Archive for 2006

• Crushing Your Enemies in a Pile of Collapsing Debris
  Eddy Elfenbein, March 23rd, 2006 at 9:40 am

  
  Behold! The Dell XPS 600 Renegade, the ulimate in computer gaming technology. The price tag, $10,000.
  Best. Computer. Ever.
  But what can it do?

  The limited-edition, custom-painted Dell(TM) XPS 600 Renegade delivers to U.S. consumers an immersive gaming experience based on the industry’s first dedicated physics accelerator — the AGEIA(TM) PhysX(TM) processor.
  The AGEIA technology lets users interact with supported games in more sophisticated and realistic ways. The AGEIA PhysX processor can power real-time dynamic motion and interaction on a massive scale so games can feature large numbers of complex characters and moving objects in incredibly life-like environments. For example, instead of using traditional weapons, gamers can pull down the roof on their enemies, crushing them in a pile of collapsing debris.

  Poland, sold separately.
  By “traditional weapons,” they mean traditional computer game weapons.
  Today, Dell announced that it’s buying Alienware Corp., a company that also makes high-end computers favored by gamers. I had no idea these things cost so much.
  Interestingly, Alienware uses AMD’s chips and Dell only uses Intel’s. Dell said that Alienware will be a subsidiary and will continue to use AMD’s products.
  Business Week has more.

• Language Matters
  Eddy Elfenbein, March 22nd, 2006 at 3:08 pm

  Polonius: What do you read, my lord?
  Hamlet: Words, words, words
  — Hamlet: Act II, Scene 2

  According to a recent academic paper, company press releases contain more information than we realize.
  Three researchers (Angela K. Davis, Jeremy M. Piger and Jeremy M. Piger) took an interesting approach. They ignored the numbers and instead focused on the language contained in press releases. Using text-analysis software, they looked for optimistic and pessimistic language used in 24,000 press releases.
  Optimistic language included words that conveyed praise, satisfaction or inspiration. This includes words like best, better, favorable, good, great, important, positive, profitable, strong and successful. Pessimistic words conveyed blame, hardship or denial (i.e., alarmed, burden, conflict, weakness, setback).
  Their results show that language matters. It’s as if the companies are tipping their hands. According to the researchers’ (jargony) conclusion:

  Taken as a whole, these results suggests that the optimistic and pessimistic language used in the narrative disclosures of earnings press releases contains information about future firm performance incremental to other factors that are commonly associated with future earnings. This result suggests that market participants consider optimistic and pessimistic language usage to be a credible (at least to some extent) source of information about managers’ future earnings expectations. Finally, the association between market returns and the unexpected portion of optimistic and pessimistic language is substantially stronger than the association between market returns and the expected portion of optimistic and pessimistic language. This result suggests that managers likely have reputations for routinely providing optimistic or pessimistic disclosures and that the market responds to language usage that differs from those initial expectations.

  Interestingly, they also found that corporate press releases are getting longer. Click here to see the paper.
  I double-checked Microsoft’s press release from yesterday, and it doesn’t contain a single negative word. These guys are good. In fact, at no point do they even say that Vista is being delayed.

• The Trend Away from Earnings Guidance
  Eddy Elfenbein, March 22nd, 2006 at 10:35 am

  Pfizer is doing it. Motorola said it will do it too. Companies like Citigroup, Google and General Motors already do it.
  More and more companies are no longer giving earnings guidance.

