|
||||||||
|
|
|
|
|
|
|
|
|
|
« June 2006 | Main | August 2006 » July 31, 2006The Midday Market The markets are mixed so far. Energy stocks are up a bit, and financials have pulled back. The yield on the 90-day T-Bill has crossed over the 5-year yield which I don't think had happened before. Expeditors International (EXPD) is set to report earnings tomorrow. After having a great first half, the stock has been very volatile recently. Posted by edelfenbein at 11:28 AM July 28, 2006Economy Grew By 2.5% in Q2 The govenment just reported that GDP grew by 2.5% for the second quarter, which is less than half the rate of the first quarter: The second-quarter's performance -- which reflected the bite of high energy prices and rising interest rates on people and businesses as well as a cooling in the once red-hot housing market -- was weaker than the 3 percent pace analysts were forecasting. Posted by edelfenbein at 9:15 AM July 27, 2006Your Soft Landing Survival Guide Talk of a soft landing is very in right now. It's the new gay. No wait...I think it might be the new black. Actually, I'm not really sure. Either way, it's here, get used to it. Even Jeremy Seigel has jumped on the Soft Landing Bandwagon. This got us to thinking, how has the market behaved during previous soft landings? The problem is, true soft landings have been quite rare. Many landings start out soft, and become hard very fast (my apologies for the wording of that sentence). By my count, there have been three successful soft landings of the past 40 years. The first was in 1966, then again in 1986, and again in 1995. Here's a graph of the 10-year Treasury yield along with the 90-day yield going back to the early 1960s:
As always, I pass the graphics savings on to you the customer. The 1966 case is probably the most relevant to us today. The country was at war. It was a mid-term election year. Short-term interest rates had been climbing for some time, and the yield curve flattened out in January in 1966. Short-term rates continued to head higher and didn’t peak until September. Remarkably, the economy wobbled but didn’t go under. Real GDP grew by 4.3% in 1966, 2.5% in 1967 (including a flat second quarter) and ramped up to 4.9% in 1968. It wasn’t until late-1969 that the economy finally started to break. The stock market, however, had a painful time in 1966. Stocks peaked on February 9, shortly after the 90-day yield first caught up with the 10-year yield. At its high point, the Dow came within 5 points of 1,000, although it wouldn’t close above the millennium mark for another six years. By the low point on October 9, the Dow lost 25% and the S&P 500 dropped 22%. This was a classic bear market. I think the outlook for stocks is far better today than it was 40 years ago. P/E ratios have been coming down, and the Fed is already talking about calling off its rate increases. Starting from January 10, 1966 (roughly when the yield curve first became flat) and measuring one year out, the best industry groups were Hardware (18.9%), Books (17.3%), Gold (15.2%) and Insurance (7.85). The worst were Health (-66.2%), Software (-39.3%), Textiles (28.8%) and Chemicals (23.4%). In 1986, it was still Morning in America, although real GDP growth had been dropping from its blistering levels. The economy grew by 5.6% in 1984 and 4.3% in 1985. By 1986, the economy grew by just 2.8% (1.4% in the second quarter) and a recession seemed possible. Once again, it was a mid-term election year. Just like 1966, the party controlling the White House was rebuked at the polls. The slowdown, however, was temporary and the economy accelerated again. In 1987, the economy expanded by 4.5%. Despite the market crash, the economy grew by another 3.7% in 1988. The major difference between now and then is that the yield curve never got anywhere close to inverting. Long-term bond holders were still not convinced that Paul Volcker had won the war against inflation. The top-performing groups of 1986 had a definite defensive bias; Tobacco (50.5%), Drugs (35.7%) and Boxes (35.4%--really, that’s what it says "Boxes"). The worst groups were Health (-15.1%), Hardware (-8.6%) and Aerospace/Defense (-7%). It’s interesting to see that Hardware went from best to worst, but Health is still at the bottom. In 1994, the Federal Reserve had raised interest rate very aggressively. By 1995, the economy began to feel the squeeze. Real GDP growth was just 2%, less than half the rate of the year before. The economy was particularly weak in the first half of 1995 when it by 1.1% in the first quarter, and 0.7% in the second quarter. Since long-term yields climbed with short-term rates, the yield curve never formally inverted. All ten S&P 500 sectors had a good year in 1995: Healthcare.............54.50% I think history shows that defensive stocks are a good place to ride out a soft landing. You're protecting yourself against the most severe losses, and there's a good chance for decent capital gains. Posted by edelfenbein at 6:03 AM July 26, 2006Earnings from Varian and Fair Isaac After today’s close, Varian Medical (VAR) reported earnings of 41 cents a share, which was above the Street’s forecast of 38 cents a share. The company also raised its outlook for this year's growth to 18%-19%. Fair Isaac’s (FIC) earnings fell from 53 cents a share to 40 cents a share. That included charges of 15 cents a share, but it was still below expectations of 42 cents a share. This was a very disappointing quarter for FIC. Respironics (RESP) will report its earnings tomorrow. Posted by edelfenbein at 9:31 PM Jeffrey Saut on War and Stocks Whatever the outcome, our sense remains that the various markets will revert to a focus on the issues evident prior to the recent hostilities. Those issues remain a softening real estate market, rising interest rates, high energy prices, inflation, a weakening dollar, P/E multiple compressions, waning earnings momentum, weakening consumer spending, flat wage growth, and declining GDP momentum. And to that GDP point, it is worth nothing that while we have a healthy distrust of the government’s measuring metrics, the one thing you can trust is tax receipts. And surprisingly, tax receipts are growing at around 10%. Ladies and gentlemen, 10% growth in tax receipts just does not “foot” with 2.5% GDP growth. “Somebody” is lying! Either tax receipts are getting ready to collapse, or the economy is going to continue to surprise on the upside. If economic strength is the “call,” then while the Fed may pause at its August meeting, it is certainly not done with its parade of rate ratchets. If, on the other hand, the economic slowing is about to accelerate, the concurrent loss of earnings momentum is not a particularly pleasant environment for stocks. Here's a table on how the market has reacted during different wars (FactSet provided the data). Posted by edelfenbein at 3:30 PM Chart of the Day The market has been shifting out of consumer discretionary stocks and into consumer staples stocks. Here's a chart of the Staples ETF (XLP) against the Discretionary ETF (XLY):
Posted by edelfenbein at 3:13 PM Executive Pay Disclosure The SEC voted today to require companies to provide more detail about executive pay, including perks. As you may know, I yield to no one is bashing the SEC and tedious regulations, but I honestly can’t get too worked up about this one. If anything, it will show shareholders that executive pay at most large corporations is a very tiny amount of overall expenses. It sure gets people upset, but it's not what's hurting most businesses. Actually, I wouldn’t mind seeing companies go a step further and provide their executive pay in per-share terms. For example, Stanley O’Neal, the CEO of Merrill Lynch, received a very generous stock options grant of $14 million just a few days after 9/11. To be sure, that’s a huge amount of money. But in per-share terms, it works about to roughly 1.5 cents. Since the time of the options grant, Merill’s stock is up $34 a share, which could also be called 3,400 pennies. Are Merrill's shareholders demanding that 1.5 cent back? The SEC did not adopt a rule which would require disclosing the income and perks of a company's highest-paid employees. This became known as the "Katie Couric" rule. Companies complained that revealing the income of celebrities could damage competitiveness. Also, just think of the catfights that would ensue if one actress knew she was being paid less than another. We just can’t have that happening. Although the final rule dropped the "Katie Couric" requirement, the SEC will seek comment on a less-sweeping approach that would target pay to policymakers at larger companies and their subsidiaries, excluding most professional athletes, television and film personalities, salesmen, traders and investment bankers. As in the original plan, the revised approach calls for identifying highly-paid non-executives by job title, rather than name. Two things. First, I’m sure that many investment bankers are the highest-paid employees at many conglomerates and financial services firm (talk about catfights). Also, no matter what job title they use, don’t you think we’ll be able to identify which one is Katie? To combat "backdating" and other abuses in awarding stock options, the SEC will require option grants to be disclosed clearly in tables showing the fair value of the option grant. The closing market price