Archive for November, 2005

  • The Undefeated Colts
    , November 29th, 2005 at 12:17 am

    OK, I’m officially on the Colts’ bandwagon. This team is incredible. I just watched them dismantle the Steelers. Every part of their game is top notch. They even have the league’s best kicker. Jeez, just give them the trophy right now.
    The Colts are 11-0 and I’m rooting for them to finish the season undefeated. I’m getting tired of the 1972 Dolphins. If you’re not a football fan, the ’72 Dolphins were the last team to go undefeated. Every year the team reunites and celebrates when the last undefeated team goes under. It used to be cute but not anymore. The time has come for another team to finish off a perfect season. Apparently, Don Shula thinks the Colts can do it.
    Since Miami’s annus mirabilis, eight teams have started 10-0. In 1975, the Vikings lost their 11th game to the Redskins 31-30. The 1984 Dolphins made it to 11-0 before losing to San Diego. Miami then went on to lose the Super Bowl to the 49ers—a team which had only lost one game.
    The 1985 Chicago Bears were just scary. They went 12-0 before being losing to the Dolphins in a legendary Monday night game. That was the most-watched game in the history of Monday Night Football. The hype for that game was incredible. It was as big as any Super Bowl. Dear lord, Marino was amazing in his prime. Miami ran rings around the Bears. It’s hard for me to believe that this Friday will mark the 20th anniversary of that game. Yikes!
    I remember how the whole world was waiting for the rematch in the Super Bowl but Miami had to go and lose to New England in the AFC Championship game. I actually felt sorry for the Super Bowl’s promoters. What could have been Ali-Frazier IV turned into football’s equivalent of Grenada. The Bears destroyed the Patriots 46-10.
    In 1990, the Giants and the 49ers made it to 10-0 but both teams got tripped up in Week 11. They met in the NFC Championship game which the Giants won 15-13. And thanks to Scott Norwood’s missed field goal, New York won the Super Bowl.
    The next year, the Redskins started 11-0 before losing to their archrivals, the Cowboys. Washington also went on to win the Super Bowl. In 1998, the Broncos made it all the way to 13-0. Strangely, they lost two straight games before recovering and winning the Super Bowl.
    So I guess history is on the Colts’ side of winning the Super Bowl. I see that in the second-to-last game of the season, the Colts play the Seahawks in Seattle which could be trouble. Shaun Alexander is having a great season, but if the Colts keep playing like this, they’re going 16-0.

  • The Market Today
    , November 28th, 2005 at 8:11 pm

    The winning streak was finally snapped! The S&P 500 had gone up for seven straight sessions, and 14 of the last 17. But another rally was not to be. The S&P 500 gave back 0.85%, and the Buy List lost 0.70%.
    Let’s thank Thor Industries (THO) for saving us today. This was clearly our big winner. In fact, it was one of the top performers on the entire NYSE. The rest of our Buy List must have been busy shopping online. Only five of our stocks were up, and 20 stocks closed lower.
    Frontier Airlines (FRNT) is now down to $8.89 a share. As I’ve said before, this is an unusually risky stock for our Buy List. Nevertheless, I think it’s a compelling bargain. In my opinion, it’s very likely that Frontier can make 80 cents a share next fiscal year. Considering that sales jumped 22% last quarter, you can see that Frontier has a lot of potential. But the stock is very volatile. It’s worth a shot only if you’re already well-diversified.
    The big news today was Merck’s (MRK) restructuring. This is sad to see from a once-dominant company, but there is a lesson here. Do you ever notice that some companies never announce a “bold, new restructuring plan”? I couldn’t imagine Expeditors (EXPD) announcing “a major cost-cutting initiative.” The reason is that they’re always looking to cut costs. That’s what great companies do. It’s in their blood. They don’t have to announce it.
    Hershey (HSY) also recently announced a reorganization. The Wall Street Journal began an article today with this: “Bank of America Corp. shares are up 9.2% since Sept. 8 — the day Alvaro G. de Molina took over as chief financial officer of the nation’s second-largest bank. A coincidence? Maybe not.” Actually, it is. My apologies to Mr. de Moline, but corporations don’t turn on a dime. Not even several thousand dimes. (Isn’t every bank up 9.2% since September 8?) Reorgs and restructurings and new business plans and new CFOs always start out optimistically. The stocks often respond. I wish them all well. And yes, some do work out, but most never do. I’m sorry, but it’s true.
    On that cheery note, here’s today’s link o’the day: Check it out.

