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« December 2005 | Main | February 2006 » January 31, 2006Google 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. 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. 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. 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. 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. 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. Posted by edelfenbein at 6:20 AM January 30, 2006Earnings 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% 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. 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 January 27, 2006A 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 January 26, 2006The 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. 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.
Posted by edelfenbein at 9:38 AM January 25, 2006The Devil Wears Prada
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. 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. Academician has big shoes to fill as Fed Reserve head Big shoes to fill Following the legend of Greenspan, Bernanke certainly has big shoes to fill. 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. Big Shoes to Fill 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. Bernanke knows he has big shoes to fill. 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. 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. 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 January 24, 2006Profits 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." 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 January 23, 2006IPO 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) 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. 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 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 January 22, 2006The 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: 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 January 21, 2006Google 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 34° 04' 24" N 118° 14' 25" W 41° 53' 25" N 12° 29' 31" E 44° 35' 24" N 104° 42' 55" W 37° 48' 51" N 122° 28' 42" W 46° 12'00" N 122° 11' 00" W 40° 42'26" N 74° 00'33" W 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 January 20, 2006213 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 January 19, 2006Every 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. 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? 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. Posted by edelfenbein at 6:17 AM January 18, 2006The Sky Isn't Falling Michael Sivy takes on the bears: "Oil prices are going to soar even higher!" 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.
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 January 17, 2006Happy 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. 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. 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. Michael Dell shouldn’t feel too bad. According to Forbes, his personal fortune stands at $16 billion. Posted by edelfenbein at 5:22 AM January 16, 2006Earnings 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.
Posted by edelfenbein at 10:59 PM MLK Day The stock market is closed today on honor of Dr. Martin Luther King. He would have turned 77 yesterday. Here’s his "Letter from a Birmingham Jail." To quote Keith Burgess-Jackson, "If this letter doesn't move you to tears, you aren't wired properly." I found a copy of the letter via Wikipedia. If you’re not familiar with Wikpedia, it's an open source Web encyclopedia. Anyone can jump in and edit it. Recently, The New York Times reported that the entry for John Seigenthaler Sr., a former aide to Robert Kennedy, contained "defamatory content." The entry was fixed, but on Wikipedia, you never know what you’re going to see. Here’s part of the Wiki entry for Martin Luther King: The March on Washington That's not correct. The march from Selma to Montgomery happened in 1965, not 1963. The text refers to Lyndon Johnson as being president, but that didn't happen until that November. I like Wikipedia, but it’s always good to remember that you can trust everything you see on the Web. Posted by edelfenbein at 12:22 PM January 14, 2006World to End Tomorrow; Republicans, Christians Suffer Most These are heady days for the Apocalypse biz. The latest offering in the "we’re all doomed" genre is The Long Emergency: Surviving the Converging Catastrophes of the Twenty-First Century by James Howard Kunstler. Yikes! Even the title scares me. I thought I was pretty immune to this stuff, but Kunstler takes his end-is-nigh riff to another level. His outlook is so bleak, he makes Thomas Malthus look like Barney the Dinosaur. This is Joe Kaplinsky's review: The picture of the future put forward in The Long Emergency is truly grim. The best-case scenario is a mass die-off followed by a forced move back to the land, complete with associated feudal relations. As the title implies, this is to be an ongoing state rather than a crisis to be overcome - a sentiment that the US critic Susan Sontag described as 'apocalypse from now on'. How bad will it be? 'The prospect will be so grim that some individuals and perhaps even groups (as in nations) may develop all the symptoms of suicidal depression.' By going extinct, Barney’s pals may have gotten off light. But before you go snapping up shares of Soylent Green Ltd. (PEPL), it’s worth remembering that these books often tell us less about the future, and more about the present. Apparently, those who will suffer most terribly in the long emergency are the US Republican states whose culture is built on violence and fundamentalist Christianity. Neighbourhoods with spacious housing ('McMansions') and 'poor street detailing', a particular insult to Kunstler, are singled out for destruction. Europeans, by contrast, may pull through in better shape. There is an uncanny alignment between the supposedly objective, inevitable laws of nature and Kunstler's prejudices. Perhaps the best summary of his views is found in the book's epigraph: 'I don't know if the Gods exist, but they sure act as if they do.' These Apocalypse books seem to be cyclical. Every few years, we’re about to hit a new calamity; global warming, famine, oil depletion, obesity, global cooling, Barbara Walters. It’s hard to keep it all straight. The Stalwart points to a NYT article highlighting the fact that sometime this October, the U.S. population will pass the 300 million mark. The article notes that in 1967, when we topped 200 million, David E. Lilienthal, the former chairman of the Atomic Energy Commission, said, "a population of at least 300 million by 2000 will, I now believe, threaten the very quality of life of individual Americans." I'm not so sure he got that one right. But hey, it’s not the end of world. A more responsible view is offered by Alfred Crosby. His book, "Children of the Sun: A History of Humanity's Unappeasable Appetite for Energy," manages to look at our energy problems without scare-mongering. Peter Pettus reviews the book in the New York Sun: As "Children of the Sun" begins to address this daunting issue, we are grateful to find ourselves in the company of grown-ups. This is our crunch time, and what we need is rational and realistic discussion instead of hysteria and panic. It is true that the fossil-fuel game is winding down. There may still be a lot of oil and natural gas in the ground; the problem is that the amount of energy expended to procure it is creeping up to the amount of energy gained. What are our other options? Posted by edelfenbein at 6:06 PM Good Riddance to Traditional Pensions In the wake of IBM (IBM) doing away with its pension plan, James Glassman says, "good riddance." Lee Conrad, a labor organizer, said after the IBM news: "Employees are going to be losing out on all kinds of benefits. You’ve got to wonder what’s going to happen to the next generation of workers." Posted by edelfenbein at 11:10 AM Guidant Accepts J&J’s Offer It’s finally over. Guidant (GDT) will go with Johnson & Johnson (JNJ) for $71 a share. Both boards still need to approve the deal. I guess the hedge funds aren’t powerful as everyone thought. In the end, all Boston Scientific (BSX) did was make a bad deal cost more money. Posted by edelfenbein at 11:05 AM January 13, 2006This is Our Final Offer…Today This is getting weird. Boston Scientific (BSX) told Guidant (GDT) that it has until 4 p.m. ET today to accept its offer. Then BSX came out with a press release extending the deadline by two hours. Then they came out with another press release telling us ignore the first press release. The 4 p.m. deadline is still on. Posted by edelfenbein at 3:53 PM 5,000% Profits in Hansen Natural From "Dave Barry's Money Secrets," a sure-fire way to beat the market: Step 1. Gather all available financial data on the top 1,000 stocks for the past 25 years. There’s of course one major drawback to this idea. Since we have an efficient market, someone else already invented the time machine and bought those stocks thereby erasing any profit opportunity. Personally, I’d only go back three years ago to buy shares of Hansen Natural (HANS). Hansen is quickly becoming the stock to own of the decade. If you’re not familiar with Hansen, the company is known for its Monster Energy drink. These drinks are basically massive amounts of sugar and caffeine, with a tiny portion reserved for water so that the drink can in fact be drunked. How well has Hansen done? You could have picked up some shares in early 2003 for $2 a piece. A little lower if you were lucky. The stock is up another $11 in today’s trading to $103 a share. So we’re looking at a 50-fold increase in three years. That’s better than Google (GOOG) or Apple (AAPL) or Toll Brothers (TOL). Even gold. The reason for today’s surge is—you guessed it—a price target increase. Gregory Badishkanian of Citigroup raised his price target from $88 (psst) to $130 (kewl!). Over the next five years, Badishkanian said he expects Hansen to grow 20 percent compared with an 8 percent earnings-per-share growth rate for the mature beverage giants. The analyst added he also sees Hansen's earnings growth sailing past its peer group of smaller beverage and food companies, which are expected to grow 12 percent in the next five years. Please. To echo Richard Dreyfus in Jaws, the idea that these analysts can predict Hansen’s earnings growth five years out is a million to one. Put it like this, even if they get the numbers right, the chances that they’d know why are another million to one. Could anyone in January 2001 predict the market environment of today? The Hansen Natural of today is largely the brainchild of two South African businessmen. They bought a shell company and then went searching for a company to buy. In 1992, they bought Hansen for $14.5 million. After seeing the success of Red Bull, the pair moved Hansen into the energy drink market. Their first drink was a flop so they decided to turbocharge it. Hansen offered its drinks in 16-ounnce cans, plus they doubled the caffeine dosage. The drinks cost about $2 a can. What’s really set Hansen apart is it ability to target younger consumers. Hansen has about an 18% share of the market, which is growing very quickly. However, the major soda players have moved in with their own offerings. (The cola wars continue, just on another front). According to Rodney Sacks, Hansen’s CEO: The energy-drink category is growing 50% a year and that there's room in the market for everybody. “These are the new soft drinks of the world,” he declares. Sacks and Schlosberg are fending off the attack by diversifying. They've launched Joker, an energy drink sold exclusively in Circle K convenience stores, and Rumba, a caffeine-laced juice drink designed to be a morning pick-me-up. And they introduced Monster Assault, which comes in a black-and-gray camouflage can that says "Declare war on the ordinary!" It's a slogan that could describe the juiced-up strategy of this formerly sleepy beverage player. I just heard Jim Cramer say on CNBC that Hansen is where Google was a year ago.
