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Economics Discovers Its Feelings

Here's a fascinating article from the Economist:

If people are bad at recalling their feelings, they are worse at predicting them. They fail to anticipate how a person feels after moving to a new city, losing a limb or winning a jackpot. Prisoners imagine that solitary confinement will be worse than it really is; mothers-to-be think the pain of childbirth will be more bearable than it typically proves to be. And it is not just unusual events that trip people up. According to Mr Kahneman, people struggle to predict how their appetite for ice-cream, low-fat yogurt or music might change in the course of a week of enjoying them. If man is an iron-balance that weigh pains and pleasures, the scales are sadly askew.

Posted by edelfenbein at 8:10 PM

Footnote of the Year

Michelle Leder has awarded the Footnote of the Year:

But in the end, it came down to this post from April 10 on Aaron’s Rent (RNT). As I footnoted at the time, getting the company that you work for to spend nearly $1 million teaching your sons to be race-car drivers as Aaron’s executive Bill Butler did is an interesting use of shareholder money. But calling it an marketing expense really reached a new nadir.

Oh dear lord. Here's the proxy.

Posted by edelfenbein at 6:12 PM

S&P Expects Q4 Earnings Growth to Slow

S&P released this on Friday:

The fourth-quarter operating earnings for the S&P 500 is on track to post its lowest year-over-year gain in over four and a half years, announced Standard & Poor’s today. Estimated fourth-quarter 2006 earnings of $22.08, or $199 billion in aggregate, would represent a 9.4% gain over the $20.19 reported for the fourth quarter of 2005 – marking the first single-digit earnings gain for the index since the first quarter of 2002. However, Standard & Poor’s expects full-year 2006 to be the best year ever for operating earnings, with a projected 14.9% gain over 2005.

Posted by edelfenbein at 5:39 PM

Deanna Brooks Wins Playboy Stock-Picking Contest

Congratulations to Deanna. Her portfolio was up 43.43% for the year.

Deanna's five stocks were Hauppauge Digital (HAUP), Pfizer (PFE), Yamana Gold (AUY), Petroleo Brasileiro (Petrobras) (PBR) and IBM (IBM).

Posted by edelfenbein at 2:50 PM

The National Mall

I saw President Ford's funeral procession earlier today. Even the monuments seemed to be in a somber mood.

Posted by edelfenbein at 10:10 PM

2007 Buy List

Here’s my 2007 Buy List. For tracking purposes, I assume it’s a $1,000,000 portfolio and each position is worth $50,000. Here’s each stock, ticker, starting price and number of shares. This is what I'm refering to when I write on how the Buy List is doing.

Fifteen stocks return from 2006. The five new stocks are Amphenol, Graco, Jos. A Bank Clothiers, Nicholas Financial and WR Berkley. The sells are Brown & Brown, Dell, Expeditors, Home Depot and Wachovia.

The total market cap of all the companies is $288 billion, which is much smaller than last year. UnitedHealth is the largest at $72 billion. Nicholas Financial is by far the smallest at $117 million. The average dividend yield is 0.55%.

That's it. The list is now "lock and sealed," and I can't touch it until next year.

Posted by edelfenbein at 6:55 AM

The 2006 Buy List

The 2006 trading year has come to a close. All in all, it was a very good year for our Buy List.

The 20 stocks on the Buy List were up an average of 10.68%, while the S&P 500 was up 13.62%. Including dividends, the Buy List was up 11.43%, and the S&P 500 was up 15.80%. The daily volatility of the Buy List was 19.22% greater than the S&P 500. The Buy List had a "beta" of 1.0404, and its daily changes were 76% correlated with the S&P 500.

I track the Buy List as if it were a $1 million portfolio. Here's how each stock did during 2006:

* Expeditors split 2-for-1 on June 26.

** The original position was Golden West Financial (GDW), which was bought out by Wachovia at the end of the third quarter. The merger called for Golden West shareholders to get 1.051 shares of Wachovia stock, plus $18.65 cash for each share of Golden West. At the beginning of 2006, we tracked 757.5758 shares of Golden West priced at $66 each. With the merger, we then had 796.2122 shares of WB (757.5758*1.051), plus $14,128.79 in cash (757.5758*$18.65). For track record purposes, I assumed the entire cash position was immediately converted into shares of Wachovia. Going by the September 29 closing price of $55.80 for WB, the cash was exchanged for another 253.2041 shares ($14,128.79/$55.80). So we then had a total position of 1049.4163 shares of WB with a cost basis of $47.64554 ($50,000/1049.4163).

Here's how the Buy List did against the S&P:

Posted by edelfenbein at 7:33 PM

Stock Exchange to Close on Tuesday

It's official. The markets will be closed on Tuesday in honor of President Ford's funeral. Trading will resume on Wednesday.

Posted by edelfenbein at 11:18 AM

Stocks Against Bonds

December has brought a major change to the financial markets, although it’s largely gone unnoticed. For the first time since June, the stock and bond markets have become decoupled. In other words, stocks are going up while long-term bonds are going down.

Yesterday, the yield on the thirty-year Treasury bond (^TYX) broke 4.8% for the first time in seven weeks. Despite this, the S&P 500 (^GSPC) has continued to rally, and it now stands just shy of a six-year high.

This is important because the bond market often acts as an early warning sign for the stock market. Decoupling usually precedes bad news for stocks. For example, stocks and bonds became negatively correlated beginning on April 25, shortly before the May 5 top. The negative correlation lasted until June 15, which was two days after the S&P 500’s low for the year. It’s as if the two asset groups were competing against each for investors’ money, and the bond market was winning.

But all that changed on June 16. From there until late-November, stocks and bonds (BTTRX is my bond proxy) had an amazing 79% correlation. Basically, the two asset classes stopped fighting with each other and marched higher arm-in-arm. It was a nice, smooth rally.

The truce finally came to an end. Since November 30, stocks and bonds have had a 60% negative correlation. This is a brief period, so it may not mean much, but something is definitely up. I don't think the stock market is about to collapse, but we've had a 16% rally since June. It may be time for a breather.

Posted by edelfenbein at 8:36 AM

10 Best Business Movies

From The American:

Barcelona

Jerry Maguire

Lost in Translation

Once Upon a Time in the West

The Shop Around the Corner

Trading Places

One, Two, Three

Mildred Pierce

Working Girl

Glengarry Glen Ross

Under the American's rules, the films aren't allowed to be "openly hostile to capitalism." That's a far bigger handicap than I realized.

Posted by edelfenbein at 9:53 PM

Jeff Matthews Ridicules Amazon So We Don't Have To

Jeff Matthews notices a theme in Amazon's Christmastime press releases:

12/26/2006 "Amazon.com’s 12th Holiday Season is Best Ever"

12/26/2005 “Amazon.com, Inc. today announced that the 2005 holiday season finished as its best ever…”

12/27/2004 “Amazon.com’s Tenth Holiday Season is Best Ever…”

12/26/2003 “Amazon.com Wraps Up Its Ninth Holiday With Busiest Season Ever.”

12/26/2002 “Amazon.com today announced it has finished its busiest holiday season ever…”

"The best Christmas EVER!" Don't you have to be Claymation to say stuff like that?

Posted by edelfenbein at 5:06 PM

Dow 12,500

Yesterday, the Dow closed above 12,500 for the first time ever. But the Dow has actually been a laggard. If the Dow had merely kept pace with the Wilshire 5000 over the last four years, which is the broadest measure of the market, then the index would currently be over 14,300.

Posted by edelfenbein at 12:15 PM

Markets and Morality

Here’s a quick thought exercise. Assume that in your town or city, or even country, voters are evenly divided between two public policy decisions. Let’s ignore what the choices are, but instead, I will tell you that one choice is a more abstract, theoretical choice, while the other is grounded in real-world understanding. Given your biases, which would you be inclined to support?

There are few guarantees in life, however, if we were to ask the platonic financial economist, he or she will always and forever—one million times out of a million—argue for the abstract decision. To many financial economists, all investors’ problems are simply a problem of emotions. The people always suffer from insufficient self-denial.

It’s a huge mistake to interpret the judgments of the financial markets as moral judgments, but this happens all the time. To choose an obvious example, it’s easy to think the collapse of the Internet boom was punishment for earlier greed. You would get few thoughtful people to admit to that in public, but they do, perhaps unwittingly, believe it.

You can also find this in the financial media all the time. For example, when the housing market soars, it’s due to greedy, irrational Americans bidding up prices. We're told that the root cause is always the victory of emotions over reason.

But what happens when the bond market soars? Nope, no judging here. Bond traders are somehow always right. You can wait a long time before you will hear the words “bond bubble.” The same holds true for oil.

The uncrowned king of this school of thought is Robert Shiller of Yale. The best part of being a member of this school is that you never have to be right. One only needs to look worried. Finger-wagging is good too. Also, you can earn extra points if you find new things to worry about.

