Author Archive

  • What’s the Hottest Market in the World?
    , November 4th, 2005 at 11:08 am

    It’s Brazil.
    The Brazil iShares (EWZ) are about 500% in the last three years. According to S&P, Brazil’s market trades at just 10.7 times trailing earnings. Brazil’s Fed recently lowered short-term interest rates to 19%.
    President Bush is currently in South America at the Summit of the Americas. He’s trying to revive the hemisphere-wide free trade agreement.
    Here’s a three-year chart of EWZ.
    brazil.bmp

  • Jobs Report
    , November 4th, 2005 at 8:58 am

    The government reported that nonfarm payrolls increased by 56,000 in October. This was about half of what Wall Street was expecting. The unemployment rate fell from 5.1% to 5%. Also, the jobs growth number was revised lower for August (148,000 instead of 211,000) and higher for September (a loss of 8,000 instead of a loss of 35,000).
    The EU reported that unemployment in Europe fell to 8.4% from 8.5%. Poland has the highest jobless rate of 17.7%. Over a third of young people are out of work. The lowest unemployment goes to…Ireland! Just 4.3%.
    The bond market is currently selling off. Long-term yields are headed to another six-month high. Also this morning, Prudential downgraded Apple Computer (AAPL) due to valuation. This might weigh on the morning’s trading. Frontier Airlines (FRNT) said that it will resume flights to Cancun, which had been suspended due to Hurricane Wilma. The company has also received approval to expand its Cancun service to Indianapolis.

  • Brown & Brown’s Downgrade
    , November 3rd, 2005 at 5:19 pm

    Here’s Sandler O’Neill’s downgrade of Brown & Brown (BRO).

    We are lowering our rating to Hold from Buy based on valuation. Brown & Brown is currently trading at 18.9x our forward twelve month earnings per share (EPS) estimate and at a 16% premium to next year’s EPS growth rate.
    While we believe the company’s valuation premium relative to peers is warranted, given the company’s consistent operating performance, we believe additional multiple expansion in the near-term will be more challenging.
    Since upgrading the stock to Buy on June 9, 2005, Brown & Brown has appreciated 24%.
    We continue to view the company’s operating landscape as attractive and could turn more positive on the stock should property and casualty premium pricing harden more than we expect in Brown & Brown’s territories.

    They’re right. The stock has rallied lately, but what I’m afraid they’re missing is how strong BRO’s earnings growth has been. For proof, you can see that BRO (black line) has consistently outperformed its peer group (gold line) over the past few years, and its P/E ratio (lower graph) is still pretty cheap compared with recent history. The earnings multiple is about where it was in 2002, and the stock is much, much higher.
    bro.bmp

  • The Market Today
    , November 3rd, 2005 at 4:44 pm

    The market rallied for the second day in a row, and for the fourth time in the last five days. The S&P 500 gained 0.43%, and our Buy List gained 0.32%. The bond market was weak again as long-term yields made new highs. The 10-year yield is up to 4.64%.
    The broader market was helped by Merck (MRK). It seems that Merck was simply unprepared for the first Vioxx trial. By all reports, the company’s defense at this recent trial was overwhelming. The stock rallied today. Qualcomm (QCOM) and CVS (CVS) also had great days. Just a few weeks ago, Apple Computer (AAPL) fell below $48 after its earnings. The stock broke through to another new high today at $61.85.
    Four months ago, Oracle (ORCL) hired Microsoft’s former CFO Greg Maffei as CFO. But then, no one seemed to know his status. The company wouldn’t discuss it and an analyst conference was canceled last week. The stock sold off sharply this morning on very heavy volume. The company just confirmed that Maffei has resigned.
    Guidant (GDT) has been sued by Eliot Spitzer. Now that it seems like Johnson & Johnson will walk away from its proposed merger. There’s been some speculation that St. Jude Medical (STJ), one of our Buy List stocks, might be J&J’ next target. St. Jude was up over $2 yesterday.
    The big winner today on our Buy List was Fair Isaac (FIC). The stock gained 5.5% in the wake of its great earnings. Lincare (LNCR) was up 4.7%. Congrats to Frontier Airlines (FRNT)! It was named #1 for on time performance. Quality Systems (QSII) just reported earnings of 43 cents a share, three cents more than estimates. Revenues were up 39%. The stock closed up 2.9%.
    Our laggards included Brown & Brown (BRO) which had two downgrades. Also, Thor Industries (THO) dropped 4.5% due to Fleetwood’s (FLE) poor sales report.
    Remember how Sarbanes-Oxley was going to increase transparency? Well, the compliance costs are weighing down lots of small companies. One publicly-traded stock has had enough, and they’re going private. Net effect: less transparency. (Via Luskin.)
    And finally, Random Roger has some thoughts on Pfizer (PFE).