Posted by edelfenbein at 1:58 PM Hip-Hop Capitalists NPR (audio link) looks at the business savvy of today’s rap artists. Posted by edelfenbein at 11:21 AM Why Buybacks Are a Lame Idea Business Week is on the case: The problem, says Thomas M. Doerflinger, an equity strategist at UBS, is that you can't easily tell how much of what companies say they're spending actually gets to investors. In a recent report on what he calls "vanishing buybacks," Doerflinger found that the number of shares in the S&P 500 has continued to increase despite the bigger share-repurchase outlays by companies. In 2004, when companies reported spending some $197 billion on buybacks—nearly 2% of the market value of the index—the number of shares outstanding increased by 1.8%. In the 12 months through June 2005, shares increased 0.7%, and only a third of the companies actually shrank their share counts by at least 1%. Share buybacks are a great idea in theory, but in the real world, I’d rather get a cash payment. If the company wants more of my equity, that’s a decision best left to me. Posted by edelfenbein at 10:58 AM Gazprom and PlayStations Ugh. "Pretty soon we're all going to be Gazprom traders," Kizenko said. "You've got to have it. Just like a PlayStation, you've got to have Gazprom." Posted by edelfenbein at 10:38 AM Stop the Presses Wendy's Facing Tomato Shortage I hope they catch up. (BA!) Posted by edelfenbein at 5:42 AM The Media Turns Against Whole Foods The WSJ questions Whole Foods' (WFMI) valuation. You heard it here first. Whole Foods' shares are up nearly 60% since the start of last year and trade at 54 times estimates of their per-share earnings for this fiscal year, according to Thomson Financial. That is about three times the valuation of its peers and for the average stock in the Standard & Poor's 500-stock Index, to which the stock was added this year. Posted by edelfenbein at 5:38 AM NYT on Gazprom From this morning's NYT: Gazprom's surge comes as a remarkable advance for Russian capitalism. Though 51 percent of the company is still owned by the government, its revenues in a few days dwarf the sums involved in the country's financial implosion of the 1990's. On Aug. 14, 1998, Russia's economy collapsed after it defaulted on $13.5 billion in Treasury bonds - less than the rise in Gazprom's market value on Thursday. Wow. Posted by edelfenbein at 5:31 AM Welcome I’ve had a lot of new visitors to the blog, so I thought I’d do a little more formal greeting. (trumpets!) Welcome to Crossing Wall Street. Please have a look around. You can see my Buy List for 2006. This is a list of 20 stocks that I recommend (and track my performance). The list won’t change all year. Here are a few recent posts that you might enjoy. This is me railing against General Motors. More ranting, this time Google. Me defending Dell against the media. Plus, you can scan the archives. I hope you become a frequent guest. Welcome! Posted by edelfenbein at 5:15 AM January 12, 2006The Market Today Not much to say today. In today’s market, the S&P 500 gave back 0.63%, and our Buy List dropped 0.77%. This snapped our three-day winning streak. Of our 20 stocks, only Bed Bath & Beyond (BBBY) and UnitedHealth Group (UNH) posted gains. BBBY was upgraded by CS First Boston. On the downside, Harley-Davidson (HDI) was downgrade by Citigroup. Incidentally, I went to my local Bed Bath & Beyond to buy linen: $200! No wonder they’ve never missed earnings. Posted by edelfenbein at 11:49 PM It’s Not Over The drama continues.... Every time I think the battle for Guidant (GDT) is over, it jumps to life again. This is getting to be like That 70’s Show—it just doesn’t know when to end. The latest is that Boston Scientific (BSX) just made a counteroffer. They’re now bidding $73 a share for GDT, one dollar a share more than Johnson & Johnson (JNJ). I have to give BSX points for bravery, if not fiscal prudence. Let’s be clear: They simply can’t afford Guidant. JNJ is an enormous company. It’s roughly ten times larger than BSX. Boston Scientific is desperate, and it’s beginning to show. Even though Boston Scientific is offering more, they’re using more stock. They have to. But JNJ has a bottomless bank account. It’s clear to me that the Guidant folks want to go with JNJ, but the hedge funds are in BSX’s corner (or rather, vice versa). The board can accept a lower offer if it think the offer in the shareholders’ best interest. Personally, I think Guidant is going to be trouble at any price. The ball’s now in JNJ’s court. (Just between you and me, isn’t this getting kinda fun?) Posted by edelfenbein at 11:13 PM A PDA for Pain Business Week on the latest technology from Medtronic (MDT): You might use the alarm on your watch (if you still wear one) or your Treo as a reminder to take your medicine. Now you can go one step further by using a personal digital assistant (PDA) to wirelessly control an internal pump that streams medication directly to its target inside your body. Posted by edelfenbein at 10:49 PM Reader Feedback One of the many benefits of this blog is the feedback I get from my readers. Here are a few interesting e-mails that I received over the past week. If you have any questions or comments, please drop me a line. The first e-mail is in response to one of my many rants against share buybacks: Share buybacks give an investor the option to receive cash (by selling some portion of their shares) or to own a larger portion of the company. Pre-tax considerations, it seems that an option to receive cash is superior to just getting the cash, no? In theory, yes. But keep in the mind an important factor: the shareholder must take on some risk. Money used to buyback a stock will not always have the same effect as getting cash. Over time, it will. But in the short-term, there's a risk factor that’s not present with a cash payout. The ROE of a stock will in theory match the stock’s return after awhile. But even the least volatile stocks are volatile, so we have to shoulder some risk in the process. (Of course, sometimes the volatility works in our favor.) Ideally, I’d prefer to not have to deal with taxes, and get a cash payment. Then I could decide if and when I reinvested the funds in management. I think that would be best for the shareholders, and accountability. The is in response to my post on valuing Berkshire Hathaway (BRKA): Berkshire's non-insurance businesses are much larger than most people realize (e.g. your comment that BRKA is mostly an insurance company). In fact, in 2005, nearly 2/3 of Berkshire's revenues were non-insurance (~65% thru 9/30/05). The profit contribution varies due to the cat losses on the insurance side, but less than half of BRKA's recent earnings come from insurance. If Berkshire's non-insurance businesses were publicly traded, they would be one of the largest companies in the SP500. One issue the NYT article and yours didn't mention is that BRKA's disclosure on these large business - which are now a majority of revenues and earnings - is poor. That, along with the Buffett issue, weigh on the stock's valuation, in my view. That's an excellent point. In resonse to Mark Stahlman giving Google (GOOG) a $2,000 price target: I think the most compelling reason behind Stahlman suggesting a target price is also the most compelling reason to sit on the sidelines of Google. It was written in the last paragraph of the article. “Stahlman said his prediction was designed in part to comfort investors concerned by Google's rapid ascent.” Hmmmmm. Will he be there to comfort investors during Google's rapid decent? Exactly! Wall Street doesn’t turn to analysts for comfort. That’s been alcohol’s job for over 200 years. And lastly, here are some comments on the news of the Dow passing 11000: Could there be any more irrelevant index than the Dow? Made up of basically of 30 behemoths that were yesterdays news. They put stocks like Intel and Microsoft in at the very top of the bubble and have done little sense. They keep companies like GM until it will likely goes bankrupt. A very mismanaged group of 30 stocks that tell you little about where the growth of America is. It does a worse job every year. I really wish people would stop quoting it. Agreed! Here’s my rant on that very subject. Posted by edelfenbein at 12:18 PM Shares of Gazprom Soar The Times of London reports on the Russian energy giant: SHARES in Gazprom, the Russian energy company in which the Kremlin owns a 51 per cent stake, have soared 17 per cent in the past three days after Western investors were given the green light to purchase as much as 29 per cent of the business. Here's a three-year price chart for Gazprom. Posted by edelfenbein at 9:21 AM SEC opens informal probe into Home Depot From Reuters: The U.S. Securities and Exchange Commission has opened an informal investigation into charges that Home Depot Inc. (HD) inflated profits through supplier payments meant to cover the cost of damaged merchandise, the New York Post reported on Thursday. Update: HD says that it's "simply not true." Posted by edelfenbein at 9:15 AM The Alito Volatility Index Time for a really geeky post! Feel free to skip if you're a mathphobe. As I've mentioned before, I’m a fan of TradeSports.com. This Web site let’s investors buy "futures contracts" on real world events. In addition to many sports and political events, they also have contracts on the nomination of Judge Samuel Alito to the Supreme Court. There are currently two sets of contracts on Alito. One is simply "Will Alito Be Confirmed?" That contract is currently running at 94.5%. So the market seems pretty confident that he’ll pass. The other is a set of six contracts asking how many votes will he get (over 40, 50, 60, 70, 80 and 90). What I find interesting in these markets is that you can look at two different contracts and find an "implied contract" for a separate event. For example, Donald Luskin and I discovered that during the (brief) Meirs nomination, the contract for her getting more than 50 votes was trading much higher than the contract for her passing. The reason is that the number-of-votes contract was only if she came up for a vote. That means that there was an "implied withdrawal contract." (Details here.) And withdraw she did. These sorts of number games are actually quite common on Wall Street. That’s exactly what the volatility index (or VIX) is. It tells us the implied volatility of the S&P 500. In options pricing, volatility is a key variable. So we can look at the price an option and work backward to the volatility number that traders are using. Personally, I don’t take these futures markets too seriously. Mostly, I think they’re just for fun. Real markets need to be much more liquid. Also, there’s too great a temptation for partisan interference. Having said that, we can look at the futures for how many votes the market believes that Judge Alito will get. Plus, we can find some interesting observations. Let’s look at two of the contracts: Alito receiving over 60 votes, and Alito receiving over 70 votes. The contract that Alito will get over 60 votes is priced at yesterday's close at 74, meaning that the market believes that there’s a 74% chance the Judge Alito will get 60 or more votes. The 70+ vote contract is currently priced at 16. Using these two numbers we can find the market’s mean and standard deviation for Judge Alito’s final confirmation vote. (Warning: math ahead!) Here’s what we do: Since there’s a 74% chance the Alitio will get 60 or more, the normal distribution tells us that a 74% chance is equal to the mean plus 0.64 standard deviations. A 16% chance works out to the mean minus 0.99 standard deviations. So the 10 votes between 60 and 70 is equal to 1.63 standard deviations. Ten divided by 1.63 equals 6.1 senators which is the standard deviation. That’s our Alitio Volatility Index, or ALIX (copyright, me!). The mean number of votes is 60 + (0.64*6.1) or 63.9. So the market believes that Judge Alito will get 63.9 "aye" votes with a standard deviation of 6.1 senators. Assuming a normal distribution, this means that there’s a 68.3% chance that Alito’s vote total will fall between 57.8 and 70 votes. Here's a chart of the implied standard deviation of the Alito vote. This line will probably fall as senators gradually make up their minds: Here's the mean vote (black line). The red lines represent plus and minus one standard deviation: I downloaded the price data off TradeSports' Web site. You can download my excel file here. Since the vote on Judge Alito will eventually come (assuming these windbags finally stop talking), the standard deviation number should gradually fall. This can happen even though the mean doesn’t change much. Every day on Wall Street, billions of dollars is invested in volatility. There are investors who don’t give a fig where the market goes, but they're passionate that it does it smoothly (or erratically). (Technical note: The real VIX is a weighted-average of several options contracts. I’m only using the 60+ and 70+ contracts.) It seems that there's a fairly solid bloc of about 35 votes dead set against Judge Alitio. However, the one-standard-deviation-below-the-mean line has nudged up a little since the hearings started. This may indicate that a few "maybe" votes have drifted over to the "aye" camp. See, I told you this was a geeky post. Update: Thanks, Ramesh! The 60+ contract moved up to 75 (a recent high), and the 60+ contract is now up to 22. That moves the mean vote total up to 64.7 with a standard deviation of 6.9 votes. Posted by edelfenbein at 5:43 AM January 11, 2006The Market Today Today was a perfect lesson on the benefits of diversification. We beat the market for the third straight day. The S&P 500 went up 0.35%, and our Buy List was up 0.56%. Ten of our 20 stocks went up, but the individual performances were very uneven. Biomet (BMET) was up 2.4%. Home Depot (HD) and Golden West (GDW) both rose about 2.8% (GDW made another new high). And Varian Medical (VAR) was our big winner, rising 4.2%. Outside our Buy List, Genentech (DNA) fell 4.4%. Frontier Airlines (FRNT) continued to plunge. It’s now down to $7.89. The stock is probably trading around 10 times next year's earnings. Google (GOOG) made finally cracked $475 a share today. General Motors (GM) fell 20 cents to $21.86 a share. Posted by edelfenbein at 5:00 PM Mylan Labs and Cogent Here are two stocks that I’ve been keeping an eye on lately, Mylan Labs (MYL) and Cogent (COGT). I’m not recommending them, but I think both have compelling stories, and they're well worth watching. Mylan is one of the largest generic drug companies. If you’re not familiar with the generic drug biz, the people who work there print money all day, then they go home. I’m skipping over some details, but that’s the basics. Mylan has been a huge winner of the past few decades. You could have picked up a share of MYL for less than a penny 30 years ago (post many splits). Since then, the stock is up over 200,000%. Today, the shares are about 30% off their all-time high. By my estimate, Mylan is going for about 18 times this year’s earnings. Not bad. The company has had some sluggish earnings reports lately. Sales dropped slightly as increased competition has squeezed prices. Sounds a lot like Dell (DELL). Cogent is normally the kind of stock I avoid. The company makes fingerprint identification technology. I hate "story" stocks. The only story I want to hear is “they make gobs of money." Cogent does that too. This is from Gene Marcial in Business Week: Business at Cogent, a provider of automated fingerprint and other biometric identification gear to law-enforcement agencies, has been on a tear: Sales vaulted from $13 million in 2001 to $88 million last year—and are estimated to have nearly doubled, to $160 million, in 2005. But the stock has been in a downspin since August when it was at 33. Now at 25, the stock was hit when Cogent failed to win some contracts in Latin America. But the drop, says Marion Schultheis, managing director at J.&W. Seligman, is a classic buying opportunity thanks to Cogent's long-term growth potential. She expects it to win new contracts this year. Cogent, she notes, has a chance to be awarded a part, if not all, of a major four-year biometric upgrade at the FBI valued at several hundred million dollars. Julie Santoriello of Morgan Stanley, who rates the stock “overweight,” notes in a report that she sees $203 million in new contracts in 2006. She expects Cogent sales to jump to $251 million this year. Some 66% of Cogent's estimated 2006 sales are already booked, she says. She figures Cogent earned 71 cents a share in 2005 and should make 95 cents in 2006, up from 38 cents in 2004. Cogent is definitely one to watch. Posted by edelfenbein at 3:17 PM Whither GM? In 1979, the British economy was in free fall. Inflation was spiraling out of control. The unions were demanding commensurate pay increases, and when they didn't get them, they struck. The country that had stood up to the Luftwaffe was failing apart. The garbage men went on strike and soon piles of "rubbish" dotted the countryside. Even the gravediggers went on strike and corpses were gruesomely left unburied. The winter of 1978-79 was called the Winter of Discontent, echoing the opening lines of Richard III. The situation was so bad that Her Majesty’s government had to apply for a loan from the IMF. This was back in the days when that had some sense of shame to it. You were even expected to pay it back. A reporter asked the Prime Minister, James, Callaghan, his opinion of the "the mounting chaos in the country." Callaghan said: "Well, that’s a judgment that you are making. I promise you that if you look at it from outside, and perhaps you're taking rather a parochial view at the moment, I don't think that other people in the world would share the view that there is mounting chaos." That was it. British socialism died right there. The commanding heights were nothing more than a literal heap of trash. The next day, The Sun's headline read: "Crisis? What Crisis?" I can't help but think of the similarities between British socialism and General Motors (GM). Once upon a time, GM ruled the world. Today, it's an embarrassment. What’s good for GM, is largely irrelevant to America. For reasons unclear, billionaire Kirk Kerkorian sunk a good part of his fortune in GM's stock. His investment has been a disaster. Now’s he’s sent his aide, another son of York, Jerome York to be exact, to Detroit to tell the automaker everything they're doing wrong. The New York Times quotes York as saying: "The time has come to go into crisis mode and act accordingly." No, the time to go into crisis mode has long since past. GM is a fiscal black hole. The company burns through $24 million a day. That's more than the Yankees. Yet the company still pays out $566 million a year in its dividend. Crisis? What Crisis? Talk about unburied corpses. I honestly don’t think GM will survive this decade. Even if it does, it will hardly be recognizable. Any future GM will merely be a Commonwealth living in the shadow of a by-gone Empire. York’s plan is to get rid of the dividend and reduce the pay of senior management. Well...that’s a nice start, but I think GM will have to go a lot further; perhaps ditching some of its key brands like Hummer. The New York Times quoted Frederick A. Henderson, GM’s new CFO: "To be honest, I am in crisis mode. So I agree with him," Mr. Henderson said. In December, he succeeded John M. Devine, now a G.M. vice chairman, who accompanied him to Mr. York's speech. Like Mr. Devine, Mr. Henderson watched impassively while Mr. York spoke. Impassively? Ha! I bet they were ready to toss him out the window. I’d actually feel much better if GM were really in crisis mode. They’re not. They’re sleepwalking. Perhaps now, they’re sleeprunning. This is a company that plainly refuses to see reality. They’d be plenty happy to go on ignoring the mess they’ve made, but high oil prices forced the issue. The long-run was much shorter than any of us expected. The idea that GM can discount its way home is a foolish illusion. The facts are clear. Every GM car carries about $1,500 in health care costs. The employees’ health care trust has over $20 billion, and GM had to tap it twice recently. For $1 billion each time. Retirees outnumber current U.S. employees 2.5 to 1. The company has stopped providing earnings guidance. GM’s problem isn’t cars or legacy costs. Companies can deal with those. What GM has is a leadership crisis. They need to make major changes soon. If not, the Winter of Discontent will last a very long time.
Posted by edelfenbein at 1:28 PM Oracle’s Debt Offering Is a Hit Oracle (ORCL) made its first trip to the bond market this week, and its debt quickly sold out. That’s good news for Larry & Co. I admire Oracle a lot but I’m nervous about its growth-through-acquisition strategy. That almost always means trouble, still I think Larry Ellison is one of the few people who can turn the trick. But it ain’t gonna be easy. The software giant has been on a buying binge lately (Seibel, PeopleSoft, Retek, and that other one). Oracle is a truly remarkable company. It generates ginormous amounts of cash. They don’t pay a dividend, and the stock hasn’t done much of anything for the last few years. I think they saw that they had to do something. And quick. The acquisitions went well, but now Oracle has to pay for them. The company’s debt offering came in three sections. The first part was for $1.5 billion at three years. The next was for $2.25 billion of five-year bonds, and finally $2 billion of 10-year bonds. That’s’ called laddering—it lowers your risk. In the secondary market, the bonds traded at a premium. This is clearly a vote of confidence in Oracle. As I’ve mentioned before, there’s a bear market going on in the price of risk. The bond market is notoriously splenetic. If they saw something they didn’t like, you’d know about it. I think the bond traders jumped at something—anything that was paying a premium over government debt. It looks as if Oracle picked the right time to issue its debt. I can’t think of a similar tech stock that has had a major bond offering. Oracle’s game plan still has a ways to go, but this debt offering is a good start. Posted by edelfenbein at 7:16 AM Google Watch Robin Arnfield writes that Google (GOOG) is being criticized (rightly) for using its own digital-rights management system to control the distribution of copyright-protected videos in its new Google Video Store: Google announced the Google Video Store last week at the Consumer Electronics Show (CES) in Las Vegas, Nevada. Google's own proprietary DRM technology represents a challenge to existing DRM systems from Microsoft and Apple, also used to control video distribution over the Internet. Posted by edelfenbein at 6:43 AM January 10, 2006The Market Today The five-day rally came to an end. Alcoa’s (AA) lousy earnings weighed on the Dow as it slipped below 11000. This was the first down day of the year. Once again, the energy sector led the market and most everything else was flat. The Energy Spyders (XLE) were up over 1%. A few other spyders were barely higher, but the non-energy sector had a rough day. The two-tiered market continues. We have energy, and everything else. The news out of Iran has been the latest catalyst for higher oil prices. I don’t see how it can last. As long as you steer clear of energy, you’ll have a good 2006. Normally, when energy leads the market, the Buy List lags. Not today. This was a very good day for our Buy List. The S&P 500 dropped 0.04%, but we edged up 0.34%. Of course, Home Depot (HD) did well for us. Also, Harley-Davidson (HDI) had a very nice day, and Golden West Financial (GDW) hit a new high. By the way, one of our former Buy List stocks is now trading at a great price. Frontier Airlines (FRNT) fell all the way to $8.47 today. Last week, the company reported that its passenger count for December jumped by 12.8%, and passenger miles rose by 16.2%. The next earnings report will probably be pretty bad (the company has already lowered the bar for expectations), but I think the quarter after that could be very strong. The big news from the tech sector came from Apple Computer (AAPL). The company unveiled its new computer with Intel’s (INTC) chips. The stock broke $80 a share today. Three years ago, you could have bought Apple for under $7. Apple will report next Wednesday, one day after Intel. After the bell, Genentech (DNA) reported earnings that were inline with expectations. I was wrong. I thought they would easily beat the Street, but I was right that the stock would fall. Shares of DNA (love that symbol!) are trading lower after hours. Genetech was also named the best company to work for by Forbes. Posted by edelfenbein at 5:43 PM Home Depot Wants a HUG Good news today. Home Depot (HD), one of our Buy List stocks, is buying Hughes Supplies (HUG) for $3.2 billion. Hughes is a neat little company. They’re involved in the wholesale construction supplies biz. This is one of those industries you never think about, but it’s actually very profitable. HD has been slowly dipping its toes in the water in this area. They bought out a couple of businesses last year, but this HUG purchase is the company’s largest acquisition ever. I really can’t say that this move is much of a surprise. It was only a matter of time. The sector is rapidly consolidating, and in November Hughes said that it was considering "strategic alternatives." (Hint, hint.) Also, Stephen D. Simpson at the Motley Fool, noticed that in the 8-K report, eighteen senior veeps and higher were set to get cash upon a buyout. So someone was planning ahead. Home Depot is offering $46.50 a share for Hughes. Yesterday, HUG closed at $38.55, so that’s a pretty nice premium. Right now, Home Depot’s stock is up so Wall Street is pleased. I’m also happy to see that the acquisition should add a few pennies a share to Home Depot’s bottom line this year. I think it’s interesting that Home Depot it working to build up its other businesses. The old story was that the stock would follow the housing market. I just don’t buy that. The company’s supply division accounts for about 4% of HD’s total revenue. Hughes will probably double that. As successful as Hughes has been, the company still only has about 2% of the wholesale construction market. There's plenty of room to grow. I was a huge fan of Lowe’s (LOW) for years (and I still am), but the gap between Lowe’s and Home Depot got to be too wide. I expect to see Home Depot back above $50 a share later this year. This is a great way for HD to start off 2006. Here's a chart of Hughes going back to 1992:
Posted by edelfenbein at 1:11 PM Earnings Season Grab a seat. Earnings season is about to get started. This should be the 15th straight quarter of double-digit earnings growth for the S&P 500. But that’s overall earnings growth. Within industries, the profit growth is very uneven: S&P expects 53.7% growth in energy firms' fourth-quarter profits.