But when you closely look at investment bubbles, they’re often less irrational than they appear. Remember, eBay is higher now than it was six years ago, but GE is down. Which one was the bubble? I have my answer.

The real mob mentality is crowd of observers trying to be the lone voice of reason in a sea of madness. Consider this Lawrence Summers' editorial from earlier this week:

The headlines and opinion writers focus on how the U.S. is badly bogged down in wars in Afghanistan and Iraq; on an increasingly unstable Middle East and dangerous energy dependence; on nuclear proliferation that has already occurred in North Korea and that is coming in Iran; on the potential weakness of lame-duck political leaders; on record global trade imbalances and rising protectionist pressures; on increased levels of public and private-sector borrowing combined with record low saving in the United States; and on falling home prices and middle-class economic insecurity.

At the same time, financial markets are pricing in an expectation of tranquility as far as the eye can see. Stock prices in the U.S. are at all-time highs (uhm...no Larry, they’re not). The risk premiums that corporations or developing countries have to pay to borrow money are at or near historic lows. In addition, estimates of the volatility of the stock, bond and foreign exchange markets inferred from the prices of options are near record lows.

Summers has brought professional worrying to a new level. Our reason to be concerned is that...(drumroll)...we’re overly cautious! He’s confusing the lack of volatility with a carefree attitude. Actually, it’s just the opposite. But Summers’ argument is that overcautiousness is the very reason to be worried.

When you turn financial analysis into moral judgments, you misunderstand an important aspect of the market’s nature. The market has zero moral intelligence. The market simply moves capital from less productive assets to more productive. Trying to find a morality tale beneath the suface won't help you explain what's going on.

Posted by edelfenbein at 9:34 AM

Bill Miller's Streak to End

After 15 years, Legg Mason's Bill Miller will lose to the S&P 500. He made some bad calls this year on housing and tech.

Miller's $21 billion Legg Mason Value Trust was up 6.7 percent as of yesterday, trailing the 16.5 percent gain of the S&P 500. The mutual fund is the worst performer of 108 "multicap value'' funds tracked by Bloomberg that buy stocks managers perceive as being cheap. Miller's fund, which holds fewer than 45 stocks, was hurt by Amazon.com Inc. and UnitedHealth Group Inc.

"It's not the right portfolio for 2006," said Jeff Tjornehoj, a Denver-based analyst at Lipper who tracks the fund industry. "Perhaps it will be the right portfolio for 2007."

The Legg Mason fund has beaten the S&P 500 every year since 1991, rising at an average annual rate of 15.8 percent, compared with 11.9 percent for the U.S. stock benchmark. Miller also manages the $6.7 billion Legg Mason Opportunity Trust, which is lagging behind the S&P 500 this year with its 14.2 percent return. Miller, 56, declined to comment.

Posted by edelfenbein at 8:23 AM

Three Days Left

With just three trading left in 2006, the Buy List is up 10.76% for the year compared with 13.51% for the S&P 500 (this doesn't include dividends). The Buy List is about 20% more volatile than the S&P 500.

Posted by edelfenbein at 5:21 PM

Cintas

Last week, Cintas (CTAS), the uniform maker, missed its earnings by a penny a share. So the stock is down about 300 pennies. Now we have to ask, should an earnings miss have a p/e ratio of 300? Time will tell.

Shares of CTAS were incredibly popular during the 90s. The stock went up and up and up some more. By the end of the decade, the stock was going for 60 times earnings. Talk about a good company and a lousy stock. This decade, shares of CTAS haven't done much but the earnings keep climbing.

Check out this chart. Rising earnings, falling multiples and a flat stock.

Posted by edelfenbein at 3:27 PM

Corporate Profits and the Economy

Since September 2001, the U.S. economy has grown by about 31%, but corporate profits are up by 132%.

Corporate profits now represent over 12.4% of the national economy, which is the highest level in over 50 years. The average is usually around 9.5%.

Think of this as an economy-wide profit margin. Profits typically grow faster than the economy during a recovery, and fall faster than the economy during a recession.

Posted by edelfenbein at 9:40 AM

Merry Everything!

I want to wish everyone a Happy Holiday, and a healthy and profitable New Year.

I also want to thank all my readers for their support. I think I must have the best readers on the Internets. I simply could not run this site without your feedback. In the last 12 months, Crossing Wall Street has received over 800,000 hits. Imagine Woodstock, but everyone with a laptop pointed right here. Scary.

The Buy List is up over 10% for the year, which isn't too shabby, especially considering all the bearish sentiment we've had to put up with. So if you followed my (free) advice, I made you over $1 million (assuming you had $10 million to start with).

I try to make this site as transparent as possible. My picks are here for the whole world to see. I try to be candid about my big winners (like FactSet, Harley and SEI Investments) as I am with my lousy picks (like Dell and UnitedHealth). Let's hope 2007 will be another "up" year.

There are a few people I want to thank for their support. Barry Ritholtz not only runs a great blog, but he's been very generous about "spreading the wealth" to me and other bloggers. James Altucher has also linked to me many times through his Daily Blog Watch at TheStreet.com. Also, Abornmal Returns (another great site) has generously linked to me, and so has Charles Kirk at the Kirk Report.

Seeking Alpha has also been a big supporter. John Carney and the gang at DealBreaker run one of my favorite sites, and they've been big supporters. I also can't forget Howard, Lindsay and the crew at WallStrip for keeping investing fun.

Here's an odd bit of trivia I've never revealed before. I came this close to calling the blog Fiscal Graffiti (get it), but I changed at the last minute. Here look, click on www.fiscalgraffiti.com. See! Same thing for Wall Street Crossing.

I’m frequently complimented on the layout and design of this site. I wish I could take the credit, but I had absolutely nothing to do with it. All the credit goes to the very talented Kristin Rule at Callisto Design Studio. Also, Michael Auger is the artist of the little cartoon guy at the top. And lastly, Mark Anderson has been my tireless hoster who has kept this running all year. Thank you all! If you ever need their services, I highly recommend them. Or you can just send them lots of money, they won’t mind.

Finally, I give you this.

Posted by edelfenbein at 7:36 AM

Forbes Profiles W.R. Berkley

Forbes takes a look at W.R. Berkley (BER), one of my new additions to the Buy List:

From its founding in 1967 commercial property casualty insurer W.R. Berkley (nyse: BER - news - people ) has thrived in a notoriously competitive business by going after underserved niche markets. "We didn't have the resources to compete head-on with the big players," says Chairman William R. Berkley. "This evolved into a corporate strategy."

The Greenwich, Conn. company is now the ninth-largest commercial property casualty insurer in the U.S., operating in all 50 states. It has a five-year average annual earnings-per-share growth of 39% and a 24% return on equity for the past 12 months. Of the company's 31 operating units, 25 were built from scratch internally; 6 were made through acquisitions.

Last year Berkley opened five new businesses, including one that specializes in aviation liability insurance for small regional airlines. That came after hiring a group of experienced aviation insurance experts. "Business opportunities lie in finding good people," says Berkley.

Each operating unit runs autonomously and is based as close as possible to its customers. A Maine subsidiary, for example, sells liability insurance to fishing fleets and lumber companies. An Iowa unit insures grain elevators and farm supply stores.

Berkley, 61, says he has no plans to retire, but is grooming his son, W. Robert Berkley Jr., 34, to take over eventually. Meantime, the boss disdains complacency: "It's a constant process of being dissatisfied with the status quo," he says.

Posted by edelfenbein at 7:09 PM

I'm Glad I Don't Own This Stock

A letter to the editor in today's Washington Post:

The largest employer in the world announced on Dec. 15 that it lost about $450 billion in fiscal 2006. Its auditor found that its financial statements were unreliable and that its controls were inadequate for the 10th straight year.

Oh wait, I guess I do own this stock.

Posted by edelfenbein at 2:57 PM

The 'Wow' Factor

Eleven months ago, Ford (F) unveiled its “The Way Forward” restructuring plan. Today, George Will takes a look at how things are going:

Mulally's vision for Ford is forward-looking nostalgia. He wants to restore Ford to the role it had in "the middle America that we grew up with." But to "spiff up the blue oval" -- Ford's trademark -- he must market cars designed on the assumption that gasoline prices "are staying up." He talks about the need to "take the hard decisions" and "rationalize our product family" with a "simplified product portfolio." He stops short of talking -- yet -- about scrapping brands. But why is the company still making the Mercury, the average age of whose buyers is 55? Perhaps because it cost General Motors $1 billion -- payments to dealers, etc. -- to eliminate the Oldsmobile brand.

Mulally says production efficiencies can solve half the company's economic problem. That will not suffice unless Ford efficiently produces exciting products. Mulally, a quick study, already has a rudimentary grasp of Detroit-speak: He says Ford must develop new products "with curb appeal -- the 'wow' factor."