  • Broker Haggle Guide
    , November 28th, 2005 at 2:19 pm

    Forbes presents the “Broker Haggle Guide.” My advice: It never hurts to ask.

  • Today’s Make-Believe Issue: We Have Too Much Cash
    , November 28th, 2005 at 11:41 am

    Here’s a great example of one of my pet peeves about the financial media. No matter how good the news is, we can always find a negative angle. The writer’s goal is what paragraph do we drop the crucial “but” line in.
    Here’s how you start: Great news! Corporations are making record profits.

    This year, the companies in the Standard & Poor’s 500-stock index are on track to pay out more than $500 billion to shareholders in the form of dividends and share repurchases, or buybacks, according to S&P. That’s up more than 30% from last year’s record — and equivalent to nearly $1,700 for every person in the U.S.
    “This is an enormous amount of money being paid, to some degree, in unison,” says Howard Silverblatt, an equity-market analyst at S&P in New York.
    The outpouring of cash from corporate coffers in the U.S. is just one aspect of a world-wide phenomenon. With interest rates low, unprecedented amounts of capital are sloshing around the globe, in search of better returns. Pension funds, mutual funds and insurance-company accounts, for example, have some $46 trillion in assets, up almost a third from five years ago.
    The flood of dividends and share buybacks is a direct result of record U.S. corporate profits and is welcome news for shareholders, particularly because dividends are taxed at lower rates and share prices have been flat; since the beginning of the year, the Dow Jones Industrial Average has risen a paltry 1.4%.
    Just this month, 23 companies in the S&P 500 have boosted their dividends, including General Electric Co. and toy maker Mattel Inc., which also expanded their share-repurchase plans. For the year as a whole, 275 companies in the S&P 500 have raised their dividends; only eight have cut them.

    Sounds good. In every episode of “Behind the Music,” you always get the line that goes something like: “Just when it seemed like nothing could go wrong for Styx, everything went wrong.”

    But there could be an economic downside to the cash glut.

    Uh oh.

    The fact that companies have been sitting on so much cash is, in some respects, a vote of no-confidence in U.S. economic prospects: At least some companies may be signaling they can’t find enough profitable ways to reinvest their earnings, so they are simply returning it to shareholders.

    Attack of the indefinite pronouns! In some respects, some journalists may use a few of them as a vote of no-confidence in a threadbare theme. By the way, what might some investors being doing with some of their dividends? Burn them or invest in the economy? It doesn’t say so we’ll simply never know.

    Through dividends, a company, in effect, distributes part of its profits directly to shareholders. Share buybacks, in which a company buys some of its own shares outstanding, can benefit shareholders in other ways: They can boost the company’s share price, and they can also be a smart corporate investment if the company correctly judges that its stock is undervalued.

    Or it can be a complete waste of money. Just ask shareholders of Cisco.

    Some economists call the payouts this year an ominous development that may be stealing from future economic growth, since they suggest companies are having trouble spotting new products, projects or services they think will boost their growth. “These payments keep the economy growing more slowly because that money isn’t flowing into capital spending,” says Milton Ezrati, chief economist at Lord Abbett Funds in Jersey City, N.J. “If businesses are giving up on innovation, we have problems.”

    Giving up on innovation? Was that what was? No one told me. And now for our final paragraph.

    The good news for dividend fans is that it looks like there’s ample room for these checks to grow from here. Today, 385 companies in the S&P 500 pay dividends, down from a peak of 469 in 1980. And even though billions are going out the door, dividends only comprise about 32% of payers’ profits. Historically, companies have paid out about 54% of their profits as dividends.

    So it turns out there’s no issue at all. Dividends are rising and they’re still far below their historic level. Yet somehow the economy was able to grow and innovate in the past. Why can’t the media?