Alcoa (AA) kicked off earnings season for the Dow by giving Wall Street an Eli Manning-style meltdown. The aluminum company earned 26 cents a share, widely missing the Street’s forecast of 37 cents. I think the critical area to watch will be the financials. The chart above shows that financials are only expected to grow by 6.3%. I’m curious how much the narrowed yield curve has impacted profitability. Analysts have been trimming estimates for stocks like Citigroup (C) and Fifth Third (FITB). On our Buy List, Golden West (GDW) still looks great. The stock is trading at 13 times earnings, and that’s after a big rally since October. I thought a former Buy List stock, Commerce Bancorp (CBH), was starting to look too pricey. Posted by edelfenbein at 6:59 AM James Surowiecki on Employment From the New Yorker: People who are unemployed stay unemployed, on average, about fifty per cent longer now than they did in the seventies, and only about half as many receive unemployment insurance as did so in 1947. Furthermore, the explosion in health-care costs means that the consequences of forfeiting company health insurance are graver than ever. So even though incomes have risen over the past three decades, they fluctuate much more than they once did. Economists estimate that income volatility is about twice what it was in the early seventies. Posted by edelfenbein at 5:37 AM January 9, 2006The Market Today The rally continues. Now we know what to do whenever the market stalls—just indict another Bushie. First, it was the Scooter Frogmarch Rally, and now it’s the fellow who dresses like a mafia don. What’s Ed Meese up to these days? Today, the S&P 500 rose 0.37% and our Buy List added 0.71%. Finally. I was getting tired of trailing the market. Of course, the big news today was that the Dow cracked 11000. This was the first time since before 9/11. According to Bloomberg, the index "had risen above that level a total of 19 separate occasions, all between 1999 and 2001, remaining there an average of 6.7 days before retreating. The longest the Dow stayed above 11,000 was for a period of 24 days starting in August 2000, while it's held for only one day on five occasions." Today ends 302 consecutive closes between 10000 and 11000. If USC could fall, so can Dow 11K. My concern is that some of the Dow’s strength recently has come from General Motors (GM), and that just ain’t gonna last. The real strength in the market today was in the smaller stocks. The Russell 2000 (^RUT)surged over 700 to close at a new all-time high. The S&P 400 Mid-Cap Index (^MID) rose 0.78%, and the Small-Cap 600 Index (^SML) rose 1.11%. Good news for the little guys. The market’s shift away from mega-caps is one of the most persistent trends of the last few years. Since the S&P 500’s highest close nearly six years ago, the index is down 15.5%. But the S&P 100 (^OEX), the top 100 stocks in the S&P 500, is off by 29.5%. I wouldn’t be surprised if the non-100 of the S&P 500 is at an all-time high. I’ll see if I can find some numbers on that. What I liked about today’s market is that it was led by financials and consumer goods stocks. Before today, approximately 98.4% of the rally was solely due to Google and gold. OK, I made that number up, but damn...it sure seems that way. Sixteen of our 20 stocks went up today. The big winner was Respironics (RESP) which added over 4.2%. The stock had slowly drifted lower during much of December, so it was nice to see some gains there. Did anyone notice that Dell (DELL) is back above $31? Good, me too. The stock got to $33ish, pulled back and then bounced off $30. If I was a technician, I would probably have seen it coming. In any event, I still think it’s an excellent buy . Also, Medtronic (MDT) hit a new high today. In October, this was the stock that raised its estimate for 2006, 2007 and 2008. That impresses me. Tomorrow, Genentech (DNA) will report its earnings. The Street has gone nuts for this stock. Now, it’s at that stage where people may start to cast some doubt its way. For the last several quarters, Genentech has destroyed the Street’s estimate. The current estimate is for 34 cents a share, which is a joke. That’s way too low. There’s no question they’ll beat, but by how much? I wouldn't be surprised to Genetech beat by two or three cents a share, and still fall after the earnings report. Posted by edelfenbein at 6:52 PM The 2006 Playboy Stock-Picking Contest Four of the five playmates are beating me, and not in the fun way. For the year so far: Amy McCarthy +8.47% (Jenny’s sister) Posted by edelfenbein at 3:24 PM Fourth-Quarter Earnings Reports The fourth-quarter earnings season is about to start. Here's a partial list of when our stocks on the Buy List are expected to report: Harley-Davidson (January 19) I'll update this as more companies make their info available. Posted by edelfenbein at 2:24 PM Dow 11000
We did it. Now only 723 more points to a record high. Posted by edelfenbein at 2:20 PM Corporate Bond Offerings Soar We’re in the midst of a booming market for corporate bond offerings. So Wall Street is following Uncle Sam’s lead and going massively into debt. In January, Wall Street will float $50 billion worth of government bonds, plus another $20 billion of junk bonds. Will the 80’s ever end? The WSJ notes that Avon (AVP) will use proceeds from its bond offering to finance its share-buyback plan. Wha? This makes no sense to me. Sure, it would great a move assuming the CFO can accurately time the bond and stock markets. But that’s not what the CFO should be doing, and that’s not the person I’d go to for my timing needs. I’ll worry about that. You guys run your business. Capisce? Posted by edelfenbein at 1:09 PM Blacklight Power The WSJ has an article this morning on the unusual story of Blacklight Power. The private company has raised $50 million to develop what could be a revolutionary scientific concept. Unfortunately, everyone else thinks it’s bunk: Blacklight Power is a Cranbury, N.J., company run by medical doctor Randell Mills, who claims to have discovered what he calls “hydrinos,” a previously unknown form of hydrogen in which electrons move to a lower state of energy than previously thought possible but still manage to kick off power. Dr. Mills says his discovery will end the reliance on fossil fuels and even "replace fire." The Journal’s article is only for subscribers, but here’s another article on BlackLight. Also, here’s a blog on alternative energy investments run by the hoster of this site. I don't know anything about BlackLight's research, and it seems highly suspicious. Nevertheless, I'm going to raise my rating to "near-term outperform." Just in case. Posted by edelfenbein at 9:50 AM January 8, 2006Value the Beloved Guru The New York Times looks at Warren Buffett’s Berkshire Hathaway (BRKA) and asks: "How should one value it?" That’s always a good question to ask. I think investors get unnecessarily tangled up by categories like "value" or "growth." All companies are trying to grow. And a company can offer a compelling value due to its growth potential. But what about a company worth $137 billion (slightly less than Google)? The problem I have with Berkshire is the "Warren Premium." The company is almost always slightly overvalued due to the presence of Buffett. Investors have so much confidence in him that the stock is given that extra, say, 10% or 15%. The stock is currently going for slightly more than 20 times this year’s estimate. That’s fairly rich. Now that Buffett is moving on in years, what will happen when he’s no longer at the helm? Could Berkshire even exist? The difficulty is that Berkshire is Warren Buffett: In a parallel world, where a 55-year-old Mr. Buffett with a fondness for kale was running the show, Berkshire stock might be trading higher as investors gave more weight to his involvement with the company. Yet Mr. Buffett's presence is still valued enough that a suddenly Buffett-less Berkshire would be a real shock to investors. "If there was a sudden announcement that Warren was going to go sit on the beach and not run Berkshire, it's very possible the stock would go down a lot initially," Mr. Weitz said. "But the board might then choose to buy back a lot of stock." Yes, it could. But that’s not what will concern the market. Investors will be looking at the empty captain’s chair. Think of it this way. Berkshire is largely an insurance stock (Geico) along with a smattering of consumer businesses. But even that’s an overly broad generality. Last year, Buffett took a big loss in shorting the dollar. I highly doubt any post-Warren board would allow such a move. The backlash would be too great. Valuing an insurance company is hard enough, but how does one place a price tag on the investing whims of a genius? This is where the textbook meets the real world and it doesn’t come away looking so good. One of my problems with the field of finance is that it tries to rationalize things that are really