But in 2001, with much fanfare, Ford rolled out a new version of a 1950s success, the Thunderbird. It was underpowered, handled badly and is no longer in production. Recently, the company heavily advertised the Lincoln Zephyr. But now it is called the MKZ. Why? This is the behavior of a company whose left hand does not know what its other left hand is doing.

Posted by edelfenbein at 12:44 PM

CEO Tells Truth, Apologizes

Seagate CEO: I help people "watch porn"

We begin counting, now. One, two, thr...

Seagate CEO apologizes for porn remark

Posted by edelfenbein at 1:23 PM

Dow Flirts with 12,500, Gets Number, Never Calls

Yawn. Talk about light volume, not a trader is stirring. The market is down again today after coming oh-so-close to breaking the elusive 12.5K barrier on Wednesday.

Walgreen (WAG) is up on an impressive earnings report. I like WAG a lot. It's a great company, but I think the shares are a bit pricey here. The stock pulled back earlier this year, and it seems to have bounced off $40. Ideally, I'd like to see it go lower before I'd be interested.

I strongly considered adding Progressive (PGR) to the Buy List, but in the end, I went with WR Berkley (BER). I'm happy with my choice, but make no mistake, Progressive is another great company. But I'm not so positive on the company's outlook for this year. Either way, this is one to keep an eye on.

In case you missed it, here’s my Buy List for 2007:

AFLAC (AFL)
Amphenol (APH)
Bed Bath & Beyond (BBBY)
Biomet (BMET)
Donaldson (DCI)
Danaher (DHR)
FactSet Research Systems (FDS)
Fair Isaac (FIC)
Fiserv (FISV)
Graco (GGG)
Harley-Davidson (HOG)
Jos. A Bank Clothiers (JOSB)
Medtronic (MDT)
Nicholas Financial (NICK)
Respironics (RESP)
SEI Investments (SEIC)
Sysco (SYY)
UnitedHealth Group (UNH)
Varian Medical Systems (VAR)
WR Berkley (BER)

I'll start tracking these stocks on the first day of trading of 2007.

Posted by edelfenbein at 10:51 AM

"Cramer" on WallStrip

Lindsay has a special guest audition.

"Shirt on."

Here's another Cramer outtake.

Posted by edelfenbein at 10:19 AM

The Stock Market in 3D

From Information Aesthetics:

an artistic 3D visualization of New York stock exchange data. "I Deal Solution" uses the spiral metaphor for its ability to translate 1-dimensional data into 3-dimensional space. in practice, the sphere size corresponds to the stock price, color to change, vibration to relative change, sphere position on spiral to volume, & sound to total percentual change. "the point is not to transmit a particular meaning but rather to express the power of energy concentrated in space information".

Plus, it weirdly aligns with the Wizard of Oz.

Posted by edelfenbein at 7:43 AM

Coastal Financial Soars on Buyout

As long-time readers know, periodically I’ll write about little-known stocks that have strong businesses, but are unheard of on Wall Street. I’ve never understood why everyone wants to own the next Google or Apple, instead of investing in proven, well-run businesses.

Last year, I mentioned three micro-cap financial stocks; NewMil Bancorp, Northern Empire Bancshares (NREB) and Coastal Financial (CFCP). These are all great stocks, just no one knew about them.

Well, someone found out. In April, NewMil was bought out for a 41% premium. Then in September, Northern Empire agreed to a buyout for a 22% premium. The only one left was little Coastal. I was still a fan. A few weeks ago, I even mentioned CFCP as a contender for the 2007 Buy List.

Today Costal announced that it’s being bought by BB&T (BBT) for $395 million or $17.04 a share. That’s an 18% premium to yesterday’s close.

Posted by edelfenbein at 1:36 PM

Random Thoughts

I watch CNBC in my office with the sound muted. Strangely, even with no sound, I can always understand what Rick Santelli is saying.

Also, if you’re looking for high CD yields, check out Bank Deals. This is a cool site. It lists high-yielding bank rates all around the country. Many require branch visits or in-state residency to qualify (though not all). Check it out, there might be a six-percenter near you.

And finally, Lenny Dykstra—all-star centerfielder, all-star options trader.

Posted by edelfenbein at 1:05 PM

3Q GDP Revised to 2.0%

This morning, the government revised third-quarter GDP growth to 2.0%. The initial estimate was for 1.6%. Then it went to 2.2%, and now it's back to 2.0%.

Here's a look at GDP growth going back to 1994:

Posted by edelfenbein at 10:11 AM

Sarkozy Calls Shareholders Hooligans

From Nicolas Sarkozy, a candidate for president of France:

Our country has to get organised to stop the actions of shareholders who... aren’t entrepreneurs but who behave like hooligans....

As a proud shareholder hooligan, I almost take offense. By the way, Sarkozy is running as the free-market reformer.

Posted by edelfenbein at 9:45 AM

Biomet PE Group to Bid for Smith & Nephew

This is getting interesting. There's a report that the private equity group that's buying Biomet is now considering a bid for Smith & Nephew.

Just before Biomet's board accepted the private equity group's buyout offer, Smith & Nephew considered making a bid for Biomet. Their bid must have been very low, or Biomet's board wanted to make it clear that it had explored all options.

In any event, the idea of Biomet merging with Smith & Nephew still lives.

Posted by edelfenbein at 9:33 AM

Have Dwight Call Your Friends

If you're a fan of The Office, go to this site. Click on "Get a Call," and follow the steps from there.

Posted by edelfenbein at 7:16 AM

Update on Bed Bath & Beyond

I’ve had some time to review the Bed Bath & Beyond (BBBY) conference call (see here, via Seeking Alpha). First, the company had a charge to SG&A last quarter of $7.2 million related to the review of stock option grants and procedures. We already new this was coming. In fact, the company said it was going to be $8 million. After tax, that comes to about two cents a share, so we have our earnings shortfall right there. The company said there might be a little more this quarter.

Next, CEO Steven Temares commented on employee tax charges the company was taking as a result of its stock options grants.

We anticipate the potential cash payments pursuant to the program to be approximately $40 million. While we are still reviewing the accounting treatment related to the potential program, we anticipate the pre-tax income statement impact in the fourth quarter to be slightly higher than the total cash payments. The potential cash outlay primarily represents payments to our employees in connection with increasing the exercised prices on certain stock option grants so as to protect them from certain potential adverse tax consequences.

It's currently believed it is likely the company will recoup a substantial portion of the cash outlay over the next several years through higher proceeds from future stock option exercises, although this recovery will not flow through the income statement.

I want to emphasize that any program arrived at by our Board will be consistent with our company’s beliefs that our people are the reason for our success. As such, we would want to protect them against any adverse tax consequences for events that were beyond their control.
While the program has not been finalized, Warren, Len and I as executive officers, who are also members of the Board of Directors, has informed the Board that we decline to be considered for payments.

That only seems fair. Employees shouldn’t be punished for this, and the company did the right thing. The charge will amount to about nine cents a share.

Now let’s turn to SG&A, which I initially found a little troubling:

Selling, general and administrative expenses for the fiscal third quarter were about $493 million, compared with approximately $410 million in the corresponding quarter a year ago. As a percentage of net sales, SG&A expenses were 30.4% compared with 28.3% a year ago, as a result of the previously mentioned $7.2 million increase in stock-based compensation expense along with legal and accounting charges related to the stock option review and a relative increase in advertising, which includes an increase in paper cost and postal rates.

In addition, there were one-time benefits experienced in the prior year for settlement of credit card litigation and certain insurance recoveries which we did not have in this year's third quarter. As a result of the deleverage in SG&A expense partially offset by the improvement in gross profit margin, the operating profit margin in the fiscal third quarter decreased by approximately 115 basis points. The company’s results also benefited from a reduction in its year-to-date effective tax rate from 36.6 to 36.3%, resulting in a third quarter effective tax rate of 35.8%.

The company also said that it’s targeting earnings of 78 cents a share for the February quarter, which is a penny less than what it said on its last conference call.

My view is that the operationally, BBBY look just fine. The company’s sales-per-share increased by 17.4% from last year. That’s darn good. It’s been helped by the company’s aggressive buyback program. Share buybacks don’t impress me much, but with BBBY, it really has an effect on its earnings statement. Today, BBBY said it's going buy back another $1 billion worth of stock.

Unfortunately, the company hasn’t had all the benefits of its growth in gross margins reach the bottom line. Gross profits-per-share were up 20% last quarter. Unfortunately, they dug around looking for one thing (back-dating), and the probe found an even bigger charge (this tax thing)!

On today’s call, the company said that it’s looking for sales- and earnings-per-share growth of 10% next year...(cough)…low-ball..(cough).

Conservatively, I’d say that BBBY’s calendar year-earnings will be about $2.34 a share next year. (Their fiscal year doesn’t follow the calendar year, but I’m estimating for sake of comparison.) That means that the stock is going for just 17 times next year’s earnings, which strikes me as a very good price.

