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Banking Industry On Hard Times

The Onion:

The banking industry is being hit hard by the subprime loan collapse. Bank of America laid off 3,000 workers and Merrill Lynch posted its first quarterly loss in six years. What are banks doing to make up the loses?

Increasing ATM fees to $601.95

Coffee temperature turned way down

Launching paid subscription websites featuring hilarious and/or deadly bank robbery videos

Limiting branch hours to noon until 12:15

Taking anything valuable from safe deposit boxes that appear not to have been opened in a while

For fee, will open cash vaults for money-bathing purposes

Charging more for crisp bills

So long as CEOs continuing to make shitloads, not too much

Posted by edelfenbein at 2:31 PM

Fed Cuts by 0.25%

Here's the statement:

The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 4-1/2 percent.

Economic growth was solid in the third quarter, and strains in financial markets have eased somewhat on balance. However, the pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction. Today’s action, combined with the policy action taken in September, should help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and promote moderate growth over time.

Readings on core inflation have improved modestly this year, but recent increases in energy and commodity prices, among other factors, may put renewed upward pressure on inflation. In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.

The Committee judges that, after this action, the upside risks to inflation roughly balance the downside risks to growth. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Charles L. Evans; Donald L. Kohn; Randall S. Kroszner;
Frederic S. Mishkin; William Poole; Eric S. Rosengren; and Kevin M. Warsh. Voting against was Thomas M. Hoenig, who preferred no change in the federal funds rate at this meeting.

In a related action, the Board of Governors unanimously approved a 25-basis-point decrease in the discount rate to 5 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Richmond, Atlanta, Chicago, St. Louis, and San Francisco.

Posted by edelfenbein at 2:01 PM

Dell's Earnings Restatement

Dell (DELL) has finally restated its earnings for the past few years. As you can see blow, the difference between the restatement and the original isn’t very much. Profits for FY ’06 were revised a little higher and the years before that were a little lower.

Original

Year.........Sales........Oper. Income.....EPS
2003.........$35,404.........$2,844...........$0.80
2004.........$41,444.........$3,544...........$1.01
2005.........$49,205.........$4,254...........$1.18
2006.........$55,908.........$4,347...........$1.46
2007.........$57,420.........$3,070...........$1.14

Updated

Year.........Sales........Oper. Income.....EPS
2003.........$35,262.........$2,738...........$0.77
2004.........$41,327.........$3,525...........$1.00
2005.........$49,121.........$4,206...........$1.18
2006.........$55,788.........$4,382...........$1.47
2007.........$57,420.........$3,070...........$1.14

Note that Dell’s fiscal year ends in late-January or early February so we’re currently in FY ’08.

Two things stand out. First, is the large amount of shares that Dell has bought back. In FY ’07, there were 14% fewer diluted shares than there were in FY ’03.

The other is the decline and fall of Dell’s operating margins. This is the key stat to watch in Dell. Not too long ago, Dell’s operating margins were around 11%. Today, they’re around 6%. In other words, you sell twice as much just to stand still.

Posted by edelfenbein at 12:15 PM

Slate to Launch Business Site

The New York Observer has the details:

Slate deputy editor David Plotz told The Observer he believes there’s a clear opening for Slate’s distinctive editorial voice. He argued that while political journalism has diversified with the arrival of blogs and other independent sites, business journalism is “still dominated by the big brands. We think there’s an opening for a really smart, analytical, opinionated Web site that could be Webby and fast and agile.”

Mr. Plotz cautioned that the new project is still awaiting final authorization from Post company executives. Assuming it goes forward, it will likely capitalize on the Slate brand with a logo at the top of the home page. He would not comment on the projected budget for the site.

According to a source at Washingtonpost.Newsweek Interactive, the publishers of Slate, the new site, which does not yet have a name, could go live as early as next summer. It was born in part out of the recent launch of Slate’s newly branded video Web site, SlateV, which Post executives are pleased with. Plans call for it to follow the same basic staffing model that has helped make Slate a success—using a few editors and assistants to run the operation, while relying for content mostly on freelancers.

No one’s been hired yet. According to a different source, Slate editors offered the top job to Elizabeth Spiers, the founding editor of both Gawker and the business blog DealBreaker, who now writes for New York magazine, but were turned down. They’ve since asked both Ms. Spiers and Daniel Gross, Slate’s regular business columnist, among others, to write for the site.

Posted by edelfenbein at 10:40 AM

Today's GDP Report

Today’s report on GDP growth for the third-quarter was a surprisingly strong 3.9%. This is nearly identical to the 3.8% for the second quarter. My only warning is that these numbers are subject to endless revisions.

It’s very likely that nominal GDP for 2007 will be over 25% more than 2003.

Update: BR calls BS.

Posted by edelfenbein at 10:02 AM

Fair Isaac's Earnings

It’s no secret that Fair Isaac (FIC) has been a disappointment this year. Yesterday’s earnings report appears to be a small bright spot.

Fair Isaac Corp.'s profit climbed 28 percent in the fiscal fourth quarter, as the business advisory reserved much less to pay taxes, the company said Tuesday.

Fair Isaac earned $28.2 million, or 52 cents per share, in the quarter ended Sept. 30, compared with profit of $22.1 million, or 35 cents per share, in the fourth quarter last year.

Analysts polled by Thomson Financial forecast profit of 41 cents per share.
Revenue was roughly flat at $207.2 million, versus analysts' expectations for $201 million.

Fair Isaac sells financial advice and business analysis. The primary difference between the fourth quarter and the comparable period a year earlier was the provision for income taxes. That provision was $2.8 million in the fourth quarter, compared with $11 million in the fourth quarter last year.

The stock is doing well this morning, but it still has a long way to go to make up for its poor performance this year.