of the stock on the grant date must be shown if it is higher than the option's exercise price, along with the date the company's directors awarded the options if it is different than the grant date of the options. If the exercise price of options is different from the closing market price on the grant date, the company must describe its method for determining the exercise price. Again, I really don’t have a problem with this; the more info the better. But I hardly see how this “combats backdating.” Unless the boards has specified it, back-dating is already illegal. Posted by edelfenbein at 2:54 PM Daniel Gross on the HCA Deal From Slate: Big business deals usually aren't ironic, but this one surely is. HCA, a firm founded by the family of the Republican Senate majority leader, Bain, a firm whose founders include Massachusetts governor and GOP presidential aspirant Mitt Romney, and KKR, a firm run by Henry Kravis, a major Republican donor, are betting on the continued expansion of government. HCA's sale is essentially a $33 billion investment in the idea that government will take an even bigger role in health care. As Les Funtleyder, health-care strategist at Wall Street firm Miller Tabak + Co., put it this morning, "[T]he buyout firms are making a leveraged bet on an improving economy and the prospect of universal health care." There’s also the role of Sarbanes-Oxley and nuisance shareholder lawsuits. Posted by edelfenbein at 11:24 AM Greenspan Was Right Here's a headline you don't see often: "Greenspan Was Right." Bloomberg is coming to the defense of Greenspan's support for derivatives. The former chairman of the Federal Reserve has been saying since 2002 that derivatives -- financial agreements used to bet on everything from bond prices to weather patterns -- actually reduce risks by making financial markets resilient to shocks. He told a Bond Market Association gathering in New York in May that derivatives are the most significant change on Wall Street ``in decades.'' Posted by edelfenbein at 11:09 AM July 25, 2006Bernanke's Financial Disclosure
Just as I suspected, he's rich: The chairman's financial disclosure form, released Tuesday, showed that he's a millionaire, with holdings last year in no-frills U.S. Treasury securities, Canadian Treasury bonds (???), stock and bond mutual funds and two annuities. Posted by edelfenbein at 11:40 PM S&P 500 P/E Ratios By Sector Here's a colorful chart. This is what the Price/Earnings Ratios have done for the last 18 months for the different sectors of the S&P 500:
While the overall market's earnings multiple has fallen, it hasn't been the same across different sectors. Notice how far Healthcare (the purple line) has fallen. It used be to second only to tech. Now it's right in the middle. Financials, which are still very low, have remained pretty steady. Posted by edelfenbein at 6:31 PM The Market Today Today was a good day for our Buy List. Fourteen of our twenty stocks rose, and the average stock climbed 0.81% compared with 0.63% for the S&P 500. The big star today was Brown & Brown (BRO) which jumped nearly 12%. Sheesh, it’s about time! The little insurance stock had been pulling back since the middle of April. Yesterday, BRO reported earnings of 32 cents a share, three cents more than estimates. Alistar Barr at MarkeWatch noted that BRO has benefited from the recent turmoil in the Florida insurance market. Medtronic (MDT) also had a good day. The stock rose $1.62 or 3.4%. I just don’t see how Medtronic can be 18% off its high. We had two more earnings reports after the close. AFLAC (AFL) just announced very good earnings. The company’s operating earnings came in at 75 cents a share, four cents more than estimates. The dollar/yen exchange rate nipped off two cents a share. However, the company warned that growth from Japan will be Also, Fiserv (FISV) reported earnings of 63 cents a share, three cents more than expectations. The company also bumped up its full-year forecast to $2.48 to $2.54 a share from the earlier range of $2.46 to $2.53 a share. Posted by edelfenbein at 4:47 PM Lagging Small-Caps Small-caps are having a big day today. In fact, that's one of few areas of the market that is convincingly higher. But that's not how it's been for the past few months. After a spectacular run, small-caps have been feeling the most pain in this market. This chart shows the Russell 2000 (black line) against the S&P 500 (gold line):
This is a big change from the previous six years. It's been one long small-cap party. From April 8, 1999 to April 19, 2006, the Russell 2000 gained 94.7% while the S&P 500 lost -2.5%. Posted by edelfenbein at 12:40 PM Second-Quarter GDP Report This Friday, the government will report how much GDP grew in the second quarter. I’m curious what this report will say because I think it will be far stronger than most people realize. The consensus on Wall Street is that the economy grew by 3% for the second three months of the year (this is after inflation). Speaking for myself, I would be surprised if GDP growth comes in any less than 3.4%. The economy has grown pretty impressively for the last three years. The annualized growth rate is almost exactly 4% (3.997%). That’s faster than the 3.81% growth rate from 1998 through 2000. The fourth quarter of last year was a dud, probably due to Katrina, but we’ve apparently shaken off that slowdown. For the first quarter, the economy grew by over 5.6%. Once the economy gets moving, it doesn’t often go off the rails so quickly. I should also mention that the GDP report will be updated twice more, and these revisions can be quite big. In fact, I wouldn’t mind seeing the Bureau of Economic Analysis ditch the early reports. I’d rather get good numbers later than bad ones early. The GDP report will be released this Friday at 8:30 am. Posted by edelfenbein at 10:24 AM July 24, 2006Brown & Brown Reported Earnings of 32 Cents a Share Brown & Brown (BRO) earned 32 cents a share for the second quarer compared with 27 cents last year. Sales jumped 12.7% to $220.8 million. J. Hyatt Brown, Chairman and CEO, noted, "We had a very good quarter. We are very pleased with the 6.8% internal growth rate of our core commissions and fees revenue. In fact, all but one of our seven business operating units showed improvement in their internal growth rates over the previous quarter. We are optimistic about the continued growth, development and strength of our company." Posted by edelfenbein at 5:22 PM Blogger Sentiment Poll The excellent Ticker Sense has started a Blogger Sentiment Poll. I've been invited to participate along with several others stock bloggers. Here's the latest:
Blogger currently have a slightly bearish outlook for the next 30 days, which seems about right. Posted by edelfenbein at 1:04 PM Brain Teaser Here’s a fun puzzle I found at Cafe Hayek, via The Stalwart: An American tourist goes to a remote island for a vacation. The natives live by a barter system-they have no money. When the tourist tries to pay for his lodging with a check, the owner laughs at first, but then decides that the design on the check is quite attractive and agrees to accept the check in return for lodging. This happens again when the tourist pays for food and some native artwork. The checks are never cashed. They begin to circulate on the island as money, replacing the barter system that had existed before. What do you think? My thoughts after the jump.... As Milton Friedman said, “there’s no such thing as a free lunch.” Well, the same goes for island vacations. The neat part of this is that it causes you to rethink how you naturally think about money. Isn’t it funny how these stupid, backward, gullible natives trade around pretty paper as if it has real value? Ooh, look! Pretty paper!! BWHAHAHAHAHA (Long Silence) Hey, why is everyone looking at me like that? Um, we also barter non-cashable checks every day. Ours also have really pretty designs, complete with dead presidents. That’s right: A paper dollar is nothing more than a “check” drawn against the central bank. A dollar is never “cashed” as you can no longer get any gold for it. It’s accepted because...it’s accepted. In the scenario above, the tourist is acting like a Federal Reserve with Bermuda shorts. It's really the same thing. So who’s the gullible native now? There’s a close real world relative to this. The Micronesian island of Yap is famous for its stone currency: Yap is notable for its stone money, known as Fé (see photograph at left): large donut-shaped, carved disks of (usually) calcite, up to 4 m (12 ft) in diameter (most are much smaller). The islanders know who owns which piece, but do not necessarily move them when ownership changes; their size and weight (the largest ones require twenty adult men to carry) make them very difficult to steal. There are five major types: Mmbul, Gaw, Ray, Yar, and Reng, this last being only 0.3 m (1 ft) in diameter. Their value is based on both size and history, many of them having been brought from other islands, as far as New Guinea, but most coming in ancient times from Palau. Approximately 6,800 of them are scattered around the island. As no more disks are being produced, this ceremonial money supply is fixed (Washington Post, 1984). The United States dollar is the currency used for exchange in Yap. Some of the stones are deep in the water, but as long as the islanders recognize them as