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Google Misses by 22 Cents a Share

Google (GOOG) reported earnings after the closing bell, and we’re in that awkward period trying to figure what the heck it all means.

By the books, it was a great quarter. Google’s sales soared 86% from $1.03 billion last year to $1.92 billion this year. Net income rose from $204 million to $372 million. On a per-share basis, earnings grew from 71 cents to $1.22.

But Wall Street isn’t concerned with the earnings by official accounting standards. They want to see the corrected, adjusted and altered numbers. By that standard, Google flopped. The company earned $1.54 a share, 22 cents below forecasts.

Opps.

It seems that Google’s tax payment caught analysts off-guard. In the after-hours market, the stock is trading over $62 lower.

Except for Sysco (SYY), our Buy List had a decent day. The sell-off in Sysco wasn’t too surprising since it had such a strong day yesterday. Expeditors (EXPD) and Donaldson (DCI) both hit new highs today; SEI Investments (SEIC) reports tomorrow.

Today was Alan Greenspan’s last day at the Federal Reserve. Tomorrow, Ben Barnanke takes over. The Fed raised rates for the 14th straight time. Here’s the Fed’s statement:

The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 4 1/2 percent.

Although recent economic data have been uneven, the expansion in economic activity appears solid. Core inflation has stayed relatively low in recent months and longer-term inflation expectations remain contained. Nevertheless, possible increases in resource utilization as well as elevated energy prices have the potential to add to inflation pressures.

The Committee judges that some further policy firming may be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance. In any event, the Committee will respond to changes in economic prospects as needed to foster these objectives.

Voting for the FOMC monetary policy action were: Alan Greenspan, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Roger W. Ferguson, Jr.; Jack Guynn; Donald L. Kohn; Jeffrey M. Lacker; Mark W. Olson; Sandra Pianalto; and Janet L. Yellen.

In a related action, the Board of Governors unanimously approved a 25-basis-point increase in the discount rate to 5-1/2 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Kansas City, Dallas, and San Francisco.

For the first time in 19 months, the "measured pace" language is nowhere to be seen.

Posted by edelfenbein at 4:51 PM

The Power of a Rumor

Shares of Napster (NAPS) exploded higher today on the rumor that it was going to be bought out by Google (GOOG).

It's not true, but that's only slightly hurt the rally.

Update: The rumor started with the New York Post. Napster closed 25% higher.

Posted by edelfenbein at 1:16 PM

Alito Is Confirmed 58-42

The Senate has just confirmed Judge Alito by a vote of 58-42. I think the futures market at Tradesports did a fairly good job of assessing the final outcome.

The markets are often referred to as “predictions markets” which I don’t believe is accurate. These markets don’t predict what will happen, but they can set odds at what could happen, knowing what we know now.

Even when the market had little information, the futures market indicated that Judge Alito had roughly 62 votes, with a standard deviation of around seven votes. Although the market was a bit optimistic on Judge Alito’s support, it was a reasonable look at his support. In this case, it was fairly accurate.

Over the last two days, trading in the 60+ votes contract was very strong. As it became clear that Judge Alito would fall short of that number, the contracts plunged. Here’s a chart.

Posted by edelfenbein at 11:30 AM

Measuring Expected Return

One of the basic laws of finance is that risk and return and positively related. Hold on. I didn’t say that quite right. Risk and expected return are positively related.

You see, that’s the hard part. We’re not talking about return itself, but the perception of what it should be, or supposed to be. How, exactly, can we measure expected return?

Finance professors have wrestled with that question for a long time. All the good measurements, like standard deviation are trailing numbers. But we need to know the here and now.

Three researchers, Long Chen, Hui Guo and Lu Zhang, had an idea. They said that to find the expected return of a stock, don’t look at the stock—look at the company’s bonds. Specifically, look at the spread between the company’s bond yield and a Treasury yield of the same maturity. This little trick is not only forward-looking, but it doesn’t lean on unreliable proxies.

Using this method, they found a positive correlation between risk and expected return. The paper is at the Web site of the Federal Reserve Bank of St. Louis, which is a great resource for all sorts of financial data. Here’s a PDF of their paper (warning: It’s written in the incomprehensible secret language of finance professors).

Posted by edelfenbein at 7:42 AM

Mittal Steel Vs. Europe

Most folks know that Bill Gates is the richest man in the world. And a lot of people are aware that Warren Buffett is second. But not many people, especially Americans, know about the #3 man Lakshmi Mittal.

Mittal is the CEO of the largest steel company is the world, Mittal Steel (MT). The company's stock is up more than 35% this year. Mittal is a tough businessman and he’s crushed his competition. But now he's up against his toughest opponent yet, the European elite.

Mittal is trying to buy pan-European steelmaker Arcelor, but the continent is in an uproar.

Writing is the Daily Telegraph, Ambrose Evans-Pritchard wrote Britishly: "Steel has sacred status in the iconology of Europe’s political and economic elite, if for nobody else."

Indeed. To the EU crowd, Arcelor isn’t merely a company. It’s the symbol of an integrated Europe. Unfortunately, Mr. Mittal has been unkind enough to remind the continent’s elite that symbol or not, Arcelor is a company. In fact, it has assets, much of which may be under employed, a situation Mittal hopes to correct. But he’s facing an uphill battle. Evans-Pritchard writes:

The Coal and Steel Community fathered by Jean Monnet in 1954 was the genesis of what became the European Union, and for a good reason. The French and Germans battled in 1870 and again in 1914-1918 for control of the grim smelting cities of the Moselle, deemed the strategic key to the Continent.

As a marriage of French, Belgian, Luxembourg, and Spanish components, Arcelor is exactly what the EU is supposed to be in the French political mind: a way of fostering industrial champions that bind Europe together and are big enough to give France leverage and clout on the world stage.

“If this raid succeeds, it will bring down one of the rare edifices of industrial Europe, proving that no position is secure any longer in a world of global competition,” said a Le Monde editorial yesterday.

It gets worse. Mittal is even guilty of acting like...an American:

Mr Mittal has not helped his cause with gauche extravagance. His style grates on French and Belgian sensitivities at every level, but especially for the workers of the Lorraine steel belt and the grim rusting hubs of the Meuse.

His £70m house at Kensington Palace Gardens - the most expensive in the world - is surpassed only, in the demonology of the French media, by a £34m birthday bash for daughter Valentine at Paris’s Chateau Vaux le Viscomte in 2004.

Some 5,000 bottles of Mouton Rothschild’s finest were washed down at a cost of £1.8m and Kylie Minogue pocked £320,000 for a half an hour’s turn.

This is how two cultures can see the same facts and reach vastly different conclusions. An American’s first thought would be "hey, if he's willing to pay that much for Kylie Minogue, think what he'll pay for my shares. Sell! Sell! Sell!"

Jean-Pierre Masseret, president of the Lorraine region, called Mr Mittal an asset-stripper bent on gutting France’s heavy industry.

"Mittal is lying when he says he won’t close any of Arcelor’s operations. He is buying a rival and could perfectly well destroy Europe’s steel industry, which he doesn’t need. The powers that be must take action to stop a stock-market raid that threatens Europe’s vital interests and its strategic future," he said.

Monsieur Masseret has a lot of Gaul. Has it ever occurred to him that not selling threatens Europe’s vital interests.

"The government must resort to all means possible to block this takeover," said Nicolas Dupont-Aignan, a leading deputy for the UMP party.

The French Left claims Mr Mittal has already shown his true by colours by shutting down Irish Steel’s operations in Cork as soon as his five-year guarantees elapsed, sacking all 450 workers and leaving the Irish state with a £21m clean-up bill for waste.

Mr Mittal sought to calm the waters in Paris yesterday. “We are not at war here. We’re a European company and this is a good way to protect European jobs in the future,” he said.

Yes, we’re all European. But some of us are more European than others, Lakshmi.

Whether the French can block the bid merely over fears of job losses is a contentious point. Under EU law, states can invoke “public interest” but only if there is a risk to national security, media freedom, and financial probity.

"Asset-stripping as such is not covered," said an EU official. "Nor is it enough to just say that national security is at risk. This has to be vetted by the commission, which can say no."

In reality, France could tie up the bid at the European Court for years to come. Whatever it says, Brussels cannot risk a spectacular bust-up with Paris just a year after the French people rejected the European constitution. Such a clash could tip the EU into a downward spiral towards disintegration.

If France’s president, Jacques Chirac, wants to keep Mr Mittal away from Arcelor, he can almost certainly do so.

His first move is an emergency meeting tonight with Luxembourg’s prime minister, Jean-Claude Juncker, who disposes of 5.62pc of Arcelor’s stock.

Mr Mittal may at last have met his match.

Posted by edelfenbein at 6:20 AM

Earnings from AFLAC and Fiserv

After the bell, two of our Buy List stocks reported earnings. AFLAC (AFL) said that it netted of 59 cents a share (excluding charges) for the fourth quarter. This was slightly below Wall Street’s forecast of 63 cents a share. However, AFLAC lost three cents a share due to currency translation. The company does most of its business in Japan.

AFLAC is one of my favorite stocks. It’s one of those stocks that consistently delivers. The company also reiterated its EPS growth forecast of 15%-16% for this fiscal year, and raised its dividend from 11 cents to 13 cents a share.

