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« February 2006 | Main | April 2006 » March 31, 2006Sorry, Folks It's just too nice outside to blog about stocks. I promise I'll have more later. This is the last day of the first quarter. The S&P 500 is flat, but it looks like this will be the best Q1 since 1999. The Nasdaq is holding above 2,340. The Buy List is looking good today, especially Respironics (RESP) and Golden West Financial (GDW). If anyone needs me, I'll running around outside with my shoes off. Posted by edelfenbein at 12:57 PM March 30, 2006Harley in China Harley-Davidson (HDI) is set to open its first dealership in Beijing. They really could have used a couple of Harley's on the Long March. The move into China is part of Harley's push to take its bad-boy image global. In the U.S., the $5.3 billion motorcycle manufacturer rules the heavyweight premium-bike segment with a 48.9% share, well ahead of Japanese rivals such as Honda (HMC) and Suzuki. Overseas is a different story. Although Harley's international deliveries grew 15% in 2005, the U.S. still represents more than 80% of the company's sales. Posted by edelfenbein at 12:13 PM Today's GDP Report The government revised GDP growth for the fourth quarter today to 1.7% from the original 1.6%. I think this was a minor slowdown for the economy. Next month, we'll get our first look at the growth rate for the first-quarter. I think it will be over 4%, perhaps 5%. Over the last three years, the economy has grown by 10.8%. Posted by edelfenbein at 11:01 AM James Surowiecki on the Newspaper Biz From the current New Yorker: But McClatchy’s gamble depends on a simple, if often overlooked, fact: newspapers remain a surprisingly robust business and generate tremendous amounts of cash every year. Most of them have profit margins that dwarf those of the average company; McClatchy’s operating margin last year was twenty-eight per cent, while ExxonMobil’s was around sixteen per cent, and the typical supermarket’s is around four per cent. The reach of newspapers remains huge. Daily circulation is around fifty-five million (not including online readers), giving the industry more customers than any other traditional media outlet. And those customers have the kind of demographics that advertisers like; even as circulation has dropped, revenue from print ads has stayed healthy, to the tune of more than forty-seven billion dollars last year. Newspapers are classic cash cows: solidly profitable businesses in a stagnant industry. Posted by edelfenbein at 10:52 AM March 29, 2006Heigh-Ho Silver The poor man's gold is over $11 for the first time in 23 years. The metal cracked $50 when the Hunt brothers tried to corner the market. The silver market famously crashed on Silver Thursday (26 years and two days ago), and the Hunts were wiped out. (They later become the inspiration for Mortimer and Randolph Duke in the movie Trading Places.) Barclays has been fighting to launch a silver ETF, much like the gold one (GLD). Posted by edelfenbein at 12:32 PM UnitedHealth Not Interested in Humana Long-time readers will note that I take a somewhat skeptical view of acquisition strategies (GAG!!). That’s why I was glad to see UnitedHealth (UNH) firmly squash any rumors that it’s about to buy Humana (HUM). Over the past few days, Humana’s stock has risen while UNH’s has fallen back. Today, UNH released an 8-K report which clearly said that it ain’t interested: From time to time in late March 2006 and the first half of April 2006, William W. McGuire, M.D., Chairman and Chief Executive Officer of UnitedHealth Group Incorporated (the "Company"), Stephen J. Hemsley, President and Chief Operating Officer of the Company, and other senior members of the Company's management team will be meeting with investors and analysts. UnitedHealth’s stock is up about 4% today. Posted by edelfenbein at 11:49 AM March 28, 2006The Fed Raises Rates For the 15th straight meeting, the Federal Reserve has raised interest rates by 0.25%. The Fed funds rate is now 4.75%. Here's the statement: The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 4-3/4 percent. What does "some" mean? For now, the market thinks it means at least one more rate hike. The second paragraph is new, but the third is the exact same language as last time. Posted by edelfenbein at 2:15 PM Hansen Natural Hansen Natural (HANS), the Monster Energy drink stock, is now just getting silly. The stock was up 333% last year, and it’s already up 55% this year. Three years ago, you could have picked up shares of HANS for less than $2. Today, it’s at $123. Wow! Lennar (LEN) reported good earnings this morning even though the housing market is showing some signs of weakness. The company earned $1.58 a share, three cents more than estimates. I was happy to see someone upgrade Fair Isaac (FIC) this morning. The stock is around $39 a share. The big news today is the Fed meeting in Washington. This is the first meeting with Bernanke in charge. The bank will almost certainly raise rates another 25 basis points to 4.75%. This will mark the 15h straight rate hike, and it will finally push the Fed funds rate to the same level as long-term interest rates. I just noticed that the 10-year bond is at 4.751%, so that makes for a perfectly flat yield curve. The Conference Board reported that consumer confidence jumped to a four-year high. That probably explains Tiffany's (TIF) strong earnings report. The company reported earnings of 97 cents a share, 13 cents more than expectations. Posted by edelfenbein at 11:41 AM March 27, 2006Apple Turns 30 This has been a busy week for Apple Computer (AAPL), which turns 30 years old on Saturday. Not only have they gotten in a fight with France, but now they're fighting with the Beatles. The Fab Four's business is also called Apple, and this is the third time Apple and Apple have clashed. The Beatles first took Apple to court in 1978 when the computer company agreed to stay away from the music business. In 1989, the Fab Four nailed Apple when the company released a music-making program. The computer company had to shell over $26 million. Now the Beatles are taking aim at Apple's iTunes Music store. The French National Assembly has also jumped into the act: Last week, France's National Assembly passed an authors'-rights bill that would, among other things, require music-download stores such as Apple's iTunes to open their proprietary "digital rights management" copy-control software to users and competitors Kevin Hassett sums up the issue: Imagine if someone built a resort so beautiful that vacationers swarmed to it, and the French passed a law requiring the resort owners to let French citizens stay at the resort for free. This ruling is essentially the same thing. The French are trying to rob an American company. Interestingly, it was 40 years ago today that John Lennon said that the Beatles were bigger than Jesus. But are they bigger than Steve Jobs? Posted by edelfenbein at 1:14 PM Walgreens’ Earnings Walgreen’s (WAG) is one of those rare companies that makes money in good times and in bad. Year after year, the company has delivered an amazing record of consistently rising profits. Today, the company reported earnings of 51 cents a share, which was decent although it was a penny below Wall Street’s expectations. Despite missing Wall Street's estimates, the company's shares rose 13 cents to $44.50 in late morning trading on the New York Stock Exchange, where they have traded in a 52-week range of $40.98 to $49.01. This is a fantastic company, but I’m not a big fan of the stock right now. I think it’s gotten a bit too rich. The stock’s P/E ratio (before today's earnings) is about 28 while CVS’ (CVS) is just 20. As good as Walgreen’s is, I don’t think it deserves a 40% premium to CVS. But if the P/E ratio got back down to 20, it would be a terrific buy. Posted by edelfenbein at 12:44 PM The Boom in India The Bombay market is heading to the stratosphere: "The way the market has gone up, it shows that there are absolutely no short sellers," said Ajit Surana, managing director at Dimensional Securities. "As the stock indices breach higher levels, stock valuations are getting out of whack and any reversal could be painful." From Latin America to the Middle East, I think I know how this story will end. Buoyed by increased foreign investment in stocks -- the Sensex has recorded a remarkable bull run. It topped the 10,000 mark in February this year after surging past the 9,000 level in November and the 8,000 mark in September. Posted by edelfenbein at 10:23 AM Dane Miller Is Retiring from Biomet After 29 years, Dane Miller is stepping down as CEO of Biomet (BMET). Last week, I wrote about this remarkable company. Here's a brief profile of Miller from Forbes. Posted by edelfenbein at 9:37 AM March 26, 2006George Mason Wins Here's the Tradesports contract for the game. When UConn pushed the game into overtime, the contracts immediately vaulted from 5 cents to 70 cents, only to become worthless a few minutes later.
