Archive for August, 2007

• 45 Years Ago Today
  Eddy Elfenbein, August 22nd, 2007 at 4:31 pm

• Wednesday Again
  Eddy Elfenbein, August 22nd, 2007 at 4:02 pm

  For the 21st time in the last 30 Wednesdays, the S&P 500 closed higher. This is also the 56th up Wednesday in the last 81.

• Comparing 1998 and 2007
  Eddy Elfenbein, August 22nd, 2007 at 3:11 pm

  This chart has been making the rounds and it’s supposed to be telling us EXACTLY WHAT’S GOING TO HAPPEN!!!
  Honestly, I don’t see it but I’ll let you be the judge.
  The Dow from 1998 is the black line and the left scale; 2007 is the blue line and the right scale.
  

• FactSet Research Systems
  Eddy Elfenbein, August 22nd, 2007 at 12:36 pm

  FactSet Research Systems (FDS) is a company whose products most professional money manager are familiar with, but it’s the stock that’s been catching my eye lately.

  The story here is pretty simple: Wall Street is addicted to data and FDS is their dealer. The fundamentals are solid; fat margins, zero debt and nice history of churning out 20% EPS increases.

  I’ll warn you, FDS is expensive although it recently got a little less expense. The shares are off about 20% from their high. I think the market is concerned that many of FDS’ clients are these dearly departed hedge funds. I doubt that’s the case. FDS has a large diversified client base (2,000 clients and 33,000 users). This is a well-entrenched business.

• The Financial Times: Don’t Cut
  Eddy Elfenbein, August 22nd, 2007 at 10:26 am

  Not everyone is on the rate-cut bandwagon. The Financial Times opines against one:

  Credit fuels the modern economy, and if the dislocation in the money markets lasts another month or two, investment, consumption and growth in the real economy will suffer. Central banks must restore confidence, but rather than cut interest rates they should extend liquidity operations to longer matur­ities, more collateral and possibly even different counterparties.
  Liquidity injections by the Federal Reserve and European Central Bank have brought down overnight interest rates, but longer-term borrowing is still unusually expensive, while US Treasury bills have been trading at panic levels of below 3 per cent. It is hard to borrow using collateral not issued or guaranteed by a government. Central bank intervention has not worked so far.
  This is not a recession panic, as in 1998, when the Long-Term Capital Management crisis coincided with weak economic data.
  Nor is it a panic caused by serious credit losses. Defaults on US subprime mortgages are miles off a level at which triple-A bonds backed by them would suffer losses. When they do trade, the prices can be reasonable: as part of its acquisition by Kaupthing last week, the Dutch bank NIBC sold its subprime portfolio for 78 cents on the dollar.
  The problem is that the bonds do not trade – the crisis is one of liquidity – and that has spread to short-term debt sold by investment vehicles that may be exposed.
  The futures market expects the Fed to cut interest rates aggressively, but unless the Fed expects harm to the real economy, that policy makes little sense. It is indiscriminate and so creates moral hazard in the markets, but there is also a good chance it would not work.
  The Fed has already pushed its main funds rate down well below its 5.25 per cent target, but the problem is not overnight liquidity at banks, it is perceived credit risk on three-month commercial paper. Giving cheaper money to banks might or might not change that perception.
  The lenders of last resort need to find ways to get money through the traditional banking system to the markets where the trouble is. They can do so by agreeing to lend against more securities (the Bank of Canada is already accepting commercial paper); by lending for a few months rather than overnight; and possibly by dealing with off-balance-sheet vehicles directly.
  There should be no handouts – lending should be at penalty interest rates – but what is needed to jump-start the credit markets is more targeted liquidity. Central banks should not crack and cut their policy rates while they have more suitable tools in the box.

• Fed: Cautiously Optimistic!
  Eddy Elfenbein, August 22nd, 2007 at 10:20 am

  Great news! The WSJ reports:

  Federal Reserve officials are cautiously optimistic that the series of steps they have taken to stabilize markets have started to work.

  Ugh! “Cautiously optimistic” is one of the great all-purpose bullshit media phrases of all-time. It means nothing. It sounds thoughtful and sober, but it really communicates nothing. You can see why central bankers love using it.
  Neil Westergaard nailed the phrase a few years ago:

  What a great all-purpose, meaningless qualifier to keep from looking stupid. It’s much better than just saying “I don’t know.” It implies that that the person really does know something important, but is being conservative and careful in the distribution of information, holding back the unverifiable facts for the good of the republic.
  Or covering their behinds.
  “Cautiously optimistic.” If the economy goes into the dumper again, we can say our earlier caution was warranted. If things pick up, we were right to be optimistic and “knew it all along.”

  The Journal continues:

  Officials acknowledge conditions are far from calm, and markets could easily take a turn for the worse. But they cite stable stock prices, a pickup in issuance of jumbo mortgages and other factors as evidence that in recent days conditions have improved, though gradually, instead of worsened.
  Many on Wall Street are more pessimistic, and believe the Fed will still have to cut interest rates sharply, perhaps starting in the next week or two. But as long as Fed officials think things are getting better, they are less likely to feel pressured to cut interest rates immediately and more likely to wait until their scheduled meeting Sept. 18 to decide.