Don’t let the earnings miss fool you, this was a good quarter for AFLAC. Assuming AFLAC earns $2.92 a share for this year, the stock is going for a very reasonable 16 times earnings, which is in line with its growth rate. This is a solid, steady grower. I wish I knew how to quit this stock.

The other stock, Fiserv (FISV), reported earnings of 81 cents a share. Discounting the company’s newly acquired check-processing operations Fiserv earned 56 cents a share which was in line with analysts’ estimates. The company said that it expects to earn $2.46 to $2.53 a share for this year, so it’s trading around 18 times earnings. This is another high-quality stock.

In today’s market, Sysco (SYY) finished 6.2% higher. Only five of our 20 stocks rose, but Sysco’s big day helped the Buy List eek out a 0.03% gain. The S&P 500 rose 0.12%.

Our next earnings report is SEI Investments (SEIC) which is due on Wednesday. Expeditors (EXPD) is also due soon, but they haven't said what day.

And finally, CNN reported:

The latest Census Bureau report shows median prices for new residences sold in December fell 1.5 percent from the previous month to $221,800. Half of the homes sold for more than the median, the rest for less.

Posted by edelfenbein at 10:33 PM

Earnings Guidance

From Hoku Scientific (HOKU):

Based upon projections, the Company expects net income to be in the range of a loss to break even or slightly profitable.

I'm glad that's all cleared up.

Posted by edelfenbein at 1:26 PM

Today is All about Energy Stocks

Energy stocks are rallying and everything else is barely moving. This has become typical of the market in the past few years. Energy stocks either lead the market or trail it badly, while the rest of the market bounces along.

Here's how the sector ETFs are performing today:

Energy (XLE) +2.52%
Tech (XLK) +0.37%
Materials (XLB) +0.22%
Industrial (XLI) +0.19%
Discretionary (XLY) +0.06%
Staples(XLP) -0.13%
Finance (XLF) -0.12%
Health care (XLV) -0.15%
Utility (XLU) -0.46%

Posted by edelfenbein at 12:50 PM

Sysco is up 5%

Thanks to ExxonMobil (XOM), today is another big day for the energy sector. Interestingly, ExxonMobil launched a preemptive public relations blitz and took out ads in several newspapers defending its profits.

Incidentally, Friday was another good day for the Buy List. We followed up Thursday’s impressive rally, which was our best day of the year, with our second-best day of the year.

For today, only five stocks on the Buy List are higher, but thanks to big rallies from Sysco (SYY) and Expeditors (EXPD), the Buy List as a whole is slightly in the black so far. Sysco is up nearly 5%, and Expeditors is at a new high.

Posted by edelfenbein at 11:03 AM

Risk is Relative

In the New York Times, Virginia Postrel had an interesting article on risk. She notes the work of Professor Shane Frederick of MIT who’s studied how people have different conceptions of risk. Risk truly is in the eye of the beholder.

Professor Frederick devised a simple math test in which all the answers are counter-intuitive. He found a very strong correlation between test answers and a person’s perception of risk.

"Even when it actually hurts you on average to take the gamble, the smart people, the high-scoring people, actually like it more," Professor Frederick said in an interview. Almost a third of high scorers preferred a 1 percent chance of $5,000 to a sure $60.

They are also more patient, particularly when the difference, and the implied interest rate, is large. Choosing $3,400 this month over $3,800 next month implies an annual discount rate of 280 percent. Yet only 35 percent of low scorers — those who missed every question — said they would wait, while 60 percent of high scorers preferred the later, bigger payoff.

Men and women also show different results. "Expressed loosely," he writes, "being smart makes women patient and makes men take more risks."

You can see Professor Frederick’s original article here.

Posted by edelfenbein at 10:34 AM

Sysco’s Earnings

Today will be another busy day for earnings. ExxonMobil (XOM) reported that it earned $10 billion for the fourth quarter. According to Reuters, the company’s profit last year was larger than the economies of 125 countries.

Sysco (SYY) reported that it earned 33 cents a share, but had a charge of four cents a share due to stock options. Including that charge, Wall Street was expecting 37 cents a share. Sales also came in above expectations.

AFLAC (AFL) and Fiserv (FISV) will report after the close.

Dell’s (DELL) CEO said that its sales will grow faster than the market’s. The company is going to hire another 5,000 people in India, bringing its total in that country to 15,000.

Posted by edelfenbein at 9:48 AM

A Look at the Long Term

Here’s a question for you.

Including dividends and inflation, what’s the average rate of return for the broad stock market?

12%?

15%?

Not even close. Over the last 80 years, the real return of equities is just 7.1%. Pretty small. At that rate, you’ll double your money every 10.1 years.

I don’t think most investors realize how small the historical rate of return is.

Below is an interesting graph I made, but bear with me, it takes some explaining. I took the 80-year real return data and divided it by a line growing at 7% a year. By doing this, the unusual bull and bear periods stand out a lot better.

(If you’re confused, think of it this way: When this line is moving straight, equities are growing at 7% a year. Also, the line roughly begins and ends at 1.0.)

Interestingly, the 1987 crash only appears as a rather minor blip. From 2000-2002, the line gave back everything it gained from 1995 to 2000. Six years ago, it was hard to tell people that this isn’t normal. Now I think you can see what an outlier that period was.

It looks like there’s only been three truly great bull markets: one in the late-20’s, another in the early-50’s and another from 1982-2000.

I also think it's interesting that the peaks and troughs are fairly symmetrical (1942 and 1982, 1966 and 2000).

Posted by edelfenbein at 2:18 PM

Happy 250th Birthday Mozart

Wolfgang Amadeus Mozart was born in Salzburg on January 27, 1756. During his life, he wrote over 600 works. His output was astounding; 41 symphonies, 21 operas, 15 masses, 12 violin concertos, 27 concert arias, 17 piano sonatas, 26 string quartets and much, much more. He did it all in 35 short years.

Tom Lehrer said, "when Mozart was my age, he had been dead for two years."

Posted by edelfenbein at 12:45 PM

Biomet Up 6%

Another good day for us. Biomet (BMET) is soaring. The shares are up over 6% today. Varian Medical (VAR) is up another 4% today. The stock is up 19% for us this year. Donaldson (DCI) is up to a new 52-week high, and Fiserv (FISV) is up over 3%. There’s still 4-1/2 hours of trading but this is a nice finish to week.

Posted by edelfenbein at 11:34 AM

GDP Report

Today, the government released its first report on fourth-quarter GDP growth. They released a GDP report at the end of each month, so this report will be revised twice more.

According to today’s report, the economy grew by 1.1% (annualized) for the last three months of 2005. That’s pretty bad and it’s about half of what economists were expecting.

Until now, the economy had delivered over 3.3% growth for ten straight quarters. So I guess we shouldn’t be too greedy. Also, this was positive growth so we can say that the economy isn’t receding.

The economy has grown at a faster rate over the last 3-1/2 years than it did during the 1990’s.

Reuters is declaring: "GDP growth at weakest in three years." That’s accurate, but that headline can be used, on average, once every three years. For any set of 12 quarters, one will have to be the weakest. Of course, only three quarters ago we were being warned about the "Slowest GDP growth in 2 years."

Posted by edelfenbein at 9:55 AM

The Market Today

This was the Buy List’s best day of the year. In fact, we more than doubled our second-best day. We also doubled the S&P 500.

The S&P 500 rose 9.15 points to 1273.83, an increase of 0.72%. The 20 stocks of our Buy List rose 1.64%. For the year, we’re still trailing the market 2.05% to 1.49%.

Sixteen of our 20 stock went up. The big winner was Respironics (RESP) which was up 7.20%. Our other big winner was Varian Medical Services (VAR) which was up 5.01%.

Expeditors (EXPD) was also up big, jumping 3.58%. Golden West Financial (GDW) closed 3.66% higher.

Chipotle (CMG) closed at $44 a share, a nice 100% for its first day on the market.

General Motors (GM) dropped 3.35%. The stock is still about five dollars above its 52-week low.

The Oil Service Holders ETF (OIH) has a nice turnaround today and closed 0.60% higher.

Posted by edelfenbein at 4:17 PM

Breaking Down The OIH

Here’s a closer look at the 18 stocks in the Oil Service Holders ETF (OIH). This has become one of the most popular exchange-traded funds on Wall Street. Since May 13, the ETF is up 75%.

I’ve thought that this sector has been overpriced for some time. Yet, despite what I think, the stocks keep going up, up, up.

With this chart, I wanted to show you just how high Wall Street’s expectations are. Look at the projected five-year growth rates. It’s rare for a company to grow its earnings 20% a year for five years, much less 30% or 50%. Thess projections are very optimistic.

Note: This is a corrected version of my original post where I had listed the 35 stocks in the Dow Jones Oil Equipment Services Index. Thanks to Roger Nusbaum for pointing me in the right direction. You can see more info on the OIH here.

Posted by edelfenbein at 3:58 PM

For Nerds Only

Here’s a fascinating article on Pythagoras’ theorem. Robert P. Crease says that the theorem is about a lot more than the sides of triangles. It’s about “the idea of proof itself.”

Posted by edelfenbein at 2:24 PM

How Much Does Government Spending Really Change? Answer: Not Much.

Each January, the Congressional Budget Office releases its massive budget outlook report. This report details what the country is (in theory) going to spend over the next ten years.

