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« September 2006 | Main | November 2006 » October 31, 2006Guy Kawasaki Amanda Congdon has a fascinating interview with Guy Kawasaki, a Silicon Valley venture capitalist. The interview has a light-hearted tone, but his answers are very interesting. Here's part two. Posted by edelfenbein at 8:48 PM The Biggest Secret on Wall Street Here’s an investing secret that many Wall Street professionals know about, but few individual investors are in on. Promise not to tell anyone. OK, here goes. Most investors think the succesful investing is about buying shares in some company that’s about to invent the Eight Dimension. Sure, we all know the story about our neighbor's aunt's best friend who knew this guy who went to high school with one of the Google guys, and now he's like totally loaded. Goody for him, but that's not what investing is really about. In reality, some of the best profits can be made in the dullest of industries. In my view, the duller the better. A great example is insurance. For those who don’t know it, insurance can be insanely profitable. It's disgusting, really (I love it!). Think about it: Insurance is a low-risk business, it has tacit state protection (try driving a car without car insurance) and it can’t easily be replaced. Here’s how some insurance stocks have performed over the last 30 years: Progressive (PGR).................................................95,548% Meanwhile, the S&P 500 is up about 1,230%. I should add that I don't mean all insurance stocks are great investments. But the cream of the industry is about the best you can do. Oh, and I nearly forgot to mention Warren Buffett. Insurance forms the basis of his entire fortune. Over the last 30 years, Berkshire is up nearly 160,000%. Posted by edelfenbein at 1:10 PM Playboy Stock-Picking Contest With the end of October, I'd thought I'd update the 2006 Playboy Stock-Picking Contest. Right now Courtney Culkin, Miss April 2005, is in the lead. Her portfolio is up 47.01% for the year. Courtney's best stock is Steven Madden ("one of my favorite dress shoe brands") which is up over 120%. Amy Sue Cooper, the Cyber Girl of the Year, is in second at 28.96%. What impresses me about Amy's portfolio is that she actually gives good arguments for her selections. Amgen (AMGN), the world's largest biotechnology company, and Abgenix (ABGX), a company specializing in the discovery, development and manufacture of human therapeutic antibodies, announced that they have signed a definitive merger agreement under which Amgen will acquire Abgenix for approximately $2.2 billion in cash plus the assumption of debt. This merger could possibly benefit this company tremendously. I am a nurse so this only makes sense. That's beats a screaming bald man. Here's how the other contestants stack up. If I were participating, I'd be on top of Lindsey Vuolo and underneath Kara Monaco: Courtney Culkin...................47.01% Amy McCarthy is Jenny's younger sister. Posted by edelfenbein at 10:47 AM October 30, 2006Does This Look Irrational to You? Not to me.
Posted by edelfenbein at 3:37 PM Sysco's Earnings Sysco (SYY) reported earnings today of 37 cents a share, which beat Wall Street' consensus by a penny a share. Due to some accounting charges, net earnings fell to $189 million, or 30 cents per share. Also, Lindsay & Co. at Wall Strip take a look at Harley-Davidson (HOG). The stock is up about 40% from its June low. Posted by edelfenbein at 10:45 AM October 28, 2006How to Combat the Rise of Asia Gabor Steingart of Der Spiegel argues for a Trans-Atlantic Free Trade Zone: The two camps are divided between Europe and America on the one side and Asia on the other. But so far there has been no shouting, no bluster and no shooting. Nor have there been any threats, demands or accusations. On the contrary, there is an atmosphere of complete amiability wherever our politicians and business executives might travel in Asia. At airports in Beijing, Jakarta, Singapore and New Delhi red carpets lie ready, Western national anthems can be played flawlessly on cue -- and they even parry Western complaints about intellectual property theft, environmental damage and human rights abuses with a polite patience that can only be admired. The Asians are the friendliest conquerors the world has ever seen. Posted by edelfenbein at 12:41 PM October 27, 2006Beer by the Numbers From the AP: -- 1,409: The number of breweries -- ranging from brewpubs to national brewers -- operating in the United States. Posted by edelfenbein at 4:21 PM Third-Quarter GDP Today’s GDP report was pretty bad. The economy grew by just 1.59% for the third quarter. What concerns me is that this is the second straight below-trend quarter. As a data series, GDP is somewhat trend sensitive. Since 1983, when the economy has grown by over 3% for one quarter, it has a 66% chance of growing by over 3% for the following quarter. If the economy grows by less than 3%, then it has a 41% chance of growing by over 3% for the following quarter.
Posted by edelfenbein at 10:54 AM Corrected for Stuff, the Dow Sucks Daniel Gross has caught the Republicans lying again. It turns out that the GOP is claiming that the Dow is at some sort of all-time high. While this is true in the sense that it’s factually correct, Gross objects to the GOP talking point because the Dow is atypical and Republicans aren’t adjusting for inflation. I should add that since Gross’ argument involves the stock market and Republicans, he unfortunately has to continue his bizarre Dow 36,000 fixation—to wit, D36K must be mocked in any article dealing with the market no matter how tangential it is to the article. For other instances, see here, here, here, here, here, here and...oh, you get the point. Of course, there’s nothing special about the Dow 30. The stocks are simply selected by the editors at the Wall Street Journal, and those folks never make a mistake. Well, rarely. For example, Homer nodded bigtime in 1939, when the editors purged IBM from the index. The stock was eventually invited back in 1979, but over those 40 years, IBM gained 22,000%. LOL What would have happened if the editors had left IBM alone? The Dow would have cracked 1,000 in 1961 instead of 1973, and it would be over 16,000 today. (By the way, did you know there’s a book called Dow 36,000? How fucked up is that?) While the Dow is at a new high, the S&P 500 is still 9% off its all-time high, and the Wilshire 5000 is 5.5% below its high. But Gross goes on to say that, “the claim that ‘the stock market’ is at an all-time high simply doesn't match most investors' experiences.” That’s not quite correct. If we consider most investors experience to be the broadest index, and include dividends, then the Wilshire 5000 is at a record. True, only 4.3% higher than its March 2000 peak, but it’s there. Also, the Dow’s period of outperformance ended more than four years ago. The bull market has been very kind to the broader indexes. As to the inflation charge, it too is correct, but we have to watch ourselves. First, the government’s measure of inflation is notoriously poor. Also, once we open up the adjusted argument, it can go on and on. Soon, someone will say that the market should truly be measured against gold, or a basket of commodities, or other currencies. Any market index can be adjusted down by a clever analyst. Posted by edelfenbein at 6:17 AM October 26, 2006The Plunging VIX For the third time in little over a year, the CBOE Volatility Index (^VIX) or VIX is making a run at 10.