  Going by the futures market, I’d say the Federal Reserve will cut in September and again in October. I don’t think the Fed wants to break out of its pattern of only cutting rates at meetings. It could, but I don’t think it sees the current situation as being that drastic.
  One of my long-standing criticisms of mainstream market analysis is the centrality placed on the Federal Reserve. This is classic over-agency bias. Sure, the Fed is important, but it’s not that important. The Fed really can’t fight what the market wants. If the market demands a rate cut, well…sooner or later, it will get one.
  Another issue that I’ve noticed is that some observers are treating the market’s recent activity as some major come-uppance for speculators. The market’s decline is not very steep and the most severe pain is confined to a small number of stocks. Yet, people will use any decline as an excuse for public moralizing.
  Let’s keep in mind that equity valuations are still quite modest. Also, growth stocks have outperformed value stocks since the market broke. That’s hardly a come-uppance to irrational exuberance. Viewed from the long-term, this summer is barely a hiccup.
  I still think the risk/reward tradeoff greatly favors equity investors. You could even say that I’m cautiously optimistic.

• Medtronic Earned 62 Cents a Share
  Eddy Elfenbein, August 22nd, 2007 at 9:19 am

  The AP has the details:

  Medical device maker Medtronic Inc.’s profits grew 12.6 percent in the first quarter, but it will be looking to some of its new products to keep that momentum going for the rest of the year.
  The maker of pacemakers, spinal implants and insulin pumps has hit a few speedbumps recently, especially in the important market for implantable defibrillators and pacemakers. Recalls at rival Guidant Corp. as well as Medtronic have hampered the market.
  New products, including its Endeavor drug-coated stent and its BRYAN Cervical Disc implant, should help, said President and incoming CEO Bill Hawkins.
  “It’s really the breadth of our whole portfolio that is going to drive growth in the back half of this year,” he said in an interview.
  Medtronic could also get a boost from recovery at its Physio-Control subsidiary for external defibrillators. Plans to spin it off were put on hold after shipments were suspended in January because of unspecified quality problems.
  Hawkins told analysts that the company has been working with the FDA on corrective action, and that it has resumed limited shipments, and plans to resume full U.S. shipments in the second half of the current fiscal year. Hawkins said Medtronic would still look to spin off Physio-Control “at the appropriate time.”
  Fridley-based Medtronic had launched a direct-to-consumer advertising campign for its implantable heart devices, but Hawkins said on Tuesday that campaign has wrapped up.
  Medtronic said it earned $675 million, or 59 cents per share, up from $599 million, or 51 cents per share, during the same period last year. Revenue rose almost 8 percent to $3.13 billion, from $2.9 billion a year ago.
  Not counting certain items, Medtronic said it earned 62 cents per share. That matched the expectation of analysts surveyed by Thomson Financial.
  Non-U.S. revenue of $1.18 billion was up 16 percent. For the quarter, 38 percent of Medtronic’s revenue came from outside the U.S.

  Here are the recent financial stats:
  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
  Jan-07………..$0.61………..$3,048.00
  Apr-07………..$0.66………..$3,280.00
  Jul-07…………$0.62………..$3.127.00

• Headline of the Day
  Eddy Elfenbein, August 21st, 2007 at 10:16 pm

  Whta Should I Consider for College Loan?

• Medtronic’s Earnings
  Eddy Elfenbein, August 21st, 2007 at 12:19 pm

  Medtronic (MDT) will release its earnings after the close today. The earnings are still humming along even though the stock hasn’t done much. Here’s a look at MDT’s stock (blue line, left scale) and earnings-per-share (gold line, right scale).
  
  Here’s the earnings preview from Medtronic:

  Medical device maker Medtronic Inc. reports earnings for the fiscal 2008 first-quarter on Tuesday. The following is a summary of key developments and analyst opinion related to the period.
  OVERVIEW: Concerns about lagging sales of its implantable heart devices followed the company into the quarter as Chief Executive Arthur Collins moved closer to his August retirement date.
  In June, the company received Food and Drug Administration approval for an implantable pain reliever, aimed at treating chronic lower back pain. It also raised its quarterly dividend 14 percent to 12.5 cents per share and elected two independent board members, raising the total number of board members to 14.
  In July, the company said its drug-coated stent Endeavor showed positive results in a late-stage study comparing it with rival Boston Scientific’s Taxus. Also in July, the company was issued a warning letter from the FDA saying the company did not properly report problems with some of its medical devices. The problems stem from the company’s Minneapolis plant where drug infusion pumps are made. The FDA noted that the company had already fixed the problems, but had failed to report them within the required 30-day period.
  During the quarter the FDA also approved Medtronic’s Prestige Cervical Disk System, which the company said is an alternative to surgery for people suffering from degenerative disc disease. Medtronic also said it would buy Kyphon, a spinal implant maker, for $3.9 billion.
  BY THE NUMBERS: Analysts surveyed by Thomson Financial expect profit of 62 cents per share for the quarter on revenue of just under $3.17 billion. During the first quarter of fiscal 2007, the company earned 51 cents per share on revenue of $2.9 billion. In May, Medtronic said it would no longer provide guidance more than a year ahead and would stop providing quarterly guidance.
  ANALYST TAKE: Leerink Swann & Co. analyst Jason Wittes said he expects the company to meet Wall Street expectations. Sales of implantable cardiac devices are expected to rise 9 percent to $732 million, with a large surge in sales figures from outside the U.S., he said.
  BMO Capital Markets analyst Joanne Wuensch also said she expects first-quarter results to meet Wall Street expectations and said implantable cardiac device sales will be a key focus.
  WHAT’S AHEAD: Wall Street and the company are waiting for the FDA’s decision on Endeavor. The company previously said it expects approval by the end of the year. Analysts are also waiting for more information on the Kyphon buyout, for which there is no set closing date.
  STOCK PERFORMANCE: Medtronic shares fell 5 percent during the first quarter to close at $50.81 on July 27. The company’s fiscal year ends April 27.

• Insider Buying and Selling at Countrywide
  Eddy Elfenbein, August 21st, 2007 at 10:34 am

  The chart says it all.