Posted by edelfenbein at 5:12 PM Euro So Beautiful Some in Europe have a dream of expanding the euro to 12 more countries. But Desmond Lachman says that it's not working where it's already in use. The daunting challenges to the euro experiment are perhaps best exemplified by the response I got from a former Salomon Brothers' emerging-market trader when I asked him where the next emerging market debt crisis would occur. Without missing a beat, he replied that it would take place in Greece, Italy or Portugal. All three of these countries suffer from government deficit levels and public debt ratios that would make any emerging market debt trader feel distinctly at home. These traders would also get the distinct feeling that they had already been to this movie before about a country unsuccessfully struggling with the rigors of a fixed exchange rate system. Posted by edelfenbein at 9:01 AM March 25, 2006Why Poor Countries Are Poor Tim Harford on the corruption-based economy of Cameroon. He finds a new school library that will never house any books because the roof wasn't built to withstand the country's rainy season. Consider the situation: money that was provided because of social networks rather than need; a project designed for prestige rather than use; a lack of monitoring and accountability; and an architect appointed for show by somebody with little interest in the quality of the work. The outcome is hardly surprising: A project that should never have been built was built, and built badly. The lesson of the story might appear to be that self-interested and ambitious people in power are often the cause of wastefulness in developing countries. But self-interested and ambitious people are in positions of power, great and small, all over the world. In many places, they are restrained by the law, the press, and democratic opposition. Cameroon's tragedy is that there is nothing to hold self-interest in check. Posted by edelfenbein at 3:34 PM March 24, 2006The Market Today Thanks to a nice gain from Harley-Davidson (HDI), our Buy List beat the market for the fifth straight day. FactSet Research Systems (FDS) came within three pennies of a new high. Bed Bath & Beyond (BBBY) broke $39 a share, before slipping back some. For the year, we're up 3.29% versus 4.38% for the S&P 500 (not including dividends). Here's how our Buy List has done (based on a starting value of $1 million). The red line is Crossing Wall Street. The black line is the S&P 500.
Posted by edelfenbein at 4:59 PM An Avian Flu Index You know you're a professional investor when you look for a profit opportunity from anything. Here's an Avian Flu Index from TrendMacro (via Luskin). These companies make vaccines, anti-virals and other products likely to be in big demand if the avian flu turns deadly, investment research firm TrendMacro says. Stock................................Weds. Close..........YTD Posted by edelfenbein at 3:44 PM Oshkosh Hits Another New High Does this stock ever go down? Man, I wish I had bought shares. The company makes all sorts of truck and military vehicles. Here's more from their Web site. Hey, someone has to make all those garbage trucks. Posted by edelfenbein at 1:57 PM Pit Bull Market Yesterday, the Feds nabbed a bunch of mobsters in a stock scam operation. How'd you like to do business with these folks? The defendants, including accused Colombo family captain Joseph Baudanza, 61, and his brother Carmine Baudanza, 63, also extorted stock brokers, traders, cold callers and brokerage firm owners through threats and violence, authorities said. In other news, a broker was fired after bringing a prostitute back to the office after hours. Now he's suing the company. He said he felt unappreciated. (I'm not making this up.) Posted by edelfenbein at 11:05 AM Google Added to S&P 500 Today is the sixth anniversary of the market's top. On March 24, 20000 (also a Friday), the S&P 500 closed at 1527.46. Six years on, we're still down about 15%. The folks at S&P are celebrating the bursting of the tech bubble by adding Google (GOOG) to the S&P 500. Burlington Resources (BR) has been voted off the island. Since Google is about three times larger than BR, index funds need to sell all 499 stocks to make room for Google. Also, Alcatel (ALA) and Lucent (LU) are in merger talks. The two sucky companies hope to form one large sucky company. Six years ago, Lucent closed at $48 a share. Today, it's at $3. Bed Bath & Beyond (BBBY) is finally starting to move. This stock is a bargain under $40. Posted by edelfenbein at 10:13 AM March 23, 2006Top 10 Industry Groups Year-to-Date Steel.......................................................38.95% Posted by edelfenbein at 6:46 PM GM Sweetens Buyout Deal with New Toyotas General Motors today sweetened its $35,000 buyout deal for 113,000 hourly workers at GM and Delphi, saying that each employee who leaves the companies by the end of March will also get the keys to a brand new 2007 Toyota Sayonara SUV. Yes, it's a parody. But GM is hard to parody these days. Posted by edelfenbein at 6:28 PM The Numbers Guy Carl Bialik writes the "Numbers Guy" column for the Wall Street Journal. Today he has a fun article looking at the chances of picking perfect brackets for the NCAA Tournament. Put it this way, it ain't gonna happen. There's even a company that provides insurance to companies that sponsor events for picking all 63 games correctly. Talk about a safe business! Fifty contests and zero winners. Papa John's contest had 90,000 entrants and no one got past the first round. To measure the probability for this year's tournament, Jay Emerson, assistant professor of statistics at Yale, suggests using power ratings developed by Ken Pomeroy, a 32-year-old meteorologist from Cheyenne, Wyo. These ratings are based on team's records, margin of victory, strength of schedule and other factors, and are expressed in units of points. For example, through last weekend's games Villanova has a rating of 65.64 and Boston College has a rating of 61.99, so Villanova is expected to beat Boston by about four points -- the difference in their ratings -- when they play Friday. Posted by edelfenbein at 3:19 PM Medtronic Wins Patent Ruling From the AP: An arbitrator has ruled in favor of Medtronic Inc. in a patent dispute with Johnson & Johnson over the design of its stents, the tiny wire metal mesh used to prop open arteries. Posted by edelfenbein at 2:16 PM Defense & Aerospace Stocks One of the hottest sectors of late has been defense and aerospace stocks. This decade's NASDAQ might be the Spade Defense Index (^DXS), which is up 125% since March 11, 2003. And lately it's been very strong, up 11.2% since January 23, 2006. The defense industry is dominated by six major large-cap stocks; Boeing (BA), United Technologies (UTX), Lockheed Martin (LMT), Northrop Grumman (NOC), Raytheon (RTN) and General Dynamics (GD). While many of these companies have done well over the past three years, the really big gains have come from smaller players like BE Aerospace (BEAV) and Precision Castparts (PCP). Though some have compared the war in Iraq to Vietnam, one area of difference is the behavior of stocks. Many defense stocks started underperforming the market in mid-1967, several months before the Tet Offensive, perhaps foretelling the end of American involvement. Also, defense stocks peaked in mid-1985, more than four years before the Berlin Wall came down. Again, the market proved the Wisdom of Crowds. But if the defense sector is telling us anything about the future, it's that we're going to be in Iraq awhile longer. Posted by edelfenbein at 12:00 PM The Morning Market Here are a few quick items for this morning: First is that Respironics (RESP) was upgraded by Wachovia. It’s about time this stock got some love. Also, Seeking Alpha has posted Biomet’s (BMET) conference call from Tuesday. Finally, Expeditors (EXPD) released its latest 8-K report. They’re the only company I know of that regularly takes time to answer questions from shareholders. I always learn something useful by reading these. On a related note, Virginia Postrel writes about how the shipping container changed the world. Posted by edelfenbein at 10:16 AM Crushing Your Enemies in a Pile of Collapsing Debris