The official release date is a big day for public policy geeks. That’s today, and the report was posted at 10 a.m this morning. The CBO’s Web site was so jammed that I couldn’t get through until a few minutes ago.

Personally, I think ten-year forecasts are a waste of time, and I ignore most of that data. What I like to look at is the historical numbers. By the way, the CBO should get major props for presenting so much data in an easy-to-read and accessible format.

What I find fascinating is that despite all political rhetoric we hear, what the government spends each year is fairly consistent. This might upset some people who are convinced that government spending is either out-of-control, or hopelessly being slashed to the done. Sorry, but it’s just not true. The level of government spending is remarkable steady. I’m not saying that there aren’t major changes in spending patterns, but it’s far less than you might think.

Over the last thirty year, total government outlays minus defense spending as a percent of GDP, has averaged 16.31%. Quite simply, that number hasn’t fluctuated much. The high reading was 17.38% in 1983, and the low was 15.39% in 2000. As you might expect, government spending rises in recessions and falls during expansions. The standard deviation is just 0.63%.

Last year, non-defense spending rose to 16.10% from 15.93% in 2004 (this is the government’s fiscal year, which ends on September 30).

Some of you may take issue with me excluding defense spending. I understand that, so like me explain my reasoning. Defense spending can—and has—changed quite dramatically in response to real world events. Over the last 30 years, the standard deviation of defense spending is over 1%, which is higher than the budget as a whole.

I see defense spending as similar to a company declaring a one-time earnings charge. Obviously, defense spending is important and it affects our national debt, but I don’t see it as a reflection of Washington’s spending habit.

Here’s the big CBO report. You can download my data here (which is all pulled from the historical tables of the CBO report), and here’s my chart of non-defense spending as a percent of GDP. As you can see, the budget soared in the 60's and early 70's, but since 1976, spending hasn't changed that much.

Posted by edelfenbein at 1:16 PM

Respironics Soars

It’s a good day so far. Respironics (RESP) is soaring. The stock is currently up about 8%. Until today, it had been one of the poorer-performing stocks on our Buy List.

Danaher (DHR) is doing well. The stock is up about 2.6% today. Varian Medical Systems (VAR) is also having a strong day. The stock is up about 2.8% to a new 52-week high. The stock is up over 12% for us, year-to-date. Expeditors (EXPD) and SEI Investments (SEIC) are also looking good.

We don’t have any more earnings results this week. The next three Buy List stocks to report will be Sysco (SYY), Fiserv (FISV) and AFLAC (AFL) on Monday.

Today is the kind of market action I like to see. The energy sector is down sharply. The Energy Spyders ETF (XLE) is off 1.48%, and the Oil Service Holders ETF (OIH) is down 2.35%. The Financial Spyders ETF (XLF) is leading the market, rising 1.3%. The Consumer Staples ETF (XLP) is also doing well, currently up 0.6%.

As long as those core sectors do well, the overall market rally can last. When the market becomes so tilted towards energy and tech, I get concerned that a downturn is near.

Update: Chipotle (CMG) opened at $45.

Posted by edelfenbein at 11:21 AM

The Super Bowl Indicator

No matter who wins the Super Bowl, the indicator points to good news for investors.

Posted by edelfenbein at 10:08 AM

GM’s Earnings Report

What a disaster! General Motors (GM) lost a stunning $4.8 billion last quarter, or $8.45 a share. This is GM's fifth straight quarterly loss. Bear in mind that this is a $23 stock, and they lost $8.45 a share! That loss comes to over $50 million a day. This figure includes "one-time" items which amount to $3.6 billion, or $6.36 a share. Excluding those charges, GM only lost $2.09 a share. Wall Street was expecting a loss of 12 cents a share. As lousy as Ford's earnings were, they at least beat the Street.

President Bush said that the automakers should develop "a product that's relevant." Ouch.

Posted by edelfenbein at 10:00 AM

Danaher & Respironics

This morning, Respironics (RESP) reported earnings of 36 cents a share which was inline with Wall Street’s expectations:

Fiscal second-quarter net income was $24.1 million, or 33 cents per share, compared with $20.1 million, or 28 cents, a year ago. Net income for the current quarter included stock compensation expenses representing about 3 cents per diluted share after taxes.

Excluding items, the company reported a profit of 36 cents per share, matching the average analyst estimate, according to Reuters Estimates.

Net sales totaled $257.9 million, up 14 percent. Foreign currency exchange rates reduced revenue by about by 1 percent during the quarter.

Domestic revenue increased 15 percent to $176.9 million.

For fiscal-year 2006, Respironics forecast earnings per share, excluding equity compensation expense, in the range of $1.46 to $1.48. Earnings per share estimates for the quarter ending March 31, are expected to be 40 cents to 41 cents, excluding items.

Danaher (DHR) earned 81 cents a share, which beat estimates by one penny a share:

Industrial tool maker Danaher Corp. on Thursday said fourth-quarter profit rose 20 percent, helped by stronger demand for professional instruments used in environmental science and medicine.

Earnings increased to $261.6 million, or 81 cents per share, from $217.7 million, or 67 cents per share, a year earlier.

Analysts on average expected profit of 80 cents per share, according to Reuters Estimates.

Sales also topped forecasts, rising 14 percent to $2.26 billion. Revenue rose 24 percent in Danaher's professional instrumentation division, its biggest, to $1.17 billion.

Chief Executive Lawrence Culp said in a statement that he was confident the company would be able to deliver "excellent results in 2006," but did not issue a specific earnings forecast.

Also, Chipotle’s (CMG) IPO price was raised for the second time. The stock will now go public at $22, or 38 times earnings.

Posted by edelfenbein at 9:38 AM

The Devil Wears Prada

MarketWatch:

When Ben Bernanke steps into Alan Greenspan's shoes at the Federal Reserve on Feb. 1, he'll be under pressure to prove he'll be vigilant on inflation, several Wall Street economists say.

Motley Fool:

In two weeks, Ben Bernanke will try to fill the shoes of the venerable Alan Greenspan as Federal Reserve chairman and begin to shape policy for the largest free market economy in the world.

Portsmouth Herald News:

Academician has big shoes to fill as Fed Reserve head

San Diego Union Tribune:

Big shoes to fill

U.S. News and World Report:

Following the legend of Greenspan, Bernanke certainly has big shoes to fill.

St. Petersburg Times:

One focus is the transition at the Federal Reserve Board, where Alan Greenspan is on his way out as chairman and Ben Bernanke is stepping into those extra-large shoes.

Black Enterprise:

Big Shoes to Fill

The Daily Yomiuri

It will not be easy for Bernanke, who is tasked with overcoming domestic and external problems that could short-circuit the currently sound U.S. economy and to fill the big shoes of Greenspan, who has won international recognition for his economic policies.

NPR:

In terms of his role as a political player, analysts agree he has some big shoes to fill.

Investors Business Daily

Bernanke knows he has big shoes to fill.

Smart Money:

You'd think Alan Greenspan shows up to work in a clown costume with all the talk about the next Federal Reserve chairman having big shoes to fill.

The Onion:

Greenspan, Entourage Demolish Hotel Room

Posted by edelfenbein at 5:50 PM

Fair Isaac Earns 52 Cents a Share

Fair Isaac (FIC) just reported earnings of 52 cents a share. I was wrong on sales growth. Revenues came in at $202.8 million, growth of just 3.7%. The good news was net margins, which held up at 17%. With the addition of stock options, the company earned 43 cents a share. Overall, this looks very good. I’ll have to dig into the numbers a little bit more to see all the messy details.

The company also guided inline for next quarter (52 cents a share) and next year ($2.16 a share). I have to say that I’m very pleased with these results.

Varian Medical Systems (VAR) beat by a penny a share (34 cents versus 33 cents). The stock tends to be much more volatile, so it could react negatively.

Also, Bed Bath & Beyond (BBBY) announced a $200 million increase to its share buyback program. The old program was for $400 million.

Still more earnings to come. Tomorrow we’re going to get results from Danaher (DHR) and Respironics (RESP). Wall Street is expecting 36 cents a share from Respironics, and 80 cents from Danaher.

Posted by edelfenbein at 5:23 PM

Medicare Drug Benefit Sparks an Industry Land Grab

The WSJ has a fascinating article today on the business impact of the new Medicare prescription drug benefit. Our own UnitedHealth (UNH) is one of the major beneficiaries:

Defying early predictions that private insurers wouldn't offer prescription-drug policies, dozens of companies are offering regional plans and 10 are selling them nationwide. The government is heavily subsidizing the policies, for which 42 million people are eligible. It's a big and unexpected growth opportunity at a time when the industry's traditional business -- administering employer health benefits -- is stagnant or shrinking.

UnitedHealth, based in Minnetonka, Minn., is one of the most aggressive players and one of the most successful so far. It has signed up about 2.8 million Medicare beneficiaries, either to stand-alone drug plans or within its more comprehensive Medicare plans. It picked up 1.5 million more sign-ups from its acquisition in December of PacifiCare Health Systems.

Posted by edelfenbein at 12:49 PM

Boston Scientific Wins

This time, it looks like it’s finally over. Guidant’s (GDT) board has accepted Boston Scientific’s (BSX) higher bid. BSX will pay $42 a share in cash, and $38 a share in stock. In my opinion, that’s way too much.

