Archive for 2007

• Gretchen Mails It In
  Eddy Elfenbein, January 4th, 2007 at 11:02 am

  Gretchen Morgenson on Nardelli:

  Even though the board gave him $20 million that was not a part of his employment contract, perhaps smoothing his way out the door, the departure seemed to be a watershed. No longer can executives demand — and directors happily grant — contracts worth hundreds of millions of dollars without at least some shareholders uttering a peep.

  How much would you bet that she went back and forth between “watershed” and “wake-up call”?
  This is what I wrote over the summer on HD.

  Oh for the love of carbs, people. This Home Depot (HD) nonsense is getting out of control. I can’t believe what I’m seeing. The stock’s popularity is somewhere between Hamas and Diptheria, and it’s getting worse. In the less than three months, shares of HD have plunged over 20%. And the stock made another 52-week low today.
  Now there’s a lynch mob after CEO Bob Nardelli. He’s even getting blamed for things he’s had nothing to do with. To quote Hoover from Animal House: “They confiscated everything, even the stuff we didn’t steal!”
  To be honest, I’ve never been terribly impressed with Nardelli. He was one of Jack Welch’s protégés at GE. Nardelli rose through the ranks at GE to lead its Power Systems division. He did a great job there but I think he’s a bit too rough around the edges to be the corporate face of Home Depot, or any other company for that matter. Perhaps that’s why Jack Welch passed him over to be GE’s next top dog. In any event, Home Depot jumped at the chance, and made him their CEO in December 2000.
  There’s an important point to remember. Nardelli didn’t start Home Depot. He was the rock star manager brought in to take over from the founder. Just because he thrived in the GE system, doesn’t mean he’ll be effective at a major company in an entirely different industry. In fact, it doesn’t make much sense at all.
  Sadly, the loudest protests concerns Nardelli’s pay. This is really a lame issue. Last year, he raked in $32 million, and over $120 million in the last five years. Yes, yes, I know. It would be great to see CEOs get paid the same as teachers. Give me a petition and I’ll sign it, but I’m not going to pretend that CEOs can be found on the cheap.
  The fight against CEO pay has probably caused shareholders more problems than the pay itself. In 1993, Congress capped the tax deductibility of salaries at $1 million, so CEOs fought back by issuing stock options. This led to companies slashing dividends payments which, in turn, increased the market’s volatility. Then we had the battle to expense stock options. Now we have the battle on back-dating, which in some cases, is perfectly legal. Chris Cox said that the 1993 law deserves “pride of place in the museum of unintended consequences.” Let’s keep the pay issue is proportion. Nardelli’s compensation last year works about to about 1.6 cents a share. This isn’t exactly soaking a $34 stock.
  The anti-Bob furor got even louder when the company said that it would no longer provide same-store sales figures. Again, I’d prefer to see this number. (Except that, Lowe’s (LOW) always creams HD’s same-store sales.) But when I hear these critics yell and scream, I don’t think they understand what Nardelli is trying to do.
  Let’s look at HD’s position from management’s point of view. They have a maturing retail business and strong competition from Lowe’s. The difficulty is that they’re running out of prime retail spots. So Nardelli is shifting HD’s strategy. If they decide to go to war with Lowe’s and play the game of “who can open up the most new stores,” Home Depot will lose, and lose badly. Remember what happened to Rite Aid?
  Instead, he’s doing something different. He’s focusing the business on commercial customers. This is a huge market segment, and it makes sense for HD to shift the battle to this front. I didn’t quite “get it” until HD made its bid for Hughes Supply. This was Home Depot’s largest acquisition in its history. Now I see how committed HD is. Plus, the company has been quietly snatching up several smaller wholesale suppliers, even one in China. Notice how they’re acting before the problems get worse.
  While, I’d prefer to see HD report the same-store sales figures, I understand why they’re not doing it. It’s simply not going to be a key component of its business strategy. Last week, however, Nardelli back-tracked and told Maria Bartiromo that HD may go back to reporting same-store sales.
  The really big showdown came at the company’s annual meeting in May. This was a PR disaster. None of the outside director showed up. The meeting was just 30 minutes long, and Nardelli refused to answer any questions about his pay. Shareholder activists were furious and they urged shareholders to withhold their support of HD’s directors.
  In the past, the company has given the results of the votes at the annual meeting. Um…not this year. The company eventually said that 10 of the 11 directors saw over 30% of their votes withheld. That ain’t good. Of course, shareholders have another way of voting—they can sell, and that’s what’s been happening.
  But Home Depot is not like Dell. The company is still doing very well. In fact, Home Depot has beaten Wall Street’s estimate for the past few quarters. The company has also reiterated its earnings guidance. We’re not seeing those ugly earnings warnings that have hit so many others. In May, Home Depot said that it expects earnings growth of 10% to 14% this year, which translates to per-share earnings of $2.99 to $3.10. This means that HD is going for just 11 times this year’s earnings. That seems pretty darn cheap to me.

