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Dell: The True Hollywood Story

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.

Posted by edelfenbein at 5:43 PM

The Market Today

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.

Posted by edelfenbein at 4:30 PM

King Win Bids for ExxonMobil?

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.

BWAHAHAHAHAHAHA

**wiping tear**

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.

Posted by edelfenbein at 12:47 PM

Scooter Goes Down, Stocks Go Up

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.

Posted by edelfenbein at 10:12 AM

Lost on Tech Stocks

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.

Posted by edelfenbein at 10:59 PM

Welcome Barrons’ Readers

Welcome! Please have a look around. You can learn more about us, check out our Buy List, peruse our archives, shoot me an e-mail. It’s all good.

Posted by edelfenbein at 6:03 PM

The Week Ahead

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.

Posted by edelfenbein at 5:11 PM

The Death of Pensions

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.

Posted by edelfenbein at 1:40 AM

Thoughts on the Market

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:

Energy 81.67%
Utilities 41.59%
Industrials 21.31%
Materials 18.01%
S&P 500 14.48%
Telecom 13.79%
Financials 12.08%
Staples 9.96%
Healthcare 7.29%
Discretionary 4.23%
Tech 2.21%

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.

Posted by edelfenbein at 3:04 PM

The Market Today

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).

Posted by edelfenbein at 4:58 PM

Google Watch

The WSJ profiles Eugene Walton, one of the few Google (GOOG) bears on Wall Street. Walton just raised his price target on Google from $200 to $225, which is about 35% below where Google’s shares are now.

The difference between Walton and others on Wall Street is that he uses discounted cash flow to value Google. Wall Street prefers to use "relative valuations," meaning to compare Google’s valuation to similar stocks like Yahoo (YHOO).

The downside of relative valuation is that if the stocks you're comparing to are mispriced, you still won’t know the true value of the stock you're analyzing. All you’ll learn is that stock X is no more overpriced or underpriced than stock Y. Even though both may trade at ridiculous levels, there’s little comfort that they may do so equally.

Many of Mr. Walton's Wall Street peers expressed some reservations about Google's future growth rate but still upgraded the stock, saying they believe the company will outperform the competition. Uncertainty about Google's future warrants use of more conservative assumptions, says Mr. Walton. In his valuation, he assumes that Google's long-term, or "terminal" growth rate -- the rate at which cash flows are expected to grow, theoretically, in perpetuity -- is 2%. Another analyst who uses discounted cash flow, Philip Remek at Guzman & Co. in Coral Gables, Fla., used a 7% rate to come up with a price target of $260.

The relative-value proponents "want to play it both ways," says Mr. Walton. "They're being conservative about earnings beyond 2006, but they're also trying to justify the current share price. You can't do that."

Many academics contend that terminal growth rates should never be higher than the gross domestic product; otherwise, a company would eventually grow so fast that it would overtake the entire economy. Goldman Sachs estimates the GDP growth rate over time at between 3% and 3.5%.

Aswath Damodaran, a professor at New York University's Stern School of Business who specializes in valuation, says he isn't surprised that analysts using the relative-value method find Google to be fairly priced or undervalued. They feed into their long-term growth assumptions "whatever irrationality is driving the stock price today," he says.

Posted by edelfenbein at 3:02 PM

Dell’s Descent

Dell’s (DELL) punishment continues. The stock is close to falling below $30 a share. It looks like today will mark the lowest close in over two years. The stock first broke through $30 seven years ago (adjusted for splits).

I try not to be surprised by what I see on the market, but the falloff in Dell’s stock is pretty stunning. Put it this way: Dell and GE (GE) are now trading at roughly 16.5 times next year’s earnings. Does anybody really that think these stocks have equal growth prospects? Dell’s earnings multiple is now less than Coca-Cola’s (KO).

The earnings report is due on November 10. To be conservative, Dell’s sales should grow around 14% or so. If Dell posts earnings of 42 cents a share or more, the stock could easily run to $40.

Posted by edelfenbein at 2:13 PM

The Morning Market

The markets are reacting somewhat favorably to this morning’s GDP report. Stocks and bonds are up; gold and oil are down. Thanks to Frontier Airlines (FRNT), our Buy List is on its way to another strong day. Frontier opened at $9.50 a share this morning, although it has slipped some since then. The stock was upgraded today by Calyon Securities. Shares of Frontier are currently up 10% today.

The theme this quarter seems to be strong earnings and weak forecasts. That’s what we heard from Microsoft (MSFT) yesterday and Bristol-Myers (BMY) today. Another good example is the orthopedics business. Melissa Davis at TheStreet.com looks at the pricing pressures facing Zimmer Holdings (ZMH).

Anticipating future price cuts, Zimmer went ahead and scaled back expectations for revenue and profit growth next year. The company now hopes to grow revenue by 8% to 9% and profits by about twice that much in 2006.

I think it's clear that Wall Street doesn't pay enough attention to good small-cap stocks. At the Motley Fool, Rich Smith pointed out that Quality Systems (QSII) is followed by just four analysts. Wall Street is still ignoring it even though its shares are up 15-fold in the last five years.

The China Construction Bank just went public on the Hong Kong exchange. This is one the largest IPOs in years. To continue to grow economically, China will have to modernize its banking sector. The China Construction Bank has a market value of $70 billion, which is more than Morgan Stanley (MWD). Also from China, China National Petroleum has completed its acquisition of PetroKazakhstan (PKZ).

Authorities in Beijing have allowed the yuan to climb 0.32% since it was “floated.” That may not seem like a big deal, but at the time of the announcement Beijing said it would keep the yuan to a strict 0.3% trading range. The yuan is supposed to be tied to a basket of currencies, but only two major currencies are rallying--the yuan and the dollar. I think the dollar must feel pretty lonely in that basket.

And finally, Hershey (HSY) is suing a California company called Milkdudz over patent infringement. The company makes clothing to make breast-feeding easier.

Posted by edelfenbein at 11:14 AM

Today’s GDP Report

The government reported that GDP grew by 3.8% during the third quarter. Economists were expecting a growth rate of 3.6%. The economy has now grown by over 3.3% for ten straight quarters. In real terms, the economy has expanded by 13.4% over the last four year. The GDP report will be updated two more times, and I still think the third-quarter growth rate could be revised to over 4%.

Posted by edelfenbein at 9:27 AM

Frontier’s Earnings

At 8:27 last night, it finally came....

Frontier Airlines (FRNT) had to wait until prime time to deliver its earnings report. I won’t lie. This one had me nervous. I kept thinking of all the horrible things they could announce. They’re already an airline. Is it even possible to get worse?

But we all knew that Frontier had to stand tall. The Evil Sith Knights over at Love Field (LUV) had invaded their turf. This could not stand.

Congratulations Potter & Co., the earnings were out-freakin-standing. The analysts were expecting two cents a share. Frontier made 18 cents a share. Read that again: 18 cents a share. They didn’t just beat the Street—Frontier steamrolled estimates. (Note: Yes, I realize I’m mixing my metaphors, airplanes don’t steamroll, but you get the drift.)

But then Jeff Potter, Frontier’s CEO had to drop this on us:

Although a quarter as strong as this is certainly cause to celebrate and for our employees to congratulate each other on a job well done, we recognize that the ills that continue to plague this industry haven't disappeared. Fuel remains at historic highs and the market still suffers from overcapacity leading to general weakness in fares. We don't anticipate a solution to these issues in the coming quarter, and we expect that high fuel costs and weak fares will adversely affect earnings for our fiscal third quarter 2006.

Don’t toy with my feelings like that. Later on, the company says that this quarter’s loss will “likely” exceed last quarter’s gain. The more I think about it, it appears that Frontier is keeping expectations low. The quarter isn’t even one-third over. Plus, fuel costs have been falling. This isn’t good news, but it’s not necessarily bad news.

Let’s look at the positives. Frontier has been able to keep operational costs low. This airline can compete with any low-cost carrier. Total revenues for the quarter increased by over 20%. Also, the company was hampered by a 38% jump in fuel prices. Total fuel costs jumped nearly 60%, yet they still had a great quarter. Fuel makes up nearly 30% of their total costs. If the price for jet fuel falls, Frontier could soar. Let's hold on and watch how the shares react this morning.