Behold! The Dell XPS 600 Renegade, the ulimate in computer gaming technology. The price tag, $10,000. Best. Computer. Ever. But what can it do? The limited-edition, custom-painted Dell(TM) XPS 600 Renegade delivers to U.S. consumers an immersive gaming experience based on the industry's first dedicated physics accelerator -- the AGEIA(TM) PhysX(TM) processor. Poland, sold separately. By "traditional weapons," they mean traditional computer game weapons. Today, Dell announced that it's buying Alienware Corp., a company that also makes high-end computers favored by gamers. I had no idea these things cost so much. Interestingly, Alienware uses AMD's chips and Dell only uses Intel's. Dell said that Alienware will be a subsidiary and will continue to use AMD's products. Business Week has more. Posted by edelfenbein at 9:40 AM March 22, 2006Language Matters Polonius: What do you read, my lord? According to a recent academic paper, company press releases contain more information than we realize. Three researchers (Angela K. Davis, Jeremy M. Piger and Jeremy M. Piger) took an interesting approach. They ignored the numbers and instead focused on the language contained in press releases. Using text-analysis software, they looked for optimistic and pessimistic language used in 24,000 press releases. Optimistic language included words that conveyed praise, satisfaction or inspiration. This includes words like best, better, favorable, good, great, important, positive, profitable, strong and successful. Pessimistic words conveyed blame, hardship or denial (i.e., alarmed, burden, conflict, weakness, setback). Their results show that language matters. It’s as if the companies are tipping their hands. According to the researchers’ (jargony) conclusion: Taken as a whole, these results suggests that the optimistic and pessimistic language used in the narrative disclosures of earnings press releases contains information about future firm performance incremental to other factors that are commonly associated with future earnings. This result suggests that market participants consider optimistic and pessimistic language usage to be a credible (at least to some extent) source of information about managers’ future earnings expectations. Finally, the association between market returns and the unexpected portion of optimistic and pessimistic language is substantially stronger than the association between market returns and the expected portion of optimistic and pessimistic language. This result suggests that managers likely have reputations for routinely providing optimistic or pessimistic disclosures and that the market responds to language usage that differs from those initial expectations. Interestingly, they also found that corporate press releases are getting longer. Click here to see the paper. I double-checked Microsoft's press release from yesterday, and it doesn't contain a single negative word. These guys are good. In fact, at no point do they even say that Vista is being delayed. Posted by edelfenbein at 3:08 PM The Trend Away from Earnings Guidance Pfizer is doing it. Motorola said it will do it too. Companies like Citigroup, Google and General Motors already do it. More and more companies are no longer giving earnings guidance. Now senior corporate managers and corporate-governance activists are debating the pros and cons of issuing or scrapping guidance. Some say discontinuing updates boosts investor confidence in corporate accounting, since it removes the temptation to rearrange the books to meet earnings targets. Others criticize tight-lipped companies for keeping owners in the dark, highlighting the importance of providing as much information as possible to the marketplace. People love to blame the companies for the "quarterly earnings game," but how come no one blames the investing public? A few years ago, employees at Cisco were madly loading boxes onto trucks as midnight approached on the final day of the quarter. If the boxes were on the trucks, it would then count as a sale. Despite their best efforts, the company failed and for the first time in 11 years Cisco had to report that they missed earnings guidance. The next day, the stock plunged 13%. Cisco knew what it was doing. I don't blame them, I blame the investors. Posted by edelfenbein at 10:35 AM What's Wrong with the Newspaper Biz? Holman Jenkins in today's WSJ: Peter Drucker once pointed out that new business models are seldom pioneered by old companies, because old companies are loath to cannibalize their existing businesses. On the specific case of voting lockups, a study by Harvard and Wharton economists found that such companies have lower share prices than their peers, and invest less in R&D and advertising. The authors conclude that a "misalignment of incentives leads dual-class firms to invest too little, leading to lower sales growth and valuations." Today's New York Times Company's press release: The New York Times Company also announced today that first-quarter diluted earnings per share are expected to be in the range of 22 to 24 cents, compared with 76 cents in the same quarter last year, which included a gain of 46 cents per share from the sale of the Company's current headquarters and another property. Posted by edelfenbein at 10:17 AM Bernanke Warns
Reuters: Bernanke warns on mixing banking, commerce CBC News: Bernanke warns about size of U.S. deficit AP: Bernanke warns community banks on loans UK Telegraph: Bernanke warns of more rate rises WSJ: Blunt-Talking Bernanke Warns of Inflation Risks UK Independent: Bernanke warns on danger of US deficits Reuters: Bernanke warns on commercial real estate loans CNN: Greenspan home robbed Posted by edelfenbein at 6:54 AM Microsoft delays consumer launch of Windows Vista The tech sector should open lower today: Microsoft Corp. said on Tuesday it plans to delay the consumer launch of its much-anticipated Windows Vista until after this year's holiday shopping season, sending its shares down nearly 3 percent. Posted by edelfenbein at 6:38 AM March 21, 2006The Market Today Today's early rally fizzled. The S&P 500 dropped -0.60%. Bonds sold off, possibly due to Bernanke's speech. The core PPI rate was higher-than-expected, but commodity stocks did poorly. Thanks to FactSet Research Systems (FDS) rising 6.3%, our Buy List beat the market by falling -0.36%. This is despite Biomet's (BMET) lousy day. Strangely, Biomet opened lowered and rallied until 1 p.m., before it dropped sharply. The stock closed down over -4.8%. Dell (DELL) finished above $30 a share for the first time in over a month. Also, something tells me that the Brazilian market has gone too far. The Brazil ETF (EWZ) was down -3.5% today. (Calling all technicians. That can't be a good chart.) Finally, stay tuned for Tim Horton's IPO. The New Wall Street is skeptical, while Clearfish is bored. Posted by edelfenbein at 4:00 PM The Global Saving Glut Here's the speech Ben Bernanke gave yesterday to the Economic Club of New York. This has been getting a lot of attention in investing circles. As I've said before, I'd never base an investing decision on anything said by a member of the Federal Reserve. However, Bernanke gives an interesting speech. Unlike other Fed Chairmen we could name, his talk is clear and jargon-free. The issue Bernanke is concerned with is why long-term interest rates are still low despite 