Posted by edelfenbein at 9:46 AM

Will the 90s Ever End?

Cool!

March 14, 2007: BigBand Networks Announces Pricing of Initial Public Offering

Wow!

May 3, 2007: BigBand Networks Reports First Quarter 2007 Financial Results with 62% Increase in Year over Year Revenues and Expanding Gross Margins

Um...

Sept. 27, 2007: BigBand Networks Announces Revised Revenue Outlook for Third Quarter of 2007

Oh.

October 30, 2007: BigBand reports Q3 loss, to cut workforce by 15 pct

No fair. I'm suing!!

Posted by edelfenbein at 4:47 PM

Becky and Dylan on Wing Women

Posted by edelfenbein at 3:52 PM

Gender Differences and Mutual Fund Managers

What I'm saying is - and this is not a come-on in any way, shape, or form - is that men and women can't be friends, because the sex part always gets in the way.
- When Harry Met Sally...

Not that men are better or worse managers than women. Instead, an all-male or all-female team might be better than a mixed gender team.

Perhaps Harry was right.

Posted by edelfenbein at 1:35 PM

Management Matters

Some numbers to consider:

Both Merrill Lynch (MER) and Bear Stearns (BSC) are 33% below their 52-week high.

Lehman Brothers (LEH) is 28% off its high.

Goldman Sachs (GS) made a new high today. The stock is up over $46 a share this year.

Of those 4,600 pennies, Lloyd Blankfein’s pay last year was $53.4 million or about 13 cents a share.

Remember that next time someone complains about executive compensation.

Posted by edelfenbein at 11:36 AM

Wall Strip on Agrium

Howard and Lindsay hit the links to talk Agrium (AGU):

Posted by edelfenbein at 10:56 AM

ADP’s Earnings

Last month, I highlighted Automatic Data Processing (ADP):

ADP is starting to catch my eye as a good contrarian stock. (The first step, however, is to ignore their notoriously inaccurate monthly employment reports.)

The stock is down to $44 from $50 in early June. I’m not claiming any great insight on its business, but it’s simply a good stock at a good price. In the last three years, earnings are up 56%. Gross margins are around 50% and the company has a solid balance sheet.

The company also raised guidance for FY 08. ADP is now looking for 12% sales growth and profit growth of 18% to 21%. I like those numbers.

The company reported earnings today of 45 cents a share, two cents more than expectations. Last year, ADP earned 39 cents a share. Revenues were up 13.5%% to $1.99 billion.

The company also nudged up its guidance for next year. ADP sees earnings coming in at the high end of its earlier forecast of $2.12 to $2.18 a share. Sales growth is now projected at 12%-13% instead of just 12%.

The stock is up about 3% this morning to $48.64.

As with many contrarian picks, ADP does face some serious problems. Scott Rothbort, my colleague at Real Money, summarized the headwinds facing ADP:

First is the slowing growth in payrolls. While employment growth remains positive, the rate of growth has declined over the last year. Second are declining interest rates. ADP makes a considerable amount of money on the float, which is due to the timing between the employer payment of payrolls to ADP and the clearing of the individual employee checks. Furthermore, with more people opting for direct debit, ADP's float base is also declining.

Posted by edelfenbein at 10:28 AM

O'Neal Writedown Erased 20% of Shareholder Equity

These numbers surrounding the losses at Merrill Lynch (MER) are staggering:

The real damage to shareholders came with Merrill's $8.4 billion writedown. It is the biggest in the history of Wall Street and wiped out four quarters of growth in shareholders' equity, according to Merrill's published figures. The charge, mostly for collateralized debt obligations and subprime mortgages, left the New York-based company with $38.8 billion of assets minus liabilities.

Losing “20 percent of shareholders' equity in one fell swoop is a serious blow,” said Robert Willens, the accounting analyst at Lehman Brothers Holdings Inc. in New York. “It might take them two to three years to earn that capital back.”

The writedown, which has ruined O'Neal's 21-year career at Merrill, is more than the world's biggest brokerage earned before taxes from fixed-income sales and trading in the past three years, according to estimates by Sanford C. Bernstein & Co. The decline may weigh on Merrill shares, this year's second- worst performer among the five biggest U.S. securities firms, because many investors use book value to price the stock.

Posted by edelfenbein at 10:08 AM

Least Mature Post of the Day

I think this is why they invented pseudonyms.

(Via Luskin)

Posted by edelfenbein at 2:08 PM

Why Is Stan O'Neal Gone?

This graph might help explain it.

Goldman (GS) must be doing something right. The stock is at another new high today.

Posted by edelfenbein at 2:00 PM

Next Year's Buy List

Each year, I unveil the new Buy List in mid-December, and I’ll start tracking it on January 1. I’m not even close to making the new list but, as usual, it will closely resemble this year’s list.

Most of the current stocks will stay on, but here are the stocks I’m thinking of ditching. Fair Isaac (FIC), Fiserv (FISV), Graco (GGG), Harley-Davidson (HOG), Sysco (SYY), Varian (VAR) and WR Berkley (BER).

Of course, this isn’t final but I wanted to let you know my thoughts beforehand.

Posted by edelfenbein at 10:22 AM

WSJ: O'Neal at Merrill

Not much of a surprise:

Merrill Lynch & Co. Chief Executive Stan O'Neal has decided to leave the firm, according to a person familiar with the matter.

An announcement on his departure could come today or Monday morning, this person said. The firm's board of directors is expected to do a broad search to find a replacement and will look internally and externally.

Those in the running for Mr. O'Neal's job include Laurence Fink, chief executive of money manager BlackRock Inc. and Gregory Fleming, Merrill's co-president. There could also be some power-sharing arrangement involving the two men, or a temporary solution to give the board more time to find a permanent replacement. Bob McCann, head of Merrill's huge brokerage arm, is also considered a candidate for a top job, according to Wall Street executives.