Last Friday, the VIX hit its lowest level of the year. On July 20, 2005 the index dipped below 10 during the day, but it hasn't closed below 10 in nearly 13 years. Generally speaking, the VIX and market move in opposite directions. Here's a scatterplot of their moves for the past year. The S&P 500 is the horizontal axis, and the VIX is the vertical.
Posted by edelfenbein at 1:41 PM Respironcs' Earnings Shares of Respironics (RESP) are down sharply this morning. The company reported earnings of 33 cents a share, which beat by three cents, but sales came in below expectations. The stock is currently down 6.6%. Perhaps I'm missing something, but I don't see the reason for the harsh reactions. The company is looking for profits of 42 cents to 43 cents a share for the December quarter, and $1.73 to $1.77 for next year. The good new today is that Varian Medical (VAR) is up sharply on its earnings new. On Tuesday and Wednesday, the stock dropped sharply. Nothing ends a sell off like a positive earnings report. Lastly, Yaser Anwar takes a look at Fiserv (FISV) and likes what he sees. Posted by edelfenbein at 10:38 AM October 25, 2006Varian Medical Earns 59 Cents a Share The stock has been falling recently, but it just delivered another solid quarter. Varian (VAR) earned 59 cents a share for the quarter, beating the Street by six cents a share. Sales were up 18% to $454 million. The stock is up after hours. We'll see how it holds tomorrow morning. Posted by edelfenbein at 4:08 PM The Fed Does Nothing. Again. The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent. Posted by edelfenbein at 2:15 PM Defending the Bull
Today, I’m going to try to do the impossible: I’m going to defend the bull market. Now, now. Before we get too carried away, I’m not going to make any outlandish predictions for the Dow or Nasdaq. Sorry, no forthcoming book, Dow 13,469.12, for me. I’m afraid I’m not any good at the whole predictions racket. But what I want to do for you, dear reader, is show you how the market ought to be analyzed. I’m afraid dissecting the market the market is a lot more boring than throwing out random numbers, which, for reasons that elude me, is often followed by macho posturing. (Boo-yah!) Investing analysis isn’t about predicting some number, and waiting to see if we hit it. We can all have a cheap and easy laugh at market professionals who get it wrong. Not only will I get it wrong, but that forms the foundation of my investing philosophy. You see, one of the best things about investing is that you don’t need to be right. You can be totally 100% wrong on lots of things. You can be wrong on the economy. Wrong on the Fed. Wrong on interest rates. Lots of things. But you can still be a good investor. I’ll give you a quick example. One of my stocks on the Buy List, SEI Investments (SEIC), is up over 50% this year. If I had predicted that, you would have thought that I was some crazed marijuana addict. I didn’t predict where it was going, but I based my recommendation on reasonable assumptions. OK, let’s read that last sentence again: I didn’t predict where it was going, but I based my recommendation on reasonable assumptions. In the investing game, we don’t need to be right, but we do need to be reasonable. What we need to do is compare the stock market with the bond market and make some reasonable assumptions of what could happen. The name for this is risk analysis. We’re not saying what will happen, we’re looking at what could happen. When I say risk analysis, we want to look at the potential upside and downside. I have to stop the discussion and mention that what may be right for me, may not be right for you. Here’s an example. Let’s say that the market has a 50% chance of rising 30% over the next 12 months, and a 50% chance of losing 3% over the next 12 months. That’s a bet I would happily make. I understand the odds. I think they’re in my favor. I understand and can face the consequences. Other people might not feel that way. But the fact is, we all know what the rules of the game are. As investment analysts, our goal is to find out what the rules are. Now let’s look at the match-up. In this corner, we have short-term interest rates (mixed boos and cheers). The one-year Treasury is currently yielding 5%. Honestly, that’s not bad. Put it this way. You can turn off the TV, ignore the market for the next year and make an easy 5%. That’s over 600 Dow points. It would bring your portfolio up to the equivalent of Dow 12,800. I think that’s an attractive option. The best part of it is that it’s low risk. The bonds are back by the full faith (cough) and credit (cough, cough) of the United States (wheeze) government. No more worrying about the Fed or options scandals or if the president of Wackistan suddenly decides he wants to be Hitler 2.0. In this corner, we have the stock market (loud and prolonged boos). So what we want to find out is if the Dow has a shot of beating 5% for the coming year. Over the last 40 years, stocks have beaten bonds by an average of 1.7% a year. That’s what you get for the “uncertainty” of owning stocks. Interestingly, that number has been surprisingly consistent. For our purposes, we’re going to ignore the risk premium because we’re going to try and explore our way out of those uncertainties. First off, the dividend yield on the S&P 500 is 1.8%, so we’re already more than one-third of the way to our 5%. Now we want to see if the market’s earnings can grow by 3.2% over the next year. Given that inflation is close to that level, all we want to see is if real earnings will grow at all. Currently, operating earnings for the S&P 500 are expected to grow by 10.1% for the next year (Q4 and the first three Qs of next year). Of course, that’s just today’s estimate. I should add that earnings growth has been impressive recently, but the rate of earnings growth has been slowly easing up, or decelerating if you want to sound cool. Personally, I think that earnings growth is closer to leveling off than going into a steep decline, but we just don’t know yet. Of course, the housing market is falling apart like the Yankees. Also, a negative yield curve has often foretold a rough earnings environment. But this earnings season is looking good so far. I