14 increases of short-term rates. Personally, I think this is more of an "angels-on-a-pin" topic. It's fun to speculate why, but it really doesn't matter that much. Bernanke seems to believe that the low rates are due to an excess of savings around the world. Posted by edelfenbein at 2:39 PM The Case Against Buy-and-Hold? In today's Investor’s Business Daily, Trang Ho makes an unconvincing case against buy-and-hold: Sitting tight may be prudent during brief downturns, but in many cases you cannot tell how long or deep a bear run will last. Change "but" to "because," and tell me which makes more sense. What I find curious is that he points to Intel (INTC) to support his case: Intel plummeted 73% in a year. It bottomed out at 13.89 — 82% off its all-time high — by September 2002. It, along with most of the tech leaders of 2000, never recovered. Sorry, but Intel is one the best examples of buy-and-hold. Let's look at history. In just four months, the stock plunged from $83.50 to $15.50. The year was 1974. Let’s just say that the stock recovered quite nicely. If you want to put those dollar figures in today’s terms, the stock has split 540-for-1 since then. Or there was the 1980’s. Many people assume Intel’s stock was a big winner during the bull market. It wasn’t. The stock’s 1986 low was about 60% off its 1983 high. I hope you didn’t sell. As they say, "in many cases you cannot tell how long or deep a bear run will last." Posted by edelfenbein at 1:00 PM FactSet Research Systems Beats Earnings FactSet Research Systems (FDS) earned 38 cents a share last quarter, one penny more than estimates. Revenue totaled $93.7 million, a 23 percent jump from $76.5 million a year earlier and beating the consensus target of $92.3 million. The stock broke out to a new all-time high this morning. Dell (DELL) is up about 2.7%, and Biomet (BMET) is down -2.5%. Posted by edelfenbein at 11:13 AM Google Finance http://finance.google.com is live. The reviews are mixed so far. The Internet Stock Blog has a summary of the new features: After much speculation, Google (GOOG) this morning launched Google Finance. Google Finance differs from Yahoo Finance in three crucial respects: first, it attempts to present most information about a stock on a single page. Second, it leverages the breadth of external sources from Google News. Third, in contrast to Yahoo (YHOO) which is investing in its own content (particularly in personal finance), Google Finance is built entirely of licensensed data and links to external sources. Here are the key points about the product (evaluation and stock impact will follow in a later post): They forgot the most important thing! You can’t download the historical data for the stock charts (or at least, I couldn’t). How can a financial site not have that? That’s like opening a cheese shop and not having any cheese. Posted by edelfenbein at 9:52 AM Dell sees 2006 sales growing faster than market More good news from Dell (DELL): Dell Inc., the world's largest maker of personal computers, expects its sales growth to outpace the broader industry this year, aided by rapid expansion in Asia, chairman Michael Dell said on Tuesday. Also, Lenovo is laying off 1,000. Posted by edelfenbein at 9:49 AM The Miracle of Warsaw, Indiana One of the more interesting figures of the American Revolution is Thaddeus Kosciuszko, a Polish army officer who was so moved by the patriot’s cause that he came to the colonies to join the fight. Kosciuszko was named head engineer of the Continental Army, and his help was critical at the Battles of Ticonderoga and Saratoga. The good citizens of Indiana and Mississippi both named counties in his honor. The Hoosiers went one better, and named the county seat Warsaw as a salute to Kosciuszko’s heritage. It might seem strange that a city in the heartland has the same name as the capital of Poland. But Warsaw, Indiana isn’t like most towns. In 1895, the city was altered forever when a salesman named Revra DePuy decided that he no longer wanted to work for other people. So he did what any American would do: He became an entrepreneur. DePuy was a splint salesman. At the time, fractures were set with wooden splints. DePuy had a revolutionary idea. He used metal splints instead of wood. The metal could be bent to fit any person. So in a garage in Warsaw, DePuy launched the town's orthopedics industry. DePuy’s business did very well, and within a few years he hired Justin Zimmer to be his first sales manager. After DePuy died, Zimmer wanted to buy the company but wasn’t able to. So, like DePuy before him, he also started his own orthopedic business right in Warsaw. The orthopedics industry grew and grew and grew. Soon, the advent of plastics launched the industry into a new age of design and innovation. In 1977, four entrepreneurs, Dane Miller, Niles Noblitt, Jerry Ferguson and Ray Harroff (two of whom worked for Zimmer) branched out on their own. Right in Warsaw, they formed another orthopedic company which they called Biomet Inc. (BMET). In their first year, the company recorded sales of $17,000 and a loss of $63,000. Despite the modest start, Biomet has delivered record sales and earnings every year since. The company has one of the best track records in American business Remarkably, the four men are still active in Biomet’s operations. If any business could be described as the perfect business, it might be medical devices. The business has demographics on its side, and the industry is constantly driven by technology and prices increases. The stocks tend to be very stable, and highly profitable. Several stocks like Medtronic (MDT), Zimmer (ZMH), Stryker (SYK), Biomet (BMET) and St. Jude (STJ) have been market-beaters for years. According to data available at Professor Kenneth French’s Web site, medical device stocks have increased 370,000% over the last 65 years, that’s more than 30 times better than the overall market. Today Warsaw is the backbone (sorry) of the global market for replacement hips, knees, shoulders. Heck, if you break it, Warsaw can make a new one. Today, knee and hip replacements are quite common. Warsaw probably controls about 40% of the worldwide orthopedics business. DePuy Inc. is still based in Warsaw. A few years ago, it was bought out by Johnson & Johnson (JNJ). Zimmer is also still in Warsaw as is Biomet. Today, Biomet employs over 6,000 people. This year, it should have over $2 billion in sales. There simply aren’t many companies that have done as well as Biomet. For the last 10 years, the company has paid an annual dividend that has increased each year. Since 1982, Biomet’s stock has split nine times for a total of 162-for-1. Despite Biomet’s past success, the stock hasn’t done much recently. The shares nearly got to $50 in 2004, but are now around $36 even though the rest of the market has been making new multi-year highs. There have been concerns that the industry is under pricing pressure. I understand the worry. Price increases are the heart and soul of orthopedics. Biomet enjoys gross margins of 70% and net margins of 20%. The second quarter (ending in November) was pretty embarrassing for Biomet. The company had said it would earn 42 to 44 cents a share. It turns out, they earned just 41 cents. If that weren’t enough, Biomet said that for the third quarter (ending in February), it would earn 43 to 44 cents a share on sales of $510 to $520 million. That was below Wall Street’s estimate of 46 cents a share and $529.4 million. Last year, Biomet earned 40 cents a share. Mind you, this is a very stable business. For years, forecasting Biomet’s profits basically meant adding 18% to whatever they did last year. This morning, Biomet reported third-quarter earnings of 43 cents a share on sales of $506 million. The important fact to keep in mind is that Biomet is a very efficient company. It has no long-term debt. Return-on-equity is regularly over 20% Also, the company’s P/E ratio is at the low end of its historic range. Biomet’s CEO, Dane Miller (one of the four founders), has consistently dismissed worries over pricing pressures. I’m inclined to take his word over that of Wall Street analysts. Miller said: "We remain comfortable with analysts' sales and earnings estimates of $530 million to $540 million and $0.45 to $0.46 per share for the fourth quarter of fiscal year 2006." Year........Sales..........EPS