Posted by edelfenbein at 7:07 AM

In China Feng Shui Guys See Market Top

From Reuters:

Forget fund flows and profit predictions, 2007 is about "fire sitting on water". Buy oil, avoid metals, and don't get your fingers burnt.

Feng shui experts steeped in the ancient Chinese knowledge of geomancy, or natural energies, see a turbulent year ahead for both markets and mankind.

"The elements -- they are in conflict," said Raymond Lo, a practitioner for more than 10 years, whose office close to Hong Kong's Victoria Harbour is considered a repository of positive feng shui energies in this hotbed of capitalism.

"Because it's fire and water, and they're not in harmony. So therefore next year in January, it's not so peaceful."

Wait, don't get my fingers burnt! Oh, that does make more sense.

Posted by edelfenbein at 6:51 AM

Bed Bath & Beyond Earned 50 Cents a Share

Bed Bath & Beyond (BBBY) just reported earnings of 50 cents a share, two cents below estimates. Wall Street was expecting earnings of 52 cents a share. Last year, BBBY made 45 cents a share.

Historically, more than one-third of the company's earnings comes during this (the February) quarter. I have to say that I'm very impressed with BBBY's gross margins. For this quarter, gross margins topped 43%. That's an improvement of 2.6% in the last six years.

Perhaps I’m missing something, but I don’t see where the big increase in SG&A is coming from (that’s gross profit minus operating profit). This had been decreasing for several quarters. It jumped in the four quarters prior to this one, but that was due to that FASB 123(R) jazz. That I understand, but this I don’t get.

Like I said, I could be missing something. This is just a first look. Perhaps the company will address it on the call (btw, BBBY is one of the few companies that doesn’t take on questions on its call).

The company also announced a $1 billion share buyback program. The AP also notes:

Bed Bath & Beyond expects a $40 million charge during its fiscal fourth quarter as part of "a program intended to protect over 1,600 employees from certain potential adverse tax consequences." The tax consequences are a result of historical issues with some of the company's stock option grants disclosed through a company stock option review.

The Securities and Exchange Commission is conducting an informal investigation into Bed Bath & Beyond's stock option grant practices. The U.S. Attorney for the District of New Jersey is conducting a similar inquiry. Both probes are looking at backdating, in which the vesting date of a stock option is changed to make it more valuable to the holder. While not illegal, the practice must be properly disclosed to shareholders.

Posted by edelfenbein at 4:29 PM

Vornado Realty Trust

More boring stocks. Today, I give you Vornado Realty Trust (VNO). Over the last 32 years, shares of Vornado are up more than 600-fold.

The flat gold line on the chart is the S&P. It's not really flat, it just looks that way in comparison to Vornado.

By the way, that 60,000% doesn't include dividends. Since VNO is a REIT, it pays fairly generous dividends. The current yield is 2.8%. If I had to estimate, I'd say that dividends by themselves gave VNO shareholders about a 200% return since 1974, meaning the stock's total return is about 180,000%.

Posted by edelfenbein at 11:54 AM

Blankfein Rakes In $54 Million

The WSJ reports that Lloyd Blankein's, Goldman Sachs' CEO, bonus was for $54 million, the biggest in Wall Street history.

Mr. Blankfein's pay package reflects the firm's performance atop the Wall Street heap over the past year, when its profits rose 70% to $9.54 billion and its stock price surged 59%, increasing its stock-market value by $31 billion.

But it also reflects the inflation in Wall Street CEO pay packages, which last year generally came in at between $30 million and $40 million, with the stock market in the fourth year of a bull run and a boom in private-equity buyouts and hedge-fund trading.

A former tax lawyer and gold salesman who rose to become head of the firm's fixed-income, currency and commodities division in 1998, the 52-year-old Mr. Blankfein epitomizes Goldman's risk-taking culture.

His latest pay package includes a cash bonus of $27.3 million, restricted shares valued at $15.7 million and options valued at $10.5 million, according to a filing yesterday by Goldman, which disclosed the stock awards and included the cash bonus. He also earned a salary of $600,000.

Goldman has 450 million shares, so Blankfein's pay comes to 12 cents a share. In the past year, the stock is up $76.

Posted by edelfenbein at 6:46 AM

An Open Letter to Biomet Shareholders

Vote Against the Private Equity Buyout

Dear Shareholders of Biomet,

On Monday, the Board of Directors of Biomet (BMET) announced that it agreed to a buyout offer from a consortium of private equity frims. The consortium consists of the Blackstone Group, Goldman Sachs Capital Partners, Kohlberg Kravis Roberts, Texas Pacific Group and one of Biomet’s founders, Dane Miller. The deal is for $10.9 billion ($44 a share) and is due to be completed by October 31, 2007.

We believe this is a poor deal for shareholders of Biomet and we urge all shareholders to vote against it.

Biomet’s track record is known to everyone. For the last three decades, the company has been one of the great success stories of American free enterprise. Biomet has delivered record sales and earnings every year since it began operations in 1977. This is an astounding achievement. Moreover, the company’s products have helped millions of people all over the world lead a better life. This is something we all should be proud of.

In 1977, the company had sales of just $17,000. For FY 2006, Biomet’s sales exceeded $2 billion. Today Biomet employs over 6,000 people. Since 1982, the stock has split nine times. In the last 20 years, shares of Biomet have increased by more than 40-fold.

Biomet has regularly had its return-on-equity top 20%. Additionally, the company has no long-term debt and a very healthy cash position.

Give all these facts, we’re very disturbed by management’s decision to sell Biomet for such a low price. Monday’s press release notes that $44 is “a 27% premium over Biomet's closing price on April 3, 2006.”

This is a misleading fact that was repeated with question through much of the financial media. This “premium” is measured from over eight months ago to more than ten months in the future. Annualized, this premium works out to 16.1% which is less than the shares’ long-term performance.

Additionally, we believe the shares were unusually low-priced in April so the appearance of a premium is illusionary. Forty-four dollars a share is not only well below Biomet’s high price from 2004, but it’s also below the average share price for the entire second half of 2004. Since that time, Biomet’s sales and earnings have continued to increase.

The graph above shows Biomet's share price (black line) with the $44 buyout offer (red line). The yellow line is Biomet's earnings-per-share (right scale), and the blue portion is Wall Street's consensus projection. The earnings and share prices and scaled by a ratio of 25 to 1.

For a number of reasons, shares of Biomet and the entire health care sector have been punished over the past year. This should not be a reflection on Biomet’s long-term intrinsic value. And it should not be a reason to sell the company at a distressed price. Bear in mind that the stock often traded above 25 times earnings. Despite being called a premium, the private equity deal represents a substantial discount to Biomet’s historic valuation. We have to asked the Board of Directors, "What’s the hurry?"

While there certainly are problems with Biomet’s business, particularly in the spinal business, these problems are a small part of the company’s overall business. Consider that over the next decade, the number of Americans aged 55 to 75 will nearly double. David Phillips at 10-Q Detective notes that “hip and knee and extremity joint replacements account for more than 95% of all orthopedic implants and Biomet holds about 12% of this market, which accounted for 68% of the company's net sales in FY 2006.”

We’re not opposed to a buyout offer, but we encourage the Board of Directors to consider other offers. The present offer undervalues Biomet’s potential and does not adequately reflects its proper value.

We encourage all shareholders to let the board know that this deal is unsatisfactory and not in the best interest of shareholders. If it comes to vote, we encourage a no vote on the present offer.

Sincerely,

Eddy Elfenbein
Crossing Wall Street

Posted by edelfenbein at 2:02 PM

FactSet Earns 47 Cents a Share

FactSet Research Systems (FDS) just reported earnings of 47 cents a share, a penny better than estimates. The company made 38 cents a share last year. Sales were up 21% to $108.9 million.

The stock is up $3 a share today to a new high. It's now a 40%+ winner for the year.

Posted by edelfenbein at 11:00 AM

What to Look for This Week

We have two Buy List stocks reporting earnings this week. FactSet (FDS) reports tomorrow. The company already gave guidance for revenues ($106 to $109 million) and operating margins (31.5% to 33.5%), but not EPS. Fortunately, I own a calculator so I'm expecting EPS of 47 cents a share. Maybe 48.

I should add that FDS is by far the most expensive stock on the Buy List. Ultimately, I decided to keep it on the 2007 Buy List. Its business is strong and I think it deserves to be richly priced.

Bed Beth & Beyond (BBBY) is set to report on Wednesday. BBBY has been one of my favorite stocks. Wall Street is expecting 52 cents a share, but I think BBBY can top that. This can easily be a $45 - $50 stock.

Posted by edelfenbein at 4:55 PM

Moron of the Year

We have a winner:

A former UBS PaineWebber employee was sentenced to eight years in prison on Wednesday for planting a computer "logic bomb" on company networks and betting its stock would go down.

The investment scheme backfired when UBS stock remained stable after the computer attack and Roger Duronio lost more than $23,000.

