Archive for December, 2005

  • Creeping Pessimism?
    , December 29th, 2005 at 12:21 pm

    On Business Week’s Web site, there’s a poll asking people where the Dow will be a year from now. Obviously, this isn’t a scientific sampling but I was struck how pessimistic the answers are.
    The last time I check, the answers were as follows:
    10,000 or below…….15.9%
    Around 10,500………12.9%
    Around 11,000………25.3%
    Around 11,500………27.1%
    12,000 or higher……15.5%
    Not sure………………..3.4%
    That means that the median is “around 11,000.” I won’t predict that the Dow will hit 12,000, but I think it’s entirely reasonable that it could. That’s a little over 10% from where it is today which is in the middle of the long-term average. Yet only one in six respondents said “12,000 or higher.” Strange.
    I normally would expect polls like this to be overly optimistic. Maybe I’m reading too much into this, or perhaps the public is much more pessimistic that I realized.

  • The Market Today
    , December 28th, 2005 at 5:36 pm

    Sheesh…what a snoozefest? I think traders must still be on vacation. There just ain’t much going on right now. The Dow, Nasdaq and S&P 500 all closed boringly higher today. Our Buy List gained 0.25% today to the S&P 500’s 0.13%. For the fourth quarter, we’re up 6.04% to the market’s 2.42%.
    Yesterday the market didn’t like the inverted yield curve. So oil and bonds went up, and stocks went down. Today, it was just the opposite. This time, energy stocks led the way and everyone else was quiet. Oil crept back over $60 a barrel. I really doubt it will be able to stay that high.
    Although yesterday was one of the worst days for the market in two months, it didn’t seem so bad to me. Perhaps it’s because volatility is so low. As I’ve said before, we’re in the middle of a remarkable bear market for risking-taking. It seems to be a worldwide phenomenon. This past week, the VIX (^VIX), the volatility index, again hit some of the lowest levels in over a decade.
    I have a hard time believing that the 10-year Treasury bond (^TNx) is currently yielding just 4.38%. Who cares about the budget deficit if we can borrow money so cheaply?
    The one stock that wasn’t boring was Frontier Airlines (FRNT). For the record, I still like Frontier a lot even though it won’t be on next year’s Buy List. It’s not anything against the stock, I just think Frontier is a bit too volatile to have on the Buy List. You can see why today. The stock opened at $9.25, dropped to $8.90 and rallied to close at $9.36.
    I noticed that Dell (DELL) is still a good buy. The shares are back below $31. The big surprise was that S&P decided to add Whole Foods (WFMI) to the S&P 500 instead of Google (GOOG). Whole Foods’ stock came close to hitting $80 a share. I’m sorry to say that I wouldn’t pay half that much.
    Remember Lucent (LU)? Me neither but it was apparently very popular a number of years ago. Anyway, for fiscal 2005 the company made $1.185 billion. Not bad, but here’s the really funny part: $973 million of that was due to a “pension credit.” So 82% of the company’s profits are solely related to the fact that’s pension fund is in the black. In short, I wouldn’t buy it.

  • The Buy List for 2006
    , December 28th, 2005 at 10:49 am

    Just in case you missed it, here’s the new Buy List for 2006:
    Bed Bath & Beyond (BBBY)
    Biomet (BMET)
    Brown & Brown (BRO)
    Donaldson (DCI)
    Dell (DELL)
    Danaher (DHR)
    Expeditors International (EXPD)
    FactSet Research Systems (FDS)
    Fair Isaac (FIC)
    Fiserv (FISV)
    Golden West Financial (GDW)
    Harley-Davidson (HDI)
    Home Depot (HD)
    Medtronic (MDT)
    Respironics (RESP)
    SEI Investments (SEIC)
    Sysco (SYY)
    UnitedHealth Group (UNH)
    Varian Medical Systems (VAR)
    I’ll start tracking these stocks beginning next week. The “buy price” will be the closing price for this Friday.