For its part, J&J will get $705 million for Guidant breaking its earlier agreement. BSX smartly stayed a step ahead of regulators by agreeing to sell part of Guidant to Abbott Labs (ABT).

This was a big victory for a couple of hedge funds and lots of lawyers and investment bankers. J&J nearly made a big mistake.

Speaking of bidding war, one of our Buy List stock, Danaher (DHR), will bow out of a bidding war for First Technology. Honeywell (HON) initially agreed to buy the company for 275 pence, then DHR bid 330. Honeywell came back and bid 365, which it’s going to get.

Disney (DIS) agreed to buy Pixar (PIXR) for $7.4 billion. Or more accurately, Pixar agreed to be bought by Disney. Steve Jobs will be the new chairman. Disney is too good a company for its current management.

Posted by edelfenbein at 10:38 AM

Profits Plunge at the New York Times

Earnings dropped 11% for the year and 45% for the quarter:

Circulation revenue remained under pressure, though the company, which owns The New York Times, The Boston Globe, The International Herald Tribune and other newspapers, as well as television and radio stations, reported a 6.2 percent increase in advertising sales for the quarter. But the company said revenue for January was "off to a slower start, especially in the entertainment and classified automotive categories."

Newspaper companies, like other media companies, are in the midst of a struggle to adapt themselves to the new ways in which readers and viewers consume news and entertainment on the Internet and digital devices. While advertising rates and revenue are increasing online - the Times Company said advertising revenue at its newspaper Web sites jumped 30.3 percent - that growth has not completely made up for the decline in revenue and profits from newspapers and other older media.

Posted by edelfenbein at 2:49 PM

Earnings Preview for Fair Isaac

Fair Isaac (FIC) will report its earnings after the close tomorrow. If you’ve read this blog for awhile, you know that I’m a big fan of this company. They’re known for the FICO credit score, and they’re the dominant player in the industry.

Last year, Fair Isaac reported that its first-quarter (ending in December) sales jumped 15%, but its earnings were only 36 cents a share, the same as the year before. But the next three quarters were very strong. Fair Isaac beat estimates by six, then nine, then four cents a share. I think they’ll beat estimates again.

The current estimate is for 50 cents a share. If revenues come in at $210 million, which is just 7.4% sales growth, and net margins fall to 17% (the average has been about 17.5%-18%), then Fair Isaac will earn $35.7 million for the quarter. That would be about 55 cents a share.

I think I’m being cautious on the net margin number, but perhaps a little aggressive for sales growth. Sales growth is the hardest to pin down. Don’t think that Fair Isaac is heavily tied to mortgage lending. For example, when you get those “pre-approved” credit cards in the mail, have you ever wondered how they know you’re a good risk? Odds are Fair Isaac told them.

For the year, Wall Street expects Fair Isaac to earn $2.16 a share, and $2.46 a share next year. Here are the financial results from the past few years:

Posted by edelfenbein at 2:36 PM

Golden West Financial Beats Earnings

This is why I like dull stocks. Sure, Golden West Financial (GDW) is boring, but it never lets me down. While everyone else is reporting slower mortgage business, GDW keeps motoring along. Today the S&L reported better-than-expected earnings. For the fourth quarter, the company earned $1.37 a share, three cents more than estimates. The shares are up about 40 cents today.

Two more of our dull stocks report tomorrow, Varian Medical (VAR) and Fair Isaac (FIC). The estimate for Varian is for 33 cents a share. How’s this for consensus? All eight analysts who follow Fair Isaac estimate earnings of 50 cents a share. Our health care stocks got clobbered yesterday, but Varian is gaining back much of what it lost.

Earnings season is Judgment Day on Wall Street. Intel (INTC) has dropped for seven straight days. It looks like it may break that streak today. The company missed by three cents a share and fell 11% last Wednesday on 280 million shares. I really underestimated how much Advanced Micro (AMD) has cut into Intel’s business. Michael Sivy has a good analysis of Intel's problems.

One stock that almost never fails during earnings time is Coach (COH). The company beat earnings by three cents a share, and the stock is up about 7% today.

Johnson & Johnson (JNJ) reported very good earnings today. Profits were up 79%. This reminds me of why I don’t want JNJ to win the war for Guidant (GDT). Guidant’s board has until tomorrow to accept Boston Scientific’s (BSX) higher offer. For the first time in 22 years, Johnson & Johnson reported that its revenue dropped.

Posted by edelfenbein at 11:31 AM

IPO for Chipotle Mexican Grill

I have to confess that I’m a Chipotle’s addict. If you’re not familiar with the restaurant, they’re crack dealers. But instead of crack, burritos.

But they’re not ordinary burritos. They’re huge. They’re like... Nietzschean overburritos.

Sometime this week, Chipotle’s will IPO. Demand is stong. The company just raised its price range from $15.50 to $17.50 a share to $18 to $20 a share.

The symbol is CMG.

Posted by edelfenbein at 2:30 PM

The Hottest Market in the World

A few months ago, I wrote about the hottest stock market in the world. It’s in Brazil, and things haven’t slowed down. The Brazil iShares (EWZ) are up about 500% in the last three years. (Chart.)

Brazil seems to be in the sweet spot of the global economy. Speaking of sweet spot, the price of sugar has doubled in the past year which helps Brazil, the world’s largest sugar producer. The reason for the rally is that more sugar is being converted to ethanol to cope with record gasoline prices.

There was some fear that the Brazilian economy might be slowing down. In response, the Brazilian Fed just cut interest rates by 0.75% to 17.25%, which helped spur the stock market.

There’s a presidential election coming up and "Lula" looked like he was on his way out, but he’s recovered in the polls. The financial situation has improved dramatically in Brazil. The government recently said that it has enough cash-on-hand to go four months without a debt offering. I would have thought someone was joking if I had heard that five years ago.

Some major Brazilian stocks include:

Petroleo Brasileiro (PBR)
Companhia Vale do Rio Doce (RIO)
Banco Itau Holding Financeira (ITU)
Banco Bradesco (BBD)
Companhia de Bebidas Das Americas (ABV)
Telecomunicacoes de Sao Paulo (TSP)
Gerdau (GGB)
Companhia Energetica de Minas Gerais (CIG)

Posted by edelfenbein at 2:06 PM

Black Monday

The official announcement came. Ford said that by 2012, it will cut as many as 30,000 jobs and shut down 14 plants. The plan is expected to save $6 billion a year by 2010.

The company reported earnings of eight cents a share, two cents more than last year. For the year, Ford made $1.04 a share, down from $1.73 a share in 2004. The stock is currently trading about 8% higher.
The real number to watch at Ford is the pre-tax loss for North American operations. For the second quarter, Ford loss $907 million, and then another $1.2 billion in the third quarter. Today, Ford said that it only lost $143 million in the fourth quarter.

Excluding all the one-time charges, Ford made 26 cents a share for the quarter while Wall Street was expecting just a penny a share. The stock is currently trading about 8% higher. Bloomberg lays out some of the details Ford faces:

Employees

Ford had 122,877 employees in its North American auto operations at the end of 2004, including 35,000 salaried employees. Detroit-based GM, Ford's bigger U.S. rival, had 173,000 U.S. employees in North America at the end of September 2005, down from 181,000 at the end of 2004. GM had 106,000 hourly and 36,000 salaried U.S. employees at the end of September.

"If Toyota and Honda weren't in the market, Ford and GM would be in fine shape," said Sean Egan, managing director of Egan-Jones Ratings Co. in Haverford, Pennsylvania, said today before the restructuring announcement. "We don't see anything on the horizon that is going to substantially change the slide."

The plan is Bill Ford's second restructuring since becoming CEO in 2001. Toyota passed Ford, which sold 6.8 million cars and trucks worldwide last year, as the world's No. 2 automaker in 2003. Toyota has said it expects to report 2005 sales of 8.09 million cars and trucks. Wagoner said earlier this month GM sold 9.17 million cars and trucks worldwide last year.

Overcapacity

Ford in 2005 had the capacity to build 4 million vehicles annually in North America at 16 assembly plants. Last year, the company sold 2.95 million of its North American-built Ford, Lincoln and Mercury models in the U.S.

Ford's U.S. sales overall fell 5 percent in 2005 compared with an industrywide gain of 0.5 percent. The company was hurt by a decline in sales of profitable sport-utility vehicles. The Explorer mid-size SUV hit a 15-year sales low in November and fell 29 percent for 2005.

The company's North American car and truck plants operated at 79 percent of capacity in 2005, according to Harbour Consulting of Troy, Michigan. That was the lowest of six automakers surveyed by the consulting company. Toyota was No. 1, with its North American plants operating at 111 percent of capacity.

Posted by edelfenbein at 11:46 AM

The Way Forward

Good morning. Today is Black Monday—the day that Ford Motor (F) will announce its major restructuring plan.

I know you might be a little confused and thinking, “wait, aren’t they already in a restructuring plan?” Apparently not. Or rather, we may be in a new restructuring plan. I’m having trouble keep their bold initiatives apart. Perhaps the old turnaround plan is itself being turned around. It’s hard to say. Honestly, I think everyone’s lost track.

Personally I’m rooting for “bold leadership in an ever-changing world.” When you’re dealing with these announcements, bold’s like a blue blazer, it never goes out of style. The good news is that the plan already has a name—“The Way Forward” which unfortunately sounds like a plan for the East German economy circa 1971. Forward Comrades! But given Ford’s history, this too might be an improvement.