Posted by edelfenbein at 6:00 AM March 20, 2006The Market Today Today was a good day for our Buy List. The S&P 500 snapped its six-session winning streak as it closed -0.17% lower. Our Buy List rose 0.25%. Our best stocks were Dell (DELL), which was up 2.3%, and Bed Beth & Beyond (BBBY) which was up 1.3% to a seven-week high. Medtronic (MDT) also had a good day, climbing 1.6%. Biomet (BMET) had a good day, rising 1.3% before tomorrow's earnings report. After the bell, Oracle (ORCL) reported earnings of 19 cents a share, one penny more than expectations. Also, Frontier Airlines (FRNT), a former Buy List stock, had an excellent day today. The stock rose 6.5% to a two-month high. Posted by edelfenbein at 4:23 PM The Aging Bull? The current bull market recently celebrated its third birthday. The S&P 500 hit a closing low of 800.73 on March 11, 2003 (it had actually gone even lower in October 2002). Yuo know, there's nothing like a war to get a stock market moving. We're up over 63.2% since then. But like any three-year-old, this market is starting to get cranky. The S&P 500 has now gone up for six straight days. With an hour left of trading, it looks like the market will close lower. The WSJ reports that analysts have been trimming back their earnings forecasts: At the start of January, analysts, on average, predicted first-quarter profits would grow 12.6% at companies in the Standard & Poor's 500-stock index. By Friday, that forecast had been cut to 11%. "We have definitely seen a dramatic pull-down" in analysts' forecasting patterns as the bull market has worn on, says Thomson Financial research analyst David Dropsey. "It seems like every quarter it gets a little more back to normal." Normal isn't necessarily great. Bull markets usually are strongest when they are young, right after a bear market. Investor expectations are low then, and surpassing them is easier. The bull market tends to end, or at least pause, when expectations get well ahead of companies' ability to deliver. Posted by edelfenbein at 2:57 PM Graco Hits New High I noticed that shares of Graco (GGG) are at a new all-time high today. Graco is one of those stocks that's not well-known, but it's been a remarkable stock for many years. Since 1976, the stock is up about 20,000%. Not bad for a company that's nearly invisible to Wall Street. Only seven analysts follow the stock. The 80-year-old company makes equipment that measures and dispenses fluid materials. Graco's products are used everywhere. They even make the pump that puts caramel into Hershey’s Kisses. I'm a fan already. You can read more about Graco here and here. Here are the financial results for the past 10 years: Year........Sales..........EPS Notice the smooth uptrend. Wall Street expects the company to make $2.08 a share this year on sales of $790 million.
Posted by edelfenbein at 1:19 PM More Problems for GM When Dwight Eisenhower became president, he appointed Charles Wilson, the president of General Motors (GM), as his secretary of defense. During his confirmation hearing, Wilson was asked if he could make a decision that was opposed to GM’s interests. He said that he could but he couldn’t imagine such a situation "because for years I thought what was good for the country was good for General Motors and vice versa." Over the years, Wilson’s answer has been changed to "What’s good for General Motors is good for the country." Quite the opposite of corporate ruthlessness, Wilson was really conveying civic responsibility. Sadly, today’s GM is quite different from Wilson’s. Last week, the company said that it had lost $2 billion more last year than it had originally reported. The company will also miss the deadline for filing its 10-K report. GM also restated results from 2000 to 2004. If you’re keeping score, GM just restated its 2001 earnings in November. This company is a financial black hole. For 2005, GM lost $10.6 billion. That’s $18.69 a share. To put it in perspective, the stock is currently trading around $21 a share. In 1955, General Motors was the first corporation to register $1 billion in annual sales. At the time, GM was the one of the largest employers in the world—only Soviet state industries employed more people. Today's it's about as profitable. The accounting mess surrounds the classification of cash flows at ResCap, the residential-mortgage business of its financing arm, General Motors Acceptance Corp. The company has been trying to sell 51% of GMAC. The restatement will cut GMAC's 2005 profit to $2.5 billion from $2.8 billion Thanks to the latest bungle, on future deal may be gone forever. Who wants to do business with these people? I expect that the ratings agencies will downgrade GM’s debt again. It’s already junk. It will soon be even junkier. GM has $300 billion in long-term debt. That’s over $530 a share of junk debt. So if you pick up a share for $21, you’re also buying $530 of junk-rate liability. Since the current Dow multiple is about 8.2, this means that GM’s debt is worth over 4,300 Dow points. How much longer will this company be a part of the Dow? Did I mention there’s also an SEC investigation? And there’s also the issue of Delphi. It looks like GM and Delphi are finally close to an agreement with the UAW on early retirement incentive. GM is liable for pension and health-care obligations for these workers. The company estimates its liability to between $5.5 billion and $12 billion. Of the 10 hottest-selling cars in the world, only one is made by GM. To be honest, GM isn’t really a car company. It’s a pension and health benefits company that sells below-cost cars as a side business. The WSJ quoted an accounting professor as saying that it appears that the auto maker "is leasing cars to rental companies at a loss, to keep the plants running." This is what it's come to. GM's board has now called for an investigation. I hate to break it to them, but there's been an investigation going on for some time. Here are the results. Draw your own conclusions. Posted by edelfenbein at 12:39 PM Is Oracle a Value Stock? I'm not so sure, but others think so. Just because a stock hasn't moved doesn't necessarily mean it's a bargain. Their core business isn't growing, and it has to digest some very big mergers. The company reports after today's close. Forbes has a video with more on Oracle's problems. Wall Street is expecting earnings of 18 cents a share. Probably as important as the financial results will be any commentary from Larry & Co. on the integration of PeopleSoft and Seibel. I wish Oracle well, but I won't go near the shares until I see more proof of a strong business. Posted by edelfenbein at 9:43 AM Dell to double workforce in India From Reuters: Dell, the world's top PC maker, plans to double its headcount in India over three years, its founder said on Monday, but there was no word on the location of a planned manufacturing unit in the country. Posted by edelfenbein at 9:37 AM March 19, 2006The Real World Versus the Theoretical Here’s a fascinating "Sunday read" from Harvard Magazine on behavioral economics. The article is long (about 6,000 words), but I think you'll enjoy it. Instead of looking at how the world ought to work in theory, behavioral economists study how people really go about making economic decisions. They've