certainly realize that 10.1% growth will not be exact, but as of now, there’s no hard evidence of an earnings recession in the immediate future. Predicting earnings growth is not easy; it's notoriously volatile. Over the past several years, the standard deviation of yearly earnings growth has been 13.7%. That’s pretty wide and it should remind us to be very cautious about making any silly predictions. We're less than one standard deviation from an earnings recession. Once again, we don’t need to be right, but our assumptions need to be reasonable. If earnings growth is 10.1% with a standard deviation of 13.7%, then that means that earnings have a 69% chance of beating 3.2% (i.e., the one-year Treasury minus the S&P dividend yield). So far, I like those odds. Now I see that some of you are ready to jump out of your seats and yell about the market’s P/E ratio. Hooold on. Of course, earnings can do well and the market might not see any of it because earnings multiples contract. For the most part, I believe that it’s best to assume a neutral valuation environment. Predicting earnings multiples is very tricky stuff, and they don’t often behave as we might like. Also, even if P/E ratios work against us, we can still make money. After all, earnings multiples have declined for much of this bull market. The closest variable that P/E ratios follow is long-term bond yields. But event that relationship isn’t so easy. For many years, the earnings yield (the inverse of the P/E ratio) was less than the 30-year Treasury bond. Not anymore. For the last three years, the earnings yield has climbed higher and higher above the 30-year yield. Does this suggest that P/E ratios are way too low? Possibly. But I think another explanation is that the long-end of the yield curve is unnaturally low. This goes back to Mr. Bernanke’s conundrum. So this means that our best guide to P/E ratios is either not working, or it’s indicating that ratios should be much higher. Even if lower P/E ratios erased stock's gain relative to bonds, that would mean that the S&P’s P/E ratio would have to fall from roughly 16 today to 15 one year from now. It certainly could happen, but it would mean that multiples would then be the lowest in over a decade. Once again, the risk analysis leans towards stocks. And we can’t forget that the P/E ratio could expand. There's always the risk of missing out on a big gain. On average, the market’s total net gain comes on just one day in 100. I also want to look at some indicators of sentiment. This is an unusual bull market because as the bull has charged on, earnings multiples have fallen and dividend yield have climbed. I can’t think of another bull market like that. Also, value stocks have outperformed growth stocks. When a market gets frothy, growth stocks typically take value stocks out to the woodshed. Also, the Nasdaq is less than 20% of the Dow. That’s about the long-term average. When the crowd gets greedy, the Nasdaq often climbs well above 20%. Six years ago, it got above 50%. To conclude: My assumptions could be totally wrong, but I think they’re reasonable. I think it shows us that the odds lie in favor of the S&P 500 beating the one-year Treasury yield. Posted by edelfenbein at 12:57 PM AFL & FISV’s Earnings After the bell yesterday, two more of our Buy List stocks reported earnings results, AFLAC (AFL) and Fiserv (FISV). AFLAC said that it made 73 cents a share which is a big drop from last year’s 90 cents. With insurance stocks, however, operating earnings are usually a better gauge of how well the company is performing. On that score, AFLAC’s operating earnings came in at 72 cents a share which was in line with Wall Street’s forecast. The company expects fourth-quarter operating earnings of 65 cents to 66 cents a share, which is less than the Street’s view of 71 cents a share. Varian Medical (VAR) is slated to report later today. The Street seems nervous since the stock took a big tumble yesterday. Also, Respironics (RESP) will report on Thursday. Posted by edelfenbein at 10:05 AM October 24, 2006Top Industry Groups This Year Steel...........................57.28% Posted by edelfenbein at 2:21 PM Gold Vs. Stocks I get the most mail whenever I write about gold. The point I try to stress is how poorly gold has performed relative to common stocks. What’s interesting is how little gold has to move for gold bugs to claim victory. If there’s one thing I can get across to investors it’s that gold is an asset, but stocks are equity. This is a huge point. By it, I mean that gold only has value for what people can do with it. Stocks, on the other hand, represent claims on real assets. It’s people taking assets, like gold, and using them to create wealth. It’s people actually doing something. Gold is merely the tool, and it has very limited industrial applications. The price of gold has historically been defined by brief and dramatic price spikes, followed by periods of long declines. I think we’re going through a spike now. In fact, it may already be over. A few days ago, Barry Ritholtz posted a chart from Chart of the Day showing the Dow-to-Gold ratio. For 20 years, the ratio had dramatically expanded, although it’s fallen in half during this decade. Of course, gold doesn’t pay a dividend so I was curious how dividends would have changed this relationship. Dividends don’t pay much these days, but the effect over 30-odd years can be pretty big. Also, small-cap stocks have done very well over the past few years so I wanted to compared Gold against the Wilshire 5000 Total Return Index (^DWCT). Here’s what the chart looks like:
That's a logarithmic chart, so you can see that the ratio has grown very dramatically over the years. In 20 years (1980-2000), stocks beat gold by an amazing 72 fold. Gold's advantage over stocks during the past few years is truly just a small dip in a long-term rise. Posted by edelfenbein at 1:53 PM October 23, 2006Not Dead Yet
