Archive for March, 2007

  • Slower Earnings Growth
    , March 31st, 2007 at 11:49 pm

    I think I’ve been too optimistic regarding earnings growth for this year. I thought there was a chance that profit growth could come in lower-than-expected, but now we’re seeing the proof.
    Jacqueline Doherty notes in Barron’s that on January 1, first-quarter earnings growth for the S&P 500 was estimated to be 8.7%. Today, it’s down to 3.8%. Since analysts tend to low-ball their forecasts, the results will probably be a bit better, perhaps around 7% or 8%.
    After that, however, things get hazy. For the second quarter, analysts see earnings growing by 4%, then 6.8% for the third quarter and 12.5% for the fourth quarter. I expect that the forecasts for third and fourth quarters will soon be pared back.
    The reason for the slower earnings growth can be blamed largely on just two sectors—the homebuilders and the autos:

    James Paulsen, chief investment strategist at Wells Capital Management, notes that 91% of real gross domestic product is growing by 4.3%. Only 9% of the economic is contracting by 10%–the part that is attracting all the attention.

    The good news is that even with lower earnings growth, the S&P 500 is still going for just 15.2 times 2007’s earnings.

  • Biomet’s CFO Resigns
    , March 31st, 2007 at 8:29 pm

    More backdating:

    Biomet Inc. said Friday its chief financial officer and another executive resigned after an internal inquiry found accounting errors related to stock option grants over the past 11 years.
    The company said it will have to restate its most recent annual report to reflect the disparity in the recorded expenses for stock option grants and the actual expenses for the grants, which totals about $50 million over 11 years, according to preliminary findings.

  • Asset Managers
    , March 30th, 2007 at 3:37 pm

    The old saying is true, it’s better to buy the stocks of asset managers than their funds.

  • University May IPO
    , March 30th, 2007 at 1:45 pm

    No, really. In India:

    When finance minister P Chidambaram said he wanted to make Mumbai Asia’s financial hub, he certainly wouldn’t have imagined the folks at Mumbai University latching on to every word of his.
    But quite obviously, they did. Why else would a proposal come up to convert the university into a company and get itself listed on the stock exchange?

  • Highlights from Yesterday’s Demonstration
    , March 30th, 2007 at 12:11 pm

    In case you missed it, there was a demonstration on Wall Street yesterday. Don’t worry, PinkNews was on the scene:

    The crowd swelled at the New York Stock Exchange, as call-and-response chants condemned health care profiteering by insurance and health care companies.
    The protest concluded at the “Wall Street Bull” statue, as the fervent group observed those engaging in civil disobedience.
    The bull was left with a pair of condoms adorning its horns.

    I think that’s supposed to be a metaphor.

  • The Great Corn Boom
    , March 30th, 2007 at 11:33 am

    Fortune looks at the dramatic rise in the price of corn:

    Four-dollar corn. The price probably doesn’t mean much to many Fortune readers, certainly not the city slickers who wouldn’t know a combine from a planter. But in farm country, $4 corn is more than a big deal. It’s a phenomenon. “It’s the center of conversation in the center of the country,” says Elizabeth Hund, head of agricultural lending for U.S. Bancorp.
    In the span of just eight months, the price of the U.S.’s most important crop – our biggest agricultural export as well as the staple feed for our livestock – has doubled from $2, about where it had been stuck since the late 1990s, to $4 a bushel. The cause is soaring demand from ethanol plants, which bought 2.2 billion bushels last year, 34% more than in 2005. Previous price spikes were short-lived and usually caused by drought, but the futures market thinks this rally has legs.
    May 2008 corn recently traded at $4.20 a bushel, while December 2010 futures were at $3.74. This means farmers can lock in terrific prices not just for the 2007 crop but for the three after that as well.
    Problem is, what’s good for farmers – and even better for the companies selling them tractors, seeds, and fertilizer – has started to roil other parts of the economy. The feed costs of cattlemen and hog farmers have skyrocketed. Ethanol producers have seen their profits slashed. Food companies are being squeezed and are starting to pass along higher costs to consumers. (This isn’t just a U.S. problem: Mexico is in an uproar over soaring tortilla costs.)

    The market is responding. The Department of Agriculture reports that corn plantings will reach the highest level since 1944.

