has to be one of the weirdest stories I’ve seen in awhile. An unknown Chinese company called King Win Laurel Ltd. has filed to buy out ExxonMobil (XOM) for $450 billion. In cash.
Apparently, they’re serious, or at least, they think they’re serious. This isn’t some Halloween Orson Wells Martians are in New Jersey thing. I’m curious where they keep $450 billion stashed right now.
King Win said it was incorporated in New Zealand on October 21 for the sole purpose of buying Exxon. A call to the Beijing number for King Win in the SEC documents elicited only a busy signal.
“It’s difficult to measure this offer as little is known about how the bidder would finance the transaction,” BOSC Inc. debt analyst Jon Cartwright said. “While our initial feeling is to ignore the offer, it is academically possible that the bidder could receive funding, making this offer real.”
Last year, an entity called King Win Laurel International Ltd. launched an unsolicited offer to acquire Telstra, which was also dismissed as a hoax. King Win Laurel International also launched a bid in 2004 for Restaurant Brands, which was dismissed by New Zealand regulators.
Dr. Evil and I would like to make a counter offer of $450 gazillion bagillion. I’ll even answer the phone.
Scooter Goes Down, Stocks Go Up
Eddy Elfenbein, October 31st, 2005 at 10:12 am
The Dow had one its best days in months on Friday, even though a top White House aide was indicted. If history is any judge, the stock market doesn’t care much about political scandals in Washington. In fact, stocks have often rallied during political turmoil.
The long-lasting controversy over President Bill Clinton’s financial dealings, punctuated by the suicide of a close adviser, didn’t prevent stocks from enjoying one of their greatest bull markets ever. Stocks did hit trouble in mid-1998, as the Monica Lewinsky scandal was dominating the news. Impeachment talk swirled in the fall, and stocks fell dramatically. But the problem on most investors’ minds then wasn’t Mr. Clinton. It was a Russian debt default, pervasive bond-market damage from the collapse of hedge fund Long-Term Capital Management and the steady slide of Asian economies.
By December, as impeachment loomed, the stock market was recovering, not tanking. From mid-December to mid-January, as the nation was transfixed by the impeachment, the Dow gained 9%, according to The Wall Street Journal’s Market Data Group.
Watergate was probably the scandal that most affected stocks. The Dow industrials entered a bear market at the start of 1973 and stayed in it through 1974, as Richard Nixon’s top aides and, ultimately, Mr. Nixon, himself, resigned. The scandal unquestionably contributed to the market malaise. But it probably wasn’t the main cause. Inflation soared in 1973 and 1974, from less than 4% to more than 12%, according to Ned Davis Research. The Arab oil embargo began in 1973 and continued into 1974. A recession began in late 1973 and lasted until 1975.
“When I think back to the 1970s, they were a time when we were confronted with a serious inflation threat, a loss of credibility on the part of the administration, and monetary policy was also off the rails,” says Stuart Schweitzer, global investment strategist at J.P. Morgan Asset Management in New York.
Oddly, the Dow industrials actually rose in the week and month following the Haldeman and Ehrlichman resignations. The Dow fell more than 15% in the three weeks following the Nixon resignation, in August 1974, but by year’s end, despite continuing uncertainty in Washington, stocks had begun a new bull market.
Market performance surrounding other Washington scandals has been more benign. A recession held stocks down during the Teapot Dome scandal, which involved abusive leasing of Federal oil reserves by Interior Secretary Albert Fall. But the worst was over in October 1923, despite President Harding’s death, and stocks were clearly recovering by the spring of 1924. The 1958 resignation of Sherman Adams, President Eisenhower’s right-hand man who had accepted a vicuña coat from a favor-seeking businessman, was barely a speed bump for the bull market of the time.
The October 1963 resignation of Vice President Lyndon Johnson’s protégé Bobby Baker as a top Senate aide — he was found to have links to organized crime — became an afterthought following President Kennedy’s assassination the next month. Even the assassination proved only a temporary impediment to that period’s bull market.
Stocks rose through the 1986 disclosure of the Reagan-era Iran-Contra scandal, in which money from covert arms sales to Iran was passed on secretly to right-wing fighters in Nicaragua. The market crashed in October 1987, but that was amid concerns over the trade deficit, the dollar, stock valuations and Wall Street excess.
This reminds me of the story of when Richard Nixon was asked what he would be doing if he weren’t president. Nixon said that he’d probably be on Wall Street buying stocks. They asked an old-time Wall Streeter what he thought of that. He said that if Nixon weren’t president, he’d also be buying stocks.
Lost on Tech Stocks
Eddy Elfenbein, October 30th, 2005 at 10:59 pm
In college, I remember my professor telling me that The Wizard of Oz wasn’t really about a girl and her dog who get blown over the rainbow. He said that the story is really a political allegory all about the events of the 1896 presidential election. Since my professor was a former 60’s radical, I just assumed this was some weird LSD/banana peel flashback. I mean, this was just too weird to be true. It had to be a coincidence, like playing Dark of the Moon during, well…The Wizard of Oz.