Today was another good day for the good guys. The Dow jumped 114.54 points to close at 12,116.91. The S&P 500 is up to 1,377.02. Adjusted for dividends, the S&P isn’t too far from an all-time high. The Buy List was up 0.90% today. The big winners included Bed Bath & Beyond (BBBY) which closed a penny shy of $40. Fiserv (FISV) also did very well and hit a new 52-week high, as did Harley-Davidson (HOG). Harley is now up 33% for the year! Boo-yah! Honestly. I’m a little concerned that Treasury yields are creepy higher. That will always kill a rally. Whenever bonds and stocks part company, you know something is up. Frankly, we need some time to take a rest about now. After the bell, Brown & Brown (BRO) reported earnings of 29 cents a share, one penny better than expectations. Revenues were in line with estimates. The earnings parade continues! Tomorrow we’ll get earnings from AFLAC (AFL) and Fiserv (FISV). On Wednesday, Varian (VAR) reports, and on Thursday, Respironics (RESP) reports. Posted by edelfenbein at 6:06 PM Ford's Earnings Ugh, the news continues to be grim for American car companies. Today, Ford (F) announced that it lost $5.8 billion in the third quarter. That's not all--it plans to restate earnings going back to 2001. On an earnings-per-share basis, the loss for Q3 comes to $3.08 compared with a loss of 15 cents a share last year. Sales dropped 10% to $36.7 billion. Two years ago, the stock was at $15 a share, while today it's below $8. And that's after a rally! Posted by edelfenbein at 9:55 AM October 19, 2006More Earnings News This is a strange day for earnings. Danaher (DHR) is currently down despite beating estimates by a penny, and raising its full-year guidance. For the third quarter, the company earned 83 cents a share compared with 70 cents last year. UnitedHealth (UNH), on the other hand, beat estimates by three cents a share, also raised its guidance but said it will delay its filing. That stock is currently up over 4%. Also, Dell (DELL) is sharply lower after creeping up slowly for the past few weeks. A research firm said that HP is now the world's #1 PC-maker. Posted by edelfenbein at 10:07 AM It was 19 Years Ago Today... ...Sgt. Pepper taught the band to play. Well, not exactly. But it was the day that the stock market crashed. On October 19, 1987, the Dow dropped 508 points. In just a few hours, the index lost of 22.6%. How have things gone since then? The Dow is up 590%. Add in dividends, the Dow is up 1,010%. (That should teach you to reinvest your dividends!) Inflation has increased by 76%. And for all you gold bugs out there, the yellow metal is up 23%. To match the Dow, gold needs to get up to nearly $6,600 an ounce. The Dow has also outperformed the Wilshire 5000 which is up 493%, and 785% with dividends. Posted by edelfenbein at 7:18 AM Larry Ellison and the Art of War In the movie Wall Street, Gordon Gekko tells Bud Fox to bone up on Sun-tzu's The Art of War (you remember, "every battle is won before it is ever fought," crap like that). Sure, this stuff is nice for the films, but it turns out Larry Ellison takes it seriously. I'm not making this up. First some background. Larry has what you might call a troubled relationship with Hasso Plattner, the top dog at SAP. Not since SAP AG founder Hasso Plattner dropped his pants in front of Larry Ellison's support vessel in a 1996 yacht race have tensions between the rival software makers been so high. Of course, that would depend on what he dropped his pants for. But as the sports announcers say, "these two just don't like each other." A normal relationship between SAP and Redwood City, California-based Oracle these days includes dueling press releases amid claims that stretch reality, SAP and analysts said. During Oracle's first-quarter conference call Sept. 19, Ellison said SAP was delaying its next major product until 2010 while abandoning its strategy of internal growth helped by small acquisitions. Oh, no he dint! No he dint! Ellison's comments were "a complete misrepresentation" of SAP's products and strategy, Walldorf, Germany-based SAP said the same day. Only once before, in 2000 when Oracle said it was first in sales of business-management software, had SAP issued a statement responding to Oracle claims. But wherever did Larry get this idea from? The tactics are classic Ellison, famous for his admiration of "The Art of War," the treatise on battle tactics written by the sixth-century BC Chinese general Sun Tzu. Ah, yes. It's coming back to me now. Bud Fox: All warfare is based on deception. If your enemy is superior, evade him. If angry, irritate him. If equally matched, fight and if not: split and re-evaluate." Posted by edelfenbein at 6:51 AM October 18, 2006WallStrip.com If you haven't seen it yet, check out WallStrip by Howard Lindzon. It's sort of a Rocketboom for Wall Street. Herre are the first three shows: October 16 Posted by edelfenbein at 4:02 PM Burying the Lede Here's a perfect example of Old Media missing the real story. This is from a WSJ article about Wal-Mart holding its analyst meeting in New York instead of Arkansas. Coinciding with the two-day event is a dinner on Monday hosted by film moguls Bob Weinstein and Harvey Weinstein to honor Wal-Mart Chief Executive Lee Scott "for his commitment to environmental sustainability," according to an invitation for the event. Also slated to attend the event are 18 heavyweights of entertainment and finance, including Cablevision Systems Corp. CEO James Dolan, hedge-fund billionaire Paul Tudor Jones, Robert Wright, chairman of General Electric Co.'s NBC Universal unit, and television host Charlie Rose. The event is closed to the public, as is the rest of the two-day meeting. The Eagles! You lead off with that. The rest of the story writes itself. The only question left is, who's selling out here, Wal-Mart or the Eagles. Posted by edelfenbein at 11:53 AM Inflationpalooza! The idea of Core CPI comes in for a lot of ribbing, but today's report shows why it can be more valuable than the headline number. Thanks to the big drop in oil, headline inlfation dropped 0.5% last month, but the core rate rose 0.2%. What's more, the data from one year ago included a big jump in energy prices, this was just after Hurricane Katrina. So the year-over-year number for headline inflation dropped from 3.8% in August to 2.1% in September. By looking at the core rate, it also seems that the Fed still might be going too easy on inflation. Real rates are currently running at around 2.3%, which is less than where they were during much of the 1990s.