money, the system works. When the Germans took hold of the islands, they tried to force the Yaps to work. Only when they put check marks on their stones, did the islanders respond. As the chores were completed, the Germans removed the marks. In other words, taxes can work the same way. When we talk about monetary “standards,” be it gold or silver or cigarettes in a prison, all of them are really misnamed. There’s no such thing as a gold standard. There’s only a human standard. Any standard is only as strong as people’s commitment to it. Now if you excuse me, I have to eBay some Beanie Babies. It’s amazing how much people will pay for this crap. Posted by edelfenbein at 12:56 PM Media Star If you caught Kudlow & Company on Friday, no, that wasn’t an imposter. It was really me! Thanks for all the e-mails. I was nervous, but once it started, it was a lot of fun. Here are some interesting numbers that I wanted to pass along. Right now, a one-year Treasury note is yielding 5.18%. That means you can “lock in” the equivalent of 563 Dow points for the next 12 months. The important point is, while doing this, you’re greatly reducing your market risk. Think about it. You can walk away from stocks right now, and say “enough of you.” You wouldn’t have to worry about oil prices or Hezbollah or elections, or any icky stuff like that. Those 563 points are locked in and it translates to a future Dow of over 11,430. Don’t worry. I’m not saying that investors ought to pull up stakes and head for the hills, but I want to show you how the markets work. There’s a constant battle going on between the stock and bond markets for your money. When bond yields creep up, and earnings growth slows, investors rotate out of stocks and gobble up bonds. When the opposite happens, investors drive stocks higher. Earnings growth has been impressive, and I think it will continue to be strong. But Price/Earnings ratios have been compressed. In fact, they’ve compressed and compressed, and compressed some more. That’s a rough environment for stock investing. It’s like a runner trying to fight a strong headwind. Even very profitable companies have seen their stocks flat line. But the reason I still like stocks is that earnings are projected to grow by 14.1% for this year, and 10.5% for next year. Plus, that 10.5% number seems a little low. This means that the Dow could advance by, say, 7% and P/E ratios would still have compressed. It’s never safe to expect earnings multiples to expand, but even if P/E ratios continue to fall, stocks can still beat bonds. The next thing to watch for is earnings guidance from companies for the third quarter. This week, six more Buy List stocks report earnings. Brown & Brown (BRO) reports later today. AFLAC (AFL) and Fiserv (FISV) are up tomorrow. Fair Isaac (FIC) and Varian Medical (VAR) follow on Wednesday. Then Respironics (RESP) on Thursday. Posted by edelfenbein at 6:46 AM Private Equity Strikes Again The HCA (HCA) deal is on again! I guess no one wants to be on the stock market anymore. Last week, the WSJ reported that the deal fell apart at the last minute. Now it looks like Bain, KKR and Merrill Lynch will offer $21 billion for HCA. The company is the largest hospital operator in the country. It was started by Bill Frist's father and brother, although the senator no longer owns any HCA stock. Private equity is up 77% this year, and I think it will continue. Companies are sitting on huge amounts of cash. Microsoft (MSFT) currently has about $34 billion in the bank, and ExxonMobil (XOM) has $36 billion. Posted by edelfenbein at 6:36 AM July 21, 2006Dell Delivers Another Profit Warning From Reuters: Dell Inc. slashed its outlook on Friday, warning that quarterly earnings would fall about 30 percent short of forecasts because of a slowdown in the computer market, driving its stock to nearly five-year lows. Posted by edelfenbein at 12:06 PM At Least the Brits Are Impressed The London Telegraph looks at U.S. corporate earnings reports for the second quarter, and is impressed: America is on track to record its longest unbroken run of profits growth with most of the country's biggest companies continuing to beat expectations in the unfolding second-quarter results season. Posted by edelfenbein at 6:40 AM July 20, 2006From the New York Times Conference Call Courtesy of Seeking Alpha: Peter Appert - Goldman Sachs Posted by edelfenbein at 7:42 PM It’s Earnings Time Three of our Buy List stocks reported earnings today. Here’s the rundown. Danaher (DHR) earned, after a few icky charges, 80 cents per share, two pennies more than estimates. The company also raised its estimate range for the year from $3.07 to $3.17 a share, to $3.15 to $3.22 a share. I never say I love a stock, but I’m in seriously like with Danaher. The company pegged third-quarter earnings at 77 cents a share to 82 cents a share. The shares gapped up to $65 this morning. SEI Investments (SEIC) earned 57 cents a share, also two cents more than estimates. The stock pulled back today, but it had a big day yesterday. The stock is our second-best performer year-to-date. Finally, Golden West Financial (GDW) earned $1.25 a share which was four cents below estimates. The stock is down, but there’s not too much to worry about. Since Wachovia (WB) announced the merger, shares of GDW have traded as a proxy for shares of WB. Wachovia, incidentally, reported earnings of $1.18 a share, three cents ahead of estimates. Posted by edelfenbein at 4:21 PM The Bambi Cam Marketwatch's tech writer, Bambi Francisco, is in France right now cycling behind the Tour de France. Check out these videos she made (here, here and here) from her helmet camera. Posted by edelfenbein at 12:41 PM Is the United States Going Bankrupt? “Come on little girl let your inhibitions run wild!" I’ve always admired that lyric. It’s not merely a malapropism, but it goes a step further. It means the exact opposite of what the songwriter intended. You have to admire that. I think of this because of the latest academic paper making the rounds. Laurence J. Kotlikoff is wondering if the United States is going bankrupt in his paper called, “Is the United States Going Bankrupt?” I think you pretty much know his answer right now. If you pay careful attention you’ll notice that the U.S. is perpetually going bankrupt. Yet strangely, financial crises always seem to happen somewhere else. Dr. Kotlikoff makes the sound point that when looking at our financial health, we ought to focus on future liabilities instead of current debt or cash flow. That's true. I can add an even better way to look at our financial health is to look at our credit-rating. While the credit rating agencies do examine our national debt, the ultimate rating agency does this every day—the free market. Think of the Treasury market as a national FICO score. The markets judge America’s fiscal health in the pricing of government debt. Despite all the dire predictions of looming disaster, interest rates on U.S. Treasuries are still quite reasonable. Not that long ago, we would have thought 5% T-Bonds were an impossibility. Now we're used to them. If we were really in serious trouble, wouldn’t that show up in Treasury prices? Maybe the market is just plain wrong. Yet investors all over the world are eager to lend us money, and that only makes our financial health even sounder. Kotlikoff cites a study by Gokhale and Smetters that pegs our “fiscal gap” at $65.9 billion. He then writes: “This figure is more than five times U.S. GDP and almost twice the size of national wealth.” Wait a second. If that’s true, then our national wealth is 2.5 times our GDP. In other words, we’re generating a return-on-equity of 40%. (Of course, this is outlandish, but it’s not my numbers.) If we have an ROE of 40% and we can borrow at 5%, doesn’t that mean the U.S. is dramatically underleveraged. Don't tell Congress. I'd rather not even discuss their inhibitions. These analyses usually focus on our looming debt, but they ignore the other part of the picture—our assets. This is what Gary Alexander wrote on this site earlier this year: Household wealth refers to household assets minus liabilities. In the Doomsday press, all you read about is the near-$10 trillion in household debts, but have you heard anyone quote the $61 trillion in gross assets, six times the debt totals, resulting in net assets of $51 trillion (61 minus 10). In the 2.5 years since the 2003 tax cut, per capita net worth has increased 16%, and the average household is now 27% better off than in 1998, in the middle of the stock market bubble. And U.S. household wealth has almost doubled since 1995. That's not counting business, which controls an $11 trillion "savings glut" of hoarded cash. As for me, I’ll stick with the free market’s judgment. Posted by edelfenbein at 11:55 AM Department of Irony Stephen Roach questions Ben Bernanke's credibility. This raises two important questions. 1. What the fuck? 2. No, seriously...what the fuck? For more on Roach, see "Wall Street's Worst Economist" and "Even Roach is bullish, so is it time to sell?" The answer to the latter question was yes. Roach mistimed the market perfectly. Again. Posted by edelfenbein at 7:12 AM Lost in Translation
The Washington Post provides this handy graphic detailing the market's and Bernanke's communication issues. Posted by edelfenbein at 7:03 AM I Totally Called Yesterday's Surge In Tech Stocks!
