Author Archive

  • Will Cisco Pay a Dividend?
    , August 11th, 2005 at 6:56 pm

    It’s almost hard to believe now, but Cisco Systems used to be the glamour stock. I’m not exaggerating when I say that people loved Cisco. Not matter how awful their own lives were, they always had Cisco. Spouses could leave them, jobs could suck, but Cisco was dependable. It was the one thing that never let us down. It was the financial North Star. It did its job simply by being there.

    At one time, Cisco beat Wall Street’s expectations for 43 straight quarters. It was Cal Ripken in corporate form. The stock went up and up and up. It was (sniff) such a beautiful thing.

    But now…it’s all gone. Cisco is no longer a star. It’s a wash-upped has-been. It’s fat and bald. It’s some guy wearing gold chains and driving a ’78 TransAm. It calls itself Cisco. It has the same symbol as Cisco, but it’s just not the same. I’m not ashamed to say that I (almost) cried at their latest earnings report. Not only was it a lousy report, but it gave a pretty bleak picture of the future.

    The company’s sales grew by just 11%. And its earnings-per-share went from 21 cents to 25 cents. I’m not sure which is worse, the 25 cents or that 25 cents was inline with expectations. The old Cisco would have laughed at 25 cents. It would have grabbed that quarter, bit it, and spit it back in Wall Street’s face, and then, maybe eaten a light bulb. That was my Cisco.

    Do you remember back in December when the CFO said he expected 12%-15% sales growth through 2008? Well, you can forget about that. Now the company says that sales will grow by 10%-12% next year. I get the feeling that John Chambers said to the Street “You want a forecast. Fine! Here’s a rotten forecast. Are you happy now?”

    Well, no. We’re not. I’m going to make a prediction. No, not like my other lousy predictions. This time, I’m nearly serious. I predict that Cisco will start paying a cash dividend. Really, it makes perfect sense. The company generates gobs of cash, but they waste it on buying their own stock (just like everyone else who buys Cisco’s stock).

    There are two reasons why Cisco buys so much stock. They issue tons of stock, and they give out tons of options to their employees. They bought nearly $20 billion of stock in the last two years and the stock hasn’t done a thing. Forget fighting the market: Just give it to shareholders.

    The market simply doesn’t trust Cisco to spend its own money wisely. Here’s a nice little factoid: If you adjust for stock-option expenses, Cisco’s 2004 earnings would have been 45 cents a share, not the 62 cents that the company reported. I think the rumor that Cisco was about to buy Nokia was started by the Street just to get Cisco thinking about how it invests its money. I knew there’s no way that Cisco would buy Nokia. Too much of their own cash flow is flowing down the drain. They don’t seem to realize that that’s not a good thing.

    John Chambers & Co. must seem baffled by the market’s displeasure with Cisco. After all, the company has reported decent profit growth for the last two years, but the stock hasn’t done much of anything. Just pay a dividend, and the market will forgive you.

  • Sullivan Gets 5 Years
    , August 11th, 2005 at 11:27 am

    The prisons are getting crowded with the WorldCom gang. Scott Sullivan, WorldCom’s former CFO, was just sentenced to five years in the old gray bar hotel. He’s the sixth WorldCom employee to be sent up river. Earlier, David Myers, the former controller, was sentenced to one year and one day. Have fun, fellas!

  • Asia Rising
    , August 11th, 2005 at 10:05 am

    There’s been interesting news from Asian markets. The Japanese Nikkei hit a four-year high yesterday. China reported its second-largest trade surplus ever. For July, China’s trade surplus was over $10 billion. The trade surplus is growing by more than 50% this year. What I find interesting is that Beijing is slowing letting the yuan rise. Yesterday, it made another post-revaluation high. There’s clearly a desire to move the yuan higher, but I’m curious as to how much Beijing will fight it.

  • The Biggest Surprise of 2005
    , August 10th, 2005 at 4:48 pm

    Brad Setser has a good post today. He calls the U.S. economy’s resiliency to higher oil prices, “the biggest surprise of 2005.”

    I suspect it also has to do with the fact that the US economy has become very credit-intensive and, at least for now, it seems that most of the petrostates’ oil windfall is being recycled (one way or another) back into the US credit markets.

    I think he’s right. We’re not in the 1970s anymore. OPEC is much less powerful than it once was.

  • Google Watch
    , August 10th, 2005 at 4:27 pm

    The Googloids are at it again. Not only is the stock overpriced, but management is thin-skinned as well. It turns out that CNET posted some personal information on Google’s CEO, Eric Schmidt. How’d they get this top-secret info? They Googled him.
    Their product has become “verbed,” which, you would think, is a good thing.

    Well, the Google Dolls are not amused. The company has banned CNET from all official communication for one year.

    If something this silly causes them to get all East German, I hate to see what a real controversy will do.

  • Mmmm…Earnings Restatement
    , August 10th, 2005 at 4:14 pm

    Last year, Krispy Kreme Doughnuts blamed a sales shortfall on the popularity of the Adkins Diet. That may be partially true, but it covers over another problem. That being, the stock is Krap.