Note that this is an imperfect data set because it compares trailing inflation to today's Fed funds rate. Posted by edelfenbein at 9:27 AM SEI Investment's Earnings SEI Investments (SEIC), our top performer on the Buy List this year, just reported earnings of 60 cents a share for the third quarter. This is three cents more than the Street was looking for. Net income climbed to $60.5 million, or 60 cents per share, from $49.2 million, or 48 cents per share, in the year-ago period. The stock is up 58.8% for the year. Posted by edelfenbein at 9:09 AM October 17, 2006Investment Don'ts
Steve Wynn recently sold Picasso's "Le Reve" (pictured above) for $139 million. Art can be a great investment. He bought it nine years ago for "just" $48.4 million. That's an annualized return of 12.4%. Unfortunately for Steve-o, he accidentally poked a hole in it: "Oh shit," he said. "Look what I've done." Oopsie. Posted by edelfenbein at 2:56 PM BBBY's Back-Dating Here's Jack Ciesielski's take on Bed Bath & Beyond's back-dating probe: Lots of other interesting stuff, though. For instance, Wall Street wonders why it takes so long to complete these investigations. One reason: Bed Bath & Beyond’s investigation covered 19,000 individual grants. The special committee’s counsel interviewed 31 officers, directors, employees, advisors and others. As they say, read the whole thing. Posted by edelfenbein at 1:42 PM Are Liberal Stocks Better? Research from Blue Investment Management found that stocks with “Democratic Values” (note large D) significantly outperform the rest of the stock market. The company even offers investors a Blue Large Cap fund and a Blue Small Cap fund (blue…as in state, get it?). Color me skeptical. First, as Jane Galt points out, back-testing can show lots of thing, or really, almost anything. I’ve carefully back-tested data and come up with the rule that you should always sell on the 29th year of each century. Hey, it’s a proven strategy. But my greater concern is the idea that “progressive values” yield business success. Well, it could be. There are certainly lots of left-leaning businesses that I admire. The Sandlers of Golden West Financials or Peter Lewis and Progressive (check out this chart). But my hunch is that this blue investing theory might be the wrong way around. Progressive values don’t breed success, but success may breed progressive values. To quote one well-known progressive, Willie Sutton: “That’s where the money is.” Posted by edelfenbein at 11:14 AM The Cubs Have Bought the White Sox! Well, not exactly...but the CME and CBOT are merging: The combined company will be named CME Group Inc., and will be headquartered in Chicago (no duh). The news sent CBOT shares soaring $21.50, or 16 percent, to $156.01 in premarket trading on the INET, indicating the stock may open above its 52-week high of $140.67. CME shares rose $17.75, or 3.5 percent, to $521 in early electronic activity. Posted by edelfenbein at 9:50 AM October 16, 2006SEC To Ease Margin Rules It’s not often that the SEC does something I like, but this one is long overdue. The SEC is likely to approve the New York Stock Exchange’s request to alter its margin rule. Under current rules, the margin requirement is the same no matter what kind of asset you hold; stocks, options or futures. This is truly unnecessary, and what’s worse is that it put us far behind bourses in other countries. Margin has gotten a bad rap ever since John Kenneth Galbraith identified it as one of the major causes for the stock market crash in 1929. The market eventually dropped by nearly 90%, but even in those loose days, margin buying probably represented less than 10% of the market’s total value. If anything, the level of margin buying is actually negatively correlated with stock volatility. The Federal Reserve sets the margin rules under its Reg T. The Fed used to move the margin requirement around a lot. In fact, it completely banned margin during World War II. In 1974, the Fed set the margin requirement at 50%, and it hasn’t touched it since. I should also mention that investors who use margin should also consider how much leverage the stock itself is using. Most investors never think of this. Take a company like FactSet Research Systems (FDS). The company doesn’t have a nickel of long-term debt. I’m not advocating buying it on margin, but it’s balance sheet is something to consider. On the other hand, we can look at General Motors (GM). According to GM’s balance sheet, the company has $11.6 billion in equity and $457.7 billion in liabilities. Yikes! That’s about $800 a share in liabilities for a $32 stock. Call me crazy but I think that’s margined well enough. If we mathimaticate the Dow divisor, that means that $1 in share price is about eight Dow points, so GM’s liabilities are about 6400 points on the Dow. Talk about debt relief! Forget Africa; send Bono to Detroit. Posted by edelfenbein at 10:27 PM 300 Million Americans We're closing in on the Big Three Oh (oh, oh, oh, oh, oh, oh, oh). Here's the Census count. The 300 millionth American should arrive sometime tomorrow morning. For reference, we crossed 200 million on November 20, 1967. We broke the 100 million mark in 1915. According to estimates, we should break 400 million in 2043. Posted by edelfenbein at 10:43 AM If the Economy Is In Such Rough Shape... ...how come cyclical stocks are leading the bull?
Maybe the market sees something we don't? Posted by edelfenbein at 9:58 AM Wachovia's Earnings Wachovia (WB) announced today that its earnings rose 13% to $1.06 a share. Excluding merger costs, the bank earned $1.19 a share which was in line with expectations. The other big news of this morning is that UnitedHealth (UNH) said that Bill McGuire will step down as CEO, apparently the latest victim of the options backdating scandal. Reuters has a timeline of key events in the scandal. Posted by edelfenbein at 9:23 AM October 15, 2006The Hitch and I So I was walking down Connecticut Avenue today, and I spotted a man in a bookstore who looked strangely familiar. I went in and asked, “excuse me, sir, are you Christopher Hitchens?” The man said, coyly, “who wants to know?” I’m assuming that’s an answer generally given by correctly identified parties. Also, he had a British accent. Yep, it was Hitch. So I tried to mumble something clever about being with George Galloway’s office. We chatted for a bit, as I did my best not to come off as Crazed Stalker Guy. Let’s face it: Even when I try to look threatening, it doesn’t come off too well. My coolness must have worked because as Hitchens was leaving the store, he asked if I was going uphill. I wasn’t but said yes anyway, and we chatted a little more. I was I could say that we had some fancy highbrow conversation, but it wasn’t that impressive. I mentioned that I had just finished Mark Steyn’s book, America Alone. He thanked me for reminding him that he had been asked to review the book. Those Brits, they have such good manners. It turns out that we’re both fans of Steyn. Hitchens said that he’s impressed with the amount of writing Steyn does, which I could imagine most people saying of him. Funny, I thought all these guys knew each other, but Hitchens said he doesn’t recall ever meeting Steyn, although he said that Steyn claims that they had once met. I told him that I liked Steyn’s book, but found it a bit alarmist. He said