In other news, Southwest came out with its plans for Denver.

Posted by edelfenbein at 6:56 AM

The Market Today

I’m not pleased with the market today. Two of our stocks reported earnings that were inline with expectations, but they gave modest outlooks for next quarter. So both stocks got nailed for big losses. I don’t know what to say. This market wants results right now, and anything less gets punished. This was not a fun day. Every single sector was down. Today was the peak day for earnings. Tomorrow the market will focus on the GDP report.

Our Buy List lost 1.69%, and the S&P 500 fell 1.05%. Our big loser was CACI International (CAI), which dropped $8.29 or 13.7%. If you’re not familiar with the company, it’s a major defense contractor based in Virginia. The company reported earnings that we inline with expectations, but it guided lower going forward. The company sees earnings next quarter of 69 to 72 cents a share. The Street was looking for 72 cents. That doesn’t seem so bad, but the market will hear none of it. Just so we have this right, the company’s low end is three cents below expectations, and we drop 829 cents. The market is giving these “missed profits” an earnings multiple of 275, and they’re not even missing yet! If you've been a long-time owner of CACI, you might have a sense of deja vu. Solid profits and the stock get slammed--that's exactly what happened nine months ago.

With Respironics (RESP), we have almost the same story. The company makes those weird mask things that help with sleep apnea. RESP reported earnings of 28 cents a share. Again, this was inline with forecasts, but the stock took a 5.4% hit due to a tepid outlook. The company sees earnings of 35 to 36 cents a share for this quarter, while the Street was looking for 36 cents a share. The stock dropped $2.05.

One of the bright spots is Frontier Airlines (FRNT), which seems to be showing some strength lately. I think the main trends will continue. The economy is getting stronger, interest rates are going higher, and oil is going lower.

Outside our Buy List, Aladdin Knowledge Systems Ltd. (ALDN) reported earnings of 24 cents a share, one penny above expectations. I had discussed this stock two weeks ago. I was happy to see their margins continue to expand. For this quarter, Aladdin’s operating margins reached 18.6%, up from 16% last year. The company sees earnings of 24 to 26 cents a share for next quarter. The stock rose 34 cents today.

Posted by edelfenbein at 6:51 PM

AT&T Brand Lives On

I have to say that I like this news. SBC Communications (SBC) is buying AT&T, and it will adopt its name. AT&T was originally formed 120 years ago. It’s a classic name that deserves to live on. I’ve already discussed how much I hate the names of telecom stocks.

The Baby Bells are almost gone now. SBC has already bought two if its siblings, Ameritech and Pacific Telesis. Two others, Bell Atlantic and Nynex, merged to form Verizon. US West was bought out by Qwest (Q). BellSouth (BLS) is the only one left as originally conceived. Perhaps it will be bought by Starbucks (SBUX).

Posted by edelfenbein at 3:40 PM

Don’t deficits matter?

"Don’t deficits matter?" asks Buttonwood at the Economist. She's not happy that the dollar continues to rally:

The currency has gained more than 10% this year, hitting a two-year high against the yen last week and a three-month peak against the euro. This is despite an American current-account deficit even wider than last year’s and apparently reduced enthusiasm among Asian central banks for dollar-denominated assets. Buttonwood was among those early in the year who expected the dollar to go every which way but up. How wrong can a columnista be? Why didn’t the currency behave as she told it to? Don’t deficits matter?

I hate it when currencies don't do what columnists say. Here's the awful admission:

Despite hurricanes, higher oil prices and indeed higher interest rates, America’s economy has grown more strongly than most people expected.

Imagine that! But don't worry; here's the mandatory "dark-clouds-on-the-horizon" ending. The dollar is about to crash. It has to crash. It must crash. Run! Hide!!

Yet if all this sounds too Goldilocks to be true, it probably is, for a couple of reasons. Any big upward movement in the dollar’s exchange rate is probably limited by the perception that there are sellers of dollars out there waiting for right price (central banks, especially). “Non-commercial traders” have longer net positions in dollar futures than almost ever before, on figures from the Commodity Futures Trading Commission—always a bad sign. As the dollar strengthens, American investors themselves are pouring money into foreign markets, which in time could blunt the greenback’s rise. Some of Japan’s normally risk-averse investors are stripping off their currency hedges to capture higher yields in America; they could flee at the slightest sign that the dollar is in trouble or Japan’s economic recovery is finally starting to lift the yen. And the euro has lost 12% in value since the beginning of the year. If the ECB starts raising interest rates in the first half of next year just as the Fed stops, it might gain it back.

Or it might not.

Posted by edelfenbein at 1:06 PM

Business Week Takes another Shot at Dell

You can tell Dell’s (DELL) earnings announcement is coming soon when Business Week starts publishing its anti-Dell articles. You can almost set your clock by them. This time, Business Week tells us that Dell is floundering in China.

You couldn't blame Michael S. Dell for sounding a little bit smug about his company's prospects in China during a cocktail party for analysts in Austin, Tex., last April. Dell's market share in Asia was growing fast, and it looked as if its formula of selling PCs directly to customers over the Internet and phone was catching on just as it had in the U.S.

"Demand for our products and services in China is tremendous," he said, adding that "99% of the economic value in China is in the large metro areas" where Dell (DELL) was concentrating its efforts.

All of a sudden, Dell's strategy in Asia is looking a little shaky. Third-quarter numbers released by tech market researcher IDC show Dell's market share for Asia, excluding mature Japan, dropped by a full point, to 7.8%. Then, on Oct. 25, the company announced that the co-president of its Chinese operations, Foo Piau Phang, had "chosen to retire."

Please. Dell has an incredibly strong business in China. Four years ago, Dell held just 5% of the Chinese market. Today, the company has 4,500 employees there and it announced plans to build a second plant in China. Japan is Dell’s third-largest market. China is fourth.

RURAL FREEZE. What's happening to Dell's march on Asia? The company won't talk -- it's in the quiet period before its Nov. 10 third-quarter earnings announcement. But there's plenty of evidence suggesting it's out of sync with shifting market conditions in fast-growing China. While Dell has focused on large business and government customers in the country's major cities, demand is emerging elsewhere -- in hundreds of smaller cities, where Dell doesn't sell as effectively as its rivals and where even some business customers want to see products before they buy.

That's where competitors Lenovo, Hewlett-Packard (HPQ), and Founder have been selling briskly through retail shops. Says HP Executive Vice-President Ann Livermore: "You have to wonder, how well does the direct model work in the hinterland?" HP has invested heavily in hiring staffers and recruiting retailers in secondary Chinese and Indian cities.

The China setback is just the latest in a string of recent disappointments for Dell. Since the Round Rock (Tex.) company missed its second-quarter revenue target, its stock price, which peaked at $42 a share in July, has sunk to less than $32. A survey by the University of Michigan recently showed a decline in Dell's customer-satisfaction rating. Also, the company was embarrassed in China in May after the publication of an e-mail from a Dell salesman criticizing the Chinese government -- a key Dell customer.

An HP executive questioning Dell’s business model? I’m sorry, but which company is laying off 15,000 employees? Does anyone know? Bueller? Anyone?

As far as its revenue miss, Dell barely missed. The stock hasn’t done well lately (and that’s why I think it’s a great buy), but it’s still well ahead of the market over the last four years. The customer satisfaction issue is important, but the survey made it clear that customers are upset with Dell’s customer service, not the products. In other words, this is a problem that can be fixed.

The article is cobbling together negative and slightly negative news and making it appear that there’s some large trend in play. The moral of the story is always the same. Dell can’t maintain its margins. Lower-cost competitors are under-pricing it, and Dell is losing market share. Just last week, we learned that Dell is still #1 and it’s slightly increasing its market share.

We'll find out more on November 10.

Posted by edelfenbein at 12:43 PM

ExxonMobil’s (XOM) Earnings

ExxonMobil (XOM) reported third-quarter earnings of nearly $10 billion and Royal Dutch Shell reported earnings of $9.4 billion. These numbers are gigantic. I doubt any corporations have ever posted numbers that larger.