very hard to rationalize. All we’re doing is estimating a guess of an assumption of something we’re not very sure of in the first place. The variables that affect a stock’s price are monumentally complex. That’s one of the reasons why I stress stable stocks so much. Once Mr. Buffett retires, I think the best move will be to divide up the company he took a lifetime to build. Posted by edelfenbein at 6:55 AM January 7, 2006Google to $2,000? Dagnabit. I lost my lead! There’s a new leader in the Google Price Target Sweepstakes. Mark Stahlman at Caris & Co. says that Google (GOOG) is headed to $2,000 a share. Update: OK, here’s goes. My new price target is... **Deep Breath** $2,000.36. Oh, and a sack of magic beans. Can't forget that. Posted by edelfenbein at 7:13 PM IBM Goes for 401K’s Last month, it was Verizon (VZ). Now it’s IBM’s (IBM) turn. The only surprise here is that it took them so long. I mean, pension plans are so last century: International Business Machines Corp. said today it will freeze the pension plans of some 120,000 employees in the United States, effective at the end of next year, and will offer instead a more generous 401(k) plan. The pension crisis is also coming after corporate balance sheets. Posted by edelfenbein at 4:14 PM End of Week One Yesterday capped off a great week for the market, but a mediocre one for our Buy List. Don’t get me wrong; I’m pleased with the market’s performance, but I’m a little suspicious of so much strength in tech, energy and gold. Bear in mind that those sectors can move quickly, but I’d much rather see "core" areas like finance and consumer stocks lead the way. That’s the foundation of a lasting rally. Yesterday, the S&P 500 was up 0.94% to another four-year high. Our Buy List gained 0.55%. So far, 2006 is looking very good. The S&P’s return this week, not including dividends, is roughly equal to what it did for all of 2005. For the week, the S&P gained 2.98% and our Buy List was up 1.54%. I’m not ready to panic just yet. The returns for the week were pretty uneven. Many tech and energy indexes were up over 6%. On our Buy List yesterday, AFLAC (AFL), of all stocks, had a good day. The insurer gained over 3.5% thanks to a bullish report from Deutsche Bank. However, our other insurance stock, Brown & Brown (BRO), had a weak day. Respironics (RESP) was also weak due to a downgrade from Harris Nesbitt. The earnings reports for the fourth-quarter will start coming out in about two weeks. On Monday, Alcoa will report its earnings. This will be the first Dow component to report for the fourth quarter. Yesterday, the Dow was finally able to break through the Fibonacci number of 10940 as it closed at 10959. I’m not a fan of technical analysis, but I have to concede that the market loves to toy around with these benchmarks. For example, the Russell 2000 (^RUT) broke out to a new all-time high yesterday. The index was briefly over 700, but it closed at 699.39. I don’t think that’s purely by chance. The Russell 2000 has been creaming the S&P 500 for nearly seven years now. Since April 8, 1999, the Russell 2000 has gained nearly 75%, while the S&P 500 is down 4%. Posted by edelfenbein at 4:05 PM January 6, 2006Dow 11K is Within Reach This could be the first close over 11,000 since June 7, 2001. It would also snap a 301-session streak of closes between 10,000 and 11,000. Posted by edelfenbein at 2:29 PM Dell cuts estimate for fiscal 2007 options expense From Reuters: Computer maker Dell Inc. (DELL) on Friday cut its estimate of what it will cost the company to expense options awarded as employee compensation in fiscal year 2007 by 8 cents a share. Ironically, it's one of the benefits of a sagging share price. Posted by edelfenbein at 2:18 PM Share Buybacks The big fad on Wall Street has been to buy back outstanding shares. I’m not a big fan of share repurchases. Personally, I’d rather get the cash. Too often, a company wastes good money on its own bad stock. As I see it, I pay corporate execs to run their businesses, not manage my money. According to USA Today: A record-breaking number of companies, 1,012, repurchased a record number of shares worth $456 billion last year, says TrimTabs. Buybacks for Standard & Poor's 500 companies also hit a record at an estimated $315 billion. Those are pretty impressive numbers. The share buybacks are starting to have a major effect on earnings. Fewer shares means higher earnings-per-share. The fourth-quarter earnings are expected to grow (or have grown) by 14.9%. This marks the 15th straight quarter of double-digit earnings growth. Posted by edelfenbein at 11:58 AM January 5, 2006The Market Today The S&P 500 has risen every day this year. OK, that’s a little leading misleading, we’re just three-for-three and today’s gain was miniscule. For the record, the S&P 500 closed higher by 0.02 points. To put that in perspective, over an entire year that works out to about 0.4%. Still, it was better than our Buy List which is not having a good week. Our Buy List fell 0.39% today. Today’s problem child was FactSet (FDS) which fell nearly 5% because the founder’s estate already sold his shares. (Yep, I don’t understand it either.) The market started on a good note. Jobless claims fell to a five-year low. This was a bit of a strange day as technology lead the way, and energy was the laggard. Both the five-year and ten-year Treasuries were unchanged. And Google (GOOG) keeps on chugging along. Today, the stock closed above $450 a share for the first time. The company is now worth $130 billion. Not bad for a couple of kids. Lastly, Howard Stern will get 34 million shares of Sirius (SIRI) stock (about $220 million) for meeting subscriber targets. Baba Booey could not be reached for comment. Posted by edelfenbein at 5:01 PM The Equity Premium Puzzle One of the great puzzles of finance is the “equity risk premium.” This refers to the fact that stocks have historically outperformed bonds. Not only that, they’ve outperformed them by a lot. Finance professors aren’t exactly sure why. According to Wikipedia: A large number of explanations for the puzzle have been proposed. These include a contention that the puzzle is a statistical illusion, modifications to the assumed preferences of investors and imperfections. Kocherlakota (1996) presents a detailed analysis of these explanation in financial markets and concludes that the puzzle is real and remains unexplained. Subsequent reviews of the literature have similarly found no agreed resolution. I believe the answer is really quite simple. Stocks have to perform better than bonds. If they didn’t, all of capitalism would come crashing down. A bond is a loan, and a stock is equity, meaning it’s what you do with the loan. In that relationship, there’s an implicit agreement that the borrower will make more money than the lender, otherwise the former wouldn’t borrow and the latter wouldn’t lend. The difference is the equity premium. Well, that’s my theory. Now Australian Professor Peter Swan has a new theory. He thinks the equity premium puzzle is due to liquidity: In a working paper titled, "Can Illiquidity Explain the Equity Premium Puzzle?", Prof Swan said that equity markets are highly illiquid compared to government securities such as bonds. "My contribution to (the puzzle) is that we can't just look at the direct impact of transaction costs on returns," he said. I’m not so sure we can ditch it just yet. Certainly, transactions costs play a role, and I think Professor Swan adds an important angle to the debate. However, I can’t help but notice that often the most volatile stocks are the most liquid ones. Who care about a penny spread on Google at $465? A modern investor can invest in something basically resembling “the market” pretty easily. Is it really that much more illiquid? I don’t know but I hope we’ll see more research on this issue. Posted by edelfenbein at 2:32 PM Barry Ritholtz in Business Week One of my favorite bloggers, Barry Ritholtz, is profiled in Business Week. I just wish he weren't so pessimistic: Why is he so glum? For starters, globalization and pricing pressures will hurt corporate profitability in 2006, says Ritholtz, who now runs independent research company Ritholtz Research and hedge fund Ritholtz Capital Partners. He's calling for the S&P 500 to go to 880. Yikes! Posted by edelfenbein at 12:26 PM FactSet Lower Today FactSet Research Systems (FDS) is trading lower today on the news that the estate of the late founder, Howard E. Wille, has liquidated its shares. The press release makes it clear that the sale has already taken place. Depsite this, the shares are off about 5% right now. The company recently reported very strong earnings. Posted by edelfenbein at 12:18 PM Morgan Stanley fires 4 after strip club visit From Reuters: Morgan Stanley has fired four employees, including a stock analyst, after they accompanied at least one client to an adult-entertainment club, the Wall Street Journal reported on Thursday, citing