Author Archive

• The Pension Crisis
  Eddy Elfenbein, December 5th, 2005 at 2:24 pm

  Here’s your scary article for the day. If companies were forced to account for their pensions properly, it would knock $250 billion, or about 7%, off the shareholder equity of the S&P 500.
  Credit Suisse estimates that only 21% of the $1.3 trillion in S&P 500 pension fund assets are currently reported on balance sheets. Here’s a little-known fact: While companies have to tell the Pension Benefit Guaranty Corp. (and by extension, Congress) what their pension liabiliites, Congress is prohibited, by law, from telling shareholders or employees. Not only might we be facing a pension crises, we don’t know what we don’t know.

• Calpine to be Delisted
  Eddy Elfenbein, December 5th, 2005 at 1:09 pm

  In three years, shares of Calpine (CPN) went from $2 to $58. Pretty soon, the company had to restate its earnings for three years. Later, the CEO and CFO resigned without comment. Now the stock is down to 21 cents. The NYSE has had enough and will delist the shares tomorrow.

• Too Much for Whole Foods
  Eddy Elfenbein, December 5th, 2005 at 6:28 am

  I’m a big fan of Whole Food Market (WFMI), but this stock is way, WAY over-priced. Last quarter, the company missed earnings by a penny a share. In the past few weeks, Wall Street has lowered this fiscal year’s consensus earnings estimate to $2.86 a share, and the stock is still trading at 53 times that. That’s almost as much as Google (GOOG)!
  Look, I like organic kumquats as much as the next guy, but let’s be reasonable. Whole Foods’ earnings will probably grow by about 17%-20%. Not bad at all. The stock, however, is already up over 60% this year.
  A stock can’t go up faster than its earnings indefinitely. At some point, something’s gotta give. That’s not finance, it’s physics. Right now, the stock is going up because it’s going up. The price and fundamentals have politely parted company. On Friday, shares of Whole Foods closed at another all-time high.
  My guess is that 2006 will not be a good year for shares of WFMI.

• The Week Ahead
  Eddy Elfenbein, December 5th, 2005 at 5:43 am

  Historically, December is the best month of the year, although the market took a breather last week after five straight up weeks. There shouldn’t be too much news this week. A few milestones could fall. The Dow has a shot of breaking 11000. Also, oil might hit $60 a barrel. Next week will have another Federal Reserve meeting, but a rate hike is fully expected. Here’s what’s on tap for this week:
  • Cisco Systems holds a three-day analyst conference beginning Monday; chipmaker Altera holds a two-day analyst meeting starting Monday as well.
  • On Monday, the Institute for Supply Management releases its November read on the services sector of the economy. The index is expected to have fallen to 59.3 in the month, according to a consensus of economists surveyed by Briefing.com, from 60.0 in October.
  • October factory orders, due Tuesday, are expected to have risen 1.5 percent in the month after falling 1.7 percent in September.
  • Brocade, a maker of gear for computer data storage, reports earnings Tuesday morning. The company is expected to have earned 5 cents per share, according to First Call estimates, versus 7 cents a year ago.
  • Texas Instruments issues its mid-quarter update after the close Wednesday; rival Intel issues its mid-quarter update after the close Thursday.
  • Toll Brothers reports earnings Thursday morning. The homebuilder is expected to have earned $1.66 per share versus $1.11 a year ago.
  • The first read on December consumer sentiment from the University of Michigan is due Friday. The index is expected to have risen to 84.0 from 81.6 in November.
  • Wholesale inventories are expected to have risen 0.4 percent in October after rising 0.6 percent in September. That report is due on Friday.