According to reports, The Way Forward (or TWAF) will reposition Ford as “America’s Car Company”—“Red, White and Bold” and “Bold, American and Innovative.” So we got “bold” in there twice along with “innovative.” That’s a double word score for your thematic marketing efforts. Of course, the problem will leadership by sloganeering is that is tells us more about Ford’s fears than it plans. I would call Bill Ford many things, innovative is not one.

I’ll make this very simple. Ford is a company that’s designed to make X number of vehicles per year. The public wants half-X. Therein lies our problem. There are many thousands of employees who need to be...well, x-ed out. I suppose restructuring is being a bit generous. The Ottoman Empire was restructured. But Ford? They’re screwed.

I’ll give you an example. Ford makes the Explorer. It really not that bad (by Ford’s standards), but sales have plunged. Ford used to make two assembly plants worth of Explorers. They don’t need that anymore. In the immediate future, Ford is actually in slightly worse shape than General Motors (GM). As hard as that is to imagine, GM at least has some new models coming out this year. Ford is empty. Also, their newer cars, like the Fusion, aren’t selling well. Truthfully, they haven’t been marketed well.

(By the way. Fusion? Good god, who named this? Rule #1: Car names should rock. Think Mustang. Don’t think 37-minute jazz improvisations. Fusion??)

It’s astounding how quickly Ford has sunk. The New York Times recently said: “Just five years ago, the talk in Detroit was about whether Ford could eventually outsell G.M. Now the talk is about which of these two companies is worse off.” Make no mistake, GM is in far worse shape.

Ford’s problems started a few years ago when the company went Google for trucks and SUVs. So the public stopped thinking of them as a car company. Now Americans turn to Accords and Camrys for that. In the past year, gas prices went up and Ford’s stock collapsed. The company’s market share is now down to 17.4%, and it’s still dropping.

In May, the company’s credit rating was downgraded to junk. Then recently, it was cut to even lower junk. Ford has basically been blackballed from the bond market. The company’s bonds were even evicted from the Lehman Brothers Bond Index.

Incidentally, Ford is the King of Extra-Long-Term Debt. They have non-callable bonds set to come due in 2043 (12% YTM), 2047 (12.3% YTM) and 2097 (11.5% YTM). I wonder how many restructuring plans Ford will have over the next 91 years.

When Bill Ford took over, his plan was to have the company make $7 billion in 2006. That’s not going to happen. It appears that Ford will shut down 10 assembly plants and cut around 25,000 jobs. Maybe 30,000. That’s a start. I’m afraid this is a year too late. Plus, Bill Ford always seems to move in half-steps when truly bold moves are needed. I should add that there’s some big double top-secret project that we’re going to learn about. Something about a recyclable, environmentally-friendly car. Yawn.

As I said, Ford isn’t in as much trouble as GM. At least Ford is making a profit, largely due to its finance arm. I hope to see Ford sell off some divisions. They already ditched Hertz.

What does the future hold? Who knows? I think Ford will exist in some form, but it won’t be a major automaker. Perhaps it will be closer to what AT&T is today. As Ford stands now, it’s trapped. The company is under attack from all sides. Any successful plan for the future isn’t The Way Forward, it’s The Way Out.

Posted by edelfenbein at 6:03 AM

The Great Crash of 1906

We recently celebrated the 100th anniversary of the start of the longest bear market in history.

What’s that, you say never heard of the Crash of ‘06?

On January 19, 1906, the Dow peaked at 103. That date may not ring throughout the annals of history, but it was pretty important for the stock market.

The stock market soon crashed and by 1907, the Dow bottomed out at 53. Now that’s a bear market! None of this wussy 1.8% nonsense.

The Dow eventually recovered, but the January 19, 1906 high haunted the market for years to come. Even by 1914, the index was still in the 80’s when the exchange was shut down due to troubles "over there." Soon traders started doing business on the street, so the NYSE opened again that winter. And once again, the Dow plunged 53.

Nevertheless, the Great War was good business, and the Dow finally hit a new record of 103.11 on September 28, 1916. The Dow nearly got to 120 in 1919, but there were still some nasty corrections. The Dow fell below 70 in 1917 and again 1921.

By 1923, the market took off. The Dow broke 100 in 1924. In early 1928, it hit 200, and a year later it smashed through 300. Over the summer, the Dow peaked at 380.

Three years later, it was at 42.

After Pearl Harbor, there was another slow sell-off. On April 28, 1942, the Dow finally bottomed out at 92.92.

Wanna read something scary? This is from FDR’s fireside chat that day:

Yesterday I submitted to the Congress of the United States a seven-point program, a program of general principles which taken together could be called the national economic policy for attaining the great objective of keeping the cost of living down. I repeat them now to you in substance:

(1.) First. We must, through heavier taxes, keep personal and corporate profits at a low reasonable rate.

(2.) Second. We must fix ceilings on prices and rents.

(3.) Third. We must stabilize wages.

(4.) Fourth. We must stabilize farm prices.

(5.) Fifth. We must put more billions into War Bonds.

(6.) Sixth. We must ration all essential commodities, which are scarce.

(7.) Seventh. We must discourage installment buying, and encourage paying off debts and mortgages.

Whoa! I can't imagine any politician talking like that today.

The market started to rise. July 2, 1942 was the last time the Dow closed below 103—an astounding 36-1/2 years after it first hit that level.

For comparison, 36-1/2 years ago was the time of Woodstock and the Moon landing. Today’s Dow is over 12 times higher than it was back then. That's a good fact to keep that in mind the next time you hear someone complain.

Posted by edelfenbein at 1:38 PM

Google Earth

is the greatest invention in the history of the world...or at least the most addictive (download).

A few things I've noticed:

21° 21' 53" N 157° 57' 00" W
The USS Arizona
You can see the whole ship underwater. You can even see the oil slick coming from the boat. I used the “Measure” function under “Tools.” It’s 590 feet long. I think that’s the "Lady Mo" to the southwest.

34° 04' 24" N 118° 14' 25" W
Chavez Ravine.
I measured 395 feet to straightaway.

41° 53' 25" N 12° 29' 31" E
The Colosseum
The Vatican is two miles to the northwest.

44° 35' 24" N 104° 42' 55" W
Dah Doo Di Dah Doo

37° 48' 51" N 122° 28' 42" W
The Golden Gate Bridge. Wow! Just amazing.
Alcatraz is the little island three miles due east. Hey, it’s only a 4,765-foot swim to the pier. But I’m guessing the water might be a little cold.

46° 12'00" N 122° 11' 00" W
Mount St. Helens
Extra cool. Click the "terrain" box, then "tilt" down a little, and slowly scan over the volcano from the north at about 12,000 feet. (Optional: Make airplanes noises).

40° 42'26" N 74° 00'33" W
40 Wall Street. Sorry Donald, but I will never call this the Trump Building. Ever. Forty Wall was designed to be the tallest building in the world, and it was for a time, until Walter Chrysler unveiled his top secret spire on his building (3.6 miles to the northeast).

Let me know if you find any cool places.

P.S. Quick, a parking space! (40° 42' 27.18" N 74° 00' 28.46" W)

Posted by edelfenbein at 7:48 PM

More Firms Are Refusing to Provide Earnings Guidance

Since the tech bubble burst nearly six years, regulators have declared war on research analysts. There was the global research settlement, plus new guidelines like Regulation FD.

When it comes to criticizing the Street, I take a back seat to no one. However, we’re now starting to see some unintended consequences of the anti-analyst movement. Perhaps the most troubling is that more and more companies are refusing to provide any earnings guidance whatsoever.

This week, Motorola (MOT) become the latest stock to say that it will no longer tell the public where it sees its earnings headed. Intel (INTC) said that it will no longer provide its mid-quarter sales updates. Today, only 71% of the publicly traded stocks give earnings guidance, which is down from 77% three years ago.

I really can’t blame these companies. The legal atmosphere has become toxic, and any misstep could result in legal action. As usual, an attempt for more transparency has resulted in less.

Hopefully, this will help more independent analysts, like stock bloggers, and any individual investor willing to do a little homework. There are lots of great stocks out there that almost no one knows about.

A few weeks ago, I mentioned a great little bank Northern Empire Bancshares (NREB). The company just report terrific earnings. For 2005, EPS came in at $1.59 compared with $1.23 for 2004. Not many banks are growing like that, yet not one single analyst follows the stock. There’s no guidance, no consensus, no upgrades or downgrades, just year after year of outstanding results.

Perhaps the lack of guidance isn’t as troubling as I think. The great stocks are still out there, but we may have to work a little harder to find them.

Posted by edelfenbein at 4:29 PM

What if They Held an Olympics

and nobody came?

Forty percent of the tickets to Turin(o) are unsold.

Posted by edelfenbein at 3:56 PM

213 Points Down

It’s all my fault. I thought I’d take it easy today, maybe a post or two. The weather’s so nice out, what’s the worst that could happen?

213 points. That’s what could happen.

Obviously, the market can’t live without me. I’ve always suspected as much, and now I have proof. Today, the Dow gave us its first 200 point drop in nearly three years. Ugh.

The S&P 500 fell 1.83% which was its biggest fall since September 24, 2003. The Nasdaq dropped 2.35% and erased all its gains for the year. Remember that Google (GOOG) stock? It lost 8.5% today—its worst day ever—and fell below $400 a share. Last Wednesday, the stock was at $475.