people familiar with the matter. Posted by edelfenbein at 7:26 AM Google Watch This morning’s WSJ has an interview with Safa Rashtchy of Piper Jaffray. The analyst just gave a super atomic wedgie to every Google (GOOG) short on Wall Street by slapping a $600 price target on the stock. His old price target was a wussy $445, which Google just gobbled thanks to...well, Mr. Rashtchy’s new price target. He thinks the search giant can make $11.91 a share in 2007. That's roughly twice what Google made in 2005. One of the wonders of Google is the way they’ve been able to have Wall Street eat out of there hand at the same time the company slams the financial establishment. I’ve always felt that Google’s unconventionality was a bit affected. They seem to relish the role of outsider too much. And if you watch carefully, Google has backed down several times when important principles were at stake--principles which they claim they stand for. Never underestimate these moments. There's a reason why I admire companies like Expeditors (EXPD). A good company shouldn't be so concerned with attitude. The Google Dolls love to quote Warren Buffett but the company is perversely secretive. That’s not at the service of shareholders. The Journal asks Rashtchy about Google’s secrecy: Google publicly discloses very little information about itself. How does that affect your ratings? No. Not at all. And by that, I mean yes. Investors could become concerned if at some point investors were to become concerned. He tells us how well he knows Google, but if he’s such an expert, why has he raised his price target five times since April? His own actions signal that there’s something important he’s consistently missing. What annoys me about most about Sarbanes-Oxley or the antics of Governor-to-be Spitzer is that they’re only willing to attack targets once they’re down. Where were they before? I’ll be very blunt. Google is one of the most hostile companies to investors possible. What they’ve been allowed to get away with is ridiculous. And the slate is wiped clean all because the stock has gone up. People like Safa Rashtchy aren’t helping things. Google’s rally isn’t going to last forever. Once the shares fall, some white-haired widow will sob to her congressman, and then we’ll hear the indignation: “Wait a minute! This company has two classes of stock; one with ten times the voting power of the other! How come no one told us?” Whenver Google is involved it seems to breed weirdness. Just consider the equation of Bear Stearns plus dumb metaphors equaling incoherent drivel. I've read this a few times and I'm still lost. Today, we are introducing the concept of the Google Ecosystem to investors, and with that, we are raising our rating to Outperform from Peer Perform. In conjunction, we are raising our 2006 price target to $550 from $360, reflecting our long-term belief in the fundamentals and the burgeoning Google Ecosystem. Oh dear lord. This metaphor is like some tiny spider scampering its way across the linoleum of understanding. I, my friends, am the sneaker of logic. I’m still a little dazed but I think we have an ecosystem that faces legal risks? Someone help me out. Perhaps the secret sauce will protect them. I’m just not sure. In any event, I’m going to raise my price target on Google to $700. And a sack of magic beans. Posted by edelfenbein at 6:27 AM Whoa Nellie! What a game! Here's the TradeSports futures contract for USC to win by 7.5 points, as it was traded during the last hour of the game. Posted by edelfenbein at 12:30 AM January 4, 2006The Market Today Another good day on Wall Street. At least this time, we beat the S&P 500. The Buy List gained 0.60%, and the S&P 500 rose 0.37%. The S&P finished at a four-year high at 1273.46. Sixteen of our 20 stocks closed higher today. I was happy to see SEI Investments (SEIC) have a good day. The stock added 2.9% in today’s session. J.P. Morgan cut its rating on Lowe's (LOW), although Home Depot (HD) seems to be have been more adversely affect. Shares of Home Depot dropped 1.8%. Outside the Buy List, Google (GOOG) added $10 a share, and it hit a new all-time high. The stock was upgraded by the analyst at Bear Stearns. Yesterday, Safa Rashtchy at Piper Jaffray gave the stock a price target of $600. Google is now inches away from $450 a share. Pfizer (PFE) also had a good day. Copper, gold and oil all climbed higher. Gold is now at a 25-year high. Posted by edelfenbein at 6:05 PM Looking at Cisco At MSN Money, Michael Brush makes the case for Cisco (CSCO): At $17.20 per share, the market doesn’t seem to be giving Cisco credit for its potential. If you subtract the $2.20 a share Cisco holds in cash, the stock trades for 13.6 times the $1.10 that Wall Street analysts project it will make in 2006. I just don’t see it. First, a growth rate of 12% to 15% seems overly optimistic to me. In my opinion, the business is too fragile to make such a prediction. Bear in mind that Cisco’s revenues in FY 2001 were higher than the next three years. Also, Cisco’s fiscal year ends in July, so that throws the comparisons off a bit. On top of that, we have the issue of accounting for options expenses. Cisco fought this regulation every step of the way. Me thinks they protested WAY too much. And if that isn’t enough, there’s the Scientific Atlanta (SFA) deal to absorb. I agree that Cisco looks cheap. Unfortunately, I think there are many good reasons why. Posted by edelfenbein at 2:40 PM Expeditors 8-K Report As usual, the folks at Expeditors (EXPD) have fun with their 8-K report. Here's a sample: 9. Recently one of your competitors indicated they will incur incremental costs due to the successful recruitment of sales talent from other firms currently undergoing consolidation. Has Expeditors been successful in recruiting new sales members from these firms and if so what are the anticipated pre-tax recruitment costs in Expeditors' upcoming quarter if any? Posted by edelfenbein at 10:31 AM Southwest Enters Denver Southwest Airlines (LUV) starts business at Denver International Airport. I think Frontier Airlines (FRNT) will prove to be much stiffer competition than LUV expects. Posted by edelfenbein at 5:52 AM Russia here to stay as energy superpower Reuters notes that we're going to have to get used to Russia being an energy superpower: Gas monopoly Gazprom warned on Tuesday there was still a risk of supply disruptions to Europe if Ukraine continues to expropriate Russian gas from the pipeline crossing its territory. The last time energy prices spiked, Russia conducted a bold acquisition--Afghanistan. Posted by edelfenbein at 5:37 AM January 3, 2006Day One 2 p.m. made all the difference.... At 2 p.m., the market got the minutes from the latest Fed meeting and a rather blah day turned into a darn good rally. The good news is on the first day for our new Buy List, our stocks were up 0.78%. The bad news is that our stocks were creamed by the broader market. The S&P 500 was 1.64%. Basically, today was a microcosm of 2005. Energy stocks were up huge. Google (GOOG) was up by $20 a share, or $6 billion in market value. Oil soared over $63 a barrel. The S&P 500 Energy Index (^GSPE) was up 4.5%. Just like much of last year, most of the other sectors were bunched together. Make no mistake though, this was a good day for stocks. Today was the best rally since October. The whole Russia versus Ukraine thing really spooked traders in the commodity pits. I mean, aren’t those two always fighting? My strategy for ’06 was just not working today. The sectors I like least (energy, gold, materials and tech) were the market leaders. My favorite areas pulled up the rear. Our best stock was surprisingly, Golden West Financial (GDW). I love GDW, but it’s normally so quiet. Fair Isaac (FIC), Dell and Donaldson (DCI) also did well. Our health care stocks were particularly weak today. The irony is that one year ago we had the complete opposite news. The Fed minutes indicated that there could be rates increases through 2005, and the Dow lost about 100 points. I think the rally in the dollar may soon come to an end. Of course, much of the media has been calling for that for some time. The European Central Bank just raised interet rates for the first time since 2000. Two other things to note: In Slate, Daniel Gross weighs in on declining volatility. Lastly, it’s good to see Charles back at the Kirk Report. Let's hope Day Two goes a lot better than Day One! Posted by edelfenbein at 11:20 PM This Day in Market History From Gary Alexander at Investorplace.com: The best January day in market history was January 3, 2001, when the Dow gained 299.6 points. That was chicken feed compared to the +14.2% ONE-DAY move up in NASDAQ! It came a year after the market's peak, when everyone thought the worst was over: NASDAQ soared from 2291.86 to 2616.69 on one day. It's safe to say that kind of a NASDAQ gain won't happen in one day, any time soon. Posted by edelfenbein at 3:36 PM