Mr. Fink's name has been mentioned repeatedly over the past week, but people familiar with the matter said the board hasn't had extensive discussions with him.

Directors have grown increasingly frustrated since Merrill announced $5 billion in write-downs three weeks ago. In the past week, the size of the hit grew by more than $3 billion, and Merrill reported a $2.24 billion net loss for the third quarter. Analysts say several billion dollars in additional write-downs may be in store.

Posted by edelfenbein at 2:41 PM

Oil Over $90

Barry Ritholtz has a great post looking at the rise in crude. He identifies five crucial factors:

1. Increasing Global Demand: Booming growth in China and along the Pacific rim is only the beginning of the global story. India, Korea, Russia, Brazil, and Australia are expanding. Even "old Europe" has experienced a spurt in growth. This may be an old story, but it has yet to fully run its course.

2. Falling U.S. Dollar: The dollar is at 15 year lows versus a basket of currencies. Blame the Federal Reserve for failing to protect the currency, and forcing capital to go where its treated better.

Fun thought of the day: Imagine if every time Treasury Secretary Hank Paulson said "We have a strong dollar policy" -- and the dollar dropped yet further, his nose grew another inch, Pinocchio-style. I originally was going to suggest a college drinking game where you do a shot each time, but I wouldn't want all those alcohol-related deaths on my conscience.

3. Wars in Iraq, Afghanistan: Its why I flipped bullish on Crude way back in 2002. The two hot wars in the Middle East have increased tensions, reduced Iraq's oil output, and generally led to higher terror premiums for Crude Oil. Future administrations should take note of this simple formula: Mid-East War = Higher Crude Prices.

4. Supply constraints: US crude oil stocks unexpectedly fell by 5.3 million barrels last week, and we have a variety of infra-structure issues contributing to this factor. Globally, there is a tight supply of ships, refineries, pipelines, and storage facilities. This contributes to a minimum amount of reserve -- no buffer -- which means Crude Oil Futures fluctuate even more than they might otherwise.

5. Saber-rattling against Iran: The increased jaw-boning against Tehran in general and the Revolutionary Guard in particular. A variety of analysts have noted that threats of US sanctions against Iran and tension on the Iraqi border had also helped fuel the oil rally.

Barry has been rightly critical of the government’s inflation data for a long time. But what’s interesting is the prices at the pump haven’t risen nearly as much as crude prices.

Posted by edelfenbein at 3:30 PM

Looking at the Credit Crunch

Posted by edelfenbein at 3:10 PM

Goldman Record: 299 New Directors

I was passed over. Again.

Goldman Sachs promoted a record 299 people to managing director, the company's second-highest rank after partner.

Managing directors are appointed annually, while partners are named every other year. The promotions take effect on Dec. 1, the start of the firm's new fiscal year, the company said in a statement yesterday. Last year Goldman named 262 new managing directors and 115 partners.

Chairman and CEO Lloyd Blankfein and Goldman set aside $16.9 billion to pay salaries, benefits and bonuses in the first nine months of the year, surpassing the record for all of last year.

Partners and managing directors are typically the highest paid of the firm's 29,905 employees. Fifty-seven percent of the new managing directors work outside the U.S. and 19 percent are women.

Including the new promotions, Goldman now has 1,384 managing directors and 383 partners. The largest portion of the new managing directors work in investment banking, said a spokeswoman for the firm.

Of the new managing directors, 30 percent are in Europe, the Middle East and Africa, 10 percent are in Japan, and 17 percent are in the rest of Asia, including China and India.

Posted by edelfenbein at 11:07 AM

Bernanke Warns

Bernanke Warns on US Housing, Economy

Bernanke warns stock investors

Bernanke warns against ad hoc regulation of derivatives

Bernanke warns of economic 'drag'

Bernanke Warns of Possible 'Crisis' From Budget Gap

Bernanke warns of worse to come in subprime fallout

Bernanke Warns Inflation Remains A Significant Risk

Bernanke warns of 'vicious cycle' in deficits

Bernanke warns about economic isolationism

Bernanke warns of falling economy

Bernanke warns action needed soon on budget

Bernanke warns US about burden of ageing population

Bernanke Warns Of Growing Inequality

Bernanke warns against protectionism

Greenspan home robbed

Posted by edelfenbein at 12:21 PM

Aflac's Earnings Report

Aflac (AFL) has been a great stock for us this year. At one point, it hit $60 a share today making it about a 30% winner for us. Yesterday, the company reported earnings of 85 cents a share, three cents more than estimates. Last year, AFL made 73 cents a share. That’s a decent growth rate.

For the fourth quarter, Aflac sees earnings of 75 cents to 70 cents a share.

This is a busy day for earnings. Later we’ll have Graco (GGG), Fiserv (FISV) and Varian (VAR).

Posted by edelfenbein at 12:05 PM

XLK or QQQQ?

I was recently asked what’s the difference, in trading terms, between the Nasdaq 100 (QQQQ) and the S&P 500 Tech Spyders (XLK).

The short answer is nothing. For most circumstances, both ETFs will behave very similarly. As a proxy for the tech sector, I prefer using the XLK.

The longer answer is that there are some differences and if you use these ETFs for trading you might want to be aware of them

First, let me explain that the Nasdaq 100 is an index of the 100 largest nonfinancial stocks on the Nasdaq. For many years, this has been used as a proxy for large-cap tech stocks. The S&P 500 Tech index is simply a grouping of all the tech stocks in the S&P 500.