found that how decisions are "framed" can have a dramatic impact on what decisions are made. For example, people have a very difficult time internalizing risk. David Laibson summaries the phenomenon: "There's a fundamental tension, in humans and other animals, between seizing available rewards in the present, and being patient for rewards in the future," he says. "It’s radically important. People very robustly want instant gratification right now, and want to be patient in the future. If you ask people, 'Which do you want right now, fruit or chocolate?' they say, 'Chocolate!' But if you ask, 'Which one a week from now?' they will say, 'Fruit.' Now we want chocolate, cigarettes, and a trashy movie. In the future, we want to eat fruit, to quit smoking, and to watch Bergman films." Economics isn't like chemistry or physics, it's a social science. As a result, numbers can sometimes fool us. In finance, a 10% gain and a 10% loss aren't symmetrical. People fear loss more than the value gain. The article has this interesting quote from Sendhil Mullainathan: "We tend to think people are driven by purposeful choices," he explains. "We think big things drive big behaviors: if people don’t go to school, we think they don’t like school. Instead, most behaviors are driven by the moment. They aren't purposeful, thought-out choices. That’s an illusion we have about others. Policymakers think that if they get the abstractions right, that will drive behavior in the desired direction. But the world happens in real time. We can talk abstractions of risk and return, but when the person is physically checking off the box on that investment form, all the things going on at that moment will disproportionately influence the decision they make. That's the temptation element—in real time, the moment can be very tempting. The main thing is to define what is in your mind at the moment of choice. Suppose a company wants to sell more soap. Traditional economists would advise things like making a soap that people like more, or charging less for a bar of soap. A behavioral economist might suggest convincing supermarkets to display your soap at eye level—people will see your brand first and grab it." Here's a well-known example of behavioral economics. Suppose you're in a roomful of people, and you're told to choose any integer from zero to 100. All participants are told that a large cash price will go to the person who chooses closest to two-thirds of the average of everyone else’s number. So what number would you choose? Thirty-three, right? Wait...everyone else will say that. I know: Twenty-two? No…hold on. Everyone else will.... *Thinking* I got it! The theoretical answer is zero. In the real world, studies have shown that the average guess is 18.91, so the winning answer is about 13. This of course makes no sense whatsoever. Remember that next time you buy a stock. Posted by edelfenbein at 10:15 AM March 18, 2006Q&A: General Electric Hi Eddy, I'm curious on your opinion of GE a "blue chip" that for the past 5 years has underperformed the market to the tune of $10k invested 5 years ago (according to S&P) = about $8k plus. Thanks for the email. General Electric (GE) is a great company. It’s one of the bluest of the blue chip stocks. It’s also one of the very few companies that has increased its earnings for ten straight years. GE is also titanic. The numbers boggle the mind. The company has over 300,000 employees and a market value of over $350 billion. Owning GE is almost like buying an index fund. The stock got absurdly overvalued five years ago. The P/E ratio got as high as 50. Last year, GE earned $1.72 a share so right now it’s going for almost exactly 20 times earnings. That’s a very good valuation for GE. The company raised the lower end of its guidance by two cents a share to $1.94 to $2.02 a share (don’t laugh, each penny is worth about $100 million). There’s also a $1 a share dividend which works out to a yield of nearly 3%. That’s equivalent to over 320 Dow points. General Electric is a great company, and the shares look very good right now. Posted by edelfenbein at 12:37 PM March 17, 2006The NASDAQ Goes Shopping in London The bidding war for the London Stock Exchange heats up. The newest player is the NASDAQ. The Economist has the story: Londoners following the LSE bidding saga had become so used to guessing games about continental exchanges, notably the pan-European Euronext and Germany's Deutsche Börse, that the Americans' hostile bid late last week came as something of a surprise. It shouldn't have. NASDAQ tried unsuccessfully to enter Europe once before with a start-up and has in the past held tentative talks with the LSE. Its cash offer of £9.50 ($16.60) a share, which would cost the Americans £2.4 billion, makes the preceding bid—£5.80, from Australia's Macquarie Bank, only three months ago—look downright stingy. Posted by edelfenbein at 1:26 PM GM's $2 Billion Accounting Error I'm just shaking my head. General Motors Corp. shares and bonds fell on Friday after the automaker increased its 2005 loss by $2 billion due to accounting errors, raising questions about the company's management and renewing doubts about its long-term survival. What other company could make this announcement and have its shares trade modestly lower? Here's how some GM bonds are doing: Maturity............Coupon........Price...........YTM These bonds are unsafe at any price. Posted by edelfenbein at 11:30 AM First Two Rounds By Seed I hope your brackets are going well. Here are the records of the first two rounds by seed since the NCAA tournament expanded to 64 teams 21 years ago. First Round.....Second Round In the first round, the #9's have a winning record over the #8's, and the #6's have done better than the #5's. It ain't easy for the Cinderellas. Only two of the #14's and three of the #13's made it to the Sweet 16. All five got knocked out in the third round. Fourteen #12's have gone on to the Sweet 16. What's remarkable is that the #12's actually have a winning record in the second round. They're 10-12 against the #4's and 4-1 against the #13's. The third round isn't so nice as they usually have to face the #1. They're 1-13 in the third round. The only #12 to make it to the Final 8 was Missouri four years ago, but they had to beat a #8, not a #1. (The table doesn't include yesterday games as the #12's went to 2-1.) The #11's have had worse luck than the #12's in making it to the Sweet 16, but three have gone on to the Final Eight and one made it all the way to the Final Four (LSU in 1986). Only six #10's have made it to the Final 8, and none has made it to the Final 4. Number 9 is a deceptively good seed. Even though they have a winning record against the #8's, they always have to face a #1 next. Of the three times that #9 has made it to the Sweet 16, only one made it to the Final 8 and that team lost (BC in 1994). Never have all four #1's made it to the Final 4, but they've never been shut out either. Here's the total number of wins by seed: #1: 281 So if you're brackets give you the number of points per seed, this is the total value of each seed (in descending order): #6: 660 So if your brackets give you points by seed, then you want to choose 1, 2, 3, 4, 6, 8, 10 and 12 in the first round. Then 4, 6, 8 and 10 in the second round. Four and 6 in the third round, and 6 in the fourth round. After that, you're on your own. Disclaimer: In no way does Crossing Wall Street Global Financial Holdings Incorporated (and Discount Weenie Hut) or its associated affiliates condone or approve of recreational office gambling. Posted by edelfenbein at 9:27 AM March 16, 2006Another New High Today is another good day for the market. New highs abound! The morning got off on the right foot when the government reported that inflation was tame