• Professor Robert Fogel
  Eddy Elfenbein, December 4th, 2005 at 6:46 pm

  Here’s an interesting Sunday read. This is an interview with Robert Fogel who won the Nobel Prize for Economics in 1993. He’s discussing his recent book The Escape From Hunger and Premature Death: 1700 to 2100.
  Fogel has been a pioneer in using statistics to help explain economic history. Here’s a sample from the interview:

  Nick Schulz: The first chapter of the book is called, “The Persistence of Misery In Europe and America Before 1900”. What was so miserable about life before the 20th century?
  Robert Fogel: Well first of all it was short. The life expectancy, if I can go back to 1700, was only about 35 years at birth. In 1900, 200 years later, it had increased by about 12 years — it was in the neighborhood of 47 in Western European countries. And, today it’s 77 or 78, so in a century we added 30 years to life expectancy, maybe a little bit more.
  Nick Schulz: That’s obviously unprecedented for life expectancy to increase by such a large amount in one century. What were the primary drivers of that?
  Robert Fogel: Public health reform, cleaning up of the water supply, cleaning up of the milk supply. But if you said what was the single most important factor, it’s technological change.
  Let me give you one small example. We complain a lot about air pollution today, but there were 200,000 horses in New York City, at the beginning of the 20th century defecating everywhere. And when you walked around in New York City, you were breathing pulverized horse manure — a much worse pollutant, than the exhausts of automobiles. Indeed in the United States, the automobile was considered the solution to the horse problem because pulverized horse manure carried a lot of deadly pathogens.
  So technological change made it possible to greatly increase the food supply and permit levels of nutrition that were not previously attainable. Secondly, it made it possible to have a safe water supply. We needed a more modern technology to be able to carry away waste water and provide safe water, both through filtering and chlorination. And, still another area was the development of vaccines, which made it possible to inoculate the very young against diseases. And with better nutrition, you greatly increase the physiology of human beings.

  Speaking of Nobel Prize winners, today is Milton Friedman’s 93rd birthday! He’s two years older than the Federal Reserve.

• Do We Become Better Investors as We Age?
  Eddy Elfenbein, December 4th, 2005 at 12:42 pm

  Two finance professors say “no.”
  George M. Korniotis and Alok Kumar looked at the data from a brokerage firm and found that older investors trail the youngsters in terms of stock-picking. The good news, however, is that older investors are better diversified and they trade less frequently.

• Carl Icahn Against Time Warner
  Eddy Elfenbein, December 3rd, 2005 at 9:12 pm

  I have to admit that watching Carl Icahn in action is a lot of fun. Most people have that one friend who enjoys fighting. That’s Carl. I think fighting is one of the things in life that truly makes him happy.
  Raider Carl is now at war with Time Warner (TWX). More specifically, their CEO Dick Parsons. It’s like when a sports announcer says, “these two teams just don’t like each other.” Let’s just say that Icahn has been somewhat critical of Time Warner’s management (“Morons are running all these companies”).
  His beef is that he wants Time Warner to sell off its cable unit and increase its share buyback to $20 billion. Personally, I don’t get too emotional about share repurchases, but the fact is that the stock hasn’t done much of anything for years.
  The company tried to meet Icahn half-way by raising the buyback from $5 billion to $12.5 billion. Well, Carl was not pleased. But what made him even angrier (meaning happier), is the idea of selling off AOL too cheaply. In my opinion, that would be technically impossible, but Carl has his views (“I’m going to hold the board of Time Warner personally responsible if they give away AOL the wrong way for the wrong reasons”). Um, Steve Case resigned two months ago, and the “AOL” has been taken off “AOL Time Warner.” You figure it out.
  Icahn is now threatening a proxy fight. It’s rare—but not unheard of—for entire boards of directors to be tossed out. I’d love to see this happen more often. There are even companies who specialize in assisting dissident shareholders in proxy fights. It’s sometimes easy to forget, but shares of stock are claims on real assets.
  Here’s my take: So what if Icahn wins? The market doesn’t hate Time Warner because of Dick Parsons. Icahn does, but not the stock market. The market hates Time Warner because it’s Time Warner. I can’t think of any media stocks that are doing well. Look at the cable stocks. Cablevision (CVC) and Comcast (CMCSK) haven’t done anything either. The market doesn’t like the industry because the industry is in rough shape. The cable industry is under threat from every direction. Even The New York Times (NYT) is fighting for more revenue.
  Icahn is probably right that the music group was sold too cheaply. He’s probably right that there’s too much bureaucracy at the top. And splitting up the company could be a good idea. But I don’t see how that will “unleash” any significant shareholder value. The problem is there has to be something there in place to unleash. Spin-offs aren’t mergers in reverse. Ichan’s plan is a concept searching for value.
  Cendant (CD) shareholders really were punished by a merger that hindered valuable companies. I think the same thing is going on right now at Citigroup (C). Stocks like Bear Stearns (BSC) and Lehman Brothers (LEH) are soaring while Citigroup’s stock languishes. That ain’t right.
  But Time Warner’s problem isn’t its corporate structure. Or rather, it’s the least of its problems. Still, this fight will be enjoyable to watch. If Time Warner were smart, they would make the proxy vote an HBO pay-per-view event. Hire Michael Buffer. Get Mills Lane. But whatever you do, don’t buy the stock.