The important thing to keep in mind about the Nasdaq is that it’s very oligarchic, meaning there are a small number of very, very big stocks, and tons of teeny, weeny stocks. The NYSE is like that as well, but it’s much more pronounced on the Nasdaq. I don’t think most investors realize how important this is. Outside of the big tech names, the NYSE still has a huge advantage over the Nasdaq.

Not only do a few very large tech stocks have a large say in what the Nasdaq 100 does, but they tend to be strongly correlated with one another so their influence is even greater.

Of the 500 stocks on the S&P 500, only 73 are from the Nasdaq and more than half of those are in the tech sector. Ironically, of the 500 S&P stocks, they categorize 73 as being in the tech sector.

So for most practical uses, the QQQ and XLK will behave the same. The big difference is that the Nasdaq 100 also had a modest weighting in consumer discretionary stocks. This would be stocks like Starbucks (SBUX) or Bed Bath & Beyond (BBBY). The ETF for this sector is XLY. So while the XLK is highly correlated to the QQQ, you can improve the correlation some by holding a ratio of about 4-to-1, XLK to XLY. You can improve it some more by using a small amount of margin.

By correlation, I mean that the daily changes are correlated by over 95%. (Note: I got my numbers using the data from the indexes, not the ETFs.) Even with that it’s still a perfect match. The big tech winners this year have come from the Nasdaq (stocks like Google or Apple), so there pushing the QQQQ more than what you might normally expect.

Let me also add that the Rydex Inverse OTC 2x mutual fund (RYVTX) is designed to do twice what the Nasdaq 100 does each day.

Posted by edelfenbein at 10:51 AM

The First Day of the Month

Here's a surprising stat. Since the beginning of this decade, all of the market's gain have come on the first day of the month. The rest of the time, the S&P 500 is down.

The blue line represents the first day of the month, the black line is the S&P 500. For the decade, the S&P 500 is up 2.52% and the first day is up 33%.

The last seven first days have all been up. In the decade, there have only been 94 first days out of nearly 2,000 trading days, or about 4.8% of the time.

Posted by edelfenbein at 2:59 PM

WR Berkley Down on Earnings News

Shares of WR Berkley (BER) are down on what I thought were decent earnings. The company earned 93 cents a share compared with 87 cents last year. This is operating earnings as that's the more important number to follow with insurance stocks. Wall Street was looking for 91 cents a share.

The stock is going for less than eight times trailing earnings.

Posted by edelfenbein at 1:34 PM

Does Apple Ever Go Down?

Seriously, it can't go up every day.

Can it?

Posted by edelfenbein at 1:00 PM

Old School Grimace

Posted by edelfenbein at 3:07 PM

Twenty Years Ago Today

On Monday, October 19, the Dow dropped 508 points, or 22.6%, in its worst crash in history.

Of course, stocks came right back and the economy continued to plow ahead but that wasn’t clear at the time.

Here’s the cover of the New York Times for the following day.

(Doncha just love how the NYT asks “Who Gets Hurts?”)

Here’s their lead article

Here’s how the Washington Post covered the news.

I also noticed this article on local reactions. What caught my eye is that at the very end. Malcolm Gladwell’s name is listed.

What’s interesting is that the articles from two of the most important newspapers in the world don’t mention either the Alan Greenspan or the Nasdaq. It’s hard to imagine a world like that, but the Fed wasn’t considered that important not too long ago. Also, the Nasdaq was a small exchange that wasn’t widely followed.

How things have changed.

Posted by edelfenbein at 10:21 AM

Torre Out as Yankee Skipper

Breaking news: Joe Torre is out as Yankee skipper.

Is there a market effect? Could be. Twenty years ago tomorrow, Steinbrenner hired Billy Martin for the fifth time. That may have led to the unpleasantness of that day.

Posted by edelfenbein at 4:14 PM

Odd Stat of the Day

If you got shares of Google (GOOG) at the IPO price you would have made an average of 5% every four weeks for the last 38 months.

At this price, if Google goes up $1 a day, that’s a decrease in its growth rate.

Posted by edelfenbein at 3:35 PM

What the Market Thinks the Fed Will Do

Here's an interesting tidbit. The Federal Reserve Bank of Cleveland has a site that tracks what the futures market thinks the Fed will do.

Posted by edelfenbein at 9:43 AM

'Mr. Madam' grilled in Wall Streeter's death

This is sad and strange, but the investigation into Seth Tobias' death has taken an odd turn:

The aftermath of last month's death in Jupiter of CNBC commentator and Wall Street big Seth Tobias has taken a bizarre turn.

Billy Ash, a former Lauderdale-based gay pimp who called himself "Mr. Madam," has become a key figure in the continuing police investigation into the death and the battle for Tobias' millions.

And then there's "Tiger." That's the stage name of the go-go dancer at the WPB gay hangout Cupids who was supposed to be deposed in the probate fight.

What's going on here?

Neither Tobias' widow, Filomena, nor her four — Count 'em! four — high-profile lawyers, including ex-husband Jay Jacknin, are talking.

But Ash, now based in San Diego, is.

He told Page Two that Jupiter PD Detectives Danielle Hirsch and Brent Hoosac spent two days grilling him at home in late September.

Ash — who was arrested at least 11 times in South Florida from 1983 through 1997 for prostitution, bouncing checks and staying in a hotel without paying, according to law enforcement records — says he was the Tobiases' personal assistant for two years.

He quit shortly after hedge-fund whiz Tobias, 44, was found floating in the pool of his $3 million home at the Bears Club. Ash e-mailed what appears to be a pay stub showing he received a $3,000 payment from Filomena on Sept. 2, two days before the death.

"I have intimate knowledge about the inner workings of the couple. I booked their travels, made sure they made appointments on time, watched after their many houses," Ash said, acknowledging that he has "a past" and that it didn't disturb the Tobiases when he was hired.