Exxon Mobil had sales of over $100 billion for the quarter. Most large corporations don’t do that kind of business for an entire year. Keep in mind that daily oil production fell from last year. From July through September, ExxonMobil made on average, $1 million in profit every 13 minutes. The company’s quarterly dividend payment comes to nearly $2 billion.

The stock is higher in today’s session, but XOM has not been treated well lately. The shares have lost about 13% in the last month. I wouldn't be surprised to see $50 oil by Christmas.

Posted by edelfenbein at 10:32 AM

Q&A: Fair Isaac (FIC)

Eddy, I’m a new visitor to your blog via billcara.com. I’ve just been reading some of your old posts – I like your writing.

I was wondering how large an impact rising interest rates will have on Fair Isaac’s credit scoring (FICO) business. Fewer consumers will be interested in refinancing their mortgages or taking on consumer debt at rising levels.

Any thoughts?

Thanks for the kind words!

I don’t think the impact will be that large. In fact, if there’s any impact, a credit squeeze could actually place Fair Isaac’s services in greater demand. If credit is tight, a lender wants to be extra-careful will their capital.

The good part of Fair Isaac’s business is that it’s not tied directly to lending, but instead it services the lenders. That helps take a lot of the interest rate risk away from their business. I look at Fair Isaac as a software company, not as a bank or financial institution.

Even if consumer borrowing dries up, lenders will still have a need for Fair Isaac. The company often works in ways you never realize. I’m sure you receive lots of junk mail offering you pre-approved credit cards. The credit card companies aren’t shooting in the dark. Fair Isaac’s logarithms tell them who’s a good risk. Low rates or not, I think it’s safe to assume that the junk mail will keep flowing!

Also, consumer credit-scoring is just one part of Fair Isaac’s business. The company works in sectors like government, insurance and health care. Looking at recent history tells me that Fair Isaac has weathered higher rates quite well. When interest rates jumped in 1994, shares of FIC went up, up, up. When the shares hit their low last year, it was shortly after the Fed started raising rates. Again, the stock doesn’t seem too concerned, so neither am I.

The company will report earnings next Wednesday. The average of eight analysts comes to 49 cents a share. However, the forecasts are in a very tight trading range. The high is 50 cents a share, the low is 48 cents a share. I’m looking forward to another solid quarter.

If you have any stock questions, feel free to e-mail me at eddy@crossingwallstreet.com. I’m happy to give you my opinion on any stock or investing in general; however per SEC rules, I’m not allowed to give personal portfolio advice.

Posted by edelfenbein at 11:33 PM

The Market Today

On Friday morning, the government will report on third-quarter GDP and right now, the bond market is in full retreat. The yield on the 10-year T-bond is close to 4.6%, and the yield on the 30-year bond is up 4.8%. The bond bulls are scared and they’re right to be.

After telling us for months how the consumer is tapped out and energy prices are burying us, the market is finally realizing what I’ve been saying all along—the economy is very strong. According to surveys, Wall Street’s estimate for third-quarter GDP growth is 3.6%. That’s way too low. I expect to see a number over 4%. In fact, I wouldn’t be surprised to see a number over 5%.

After more than three years, we might finally break the bond market’s tight trading range. The yield on the 10-year has traded between 3% and 5% everyday since June 11, 2002.

As long-term bond yields rise, cyclical stocks tend to outperform consumer stocks, and that’s exactly what happened today. The Morgan Stanley Cyclical Index rose 0.52% today, while the Consumer Index dropped -0.19%. What’s interesting today is that the cyclicals were not led by energy. Energy stocks were among the poorest performers today. Some of the big winners included stocks like Dow Chemical (DOW) and International Paper (IP).

The yield on the 90-day T-bill fell back some, but it’s still above the Fed’s 3.75% target for the Fed funds rate. This fits a pattern. Rates will be going higher next year. Yesterday, the futures markets was telling us that there’s a 64% chance that the Fed will raise rates in January. Today, there’s a 76% chance.

Our Buy List eked out a tiny 0.03% gain for today, while the S&P 500 lost -0.43%. Although we had some trouble spots; Medtronic (MDT) and St. Jude Medical (STJ) were subpoenaed by the government for info on their heart-device businesses. There have been some concerns about pricing strategy in this sector.

As a rule of thumb, I don’t get too worried about these sorts of things except that Guidant (GDT), which is not on our Buy List, was also subpoenaed. Guidant is just one of those stocks that you have to stay away from. Everything they do seems to turn out wrong. I’m curious to see what J&J (JNJ) will do with Guidant.

Brown & Brown made another new high today. By the way, IBD had an article on new market leaders, which includes insurers and medical device companies, two of my favorite sectors.

Three of our stocks reported earnings after the close today. Zimmer Holdings (ZMH), which has been getting slammed lately, beat by three cents a share and guided higher. Our star stock of late, Varian Medical Devices (VAR), beat by two cents a share. The company also guided higher for next year. The stock is down after-hours, but it’s done very well recently. CACI International (CAI) reported inline and guided slightly higher for next year.

Outside our Buy List, Amazon.com (AMZN) dropped -13.9%. Google (GOOG) busted the $350 barrier. Human Genome Sciences (HGSI) lost three cents a share today. And Cendant (CD) still sucks. It lost 3.6% and made a new 52-week low. Again.

Finally, Baidu.com (BIDU) reported earnings of $1.1 million. That’s not a typo. Baidu made $1.1 million with an M. The company has a market value of $2.6 billion. That is, until trading opens tomorrow.

Posted by edelfenbein at 5:48 PM

My Take on Amazon.com (AMZN)

Amazon.com (AMZN) is getting slammed in the market today. Right now, the shares are down about 13%. I hate to say this, but I think this is just the beginning. I love the Web site, but the stock is simply overpriced.

My concern comes down to the fact that while Amazon may be growing fast, it’s not growing that fast. For the first nine months of this year, sales were up 25.9%. I also don’t like the way Amazon uses gimmicky promotions like Amazon Prime to increase sales. These are nice to have but they cut into profit margins and you can only do that for a limited time.

Amazon’s gross margins seem to have stabilized around 25%, which is a good number but I doubt we’ll see much improvement. Net profit margins had been falling, but those too seem to have stabilized.

Wall Street has targeted a growth rate of 22%, which strikes me as a bit generous. Considering that we’re in a good economy, I’d say that Amazon’s true growth rate is closer to 18%. Let’s be very generous and say that Amazon will be able to maintain a 25.9% growth rate—the same as its sales growth for this year. Compare that with the fact that Amazon is going for over 42 times next year’s earnings and you can see how rich the shares are.

I’ll repeat what I said three months ago. Enjoy the service, but steer clear of Amazon's stock.

Posted by edelfenbein at 12:58 PM

Human Genome Sciences (HGSI)

I look at income and balance sheets almost all day long and there are few more barren than Human Genome Sciences (HGSI). This is a biotech stock that’s worth over $1 billion, but it doesn’t have a single product on the market.

The company has virtually no revenue. Earlier this year, the company got a $7 million payment from GlaxoSmithKline (GSX) for a licensing agreement. They recognized $5 million of it for last quarter, giving them a grand total of $5.9 million in revenue. That’s it? I don’t get it. How does the company stay in business? Why would anyone buy their stock? Total costs for the quarter came to $63.9 million. They spend more than ten times what they take in.

Aside from the licensing deal, Human Genome brought in about $1,000 per employee for the quarter. If the company ceased operations and sent their workers out to mow lawns, they would have brought in more money.

To be fair, Human Genome is working on new drugs, however LymphoStat-B, its lupus drug, failed to meet main targets in a mid-stage study. This doesn’t mean the drug is dead, but it will take longer to see hard data. That’s fine. I have nothing against a drug company doing important research, but that’s all this company does. I don’t understand how any analyst could follow Human Genome, but 15 currently follow it. If Human Genome can be a stock, why can’t a charity go public? I’d rather buy shares in the United Way or the Salvation Army.