A federal judge in New Jersey sentenced Duronio, 64, to 97 months in prison and ordered him to make $3.1 million in restitution to his former employer, the U.S. attorney's office said in a statement.

Duronio was convicted on July 19 of one count of securities fraud and one count of computer fraud in the 2002 case.

Duronio quit his job as a systems administrator in February 2002 after repeatedly expressing dissatisfaction about his salary and bonuses, the statement said.

He then planted malicious computer code known as a "logic bomb" in about 1,000 of PaineWebber's approximately 1,500 networked computers in branch offices. On March 4, 2002, the "bomb" detonated and began deleting files.

Duronio attempted to profit from the attack, the statement said. He bought more than $23,000 in put option contracts for UBS AG stock, betting the stock's price would go down after his "logic bomb" went off.

But, according to testimony at his trial, the stock remained stable after the computer attack and Duronio lost all of his investment.

He would have gotten away with it, too. If it weren't for those meddling kids.

Posted by edelfenbein at 12:40 PM

Biomet Goes Private Equity

At $44 a share. Here's the press release:

Biomet, Inc. to Be Acquired by Private Equity Consortium for $10.9 Billion or $44 Per Share in Cash

WARSAW, Ind.--Biomet, Inc. a worldwide leader in the design and manufacture of musculoskeletal medical products, announced today that it has entered into a definitive merger agreement to be acquired by a private equity consortium in a transaction with a total equity value of approximately $10.9 billion. The consortium includes affiliates of the Blackstone Group, Goldman Sachs Capital Partners, Kohlberg Kravis Roberts & Co. and TPG.

Under the terms of the merger agreement, Biomet shareholders will receive $44 per common share, representing a 27% premium over Biomet's closing price on April 3, 2006, the trading day prior to public speculation, which was subsequently confirmed by Biomet on April 6, 2006, that it had retained Morgan Stanley to assist it in exploring strategic alternatives.

The board of directors of Biomet has unanimously approved the merger agreement; the merger and the transactions contemplated thereby, and will also recommend approval by Biomet's shareholders.

The transaction will be financed through a combination of equity contributed by the private equity consortium and debt financing that has been committed by Bank of America and Goldman Sachs. There is no financing condition to the obligations of the private equity consortium to consummate the transaction.

I'm not happy with this price, and I think it's a lousy idea. This is just $2 a share above Friday's close, and it's lower than where Biomet was two years ago. Earlier I said that $45 a share was a minimum, but I didn't think the board would consider anything below that. I don't see how this deal helps shareholders.

If I were in Medtronic's shoes, I would consider making an offer. The worst they can say is no.

Update: Speaking of Medtronic, Barron's had a good piece on the stock last week.

Posted by edelfenbein at 8:20 AM

Einstein and Keynes

Here's a fascinating article by James K. Galbraith, John Kenneth. Galbraith's son, about the influence of Albert Einstein on John Maynard Keynes.

One of the most intriguing and little-noted facts about John Maynard Keynes's masterwork, The General Theory of Employment Interest and Money, concerns the first three words of its title. These are evidently cribbed from Albert Einstein. Alone that would be only a curiosum; but there is more. The parallels between Keynes's economics and Einstein's relativity theory are deep enough, and evidently intentional enough, to provide a useful framework for thinking about what Keynes meant to do with his scientific revolution.

Posted by edelfenbein at 12:44 PM

What's Alan Up to These Days?

From The Onion:

Posted by edelfenbein at 8:07 AM

The Pessimism of Crowds

The Dow is at another all-time today. The index is now up to 12,468.

Last year, Business Week asked its readers to vote on where the Dow would be at the end of 2006. Here are the results:

10,000 or below.........................15.1%
Around 10,500............................13.1%
Around 11,000............................24.3%
Around 11,500............................28.3%
12,000 or higher.........................15.8%
Not sure......................................3.4%

Sheesh, what was everyone so gloomy about? For from being irrational or even exuburent, the crowd was very tame. Less than one in six got it right. Here's what I wrote at the time:

That means that the median is "around 11,000." I won’t predict that the Dow will hit 12,000, but I think it’s entirely reasonable that it could. That’s a little over 10% from where it is today which is in the middle of the long-term average. Yet only one in six respondents said "12,000 or higher." Strange.

I normally would expect polls like this to be overly optimistic. Maybe I’m reading too much into this, or perhaps the public is much more pessimistic that I realized.

The professionals were even gloomier. Here were the predictions of 76 market pros. The Dow is currently higher than all but three of their forecasts.

Ticker Sense points out that the latest Barron's roundup of market pros sees the Dow headed to 13,220. That's only 6% from where we are now.

Posted by edelfenbein at 10:48 AM

The 2007 Buy List

Here’s the Buy List for 2007:

AFLAC (AFL)
Amphenol (APH)
Bed Bath & Beyond (BBBY)
Biomet (BMET)
Donaldson (DCI)
Danaher (DHR)
FactSet Research Systems (FDS)
Fair Isaac (FIC)
Fiserv (FISV)
Graco (GGG)
Harley-Davidson (HOG)
Jos. A Bank Clothiers (JOSB)
Medtronic (MDT)
Nicholas Financial (NICK)
Respironics (RESP)
SEI Investments (SEIC)
Sysco (SYY)
UnitedHealth Group (UNH)
Varian Medical Systems (VAR)
WR Berkley (BER)

I’ll start tracking their performances on January 1. As the rules say, I can’t make any changes for the entire year.

You might think the list looks very familiar. Well, you’re right. I’ve only made five changes. Some of you might be surprised but such little activity, but it’s actually quite reasonable. This implies a holding period of four years. Investing is one of few areas where doing nothing is often the best thing that needs to be done. And frankly, I like to think of myself as a pioneer in the field of idleness.

The five stocks I’m removing are:
Brown & Brown (BRO)
Dell (DELL)
Expeditors International (EXPD)
Home Depot (HD)
Wachovia (WB)

The new additions are :
Amphenol (APH)
Nicholas Financial (NICK)
Graco (GGG)
WR Berkley (BER)
Jos. A Bank Clothiers (JOSB)

I’ll discuss these stocks more in the days ahead. I’ll start tracking the new stocks at the start of the year. Just like this year, I’ll consider the stocks to be equally weighted on January 1.

Posted by edelfenbein at 10:46 AM

CPI Unchanged in November

Today's CPI report shows that consumer prices didn't change during November. Both the headline and core numbers came in flat. This is good news for Bernanke's credibility. In July, he testified that core CPI would fall later this year.

Posted by edelfenbein at 9:25 AM

Safety Insurance Group (SAFT)

I'm not recommending Safety Insurance Group (SAFT), but I wanted to show you another "dull" insurance stock that's been a huge winner for investors. The company has a market value of $840 million, and it's only followed by three analysts.

Not a bad chart:

Posted by edelfenbein at 4:20 PM

Morning Notes

Today is a huge day for the market and our Buy List. The Buy List is now up over 12% for the year. Thirteen of our 20 stocks are up over 1% today. FactSet (FDS) is at a new 52-week high, as is Biomet (BMET). We’re still waiting for any big announcements from Biomet (nothing less than $45!) on the merger front.

I also want to remind you that tomorrow I’m going to unveil the Buy List for 2007. Can you feel the excitement? Great, me too! We’ll start tracking the new list on January 1.

Yesterday, Danaher (DHR) said that it expects earnings next year in a range of $3.68 a share to $3.78 a share. That means that it’s going for about 19 times next year’s estimate. The company also narrowed its fourth-quarter range to 92 cents to 94 cents a share, from 89 cents to 94 cents a share. Home Depot (HD) announced that it’s buying China’s The Home Way. This is HD’s first move into China.

Finally, Mark Gilbert looks at how investment banks advertised themselves.

Posted by edelfenbein at 10:49 AM

A Three-Way With Playboy Playmates....

It looks like it's a three-way race to win the 2006 Playboy Stock-Picking Contest. With just two weeks left, here are the top three competitors:

1. Courtney Culkin +36.38%
2. Amy Sue Cooper +34.80%
3. Deanna Brooks +34.69%

I have a feeling this will come down to the wire. Good luck, ladies!

Posted by edelfenbein at 10:08 AM

A Theory of Investment Banking

Arnold Kling asks, "Why Aren't There More Investment Bankers?"

It's an interesting question. Given the compensation, why doesn't the demand overwhelm supply. Kling suggests that supply and demand are, indeed, out of balance -- the wannabe bankers have too little self-respect.

I think you have to come up with a story about barriers to entry. One plausible story that occurs to me is that some highly-remunerated aspects of investment banking require experience. For example, if a corporate client is involved in a megabucks merger, the client cannot afford a mistake. So the client would pay a premium to have an experienced M&A (mergers and acquisitions) team.

The scarce resource in M&A is the experienced investment banker. The barrier to entry is that you cannot get experience without doing big deals, and you cannot do big deals until you get experience.