But slowly, my professor convinced me. He said that L. Frank Baum was mocking the politicians of his day in the guise of an innocent children’s story. The Scarecrow represented the farmers (Baum thought they didn’t have any brains). The Tin Man (factory workers) was heartless. And William Jennings Bryan was the Cowardly Lion who was trying to make it to the White House (Emerald City) on the issue of the gold standard (yellow brick road). Gold is measured in ounces. Oz. Get it? I don’t know who Toto was, but I’m sure he fit in somewhere.
I couldn’t believe it. I felt like my whole childhood had been robbed. Instead of watching the Wizard of Oz, I had really been watching Agronsky & Co. Is anything sacred? Ever since then, I’ve been a cynic. Later, I went to business school and now I do this. You see, the scars never heal.
Now I looked for hidden meanings in everything. Nothing is what it seems. I look for codes in Spaghettios. I was way ahead of this da Vinci person. And now, dear reader, I’m going to share my most brilliant discovery with you. The hit television show Lost is not what it seems. The more I watch it, the more I realize the truth. Lost is an allegory about…tech stocks.
dun dun DUNN!!
Now, this isn’t some “crazy” theory typed out by some “weirdo” on the Interweb. I have “proof.” If you watch carefully, every character is oddly similar—too similar—to a tech stock. The connections are down right eerie. My firm belief is that the producers of Lost are sending us a message. What it is, I know not. All I can say is that I report, you decide.
Let’s look at the characters one-by-one. We’ll start with Dr. Jack Sheppard who is quite obviously a thinly-disguised Microsoft (INTC). Dr. J is the center of the island. He’s the leader and we understand that his fate is tied to the fate of the survivors. Jack is basically an older version of Charlie Salinger on Party of Five. He’s the prissy drama queen who’s in charge. But instead of his parents dying and bravely leading his family onward, it’s a plane crash, and he’s bravely leading the survivors onward. Instead of Jennifer Love Hewitt, we have Maggie Grace. Instead of Scott Wolf, we have sand.
Not only is Microsoft the largest tech stock, it’s easily the most influential. If MSFT says something, others might grumble, but they’ll go along eventually. Jack is arrogant and bossy, but everyone knows that he’s smart. Being a doctor on that island is like making software in today’s economy. At the end of the day, no one can question Redmond. Also, Microsoft would have some of the best flash back scenes. Jack’s father is IBM (IBM). There’s a whole Oedipal subtext floating around.
Hugo “Hurley” Reyes and Google (GOOG). Hurley is everyone’s favorite character. He’s the most fun; Hurley is laid back and funny. But even he has a dark secret. Like the Google Dolls, Hurley is filthy rich, and he has some odd connection to the series of numbers (Google’s algorithms!). I could even see Hurley arguing TNG plot lines with Sergey and Larry. Also like Hurley, Google is a bit overinflated. That fit is just too much. But like Google, we have no idea what the future holds. What does it all mean? In the end, Hurley/Google is an enigma, but we can’t help liking him.
Warning: Plot spoiler.
This concludes Part I of my Lost/Tech Stock Theory. I’ll have more as the market/season develops.
Welcome Barrons’ Readers
Eddy Elfenbein, October 30th, 2005 at 6:03 pm
The Week Ahead
Eddy Elfenbein, October 30th, 2005 at 5:11 pm
This week, the Federal Reserve holds a tribal council meeting, and will almost certainly raise interest rates for the 12th straight time. This will bring the Fed funds rate up to 4.0%. They’re still not done. Right now, the futures market is telling us that the Fed has two more rate hikes to go.
We’re now entering the tail-end of earnings season. So far, about 70% of companies have beaten expectations, but this is where things get confusing. You see, you’re expected to beat expectations; 70% is the historical average. However. Companies haven’t beaten expectations by the usual expectation (about 2% instead of 3%). That wasn’t expected. We can now expect expectations to change, perhaps more than expected.
Part of the part of problem is that some of the sucky big-caps have sucked more than usual. General Motors (GM), for example, reminded everyone that they suck, which we knew, but they also took their suckiness to a whole new level. They lost $1.92 a share, blowing past Wall Street’s forecast of an 87 cent a share. The stock is now trading roughly on par with the ebola virus.
Discounting for large-cap stocks like GM and Allstate (ALL), the earnings haven’t been too bad. The problem is that the forecasts for next quarter have been weak. This week, we’ll more earnings reports, including stocks like Valero Energy (VLO), Procter & Gamble (PG), Kellogg (K) and Time Warner (TWX).