By Geoffrey Fox: You all think you're hot shit because you guessed that the dollar would continue to slide against the euro, but answer me this: Who totally called yesterday's 0.4 percent surge in technology stock valuations, in spite of their inflated P/E ratio? Who defied conventional wisdom and foresaw the late-afternoon rally after a morning of relatively tepid technology trading? Who is the fucking man? If you said "Geoffrey Fox," you are correct. It was yours truly, the NASDAQ maverick, the guru of guidance, the man who redefined outperform and reinvented rebound. Boo-ya! Posted by edelfenbein at 6:22 AM July 19, 2006The Ben Rally The stock market had a major surge today for the third time in the past five weeks. Today was our Buy List's best day of the year. We gained 2.5%. Here's the rundown: DELL...............5.29% Posted by edelfenbein at 5:05 PM UnitedHealth's Earnings UnitedHealth (UNH) posted earnings of 70 cents a share, two cents more than estimates. The company also guided higher for the year. UnitedHealth, the largest managed-care company in terms of revenue, is the first such provider to report each earnings season and is typically seen as a harbinger for the rest of the industry. UnitedHealth's steady gains in health-plan enrollment, higher premiums and still-moderate medical cost growth seemed to allay investor concerns that a price war among health insurers is breaking out anytime soon. The shares are up about 5% today. Posted by edelfenbein at 2:33 PM Earnings Champions The following stocks have had 10 straight years of increasing earnings: NVR (NVR) Notice a lot of names from our Buy List. Posted by edelfenbein at 2:16 PM Fed Blogging
This might be an Internet first but I'm live blogging Ben Barnanke's Humphrey-Hawkins testimony. In 1978, Congress passed the Humphrey-Hawkins Full Employment Act. Most of the bill’s original aims were stripped out, but one important development did come about. The chairman of the Federal Reserve is now required to testify on Capitol Hill twice a year. Before that, most Americans had little idea what the Fed was, what it did and who was in charge. Perhaps, they still don’t, but still, the Fed chairman must make twice-a-year visits to Congress. This usually happens once in the middle of summer and again in the middle of winter. Today is summer’s turn (and DC is in the midst of a blistering heat wave). Bernanke starts today in the Senate Banking Committee and tomorrow, he heads over to the House Financial Services Committee. The Chairman of the Banking Committee is Richard Shelby, a Republican from Alabama, although he started off his career as a Democrat. The hearings usually start off with some comments by committee members, then Bernanke’s testimony, and finally some questions from the senators. There’s also an accompanying report on monetary policy on the Fed’s Web site. The senator’s questions are often pretty embarrassing. The fact is, monetary policy is far less influential than many people realize. Sorry folks, but it won’t improve your golf swing. The members of Congress used to ask Alan Greenspan his opinion of everything. These guys are just bureaucrats—smart bureaucrats—but still bureaucrats. Jim Grant said that the Fed has two functions; set interest rates and give speeches. That’s about right. This testimony will receive particular scrutiny since it appears that the Fed's interest rate campaign is coming to an end. Or perhaps, it’s merely a temporary pause. Over the last two years, the Fed has raised the Fed funds rate by 0.25% for the 17 straight meetings. The rate has climbed from just 1% to 5.25%. We’re now at the point where the overnight rate is roughly equal to long-term rates. In other words, the yield curve is flat. The yield curve is vitally important to the financial community. When the yield curve is wide (short-term rates are below long-term rates), it’s easy for banks to make money. Just borrow from the Fed and buy long-term Treasury bonds. You keep the difference. In Vegas, this is known as the “vig.” When the yield curve narrows, or even inverts, it becomes much harder for banks to make money. Banks become far more selective in making their loans. Not surprisingly, an inverted yield curve is often a warning sign of a slowing economy. The futures maket indicates that Wall Street is evenly split on the Fed’s next move. Historically, the stock market loves declining rates and hates rising rates. It almost doesn’t mind the level, just the direction. The next Fed meeting will be on August 8, and I think a pause from the Fed could spark a rally. That’s why today’s testimony is so important. One of the problems of monetary policy is that to work, it has to be secret. So we want to know everything that the Fed is thinking, but please don’t tell anyone. The FOMC meetings are private. The minutes are released three weeks later, and the transcripts are released five years later. As a result, every public utterance is a potential clue for what Bernanke is thinking. A few weeks ago, he made some comments to Maria Bartiromo at a dinner party and it moved the market. I think he’s learned not to do that again. Here goes: 9:53: I made it! I’m in the (air-conditioned) Dirksen Senate Building. Two young aides are talking right by me. One asked the other if he went to see John Roberts yesterday. The guy said yes, and the first asked if it was “cool.” Apparently, it was. Yep, I'm in DC. 9:57: Dude, I totally got an awesome seat. Third row inside aisle baby. Benny will be like twelve feet from me. This is better than my first Dead show. This is so cool! (Wait...did I just write that?) 10:03: Benny is in the house! Dark suit. I guessed right. He’s sitting at the table and there’s like eight photographers snapping away in his face. He's right next to me. Turn on your TV. I'm the guy three rows directly behind him. Look, I'm waving. 10:05 Shelby has gaveled the meeting to order. It's showtime! 10:10: The senators are making their opening statements. Ugh. Here's something you don't see on TV. Senator Sarbanes is talking, but Senator Carper is yakking away with everyone around him. He's jumping all around. There are aides walking in and out all the time. Did you know that Congress is really run by aides who look 12 years old, and think John Roberts is cool? 10:24 Senator Bunning is reading his opening statment. He's really laying into Ben. He's "disappointed" with the rate hikes. Where's the inflation, says he. This is very strange because he's passionate but his public reading skills are extremely poor. 10:32 Elizabeth Dole is making her opening statement. She seems really nice. Eight GOP members showed up to just four Democrats. The Dems are taking turns criticizing the economy. 10:41: Senator Carper said that Bernanke is a rare witness who actually listens to the opening remarks. He said that cabinet members just look at their blackberries or read the paper. Ben is taking notes and everything. Such a good boy. 10:43: Ben has much less hair than I thought. That's not a criticism. Just something I noticed. 10:45: Dodd just showed up, now it's eight to five. By the way, senators now use charts to make their points. So you have a twelve-year-old aide hold up some big chart while you talk. Where do they make the charts? Is there like a Kinko's in the basement? 