He said he didn't witness the death and was flying home when it occurred.

Jupiter PD has yet to classify Tobias' death, and a spokesman for the medical examiner said toxicology tests are still pending.

"At this point, this is just a death investigation," said JPD spokesman Scott Pascarella. "We did fly to San Diego to interview Mr. Ash. We have the obligation to investigate all information presented to us."

The fight for Tobias' $25 million-plus fortune, meanwhile, is really getting out there, too.

Filomena — Seth's wife of two years, against whom he filed for divorce, then had the case closed — is duking it out in a West Palm Beach court with Tobias' four brothers. They are in his will and Filomena isn't, but she claims to be the sole heir.

Ash is scheduled to be deposed in that case Monday in his home city. Tiger the stripper was supposed to be deposed in West Palm on Oct. 4, according to court records.

In another development Filomena, 41, who once claimed in court documents that she needs nearly $46,000 a month to live, is selling Tobias' homes here. Two in WPB's east side are going for a total $3.6 million, and the Bears Club mansion where the death occurred may soon go up for $6 million.

Posted by edelfenbein at 8:41 AM

Two Quick Earnings Notes

Solid numbers from Danaher (DHR) this morning. The company netted 98 cents a share, which is a penny better than the top of its range. There was also another nickel a share due to favorable tax treatment.

This is a quiet company but don’t let that fool you. For the year, DHR is looking at 16%-18% growth and it’s going for 21-22 times this year’s earnings. I wouldn’t mind seeing it pull back some, but either way, this is a very sound company.

Also, UnitedHealth (UNH) earned 95 cents a share, three cents more than estimates. What caught my eye was this was the first time the company made a forecast for next year. The EPS range for 2008 is $3.95 to $4.

As I said last week, this is a good long-term buy below $50.

Posted by edelfenbein at 6:44 AM

Illinois Tool Works (ITW)

If you’re new to investing, don’t be afraid of companies that sound boring. It’s easy to get caught up in looking for the next Google or Apple, but sometimes boring companies are great investments.

A perfect example is Illinois Tool Works (ITW). Man, I love that name! In my book, the name alone is worth 15 on the p/e. I guarantee you, you’ll never hear someone say, “Keep your eyes on them, they could be the next Illinois Tool Works.”

Here’s some 411. ITW is a diversified manufacturer based in...well, Illinois. The company has delivered double-digit earnings growth for 10 straight years. Not many companies can say that. Plus, it looks to do it again this year. Today, ITW reported Q3 EPS growth of 13% and it sees Q4 EPS coming in at 86 to 90 cents, which translates to growth of 11% to 16%. (Wow, even their financials are dull.)

What they do extremely well is buy dozens of small companies that they then fold into the larger ITW universe. The management team has done a remarkable job of pinpointing small businesses. High ROE, solid margins, strong cash flow. In the last 30 years, the shares are up nearly 100-fold, and that doesn’t include dividends that have steadily grown each year.

Posted by edelfenbein at 1:07 PM

Guess This Stock?

Give up?

It's the Dow in 1987 up through October 8. The only difference is I divided it by 100. Yeah, I'm sneaky that way.

Posted by edelfenbein at 11:29 AM

The Free Market and Point Spreads

There will be an interesting test of the free market this weekend. The best team in the NFL, the New England Patriots, is playing the worst team, the Miami Dolphins (although the Rams may challenge that title before the season ends). The game is in Miami.

I find these things interesting because a point spread is no different from how the stock market works. It’s the judgment of the free market. The point spread for the game is 17 which is about as high as you’ll ever see for an NFL game. Many years ago, you could see games with over 20 points but those days are long gone.

Still, 17 points seems on the low side. New England’s worst game this year was a 17-point win. I also noticed that the Tradesports contracts to cover are up 53%. Perhaps the line will move. I wonder if the odds makers are simply afraid of an event that appears to be at the margins.

The question comes up in finance too. Basically, how do you handle a rare event? There just isn’t that much data to analyze when two teams like this meet. For now, the market seems to have selected caution. But how will sophisticated investors (gamblers) handle this?

Posted by edelfenbein at 11:03 AM

Core Inflation Is Still Tame

The government reported that headline inflation rose 0.3% last month. The good news is that the core rate, which excludes food and energy, is still well-behaved.

The core rate comes in for a lot of criticism but it's probably the best short-term indicator of the Fed's performance. The 12-month core rate has ranged between 1% and 3% for over 10 years.

Posted by edelfenbein at 10:28 AM

A Closer Look at Goldman's Earnings

Last month, Goldman Sachs (GS) reported amazing earnings. Maybe too amazing:

Much of the focus is on Goldman's trading revenue, which totaled a spectacular $8.23 billion, up 70% on the year-earlier quarter. Part of that increase was due to a bold bet that made money if mortgage-backed bonds and financial instruments tied to mortgage values fell in price. Of course, because of the credit crunch, they did plunge in value, netting gains for Goldman that the banks said "more than offset" the losses it saw on the mortgages it was holding.

It's impossible to trace exactly how that bet against mortgages was made, but the financial filing does describe some very telling details about what made up the enormous $8.23 billion of trading revenue.

The interesting data comes from disclosures in the filing about 'level 3' assets and liabilities, which are securities and derivatives that can't be valued according to observable prices in liquid public markets. Because of their illiquidity, Goldman has to attach values to them chiefly according to in-house models and estimates.

Posted by edelfenbein at 2:19 PM

The Hanger-On

In New York Magazine, Duff McDonald looks at how Chuck Prince still has a job.