  Now senior corporate managers and corporate-governance activists are debating the pros and cons of issuing or scrapping guidance. Some say discontinuing updates boosts investor confidence in corporate accounting, since it removes the temptation to rearrange the books to meet earnings targets. Others criticize tight-lipped companies for keeping owners in the dark, highlighting the importance of providing as much information as possible to the marketplace.
  To be sure, investors can extract a toll from companies who remain silent about their future prospects. Google, which has never issued forecasts, experienced a 7 percent drop in its stock price on February 1, when its fourth-quarter results didn’t meet the markets’ expectations. Some have argued that if the Internet search engine had issued forecasts, expectations would have been more realistic, according to McKinsey.
  A number of companies, however, have managed to stave off negative investor reactions by putting a positive spin on their guidance cutbacks. In 2002, for instance, Coca-Cola explained that it stopped updating the market on its earnings projections as a way to focus on the company’s long-term performance. Even though investors had been slamming Coke for its alleged lack of business progress and its declining stock price, they didn’t react negatively to the news that no guidance would be forthcoming.
  Similarly, when Intel’s Otellini cited the company’s intent to focus on the long-term, the market seemed to accept that explanation. The company’s stock closed only pennies lower on the day Intel announced it would curb the frequency of its guidance.
  Indeed, there’s no evidence that frequent guidance positively affects valuation multiples, boosts shareholder returns, or curbs share-price volatility, according to the McKinsey study.

  People love to blame the companies for the “quarterly earnings game,” but how come no one blames the investing public?
  A few years ago, employees at Cisco were madly loading boxes onto trucks as midnight approached on the final day of the quarter. If the boxes were on the trucks, it would then count as a sale. Despite their best efforts, the company failed and for the first time in 11 years Cisco had to report that they missed earnings guidance.
  The next day, the stock plunged 13%. Cisco knew what it was doing. I don’t blame them, I blame the investors.

• What’s Wrong with the Newspaper Biz?
  Eddy Elfenbein, March 22nd, 2006 at 10:17 am

  Holman Jenkins in today’s WSJ:

  Peter Drucker once pointed out that new business models are seldom pioneered by old companies, because old companies are loath to cannibalize their existing businesses. On the specific case of voting lockups, a study by Harvard and Wharton economists found that such companies have lower share prices than their peers, and invest less in R&D and advertising. The authors conclude that a “misalignment of incentives leads dual-class firms to invest too little, leading to lower sales growth and valuations.”
  That describes the newspaper business to a tee. A Columbia University survey recently found that many operators have actually been dumbing down their online editions for fear of cannibalizing their dead-tree audiences. Newspapers have cut costs in round after round of journalistic downsizing, some of which was perfectly sensible: The local paper’s impregnable strength is local reporting, not having a Rome bureau. But while this disinvestment in customer service has helped maintain the industry’s enviable cash flows, it hasn’t done much for stock prices or boosting investor confidence in the future.

  Today’s New York Times Company’s press release:

  The New York Times Company also announced today that first-quarter diluted earnings per share are expected to be in the range of 22 to 24 cents, compared with 76 cents in the same quarter last year, which included a gain of 46 cents per share from the sale of the Company’s current headquarters and another property.
  The first-quarter range includes estimated expenses for the Company’s staff reduction program announced in September 2005 of $8 to $10 million or 3 to 4 cents per share.

• Bernanke Warns
  Eddy Elfenbein, March 22nd, 2006 at 6:54 am

  
  Reuters:

  Bernanke warns on mixing banking, commerce

  CBC News:

  Bernanke warns about size of U.S. deficit

  AP:

  Bernanke warns community banks on loans

  UK Telegraph:

  Bernanke warns of more rate rises

  WSJ:

  Blunt-Talking Bernanke Warns of Inflation Risks

  UK Independent:

  Bernanke warns on danger of US deficits

  Reuters:

  Bernanke warns on commercial real estate loans

  CNN:

  Greenspan home robbed

• Microsoft delays consumer launch of Windows Vista
  Eddy Elfenbein, March 22nd, 2006 at 6:38 am

  The tech sector should open lower today:

  Microsoft Corp. said on Tuesday it plans to delay the consumer launch of its much-anticipated Windows Vista until after this year’s holiday shopping season, sending its shares down nearly 3 percent.
  The world’s largest software maker pushed back the consumer version of Vista until January 2007 from an earlier target for the second half of 2006 and pledged to ship the next version of its operating system to business customers in November.
  Vista is the first major overhaul of Windows since Microsoft rolled out Windows XP nearly five years ago.
  Microsoft had originally been expected to release Windows Longhorn, now Vista, in 2005. The company scaled back its ambitions and pushed it out to 2006 before this latest delay.
  The eight- to 10-week delay, according to estimates by research firm Gartner Inc., may reverberate throughout the technology industry from PC manufacturers to chip makers and down the supply chain, analysts and investors said.
  “It is a critical eight- to 10-weeks for retailing and for the producers. The retailers and PC hardware manufacturers work on razor-thin margins, so the impact there could be pretty severe,” said David Smith, analyst at Gartner.