What that suggests is that if you are young and greedy, you would pay an investment bank to give you experience. And in fact, young investment bankers do feel exploited--working incredibly long hours, doing tedious stuff, and toadying up to people in a way that no self-respecting intelligent person would otherwise be willing to do. In return for that exploitation, you earn a decent living, but more importantly, you get the experience that gives you a chance to work/luck your way into the ranks of the truly rich.

Posted by edelfenbein at 10:31 PM

Slowing Growth or Inflation?

For this week's Blogger's Take, Barry Ritholtz posits: "Given the concerns raised by the Fed, what is really the bigger threat to the economy: Slowing Growth or Inflation?"

Here's my answer:

Slowing growth is more important, by far. Through its history, the Fed has basically perfected the art of killing off growth. Stopping inflation? Eh…not so much. In fact, I would say that slowing growth is itself an inflation threat. Personally, I’d like to see the Federal Reserve much less federal, and far more reserved. Monetary policy is always and everywhere a human phenomenon.

As a general rule, $13 trillion economies don’t start or stop on a dime. Since 1990, when one quarter of GDP growth is above trend (3%), there’s a 60% chance that the following quarter will also be above trend. Conversely, when growth falls below trend, there’s a 64% chance that the following quarter will also be below trend.

In other words, once you’re stuck in slow growth, it’s hard to break out. During the last recession, we had 11 straight below-trend quarters. We finally broke out, but now the outlook is looking shaky. The last two quarters, and three of the last four, have been below trend.

Inflation, on the other hand, is—and has been—well contained. The 12-month core CPI has bounced between 1% and 3% for ten straight years. Not once has it left that range. And it’s been over 15 years since it hit 4%, which was during a period of below-trend growth. That’s not a coincidence.

Other bloggers weighing in include Rob May of Businesspundit.com, Abnormal Returns, Mike Shedlock of Mish's Global Economic Trend Analysis and Russ Winter of Winter (Economic & Market) Watch.

Posted by edelfenbein at 8:23 PM

Lindsay & the Pacemakers

Today, WallStrip looks at Medtronic (MDT).

Medtronic is simply an amazing company. The medical device maker has increased its dividend every year for the past 28 straight years! In the last 40 years, Medtronic's stock has split 2-for-1 ten times. That turned every one share into 1,024 shares.

Ah, but what have you done for me lately? Well, for starters, three weeks ago the company gave us another great earnings report. For the October quarter, MDT made 59 cents a share, three cents more than Wall Street was expecting.

More importantly (in my mind), Medtronic stood by its earnings forecast for FY2007 and FY2008 (its fiscal year ends in April). For 2007, MDT expects earnings-per-share to range from $2.30 to $2.38. And in 2008, it expects EPS of $2.65 to $2.75. Trust me, not many companies make public forecasts like that.

This was actually a reiteration of an earlier projection. I always like to see companies stand by their forecasts. This is especially important in Medtronic’s case because the stock’s relative valuation has dropped sharply this year.

Shares of Medtronic routinely traded above 25 times earnings. But this summer, the stock plunged to a four-year low, even as its earnings and dividends continued to grow. Check out this graph:

The black line (left scale) is the share price, and the blue line is the earnings (right scale). The red is the company’s projection. The two sides of the chart are set at 25-to-1. If anything, the lower end of the forecast appears to be very conservative.

You can see that the stock really got smacked around. The good news is that its been recovering, but even a $60 share price today would still been on the modest side by historical standards.

While the P/E ratios have narrowed in general for the overall market, the effect has been even greater on Medtronic. Here's a chart showing MDT's P/E compared with the S&P 500.

Here's Medtronic's relative P/E ratio, which is probably one of the purest measures of values. The relative P/E ratio is simply the company's P/E divided by the market's P/E. Medtronic would often carry an earnings multiple 50% to 70% greater than the market's. Today, that's down to 44%, but it's higher than where it was.

Here are Medtronic's numbers for the past several quarters:

Quarter...........EPS.............Sales
Jul-01............$0.28...........$1,455.70
Oct-01...........$0.29...........$1,571.00
Jan-02...........$0.30...........$1,592.00
Apr-02...........$0.34...........$1,792.00
Jul-02............$0.32...........$1,713.90
Oct-02...........$0.34...........$1,891.00
Jan-03...........$0.35...........$1,912.50
Apr-03...........$0.40...........$2,148.00
Jul-03............$0.37...........$2,064.20
Oct-03...........$0.39...........$2,163.80
Jan-04...........$0.40...........$2,193.80
Apr-04...........$0.48...........$2,665.40
Jul-04............$0.43...........$2,346.10
Oct-04...........$0.44...........$2,399.80
Jan-05...........$0.46...........$2,530.70
Apr-05...........$0.53...........$2,778.00
Jul-05............$0.50...........$2,690.40
Oct-05...........$0.54...........$2,765.40
Jan-06...........$0.55...........$2,769.50
Apr-06...........$0.62...........$3,066.70
Jul-06............$0.55...........$2,897.00
Oct-06...........$0.59...........$3,075.00

Posted by edelfenbein at 9:09 AM

Happy Birthday, Mr. Chairman

Ben Bernanke turns 53.

Posted by edelfenbein at 8:44 AM

"Substantial"

For the fourth straight meeting, the Federal Reserve didn't change interest rates. Here's the statement:

The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent.

Economic growth has slowed over the course of the year, partly reflecting a substantial (NEW!) cooling of the housing market. Although recent indicators have been mixed (also new), the economy seems likely to expand at a moderate pace on balance over coming quarters.

Readings on core inflation have been elevated, and the high level of resource utilization has the potential to sustain inflation pressures. However, inflation pressures seem likely to moderate over time, reflecting reduced impetus from energy prices, contained inflation expectations, and the cumulative effects of monetary policy actions and other factors restraining aggregate demand.

Nonetheless, the Committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; William Poole; Kevin M. Warsh; and Janet L. Yellen. Voting against was Jeffrey M. Lacker, who preferred an increase of 25 basis points in the federal funds rate target at this meeting.

The "substantial" is new. That sounds like there was some debate about that one. If I had to guess, I'd say there was some debate at previous meetings. The "although recent indicators have been mixed" used to be just "going foward." That entire sentence was added last time.

The vote was the same as in October. Jeffrey Lacker wanted higher rates for the fourth straight time. This is Lacker's last meeting with a vote as the chairs rotate at the end of the year. Hoenig, Minehan and Moskow will get votes at the next meeting in January.

It's now been over five months since the Fed last raised rates. It's not unusual for the Fed to cut rates so soon after a series of increases. The Fed cut rates in July 1995, less than five months after an increase. And at the start of 2001, the Fed lowered rates seven months after an increase.

Real rates are still rather modest for an economic expansion.

Posted by edelfenbein at 2:15 PM

Breaking: Transcript of Today’s Fed Meeting

I’m afraid I can’t disclose my sources, but I got hold of a transcript of today’s FOMC meeting.

I'll warn you, it's a bit rough:

Bernanke:…as you can see in Chart 34-D, aggregate household balance sheets remain generally sound; although some pockets of distress have surfaced, average delinquency rates on mortgages remain at elevated levels...
Kroszner: Hey folks, lunch is here!
Warsh: Finally, I’m starving.
Lacker: Alright!
Bies: Hallelujah!
Yellen: Where’d he order...Krupins?
Poole: Anybody check the market?
Geithener: OK, who had the chicken salad?
Kohn: Yeah, it’s not looking good.
Mishkin: That’s me.
Lacker: The chicken salad?
Kohn: No, the dollar.
Geithener: Turkey Breast?
Lacker: LOL, how bad?
Kroszner: Yo!
Kohn: $1.33.
Poole: Damn it.
Mishkin: Hey, how’s Google? LOL
Bies: Randy, I had the turkey. I think you had the pastrami.
Kroszner: Oh, you’re right. My bad.
Bernanke: What about the yen?
Mishkin: I just got 300 shares at $485.
Kohn: I didn’t see the yen. CNBC had some reporter at a mall in Jersey.
Yellen: This is yours.
Poole: Liz Claman?
Warsh: LOL.
Poole: Man, I like that Liz.
Kroszner: Give me Becky, anytime.
Geithener: Corned beef for the chair.
Warsh: Boo-yah, Freddie. LOL.
Bernanke: Thanks Tim.
Geithener: OK, I’ve got unclaimed roast beef assets.
Kroszner: Check out GROW. That stock kicks ass.
Geithener: Going once, going twice....
Pianalto: Sold!
Mishkin: What does it do?
Geithener: I think we have an extra pastrami.
Kroszner: It fucking goes up. That’s what it does. LOL.
Yellen: I had the Cobb salad
Geithener: Oh, here you go Jan.
Yellen: Thanks.
Geithener: Hey, can somebody tip the guy?
Bies: Don’t look at me, Tim. I put all my money in euros!
All: LOL

(long, awkward pause)