  • Quotes From Chariman Alan
    , November 3rd, 2005 at 2:41 pm

    viva greenspano.gif
    Here are some quotes from Greenspan’s testimony today.
    On the yield curve:

    That used to be one of the, I guess, most accurate measures we used to have to indicate when a recession was about to occur and when a recovery was about to occur.
    It’s lost its capability of doing so in recent years. The markets have become far more complex and the simple relationships that that yield curve slope indicated no longer work.

    On low long-term bond yields:

    Disinflationary pressures, the excess savings pressures, have more than offset the expectational concerns that rising supplies of U.S. Treasury debt have out there. I think that’s going to change.

    On energy prices:

    We have been able to absorb that to a large extent because
    we have an extraordinarily more flexible economy than we had back in the mid-1970s.
    The fact that the use of energy is much less than it was has enabled us to absorb the energy shock with nowhere near the type of consequences that we confronted in the earlier period.

  • Fair Isaac’s Earnings
    , November 3rd, 2005 at 1:05 pm

    I wanted to say more about Fair Isaac’s (FIC) earnings report. I was very impressed. The company holds a near-monopoly position in the industry. Last quarter, gross margins expanded from 64% to nearly 67%. Operating margins jumped to 26% from 21%.
    The company also raised guidance for next year to $2.15 a share. Here’s a report from Reuters, but catch what’s at the bottom.

    –The company said shares used in computing earnings per
    share for the latest third quarter were about 67.2 million,
    compared with about 80.4 million in the year-ago period.
    –The provider of analytics and decision technology said it
    expects first-quarter earnings to be about 50 cents per share,
    excluding the impact of stock-options expensing. It said
    revenue for the quarter would be $207.0 million.
    –Six analysts on average expect the company to earn 48
    cents per share, excluding special items, and four analysts
    expect revenue of $212.4 million for the first quarter,
    according to Reuters Estimates.
    –Fair Isaac said for fiscal 2006 it expects the earnings
    to be about $2.15 per share, excluding the impact of
    stock-options expensing. It said revenue for the year would be
    $860 million to $900 million.
    –Nine analysts on average expect the company to earn $2.06
    per share, before special items, and six analysts expect
    revenue of $875.5 million for 2006.
    (Reporting by Debiprasad Nayak in Bangalore)

  • The Alito Portfolio
    , November 3rd, 2005 at 12:10 pm

    Forget his opinion on the Commerce Clause, why the hell does Judge Alito own Bristol-Myers (BMY)? Did he see their earnings report? WTF? Bush wants this man on the Supreme Court! I hope the senators grill him on this. Bristol-Effing-Myers?? Well, let’s just burn the Constitution while we’re at it.
    He also owns Disney (DIS), Intel (INTC), McDonald’s and ExxonMobil (XOM), plus a ton of Vanguard funds. Wow, how 1972.
    Here’s his financial disclosure form.
    If you ask me, Roberts has a much better portfolio. (1/8 interest in a cottage in Koncklong, Limerick, Ireland??)

  • SEC Investigating Place Dome Trades
    , November 3rd, 2005 at 11:52 am

    Here’s some helpful advice. If you ever know about a major merger announcement coming up, do not buy up a ton of calls. People will notice.
    On October 25 and 26, a client of a Swiss brokerage loaded up on calls of Placer Dome. On October, Barrick Gold made a bid for Placer Dome. The stock shot up 20%, and the calls were sold for $1.9 million.
    The SEC is now investigating.