• The Market Today
  Eddy Elfenbein, March 21st, 2006 at 4:00 pm

  Today’s early rally fizzled. The S&P 500 dropped -0.60%. Bonds sold off, possibly due to Bernanke’s speech. The core PPI rate was higher-than-expected, but commodity stocks did poorly.
  Thanks to FactSet Research Systems (FDS) rising 6.3%, our Buy List beat the market by falling -0.36%. This is despite Biomet‘s (BMET) lousy day. Strangely, Biomet opened lowered and rallied until 1 p.m., before it dropped sharply. The stock closed down over -4.8%.
  Dell (DELL) finished above $30 a share for the first time in over a month.
  Also, something tells me that the Brazilian market has gone too far. The Brazil ETF (EWZ) was down -3.5% today. (Calling all technicians. That can’t be a good chart.)
  Finally, stay tuned for Tim Horton’s IPO. The New Wall Street is skeptical, while Clearfish is bored.

• The Global Saving Glut
  Eddy Elfenbein, March 21st, 2006 at 2:39 pm

  Here’s the speech Ben Bernanke gave yesterday to the Economic Club of New York. This has been getting a lot of attention in investing circles.
  As I’ve said before, I’d never base an investing decision on anything said by a member of the Federal Reserve. However, Bernanke gives an interesting speech. Unlike other Fed Chairmen we could name, his talk is clear and jargon-free.
  The issue Bernanke is concerned with is why long-term interest rates are still low despite 14 increases of short-term rates. Personally, I think this is more of an “angels-on-a-pin” topic.
  It’s fun to speculate why, but it really doesn’t matter that much. Bernanke seems to believe that the low rates are due to an excess of savings around the world.

• The Case Against Buy-and-Hold?
  Eddy Elfenbein, March 21st, 2006 at 1:00 pm

  In today’s Investor’s Business Daily, Trang Ho makes an unconvincing case against buy-and-hold:

  Sitting tight may be prudent during brief downturns, but in many cases you cannot tell how long or deep a bear run will last.

  Change “but” to “because,” and tell me which makes more sense.
  What I find curious is that he points to Intel (INTC) to support his case:

  Intel plummeted 73% in a year. It bottomed out at 13.89 — 82% off its all-time high — by September 2002. It, along with most of the tech leaders of 2000, never recovered.

  Sorry, but Intel is one the best examples of buy-and-hold. Let’s look at history. In just four months, the stock plunged from $83.50 to $15.50. The year was 1974. Let’s just say that the stock recovered quite nicely. If you want to put those dollar figures in today’s terms, the stock has split 540-for-1 since then.
  Or there was the 1980’s. Many people assume Intel’s stock was a big winner during the bull market. It wasn’t. The stock’s 1986 low was about 60% off its 1983 high. I hope you didn’t sell. As they say, “in many cases you cannot tell how long or deep a bear run will last.”

• FactSet Research Systems Beats Earnings
  Eddy Elfenbein, March 21st, 2006 at 11:13 am

  FactSet Research Systems (FDS) earned 38 cents a share last quarter, one penny more than estimates.

  Revenue totaled $93.7 million, a 23 percent jump from $76.5 million a year earlier and beating the consensus target of $92.3 million.
  Looking forward, FactSet forecast third-quarter revenue of $95 million to $97 million. That compares with analysts’ expectations for $94.9 million in revenue.
  Last month, the company acquired Europrospectus.com for $7.5 million of cash in a deal that increased quarterly subscriptions by $3.2 million, but is projected to dilute earnings by 1 cent per share over the next year.

  The stock broke out to a new all-time high this morning. Dell (DELL) is up about 2.7%, and Biomet (BMET) is down -2.5%.