  • Thoughts for 2006
    , December 28th, 2005 at 10:46 am

    I’m not going to make any broad market predictions for 2006. I’m always awful at those. Hey, I thought the Colts were going to go undefeated. The real news happens in places where most people aren’t looking. That’s the thing about financial markets. The surprises are so surprising because no one expects them. Weird, huh?
    We all know what’s going to happen with General Motors (GM), but who will say the same about Wal-Mart (WMT)? The only truism is that you should never say “it can’t happen.” Here are a few quick thoughts on the year ahead.
    Stocks to Sell Right Now
    I truly love my local Whole Foods (WFMI). The stock split today and it was just announced that it’s being added to the S&P 500. That’s an odd coincidence, and I’m going to take it as a sign. Whole Foods’ stock is WAY too expensive. The forward P/E ratio is slightly higher than Google’s. Simply put, Whole Foods shouldn’t be where Google is. Come to think of it, Google shouldn’t be where Google is.
    Every year I think Panera Bread (PNRA) is about to crash and burn and I’m always wrong. So why should I stop now. There’s no question that Panera is a big hit. The restaurants are Starbucking their way across the continent, and the company has a solid balance sheet. But still, $67? I don’t think so.
    No one has gotten better press this year than Hewlett-Packard (HPQ), but the company still has a long, long way to go. I can’t wait for Carly’s book, which should be coming out soon. This will be a rare instance of pride coming both before and after the fall. HPQ still doesn’timpress me. Yes, when you lay off 15,000 people, you’re able to see an improvement in your financials. The real trick is getting good press while you’re doing it. My prediction is that Mark Hurd’s honeymoon with Wall Street will come to an end.
    There’s something about Lehman Brothers (LEH) that I just don’t get. Every quarter they put up great numbers. I can’t put my finger on it, but I don’t see where all the growth comes from. How can they consistently do what others can’t? Maybe the company really is that good. Maybe not. Personally, I’m rooting for the yield curve
    Also, Google (GOOG). Sorry sports fans, not this year. There’s just too much baggage.
    Stocks to Watch
    If Citigroup (C) decides to spin-off Smith Barney, that could be one of the best opportunities in years. I so want this to happen, it just makes sense. The larger Citi is weighing down a very good business unit.
    What will happen with Cendant (CD)? I don’t know but I’d love to see the new structure succeed. More companies on Wall Street should be broken up.
    Patterson Companies (PDCO) has been a great stock for years, but the company has fallen on hard times. Here’s an important investing lesson: Companies aren’t like sports teams that suddenly hit slumps. When earnings get hit for a few quarters, there’s usually something very wrong. I hope Patterson can get back on track.
    Who will do better this year, Merck (MRK) or Pfizer (PFE)? I’m not going near either one, but I’m rooting for Merck. If I were smarter, I’d make a paired trade—long Merck and short Pfizer. It could the smoothest line we’ll see all year.
    I can’t wait to see how well Danaher (DHR) does this year? It’s on the Buy List for 2006. The stock hasn’t done much recently even though earnings continue to grow and grow.
    Oracle (ORCL) is always fun to watch. This is another stock that I won’t go near. They have many problems, but I never count Larry Ellison out.
    Trust me, the least-important stories this year will be Ben Bernanke, the Fed or the mid-term elections. The status quo will probably hold across the board. The big story to watch is what’s happening in China. We’ve never seen anything quite like it.
    As Americans, we’re not used to having our economy knocked around by someone else. Other countries worry about a recession in the U.S. because it will impact them. The thought never even occurs to us. For the first time, Americans may start to worry that rough times in China will mean rough times here. The emergence of China is the story of our times.

  • The Story of Wheat
    , December 28th, 2005 at 4:34 am

    The Economist and I don’t have the best relationship. Sometimes it drives me freakin’ nuts. But then, just as I’m ready to bash my keyboard against my forehead, it will give me this and all is forgiven. Read the incredible, improbable and wonderful story of wheat. (Yes, wheat.)

  • Hedge Funds Are the New Mutual Funds
    , December 27th, 2005 at 9:49 pm

    So says Daniel Gross in Slate:

    This was the year of hedge funds. The largely unregulated pools of private capital—generally available only to institutions and the rich—have proliferated nearly as fast as adulatory articles about them. Hedge-fund managers have historically been the Garbos of the asset management world: They want to be left alone by the media, by the public, and above all, by the Securities and Exchange Commission. But in recent years—and especially in 2005—they’ve had a coming-out party. Aggressive hedge-fund managers are seeking to shake up management and push restructurings at blue-chip companies like Time Warner and McDonald’s. Others, not content to flip stocks, have taken the reins at well-known companies, as Edward S. Lampert has done at Sears.
    As the chart accompanying this article shows, the hedge-fund industry has doubled in the last four years; there are now an estimated $1 trillion in assets in 8,000 funds. Staid institutions like university endowments and state employee pension funds are plunging cash into hedge funds. And investment banks have rolled out funds that allow merely well-off people to invest in them.
    Are hedge funds the next big thing in mass investing? And if so, will they suffer the same lousy fate as the last big thing in mass investing—mutual funds? In the 1990s, the mutual-fund industry doubled. Millions of new investors, lured by excellent recent performance, thronged into funds. Today, according to the Investment Company Institute, there are 8,000 U.S. mutual funds with $8.5 trillion in assets. Yet every year, the majority of them underperform broad market indexes—and charge fees for doing so. It turns out the mutual-fund industry expanded well beyond the ability of mutual-fund managers to run the money effectively. Today, mutual funds are a clunky business that relies heavily on marketing, survives on management fees, and fears new competitors.