10:49: Now it's Benny's turn. This is from the Fed's Web site which seems to be following closely. The U.S. economy continued to expand at a brisk rate, on balance, over the first half of 2006. Spending in the first quarter, which was especially robust, was temporarily buoyed by several factors, including federal spending for hurricane relief and the effects of favorable weather on homebuilding. The pace of the expansion moderated in the spring, to some degree because the influence of these special factors dissipated. More fundamentally, consumer spending slowed as further increases in energy prices restrained the real incomes of households. In addition, home sales and new homebuilding dropped back noticeably from the elevated levels of last summer, partly in response to higher mortgage interest rates. Outside of the household sector, increases in demand and production appear to have been well maintained in the second quarter. Demand for U.S. exports was supported by strong economic activity abroad, and business fixed investment remained on a solid upward trend. Early in the year, as aggregate output increased rapidly, businesses added jobs at a relatively robust pace, and the unemployment rate moved down further. Since April, monthly gains in payroll employment have been smaller but still sufficient to keep the jobless rate steady. Ok, here's the money part: For inflation, the central tendency of the forecasts is an increase in the price index for personal consumption expenditures excluding food and energy (core PCE) of 2-1/4 percent to 2-1/2 percent over the four quarters of 2006; in 2007, the forecast shows a slower rate of 2 percent to 2-1/4 percent, which is similar to the rate of core PCE price inflation in 2004 and 2005. There's much more, but that gives you a feel. I'm surprised the Fed has such a bold prediction of slowing core inflation. Here's a chart I did last month of core and non-core inflation. The trend seems to be upward. 11:16: He's done. That was faster than I thought. Ben has a clean delivery. He strikes me as a no-nonsense guy. 11:18: It's question time! 11:37: Here's another thing you don't see on TV. Ben and the senators have this little clock thing in front of them with a light thing. The question time starts at 10 minutes with a green light and counts down. When the time hits one minute, the light turns yellow. And when time runs out, the light goes red. This seems to be rather liberally enforced. Sarbanes ran a full minute over. If I ran the committe, I'd have it like the Oscars and strike up the band when people run over. I can see Ben's clock right in front of me. Here, I'll wave again (did you see me?). 11:52: Yikes, my battery is dying. Let's just ignore the metaphorical implications. I'm going to power down for a few minutes. 12:23: I'm up again. Yuck, these questions are boring. I think everyone heree is worried about home prices. Now my stomach is growling. I hope nobody heard that. 12:37: We're done. Shelby just gaveled us out. 12:42: Wow! I just checked the market and we're rolling. The Dow is up 150! Benny's got to talk this way more often. Posted by edelfenbein at 9:40 AM July 18, 2006Death Cross for the S&P 500 The market is down for the fifth straight day:
The market has given back all of its gains since November. Since then, the Fed has raised rates an additional 125 basis points. Mark Anderson of Alt Energy Stocks notes that today's close could confirm a death cross--where the 50-day moving average falls below the 200-day moving average. On a side note, Death Cross would be a cool name for a band. Update: We just barely missed a Death Cross. The 50 DMA is 1264.487. The 200 DMA 1264.325. The 50 DMA has been higher than the 200 DMA continuously since November 2004. Since 1950, the 50 DMA has been higher than the 200 DMA for about 68% of the time. When it's higher, the S&P 500 grows by 7.24% at an annualized rate. When it's lower, the S&P 500 grows by just 0.95% annualized. Posted by edelfenbein at 3:30 PM The Advertising Slogan Generator Crossing Wall Street needs what every good organization needs, a slogan. So we've turned to the folks at Advertising Slogan Generator. Just hit refresh and a new slogan pops us. Here are some of our favorites:
Every Kiss Begins With Crossing Wall Street If Only Everything in Life was as Reliable as a Crossing Wall Street It's like they know us! Posted by edelfenbein at 2:34 PM 9/11 Options Part II Barry Ritholtz lays down a challenge to me and Professors Ribstein and Bainbridge. So Barry, but I won’t bite. Let me briefly restate my argument. I am not an apologist for these executives. Nor am I saying that they’re “fine human beings.” I am, however, a critic of the unfair accusations made against them in Saturday’s WSJ. It was highly unprofessional journalism. The article used stilted language and sloppy juxtapositions to create a sense that these were shadowy executives using illegal or unusual methods to profit off people’s misery. It wasn’t illegal. It wasn’t unusual, and some of them didn’t make money. In fact, the article later goes into detail explaining just that, which in my opinion, makes the journalism even worse. They introduce the charge and back away from it. That’s like saying, “they say he’s a wife-beater, which I don’t believe.” Then don’t say it. If you want to ban stock options, fine. If you want to call them greedy, fine. If you want to say that they’re lousy executives and don’t serve shareholders well, go right ahead. But it’s grossly unfair to imply that they profited off 9/11, or were uncaring to the suffering of the terrorist attacks. (Do you want an example of war profiteering? How about...paying to avoid military service and then selling shoddy guns to the army. Just like J.P. Morgan. About Richard Whitey, well…the less said the better. And Thomas Lamont, Ned’s great-grandfather btw, was rather a big fan of Mussolini. Not to mention, he drove Keynes nuts at the Paris Peace Conference of 1919.) Actually, I do own both Home Depot (HD) and UnitedHealth (UNH), so perhaps I do meet Barry’s challenge. What’s more, I’ve defended both positions on this site, and suffered the consequences. My Buy List is free for all to see. Were the actions of the executives slimy? Probably. Evil? No. Update: Here's Professor Ribstein's response. Also, John Carney has a vote tally at DealBreaker. Posted by edelfenbein at 1:57 PM The NASDAQ-to-Dow Ratio Every so often I like to look at the ratio of the NASDAQ Composite to the Dow 30. Traditionally, the Dow goes for about 5 times the NASDAQ, or a NASDAQ-to-Dow ratio of 0.2. As you can see from this chart, the 5-to-1 rule has held up surprisingly well for a long time:
If you have a sharp eye, you may have noticed that something seems...missing from the chart. Well, you are right. I cut out two-and-a-half years from the chart. Here’s what the whole thing looks like. That really shows you how crazy the NASDAQ got. At its peak, the ratio topped 0.5. Yet even after all that madness, the traditional range reasserted itself. As of yesterday’s close, the NASDAQ was going for 0.1896 of the Dow which is a bit below the heart of its long-term range. Posted by edelfenbein at 10:36 AM Yahoo Finance to Have Blogs Say goodbye to those unsightly wrinkles, Yahoo Finance is getting a makeover. This seems to be a niche where Yahoo is clearly kicking Google's ass. Here's a shocking stat: During the last week of June, Yahoo Finance had 108 times more unique visitors than Google Finance. Of courese, that's not an entirely fair comparison since Google Finance sucks. So what are the changes? Yahoo Inc. on Monday will unveil an upgraded version of its top-ranked financial information site that features new stock charting tools, improved investor chat rooms and financial video news. That's not all. The new Yahoo Finance will offer something that Google Finance already offers--blogs! Financial blogs will be added shortly as well, perhaps filtered by a third party. By offering a new reputation system that allows readers to rate the value of postings on its stock message boards, Yahoo has recently begun seeking to breathe life into the decade-old stock chat room phenomenon. Yes, I'm glad blogs are here to end that unpleasantness. It seems as if Yahoo Finance is moving towards the model pioneered by David Jackson’s excellent Seeking Alpha. A few months ago, Joe Weisenthal of The Stalwart (and DealBreaker and Techdirt) said that Yahoo Finance might as well go all the way and buy a brokerage. I think he’s right. If/When I become King of Yahoo Finance, these are the changes I’d make. 1. Get rid of the Motley Fool as a news provider. Or at least, make them provide real content. Look at “news stories” under a hot stock like Hansen Natural (HANS). Almost none of that is news. It’s mostly advertising for the Motley Fool’s paid content disguised as news. The frustrating part is that the Motley has excellent commentary. 