Bernanke: Um...okay people, let’s get back to business. We have a lot to get through.
Mishkin: Hey Ben, what’s the rush? I know we’re not gonna cut. You know we’re not gonna cut. Everybody knows it. No use forcing this.
Bies: He’s right B. Let’s punt it till January.
Kroszner: Yeah, let’s just chill. See how the market takes it. Hell, the more we keep our mouths shut the better.
Poole: LOL, that’s right. I’m with Fred.
Yellen: Me too.
Bies: Me too.
Geithener: This is so weird. How’d we get an extra pastrami? Is it yours Kev?
Warsh: Sorry, bro.
Bernanke: Ladies and Gentleman, I feel as if I must remind you that we have an obligation—a duty—to look at the broad spectrum of economic activity. As the FOMC, that’s our job.
Pianalto: That’s right, Mr. Chairman. We haven’t even discussed my bank’s region...
(Assorted Moans)
Mishkin: Oh, Christ.
Kroszner: Here she goes again.
Geithener: Folks, we’ve got an extra pastrami if anybody wants it.
Pianalto: Mr. Chairman, I’ve prepared a Power Point presentation...
(Loud and Prolonged Groans)
Poole: Oh, fuck!
Mishkin: No way. I am NOT sitting through this shit again.
Geithener: Look, I’m just going to throw it away if nobody wants it.
Pianalto: This details a disturbing slack in gross output...
Poole: I got a 3 o’clock tee...
Pianalto: ...of aggregate demand.
Mishkin: Gee Sandy, why could that be? Why could that possibly be?? Oh, right, it’s fucking Cleveland. That’s why! You live in fucking Cleveland!
Kroszner: Ba!
Pianalto: Mr. Chairman!
Warsh: Oh, snap!
Bernanke: Gentleman, please
Pianalto: Mr. Chairman!
Bies: LOL
Bernanke: I must ask you to please respect…
Geithener: Look, it’s a perfectly good sandwich.
Bernanke: Sandy, it might be easier for the committee if you just gave us a summary.
Pianalto: Well, I’ve also prepared this memo.
Mishkin: Geez…well, why didn’t you start with that?
Bernanke: Mr. Mishkin…
Mishkin: I’m sorry Ben, but she does this every fucking time.
Geithener: Fine, I’ll eat it.

(Pause as Bernanke paces the floor)

Bernanke: Ladies and gentleman, I have to go up to Capitol Hill in a few weeks for Humphrey-Hawkins. Not you guys, but me, all alone! And I got to face the brand-new committee chairs. These guys are looking for blood, and I can’t go in empty-handed. We need to get our act together. We need a solid, tough statement from us.
Poole: Who are the new chairs, anyway?
Geithener: Um, I think it’s the guy from Connecticut.
Kroszner: Dodd?
Bernanke: Right, Dodd and …um…who’s that gay one?
Mishkin: Hillary?
All: LOL
Bernanke:Very funny.
Bies: No, not Hillary. The one who has sex with men!
All: ROFL
Bernanke: People, please.
Yellen: Just watch out for Bunning, he’s cuckoo.
Kroszner: Forget Bunning, stay away from Bartiromo.
All: LOL
Bernanke: I swear, you guys are worse than a faculty meeting at Princeton. Now let’s focus on the wording of the statement. I think we have to keep the ling about “inflation pressures seem likely to moderate over time.”
Eddy: BA!
Pianalto: Who said that?
Pianalto: I think it came from the… the credenza?
Bernanke: Folks, we don’t have much time. Can we get back…
Bies: Wait…did the eyes in that portrait just move?
Bernanke: …to our statement…
Geithener: OH, DEAR LORD!
Poole: What?
Geithener: This pastrami is terrible.
Kroszner: Benny, the most important thing we need to make clear is that we have to tell the bond market that the Federal Reserve will not let the housing market do our job for us.
Mishkin: Exactly!
Bernanke: But they know that’s not true.
Mishkin: Of course they know that, but we still have to go through the motions.
Bernanke: Are you saying we have to lie?
Mishkin: No, I'm saying we have to lie AND make it perfectly obvious that we know we're lying.
Geithener: Seriously guys, this is inedible.
Yellen: He’s right, Ben. If we don’t lie clearly and obviously, it could hurt our credibility with the markets.
Bernanke: Gee, I dunno. Bill, what do you think?
Poole: Personally, I think the best strategy is just attack it head on and keep focused.
Bernanke: Aren’t you worried about fallout from the currency and bond markets?
Poole: I’m sorry. I thought we were talking about the pastrami.
Bernanke: Does anyone else have something to add?
Kroszner: Look, it’s real simple. We don’t meet again until late-January. Until then, we talk tough in public but let the dollar fall against every dipshit currency out there.
Mishkin: It's really quite easy.
Bernanke: Geez, is this as cynical as I think?
Warsh: Yeah, probably.
Bernanke: Ok, but let’s make the vote with one abstention again. The media loves that. Jeff, is that cool with you?
Lacker: Um...yeah, whatever.
Bernanke: Well, I think we’re all set then. Oh, I nearly forgot. Do we have your approval, sir?
Rove: Let’s roll.
Bernanke: Terrific! Meeting adjourned.

Posted by edelfenbein at 1:45 PM

Goldman's Profits Up 93%

Another blow-out quarter for Goldman Sachs (GS).

The famous Price/Earnings Ratio comes under frequent attack, but you can see from the chart Goldman’s stock has followed its earnings rather closely. Goldman just capped off the most profitable quarter in Wall Street history. The firm made $3.15 billion in the November quarter, nearly doubling what it made last year. Revenues soared 47% to $9.41 billion. All told, Goldman made $6.59 a share, which beat Wall Street’s consensus by 42 cents. Once again, the profits were driven by trading:

Fourth-quarter trading revenue rose 55 percent to $5.24 billion, accounting for more than half of the firm's income. Revenue from fixed-income, currencies and commodities trading rose 58 percent to $3.1 billion, including the Accordia gain. Equities trading revenue jumped 52 percent to $2.13 billion.

By the way, if you're interested in working for Goldman, you can take their "where do I fit in" quiz. Good luck!

Posted by edelfenbein at 10:00 AM

Jim Cramer--Cub Reporter

Way back when, Jim Cramer used to be president of the Harvard Crimson. The paper has all of his stories archived online.

Here's JJC's very first article, from March 16, 1974, about being a vendor at the Vet. Apparently, he's always had the heart of a trader.

As soon as the 1973 campaign began, I rushed down to Veteran's Stadium to watch not the Phillies, but the professional vendors. I noticed two types of real hawkers: the 40-year veterans who sell year-round, and the college kids from the Mainline area who work from May to September. I realized I couldn't vie with the aging hustlers. These lower-deck professionals had techniques and aisle space-rights not to be violated by any rookie.

So I decided to go to the lucrative upper-deck trade and challenge the successful students. I went to the upper deck commissary and demanded to sell hotdogs. I hoped to combine the style of Veteran's Stadium fixture Charlie "Hotdog" Frank and the hustle of the nouveau-riche dog-men. Nevertheless, lacking the seniority to sell the high-profit-margin dogs, I settled back to the 35-cent cokes and prayed for an instant heat wave.

This just in, Carter beat Ford.

Posted by edelfenbein at 4:53 PM

Bambi on What Yahoo Did Wrong

Bambi Francisco does a good take down on how Yahoo (YHOO) missed, and keeps missing, the ball.

Posted by edelfenbein at 3:51 PM

Craig's List: Delightfully Communist

DealBook writes about the appearance of Craig's List at the UBS global media conference.

When one analyst asked how CL plans to maximize its revenue, the company said, "um yeah, we're really not interested in that stuff."

A riot nearly broke out.

Following the meeting, Mr. Schachter wrote a research note, flagged by Tech Trader Daily, which suggests that he still doesn’t quite get the concept of serving customers first, and worrying about revenues later, if at all (and nevermind profits). Craigslist, the analyst wrote, "does not fully monetize its traffic or services."

Mr. Buckmaster said the company is doubling in size every year, as measured by page views and listings.

Larry Dignan, writing on Between the Lines blog at ZDNet, called Mr. Buckmaster "delightfully communist," and described the audience as "confused capitalists wondering how a company can exist without the urge to maximize profits."

A Web site that doens't run ads? What-EVER!

Posted by edelfenbein at 12:58 PM

Smith & Nephew Poised to Bid for Biomet

Whoa, this is big. The Financial Time's Alphaville is reporting that Smith & Nephew is in merger talks with Biomet (BMET). Coming after Golden West Financial, this would be our second Buy List merger of the year.

Smith & Nephew is in preliminary merger discussions with Biomet, its US rival best known for its artificial hips and other replacement joints, in a deal that could double the size of the British healthcare group. While sources stressed last night that the talks were at a very early stage, the deal is aimed at creating an orthopaedic specialist worth up to $20bn and capable of competing against the US sector leaders, Zimmer and Stryker.