An average of four million shares of Human Genome trade each day and they have absolutely nothing to go on. It’s pure speculation. This is a disservice to investors. The company should either go private, or consider the lawn-mowing idea.

Posted by edelfenbein at 9:57 AM

Google Watch

In a rare interview, Sergey Brin talked to Alan Murray about Google Library in the Wall Street Journal:

There was a time when folks thought compelling content would be king of the Internet. Attract enough "eyeballs," the gurus said, and money would follow. But instead, Google's blank home page has trumped all. The Google economy is a kind of high-tech feudal system: The peasants produce the content; Google makes the profits.

That's all the more annoying to the content crowd because the lords of this money machine -- Sergey Brin and Larry Page -- perpetuate the goofy-sounding notion that they do all this to help the world, rather than line their own pockets.

"That's true," Mr. Brin said in an interview yesterday. "We talked at Stanford for a while about making Google an open-source project. We ultimately decided that would not be an efficient way for us to get the resources we needed to make it run. So we started a company."

As for the Google Print Library Project, Mr. Brin says, "We actually dreamed of the ability to do this back before we started Google as a company." It is good for Google's users, good for the business, it's fair and it's legal, he says. "But more importantly, I think it is really great for the world."

The publishers may find Mr. Brin annoying. And he certainly is successful and rich. But he also happens to be right. The Google Print Library Project is great for the world.

The problem is that Google wants to include all material unless a particular author opts out. The publishers want everything to be excluded, unless the authors opt in. It seems very unreasonable to me that an author has to work to protect his or her copyright. If it’s so great for the world, then it should be worth paying for.

Posted by edelfenbein at 8:35 AM

Fiserv (FISV) on Mad Money

One of the things I love about Fiserv (FISV) is that it doesn’t draw much attention to itself. It’s a solid company that delivers consistent growth. This is a stock that will never light up the message boards.

Until today.

A certain Mr. Cramer on television just recommended Fiserv. He said it’s boring, but it may be a target for a buyout. This Cramer fellow thinks it could “easily” go for $10 over the current share price. This was followed by rather odd shouting and I believe what were animal noises.

Well, I have no earthly idea if anyone is going to buy it, but Fiserv is a good stock selling at a good price. I don’t like Cramer’s reasoning which is, “I don’t like it, but buy it because other people like it, or may like it at some point.” I only recommend stocks that I like. And I only like stocks of outstanding companies. Boring or not, that’s Fiserv.

As always, I welcome any questions from my readers. Please feel free to e-mail me at eddy@crossingwallstreet.com. I’m happy to give you my opinion on any stock or investing in general; however per SEC rules, I’m not allowed to give personal portfolio advice.

Posted by edelfenbein at 6:53 PM

Today’s Market

Today was a strong day for energy, and a crummy day for most everything else. The price of crude oil jumped over $2. The S&P 500 lost -0.24%, while our Buy List dropped -0.30%. Nine of our stocks were up, fifteen were down, and Dell (DELL) was unchanged. Expeditors International (EXPD) closed at a new 52-week high. What a great stock! Varian Medical Systems (VAR) is also at a new high. The stock has been our top-performer for the month, rising nearly 15%. Financial services are my first true love. Health care stocks are more of a friend with benefits.

The two big drags on our Buy List were eBay (EBAY) and Frontier Airlines (FRNT). eBay was hurt by the announcement from Google (GGOG) of its new Google Base service. According to the WSJ:

Google Base would let users submit information to a searchable Google database, according to a page posted at base.google.com that was available briefly on Tuesday.

In the Web page, Google cites "description of your party planning service," "listing of your used car for sale," "articles on current events from your website" and "database of protein structures" as types of content that a user could submit. Several Web logs also carried an image of another Google Web page that contained a form for entering information such as price, property type, and photos, presumably for listing real estate for rent or sale.

Google in a statement described the service as "an early-stage test of a product that enables content owners to easily send their content to Google." It said it didn't have anything further to announce about it. Google confirmed the screenshots posted on blogs were legitimate.

The existence of Google Base heightens anticipation of the Mountain View, Calif., company's long-expected entry into direct competition with online auctioneer eBay, which also owns a minority stake in classified listings site Craigslist Inc.

eBay might be weak tomorrow due to Amazon’s (AMZN) lousy earnings. The company’s profits dropped from $54 million to $30 million, although sales rose 27%. The reason for the bad earnings was a $40 million legal charge. The company settled a patent-infringement suit with Soverain Software LLC. Even without the charge, Amazon’s earnings would have dropped. This has been a theme for Amazon for the past few quarters--higher sales, lower profits. I've always believed this company has been overhyped.

Tomorrow, three of our Buy List stocks report earnings, Zimmer Holdings (ZMH), CACI International (CAI) and Varian Medical (VAR).

Perhaps the most underreported story today is that the 10-year Treasury bond yield closed over 4.5% today, the highest in seven months. I didn't see anything on CNBC about this. Also, the two-year Treasury note is about to make a four-year high. Here's a chart of the 10-year yield since April. The message is that money is leaving stocks and bonds and is going into gold and other hard assets.

Posted by edelfenbein at 5:11 PM

Gazprom of Russia

Gazprom is the most powerful company that you’ve probably never heard of. The company is Russia’s state-controlled natural gas monopoly. Imagine if the KGB went into the energy business, and you have a good idea of what Gazprom is all about. Basically, these boys don’t like to lose. While everything else is falling apart in Mother Russia, Gazprom is raking in the bucks. For the most recent quarter, profits rose 34%. And if the price of natural gas keeps rising, Gazprom will become even more powerful.

Gazprom is easily one of the most important institutions in Russia today. The company accounts for 8% of Russia’s GDP, and an astounding 25% of its tax revenue. The government recently upped its stake in Gazprom to 51%. The company provides natural gas to Russians at break-even prices, and it makes a profit though exports to Europe.

Earlier this year, Gazprom got into a nasty fight with Belarus. The company demanded that Belarus sell them a pipeline operator for $1 billion. The government in Belarus thought it was worth five times that much. So Gazprom made them an offer they couldn’t refuse: They shut off all gas supplies to Belarus in the middle of winter. Yep, these guys are Disney-level evil.

When Putin got elected, he promised to clamp down on the oligarchs that dominated Russian industry. Today, the oligarchs are either in jail or they’ve fled the country, and they’ve been replaced by state-owned enterprises. In other words, the Kremlin. (The Economist has an article about the current level of corruption in Russia.)

Earlier this year, the CEO said that he wanted to make Gazprom the world’s largest energy company. The company already has more hydrocarbon reserves than ExxonMobil, Royal Dutch Shell, British Petroleum, Total and Conoco Phillips put together. They’ve even buddied up with Hugo Chavez. Gazprom recently won development rights to Venezuela’s off-shore oil fields.

The company just bought Sibneft, an oil company, for $13 billion. Ranking behind only Saudi Arabia and Iran, Gazprom is now the third-largest owner of oil in the world. Sibneft’s owner, Roman Abramovich, walked away with $9 billion. Contrast that with the former head of Yukos, Mikhail Khodorkovsky, an oligarch who openly criticized the Kremlin. He’s currently sitting in jail for tax evasion.

I guess you could say that what’s good for Gazprom is good for Russia.

Posted by edelfenbein at 4:22 PM

Consumer Confidence Drops

Consumer confidence unexpectedly dropped in October to its lowest reading in two years. Economists were expecting a small rebound, but worries about Katrina and oil are weighing on American consumers. For example, Nissan (NSANY) said that U.S. sales dropped 22% in the first two weeks of October.

The market is mostly flat this morning. None of our Buy List stock is reporting earnings today. Golden West Financial (GDW) announced that it will increase its quarterly dividend by 33%. Yesterday, Frontier Airlines (FRNT) announced plans to add flights to Salt Lake City, Dallas, Phoenix, Las Vegas and Chicago.

While the broad market doesn’t seem to be very volatile, there’s a stealth bear market going on. John Dorfman reports that of “2,399 U.S.-traded stocks with a market value of $500 million or more, 58 have fallen 20 percent or more through Oct. 21.” Fortunately, our Buy List is ahead of the market this month.