that in the case of Islamism, alarmism is justified. Then we reached his building, said our “good days” and that was it. Posted by edelfenbein at 9:44 PM October 14, 2006Updating CAPM William F. Sharpe says that his baby, the Capital Asset Pricing Model, is due for an extreme makeover. I think we ought to pay attention. This model is the bedrock of much of modern finance. Sharp's new book, "Investors and Markets: Portfolio Choices, Asset Prices and Investment Advice," argues in favor of a "state/preference" approach instead of the fancy math of his "mean-variance" method. Pensions and Investments has the details (Hat Tip: All About Alpha). Posted by edelfenbein at 12:23 PM Play the Ultimatum Game Imagine that you are sitting next to a complete stranger who has been given £10 to share between the two of you. He must choose how much to keep for himself and how much to give to you. According to classical economics, people are supposed to be rational. But in the Ultimatum Game, they're not. Indeed, if the sum is less than £2.50, four out of five of us tell the selfish so-and-so to get lost. Come to think of it, so would I. Why is this? Neuroeconomists say, it's all in the brain. Posted by edelfenbein at 6:29 AM October 13, 2006Two Articles of Note I saw two articles in the Wall Street Journal that I wanted to pass along. The first is from Susanne Craig who looks at how partners are selected at Goldman Sachs. This is Wall Street's equivalent of being a "made man" in the mafia. Once you're a PMD (partner managing directors), no one can mess with you. You're even allowed to have three people killed. It's one of the perks. Ok, I made that up, but still, it's a sweet gig. For years since Goldman's founding in 1869, anyone who joined the firm and showed promise had a good shot of becoming partner. Until a couple of decades ago, the firm was much smaller and kept the number of partners to a minimum; in 1982 there were just 70. The other article looks at Wachovia's future with Golden West. As you may know, I'm rather skeptical of this merger, and I'm not a big fan of most large mergers. In December when I decide on next year's Buy List, Wachovia will probably be gone. First, WB paid too much. I think the Sandlers wanted a way out, and they got the right deal from Wachoiva. The Golden West business model is extremely simple, yet I'm not sure how well it will be integrated into Wachovia. I still haven't recovered from the Fifth Third/Old Kent deal, and that was six years ago. Frustrated Wachovia officials insist the payoff from the Golden West purchase looks as promising as ever. "We go in with a little bit of a chip on our shoulder because we've got something to prove," says Bob McGee, leader of the Wachovia integration team at Golden West, the second-largest U.S. savings and loan behind Washington Mutual. Wachovia also points out that this is by far the biggest deal of Mr. Thompson's tenure, and the bigger the deal, the more investors tend to fret. Posted by edelfenbein at 1:06 PM October 12, 2006Stock Market Report From Monty Python. Posted by edelfenbein at 1:53 PM Looking At Executive Pay
The WSJ has a fascinating story today (sorry, but it's a paid link) on the history of soaring executive pay: Amid the economic downturn and corporate restructurings of the early 1990s, complaints about such awards found receptive audiences. In 1992, Democratic presidential candidate Bill Clinton made executive pay a campaign issue. Washington responded.
Posted by edelfenbein at 12:26 PM TradeSports on the Election Tradesports has started a new series of contracts on how many seats the Democrats will pick up in the House this election. I’m not sure why they started these contracts just a few weeks before the election, but here are the prices as of this morning: Democrats pick up at least: Contract...................Price We can bust out a little math and find some interesting numbers. **Inserting Pocket Protector** If there’s a 60% chance of the Democrats getting at least 14 seats (they need 15 to get control), and a 41% chance of getting at least 19 seats, we can find the implied standard deviation. A 60% probability works out to +0.2533 standard deviations (=normsinv(.6) in Excel), 41% comes to -0.2275 standard deviations. So those five seats are worth the difference, or 0.4809 standard deviations, and 5/0.4809 equals 10.3973 seats. So Tradesports currently thinks the Democrats will pick up about 17.1 seats with a standard deviation of 10.4 seats. This is pretty similar to how the VIX is calculated. Posted by edelfenbein at 10:25 AM Harley Beats By 10 Cents a Share Harley-Davidson (HOG) had a huge quarter. The company earned $312.7 million, or $1.20 a share. Wall Street was expecting $1.10 a share. This is a 25% increase over last year’s third quarter when the company made 96 cents a share. Sales rose 14.3% to $1.64 billion. The stock is up sharply this morning (so we'll just ignore this). Here's how the company has done for the past few years: Year...........Sales (mil).........EPS Posted by edelfenbein at 9:23 AM The Morning Blog Needs Your Help
I always love how Liz Claman begins her Morning Blog entries with, "hey bloggers." Isn't that just adorable? It's so perky! I know. I know. As much as I adore Liz, she's committed a slight faux pas. The aforementioned bloggers are in fact, us, the readers. She's the blogger. Ok, so Liz isn't hip to our new fangled techno-lingo. Big deal, right? Apparently, The Man has put an end to it: Okay gang, Now I *really* need your help. I have been informed by THE POWERS THAT BE at CNBC.com that while they think TheMorningBlog is terrific and that you guys are terrific, they did want me to know (lower voice here:) that 'people who read blogs, Liz, really *aren't* called Bloggers, like you've been calling them." My first effort was to combine Claman and Media, and I got Chlamydia. I don't think that works. Posted by edelfenbein at 12:59 AM October 11, 2006Does the Bond Market Rule the Country? I’m a fan of predictions markets, although I think they’re mostly just for fun. There is, however, some evidence that one of the best political markets is the bond market—specifically—short-term interest rates. The direction of short-term interest rates has had a fairly strong correlation with the political environment of the electorate. I should warn you that this is a soft relationship, and not to read too much into it. But as short-term interest rates rise, the country generally turns to the right. Conversely, when rates fall, the country shifts to the left. Generally, It’s not that the Federal Reserve “pushes” the country in either direction, but instead, the electorate is reacting to the same things causing the Fed to act. Few things make a country more conservative than a bout of inflation (google Weimar and Germany for more details). The value of a country’s currency is one of those weird mystical bonds that connect a citizen to the state. When that gets ruptured, people don’t like it. It's almost like a daily referendum on the legitamacy of the state. Here’s a chart showing the change in short-term interest during the last five GOP-heavy election cycles. The elections were 1966, 1978, 1980 (a particularly crazy time), 1984 and 1994. In each of these elections, voters went to the polls facing higher short-term rates. I’ve also include the current cycle.