2. Better charts. There’s a reason why I use Big Charts on this site. At a minimum, you should be able to use charts with customized dates. The “Rolling EPS” and “P/E Ratio” functions are also very good, although I think the EPS data at Big Charts is often a bit bizarre. (See here for an example). 3. Clean up the historical data. This probably isn’t Yahoo Finance’s fault but their data provider’s. There are several mistakes in the historical data for major indexes like the Dow and S&P 500. Posted by edelfenbein at 6:54 AM July 17, 2006Harley-Davidson's Earnings Were In line This will be a busy week for earnings. Harley-Davidson (HDI) leads off by reporting 91 cents a share which matches the Street's estimates. Motorcycle maker Harley-Davidson Inc. on Monday said second-quarter profit grew 3 percent, helped by double-digit growth of international sales. The shares are up in early trading. Posted by edelfenbein at 9:43 AM July 16, 2006Karl Marx the Artist Karl Marx’s unfinished masterpiece, Capital, is a disjointed and incoherent mess. But as Francis Wheen argues, that’s the point. Marx believed capitalism was a disjointed, incoherent mess. Don’t read the book as a work of economics, but read it as Marx intended—a work of art: Marx was a modernist avant la lettre. His famous account of dislocation in the Communist Manifesto - "all that is solid melts into air" - prefigures the hollow men and the unreal city depicted by TS Eliot, or Yeats's "Things fall apart; the centre cannot hold". By the time he wrote Das Kapital, he was pushing out beyond conventional prose into radical literary collage - juxtaposing voices and quotations from mythology and literature, from factory inspectors' reports and fairy tales, in the manner of Ezra Pound's Cantos or Eliot's The Waste Land. Das Kapital is as discordant as Schoenberg, as nightmarish as Kafka. Posted by edelfenbein at 12:37 PM July 15, 2006The WSJ Breaks a Pseudo-Scandal The Wall Street Journal has a front-page story today on how corporate boards awarded stock options to senior executives in the wake of 9/11. The story has the look and feel of uncovering some insidious corporate scandal. Look at the juxtaposition presented in the first two paragraphs: On Sept. 21, 2001, rescuers dug through the smoldering remains of the World Trade Center. Across town, families buried two firefighters found a week earlier. At Fort Drum, on the edge of New York's Adirondacks, soldiers readied for deployment halfway across the world. Not very subtle is it? The soldiers readying for deployment was nice touch. Those evil corporate plutocrats just couldn’t wait to profit off 9/11. But hold up, how exactly did those boards know that the options grants were, as the Journal points out, “bargain-priced”? The answer is, they didn’t (assuming the options were at-the-money). More importantly, they couldn’t have known. The grants were based on nothing more than faith in the future, which was hardly in overabundance at the time. It’s true that stocks nosedived when the markets reopened, but that doesn’t by itself mean the options were a bargain. After all, the market had already been falling and it continued to fall for more than a year. In fact, the S&P 500 was still below its pre-9/11 level nearly three years after the attacks (and, of course, those soldiers readying themselves). The article continues: A Wall Street Journal analysis shows how some companies rushed, amid the post-9/11 stock-market decline, to give executives especially valuable options. A review of Standard & Poor's ExecuComp data for 1,800 leading companies indicates that from Sept. 17, 2001, through the end of the month, 511 top executives at 186 of these companies got stock-option grants. The number who received grants was 2.6 times as many as in the same stretch of September in 2000, and more than twice as many as in the like period in any other year between 1999 and 2003. Before I get myself into any more trouble, let me make the usual disclaimers. If the executives back-dated their options against company policy, that’s fraud. Fine. Toss them away for good. But that’s not the issue here. As Larry E. Ribstein points out, this article arrives with the back-dating scandal to give the appearance of flowing from one river into a new branch. It’s not. Or, if the issue is the use of stock options. Fine. Let’s talk about that. But then, you have to address Congress’ silly law that caps the tax deductibility of salaries at $1 million. That’s what’s led to the soaring use of stock options. I say, let’s have that debate. The two sides of the WSJ can square against each other. Or, if the issue is corporate boards being the poodles of CEOs. Fine. I think that’s an important issue that needs to be looked at. But again, that’s not what this article is about. Instead, we get more juxtaposing: The 91 companies included such corporate icons as Home Depot Inc., Black & Decker Corp. and UnitedHealth Group Inc. It included two companies directly touched by the tragedy. Merrill Lynch & Co., across the street from the Twin Towers, lost three employees. On Sept. 24, Merrill granted its president options to buy more than 750,000 shares, at a price 15% below the pre-attack level. At Teradyne Inc. in Boston, an employee delayed a business trip until Sept. 11 to attend a son's soccer game and died on American Flight 11. Teradyne that month gave its CEO more than 600,000 options at a price enabling him to buy stock at 24% below its pre-attack level. I think we’re all agreed not to use Mr. Lillard as a PR spokesman. It may be flippant, but he’s got a point. This is exactly what was being said at the time, “get on with you lives, get on with your work.” If you recall, there was an urgency to open the markets as soon as possible. The Journal notes that the Merrill Lynch options were granted at a price 15% below the pre-attack level and for Teradyne, the options were 24% below the pre-attack level. Wouldn’t it also be true to say that the executive at those companies saw their share values drop by 15% and 24%? This also could have erased millions of dollars of previously granted options. The article doesn’t say, but in the eighth paragraph we learn: There's nothing illegal about granting options after the market plunges. (Oh!!). But acting so quickly after a national tragedy drove down stocks shows the eagerness of some companies to increase their executives' potential wealth. These grants also offer important new fodder for an already fractious debate over what constitutes the proper use of options in executive compensation. Let me see if I have this right. It’s not illegal. It’s not backdating. Although if it were, it’s definitely possible that it could be illegal assuming the possibility that it is legal is incorrect. And backdating, the thing it’s not, is going on now which is raising fodder which this adds to. Or perhaps this is the one raising fodder which adds to earlier fodder that’s already been raised. I’m really not sure. But they’re absolutely guilty of one thing—being unseemly. And rushing. And eagerness. I got it: They’re unseemly rushing towards their eagerness to increase their wealth. I mean, potential wealth. Those bastards! Sorry folks, but this is what options grants are all about. They have to be granted at some point. Some points will be better than others. There’s no guarantee. Despite barrage of indefinite pronouns, this is not “profiting off 9/11.” These were events caused by 9/11 but the executives had no assurance that it would make money for themselves or anyone else. Remember that Saudi prince guy who gave money after 9/11 and used the moment to denounce Israel. That’s abusing 9/11. Not this. Minutes after the bell rang Sept. 17 at the New York Stock Exchange, New York Mayor Rudy Giuliani, who'd attended the solemn reopening ceremony, told CNBC, "Everybody should step up to the plate right now and show the strength of the American economy." He added: "We depend on this. A lot of jobs and the future