• Reversify
  Eddy Elfenbein, January 3rd, 2007 at 4:48 pm

  
  After an early rally, the market reversed course this afternoon to close down 0.12%. The new Buy List lost 0.19%. Ironically, I just threw Home Depot (HD) overboard and it was up over 2.2% today thanks to Bob Nardelli’s resignation. Oh well, I told you I’m not much of a market timer.
  The good news is that two of my new buys, Amphenol (APH) and Jos. A Bank (JOSB), had good days. APH was up 2.7 and JOSB was up 2.9%. Sysco (SYY), which is one of the most stable stocks on the Buy List, was hurt by a downgrade from JP Morgan. The stock dropped 1.3%. Also, Fiserv (FISV) was downgraded by AG Edwards. FISV lost 1.6%.
  The most surprising activity came from the energy sector. The Dow Energy Index (^DJUSEN) closed down 3.8%. For the record, I’ve been expecting energy stocks to crack for over a year. Yesterday, oil had its biggest fall in 20 months.

• The S&P 500 Total Return Index
  Eddy Elfenbein, January 3rd, 2007 at 1:43 pm

  The market is starting 2007 just how it finished 2006. For the year, the S&P 500 was up 15.80% including dividends. How’s how the Total Return Index has done since 1996:
  
  Here’s the sector breakdown for 2006:
  Telecom………………………………32.13%
  Energy………………………………..22.22%
  Consumer Discretionary………..17.23%
  Utilities……………………………….16.87%
  Financials……………………………16.16%
  Materials…………………………….15.73%
  Consumer Staples………………..11.76%
  Industrials…………………………..11.02%
  Technology……………………………7.70%
  Health Care……………………………5.78%

• Mark Cuban: The Stock Market Is for Suckers
  Eddy Elfenbein, January 3rd, 2007 at 10:31 am

  Exactly one year ago, Mark Cuban wrote on his blog that the stock market is for suckers:

  The concept that you own “your share” of the company is a joke. You are completely at the whim of the CEO and board who will dilute you on a daily basis with stock options, then try to buy back stock to cover it up and push up the price, rewarding the shareholders who get out, rather than those that continue to hold the shares. Meaning you.

  Cuban’s post was a response to a comment from Thomas Hawk. Yesterday, Hawk followed up:

  So here we are a year later (much too short a time horizon to matter by the way) — where would you be if you took $100,000 and followed Mark Cuban’s advice vs. mine?
  For comparison purposes, I’m going to assume that two investors both had $100,000 to invest on January 3, 2006. Had you followed Cuban’s advice (and I’m using the Vanguard Prime Money Market Fund) you would have today approximately $104,882.60.
  Had you taken that same $100,000 and put it into the Vanguard Total Stock Market Index (a low cost basket of stocks that tries to roughly equate to the U.S. Market) today you would have approximately $113,890.00.

• Nardelli Quits Home Depot
  Eddy Elfenbein, January 3rd, 2007 at 10:03 am

  And he’s taking his money with him.