last month. Inflation was up just 0.1% last month, and the “core rate,” which excludes volatile food and energy prices was also up just 0.1%. You wouldn’t know this by listening to some corners, but the core rate of inflation has been trending slightly lower over the past year. The latest word is that Bernanke & Co. will raise rates two more time, and then cool it. Our Buy List is having a decent day. Danaher (DHR) is up for the sixth straight day. This is such a cool little company. The stock is at a new all-time high. I’m also happy to see Bed Beth & Beyond (BBBY) hold onto its gains. Here’s what Jon Markman had to say about Brown & Brown (BRO) a few weeks ago: The company is scheduled to announce its 2006 first-quarter results in the third week of April, and I think they will show they're on track to earn $1.28 in 2006, and $1.48 in 2007. At a much-deserved premium price/earnings multiple of 26, that would peg the stock for a move to around $38 over the next 12 months, which would be a 24% move. He’s right. It is a strange site. Fair Isaac (FIC) is rebounding some. Yesterday, the stock got as low as $36.36. It’s currently just a tad above $40. I think the panic has passed. On Tuesday and Wednesday the stock generated volume of 10 million shares, equal to what it did over the previous month. Now I see why the brokers have been making so much dough. Next Tuesday, we’ll get earnings reports from Biomet (BMET) and FactSet Research Systems (FDS). Outside our Buy List, I’m still having a hard time believing Intel (INTC) is below $20 a share. I’m not wild about the stock. I’ve always thought it was a bit overrated, but the stock is where it was nine years ago. Posted by edelfenbein at 1:34 PM Big Profits On Wall Street Heavens to Murgatroyd! Wall Streetistan is swimming in profits. Thanks to heavy trading volume and a flurry of M&A activity, Wall Street firms are reporting ginormous earnings. The profits are so high, even Wall Street itself is surprised. First up was Goldman Sachs (GS) which floored the market on Tuesday. Goldman’s net income soar 64% to $2.48 billion. No one saw that coming. Funny thing, one of the little ironies of Wall Street is that the investment houses are the hardest businesses to read. So whatever it is Goldman does behind those doors, they’re doing a heck of a lot of it. Put it this way, Goldman made more coin last quarter than it did during all of 2002. The company’s asset management business (think, hedge funds) doubled. Goldman’s crushed Wall Street’s forecast by 54%. This was their third straight record quarter, and the company raised its dividend by 40%. Yesterday, Lehman Brothers (LEH) followed up with another blowout report. Actually, I feel a little sorry for them since Goldman had set the bar so high. Lehman had record earnings of $1.09 billion. Excluding an accounting charge, earning-per-share came in at $3.50, a 26.8% increase over last year’s first quarter. That easily topped Wall Street’s expectation of $3.17 a share. Although, the stock sold off a little at first, so I’m not exactly sure what the real expectations were. For the past several years, Lehman has been the shining star of the big houses. The company is traditionally known as a bond house, but Richard Fuld, the CEO, has worked to diversify their business. Plus, he’s probably noticed that the yield curve doesn’t exactly curve anymore. Then Bear Stearns (BSC) said this morning that it's also making some serious cash. Wall Street was looking for $2.95 a share. BA! Bear Stearns made a cool $3.54. Profits jumped 36% to $514.2 million. But not everything is great for Bear this morning. There's also the little issue of the $250 million fine for fraudulent market timing and late trading of mutual funds. According to NYSE Regulation, the exchange's regulatory arm, Bear Stearns engaged in a pattern of deceptive market timing and late trading of fund shares from 1999 through 2003. The trades were designed to take advantage of the time between the markets' closing and the new share values posted by mutual fund companies. Morgan Stanley (MS) will report is earnings next week, and Merrill Lynch (MER) will follow in April.
Posted by edelfenbein at 10:34 AM Buy List Update Now that we're winding up the first quarter, I thought this would be a good time to look at how well our Buy List has done. If you're not familiar with our Buy List, this is a list of 20 stocks that I select each year and start tracking on January 1. The hitch is that the list does not change all year. So I'm stuck with the good, the bad and the ugly. I do this to show investors that you don't need to do a lot of trading to be a successful investor. So how well are we doing? The good news is that we're up slightly for the year. The bad news is that we're trailing the market by nearly 2%. We were slightly ahead of the market through mid-February, but this latest surge caught our stocks a bit flat-footed. Here's how our stocks have done:
Fair Isaac’s (FIC) troubles started just two days ago, but Medtronic (MDT) and UnitedHealth (UNH) come in at #18 and #19. In fact, there’s a good deal of space between them and #17. So much for safety with size! MDT and UNH are two of the largest stocks on the Buy List. While I'm a very competitive person, I'm not ready to panic just yet over trailing the S&P 500. Given the short time period, our performance to date is completely normal. I still see lots of great bargains on the list. Dell (DELL) below $30 is a good buy. I'm in shock that Bed Bath and Beyond (BBBY) cracked $37 yesterday. Fiserv (FISV) and Harley-Davidson (HDI) are both good buys. The only stock I'm leery of is our best-performing one. Expeditors (EXPD) is a great company, but it looks a wee bit rich at this price. As always, my advice is to buy and hold great companies. Don't worry about oil or moving averages or the Federal Reserve or whatever else we're being told to worry about. Worry about your friends and family. Our Buy List stocks are terrific companies. The great Benjamin Graham said that the market acts like a voting machine in the short term, but a weighing machine in the long term. The voice of reason is quiet, yet persistent. Posted by edelfenbein at 5:58 AM March 15, 2006See What $1 Million Looks Like All 899 square feet. One bedroom and one-and-a-half baths.
On a related note, Google (GOOG) closed at $344.50 today. Posted by edelfenbein at 4:54 PM Sherron Watkins Is No Whistleblower Sharron Watkins is ready to take the stand at today’s Enron trial. She’s become a mini-celebrity due to her role as the brave whistleblower inside Enron. Watkins was even named one of Time’s "Persons of the Year," along with two other female whistleblowers. We even had to endure articles asking us if women are really more honest than men. Unlike the other two women (Cynthia Cooper and Coleen Rowley), Sherron Watkins is no whistleblower. All she did was write an anonymous letter to Ken Lay. She didn’t go to the media or regulators, and she never followed up. You can read the memo here. In it, you can see that she’s not only not a whistleblower, she was actually concerned that others might blow the whistle. I’ll politely skip over the issue of Time, owned by what was once known as AOL Time Warner, pointing out the problems of creative accounting. Dan Ackman sums up what Watkins really did: A whistle-blower, literally speaking, is someone who spots a criminal robbing a bank and blows a whistle, alerting the police. That's not Sherron Watkins. Don’t feel too bad for her. She already had her $500,000 book deal. Posted by edelfenbein at 2:24 PM Cyclical Index Follow-up I wrote too soon about the Morgan Stanley Cyclical Index (^CYC) (see here). The cyclicals are having a huge day compared with the rest of the market. The CYC is up 1.04% while the S&P 500 is down 0.05%.