Here’s the GOP gain in the House in each of those cycles: 1966........................47 James Carville once said that if he could be reincarnated, he’d want to come back as the bond market: "You can intimidate everybody." Posted by edelfenbein at 10:52 PM Bed Bath & Beyond Admits Backdating Bed Bath & Beyond (BBBY) just completed a big internal probe and has found that the company practiced options backdating. The Wall Street Journal reports: Bed Bath & Beyond said its internal probe examining the period from its 1992 initial public offering through May 2006 found that the company had misdated options on 44 occasions, 37 of them in favor of the recipients. In many cases, the probe concluded, executives used "hindsight" to select favorable grant dates in the past when the stock was trading at low points. As a shareholder, I'm not happy with what BBBY has done, but I'm impressed with the way the company has handled this. Here's the company's report. This should have no effect on the stock. The company said that it won't restate historical results, but it will take an $8 million charge next quarter, which is about three cents a share. Posted by edelfenbein at 9:09 AM October 10, 2006Buy List Update
Through today, the Buy List is up 7.18% compared with 8.42% for the S&P 500. The good news is that we've closed the gap over the last two months. Since August 9, we're up 11.30% compared with 6.91% for the S&P 500. Posted by edelfenbein at 8:11 PM Two Stocks I'm Watching One of things I enjoy about this blog is that it let's me think out loud. Given that, here are two stocks that I'm keeping a close eye on right now. It doesn't mean I'll add them to the Buy List, but they look somewhat interesting at the moment. The first is TrustCo Bank Corp. NY (TRST). This little bank is about as dull as they get. The share price has slooowwwlly drifted down from $13 to $11. This thing just doesn't move much, and no one follows it. But TRST pays a nice dividend (hey, 16 cents a quarter is more than any T-bond will get you). The other is Lincare (LNCR). Frankly, I'm undecided on this one. It's a health care company that makes home oxygen equipment. The stock got slammed after Medicare cut back on its reimbursements. The stock is down, and it may be a great value. I'll have to look at this more closely. Posted by edelfenbein at 1:12 PM Google Buys YouTube The Google guys have swallowed YouTube for $1.65 billion. Marking its biggest deal ever, the Internet giant agreed to snap up the red hot site in a major push for video supremacy on the Internet. Sigh. Will the 90s ever end? Posted by edelfenbein at 10:00 AM October 9, 2006Phelps Wins Nobel Prize Congratulations to Edmund Phelps, the winner of this year's Nobel Prize in Economics: The 73-year-old Columbia University professor's work showed how low inflation today leads to expectations of low inflation in the future, thereby influencing future policy decision making by corporate and government leaders. U.S.A! U.S.A! Posted by edelfenbein at 11:09 AM October 8, 2006Fifty Years Ago Today
Twenty-seven batters up. Twenty-seven down. Retrosheet has the details: DODGERS 1ST: Gilliam was called out on strikes; Reese was called YANKEES 1ST: Bauer popped to shortstop; On a bunt Collins DODGERS 2ND: Robinson grounded out (third to shortstop to YANKEES 2ND: Berra popped to shortstop; Slaughter made an out to DODGERS 3RD: Furillo made an out to right; Campanella struck YANKEES 3RD: McDougald grounded out (third to first); Carey DODGERS 4TH: Gilliam grounded out (second to first); Reese YANKEES 4TH: Bauer grounded out (third to first); Collins was DODGERS 5TH: Robinson flied to right; Hodges flied to center; YANKEES 5TH: Slaughter walked; On a bunt Martin forced Slaughter DODGERS 6TH: Furillo popped to second; Campanella popped to YANKEES 6TH: Carey singled to center; Larsen out on a sacrifice DODGERS 7TH: Gilliam grounded out (shortstop to first); Reese YANKEES 7TH: Berra popped to third in foul territory; Slaughter DODGERS 8TH: Robinson grounded out (pitcher to first); Hodges YANKEES 8TH: Larsen struck out; Bauer struck out; Collins struck DODGERS 9TH: Furillo made an out to right; Campanella grounded Posted by edelfenbein at 9:59 PM October 6, 2006Today's Jobs Report This morning, the government reported that the unemployment rate fell to 4.6% (or 4.578% to be exact), which is the lowest rate since before 9/11. But the economy only created 51,000 new jobs last month which is less than half what economists were expecting. The economic environment continues to be defined as one with surging corporate profits and very meager job growth. Over the last three years, the economy has created an average of 160,000 new jobs a month, which is just barely above the rate of growth of the labor pool. Contrast this with the 1990s when the economy routinely created over 250,000 jobs a month. Posted by edelfenbein at 9:25 AM October 5, 2006Berkshire Hathaway Breaks $100,000
Posted by edelfenbein at 4:04 PM The Correlation of Stocks and Bonds I wanted to follow-up on my previous post about how stocks and bonds have become correlated. This is a very important point, and I think it explains much of the recent rally. Here's at look at how they've performed since April 25. For my bond proxy, I'm using the American Century Target Maturity 2025 Fund (BTTRX).