  • Take-Two Shareholders Win
    , March 30th, 2007 at 10:26 am

    Good for them.

    A group of Take-Two Interactive Software Inc. shareholders owning 46.1% of the videogame maker’s stock succeeded in removing the board and replacing it with six new directors.
    The newly elected board already nominated as chairman Strauss Zelnick, founder of media management and investment firm ZelnickMedia. The board also named Benjamin Feder as acting chief executive, succeeding former CEO Paul Eibeler, and increased the number of board seats to seven from six in order to reappoint the just-ousted Grover Brown as the seventh director.
    The board coup is the handiwork of four institutional shareholders, a class of investors not known for activist investing, or agitating for change at companies to boost the stock price. The group consists of mutual-fund firm OppenheimerFunds Inc., D.E. Shaw Valence Portfolios LLC, Tudor Investment Corp. and hedge fund S.A.C. Capital.
    The upheaval comes as the maker of “Grand Theft Auto” videogames struggles to rebound from a stock-options scandal and return its operations to profitability. Earlier this year, former Chairman and Chief Executive Ryan Brant pleaded guilty to charges in connection with an options-backdating scheme.

    Despite the victory, Take-Two (TTWO) is still an unimpressive stock. But I’m happy to see shareholders beat management. Ideally, this should happen much more often than it does. Shareholders are owners, and should be treated as such. It’s unfortunate that it took such a dismal performance to bring this about.

  • Solengo Capital Takes on Internets
    , March 29th, 2007 at 12:27 pm

    Yesterday, DealBreaker and Naked Shorts posted the marketing brochure for Solengo Capital, the new hedge fund started by Brian Hunter, who happens to have the same name as the energy trader who ruined Amaranth. Turns out, it’s the same guy.
    One would think that a marketing brochure’s purpose is to market the company. One is, apparently, wrong. Solengo asked both blogs to take down the brochure. I guess they don’t want the word to get out. Anyway, Naked Shorts complied, but DB is holding its ground.
    Reuters reports:

    “We think it is valuable information to our readers and they haven’t given us persuasive arguments for taking it down,” said Beth Levin, associated editor of the site, which focuses on Wall Street matters.

    (Note to Reuters: That’s Bess Levin.)
    I can’t believe that Solengo really thinks it can come out this looking good. I find it ironic that energy traders are wasting their energy on this.

  • Q4 GDP Revised to 2.5%
    , March 29th, 2007 at 8:52 am

    The economy grew by 2.5% for the fourth quarter (technically, it was 2.452%).
    Three percent is the Magic Line in GDP growth. Once the economy starts growing less than 3%, it will tend (though not always) to keep doing that for several quarters. The fourth quarter was the third straight quarter of below-trend growth.
    Corporate profits had been growing faster than the economy, but that has probably come to an end. For the third quarter of 2006, corporate profits comprised 12.41% of the overall economy, which was the largest share in over 50 years. In the fourth quarter, it dropped to 12.25%.

  • Wall Street and the Subprime Market
    , March 29th, 2007 at 8:34 am

    In today’s Wall Street Journal, Gregory Zuckerman has a great article on the decline and fall of New Century Financial:

    In February, New Century mortgages that had been worth $8 billion fell by more than $300 million within days, someone familiar with the matter says. The result: More lenders demanded additional collateral, also called margin, from New Century, including Goldman and Credit Suisse, people familiar with the matter say. Banks also invoked terms allowing them to demand that the company buy back loans if borrowers failed to make payments.
    The company’s cash was dwindling quickly. Adding to the company’s woes were revelations about accounting problems, plans to restate 2006 earnings and post a fourth-quarter loss, and a Securities and Exchange Commission inquiry.
    New Century was running out of options. It was unable to get new financing and in violation of its existing lending agreements, in part because it was low on cash. So the company convened the March 6 conference call with its 11 lenders. Mr. Morrice, the CEO, was joined on the call by New Century board member David Einhorn, who runs Greenlight Capital, a New York hedge fund that owned 6% of the company’s stock, which by then had fallen 70% in two weeks.
    Mr. Morrice informed the bankers that New Century’s available cash had dropped to $40 million, down from the $100 million he had reported to some of the bankers a day earlier and from $350 million at year end, a participant on the call said.