Outside our shores, there’s an interesting development in Europe. The Europeans might actually raise interest rates. The eurozone hasn’t raised rates in five years. This is a direct consequence of our economy’s strength. The euro has been slipping against the dollar, and Europe’s Greenspan, Jean-Claude Trichet, has pledged to pounce (or hop) on any sign of inflation.
China recently said that its trade surplus will balloon to $90 billion this year, up from $32 billion last year. Obviously, the U.S. is at the other end of that surplus. Wal-Mart (WMT) is currently China’s eighth-largest trading partner. But for all the talk we hear about China and trade, thanks to oil, Russia and Saudi Arabia have trade deficits that are almost as large. Plus, the Saudis have their currency pegged to the dollar. I think it makes sense for the oil producers to diversify into another currencies. OPEC’s president recently said that oil prices are approaching an “acceptable” level. Earlier today, I filled up my tank for $2.51 a gallon. That’s the lowest I’ve seen in these here parts is a long time.
We’re also seeing the first clear signs of a slowdown in the housing market. (Ever notice how the media loves to call the housing market a “bubble,” but that never applies to oil?) New home sales were sluggish and backlogs seem to be growing. And inventories of unsold homes increased as well. The level of unsold homes is the highest in nine years. Plus, median new home prices dropped 5.7% last month, the fourth drop in the last five months. The homebuilding stocks have been getting creamed lately. This could be just the beginning.
The Death of Pensions
Eddy Elfenbein, October 30th, 2005 at 1:40 am
Forget terrorism. Forget Bird Flu. In today’s New York Times, Roger Lowenstein takes 8,000 words to look at the country’s real threat—our dysfunctional pension system.
Corporate pension plans are underfunded by a staggering $450 billion. This is the world’s slowest-moving train wreck. The question is no longer if, but when. Years ago, companies promised their employees lifetime pensions, but now these “legacy costs” have overburdened companies. Employers simply don’t have the money to fund their pensions adequately. And newer companies don’t even bother; they just go the 401(k) route.
(In the movie Wall Street, Gordon Gekko was initially attracted to Bluestar by its overfunded pension. An airline with an overfunded pension! Only in Hollywood.)
Most pensions are insured by the Pension Benefit Guaranty Corporation. The problem is that this insurance invites “moral hazard,” meaning the companies don’t worry about underfunding because they know they have a government-insured safety net. This could be the S&L crises redux. Right now, the PBGC is in the red by $30 billion, and it’s projected to get worse. Much worse.
As bad as it is for the private sector, the outlook is even bleaker for public sector pensions. In San Diego, 8% of the city’s budget goes to pensions. In West Virginia, the teachers’ pension is only 22% funded. In Illinois, the pensions are underfunded by $38 billion.
Then there’s the issue of pension accounting. I remember I used to think accounting was simple. Take your revenues and subtract your cost. What’s left is your profit. That’s not even close. When accounting for a pension, a company selects a discount rate to price future liabilities. But companies are selecting higher and higher discount rate so they can set aside less and less money. You can completely alter your profit or loss simply by selecting a new number, and it’s all perfectly legal.
United Airlines didn’t make any contributions to its pension from 2000 to 2002. In 2003, it made the minimum contribution and it raised pension benefits by 40%. The company filed for bankruptcy and its pension is $10 billion in the hole by. But the accounting was all legit. Imagine that by a factor of 10 and it’s how our future might look.
Lowenstein is one of the best business writers around, but I think he’s too dismissive of 401(k) plans. Articles like this often follow the formula, here’s theme A, here’s theme not-A, here’s my resolution—watered-down A. But Lowenstein tries to find a self-defined middle ground that never addresses the problem directly. A pension by any other name is still a problem. Corporations are much more fragile entities that its critics realize. They can’t stand the weight of increased government outsourcing. I think 401(k) plans are the answer. Never underestimate the ability of people to solve problems for themselves.
The worst problems countries face aren’t natural disasters like hurricanes or infected chickens. The worst are manmade problems, like lack of political will. Ultimately, the pension mess can be solved if we abandoned pensions all together and move to 401(k) accounts for all.
Thoughts on the Market
Eddy Elfenbein, October 29th, 2005 at 3:04 pm
When I look at this market, I’m surprised by how strange it is. The market doesn’t seem to be committed to any trend or sector. If anything, it’s committed to a boring status quo. Every rally is met by a sell-off of the same amount and duration. This isn’t just frustrating, it’s bizarre. Here are a few random observations:
Volatility: The stock market’s daily volatility has plunged. Looking at this from an historical perspective, the decline in volatility is dramatic. The S&P 500 hasn’t had a daily move of 2% or more in over two years. A 2% day used to be nothing. It happened all the time. In the last six months of 2002, the S&P 500 swung by 2% or more 43 times—that’s about one out of every three sessions. This year, the market’s daily volatility has averaged about 0.68%, which is a fall-off of nearly two-thirds since the early part of this decade. Day-traders must be pulling their hair out.