    Read the whole thing.

  • The Market Today
    , December 27th, 2005 at 9:06 pm

    The yield curve finally inverted today. Unlike most things Wall Street freaks out about, I actually agree that this is a big deal. An inverted yield curve is when short-term interest rates are higher than long-term rates. The norm is that long-term rates are higher. Investors typically get more by shouldering the risk of having their money tied up for a longer period of time. That’s the theory anyway, and it ain’t happening now.
    When people aren’t paid to take risks, they stop taking them. The yield curve has often been a good barometer for future economic performance. It’s actually been a lot better than most economists.
    Interest rates had been headed this way for along time, but today the yield two-year Treasury note briefly topped the yield on the 10-year Treasury bond. This seemed to scare the market as stocks lost ground all afternoon. The S&P 500 lost 0.96% and our Buy List lost 0.53%.
    We can thank our avoidance of energy stocks to today’s out-performance. For December, the Buy List is up 0.95% to the S&P’s 0.57%. The energy sector was clobbered in today’s session. Natural gas prices plunged 10% today, and they’re down 23% since Wednesday.
    Frontier Airlines (FRNT) did very well today. Bob McAdoo, the analyst at Prudential, raised his earnings guidance for next year by four cents a share to 12 cents.
    Also Boston Scientific (BSX), against all reason, logic and common sense, is sticking by Guidant’s side. Well…at least they get points for loyalty.

  • Natural Gas Prices are Down 23% in the Last Three Days
    , December 27th, 2005 at 1:43 pm

    From Bloomberg:

    Natural gas plunged for a third day in New York as warmer-than-normal weather slashed demand for the furnace fuel.
    “The long-range forecast is for more warm weather,” said Michael Rose, director of the trading desk at Angus Jackson Inc. in Fort Lauderdale, Florida. “There’s no doubt about it. When it’s cold in New York, the prices go higher, and when it’s warmer, prices go lower.”
    U.S. heating demand will run 30 percent below normal for the next week and 22 percent below normal from Jan. 2 to Jan. 6, according to Weather Derivatives, a Belton, Missouri-based forecaster. New York will have a low tomorrow night of 41 degrees Fahrenheit (5 Celsius), the National Weather Service said. That’s 13 degrees above normal.
    Gas for January delivery fell $1.213, or 9.9 percent, to $11.07 per million British thermal units as of 12:29 p.m. on the New York Mercantile Exchange. It was the biggest fluctuation of any commodity today. Gas prices are down 30 percent from a record $15.78 per million Btu on Dec. 13.

  • The Midday Market
    , December 27th, 2005 at 11:55 am

    The Buy List is having a very good day so far. Right now, we’re up about 0.54% while the S&P 500 is off around 0.36%. Energy stocks are being hit pretty hard. Our big winner so far is Frontier Airlines (FRNT) which is up nearly 4%. Brown & Brown (BRO) has made a new high, and Commerce Bancorp (CBH) is very close to a new high.
    The yield curve finally—and very briefly—inverted, meaning that short-term interest rates were higher than long-term rates. I see that the yield on the five-year Treasury is very close to the yield on the ten-year Treasury. This means that investors aren’t being rewarded for lending their money for longer terms. The price for taking “time risk” is zero.
    As the 2005 trading year is almost over, it will be interesting to see if the Dow can hold onto its slight gain. Right now, the index is up about 80 points for the year. The S&P 500 is currently up about 4.5% for the year.
    Two other things to note: The Wall Street Journal reported that holiday sales were pretty strong. Also, (OSTK) gave an earnings warning. Something tells me this company will not have a smooth future.

  • Market Report from Vietnam
    , December 27th, 2005 at 4:26 am

    Take a deep breath, here’s the stock market report for the Saigon Times. The Vietnamese exchange opened 2000. Trading is done in the rather unfortunately-named Vietnamese dong.
    I really don’t know what most of this means, but I assume it’s a good sign. Free enterprise seems to be catching on. Believe it or not, property prices in Hanoi rival those of New York and Tokyo.
    Vietnam has followed the other South Asian countries down the path of economic reform. I guess it’s sort of a domino effect.