of America and the world rests on what happens here." This is truly a first. The WSJ is reporting on a scandal that’s not scandal involving profiteering that didn’t make money. (At least, not in Nardelli’s case). Wow, that is unseemly. This pseudo-scandal is that what went on didn’t “look right.” Essentially, Wall Street is accused of being gauche. Is this news to anyone? Of course they’re greedy bastards, it’s Wall Street. That’s the idea. Or as Professor Ribstein put it: One reason our markets were so resilient is because we had managers who were focused on money. Should they have been thinking only about how to fill the shareholders' wallets with the nasty stuff? So what we really want from our corporate executives is people who are greedy enough to be thinking about money after 9/11, but altruistic enough only to be thinking about how to make it for the shareholders? Aren't we getting a little picky? Exactly. The problem with the “how it looks” accusation is that it can be thrown around very easily. How long are we supposed to wait? What about last week? Or is that profiting off Hezbollah’s terrorist attacks on Israel? I fail to see how murdering civilians with Katyusha rockets affects the price of oil, but apparently, it does. Now there’s an unseemly juxtaposition for you. Update: Barry Ritholtz has a very different take here and here: "Brain cancer is too good for these people." Except he didn't call them "people." Stephen Bainbridge has more thoughts here. Posted by edelfenbein at 9:03 PM July 14, 2006What's Dragging Down the Market
The market is down for the third day in a row. Since July 3, the S&P 500 has lost close to 4%. This is a continuation of the selloff that began in early May. The recent downturn, however, has a very different flavor than inital correction. In the first part of the selloff (May 5 to June 13), the energy stocks were hit the hardest. Here's a chart showing the Oil Services HOLDRs ETF (OIH) in gold, compared with the S&P 500 (in black) and the Morgan Stanely Consumer Index (^CMR) in blue.
This what I wrote on June 13, (Dissecting the Bear): Since May 5, the S&P 500's market value has fallen by $807 billion. That's a nice chunk of change. Percentage-wise, it comes to -6.74%. The defensive sectors were pretty safe. But since July 3, the energy stocks have been doing well (i.e., not down a lot), while the rest of the market has been feeling the squeeze. Here's how the sector ETFs have performed from July 3 to this afternoon: Utilities (XLU)....................0.09% Tech and Materials are still lousy. Utes, Health Care and Staples are holding up OK, but energy has changed sides, going from laggards to leaders. Posted by edelfenbein at 1:12 PM Bill Miller's Streak in Danger Bill Miller, the manager of Legg Mason's Value Trust mutual fund (LMVTX), has beaten the market for the last 15 straight years. This year, however, isn't working out so well. Here's how the fund (black line) has performed year-to-date against the S&P 500 (gold line).
Unless Miller has a big turnaround in the second half of the year, he'll lag the overall market. At the end of March, his top holdings were Sprint Nextel (S), UnitedHealth (UNH), TYCO (TYC), AES (AES), Amazon (AMZN), Google (GOOG), JP Morgan (JPM), Qwest (Q), Aetna (AET) and Eastman Kodak (EK). Posted by edelfenbein at 11:48 AM Second-Quarter Earnings Preview Christine Arnold at Morgan Stanley is bullish on UnitedHealth (UNH). She’s expecting earnings of 68 cents a share and thinks the stock could trade at the high end of its five-year historical range once the options issue is resolved. That’s not all. Yesterday, Banc of America Securities upgraded Respironics (RESP) from neutral to buy. Here’s a look at our earnings reports due over the next few weeks: Harley-Davidson..........17-Jul.........$0.91 Posted by edelfenbein at 10:32 AM Investing in Yoga Instructors Here’s an interesting article from Bloomberg on the phenomenal growth of the school loan market. Sales of student-loan backed securities grew almost five times as fast as the $1.97 trillion asset-backed bond market last year, according to the Bond Market Association, a New York-based trade group of dealers and underwriters. Bankers are packaging anything that resembles student debt, including loans for college, primary school, tutorials for casino dealers in California and yoga instructors in Iowa. I didn’t know that in bankruptcy, you can wipe out your credit card debt, but not your school loans. Posted by edelfenbein at 9:28 AM The Bank of Japan Raises Rates For the first time in six years, the BOJ has increased interest rates. The overnight rate has been lifted from near-zero to 0.25%. The bank's decision means the end of deflation is near, said Prime Minister Junichiro Koizumi, speaking in Jordan. It's too early to discuss the timing of another rate increase, Tanigaki said today, adding that the government will closely watch the effect of the move. Today's decision was ``appropriate,'' Chief Cabinet Secretary Shinzo Abe said. Posted by edelfenbein at 7:18 AM Rosneft IPO Priced at $7.55 a Share Rosneft's offering will raise $10.4 billion. The company said in a statement that the pricing gives Rosneft a total value of $79.8 billion, a higher market capitalization than Russia's biggest oil producer, Lukoil. The shares are due to start trading next Wednesday in London and on Russian exchanges. Posted by edelfenbein at 7:13 AM July 13, 2006Dow -166.89 For the eighth time in the past nine weeks, the S&P 500 dropped by over 1.1%. That only happened once in the previous 29 weeks. The index is now 1.5% from its June low, Posted by edelfenbein at 4:20 PM To the Home Depot Haters Oh for the love of carbs, people. This Home Depot (HD) nonsense is getting out of control. I can’t believe what I’m seeing. The stock’s popularity is somewhere between Hamas and Diptheria, and it’s getting worse. In the less than three months, shares of HD have plunged over 20%. And the stock made another 52-week low today. Now there’s a lynch mob after CEO Bob Nardelli. He’s even getting blamed for things he’s had nothing to do with. To quote Hoover from Animal House: “They confiscated everything, even the stuff we didn't steal!” To be honest, I’ve never been terribly impressed with Nardelli. He was one of Jack Welch’s protégés at GE. Nardelli rose through the ranks at GE to lead its Power Systems division. He did a great job there but I think he’s a bit too rough around the edges to be the corporate face of Home Depot, or any other company for that matter. Perhaps that’s why Jack Welch passed him over to be GE’s next top dog. In any event, Home Depot jumped at the chance, and made him their CEO in December 2000. There’s an important point to remember. Nardelli didn’t start Home Depot. He was the rock star manager brought in to take over from the founder. Just because he thrived in the GE system, doesn’t mean he’ll be effective at a major company in an entirely different industry. In fact, it doesn’t make much sense at all. Sadly, the loudest protests concerns Nardelli’s pay. This is really a lame issue. Last year, he raked in $32 million, and over $120 million in the last five years. Yes, yes, I know. It would be great to see CEOs get paid the same as teachers. Give me a petition and I’ll sign it, but I’m not going to pretend that CEOs can be found on the cheap. The fight against CEO pay has probably caused shareholders more problems than the pay itself. In 1993, Congress capped the tax deductibility of salaries at $1 million, so CEOs fought back by issuing stock options. This led to companies slashing dividends payments which, in turn, increased the market’s volatility. Then we had the battle to expense stock options. Now we have the battle on back-dating, which in some cases, is perfectly legal. Chris Cox said that the 1993 law deserves “pride of place in the museum of unintended consequences.” Let’s keep the pay issue is proportion. Nardelli’s compensation last year works about to about 1.6 cents a share. This isn’t exactly soaking a $34 stock. The anti-Bob furor got even