Posted by edelfenbein at 11:50 AM

AP: Chipotle Plans $100 Million IPO

My favorite restaurant is going public!

NEW YORK (AP) -- Chipotle Mexican Grill Inc. filed with regulators Tuesday for an initial public offering of $100 million worth of stock in the restaurant chain owned by fast-food giant McDonald's Corp.

The Denver-based company did not say how many shares it planned to offer or give an estimated price range, but said it will apply to trade its shares on the New York Stock Exchange as "CMG."

Investment firms Morgan Stanley and SG Cowen & Co. are managing the IPO, according to documents submitted to the Securities and Exchange Commission.

Chipotle, a quick-service restaurant offering burritos and tacos, has grown to more than 450 locations nationwide since opening in 1993. The restaurant turned profitable in 2004 and saw its profit grow fivefold as sales swelled 33 percent for the first six months of this year.

McDonald's Ventures LLC and Chipotle are selling all the stock in the offering. McDonald's currently owns about 92 percent of the chain, but the size of its stake following the IPO was not disclosed.

Proceeds will be used to pay down a $30 million revolving credit with McDonald's, as well as for capital expenditures and general corporate purposes, Chipotle said.

Posted by edelfenbein at 10:44 AM

Today’s Market

I didn’t think the S&P 500 could stay below 1200 for long. Today, it rallied to 1199.38. The S&P 500 added 1.68% today and our Buy List trailed it slightly, rising 1.55%. Every one of our stocks went up except for Dell (DELL). The NYSE had its broadest rally in 14 months. Advancers led decliners by more than 6-to-1.

After the close, AFLAC (AFL) reported earnings of 66 cents a share, two cents ahead of estimates. The stock broke out to a new all-time high today. Despite Rita and Katrina, the insurance sector looks great. Brown & Brown (BRO) made a new high as well.

Also after the close, Lincare Holdings (LNCR) reported earnings of 52 cents a share, also two cents above estimates. Lincare’s profits are down due to the loss of Medicare reimbursements. The company said that Medicare price reductions hurt sales by about 14%. I still think the company is delivering very strong numbers. This continues to be one of my favorites in the health care sector.

I’m still venting about Merrill Lynch’s downgrade of Frontier Airlines (FRNT). The analyst, Michael Linenberg, downgraded the airline from a “buy” to a “sell.” You don't many downgrades go straight from “buy” to “sell.” They prefer to downgrade a stock to a “medium near-term weak-hold,” or something along those lings. But he hurt his case by stressing the severity of the Southwest’s (LUV) entry into Denver’s market. Did it never occur to him that this could happen? Frontier’s management said that they knew it was coming, they just didn’t know when. I really liked the letter that Frontier’s CEO wrote. He laid out the issue very well. This is a difficult obstacle for Frontier, but it’s not a killer.

Outside the Buy List, Merck (MRK) reported earnings today. The company’s profits rose, but the most telling fact is that sales fell. If someone told me a few years ago that Merck would report a quarter of declining sales, I don’t think I would have believed them. The Journal looks at Merck’s business:

Vioxx-related lawsuits against Merck continued to pile up. As the second Vioxx trial begins to wrap up this week in New Jersey, the company announced that as of September, there were about 6,400 lawsuits filed against it, up from fewer than 5,000 a few weeks earlier. Merck lost its first Vioxx trial when a Texas jury returned with a $253 million verdict against the company. That verdict will be reduced to $26 million under Texas state caps, and Merck said it intends to appeal the decision. The company's general counsel, Kenneth Frazier, reiterated on a conference call with analysts that the company plans to defend itself against each case individually in a long process. Mr. Frazier said the company faces six trials in the next six months.

In addition to the loss of Vioxx, which at its peak contributed $2.5 billion in annual sales to Merck, the company is dealing with precipitously declining sales of its biggest blockbuster, Zocor. The cholesterol medicine has lost patent protection overseas and will lose patent protection in the U.S. next year. As a result, world-wide sales of Zocor in the third quarter fell 14% to $1.05 billion.

Posted by edelfenbein at 6:10 PM

Cendant Splits Up

I just don’t get Cendant (CD). Everybody loves this stock and I just don’t know why? Am I missing something? It’s like the saki of Wall Street. I know I’m supposed to like it, but I’m sorry. I just don’t.

First there’s the name. It’s one of those modern names that sort of sounds like something, but it’s not. (The worst of these names, of course, are the spin-offs of Ma Bell, and the spin-offs of the spin-offs. I think it was part of Judge Greene’s break-up decision that henceforth all telecom names must be non-descript and wretched. Avaya? Lucent? Verizon?? Think about this: At some point in history there was a meeting that ended with the words, “So we’re all agreed. Agere!”)

The problem with Cendant is that it doesn’t make sense. It never made sense. The idea was to combine HFS and CUC International into a giant cross-marketing dynamo. These always sound good on paper, especially whatever paper press releases are written on, but they never work out. The new conglomermess wants to get a high earnings multiple, so it can use its stock to buy more companies. The cycle repeats until you’re left with some Tyco/Citigroup hydra-headed monster that the market hates. I have to admire Henry Silverman’s determination to try a strategy that has never worked in the past. Not only did it not work this time, Silverman partnered up with a bunch of crooks.

CUC International was cooking their books and they got caught. Getting nailed for accounting fraud back in the 1990s was pretty hard to do. CUC’s former president, Kirk Shelton, got a 10-year prison sentence and has been ordered to pay Cendant $3.27 billion. The judge ordered a payment schedule of $2,000 a month, so Kirk should be all done by about the year 15000. Walter Forbes is due for trial soon.

Now Cendant has completely reversed course. The company wants to be a real estate and travel company, and nothing else. Bravo. At least this is a strategy. It's not a good one, but now they have a game plan. The problem is that the company is selling off good businesses at the wrong time for too low a price. I really wish I had Henry Silverman in my fantasy football league. Cendant has sold off Jackson Hewitt (JTK), the tax preparer. In January, they sold PHH (PHH), then they sold off Wright Express (WXS). Separately, these stocks have outperformed shares of Cendant. They’re still not done. Henry also wants to sell Market Services.

Cendant has tons of cash, but I still don’t like what they’re doing with it. They’re paying off debt, which is nice but not necessarily a priority. They’re gobbling up other businesses. They’ve snagged Orbitz, Fairfield Communities and the rest of Avis, plus some boring others. They’re also buying back their stock which makes no sense at all. Fortunately, that's been put off due to the breakup. In short, Cendant is over-investing in real estate at the top of the real estate market. Is anyone there looking at the prices of homebuilding stocks? The sector is off 20% in the last three months.

Cendant is in a quagmire. The stock hasn’t done anything in years. They’ve bought and sold 93 companies in seven years. They can’t be bought out because they’re too big. They can’t spin-off businesses because of the tax basis. So what’s left?

Today we got the answer. Cendant is splitting itself up into four different companies:

In breaking itself up, Cendant will create four companies out of its four main lines of business: real estate, travel, hotels and car rentals. The real-estate company will include brokers Century 21 and Coldwell Banker; the travel business will consist of Cendant's Orbitz, Galileo and Cheap Tickets brands; the hotel company will include the Ramada, Howard Johnson and Days Inn brands; the car-rental company will have the Avis and Budget businesses. Cendant expects all the new companies to be major players in their industries.

Cendant also guided lower for this quarter and next. Cendant is a great example of a stock where the numbers don’t give you a good idea of what’s happening. I think too many people saw a low multiple and high cash flow and thought there was a bargain there.

I expect to see a lot of articles on Silverman’s “brave vision” for Cendant. In reality, this is a surrender to the market’s vision. It took too long to realize. I wish the Baby Henries well, but I’m still not convinced. Though I have to admit that the new strategy sounds great. On paper.

Posted by edelfenbein at 1:53 PM

Bernanke to Head Fed

President Bush will appoint Ben Bernanke to be the next chairman of the Federal Reserve. He’s currently the head of the President’s Council of Economic Advisers. From 2002 to this past June, Bernanke was a Fed Governor.