• Danaher Buys Visual Networks
  Eddy Elfenbein, December 3rd, 2005 at 5:41 pm

  One of my favorite stocks is Danaher (DHR). The company doesn’t get much press, which I don’t mind at all. I guess its business, making tools, is bit dull. Still, the company is very profitable, and that’s something I never find dull.
  Yesterday, Danaher said that it’s going to buy of the great tech wreck stocks, Visual Networks (VNWK). I know all these stocks tend to blur together, but Visual was a complete disaster in a universe of disasters. How badly did Visual Networks crash and burn? Five years ago, the stock hit $83 a share. Danaher is buying it for $1.83 a share. Yep, that’s a nice 98% savings. Last year, Visual earned $15,000. Not a share, $15,000 total. In some states, they might qualify for welfare.
  Danaher’s earnings have kept humming along all year, even though the stock has been pretty lazy. I think this is another bargain staring us in the face. The company recently reiterated its earnings for the fourth quarter. I always like seeing that. I’d much rather hear that there’s no major news at a good company, than a series of press releases from a turnaround stock.
  Let’s play with the numbers. Danaher should make about $2.75 a share this year. That’s a nice 20% from last year. To be safe, let’s say that earnings grow by 16% next year to $3.20 a share. I think Danaher could easily sport a forward P/E ratio of 20. That’s slightly high, but certainly not unreasonable. That would give the stock a fair value of $64, which is about 13% above where it is today.
  Maybe it’s not that boring after all.
  

• Financial Service Ads
  Eddy Elfenbein, December 3rd, 2005 at 1:43 pm

  I usually watch CNBC during the day with the sound turned off. One of the drawbacks of the network is that it seems like there’s a total of five different commercials that are run over and over again.
  Obviously, most of the ads are for financial service firms. The problem is that these ads are almost always awful. They’re designed to appeal to the narcissism of baby boomers. Even Sir McCartney has gotten into the act. He’s pitching for Fidelity.
  The general message of these ads is that “Sure you’re wealthy, but you’re still ‘real.’ You haven’t ‘sold out.’” Look, if you’re even worried about retirement planning, you’ve sold out. Sorry, but it’s true. Plus, you don’t need your authenticity confirmed by, of all things, your choice of mutual fund company. Investing is business. You’re not buying a lifestyle.
  The ads show things like retirees helping villagers in Africa. There’s even one that has a senior skateboarding. Please. In a Wall Street Journal op-ed, Melanie Wells takes aim at the financial service ads.

• The Market Today
  Eddy Elfenbein, December 2nd, 2005 at 7:13 pm

  Holy crap, we kicked ass today! The Buy List was up 0.75% while the S&P 500 was up a puny 0.03%. For December, we’re already one full percent ahead of the market. I don’t want to get too optimistic. My goal is to outperform the market by a few percentage points a year. Days like today are nice, but our focus is still on the long-term.
  We were helped today by three surging medical device stocks, Biomet (BMET), Zimmer (ZMH) and Stryker (SYK). I just don’t get how Biomet can be 20% off its high.
  An AP story picked up on the rise in this sector:

  Comments made at a Merrill Lynch conference on Thursday were likely pushing the stocks upward, said John Farrall, a health-care analyst with National City’s Private Client Group.
  One panel at the conference included a discussion about how negotiations with the Japanese government regarding biannual price reductions suggest that the price cuts won’t be as drastic as expected, Farrall said in a note to investors.

  Incidentally, the Japanese Nikkei finally broke 15000. To put that in perspective, during the closing days of 1989, the Nikkei was near 39000.