  • Thor’s Earnings
    , November 28th, 2005 at 11:10 am

    Today’s trading is fairly quiet but Thor Industries (THO) is soaring on a strong earnings report.

    Thor Industries Inc., a maker of motor homes, travel trailers and other recreational vehicles, said Monday its fiscal first-quarter profit rose 24 percent, driven by higher recreational vehicle sales and increases in retail market share.
    For the quarter ended Oct. 31, Thor reported net income of $43.4 million, or 76 cents per share, compared with a prior-year profit of $35.1 million, or 61 cents per share. Sales climbed 20 percent to $761.3 million from $632.7 million a year ago.
    Wall Street had projected a profit of 72 cents per share on estimated sales of $734.2 million, according to Thomson Financial.
    Retail recreational vehicle sales rose 19 percent in October and jumped 21 percent in the quarter, Thor said.

    The stock is up over 7% today. It looks like we’ll have to wait another day for Dow 11000.

  • What’s Buffett Buying
    , November 28th, 2005 at 6:37 am

    After sitting on the sidelines for much of 2004, Warren Buffett is buying stocks again. What’s he buying?
    The Oracle of Omaha has been snapping up shares of Wal-Mart (WMT) and Anheuser-Busch (BUD). Don’t worry—he hasn’t gone completely Bubba on us. Buffett has also bought shares in Diageo (DEO), which is a European liquor company (Johnnie Walker, Captain Morgan, Smirnoff). Plus, he’s been increasing his stake in Wells Fargo (WFC). Remember, sometimes the best stock to buy is one you already own.

  • The Unsinkable Dollar
    , November 28th, 2005 at 5:45 am

    A widening trade gap is supposed to sink a currency. But our trade deficit keeps growing and the dollar is rallying. What’s going on? The Wall Street Journal opines:

    At the end of the day, a currency isn’t a true commodity, like gold or wheat. It is a store of value. Its supply is determined by a central bank, which has a monopoly on its creation. Foreign-exchange markets are dominated by a cartel of central banks, and currency rates are a function of those central banks’ monetary policies.
    Nowhere is this truer than in Asia, where central banks happily attempt to manipulate foreign-exchange rates. China, Malaysia, and Indonesia have all intervened heavily in the foreign-exchange market this year. (A notable exception has been South Korea. The won has responded by holding steady against the greenback this year, helping to contain inflation.)
    The relative economic health of nations of course also influences currency demand. The U.S. economy has continued to power along while most of Asia is gradually slowing and Europe bumps along. Most economists expect America to expand at around a 3.5% rate in the fourth quarter and into next year — nothing to sniff at. Employment is rising. So far consumer spending remains strong, despite the slowdown in housing. This isn’t a picture of a country in distress.
    Contrary to popular wisdom, all this has happened while the U.S. current account, a measure of commercial trade in the balance of payments, hit a record $66.10 billion in September. The U.S.-Sino trade deficit to October alone was $80.4 billion. Some economists are now predicting deflationary pressure on the yuan. That’s right: Wall Street was predicting the Chinese currency would rise only a few months ago, and now an opposite trend may be emerging. That shows how fickle foreign-exchange markets can be.
    It also shows how politicians venture into this area at their peril when they get excited about the effects of shifting exchange rates on national “competitiveness.” The overall economic causes and effects that derive from a currency’s relative value are by no means as easily discerned as protectionists like to pretend, as witness the number of countries that have benefited from muscular currencies. That seems to be happening right now as the U.S. prospers with a dollar that has surprised the markets with its relative strength.