We don’t get new Fed chairmen often. Alan Greenspan has held the post since 1987. Paul Volcker Fed chariman from 1979-1987. If confirmed by the Senate, Bernanke will be the 14th Fed chairman since the Fed’s creation in 1914. He would takeover on February 1, 2006.

There’s an old Vatican saying that “a fat pope is followed by a thin pope.” Perhaps the central banker version is that a jargon-filled Fed chair is followed by a plain-speaking one. The media likes the fact that Bernanke speaks clearly and is much easier to understand than Greenspan.

My proposal that Fed governors should signal their commitment to public service by wearing Hawaiian shirts and Bermuda shorts has so far gone unheeded.

-Ben Bernanke

I can't picture Alan Greenspan saying that. For more Bernanke, here’s a speech he gave warning against the dangers of deflation.

Posted by edelfenbein at 10:57 AM

Five Gold Stars for Micros

One of my favorite blogs, Footnoted.org, gives five gold stars to Micros Systems (MCRS):

For one, there’s the disclosure that the company doesn’t believe in perks for the top executives. That means no personal use of the corporate jet, no luxury apartments, no executive health plan, no private school tuition, etc…Instead a footnote to the proxy notes that the only perk executives receive are the same health insurance benefits that all employees get.

But what really makes Micros stand out is that they make it very easy for individual investors to see how much the executive’s options are really worth. Because they offer no perks, the amount of money listed under “other annual compensation” in the summary comp table is the value of the options exercised in the past year. Most companies make investors work for this information by forcing them to read multiple charts and the accompanying footnotes.

Micros reports earnings on Thursday.

Posted by edelfenbein at 8:30 AM

Can Google Keep Rising?

Here's an upbeat research report on Google from Needham & Co:

Google (GOOG) reported Third-quarter 2005 revenue well above expectations. Given the momentum in Google's business, and the implied 10% upside from current levels to our new price target, we are raising our rating to Buy from Hold.

Gross revenue, which includes revenue both from Google's owned and operating Web properties (proprietary) and from its partner sites (network), of $1.58 billion rose 96% year-over-year and 14% sequentially.

Net revenue, which exclude traffic acquisition costs, or the revenue share with network partners, exceeded the consensus mean of $943 million by 11%.

In all, growth was driven primarily by gains at Google's owned and operated properties (up 20% sequentially), though Google's network business was also solid (up 7% sequentially).

And despite an increase in the revenue share with network partners, the overall gross margin increased 170 basis points sequentially to 59% due to the greater mix of higher margin proprietary revenue.

Net revenue of $1.05 billion exceeded the consensus mean of $943 million by 11%. Operating earnings of $644 million exceeded the consensus mean by 8%.

The adjusted earnings per share of $1.50 exceeded the consensus mean of $1.36. Not surprisingly, incremental operating margins (using gross revenues) declined 180 basis points to 41%.

As usual, management did not provide guidance. Our revenue estimates increase due to the upside in the quarter and the likelihood of continued strong growth.

Our earnings estimates also benefit from an assumed increase in mix of higher margin proprietary revenue, and from our use of a lower effective tax rate in 2006 (from 35% to 30%, which alone increases our 2006 adjusted earnings-per-share estimate by 54 cents).

Given our new, higher forecasts and our shift to using 2007 forecasts to calculate our 12-month price target, we are raising our price target to $370 from $300.

Google remains the leading technology company in the consumer Internet space, and arguably has one of the best platforms for expansion into new high-growth consumer Internet services.

We continue to view Google as a core holding, and believe the company's strong brand loyalty, the business' substantial free cash flow and the team's track record of innovation will lead to further gains.

-- Mark May, CFA

Posted by edelfenbein at 8:22 AM

Will Harriet Miers Be Withdrawn?

I’ve been following the Harriet Miers futures at Tradesports. They have two contracts on Ms. Miers becoming a Supreme Court justice. One is simply whether or not she’ll be confirmed; the other is how many votes she’ll get.

I noticed an odd discrepancy. The contract to confirm dropped far below the contract that she’ll get 50 or more votes. An arbitrage opportunity? I pointed this out to Donald Luskin at The Conspiracy to Keep You Poor and Stupid. He said that the vote total contract is only if there's a Senate vote. Then we hit on the fact that there’s an implied withdrawl contract within these two contracts. Since the vote-to-confirm contract has fallen to 30, and the 50-or-more-votes contract is at 68, the withdrawl contract would be: 1-(.30/.68) or 55.8%.

I’ve downloaded the historical data, and the withdrawl contract had been around 15%-20% for most of this week, but it only became Google-like in the past 24 hours.

Posted by edelfenbein at 2:01 PM

Today’s Market

So ends a very weird week. It seems like there’s no middle ground anymore. The S&P Value index was up 0.41%, while the Growth Index lost -0.11%. The Small- and Mid-Cap Indexes were both up, but the S&P 100 was down.

Today was led by telecom tech and energy, while health care and industrials lost ground. Caterpillar’s (CAT) earnings held back the Dow, but the S&P 500 and Nasdaq finished in the black. Pfizer (PFE) continued to bleed and Merck (MRK) isn’t far behind. Pfizer’s low today was lower than its high price from July 3, 1997. Merck is below where it was on January 3, 1992. The company reports on Monday.

So what’s doing well? Google. Today the stock jumped $36 making the search engine worth close to $100 billion. The company is now worth more than Coca-Cola (KO) and Wells Fargo (WFC). According to Bloomberg, Google is currently followed by 34 analysts; 25 rate the stock a “buy,” eight say “hold,” and only one, Philip Remek of Guzman & Co., says “sell.” In other news, Philip Remek disappears from Internet.

The best news for us was the rebound in Frontier Airlines (FRNT). After yesterday’s debacle, the stock closed up about 6%, although it was weak in the afternoon. Our Buy List was up 0.38% today, compared with the S&P 500’s 0.15%. Nineteen of our stocks were up, and six were down.

Among the losers, Fiserv (FISV) got dinged today. The earnings were fine by me, but David Trossman at Wachovia downgraded the stock. I’m not sure how a stock can beat estimates, give an upbeat outlook and get downgraded, but there you go.

Brown & Brown (BRO) reached another new high today. On Monday, AFLAC (AFL) will report earnings. The insurance stocks have been doing very well. The consensus estimate is for 64 cents a share.

And lastly, Business Week interviews Simon Ramo (the R of TRW) on why meetings stink.

Do you have any tips for chairing meetings more efficiently?

The most important thing is to be prepared, to know the subject and purpose of the meeting, and what you hope it will achieve. If you can't find the time to prepare for meetings then you should stop calling so many. Another is to know the people who are invited. Think ahead as to which individuals are most likely to make the greatest contribution, and anticipate others who you'll have to, as tactfully and gently as possible, interrupt to move the discussion along. Finally, keep the objective of the meeting constantly in your mind so you'll keep moving toward the goal. But if the goal changes during or because of the meeting, be prepared to invent Plan B.

Posted by edelfenbein at 5:22 PM

Top 10 Stock Symbols

Just so you don’t think Wall Street is full of a bunch of stuffed-shirts:

1. (BUD) Anheuser-Busch

2. (WOOF) VCA Antech (veterinary services)

3. (BOOM) Dynamic Materials

4. (FIZ) National Beverage

5. (LVB) Steinway Musical Instruments (in honor of Ludwig Van Beethoven)

6. (ZEUS) Olympic Steel

7. (CHUX) O'Charley's Inc.

8. (TAP) Molson Coors Brewing

9. (BID) Sotheby's Holdings

10. (LENS) Concord Camera

Posted by edelfenbein at 1:20 PM

Jeff Potter's Letter to Frontier Employees

From the Denver Post, this is worth posting in its entirety.