Posted by edelfenbein at 12:33 PM Harley Grows Up
Legendary hogmaker, Harley-Davidson (HDI), is facing a mid-life crisis. How do you market a plaything for older white guys to a mass audience? As the Baby Boomers who transformed Harley's rumbling, lumbering bikes from countercultural totems into American icons enter their senior years -- the leading edge of the generation is turning 60 this year -- they're increasingly in the market for knee and hip replacements (Biomet!), not Harley's notoriously bone-shaking bikes. Here are Harley's sales and earnings for the past ten years: Year...........Sales (mil).........EPS Not a bad trend. Wall Street is expecting 2006 EPS of $3.72 on sales of $5.6 billion. The stock is currently going for about 13 times this year's estimate. Posted by edelfenbein at 11:22 AM Fair Isaac Roundup Yesterday, shares of Fair Isaac (FIC) were knocked down on the news that three credit-reporting companies are creating a rival credit scoring system to Fair Isaac’s FICO. So far, I’m far from convinced that this new system is a serious threat to Fair Isaac. The Wall Street Journal quotes Fair Isaac’s CEO, Thomas Grudnowski, who summed up the situation nicely: The new VantageScore system developed by the three bureaus competes with the FICO score system developed by market leader Fair Isaac Corp. of Minneapolis, whose proprietary credit-scoring system is used by 80% of the 50 largest banks in the U.S., according to Thomas Grudnowski, chief executive officer of Fair Isaac. About 75% of mortgage-loan originators use Fair Isaac's FICO scores in their underwriting process, according to Doug Duncan, chief economist of the Mortgage Bankers Association. I like the way the company is responding. MarketWatch quotes Ron Totaro, a Fair Isaac veep: But Fair Isaac's Totaro says lenders face significant hurdles in switching to new score models. Yes, it's not so easy to kill the king. Here’s Grudnowski again, this time in Business Week: Fair Isaac Chief Executive Tom Grudnowski said in an interview that FICO scores are deeply embedded in the way lenders evaluate loan applications. The biggest challenge for the credit bureaus, he says, will be to prove that their score is so much better that it justifies ripping up the way they do things now. Says Grudnowski: "There's got to be a really compelling reason to convince an institution to change." There are also anti-trust concerns. I’m not so sure three companies can get together so easily to take on a market leader. The stock is below $37 this morning. I'll gladly buy more if it goes any lower. Posted by edelfenbein at 10:25 AM The Middle East Markets Get Pummeled Some people think the Middle East is living in another century. Well, the region apparently just arrived at 1929. The stock markets across the Arab world dropped dramatically yesterday. The Dubai Financial Market dropped 11.71%, which is eerily similar to the 11.73% that the Dow lost on October 29, 1929. Since its January high, the Dubai index is now off over 44%. But the good news is, they don't run our ports! I don't mean to say "I told you so," but I did, in fact, tell you so four months ago. (Dubai: Do Sell). This is a good time to remember that there’s an interesting correlation between market crashes and the largest buildings in the world. The Empire State Building went up just as our market crashed. The Petronas Towers were built as the Asian Tigers fell apart. The World Trade Center and Sears Tower accompanied the crash of the early 1970s. Even the Nasdaq’s shiny new office was opened just before its bubble burst. And it's not just Dubai. The pain is being felt all across the region. Since February 25, the Saudi Index is down 28%. According to Bloomberg: "Finance Minister Ibrahim al-Assaf said his government won't intervene to stop the slide, the Saudi-owned television station Al-Arabiya reported." So the state-owned media is telling us that the state won't intervene in the markets. Somehow, I'm not relieved. In Egypt, the government is working to prop up shares. The main index there, the CASE 30 Index, has doubled in each of the last three years. The index dropped 5.9% yesterday. The Kuwaiti index is down 17% since February 7, and there have been protests for the government to do something. For all the pain of a market crash, I'd like to believe that a financial crisis is an important step towards democracy. I even found a very sensible editorial against government intervention here. I hope the authorities behave reponsibly like a mature democratic country would, and not do anything dumb or silly to play upon public anger. Posted by edelfenbein at 7:32 AM Credit Derivatives Market Expands to $17.3 Trillion From Bloomberg: Credit-default swaps, which pay compensation in the event of borrowers defaulting on their debt, expanded 105 percent in the full year, leading an increase in the $236-trillion market for derivatives, or contracts based on underlying assets. The market's growth was slower than 123 percent increase in 2004, ISDA said in a report today at its annual meeting in Singapore. Weeks or months? Posted by edelfenbein at 6:13 AM March 14, 200657-Month High The S&P 500 closed at 1,297.44, it's highest close since May 22, 2001. We just nipped out the January 11, 2006 high of 1,294.18. The Russell 3000 (^RUA), which is an even broader index, closed at its highest level since January 30, 2001. Going even broader, the Wilshire 5000 (^DWC) closed at its highest level since November 8, 2000. All told, the S&P 500 was up 1.04% and it was led by the cyclicals. The Morgan Stanley Cyclcal Index (^CYC) was up 1.58%. The Buy List was up 0.60% which badly lagged the overall market. The main culprit was Fair Isaac (FIC) which was down 6.6% on news of the new credit scoring system. Posted by edelfenbein at 4:02 PM Jay Walker on Technical Analysis Jay Walker has a smart new investing blog at Confused Capitalist. Here he nails a well-known technician. Here's a recent prediction by a technical analyst with a national audience, relating to a security then priced by the market in the $69-$72 range for about two weeks ... get ready ... here it is .... Whenever I read technical analysis it always sounds like "this trend will continue what it’s doing until it stops what it’s doing...and that’s a reversal...unless, of course, it reverses again." When in doubt, I just follow the blue line. Posted by edelfenbein at 3:35 PM Agencies Adopt New Credit Scoring System One of my favorite Buy List stock, Fair Isaac (FIC), is down sharply today on the news that the nation’s major credit bureaus have created a new credit-scoring system. Equifax Inc., Experian and TransUnion LLC, a unit of Britain's GUS Plc, in a statement said they adopted the "VantageScore" in response to "market demand for a more consistent and objective approach to credit scoring." Shares of FIC are currently down about 8.6%. Posted by edelfenbein at 2:59 PM Looking at Cyclical Stocks One of the market stats I like to keep an eye on is how well the Morgan Stanley Cyclical Index (^CYC) is doing relative to the S&P 500 (^SPX). The cyclical index is made up of stocks that are most sensitive to the business cycle. It’s important for investors to know if their stocks are cyclical or non-cyclical businesses. Some businesses see their earnings soar or crumble solely due to where we are in the economy. Probably the best example of this is the homebuilders. Even the worst homebuilder makes money when times are good. But when the housing market dries up, it does so dramatically. In fact, the real key to these businesses is working your way through the rough patches. Energy is another good example. To get my reading, I simply divide the cyclical index by the S&P 500 and this gives me a very rough gauge of how well the economy is doing. I also like this ratio because it follows very definite trends (see the chart below). For example, the cyclical index bottomed out at 0.308 on September 21, 2000 and hit its recent peak at 0.651 on December 28, 2004. That means that cyclical stocks did more than twice as well as the rest of the market. I’m not bright enough to pick the tops of the bottom of this cycle (I’d be filthy rich if I knew how!), but I like to know where we are in the cycle. Since the ratio hasn’t made a new high in over a year, I’m inclined to think that we’re now in the downswing of the economy. The last such period lasted for nearly 6-1/2 years. I should add that following this index gives you lots of false tops and false bottoms. Cyclicals zoomed in April 1999, but it still wasn’t the bottom of the cycle. Also, cyclicals were hit hard when the market reopened after 9/11, but the cycle still has three years to go. Cyclical stocks generally outperform the market when the market is rising, so you get a double whammy from owning cyclicals. To be honest, I’d rather know when the tops of bottoms of this cycle |