  • Merck Wins
    , November 3rd, 2005 at 11:41 am

    Merck (MRK) just won its big Vioxx trial. Four years ago, Mike Humeston had a heart attack that came just two months after he started taking Vioxx. The jury said that Merck is not responsible. In August, a Texas jury held Merck liable for the death of Robert Ernst. His widow was awarded $254 million. Merck is appealing that case. Merck’s stock is up about 6% today.
    Expeditors (EXPD) is up 4.7% today. Lincare (LNCR) is up 3.2%. Quality Systems (QSII) is up 3.6%. The company is due to report earnings after the close. Fair Isaac (FIC) is up about 3% after its great earnings yesterday.
    Brown & Brown (BRO) got two downgrades today. The company has been on an acquisition binge lately. The stock is off about 3%.

  • Airlines & the PBGC
    , November 3rd, 2005 at 10:24 am

    Guess who’s become a large owner of airline stocks? You, the taxpayer.

    The Pension Benefit Guarantee Corp., the federal agency that partially guarantees traditional pensions, recently was awarded 7% of US Airways Group Inc. by a federal bankruptcy court handling the company’s Chapter 11 reorganization, according to the PBGC’s recent filing with the Securities and Exchange Commission. The agency got the shares as compensation for the underfunded pension plans it assumed when the company filed for bankruptcy.
    The agency is likely to get an even larger stake — between 15% and 35% of new shares — of UAL Corp.’s United Airlines when it emerges from Chapter 11 in February, after 38 months in court protection, according to a PBGC official. And it’s likely to get sizable chunks of Northwest Airlines, Delta Air Lines and Delphi Corp. — if, as expected, the companies ask the bankruptcy courts to dump their pension plans on the insurer.
    Taxpayers stand to benefit if the PBGC’s stockholdings increase in value. Stock sales would bolster the agency’s assets that are used to pay retirement benefits, and possibly forestall the need for a taxpayer bailout of the deficit-ridden federal insurer.

    By going under, the companies can finally get ditch of their pension liabilities. But then there’s the question of what the government should do as a shareholder.

    When companies seek to shift pension plans to the PBGC in bankruptcy, the agency typically becomes a member of the unsecured-creditors committee that tries to recover assets to cover unfunded liabilities. As a member of the committee, the agency can object to parts of a proposed reorganization plan, including mergers or acquisitions. Its primary role as a committee member is to get as big a share of the assets recovered as possible.
    The PBGC’s recoveries are often small because of the relatively low standing of unsecured creditors. The agency has gotten some equity stakes in the past and an occasional board seat. It currently has three board seats, including one with Fansteel Inc., which turned over to the agency a pension plan underfunded by $21 million early last year; the PBGC has a 26% stake in the company. The agency couldn’t immediately provide the names of the other companies for which it holds board seats. The PBGC owned 8% of a new Polaroid Corp. holding company that was created in a 2002 bankruptcy proceeding, and sold the stake a year ago for $31 million.
    The PBGC takes the position that the government should not take an active role in corporate management or governance. That’s why it assigns one of its 11 money managers — which primarily invest its pension assets — to manage individual equity holdings. J.P. Morgan Chase & Co., one of its money managers, has taken on the role of managing equity stakes because of its experience. As a fiduciary, the money manager’s role is to monitor whether company management is getting the maximum for its investment.

    Remember, the Feds actually made a nice little profit with its loan to Chrysler 25 years ago. Normally, I’m a bit wary of government ownership of industries. The usual side effects are huge operating losses, poor quality and endless union troubles. With the airlines, we already have that.
    As usual, the Simpsons has something to say on this subject. When Krusty the Clown is indicted on tax fraud, the IRS seizes all of his assets. Krusty Burger becomes IRS Burger.

    Homer: Lesse, I’ll have four tax burgers, one IRS-wich, withhold the lettuce, four dependent-sized sodas, and a FICA-ccino.
    Kid: Fill out schedule B. You should receive your burgers in six to eight weeks.