From: Potter, Jeff

Sent: Thursday, October 20, 2005 11:19 AM

To: All Frontier Employees

Subject: Southwest Announces Service in Denver

As you may have heard, and no doubt will hear repeatedly in the press over the next few days, Southwest Airlines announced today that they will begin service in Denver in the early part of 2006. We know that Southwest has a reputation that is sometimes larger than life so we wanted to address any potential concerns you might have about what this means to Frontier and what our strategy will be against a competitor like Southwest. While we didn't know when, and we aren't 100 percent positive as to where yet, it was an inevitability that Southwest would initiate service here. However, whether it's Southwest or anyone else, we can all take solace in the fact that we have spent the past 12 years preparing to compete with any and all airlines, by building an amazing company, and offering the industry's best product. So, in essence, it is each of you that has helped us prepare for Southwest.

That being said, from a management standpoint, we too have been preparing ourselves for Southwest's entry, and I think it is important to note that not everything you have heard about Southwest is necessarily true. It's worth mentioning that we already compete with Southwest on about 75-80% of all F9 connecting markets (about 500 city pairs) and are competitive with them in pricing. While there is certainly no arguing their success, it may surprise you to know that based on the most recent DOT statistics (June quarter 2005), Southwest's fares were actually about 12 percent higher than Frontier's on a per-mile basis, in markets where we compete directly. Obviously, pricing power is one of Southwest's primary competitive advantages in the markets it enters, but that won't necessarily be the case here in Denver. In other words, we have been competing quite effectively for a long time.

Just as the pricing "myth" is not necessarily always true, it is also important to recognize that at the end of the day, Southwest is just an airline. And, just as we would view any airline entering our home market, we will watch them closely. But we are not about to cower or back away. This is OUR home, and Southwest's entry is just another opportunity for us to shine. It is an opportunity for us to show Southwest, as well as our passengers, what it really means to make a difference. Fact is, we have a better product with DirecTV, new A/C, more legroom AND, of course, assigned seating. But, more importantly, we have you. I have said it time and time again, our employees make the difference, and you will continue to be our competitive secret weapon. The loyalty you have helped create in this market with the level of service you provide our customers cannot be matched--by Southwest, TED or anyone.

We are going to move forward as we always have--by running our own race. Yes, Southwest's entry will have in impact in the markets they choose to serve from Denver, just as you would expect any additional capacity would. But, our goal is to continue to do what we all do so well--run a great airline and that requires each of you to continue doing what you have always done--keeping your focus on our customers, and not the competition. Again, they are the new kids on the block in Denver, and we should be ready to circle the wagons and protect our hub by continuing to run one of the most on-time airlines in the country; by consistently going above and beyond for all our passengers; and by never losing the intensity of our focus on offering an experience that is "a whole different animal."

However, I want to reiterate a statement we have made many times in the past-we MUST continue our diligent focus on CASM. Products, employees and loyalty aside, we are indeed doing battle on the cost side against all airlines, and Southwest is a staunch competitor when it comes to costs. We heard Gary Kelly, CEO of Southwest say it today on their conference call-they consider themselves the cost leader, and this industry is currently being won and lost on costs. We have done amazingly well on the cost side, particularly given that we operate out of one of the most expensive airports in the country, but there is much work to be done to remain competitive. So I urge each of you to scrutinize every financial decision you make for this company and view it in the context of cost containment.

I personally want to thank each and every one of you for creating the best airline in the industry, and I assure you that our ability to compete with any airline, in any market, is a direct reflection of your efforts. Much as we did when TED launched, we will continue to keep everyone updated on any competitive measures taken by Southwest, or by Frontier, and if you have any questions in the meantime, please don't hesitate to speak with your manager and as always, feel free to contact me directly.

Jeff

Well said.

The Denver Post has more, including a list of possible routes Southwest (LVB) could fly to Denver International Airport. This move by Southwest is a direct response to Katrina.

From Investor’s Business Daily, J.P. Morgan upgrades Frontier. It’s nice to see that not all analysts think alike.

J.P. Morgan upgraded Frontier Airlines, Inc. (FRNT) to overweight from neutral and added it to its focus list. The broker told clients it believes the market has over-penalized Frontier for Southwest Airlines' (LUV) entry into Denver, while significantly underestimating Frontier's earnings potential in fiscal 2007.

And from the Colorado Springs Gazette:

Mike Boyd, an Evergreen-based airline industry consultant, said fares will drop in Denver but likely not by much.

“Denver is no longer a highfare market,” Boyd said. “Southwest will lower them somewhat more. But the other carriers will match (Southwest’s) fares, and they already offer a better product than Southwest does, including an assigned seat and satellite TV.”

Frontier is up about 7% today, and oil is now below $60 a barrel.

Posted by edelfenbein at 11:10 AM

Fiserv's Earnings Report

Fiserv (FISV) reported earnings of 60 cents a share for the third quarter. This is a really good little stock. The company never floors Wall Street, but it almost always delivers solid results. It’s sort of the Craig Biggio of the financial data processing industry.

Fiserv has consistently grown its earnings-per-share by about 18% for several years now. That doesn’t get anyone’s attention in one year, but when you look at the full record, it’s pretty impressive.

Last year, FISV netted 47 cents a share. For the fourth quarter, the comapny sees earnings of 54 to 57 cents a share. For the full year, the company projects earnings of $2.28 to $2.31 a share. The stock was downgraded by Wachovia this morning, and it’s trading lower.

Posted by edelfenbein at 10:18 AM

AP: Man requests 33-year sentence to match Bird's number

OKLAHOMA CITY -- A man got a prison term longer than prosecutors and defense attorneys had agreed to -- all because of Larry Bird.

The lawyers reached a plea agreement Tuesday for a 30-year term for a man accused of shooting with an intent to kill and robbery. But Eric James Torpy wanted his prison term to match Bird's jersey number 33.

"He said if he was going to go down, he was going to go down in Larry Bird's jersey," Oklahoma County District Judge Ray Elliott said Wednesday. "We accommodated his request and he was just as happy as he could be.

"I've never seen anything like this in 26 years in the courthouse. But, I know the DA is happy about it."

Shouldn't he have said that he's a fan of Robert "00" Parish?

Posted by edelfenbein at 7:22 AM

The Future, if any, for General Motors

George Will with some sobering thoughts on General Motors (GM).

General Motors took an interesting turn on Monday. It is going back into the automobile business.

Granted, GM has always been in that industry, but it has also become the nation's largest private purchaser of health care. This supposedly secondary role has become primary.

GM has been forced to allow product development, pricing and other decisions to be driven by the need to keep sufficient revenue flowing in so it can flow out in fulfillment of GM's function as a welfare state. GM provides $5.2 billion in health care annually -- more than Harley-Davidson's revenue -- to 1.1 million workers, retirees and dependents. Retirees outnumber current U.S. employees 2.5 to 1. The $4 billion that goes annually to retirees does not go into developing products people want to buy.

For several decades, the government has outsourced social welfare programs on the backs of corporations. The problem is that corporations are far more fragile than its detractors assume. Many of the blue chip names of a generation ago no longer exist.

Shortly before Monday's announcement that the UAW agreed to trim GM workers' and retirees' benefits, Delphi, the auto parts company that GM owned until 1999, sought bankruptcy protection. Under terms of the 1999 separation, GM may be liable for up to $12 billion of Delphi's pension and health care benefits, which would offset GM's gains from the UAW concessions.

The bankruptcy of Delphi is another pebble -- a big pebble; Delphi has 185,000 employees worldwide, 33,000 of them unionized Americans -- in an accelerating avalanche of corporate decisions dismantling "defined-benefits America." As a result, intergenerational strife, which has long been anticipated, may at last be at hand: Delphi proposes cutting the compensation -- pay and benefits -- of younger workers from $65 per hour to $20 or less, so it can fulfill the promise to retirees of a fixed percentage of their salaries.

Robert "Steve" Miller, Delphi's chief executive, minces no words, telling the Wall Street Journal that defined-benefit programs are imprudent anachronisms: "The notion of having all your retirement eggs in one basket -- your employer -- is a concentration of risk that is simply inadvisable for anyone in today's fast-moving economy." He calculates that a competitive American industrial compensation cost is about $20 an hour. And to get to a total compensation cost of $20, including health care, retirement and workers' compensation, "which is high in the states we are in like New York, Ohio and Michigan," you have to have a basic hourly wage of $10. Pay at Delphi's plants in China is roughly $3 an hour.