  Vice Chairman Frank Blake, 57, will replace Nardelli, effective immediately, Home Depot said in a statement today. Nardelli, 58, will receive $210 million in severance payments, the company said.
  Home Depot has lost market share to Lowe’s Cos. during Nardelli’s six-year tenure, its shares have declined 7.9 percent and the company is headed for its smallest annual gain in profit in at least nine years.
  “Ultimately the board felt the negativity associated with Nardelli was an impediment to his and the company’s success,” said Daniel Popowics, an analyst with Fifth Third Asset Management. “This is a surprise. I thought Nardelli carved out some time for himself to turn things around.” The Cincinnati firm manages $21 billion, including Home Depot stock.
  Nardelli, who joined Home Depot from General Electric, became a lightning rod for critics of excessive executive pay. Nardelli was the only board member to appear at the company’s annual meeting last year, where the size of his pay package was questioned.

  In the press release, the company stated exactly what Nardelli is going to get.

  Nardelli and the Company have agreed in principle to the terms of a
  separation agreement which would provide for payment of the amounts he is
  entitled to receive under his pre-existing employment contract entered into
  in 2000. Under this agreement, Nardelli will receive consideration
  currently valued at approximately $210 million (including amounts which
  have previously been earned or vested). This consideration will include a
  cash severance payment of $20 million, the acceleration of unvested
  deferred stock awards currently valued at approximately $77 million and
  unvested options with an intrinsic value of approximately $7 million, the
  payment of earned bonuses and long-term incentive awards of approximately
  $9 million, the payment of account balances under the Company’s 401(k) plan
  and other benefit programs currently valued at approximately $2 million,
  the payment of previously earned and vested deferred shares with an
  approximate value of $44 million, the payment of the present value of
  retirement benefits currently valued at approximately $32 million and the
  payment of $18 million for other entitlements under his contract which will
  be paid over a four year period and will be forfeited if he does not honor
  his contractual obligations.

• World War II Ends
  Eddy Elfenbein, January 2nd, 2007 at 3:32 pm

  The Brits pay off their war debt to us.

  Under the arrangement, the US handed a financial lifeline to Britain, allowing it to secure oil, food, arms and other military equipment on credit to help the war effort. Though other countries also benefited under the programme — a $48 billion project — Britain received the largest chunk of aid.
  When the war finished, the economist Maynard Keynes — by then the government adviser Lord Keynes — led a delegation to the U.S to agree repayment for those materials for which it had been charged and to secure a loan of $4 billion. He warned that Britain had been left facing a “financial Dunkirk”.

  Still, I was kinda hoping we could send over a couple repo guys. Nothing big. Maybe a few castles.

• The Do Something Congress
  Eddy Elfenbein, January 2nd, 2007 at 1:26 pm

  Andrew Roth of the Club for Growth ran the numbers on 2006. When Congress was in session, the S&P 500 went up 2.25%. On days when it wasn’t it session, it went up 11.56%.

  So you’re probably asking yourself, “Was this just coincidental?” The cynics out there would say no. And the cynics would be right. Long term empirical evidence says that correlation does, in fact, mean causation. According to two economists, Mike Ferguson of the University of Cincinnati and Hugh Douglas Witte of the University of Missouri at Columbia, if you had invested $1 in the Dow Jones Industrial Average back in 1897 when the index first started and conducted the In/Out Session schemes until the year 2000, here’s how much money you would have:
  In Session: $2
  Out Session: $216

• “Cautiously Optimistic”
  Eddy Elfenbein, January 2nd, 2007 at 11:12 am

  One of my favorite media phrases is “cautiously optimistic.” It means nothing while it sounds important. Can you think of a situation where it wouldn’t apply? (Apocalypse to Strike Earth, Experts Cautiously Optimistic). See! You can’t go wrong.
  A few years ago, Neil Westergaard wrote:

  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.”

  Which brings me to today’s New York Times:

  Economists Cautiously Optimistic About 2007

  I hope they’re right.

• How Will the Dow do in 2007?
  Eddy Elfenbein, January 2nd, 2007 at 10:58 am

  The new-and-improved Wall Street Journal asks its reader how will the Dow do in 2007?
  Here are the results as of 11 a.m.:
  Up more than 10%…………………..24%
  Up 5% to 10%………………………..45%
  Up less than 5%……………………..15%
  Down less than 5%…………………..4%
  Down 5% to 10%……………………..5%
  Down more than 10%………………..7%
  This stikes me as somewhat conservative.

• Happy New Year!
  Eddy Elfenbein, January 1st, 2007 at 12:08 am

  818,304 visitors for 2006.
  Thank you all!