Archive for November, 2007

  • The Turnaround at Dell
    , November 30th, 2007 at 10:22 am

    Dell’s (DELL) rebound isn’t going as smoothly as had Wall Street hoped. The company just reported a decent earnings increase, 34 cents a share compared with 27 cents last year. Wall Street, however, was looking for 35 cents. As a result, the stock is getting clobbered today.
    The company recently revised all of its financial numbers for the past few years. Here’s a summary of Dell’s new financial data.
    Investors need to understand that businesses don’t turnaround very easily. Often the departure of a CEO is really a symptom of larger problems. Hewlett-Packard’s (HPQ) turnaround is closer to the exception. We sometimes think of stocks as athletes that have an off-night. There usually aren’t short-term earnings glitches. You’ll notice that small problems are like cockroaches, there are several more for each one you see.
    Michael Dell took over as CEO with the departure of Kevin Rollins. The problems at Dell continue to be one of costs. Business Week notes:

    But expenses as a percentage of revenue, a key measure of how well the company is managing costs, rose noticeably. Selling, general, and administrative expenses rose to 12.2% of revenue from 10.6% a year ago. Total operating expenses rose to 13.2% of revenue, up from 11.5% a year ago. “People are disappointed that the revenue increase did not flow through to the bottom line,” says Brent Bracelin, analyst at Pacific Crest Securities. “It doesn’t look like the company has trimmed enough fat.” Dell’s operating income of $829 million was 5.3% of revenue, well below the 8% level that Dell posted in years past.
    Earlier this year, Dell said it wants to reduce its workforce by about 10%, but as of Nov. 2, Dell had cut only about 2.5% of the 84,000 employees it had on Aug. 3. Carty insisted, though, that the company “is still driving to that [10% reduction] number.” Carty added: “We’ve identified a considerable amount of low-value work.” The company also is working to automate certain tasks to help it eliminate more employees. “We have more manual work going on than we need,” he said. At the same time, he said that other initiatives, such as acquisitions or “new strategies,” may mean keeping or hiring certain kinds of employees.
    Gross margin performance, too, didn’t meet some analysts’ expectations. Gross margin inched up to 18.5% of revenue, from 16.6% a year ago, but still fell below the 19% analysts were projecting. The company blamed component costs, saying they didn’t decline as steeply as the company was projecting. Shaw Wu, analyst at American Technology Research, questions why that’s the case, when some of Dell’s main competitors, including HP and Apple (AAPL) have recently enjoyed the benefits of low component costs.

  • Three-Month T-Bill Hits 2.8%
    , November 29th, 2007 at 12:46 pm

    I’m amazed at the plunge in Treasury yields. The three-month T-Bill rate touched 2.8% this morning. We’re approaching the low of 2.40 from August. I don’t see how the Fed can keep rates so far above the market. Something has to give.

  • Bloomberg Profile of Jim Simons
    , November 28th, 2007 at 9:36 am

    Jim Simons doesn’t talk with the media much. You can tell why.

    Renaissance is under increasing pressure to stay ahead of the pack — and to keep its secrets under wraps. Save current employees and a few former ones, nobody knows precisely how the firm makes its millions. Medallion stopped taking new money from outside investors in 1993 and returned pretty much the last of their capital 12 years later. Today, the fund is run almost exclusively for the benefit of Renaissance staff.
    The wise-cracking Simons himself is mum on virtually all of its details.
    What can he say about Medallion’s trading strategy?
    “Not much,” Simons says with a chortle, and then takes a drag on one of the Merit cigarettes he often smokes.
    What kind of instruments does it trade?
    How many different strategies does it use?
    “A lot.”
    Simons says his Ph.D.s laugh when they read the far-fetched theories about what their fund might be doing. One chat room participant speculated that Renaissance uses audio hookups to futures exchanges and analyzes the noise from the pits with voice-recognition software.