What’s more, the volatility of every sector has plunged, except for one—Energy. The energy sector stands out from all the other sectors right now. The energy sector used to have about the same volatility as the rest of market, slightly more, but nothing like the tech sector. But now, the S&P 500 Energy Index is more than 2.5 times as volatile as the S&P 500.
Look what’s happened to tech stocks! At its peak, the S&P 500 Technology Index was averaging swings of 4.5% a day, which was also about 2.5 times the rest of the market. Today, tech stocks swing, on average, just 0.78% a day, a measly 15% more than the rest of the market. The tech sector has become like Henry Hill in witness protection at the end of Goodfellas. They’re schmoes just like everybody else.
The VIX (CBOE Volatility Index), which is a measure of implied volatility, has actually risen over the past few months, but it’s still very low. This summer, it reached some of its lowest readings in a decade. The impact of volatility is a heated topic among technical analysts. I’m in the camp that believes volatility is over-rated as an indicator of future performance. To the extent that low volatility means anything, it most likely means that the market is pleased with current valuations. Of course, this doesn’t mean it will stay that way. But for now, this is a market that has a hard time rewarding or punishing anything.
Here’s a good example of how bunched up the market is. From top-to-bottom, this is how the 10 sectors of the S&P 500 have done over the past two years:
S&P 500 14.48%
That’s very strange. Except for energy (and to a lesser extent utilities), every sector is doing roughly what the market is doing. The market is usually far more judgmental in how it treats leaders and laggards. This is the non-judgmental market. It’s energy stocks, and everybody else.
Trading Range: Over the last year, the S&P 500 has spent about 90% of its time locked between 1167 on the low end and 1237 on the high end. There was a brief period in the spring when we tested the lower bound, and we were at the high end during part of the summer. Except for that, we’ve been in a flat line. For the last 272 trading days, the Dow has been boxed between 10000 and 11000. For much of that time, the Dow has been squeezed between 10400 and 10700.
Long-term interest rates have also been trapped in a range. Since the middle of 2003, the 10-year T-bond has yielded between 4%-4.5% most of the time. This past week, the yield finally jumped over 4.5% for the first time in seven months.
So what now? For a long time now, researchers have shown that stocks prices exhibit leptokurtosis. That’s a seriously geeky word that means that the stock market’s volatility is not normally distributed in the classic Bell Curve sense. (Warning: math ahead). Instead, the distribution of the market’s volatility has a “fat” tail and a “tall” peak. I’m going to skip over a whole bunch of stats (and get some stat professor somewhere angry at me) by saying that this means that the market goes from periods of stability to periods of freaking out. Right now, we’re very deep in a stable period.
I’m waiting for this stability to break down. By that, I don’t mean a bear market, but I want to see a new leadership group emerge. Anything but energy. Normally, when long-term rates rise, I would lean towards cyclical stocks. However, energy stocks are finally starting to get hit, and it could turn into a rout. Whenever Congress makes noise, it’s a nice contrarian indicator (i.e., Schumer and the yuan). For now, the best values are in a scattering of different areas like Frontier Airlines (FRNT) and Dell (DELL).
The theme is a lack of a theme.
The Market Today
Eddy Elfenbein, October 28th, 2005 at 4:58 pm
The stock market wasn’t held back by the news of the indictment of Scooter Libby, Dick Cheney’s Chief of Staff. The Dow gained 172 points, the Nasdaq was up 26 points and the S&P 500 added 19.51 points. Our Buy List edged out the broader market by gaining 1.73% to the S&P 500’s 1.65%.
The S&P 500 rose almost the exact percentage as it did on Monday. The market’s volatility recently hit some of its lowest levels in years, but that may be changing. The S&P didn’t have one daily change that was greater than 1.4% from May through September, but today was the fifth such move in October. Donald Luskin has more thoughts on volatility.
Our big winner today was Frontier Airlines (FRNT), which soared higher, but gave back some of its gains to close up 8.3%. Although Stryker (SYK) and Biomet (BMET) had good days today, some of our medical device stocks like Varian (VAR) and Respironics (RESP) were laggards. Progressive (PGR) became our latest insurance stock to hit a new 52-week high.
Outside our Buy List, Business Week looks at the growing mess at Martha Stewart Living Omnimedia (MSO). Overstock.com’s CEO takes the blame for his company’s lousy quarter. Lastly, I was struck by this line: “The economists at Merrill Lynch figure that 40 percent of after-tax personal income is now absorbed by a combination of (rising) health care, energy and interest expenses. That leaves 60 percent to make the house and car payments and pay for life’s little extras – such as groceries.” I guess consumers are becoming more and more like General Motors (GM). (H/T: The Kirk Report).
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