Morgan Stanley, Biomet’s financial adviser, was drafted in to work on the company’s options in the spring following the sudden resignation of its co-founder and president, Dane Miller. Biomet is believed to have also held discussions with JPMorgan private equity.

S&N is valued at £4.8bn ($9.2bn), while Biomet’s market cap is $8.9bn. S&N would likely demerge Biomet’s dental business, which has been valued at $2bn. Zimmer has been mooted as a possible buyer.

Biomet is up big today. My hope is that they accept nothing less than $45 a share.

Posted by edelfenbein at 10:32 AM

Damn It Feels Good to be a Trader

Check out these results from the big houses.

This week begins around round of earnings reports from the brokers. Goldman (GS) leads off tomorrow, Bear Stearns (BSC) and Lehman (LEH) on Thursday and Morgan (MS) follows next Tuesday.

The party, however, could be coming to an end. Bloomberg notes:

Merrill's Guy Moszkowski, the No. 1-ranked U.S. brokerage analyst by Institutional Investor magazine, estimates the combined profits of Goldman, Morgan Stanley, Lehman and Bear Stearns will fall 5.8 percent in 2007. Revenue will decline about 2 percent, compared with a 31 percent gain this year.

Trading revenue, which accounts for about half of the firms' total, will fall 3.7 percent next year, Moszkowski said. Revenue from investment banking, which includes securities underwriting and providing mergers advice, probably will rise 7.8 percent, he forecast. Asset management will gain 11 percent.

Investment banking executives, including Goldman CEO Lloyd Blankfein, say their traders thrive on price swings. The volatility of U.S. Treasury bonds slipped this year to the lowest in five years and is the lowest in a decade for U.S. stocks, reducing the firms' opportunity to make money on hedging and trading for clients and themselves. Trading volume in stocks on the S&P 500 fell in each of the past three months from a year earlier.

Citigroup's (C) stock has badly lagged this sector. As I've said before, I think it would be a good move to spin off both Smith Barney and Salomon Brothers.

Posted by edelfenbein at 7:26 AM

Five Macroeconomic Myths

Nobel Prizer Edward Prescott looks at Five Macroeconomic Myths in today's Wall Street Journal. Here's #1, "Monetary policy causes booms and busts."

Greg Mankiw, former chairman of the Council of Economic Advisers, wrote the following in a 2002 paper: "No aspect of U.S. policy in the 1990s is more widely hailed as a success than monetary policy. Fed Chairman Alan Greenspan is often viewed as a miracle worker." Or, as Mr. Mankiw later asks, was Mr. Greenspan just lucky?

One of the mysteries of the 1990s is how to explain the economic boom when the increase in capital investments -- as measured by the national accounts -- grew at a subdued pace. The numbers simply don't add up. However, it turns out that something special happened in the 1990s, and it wasn't monetary policy. In a recent paper, Minneapolis Fed senior economist Ellen McGrattan and I show that intangible capital investment -- including R&D, developing new markets, building new business organizations and clientele -- was above normal by 4% of GDP in the late 1990s.

This difference is key to understanding growth rates in the 1990s: Output, correctly measured, increased 8% relative to trend between 1991 and 1999, which is much bigger than the U.S. national accounts number of 4%. Associated with this boom in unmeasured investment is the huge amount of unmeasured savings that showed up in the wealth statistics as capital gains. This was the people's boom, the risk-takers' boom. We should hang gold medals around these entrepreneurs' necks. So indeed, it does seem that Mr. Greenspan was lucky in that a boom happened under his watch; but we can at least say that he did a pretty good job of keeping inflation in check. Here's hoping for the same performance from our current chairman.

What about busts? Let's begin with the assumption that tight monetary policy caused the recession of 1978-1982. This myth is so firmly entrenched that I could have called this downturn the "Volcker recession" and readers would have understood my reference. To accept the myth, you have to accept a consistent relationship between monetary policy and economic activity -- and as we've just seen, this relationship is simply not evident in the data.

Between 1975 and 1980, the inflation-corrected federal funds rate was low; at the same time, output trended upward until late 1978. So far, things look somewhat promising for the mythmakers. But looking closer at the data we see that output began its downward trend in late 1979 while monetary policy was still easy through most of 1980. Also, output continued its decline through 1982, when it began to climb at a time when monetary policy remained tight.

These facts do not square with conventional wisdom. Our obsession with monetary policy in the conduct of the real economy is misplaced.

One caveat: I am not saying that there are no real costs to inflation -- there certainly are. And if we get too much inflation we can exact high costs on an economy (witness Argentina as an example). However, I am talking here of the vast majority of industrialized countries who live in a low-inflation regime and who are in no danger of slipping into hyperinflation. It is simply impossible to make a grave mistake when we're talking about movements of 25 basis points.

It's true, the Fed doesn't run the world. Please don't tell the gold bugs.

Posted by edelfenbein at 7:03 AM

The Limits of Economics

Here's a fascinating article from Christopher Hayes on the limits of economics:

The simple models have an explanatory power that is thrilling. Once you’ve grasped the aggregate supply/aggregate demand model, you understand why stimulating demand may lead, in the short run, to growth, but will also produce inflation. But the content of that understanding turns out to be a bit thin. Inflation happens because, well, that’s where the lines intersect. “A little economics can be a dangerous thing,” a friend working on her Ph.D in public policy at the U. of C. told me. “An intro econ course is necessarily going to be superficial. You deal with highly stylized models that are robbed of context, that take place in a world unmediated by norms and institutions. Much of the most interesting work in economics right now calls into question the Econ 101 assumptions of rationality, individualism, maximizing behavior, etc. But, of course, if you don’t go any further than Econ 101, you won’t know that the textbook models are not the way the world really works, and that there are tons of empirical studies out there that demonstrate this.”

Posted by edelfenbein at 3:40 PM

The Buy List So Far

With three weeks left, our Buy List is up 10.88% for the year, compared with 12.94% for the S&P 500 (not including dividends). The Buy List is about 20% more volatile than the rest of the market.

By looking at the current results of each stock on the Buy List, you can see why diversification is so important. Look at the spread of the results (from a high of 61% to a loss of -19%). Five stocks are currently up over 29%, yet eight stocks are down for the year.

I should add that Biomet (BMET) finally made a new high today. This stock has been terrified of $40 a share, but nevertheless, it finally hit that number for the first time in 21 months.

I'll unveil the new Buy List for 2007 next Friday. The rules are, once the Buy List is set, I can't touch it for the entire year.

Posted by edelfenbein at 9:49 PM

Good Stocks No One Knows About

I'm always amazed at the number of stocks that have been great long-term performers, yet no one knows about them. Many highly profitable stocks are completely ignored by Wall Street. Here are a few examples:

Hawkins (HWKN) is a small chemical company in Minnesota. The stock has creamed the market for decades (the gold line is the S&P 500). Hawkins has just 235 employees. They made $9 million last year, which Wal-Mart makes in about eight hours. No analysts cover it, and yesterday it had zero volume. They might as well be private equity.

Here's a good one. Weyco Group (WEYS) is a 110-year-old shoe company based in Milwaukee. Thirty-two years ago, you could have picked up a share for 20 cents (adjusted for splits totaling 54-for-1). Weyco also pays a dividend. One analyst covers it.

Met-Pro (MPR) makes pollution control equipment. The company has a market cap of $160 million.

Posted by edelfenbein at 12:49 PM

Today's Jobs Report

The media is reporting that the unemployment rate increased from 4.4% to 4.5% in November. This is technically true, but it owes some credit to rounding. I got the raw data and the jobless rate increased from 4.42% to 4.47%.

Here's what the past twenty-odd years have looked like:

And here's nonfarm payrolls over the past ten years:

You can see that job growth is slower in this recovery than in the 90s.

Posted by edelfenbein at 10:18 AM

Hedge Funds Now An Official Cultural Phenomenon Fit to Print

So sayeth The New York Times:

In October, John Wiley & Sons rolled out its latest how-to book, “Hedge Funds for Dummies.’’ Doug Ellin, the creator of “Entourage” on HBO, is seeking to transplant that show’s successful premise of dudes living large to the world of seeking alpha. And for those who just want to look like a hedge fund manager, Kenneth Cole offers the Hedge Fund — a leather loafer available in black or brown, recently available on its Web site at a clearance price of $119.98.

Hedge funds have become the new cultural shorthand for fast money. In the 1980s, corporate raiders and bond traders, as represented by Gordon Gekko and Sherman McCoy, were models for those seeking to be masters of the universe. The 1990s brought the Internet entrepreneur and the day trader, two variations on the Generation X slacker who made millions without leaving his apartment, using only a computer and his savvy.

Read the whole thing. “Wall Street Warriors" makes an appearance.

Posted by edelfenbein at 6:19 AM

Calls to Shut Down Wall Street

The death of Sean Bell has inspired a call to shut down Wall Street for a day:

The December 12th Movement, a human rights group that o