Today, energy stocks led the charge and tech stocks got whacked the most. Concerns about the nuts running Iran, and the reappearance OBL sent oil up $1.52 to $68.35 a barrel. I think it’s interesting that oil is climbing on potential news, not news itself. This is a typical pattern. Oil rallies on fears, but falls on news.

Most people forget that the hurricanes didn’t cause oil to rally. Oil peaked on the day Katrina made landfall. The price of oil fell in the aftermath. That’s now how many people have remembered it. We're not experiencing inflation. This is just scared oil traders.

The Oil Service Holders ETF (OIH) has become very popular with traders, and it shined today. That ETF tracks the Dow Oil Equipment and Services Index (^DJUSOI) which rose 2.56%. That was the single best industry group of all 100 sectors. Of the stocks in that index, Schlumberger (SLB) rose 6.4% and Halliburton (HAL) rose 5.2%. This energy rally is starting to depart from reality. It's as if Google isn't falling, it's just being replaced. Same crazniness, different stocks.

On the tech side, the Dow Jones U.S. Technology Total Return Index (^DJUSTCT) dropped 3.16%. That doesn't shock me so much.

Twenty-nine of the 30 Dow stocks lost value. Every single stock on our Buy List fell today. Combined, the Buy List fell 2.12%. Our biggest losers were Respironics (RESP) which lost 4.30% and UnitedHealth (UNH) which lost 3.24%. There wasn’t major news with either stock. Unlike the Dow and Nasdaq, we're still up for the year (0.167% woo!).

General Electric (GE) made a lot of news by reporting earnings that matched estimates, but sales were weak. The stock fell 3.8%. That's about $13 billion. Citigroup (C) fell 4.7% as it missed its earnings by two cents a share.

Today the market clearly said that it’s worried about the economy. Stocks move to earnigns and interest rates. Since long-term rates fell, that must mean its earnings. Here's our proof: The Cyclical Index (^CYC) fell 2.41% today, but the Consumer Index (^CMR) only fell 1.31%. That’s a pretty wide spread for one day.

One curious thing today is that investors didn’t seek safety in Treasury bills. The three-month yield rose today to 4.25%. Investors did seek comfort in longer term Treasuries. The 10-year yield fell to 4.36%. Also, gold fell today. That wouldn't happen if people were really scared.

I’m not concerned by today’s sell-off. I had said before that too much of the recent rally has been skewed to tech and energy. That couldn't keep up. I was glad to see tech come down some, but energy look at risky as ever.

More of our stocks will report earnings next week, and I think our Buy List looks as good as ever. It should be a good week for us.

Here's today's damage:

Posted by edelfenbein at 5:54 PM

The Midday Market

Here are few random thoughts on the market this morning.

This is one of the uglier days of the year so far. The energy stocks are climbing once again, while all the other sectors are in the red. GE’s earnings report didn’t please the trading gods. The techs are getting hit hard with the industrials close behind. Motorola (MOT) became the latest tech stock to fall after reporting good earnings. The market was annoyed that the company didn’t raise its guidance.

The Dow is currently down over 120 points, and oil is close to $68 a barrel. The Dow Oil Equipment & Services Index (^DJUSOI) is up nearly 19% this year. The Oil Service Holders (OIH) closely tracks this index. The index includes stocks like Schlumberger (SLB), Transocean (RIG), Halliburton (HAL) and Baker Hughes (BHI).

Although I liked what Home Depot (HD) had to say yesterday, some investors didn’t. The company said that it’s going to slow the rate of new store openings, while it focuses more attention on industrial customers. I’ve heard the professional builders hate Home Depot with a passion, and the company is looking for reconciliation.

Although UnitedHealth’s (UNH) earnings missed some analysts’ expectations, the stock recovered yesterday afternoon from a sell-off in the morning. Varian (VAR) is the only stock on the Buy List that’s up. Jim Cramer profiled the stock on last night’s show. I’m curious if he’s following IBD’s lead.

Gold is at another 25-year high. The metal is close to $570 an ounce. Google (GOOG) is down another $15 a share today.

Posted by edelfenbein at 12:09 PM

Every Weekly Dow Close

I’m an incessant data fiend. If something has data, I’m all over it. Even as a kid, I could swallow baseball statistics whole. Batting averages, slugging averages, it didn’t matter. I have no idea why I do it. I just do.

I’m afraid I’m incurable. Any twelve-step program would backfire. I’d count the steps and find a moving average. I’m pathetic, I know.

Here's an excel spreadsheet of the Dow’s closing value for every week. And by that, I mean week. Starting from when Mr. Dow began calculating it by hand. All 5,698 weeks from May 12, 1896 until today.

Some stats: The Dow’s average weekly gain is puny, just 0.13% (this doesn’t include dividends). That’s equal to a $76 stock rising 10 cents in a week.

The weekly standard deviation is 2.56%. So the market’s average weekly swing is nearly 20 times its average weekly change. So 95% of what happens each week is pure noise. It’s totally meaningless.

And that noise hangs around for a long time. Even after five years, the Dow’s average return is still equal to one standard deviation (for cool math types, 1.0013^260 is roughly 2.56*[260^0.5]).

Think about that. That means that there’s roughly a 1-in-6 chance that the Dow will be exactly where it half-a-decade from now. Five years, zippo capital gains.

The Dow is currently 2.8% higher than where it was five years ago today.

Let’s hope the next five years will be better.

Posted by edelfenbein at 11:03 PM

Home Depot Raises Dividend by 50%

We have a nice rally on our hands this afternoon. The big news today is that Disney (DIS) is reportedly in talks to buy Pixar (PIXR). I can’t say that this is a big surprise, but it’s a neat story. It’s the marriage of old and new media. Disney’s stock hasn’t been a good buy in ten years. If the deal goes through, Steve Jobs would be Disney’s largest shareholder. I’m sure he won’t be a silent partner, which is probably a good thing.

There’s more good news for our Buy List. Home Depot (HD) raised its earnings forecast and increased its dividend by 50% to 60 cents a share.

For 2005, the company expects earnings at the high end of its projected growth range of 17% to 18%, and sales at the midpoint of its growth range of 10% to 12%. On this basis, Home Depot sees earnings of $2.64 to $2.67 a share for the year on sales of more than $81 billion. The current average estimates of analysts polled by Thomson First Call are for profit of $2.67 a share for 2005 on sales of $80.53 billion.

Posted by edelfenbein at 1:58 PM

Computer Problems at the Nasdaq

Has caused incorrect stock quotes and prevented 81,000 trades.

Posted by edelfenbein at 11:58 AM

Philips Buys Lifeline

Yesterday I was working on a post on Lifeline Systems (LIFE). I was going to say that this is a cool little small-cap health care stock that’s worth watching. The company has posted impressive sales and earnings growth for the past few years. Periodically, I like to talk about socks that I like but aren’t on my Buy List.

Well, Philips Electronics (PHG) beat my posting skills. I find out this morning that they said they’re going to buy Lifeline for $750 million, which is a 21% premium. The stock is soaring today.

If I had gotten to post about Lifeline 24 hours earlier, I would look like a genius today, alas, I was too slow. In any event, here’s a profile of Lifeline Systems.

Posted by edelfenbein at 11:55 AM

Google Watch

We’re less than two weeks away from Google’s (GOOG) next earnings report and I’m starting to sense some nervousness about the stock. I can’t even pretend to forecast Google’s business, but I can judge its management, This company isn’t merely “insensitive” to its shareholders, it’s actively hostile.

The WSJ has an interesting article this morning on Google’s increasing use of stock options and restricted stock. When your stock is soaring, this seems like free money to pay your employees, however, the bill will eventually come due:

But few investors are focusing on the growing number of restricted shares and options that Google is handing out to employees, which will emerge as a sizable expense in the next few years. That expense added up to a hefty $600 million or so as of Sept. 30 of last year, all of which will be charged against future earnings.

As Google's business grows and it courts employees in a competitive marketplace, it is picking up the pace of its issuance of "performance-based stock units," according to securities filings, a form of compensation that many investors overlook. Between March 31 and Sept. 30 of last year, Google gave out 498,000 units, a close cousin of stock options, which likely will convert into Google shares over a four-year period.

The units are valued at the price of Google shares at the time they are granted. Since the average stock price was about $300, the units represent an expense of about $150 million. Because the units vest over four years, accounting rules require the company to count one-quarter of their cost as an expense each year. So, Google took just $8.9 million of expense for the units during the second and third quarters. The remaining cost will hit earnings over the next few years.

This past weekend, Floyd Norris looked at the valuation comparisons between IBM (IBM), Berkshire Hathaway (BRKA) and Google.

If Google were to now trade at the same multiple to historic revenue that Yahoo does, it would lose nearly half its value. If it traded at the same multiple to historical earnings, it would fall around 65 percent.

On Tuesday, Scott Kessler at S&P did the unheard of. He downgraded Google to a "sell." He told Business Week that he's concerned about Google's growing risk:

What are the risks that Google faces?

I think investors should know the ABCs of Google risk. "A" is for the absence of material revenue diversification. As good a company as Google is, it still generates 99% of revenue from one source: Internet search advertising.