louder when the company said that it would no longer provide same-store sales figures. Again, I’d prefer to see this number. (Except that, Lowe’s (LOW) always creams HD’s same-store sales.) But when I hear these critics yell and scream, I don’t think they understand what Nardelli is trying to do. Let’s look at HD’s position from management’s point of view. They have a maturing retail business and strong competition from Lowe’s. The difficulty is that they’re running out of prime retail spots. So Nardelli is shifting HD’s strategy. If they decide to go to war with Lowe’s and play the game of “who can open up the most new stores,” Home Depot will lose, and lose badly. Remember what happened to Rite Aid? Instead, he’s doing something different. He’s focusing the business on commercial customers. This is a huge market segment, and it makes sense for HD to shift the battle to this front. I didn’t quite “get it” until HD made its bid for Hughes Supply. This was Home Depot’s largest acquisition in its history. Now I see how committed HD is. Plus, the company has been quietly snatching up several smaller wholesale suppliers, even one in China. Notice how they’re acting before the problems get worse. While, I’d prefer to see HD report the same-store sales figures, I understand why they're not doing it. It’s simply not going to be a key component of its business strategy. Last week, however, Nardelli back-tracked and told Maria Bartiromo that HD may go back to reporting same-store sales. The really big showdown came at the company’s annual meeting in May. This was a PR disaster. None of the outside director showed up. The meeting was just 30 minutes long, and Nardelli refused to answer any questions about his pay. Shareholder activists were furious and they urged shareholders to withhold their support of HD’s directors. In the past, the company has given the results of the votes at the annual meeting. Um...not this year. The company eventually said that 10 of the 11 directors saw over 30% of their votes withheld. That ain’t good. Of course, shareholders have another way of voting—they can sell, and that’s what’s been happening. But Home Depot is not like Dell. The company is still doing very well. In fact, Home Depot has beaten Wall Street’s estimate for the past few quarters. The company has also reiterated its earnings guidance. We’re not seeing those ugly earnings warnings that have hit so many others. In May, Home Depot said that it expects earnings growth of 10% to 14% this year, which translates to per-share earnings of $2.99 to $3.10. This means that HD is going for just 11 times this year’s earnings. That seems pretty darn cheap to me.
Posted by edelfenbein at 2:02 PM Dell Revamps Pricing Structure From the AP: Dell Inc. outlined plans Thursday to simplify pricing and reduce the number of mail-in rebates for consumers and small business as part of the computer maker's recent $100 million initiative to improve customer service. Beginning next month, Dell said it hopes to reduce the number of promotions per product line by 70 percent and the number of promotions for any single product by 80 percent within the next 18 months. The shares are back up to $22.50 (Woo!). Posted by edelfenbein at 12:20 PM Sterling Bancshares Investor's Business Daily looks at one of my favorite regional banks, Sterling Bancshares (SBIB): Sterling, with $3.7 billion in assets, focuses on Texas' three largest markets: Houston, Dallas and San Antonio. It has 26 branches in its home base area of Houston and seven each in the Dallas and San Antonio markets.
Posted by edelfenbein at 10:24 AM Tough Times for Apple and Dell? The market is down again today. The S&P 500 has fallen below 1,250, and oil is up to $76.30 a barrel—a new all-time high. There’s a lot of anxiety in the tech sector today as Dell (DELL) will announce its new pricing strategy at noon today. Business Week notes that there’s growing concern the computer industry is in for a bigger slump that previously thought: Some (analysts) are concerned price wars are imminent and that economic slowdown could crimp overall demand. "There's a softness in the market that's building," says Richard Shim, a senior research analyst at Interactive Date Corp. In the past two weeks, IDC cut its 2006 forecast for U.S. PC growth to 5.7%, from 6.8%. "In '04 and '05 there was tremendous growth. In a market that's as mature as this industry is, there's no way you can maintain those levels." Posted by edelfenbein at 10:16 AM July 12, 2006Enron Witness Found Dead On the day of Ken Lay's funeral, Neil Coulbeck was found dead in east London: A body discovered in a London Park has been identified as a banker reportedly questioned by the FBI in connection with the Natwest Three fraud case. Posted by edelfenbein at 2:25 PM CVS vs. Walgreen’s I’ve always been intrigued by the battle between Walgreen’s (WAG) and CVS (CVS). Both are great companies, and both have made lots of money for their shareholders. Walgreen’s, however, is definitely the Marcia to CVS’ Jan (we won’t even discuss Rite Aid’s Cousin Oliver). Thirty years ago, you could have picked up Walgreen’s stock for just 12 cents a share (that is, adjusting for seven 2-for-1 splits). Today, you’d be sitting on a 40,000% gain. Not surprisingly, WAG usually trades at a premium to CVS. But the question I’m always asking is, how much? Right now, WAG is going for 28.7 times trailing earnings while CVS is going for 21.6 times trailing earnings. So that’s a premium of 33%. Is that fair? Sometimes the premium has gotten as high as 100%. Last November I notice that the premium got to 50%, which I thought was way too large. I was right. Since then, shares of CVS have done fairly well, and they even made a new high today. WAG, on the other hand, slumped until May and has started to bounce back recently I think a lot of Walgreen’s premium is due to its consistency. If people know you can deliver the goods, they’ll pay extra for it. Coke (KO) is a great example of a consistency premium. For years, Coke was always slightly overpriced by most reasonable valuation measures. But since it always stayed overpriced, there was no harm. That is, until it stopped being so consistent. Today, shares of Coke are worth less than half of what they were eight years ago. Pepsi (PEP) is up about 30% and is at a new high today as well. Paying for consistency is another way of investing in risk. The problem with measuring risk is that it’s highly subjective. What I consider risky may not be to you. The “return” side of the equation is pretty simply. We should all be able to agree on what a 40,000% return looks like. As I like at CVS and Walgreen’s, I don’t see how the market can justify a premium any larger 15%. I’m still staying away from Walgreen’s. Posted by edelfenbein at 2:03 PM Vatican Reports Profit The Vatican (POPE) is raking it in: The Vatican on Wednesday released its best financial report in eight years, saying it had a surplus of 9.7 million euros ($12.4 million) in 2005 despite extraordinary costs of 7 million euros ($8.9 million) for the funeral of Pope John Paul II and the election of his successor. Cardinal Sergio Sebastiani, who heads the Vatican's office for economic affairs, called it "good news" as he presented the Holy See's annual financial statement after it was examined last week by international auditors and presented to Pope Benedict XVI. I'm raising the Holy See to a near-term outperform. Posted by edelfenbein at 1:58 PM Third-Quarter Performance of S&P 500 by Sector, 1990-2005 Since 1990, this is how the sectors of the S&P 500 have performed during the third quarter: Energy..............................1.8% Posted by edelfenbein at 1:52 PM Weighted Index Funds Vulnerable to Bubbles Letter to the Editor in today's Wall Street Journal: John C. Bogle and Burton G. Malkiel ("Turn on a Paradigm?" editorial page, June 27) accept that market-weighted indexes over-weight stocks that are overvalued and under-weight stocks that are undervalued, but dismiss the point altogether by referring to the weakness as temporary. |