Purge GM from the Dow? Business Week asks if GM (GM) should be replaced in the Dow. My answer is a resounding: Duh! And take Alcoa (AA) with you. First, there’s a little back story involved. The Dow Jones Indexes are owned coincidentally enough by Dow Jones & Co. (DJ). The company also publishes Barron’s and the Wall Street Journal. Business Week is owned by McGraw Hill (MHP) which also owns Standard & Poor’s, which coincidentally enough, owns the S&P Indexes. So we have a little inter-indexian warfare going on. I’ll be very simple: The Dow is a lousy index. The big advantage it has is age. The Dow is a price-weighted index which means that it’s calculated by adding up the 30 stocks and multiplying by a variable (about eight) to get the magic number. The S&P 500 is much better and it’s the one I follow most closely. The stocks are weighted by market value and it uses 500 stocks. Over the past few decades, the Dow has slowly lost ground relative to the S&P 500. Forty years ago, the Dow was about 10 times the S&P. Thirty years ago, it was nine times. Twenty-five years ago, it fell below eight and twenty years ago, it fell below seven. Beginning in the mid-80s, the Dow regained some of its lost ground. The Dow generally falls less than the market as a whole during bear markets, and trails it during bull markets. The bursting of the tech bubble was good news for the Dow. By the market’s low, the index vaulted all the way to 9.75 times the S&P. Since then, it’s been three-and-a-half rough years for the Dow. The ratio is back down to 8.6. General Motors now has a market value of roughly $10 billion, about one-twelfth that of Google (GOOG). Its debt, which is rated as junk, represents about 4,000 Dow points. The company is simply no longer a good barometer of the American economy. Here's an interesting tidbit on the Dow. The editors of the Wall Street Journal changed the index in 1939 by tossing out IBM (IBM). They added it back in 1979. In those 40 years, IBM gained 22,000% If the editors had left the index alone, the Dow would now be about 35% higher than where it is. All the historical benchmarks would be different. The Dow would have cracked 1,000 in 1961 instead of twelve years later. Behold the power of one really great stock! Posted by edelfenbein at 2:38 PM Walgreen’s Earnings Report Walgreen’s (WAG) is a great company. I came close to adding it to this year’s Buy List, but I think it’s a bit pricey, especially compared with CVS (CVS). For the most part, I simply buy great companies and don’t worry so much about the price. If you look historically, the great stocks are almost always overpriced, but they stay that way. Walgreen’s is one of the few times where I think it’s wise to stand back. The company reported good earnings today: The drugstore chain earned $345.6 million, or 34 cents per share, in the three months ended Nov. 30, up from $328.6 million, or 32 cents per share, a year ago. Excluding stock options expensing, Walgreen said it would have earned 36 cents per share. How's this for a 20-year chart?
Posted by edelfenbein at 1:53 PM Best Starbursts 4. Yellow (why?) FYI: The list also works for Slurpees. Posted by edelfenbein at 12:40 PM The Not-So-Invisible Hand of the Editor It's not a joke if it needs an explanation. Take a guess what the NYT's editor probably added in this column by Paul Krugman: So here's the bottom line: yes, northern Virginia, there is a housing bubble. (Northern Virginia, not Virginia as a whole. Only the Washington suburbs are in the Zoned Zone.) Krugman makes a good point that we really have two housing markets. The "Zoned Zone" of America which is greatly overpriced, and "Flatland," which is still reasonably priced. Posted by edelfenbein at 12:00 PM Oil over $62 The new year is getting off to a rough start. Oil has soared over $62 a barrel over concerns in Russia. The country finally restored natural gas shipments to normal levels. Still, the standoff has worried traders. Energy stocks are up, and most everything else—including the new Buy List—is lower. Posted by edelfenbein at 11:01 AM January 2, 2006Big Profits in Title Insurance The stock market is closed today. I hope you’re enjoying another nice long weekend. I noticed this story in the Journal about the title insurance industry. Not too long ago, I had no idea what title insurance was. Now that I follow the industry, I have a hard time believing that everyone doesn’t know about it. I won’t call it a “scam,” but it’s hard to imagine this is not only legal, but lenders make title insurance mandatory. Title insurance protects homeowners against competing claims for their property. Here’s an interesting historical tidbit for you: Title insurance played an important role in the history of our two greatest presidents. In the 1750’s, Lord Fairfax, the only peer living in North America asked a young man named George Washington (a distant relative) to survey some of his land in the western part of Virginia. By "some land," I mean half the darn state. Fairfax owned some five million acres. Earlier, the Virginia House of Burgesses tried to do what governments like to do, claim some of his land for itself. About 60 years later, and not that far away, a Virginia-born farmer named Thomas Lincoln bought a small farm in Kentucky. At this time, this was frontier country. He built a log cabin there and soon, he and his wife had a son. Then along came a man with a competing claim to the farm and the court ruled against the Lincoln family. They had to move and the legal costs were a great hardship to the young family. They were able to lease another farm and soon, the same things happened again. Thomas Lincoln was fed up with Kentucky and moved to Indiana which had recently been surveyed by the Federal government, so land claims were more secure. Or at least, they were supposed to be more secure. Shortly after the family got in Indiana, Thomas’ wife Sarah died. The whole episode left a great impression on Abraham Lincoln and it may have led him to study surveying and the law. America has been very fortunate to have avoided the ugly land claims problems of the Old World, and that’s were title insurance comes in. I believe that title insurance is required by law in most states. So you have a product that few people know about, no one even thinks about, the prices vary greatly and I can’t imagine there are too many claims. The profits are enormous and the risk is low, so sign me up! Well, the Journal notes that the industry is coming under some criticism: Critics say that the problem with the business is that often consumers don't take note of the fact that they need the coverage until they sit down at the closing. To give you an example of how profitable some title insurers are, here’s a long-term graph of Fidelity National Financial (FNF, the black line) compared with ExxonMobil (XOM, the gold line). Now ask yourself, when was the last time you heard anyone complain about Big Title?
Posted by edelfenbein at 12:42 PM January 1, 2006Options Boom Barron’s notices the booming business in options: For the 13th time in 14 years, option trading volume grew in 2005 at a record pace, and it's beginning to exhaust superlatives and test the thesaurus. More than 1.5 billion options traded in the U.S., a 27% jump from 2004. These included nearly 1.37 billion stock options (up 26%), and about 135 million index options (up 38%), according to the Options Clearing Corp. The 10 busiest trading days in history? They all occurred in 2005. Posted by edelfenbein at 6:20 PM Remembrance of Januaries Past Historically, January has been a good month for the stock market but not in recent years. In 2000, January had its seven-year win streak broken. Since then, the S&P 500 has fallen in four of the six Januaries of this decade. (Yikes, is this really the seventh year of the decade??) We’ve had some spectacular Januaries in the past. In 1975 and 1976, the S&P 500 rose over 12% in the first the month of the year. It jumped 13% in “the year we will not mention” (hint: between 1986 and 1988). The 25 Januaries from 1975 to 1999 average an annualized growth rate of 39.4%. The other 11 months together averaged 15.4%. Posted by edelfenbein at 5:17 PM Tim Harford on Subsidies Here's part of a fascinating interview with Tim Harford about his book, "The Undercover Economist." Nick Schulz: I was interested to read in your book that you suggested that agricultural subsidies are harmful to the environment. And that might be news to some people. How is that the case and why is that so? Posted by edelfenbein at 2:23 PM WSJ: Medtronic's Looking Good The Wall Street Journal takes a look at Medtronic (MDT) and likes what it sees: Recalls and safety alerts roiled the market for implantable defibrillators last year. Fortunately for medical-device maker Medtronic of Minneapolis, the bad news mostly has hurt a rival, Guidant. Posted by edelfenbein at 12:37 PM |
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