"B" is for building competition. Yahoo! is investing aggressively in search. It is No. 2 in the Internet search-advertising area and is doing its best to compete. Microsoft is slated to introduce adCenter in the second half of 2006. This will launch the company into Internet search advertising.

We do think that Microsoft's entry into this category is going to have an impact. In addition, Ask Jeeves, which was acquired by IAC/InterActiveCorp last summer, says it will pursue a proprietary Internet search-advertising strategy.

Last but not least is Fox Interactive Media. This was created in mid-2005 by News Corp., and includes MySpace.com, which has become an extremely popular destination for teens and twentysomethings. This is not speculation that Fox Interactive Media will pursue Internet search -- its executives have said they will do this. The question is how they will do it, either via acquisition or partnership. We don't expect it to partner with Google.

Getting back to the ABCs of Google risk, "C" is for click fraud. This is relatively unknown to most Internet users and investors. It's relatively simple. A recent study suggests that up to 30% of online clicks could be fraudulent -- meaning not authentic, or not consisting of real users delivering clicks. We're talking about synthesized clicks by people or a box that automatically rings up clicks that benefit Internet search companies like Google.

We think this problem is more pervasive than people think. We think it will affect advertisers' taste for Internet advertising and the prices they are willing to pay for ads. And this could have a negative effect on Google.

So, essentially, my downgrade of Google is about valuation and risk. The stock is up 450% since its August, 2004, debut at $85 a share. We think there are notable risks to the stock, and investors should take action based on them.

Posted by edelfenbein at 10:36 AM

Earnings from Harley-Davidson & UnitedHealth

This morning Harley-Davidson (HDI) reported very strong earnings for last quarter. The company earned 84 cents a share, three cents more than Wall Street was expecting. That matched the Street high. Sales jumped 10%. Right now, the stock is trading about 3% higher.

UnitedHealth (UNH) reported earnings of 65 cents a share. According to Thomson First Call, this was inline with Wall Street’s estimates. I was expecting a little bit higher number, but UNH always delivers solid growth. Last year, the company earned 54 cents a share. UnitedHealth is down about 1.5% today.

Posted by edelfenbein at 10:24 AM

Earnings Preview: Harley-Davidson

From AP:

EXPECTATIONS: The motorcycle maker has predicted year-end earnings will rise between 10 percent and 13 percent. Analysts surveyed by Thomson Financial, on average, are looking for 2005 profit of $3.38 per share -- a growth of about 13 percent. For the fourth quarter, analysts expect earnings of 81 cents per share on sales of $1.35 billion.

ANALYST TAKE: "Although we believe retail sales to moderate, which is reflected in our lowered wholesale sales outlook, we think the company could earn above consensus given its ability to buy back shares," Citigroup analyst Gregory Badishkanian wrote in a recent research report. He predicted retail sales growth of 3 percent in the fourth quarter, the low of end of Street expectations for 3 percent to 5 percent growth.

"Checks suggest retail sales in October were strong but borrowed heavily from November," and were balanced by a "flattish" December, Credit Suisse's Scott Barry wrote in a note to clients. He expects fourth quarter earnings of 82 cents per share.

QUARTER DEVELOPMENTS: The Milwaukee-based company recalled more than 500 motorcycles in Japan in December, citing transmission problems. Harley also recalled about 13,400 of its Dyna series motorcycles because of a transmission defect.

In October, Harley said it expects to ship 348,000 to 352,000 of its namesake motorcycles in 2006 and predicted earnings growth of 11 percent to 17 percent.

COMPETITORS: Germany's Bayerische Motoren Werke AG, or BMW, said earlier this month it sold 97,500 motorcycles in 2005, a 5.6 percent increase over 2004.

STOCK PERFORMANCE: Harley shares fell 14 percent in 2005, ending the year at $51.49 on the New York Stock Exchange.

Posted by edelfenbein at 6:17 AM

The Sky Isn't Falling

Michael Sivy takes on the bears:

"Oil prices are going to soar even higher!"

THE REALITY Yes, turmoil in the Middle East and hurricane damage to Gulf Coast wells and refineries have temporarily put a crimp in supply. Strong demand, including greater consumption in China, also has boosted energy costs.

But there's no long-term energy shortage. Canada's oil sands alone contain nearly as much petroleum as Saudi Arabia has. It just costs $20 a barrel or more to produce, six times the cost of the cheapest existing wells in the Middle East. Other sources of oil and gas are abundant as well, although at high prices. The bigger catch is that it takes as long as five years to find and bring new production online.

Read the whole thing.

Posted by edelfenbein at 3:39 PM

The Schwab Economy

Here’s an interesting story. I think it’s a microcosm of the economy.

Charles Schwab (SCHW) just reported that its earnings tripled from last year. The reason for the good news is that the company has cut—slashed—its costs.

As the tech bubble deflated, shares of Schwab fell from $50 a share to just $7. Management was replaced as founder Charles Schwab returned to take over, and the brokerage firm slashed its fees by 55%. The turnaround has been remarkable. Recently, the stock has recently been as high as $16.

The company finally surpassed its peak earnings from 2000, even though it has about half the number of employees. Despite what I often hear about inflation returning, Schwab is proving that businesses can do more with half the employees at half the price. Lower costs and greater productivity can mean greater profits.

Posted by edelfenbein at 3:18 PM

The Energy Rally Ain't Over

One of the hard parts about writing an investing blog is that I can’t run from my mistakes. When I’m wrong, it’s there for the whole world to see.

Lately, I’ve been completely and totally wrong on energy stocks. I said that I thought the run-up in energy stocks had run its course. Nope. Yesterday, oil cracked $66 a barrel, and the Dow Energy Sector hit a new high (see the chart below). Poor Frontier Airlines (FRNT) fell all the way to $7 a share (higher fuel costs hit the airlines the most).

I haven’t changed my outlook. I still don’t like the sector. Maybe this is what the technicians call a “double top.” I don't know, but I simply don’t see how energy stocks can maintain their valuations. Take away energy and tech, and this is still a pretty quiet market.

I’d have a lot more confidence in this market if it were being led by “foundation sectors,” like financials, industrials and consumer stocks. Everyone got excited about the market’s upturn at the start of the year, but it seemed far too narrow for my taste.

Today may be the first of a reckoning of sorts. Both Yahoo (YHOO) and Intel (INTC) are down about 11% due to poor earnings reports. Google (GOOG) is back down to "only" $450 a share. All eyes are on Apple (AAPL), which reports after the close. The techs are taking a beating today, and the Nasdaq is down about twice that of the S&P 500.

Right now, the Buy List is down about 0.15% while the S&P 500 is off 0.68%. Anytime energy stocks get hit, our Buy List will beat the market. For the year, the S&P 500 is beating us: 2.1% to 1.4%.

Tomorrow, Harley (HDI) and UnitedHealth (UNH) weill report before the bell. I’m not so concerned about UnitedHealth. You can set your watch to their earnings. It’ll either be 66 or 67 cents. I don’t they’ll fall outside that range.

But Harley is a little more difficult. The current estimate is for 81 cents a share. That strikes me as a bit too low, but I can’t be sure. Options buyers have been loading up on puts to protect themselves from a possible sell-off. The stock dropped about 17% after its earnings report last April. I think the market is being overly cautious but we’ll know more tomorrow.

Here’s a chart of the Dow Energy Sector for the past few months:

Posted by edelfenbein at 12:47 PM

Radiating Success

IBD profiles Varian Medical Systems (VAR):

It's not every day that a hospital spends a couple of million dollars on a new piece of equipment.

But it's happening a lot more often, thanks to a new product from Varian Medical Systems.

Varian's cancer therapy systems are used to treat thousands of patients a day. The company dominates the market for radiation therapy treatment, which is used for a number of types of cancer.

Varian is just now entering the first stages of a new product cycle. That fuels sales for Varian as well as the industry as a whole.

Of course, it's nice when your firm practically is the industry. Varian controls about 60% of the global share of radiotherapy treatment, says analyst Mark Lanyon of Morningstar. That number is more like 70% in North America.

"You rarely see a company in any industry with that level of global market share," Lanyon said. "They dominate this niche."

With the new product cycle, Varian is cranking out even more business. The impact is just taking effect.

"The last few quarters, we've started to see acceptance ramp up," Lanyon said.

On Target

Varian's image-guided radiation therapy system, known as IGRT, is leading the new cycle.

The product features the same core technology as its previous version, called intensity modulated radiation therapy, or IMRT, which launched in 1999.

The IGRT system is designed to be more accurate and efficient than its predecessor. When you're zapping cancerous cells with radiation, the more accuracy you have, the less likely healthy tissue is damaged.

IGRT lets hospitals account for a tumor's small movements. It can even adjust for shifts of up to one inch that take place when a patient breathes in and out.

"People have been talking about a magic bullet for a long time," said Varian Chief Executive Dick Levy. "That's usually a drug that kills damaged cells and leaves healthy ones untouched. IGRT is getting close to the magic bullet."

Varian's IGRT sales accelerated in the last two quarters of fiscal 2005, which ended in September. That should continue. Acceptance of the product has already come three times faster than IMRT. And IGRT just picked up Medicare reimbursement starting Jan. 1.

"That should really facilitate order growth," said Ryan Rauch, analyst at Jefferies & Co. "Reimbursement has improved, so this is really profitable for hospitals."

A survey Rauch's firm did of 450 radiation oncologists showed 61% plan to upgrade to an IGRT system in the next year.