It’s unlikely the two have ever met, but Citigroup chairman and CEO Chuck Prince and Yankees relief pitcher Luis Vizcaino have something in common. Consider Game 2 in the recent American League divisional playoff series, when Vizcaino was brought into the game in the bottom of the eleventh, after Joe Torre had burned through his best relievers. Nervous Yanks fans could only watch in stupefaction as Vizcaino loaded the bases just in time to face the Indians’ top slugger. How was it that with everything on the line, this was the guy holding the ball? The same is asked about Chuck Prince, who gave up the Wall Street equivalent of a grand slam when Citigroup reported a third-quarter loss of $5.9 billion. The company’s share price now rises when there’s bad news in the hopes that it will lead more quickly to his departure. But despite calls for his ouster from all over Wall Street and from Jim Cramer in this magazine, he’s still very much in the game.

What the critics fail to fully consider is, who would replace him? With no obvious choice from within—and no eager prospects from without—the bank is suffering from what one might call the Vizcaino Condition: Watch and pray he doesn’t do half as badly as everyone expects.

I actually talked with McDonald a few months ago about Chuck Prince and Citi. My take is that human nature will always blame a bad plan’s failure on execution, first, and the idea itself last. The reason Citigroup is struggling is that the company, as presently constructed, doesn’t make sense and it should be broken up.

The financial supermarket idea sounds great on paper but it just doesn’t work. It never works, and Citigroup will keep learning that lesson. People can blame Prince all they want, but it’s the idea that has to go.

This year is the 20th anniversary of the movie Wall Street, the big crash and the book Bonfire of the Vanities. How many of today’s first-year MBAs would know that Sherman McCoy’s firm was based on Salomon Brothers? There’s a name that’s completely disappeared, but imagine if Citigroup revived it. Spin it off! According to the most-recent 8-K, Citigroup has assets of over $2.3 trillion. Why so big?

Earlier I pointed out that Citigroup’s Management Committee has 125 members. Is that really needed? The last papal conclave had just 115 members. Sure, both entities have global operations and strong brand names. (Granted, the analogy break down once we come to Bob Rubin, but you see my point). I failed to see the advantage of having a company that’s so large.

Let me also add that I think Sallie Krawcheck will easily become Prince’s replacement. Unfortunately, I don’t think she’ll have any more success.

Posted by edelfenbein at 1:15 PM

Duck and Cover

The first Boomer applies for Social Security:

The baby boomers' stampede for Social Security benefits has begun.

The nation's "first" baby boomer, a retired teacher from New Jersey, applied for Social Security benefits Monday, signaling the start of an expected avalanche of applications from the post World War II generation.

Social Security Commissioner Michael Astrue called it "America's silver tsunami."

Kathleen Casey-Kirschling applied for benefits over the Internet at an event hosted by Astrue. Casey-Kirschling was born one second after midnight on Jan. 1, 1946, gaining her recognition as the first baby boomer — a generation of nearly 80 million born from 1946 to 1964, Astrue said.

"She's leading the way for her generation," Astrue told reporters.

Casey-Kirschling will be eligible for benefits after she turns 62 next year. She said she taught seventh graders for 14 years at a school near Camden, N.J., before retiring and volunteering for the Red Cross in Gulf Coast areas hit by Hurricane Katrina.

Posted by edelfenbein at 11:07 AM

Third-Quarter Earnings Reports

Earnings season gets underway for out stocks this week. On Thursday, Danaher (DHR) and UnitedHealth (UNH) report. Then on Friday, Harley-Davidson (HOG) reports. I think HOG is due for a lift soon.

Posted by edelfenbein at 11:05 AM

Medtronic Pulls Defibrillation Leads

Ugh.

Medtronic Inc. has suspended distribution of its Sprint Fidelis defibrillation leads after identifying five patient deaths in which a lead fracture may have been a contributing factor.

Medtronic shares fell nearly 5 percent in premarket trading.

A defibrillator monitors a patient's heartbeat; if it senses an abnormal heart rhythm, it delivers an electronic shock to reset the heart to a normal beat. A defibrillation system consists of a device implanted near the shoulder with one or more leads connecting the device to the heart.

Medtronic said Monday it had discovered a "small chance of fractures in particular locations" on Sprint Fidelis models 6930, 6931, 6948 and 6949. The company is asking doctors to stop implanting the leads and return all unused leads to Medtronic.

A fractured lead "can cause the defibrillator to deliver unnecessary shocks or not operate at all," said Daniel Schultz, director of the Food and Drug Administration's Center for Devices and Radiological Health.

The company is not recommending that patients with such a lead have it removed, since they "are more likely to experience complications from removal." Instead, Medtronic said, doctors can reprogram the device to alert the patient that a fracture may have occurred. Possible indicators could include audible alerts or inappropriate shocks.

The stock is getting crushed today. The shares went as low as $50.20.

Posted by edelfenbein at 10:36 AM

UNH Below $50

If you're looking to add new money to the market, consider shares of UnitedHealth (UNH). I really am surprised to see the stock going for less than $50. I'm not sure what the market is expecting. The stock is going for about 12.6 times next year's earnings estimate. Yet, the company will probably grow its earnings about 17% this year, and 14% next year.

Posted by edelfenbein at 12:24 PM

Is the Worst Over?

Quick question: How much did foreclosures increase last month? 10%? 20%?

Try an 8% drop.

But the figures were still double the number reported a year ago. "It's important to note that September's total was still the second highest monthly total we've seen since we began issuing our report in January of 2005," James Saccacio, chief executive of RealtyTrac, said in a statement.

"It's too early to tell if September's numbers represent a one-month lull," he said, "or if they could signify that more buyers and investors are getting back in the market and snatching up discounted foreclosure properties, thereby providing a release valve for distressed homeowners and overwhelmed lenders."

Posted by edelfenbein at 10:24 AM

The Market Five Years On

Today is the fifth anniversary of the market’s low close. On October 9, 2002, the Dow closed at 7,286.27. The S&P 500 closed at 776.76, which is eerily similar to the Dow’s low from 20 years before.