    (Hat Tip: Altucher)

  • Buy List Update
    , November 28th, 2007 at 7:28 am

    The Buy List continues with a very impressive fourth-quarter rally in terms of relative performance. Through yesterday, the Buy List was down 0.32% for the year while the S&P 500 is up 0.70%. That’s a gap of just 1.02%.
    But on October 18, the Buy List was getting creamed by the S&P 500, 8.59% to 1.77%. That’s a gap of 6.82%.
    It looks like we have an outside chance of catching the index before the year is out. That was something I wouldn’t have believed just five weeks ago.
    Yesterday, the Buy List jumped 1.93% compared with 1.49% for the S&P 500. The big help came from Donaldson (DCI) which jumped 8.5%.
    Donaldson announced earnings of 53 cents a share for its fiscal first quarter compared with 43 cents last year. Analysts were expecting 48 cents a share. The company also said it expects full-year earnings (their fiscal year ends in July) of $1.97 to $2.07 a share. That would make their 19th straight record year.

  • The Plunge of the 10-Year Yield
    , November 27th, 2007 at 11:49 am

    Yesterday was the 11th largest fall in the 10-year T-bond rate since 1962. (Note: I’m referring to the percent change in the rate.)

  • Wall Strip Looks at Fair Isaac
    , November 27th, 2007 at 10:31 am

  • An Official Correction
    , November 26th, 2007 at 4:51 pm

    The Dow is now down 10% from its all-time high close. On October 9, the Dow closed at 14,164.53. Today’s close of 12743.44 makes for a drop of 10.03%. The S&P 500 is down 10.09%.

  • Bed Bath & Beyond Is Now Below $30
    , November 26th, 2007 at 12:37 pm

    Shares of Bed Bath & Beyond (BBBY) are now trading at $29.72. This is the lowest the stock has been in the last five years.
    I’m not a believer that the housing market is having a severe impact on its business. There is some impact, but it’s easy to overstate.
    The company’s quarterly sales growth numbers have been pretty stable for the past three years, each quarter coming in around 10%-14%.
    BBBY is a remarkably efficient company. Gross margin usually run in the low 40% range. Operating margins have slipped a bit from 15% to 13%, but that’s to be expected. Net margins are down from 10% to about 8.5%. Both are higher than they were during the run-up in housing prices.
    There’s a big difference is a slowdown in earnings growth and losing a lot of money. Now let’s look at some of the homebuilder.
    Lennar (LEN) will see its EPS drop from $8.32 two years ago to $-4.90 this year. DR Horton (DHI) will drop from $4.62 to $-2.27. KB Home (KBH) will drop from $9.53 to $7.61.
    Basically, BBBY’s return-on-equity has fallen from about 24% to around 20%, yet their shares have fallen by one-third. Compare 20% ROE to the 10-year T-bond that’s now paying about 4%.

  • Cyber Monday Myth and Reality
    , November 26th, 2007 at 9:50 am

    Don’t get too worked up about Black Friday or Cyber Monday. They’re not the busiest days of the year.

    While not as famous as Black Friday, retailers just a few years ago invented Cyber Monday as a way to create buzz around online shopping.
    The National Retail Federation’s online division,, coined the term in November 2005.
    Some retailers had noticed an uptick in online sales, and the federation decided to brand it. Now, two years later, more and more stores are playing off the Cyber Monday theme and offering sales.
    “It’s a starting point. It’s a kickoff point where many retailers have special deals and bargains,” said Scott Krugman, spokesman for the National Retail Federation. “Retailers are having special Cyber Monday sales, and the way I see it, if retailers are attaching a sale and calling it Cyber Monday, it’s true.” said that 72 percent of online retailers are planning a special promotion for Cyber Monday this year, up from nearly 43 percent just two years ago.
    But don’t confuse the name with big purchases. Cyber Monday is by no means the busiest day for online sales, just as Black Friday is not the biggest day of sales for most stores.
    “Black Friday is a great day for creating energy, buzz and excitement about the holiday season,” Krugman said.
    So, what is the busiest shopping day of the year?
    The Saturday before Christmas.

  • Barron’s on Harley-Davidson
    , November 24th, 2007 at 7:50 pm


    Yet when the Street throws in the towel on Harley-Davidson — as it seems to do every few years — that is usually the best time to buy the shares. Harley has fallen 30% to 40% ahead of previous U.S. recessions, only to rebound when the economy perks up. This time, the stock could top 60, although that is unlikely to happen tomorrow, or the day after.