Varian is getting higher prices per sale, too. Its prior system sold for about $1 million. The upgraded system runs about $2 million.

Tight Focus

The new product helped Varian's fiscal fourth-quarter sales rise 12% from the prior year to $386 million. Earnings increased 22% to 45 cents a share. Sales for all fiscal 2005 gained 12% to $1.38 billion, while earnings rose 27% to $1.50 a share.

Analysts polled by First Call expect Varian's profit this year to climb 18% to $1.77 a share.

The company battles huge firms such as Siemens and Philips. Varian's advantage is that it's been tightly focused on this area for decades, while the others run far-flung companies.

Varian's research strength helps it carry the best technology and the most diverse product set while it offers the best service, Rauch says.

Global Play

Beyond IGRT, Varian has other factors boosting its results. It's getting a boatload of growth from its international business, Lanyon says. And it has the chance to gain share in Eastern Europe and Asia.

"They can win business that didn't exist before," Lanyon said.

Even in Western Europe, the number of radiation machines per capita is one-third what it is here, Levy says. Many countries there are committed to boosting that percentage.

Varian's international order growth rate has ranged from 20% to 30% the past four years, Lanyon says. The U.S. rate has been less than 10%.

A rise in the cancer rate also will boost Varian's sales. The rate in the U.S. is projected to swell by 50% by 2020, Lanyon says.

Meanwhile, Varian looks to increase sales of other products. Sales for its smaller X-ray products unit rose 18% last fiscal year, thanks partly to its new line of flat-panel image detectors. These replace the need for film and let doctors read X-rays instantly.

The market for flat-panel detectors is around $150 million, Levy says. It could reach $2 billion in the next decade.

Varian uses the X-ray unit's technology to make detectors used in busy ports like the one in Long Beach, Calif. The product can screen cargo containers for bombs.

How much business could this market generate?

"It could be enormous or it could be nothing," Lanyon said.

Another uncertainty is how much reimbursement Medicare will offer for Varian's radiation products. If governments change their minds, they could slash payments by half, Lanyon says.

"That's one of those land mine risks that could derail it," he said.

Levy, 67, is retiring next month, to be replaced by President Timothy Guertin. Analysts don't see that as a concern. Levy will remain as chairman, and Guertin has been with the firm for 30 years.

"I don't want to downplay the importance of Dick Levy," Rauch said. "He's going to be missed. But I don't think they'll miss a beat."

Posted by edelfenbein at 5:39 AM

Turmoil in the Japanese Markets

Volatility has finally returned, but not here—in Japan. The Japanese Nikkei 225 Index (^N225) got slammed for the second straight day. On Tuesday, the index fell 2.8%. Then it fell another 2.9% on Wednesday. Today’s session was cut short due to a surge of transactions.

Posted by edelfenbein at 5:27 AM

Happy 300th Birthday Benjamin Franklin

The ulitmate buy-and-hold investor:

At his death, Franklin bequeathed £1000 (about $4400 at the time) each to the cities of Boston and Philadelphia, in trust for 200 years. The origin of the trust began in 1785 when a French mathematician named Charles-Joseph Mathon de la Cour wrote a parody of Franklin's Poor Richard's Almanack called Fortunate Richard. In it he mocked the unbearable spirit of American optimism represented by Franklin. The Frenchman wrote a piece about Fortunate Richard leaving a small sum of money in his will to be used only after it had collected interest for 500 years. Franklin, who was 79 years old at the time, wrote back to the Frenchman, thanking him for a great idea and telling him that he had decided to leave a bequest of 1,000 pounds each to his native Boston and his adopted Philadelphia, on the condition that it be placed in a fund that would gather interest over a period of 200 years. As of 1990, over $2,000,000 had accumulated in Franklin's Philadelphia trust since his death. During the lifetime of the trust, Philadelphia used it for a variety of loan programs to local residents. From 1940 to 1990, the money was used mostly for mortgage loans. When the trust came due, Philadelphia decided to spend it on scholarships for local high school students. Franklin's Boston trust fund accumulated almost $5,000,000 during that same time, and eventually was used to establish a trade school that, over time, became the Franklin Institute of Boston.

Pretty cool.

Posted by edelfenbein at 1:04 PM

Boston Scientific Strikes Back

$80 a share for Guidant (GDT).

BSX has pushed all its chips to the center of the table. They're also getting help from Abbott Labs (ABT).

Here’s the press release, and here's a timeline of the Guidant War from the beginning.

Posted by edelfenbein at 10:10 AM

The Gold Rush of 2006

Another reason why I’m not a gold bull: Higher prices mean more exploration.

It’s always been this way. The panic of 1893 and the Free Silver candidacy of William Jennings Bryan were eventually defeated. Not by President McKinley (or his political advisor Mark Hanna, whom Karl Rove greatly admires), but by the discovery of gold in the Klondike.

Posted by edelfenbein at 7:35 AM

A Short Squeeze at Hansen Natural

Last week, I discussed Hansen Natural (HANS). The stock is up over 50-fold in three years. Nearly one out of every four shares is currently being shorted. That’s astounding. A whole bunch of those shorts got "squeezed" last week.

Reuters profiles the company:

The stock of the No. 2 energy drink maker behind Austria-based Red Bull GmbH emerged as the clear winner on the Standard & Poor's 1500 index, rising 333 percent in 2005 with an average daily share volume of more than 1 million shares.

“There's no exact science or answer as to why we have been successful,” the South-African born Sacks told Reuters. "What we did to make ourselves different was we created an aggressive personality and in-your-face image for the brand.”

Posted by edelfenbein at 7:13 AM

Privacy Advocates Are Concerned with Search Engine Maps

Here’s another article about the map technology from search engines. Privacy advocates aren’t happy with the level of detail that users can see.

Google Earth is simply jaw-dropping. If you haven’t done so, I encourage you to download it. I was able to zoom in on the infields of several major league baseball stadiums.

Posted by edelfenbein at 6:04 AM

The Scooba Robot

iRobot’s (IRBT) vacuuming robot was a hit. Now they’re pinning their hopes on Scooba—a floor-cleaning robot:

Burlington, Mass.-based iRobot is hoping to have the kind of success with Scooba that it had with the Roomba. It has sold more than 1.5 million Roombas since the product debuted in 2002.

"It's going to be a fun year for us," said iRobot Chief Executive Colin Angle, "as we start to get another product under our belt launched and continue on our quest to make robots a mainstream new industry."

To get the word out about its household robots, iRobot is funding a multimillion-dollar advertising campaign called "I Love Robots." The campaign includes TV ads featuring real customers talking about why they love their Roombas and showing the robots at work in their homes.

Pretty cool. I’ll hold off getting one, though. My luck, I’d get some insane HAL-wannabe robot that would turn against me. Just to be safe, I’ll wait till all the kinks are worked out. You never know.

Posted by edelfenbein at 5:39 AM

Apple is Now Bigger than Dell

Recently, I ordered a new laptop from Dell (DELL). A few days later, a small brown box arrived. I thought "man, these laptops are getting tiny." Then I was terrified that there might be "some assembly required." Let’s just say that outside of gin and tonic, I don’t assemble well.

Turns out, it was a free Dell iPod which I got as part of the order. The laptop came the next day.

Just to show you the power of the Apple (AAPL) brand, I don’t even know what the Dell electronic musical device machine is called. Me? I’m calling it my Dell iPod. I think "iPod" is now the generic name as well as a brand name. As the proud owner of many shares of Dell, I have to concede that this thing is the hydrox of the industry.

Well yesterday, the UPS (UPS) guy shows up and gives me another small brown box. Lucky day! I rip it open (like I’m 12) and Ameritrade (AMTD) sent me a video iPod!

How cool is that? In no time, I went from being an iPodless American to having two iPods. Both un-frickin-expected!! I’m now a multiPod! A wePod?

I have a non-iPod iPod and a real iPod iPod.

Make that, a real VIDEO iPod.

(Update: Um...anyone how to work a video iPod? As a long-standing principle, I refuse to read directions. Ah..I'll figure it out.)

I’m not sure why Ameritrade sent it to me. Something about a deposit. I use the service, but truthfully, I think their interface can be a bit confusing. (Yeah, I know...directions.)

Coincidentally, last week Apple Computer passed Dell in market value. Steve Jobs enjoyed a nice little in-your-face moment:

In 1997, shortly after Mr. Jobs returned to Apple, the company he helped start in 1976, Dell's founder and chairman, Michael S. Dell, was asked at a technology conference what might be done to fix Apple, then deeply troubled financially.

"What would I do?" Mr. Dell said to an audience of several thousand information technology managers. "I'd shut it down and give the money back to the shareholders."

On Friday, apparently savoring the moment, Mr. Jobs sent a brief e-mail message to Apple employees, which read: “Team, it turned out that Michael Dell wasn't perfect at predicting the future. Based on today's stock market close, Apple is worth more than Dell. Stocks go up and down, and things may be different tomorrow, but I thought it was worth a moment of reflection today. Steve.”

Michael Dell shouldn’t feel too bad. According to Forbes, his personal fortune stands at $16 billion.

Posted by edelfenbein at 5:22 AM

Earnings Calendar

Fourth-quarter earnings season is about to start. Here's a calendar for our stocks on the Buy List. Not all of the companies have said when they're going to report, but I'll update this as more info becomes available.