  • A Rebound for Airlines
    , November 27th, 2005 at 2:30 pm

    One of my golden rules is never, never, never, never invest in an airline stock. Airlines stocks are nothing but trouble. They’ll lie to you. They’ll cheat. They’ll steal. They’ll say they love you, but they stay out late drinking. Airline stocks can never be trusted. Even Warren Buffett got burnt in an airline investment. Just don’t do it.
    So…have I told you about our airline stock?
    Yes, I admit it. Frontier Airlines (FRNT) is on our Buy List. I wish I could say that I have some highly technical reason for liking Frontier. I don’t. I simply think the stock is undervalued.
    As long as your portfolio is well-balanced, I think it’s acceptable to add a reasonably risky stock. But it should be a small portion of your portfolio. Also, for the first time since Kitty Hawk, things are looking up for the airline sector:

    After five years of steep losses, the U.S. airline industry appears to be on the verge of a recovery, as fuel prices come off their peaks, labor costs decline and excess capacity finally begins to shrink.
    Strong demand for travel also is adding to the industry’s tailwind. The Air Transport Association says passenger traffic this year looks likely to exceed 2004’s record, which surpassed the previous peak set in 2000. During the busy Thanksgiving travel period, from Nov. 19 through Nov. 29, the trade group expects the nation’s airlines to carry 21.7 million passengers, topping the year-earlier high of 21.6 million.
    Several large airline operators, including Continental Airlines, Alaska Air Group Inc. and the newly merged US Airways Group Inc., are expected to be in the black for all of next year, compared with just three carriers this year, according to mean estimates of analysts surveyed by Thomson Financial.
    Among the discounters, which now control pricing on major routes, perennially profitable Southwest Airlines forecasts a 15% jump in profits for 2006. JetBlue Airways, which is projecting an unusual loss for 2005, is expected to return to profit in 2006, according to analysts. Meanwhile, seven airline stocks are trading near their 52-week highs.

  • Cyber Monday
    , November 27th, 2005 at 2:07 pm

    The Friday after Thanksgiving is traditionally known as Black Friday, which is the beginning of the holiday shopping season. Now we have a new phenomenon, Cyber Monday. This is supposedly when the online shopping season starts. Why Monday? That’s when everyone is back in the office and they can use faster Internet connections.

  • The $74 Million Research That No One Wants
    , November 27th, 2005 at 1:26 am

    As part of the famous global research settlement, Wall Street brokerage firms are supposed to give their clients free, independent research. The problem is, nobody wants it.

    Reports by outside consultants, the first since the 2003 settlement, show that 10 Wall Street firms collectively spent nearly $74 million to provide clients with “independent” research — reports generated from outside analysts — through mid-2005. Yet the reports suggest the research isn’t a hit.
    “Usage by the expected prime beneficiaries of the settlement, individual investors, is not as high as one might have thought it would be,” wrote Lehman Brothers Holdings Inc.’s consultant. Lehman’s data show less than 1% of hits to its Web site are for independent research.
    Merrill Lynch & Co. spent $13 million on independent research, but consultant Bridget Macaskill said it has received little feedback from investors to the Web site where it is posted. However, she said it appears the reports are used “extensively.”
    Credit Suisse Group’s Credit Suisse First Boston spent nearly $10 million on independent research, but feedback has been “infrequent,” wrote consultant Patricia Chadwick. Most of the 10,000 hits to CSFB’s independent research Web site were from its brokers. Just 110 retail customers accessed the site in its first year, which Ms. Chadwick attributes to CSFB’s relatively small retail client base.
    Goldman Sachs Group Inc.’s Goldman Sachs spent $8 million on outside research and makes it available through three Web sites, which generated 408 “unique visitors” in July 2004, its consultant said. Usage rose to a monthly high of about 722 visitors in 2005.

    Wait a minute! Eight million clams for 408 unique visitors a month! Did everyone else’s head explode or was that just me? You guys hit me more than that in a day (way more), and I’m willing to be paid…say…$6 million? I really am a bargain.

    At $500 an hour, independent consultants don’t come cheap. UBS’s consultant was paid $1.6 million for about 3,700 hours over two years and Morgan Stanley’s consultant made $1.2 million in 18 months. Merrill’s consultant logged almost 2,000 hours over two years and made nearly $1 million.

    Please excuse me while I go light myself on fire. Folks, the best independent research is already free and it’s on the Web. Which reminds me; please check out some of my links. There are lots of great stock bloggers out there. Also, keep those e-mails a-coming. You guys totally rock. The feedback (and stock tips) I get is invaluable.
    P.S. OK, $5 million. That’s as low as I go.