The two asset categories were negatively correlated until the middle of June. Since then, stocks and bonds have moved in tandem. A scatter plot will show it better. Here's the S&P 500 and the BTTRX from April 25 to June 15:
A downward sloping lines mean a negative correlation. The worse bonds did, the better stocks did. This tells us that money went directly out of one asset and into the other. But then, the markets suddenly converged in mid-June. Here's a scatterplot from June 16 to yesterday:
Except for a few strays, that's a pretty strong positive correlation. This tells us that money was coming out of hard assets like gold and into paper assets. Posted by edelfenbein at 12:58 PM Third-Quarter Earnings Season Thirteen of our 20 Buy List stocks ended their quarter in September, so we have these earnings announcements to look forward to: Company.......................Ticker.....................Date........................EPS Posted by edelfenbein at 11:21 AM The Campari Family Feud How's this for a dysfunctional family: Luca Garavoglia, chairman of the Milan-based beverage company, has just been slapped with a court order to pay his sister and fellow shareholder 100 million euros ($127 million) in damages. That's not all. Maddalena's brother and mother also face criminal charges for allegedly giving her false information. Posted by edelfenbein at 6:43 AM October 4, 2006Value Versus Growth The market is rolling again today. The Dow broke 11850 and the S&P 500 is closing in on 1350. I've mentioned before that this is one of few market rallies I can think of where the market's P/E ratio has declined as the rally has wore on. Not only that, the market''s dividend yield has climbed as well. In other words, as well as stocks are doing, profits and dividends are growing faster. There's something else interesting to note which is probably related. Value stocks have led growth stocks during this rally. Looking at the relative performance of growth versus value is a basic sentiment indicator. Growth tends to cream value during market tops, and vice versa during market bottoms. This rally may not be over. Here's how growth and value have done since March 2003:
Growth has closed the gap some over the last two months. Posted by edelfenbein at 3:45 PM Melissa Francis: Child Star
Before she was Melissa Francis, hardass CNBC reporter, she was widdle Missy Francis playing Cassandra Cooper-Ingalls on Little House on the Prairie. Unlike most child stars, Missy's future lay not in porn and blow, but Harvard and basic cable. Not that there's some similarity. Posted by edelfenbein at 2:00 PM Wolverine World Wide's Earnings Wolverine World Wide (WWW) is one of those teeny companies I love to follow. Despite its strange name, the stock is up around 200-fold in the last 30-odd years. Still, most people have never heard of it. The company makes shoes under various labels like Hush Puppies, Sebago and even Harley-Davidson (HOG), and its stock has been doing very well lately. Shares of WWW are up about 30% for the year. Today looks to be another good day for Wolverine as the company announced very good earnings this morning. EPS rose 9.5% to 46 cents a share, two cents more than Wall Street was expecting. This is the company's 17th straight record quarter. Wolverine also raised its forecast for this year to $1.41 to $1.44 a share, and for next year to $1.56 to $1.62 a share. Here are the results for the last few years: Year................................Sales................................EPS * First Nine Month Posted by edelfenbein at 9:28 AM Erasing Our Losses The New York Times writes: Market historians have noted that stocks can take a long time to recover from periods of great excess. The Dow and the S.&. P., for instance, did not return to their 1929 pre-crash peaks until 1954, long after the Depression and World War II ended. That's true, but it ignores the effect of dividends--which were quite generous back then--and inflation, which in this case was deflation. The total return of the stock market in real terms made a new high by 1936, which is surprisingly similar to the period from the March 2000 peak to today. After 1936, the market collapsed again for another five years. Posted by edelfenbein at 12:27 AM October 3, 2006The Dow Hits a New All-Time 11,727.34. After 6.75 years, the market has gained 4.36 points. Booyah! With the Dow at a new high, Barry Ritholtz noticed that James Glassman was recently on CNBC to discuss his book, Dow 36,000. The book has come in for a lot of criticism over the years, and not all of it undeserved. I've even noticed that some commentators seem weirdly obsessed with D36K. When the book came out, I wrote a review that was going to appear in Barron's, but got pulled at the last minute. Well...I figure enough time has passed. Here's my review of Dow 36,000: Now that the Dow Jones Industrial Average has soared over 4,500 points since Alan Greenspan warned us of the market's "irrational exuberance," a mini-industry has evolved of publishing books that attempt to explain the "new market." The latest addition to the genre is Dow 36,000 by James K. Glassman and Kevin A. Hassett, both of the American Enterprise Institute. To give you an idea of how crowded the field is becoming, two other books are titled Dow 40,000 and Dow 100,000. Posted by edelfenbein at 4:50 PM Marvell Warns Just seven shopping days until earnings season starts. The traditional first major announcer is Alcoa (AA), which should have outstanding earnings. We’re also getting cautionary announcements of what to expect this season. Today’s earnings bomb is brought to you courtesy of Marvell Technology Group (MRVL). The company anticipates that its revenues will fall 10% from last quarter’s total of $574 million. The anticipated decline in net revenue is largely due to lower than expected demand from a number of the Company's hard disk drive customers. The Company believes the shortfall of demand is primarily due to a combination of weaker than normal seasonal shipments in the personal computer market as well as excess inventory held by some of its significant storage customers. If that’s not enough, the company is also looking at its options practices. Posted by edelfenbein at 9:24 AM October 2, 2006Wachovia Closes Golden West Purchase Banking and financial services company Wachovia Corp. said Monday it closed its acquisition of Golden West Financial Corp. and named three new board members, two of them Golden West officials. Wachovia (WB) will now appear on the Buy List in place of Golden West Financial. For Buy List tracking purposes, we have to make some changes (someone please double-check my math!). At the beginning of the year, we added 757.5758 shares of Golden West at $66 each. With the merger, we now have 796.2122 shares of WB, plus $14,128.79 in cash. Going by Friday’s closing price of $55.80 for WB, that cash is being exchanged for another 253.2041 shares. So now we have a total position of 1049.4163 shares of WB with a cost basis of $47.64554. Posted by edelfenbein at 9:38 AM The Housing Bust--Not So Easy Investing Henny Sender notes in today's WSJ that the long-awaited housing bust isn't developing into a good investing there: Playing the housing slowdown in financial markets is proving tougher than anyone expected. New Century Financial (NEW) paid out a dividend of $1.85 a share in September. The company has raised its dividend by a nickel a share for the past several quarters. To give you an idea of how negative the market is on housing, if we assume that New Century doesn't cut its dividend, that means that the stock is indicating a dividend yield of close to 19%, which is the equivalent of 2,200 Dow points. Posted by edelfenbein at 9:22 AM |
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