Over the last five years, the Wilshire 5000 is up 132.1% (including dividends) which slightly beats gold’s gain of 129.8%. Also, the dollar has lost about 30% of its value against the euro.

Posted by edelfenbein at 11:02 AM

Monday Night Football at Tradesports

Here's the futures contract for the Cowboys to win last night's game:

If you missed the game, I'm not sure how to describe it. Dallas was counted out not once, but a few times and still managed to win. Look at how often the contract was basically worthless.

Posted by edelfenbein at 10:09 AM

Write-Offs Are a Buy?

David Weidner looks at the recent round of broker write-offs:

The bet is that the bigger the write-down now, the less these institutions will have to write down in the future. This is like a baseball team that celebrates after losing by nine runs, because the odds seem somehow greater that it will lose the next game by a big margin. This logic has Richard Bove, an analyst at Punk Ziegal & Co., flabbergasted.

"These companies are not going to see their markets jump back immediately," he wrote in a note to clients. "Their earnings power has been lowered. This is a reason to sell not buy. The theory that if the company writes off $2 billion it should see its stock price up $1 and if it writes off $6 billion the stock should jump $3 is not one I can embrace."

Doesn’t make much sense to me either.

Posted by edelfenbein at 9:24 AM

Option Traders Fear a Crash

In the stock pits, traders are bullish but not so in the options arena:

Investors are paying the most ever to protect against a drop in the Standard & Poor's 500 Index, data compiled by Morgan Stanley show. The gap between the price of so-called put options on the benchmark for U.S. equity and the cost to wager on further gains has averaged about 8 percentage points since August. That's more than the previous high in July 2001, before the index dropped 34 percent and fell to the lowest this decade.

Posted by edelfenbein at 12:14 PM

Business Deals Gone Bad

Business Week has an interesting article on bad business deals. This problem is far more common than most people realize. My particular concern is the mega-merger. Time and time again, these deals never seem to work out. They’re always greeted with great fanfare. You see the new CEOs smiling and shaking hands. Everyone is talking about synergy this and new markets that.

My hunch is that mega-mergers flatter the vanities of the executives who make the deal. Shareholder value, on the other, is probably more do to innovation and execution where executive decisions play a much smaller role.

So how come the mergers rarely seem to work out? I think the problem is that there are a million steps that can go wrong. You have to merge two different cultures. Your clients need to realize that. There are ego and turf wars. Shareholders must be pleased. Lawyers need to be pleased. Plus, there’s always the issue of anti-trust battles.

The wreckage of deals gone bad litters the business landscape these days. On Oct. 4, shareholders of German automaker DaimlerChrysler (DAI) are expected to approve renaming the company Daimler, jettisoning the last vestiges of the disastrous 1998 acquisition of Chrysler, for which it paid some $40 billion. While retaining a 19.9% stake in the Michigan company, Daimler's shareholders will be more than happy to forget the whole episode, which saw litigation over the deal, a dearth of hit models, cultural and operational snags between U.S. and German managers, and heavy financial losses. In May, Daimler agreed to sell the bulk of the company to private equity firm Cerberus Capital Management for a mere $6 billion.

On Oct. 1, online auction house eBay (EBAY) conceded that it had overpaid in its $2.6 billion acquisition of Internet telephone service Skype Technologies in 2005. EBay took a writedown of $1.4 billion, and Skype founders Niklas Zennström and Janus Friis departed from their former suitor.

Here's Business Week's list of the Worst Deals of All-Time.

Posted by edelfenbein at 11:11 AM

The Buy List Today

I shouldn’t toot my own horn, but the Buy List has been doing pretty well lately. Since September 21, we’re up 2.91% a full two points ahead of the S&P 500. For the year, however, we’re still trailing the S&P 500, 8.55% to 3.74%.

Today we were up 0.19% while the S&P was down -0.46%. That’s a nice spread for one day. Today’s big winners were Harley-Davidson (HOG) and Fiserv (FISV). Harley’s been a disaster this year, but to be honest, I still like the stock. For the year, HOG is down over 30% but the company recently raised its dividend.

Respironics (RESP) is still kicking ass and it’s another 52-week high today. FactSet Research Systems (FDS) is also doing well and it nearly made a new high yesterday.

Posted by edelfenbein at 5:00 PM

Date Of Apple Backlash Set For March 21, 2008

The Onion:

In the face of Apple, Inc.'s 3-billionth iTunes sale and soaring stock price, some Wall Street forecasters are predicting that consumers will finally get fed up with the computer manufacturer's high retail prices and various product bugs sometime between March 20 and 22 of next year.

"At the current rate, we believe that at this time a sea change will occur in which people will look down at their glossy white or black devices and feel a sense of embarrassment and gullibility," Goldman Sachs analyst Steven Shore said. "They will realize that, despite all the sleek design, they got caught up in a wave of hype that made them shell out additional hundreds of dollars for options and features they didn't need. Until then, I would like to point out that my iPhone is awesome."

Apple has responded to the backlash rumors by announcing the late-October release of a mint green iPod in time for the holiday shopping season, a strategy that appears to have silenced naysayers at least temporarily.

Posted by edelfenbein at 3:09 PM

The Dow's Annual Trend

Here’s a look at how the Dow has performed, on average, throughout the year. I used all the daily closings since 1896.

Looking at the annual trend, there are two basic surges. The biggie is from October 29 to May 6, when the Dow rises 7.79%, which is about 93% of the annual gain. The rest of the time, the Dow gains just 0.49%. The other big surge is from May 25 to September 6 when the Dow rises an average of 4.72%.