Daniel Gross at the Slate.com thinks that the UAW deal doesn’t go nearly far enough. As he sees it, GM is corned with no way out.

GM has a pathological need to produce and sell cars—even at a loss—because it needs the revenues. For decades, GM has fought a vicious—and losing—battle against domestic and foreign competitors to maintain its once (and still) leading market share in the all-important North American market. In recent years, GM's leadership has repeated the mantra that if GM could only retain market share in the short-term, many of its long-term problems will go away.

A company that has high structural costs, pays a healthy dividend, and has made large investments in infrastructure needs to have all its factories running to the fullest extent at all times. A strike, even for a week or two, would prove devastating. It would halt production and screw up the just-in-time delivery system. Some dealers would have fewer cars to sell, or lose out on expected sales. Rivals would rush to capitalize on GM's woes by offering incentives. And as the last few decades have shown, once GM's customers go elsewhere, they tend not to return. GM wants a 28 percent market share in North America, but it's down to 26.1 percent so far this year. A strike would drop that number even lower.

The Federal Reserve is often described as the lender of last resort. I have a feeling that in the near future, the federal government will be the car marker of last resort.

Posted by edelfenbein at 11:03 PM

Today’s Market

I’m officially declaring that today never happened. Frontier Airlines (FRNT) plunged 28.6% on the news that Southwest Airlines (LUV) is moving into Frontier’s Denver hub. Merrill Lynch quickly downgraded the stock. That’s an awful downgrade. Did it never occur to the analyst that Southwest would or could do this? Obviously, I think today’s sell-off is waaayy overdone. The fact is Frontier has been competing against Southwest for along time. Southwest will probably get two gates at Denver’s airport, and they’re going to have about 40 employees there. That’s hardly worth chopping 28.6% off the stock.

We’ll know all the details later, but we’re probably looking at maybe a dozen or so daily flights. I think this will hurt Frontier’s flights to Vegas and L.A., but it won’t harm their lucrative Mexico business. Frontier is a healthy company with a growing business. Earlier, Southwest moved into to Philadelphia and clobbered everyone. Frontier will not be such a pushover. I’m still holing on to my Frontier stock.

eBay (EBAY) fell after its earnings yesterday. The online auctioneer earned 20 cents a share, which was inline with expectations. But due to the Skype merger, the company expects 20 cents a share for this quarter, which was one penny below expectations. Sales grew by 37%. The company forecast earnings for next year of 81 to 86 cents a share.

Our Buy List dropped -2.85% today while the S&P 500 lost -1.50%. Ironically, the S&P 500 was up 1.50% yesterday. This was just an ugly day, although we’re still ahead of the market for the month. The good news is that oil prices continued to fall. Oil is now down to $61 a barrel. That should help Frontier tomorrow.

Google (GOOG) just reported earnings of $1.51 a share which was far ahead of Wall Street’s estimates of $1.36. That topped that highest estimate on Wall Street of $1.46 a share. The stock is soaring in the after-hours market. Google’s bottom line increased from $52 million last year, to over $380 million this year. The company is now up to nearly 5,000 employees and has a market cap of roughly $90 billion. That’s $18 million per each employee. General Motors (GM), by contrast, is worth about $50,000 per each worker.

Lastly, here’s a chart of how the energy sector has been doing over the past month. It’s not looking good, and I don’t think it will get better.

Posted by edelfenbein at 5:54 PM

Q&A: Oracle (ORCL)

Hi Eddy,

I like your blog and I find it very informative. What’s your opinion of ORCL? I bought some share around 10…do you see it going much higher?

Thanks for the nice words. With Oracle (ORCL), there’s always one key rule I have: Larry Ellison is nuts. Not in a bad way, mind you. I love Larry. He’s a genius, but he’s also a bit nuts. Look at his track record. He named Oracle's first database Oracle 2, so people would think that all the bugs had been fixed. That’s brilliant, but think of the kind of person who thinks that stuff up. This is a guy who’s been repeatedly fined by his local airport due to the noise from his private jet. I mean, you have to admire that.

The Larry factor filters down to the company and therefore, the stock. Oracle has made two huge acquisitions recently, and I can’t stand acquisitions. I’m terrified of what Gillette will do to Procter & Gamble (PG), and vice versa. Pfizer’s (PFE) mergers have caught up with them. The same with Citigroup (C). Oracle first bought PeopleSoft and now, they’re buying Seibel (SEBL).

The company canceled its analyst day yesterday. It might be nothing, but it’s certainly not a good thing. On top of that, analysts have been paring back their estimates for this year and next. Oracle is one of those stocks that appears to be cheap, but really isn’t. The current price assumes the kind of performance that Oracle has had, not will have. I’m very doubtful Oracle will be able to digest these acquisitions smoothly. Just look at the Pfizer news today. A few years ago Pfizer looked unbeatable.

You’re lucky to have gotten Oracle at $10, but I don’t see much upside from here. Oracle is a sell. Any of the stocks on our Buy List are better.

Thanks for all the e-mails. Please keep them coming!

Posted by edelfenbein at 3:21 PM

Pfizer’s Earnings Plunge

This is why I don’t like mergers. They’re great for press releases, but lousy for earnings. Pfizer has been a dud stock ever since its mega-merger with Warner Lambert, and later with Pharmacia. Why do companies continue doing this?

I used to think that things couldn’t get much worse for Pfizer. Well, I was wrong. Today the drugmaker said that its earnings fell in half last quarter. Sales of Celebrex dropped by 44%. The problem with Celebrex is that it’s supposed to help your arthritis. The downside is an increased risk of a heart attack, which ironically, is still easier on your heart than actually owning shares of Pfizer.

If that weren’t enough, Neurontin went off patent protection and saw its sales plunge by 80%. And Pfizer’s only bright spot wasn’t very bright. Lipitor sales grew by 6%, much less than Wall Street was hoping for. Sales in the U.S. grew by just 1%. Even sales of Viagara were down. The company also withdrew its sales forecast for next year and the year after that. I don’t see any bright spots here. The stock is now roughly were it was eight years ago. I hope you don’t own this stock. If you do, you can do better elsewhere.

Posted by edelfenbein at 11:57 AM

Frontier Down as Southwest Enters Denver

Frontier Airlines (FRNT) is down sharply today on the news that Southwest Airlines (LUV) will be going back into the Denver airport. This is bad news for Froniter, but it’s not the end of the world. Denver has been an overlooked opportunity for other carriers for a long time, and now that’s coming to an end. Don’t count Frontier out just yet. The company still has a solid business. Their earnings are due out one week from today.

Posted by edelfenbein at 10:06 AM

Danaher & Golden West

We have two big earnings reports this morning. Golden West Financial (GDW) continues to be one of my favorite financial stocks. The company just reported earnings of $1.22 a share, up from $1.05 last year. Herb Sandler, the CEO, said that despite higher interest rates from the Federal Reserve, the savings & loan continued to hold expenses down. Wall Street was looking for earnings of $1.19 a share, so this was a good showing. The stock is now going for about 13 times earnings. It doesn’t get a lot cheaper than that. This stock is a great buy.

Danaher (DHR) may be the best company that no one knows about. The company makes industrial tools. Danaher just announced that it earned 70 cents a share which was inline with expectations. Last year, it earned 62 cents a share. For the fourth quarter, DHR sees earnings of 76 to 81 cents a share, and $2.74 to $2.79 for the full year. For more on Danaher, here’s a recent report from Standard & Poor’s.

Posted by edelfenbein at 9:36 AM

China’s Economy Grew by 9.4% in Q3

The world is waiting for the Chinese economy to go all Refco on us, but that doesn’t look like it’s going to happen any time soon. For the third quarter, China’s economy grew by 9.4%. In the second quarter, the economy grew by 9.5%. China now has 300,000 millionaires.

The economy is expected to slow down next year to just 9.1% growth from the 9.4% rate for this year.

The Chinese economy, which accounted for a 10th of global growth