The average sell-off from May 6 to May 25 is -1.25%, and the one from September 6 to October 29 is -2.82%.

The most impressive short-term gain is from December 21 to January 7 when the Dow averages a gain of 3.39%.

Posted by edelfenbein at 11:59 AM

Right on Walgreen

Last year, I wrote that Walgreen was too expensive at $44 a share. Let's just say that it wasn't one of my more popular posts. One commenter at Seeking Alpha was abusive that the editors there had to rewrite his comment.

Today, the company announced a 4% profit decline. The shares are now down to $39. It doesn't look like things will get better soon:

Net income was $396.5 million, or 40 cents a share, compared with $412.3 million, or 41 cents, in the quarter a year earlier.

It was the first decline in quarterly profit since early in the 1998 fiscal year, and executives warned that trouble could persist.

Revenue in the period, which ended Aug. 31, rose more than 10 percent, to $13.4 billion from $12.2 billion.

Analysts expected earnings of 47 cents a share and revenue of $13.5 billion.

"Many of the challenges we faced in this quarter will continue, including comparisons to last year’s blockbuster generics," said Rick Hans, the company’s director of finance.

Posted by edelfenbein at 11:40 AM

GorillaTrades Unmasked

Business Week looks at GorillaTrades:

But does the gorilla deliver for investors? A BusinessWeek analysis of the service's picks found they performed far worse than the stock market as a whole.

The company has attracted attention thanks to its quirky approach and heavy advertising. It has refused to divulge the identity of the firm's founder and chief spokesman, who calls himself "the gorilla." Nor does it give out results on the overall performance of his picks. However, BusinessWeek has learned that the gorilla is a former stockbroker named Ken Berman, in Jupiter, Fla., who has confirmed that fact in an interview.

Posted by edelfenbein at 11:14 AM

The Write-Off

UBS to write off $3.4 billion

UBS AG, the world's largest wealth manager, unveiled $3.4 billion in losses, swept out senior managers and slashed jobs in one of the biggest casualties yet worldwide from the credit crunch.

UBS said on Monday it would write down 4 billion Swiss francs ($3.42 billion) in losses in its fixed income portfolio and elsewhere, resulting in a third-quarter loss of 600-800 million Swiss francs, its first quarterly loss in nine years.

UBS said it would shed 1,500 jobs in its investment bank.

Can they do that?

Jerry : So were going to make the Post Office pay for my new stereo?
Kramer : It's just a write off for them.
Jerry : How is it a write off?
Kramer : They just write it off.
Jerry : Write it off what?
Kramer : Jerry all these big companies they write off everything
Jerry : You don't even know what a write off is.
Kramer : Do you?
Jerry : No. I don't.
Kramer : But they do and they are the ones writing it off.
Jerry : I wish I just had the last twenty seconds of my life back.

Posted by edelfenbein at 3:02 PM

Fox Business News Is Coming

Fox Business News is coming October 15. The Web site is now live.

Posted by edelfenbein at 2:23 PM

Buy List Update

Now that we have three quarters under our belt, let's look at the Crossing Wall Street Buy List. For the year, the Buy List is up 1.88% compared with 7.65% for the S&P 500 (dividends not included). The Buy List has been about 7% less volatile than the S&P 500.

Posted by edelfenbein at 11:19 AM

Predatory Lenders Are Now Murdering Little Girls

With today’s announcement from Citigroup, the subprime may still have a ways to go, but the political issue is just getting started.

Yesterday’s Washington Post had an absolutely wretched article by Jim Rokakis, the treasurer of Cuyahoga County, Ohio. It’s almost something out of the The Onion. He basically blames the death of a little girl and an elderly man on predatory lenders. I’m not exaggerating:

Twenty years ago, the Slavic Village neighborhood of Cleveland was a tightly knit community of first- and second-generation Polish and Czech immigrants. Today, it's in danger of becoming a ghost town, largely because a swarm of speculators, real estate agents, mortgage brokers and lenders saw an opportunity to make a buck there.

You could say it was because of them that 12-year-old Asteve' "Cookie" Thomas lost her life on Sept. 1, shot in Slavic Village when she stumbled into the crossfire of suspected drug dealers.

No, you can’t. You could, however, blame her death on the suspected drug dealers who fired at her. I'm going to take a wild guess and say that they're probably actual drug dealers as well.

It gets worse:

The Federal Reserve's recent decision to cut interest rates may calm the nerves of Wall Street bankers, but it won't bring back Cookie Thomas or Joe Krasucki.

Vile.

I think another Sarbanes-Oxley is on the way.

Posted by edelfenbein at 11:09 AM

Can We Turn Off Our Emotions When Investing?

Joe Nocera has an interesting story about investing and emotions (via Mankiw).

“There is a story in the book about Harry Markowitz,” Mr. Zweig said the other day. He was referring to Harry M. Markowitz, the renowned economist who shared a Nobel for helping found modern portfolio theory — and proving the importance of diversification. It’s a story that says everything about how most of us act when it comes to investing. Mr. Markowitz was then working at the RAND Corporation and trying to figure out how to allocate his retirement account. He knew what he should do: “I should have computed the historical co-variances of the asset classes and drawn an efficient frontier.” (That’s efficient-market talk for draining as much risk as possible out of his portfolio.)

But, he said, “I visualized my grief if the stock market went way up and I wasn’t in it — or if it went way down and I was completely in it. So I split my contributions 50/50 between stocks and bonds.” As Mr. Zweig notes dryly, Mr. Markowitz had proved “incapable of applying” his breakthrough theory to his own money. Economists in his day believed powerfully in the concept of “economic man”— the theory that people always acted in their own best self-interest. Yet Mr. Markowitz, famous economist though he was, was clearly not an example of economic man.

Posted by edelfenbein at 10:49 AM