    Krispy was simply getting kreamed and it started playing fast and loose with the books to try and catch up. Krispy was trying to “manage” its earnings. It wanted to tell Wall Street what Wall Street wanted to hear. The accounting soon grew out of hand, and the company could never match the image they wanted to project.

    So, they lied.

    Today, Krispy Kreme said that it’s going to restate earnings for the last four years. The company overstated profits by about $22 million. A committee reporting to the board of directors found that the “number, nature and timing of the accounting errors strongly suggest that they resulted from an intent to manage earnings.” The committee pinned the blame on former Chairman Scott Livengood, and former COO John Tate.

    The company has hired Stephen Cooper as the new CEO. He’s made some dramatic moves so far, like firing one-quarter of the work force. He even sold the company jet. (Krispy Kreme had a jet?)

  • Oil Over $65
    , August 10th, 2005 at 3:35 pm

    The market is down again today thanks to oil fears. Oil is now over $65 a barrel. I just don’t get how oil can be this high.

    Crude for September delivery touched $65 a barrel in New York, an all-time high. Oil futures have climbed more than 7 percent this month as the death of Saudi Arabia’s King Fahd and a threat to the U.S. embassy there raised concern about supplies from the world’s largest exporter.

    I would definitely not be long oil right now.

  • 10-for-10
    , August 9th, 2005 at 3:49 pm

    The Fed just raised interest rates for the 10th straight time. The fed funds rate is now up to 3.5%. It was 1% just last year. The central bank also restated its intention to increase rates at a “measured pace.”

    According to a survey of economists, more rate increases are on the way.

    The target for the benchmark overnight bank rate will climb to 4.25 percent by the end of next year’s first quarter, a quarter percentage point more than predictions last month, and reach 4.5 percent by June, according to a Bloomberg monthly survey of economists. The overnight rate is forecast to reach 4 percent by the end of this year, the survey showed.

    Economists at Goldman Sachs Group Inc. said yesterday the target rate may rise to 5 percent by the middle of next year.

    The world’s largest economy will grow at a 4.1 percent annual rate this quarter, the most since the first three months of 2004 and up from the 3.5 percent estimated last month, based on the median forecast in the monthly survey. Growth for October through December is predicted to reach a 3.5 percent pace, up from last month’s prediction of 3.4 percent.

    The other good news is that oil finally backed off some today. It reached an all-time of $64.27 a barrel. There are still worries about oil supply, but few traders seem interested in the fact that oil supplies are already above average.

    U.S. oil inventories at 318 million barrels for the week ended July 29 are 7.3 percent higher than the five-year average, according to the Energy Department.

    Domestic supplies of heating oil at 49.9 million barrels are up 4.9 percent from the five-year average, government figures show.

    Long-dated bonds actually rallied this afternoon, and the major stock indexes are poised to closer higher for the first time in four sessions.

  • Idiot Award
    , August 8th, 2005 at 8:50 pm

    The week’s winner brings our Idiot Award to a whole new level. Not only was his goal idiotic, but so was his method and outcome. He nailed it all! It’s like a Triple Crown of stupidity.

    C. Clive Munro, a Wyoming stock analyst, was arrested from trying to extort money from Hardee’s. If there’s anything I learned it high school, it’s that you don’t screw with Hardee’s.

    Munro demanded that CKE Restaurants, the owner of Hardee’s, hire him as a consultant for $25,000 a month. Hardee’s declined, so Munro showed them. He put a sell on the stock and down it went.

    Most idiots would simply end there, but not our Mr. Munro. When the stupid get angry, they become a lethal force of anger (and stupidity). So Munro sent Hardee’s an e-mail.

    ”Hi Andy,” prosecutors said it read. “If you were smart, you would hire me at $25K per month for 12 months (for half my time) and take me out of the game. Plus, you would have vastly improved your relations with investors, and you might have avoided some of the current problems with Hardee’s. So far this year, this would have saved you $160 million in lost market value. That certainly beats shutting me out of asking questions on conference calls. You are getting some bad advice. Clive.”

    Munro has been sentenced to a year and nine months in prison. I prefer to look on the bright side. He just might land that job in the fast food industry after all!

  • Scary Thought for the Day
    , August 7th, 2005 at 9:47 pm

    General Motors’ debt, most of which is rated as “junk,” is worth 4,000 Dow points.

    Before 1997, it was accepted wisdom that nuclear powers simply “don’t go bankrupt.” Well, Russia changed all that. If you recall, when the ruble went under, it also took down the infamous hedge fund, Long-Term Capital Management. The world financial markets got a bit freaked for a few days.

    History may be repeating itself, but this time the culprit is much more important that some has-been empire. General Motors could actually declare bankruptcy. One of the great American corporations could join the ranks of Willie Nelson, Hammer and Sherman Hemsley. Once again, the markets seem pretty nervous. Some hedge funds reportedly took big losses when GM’s debt was downgraded.

    Consider the facts: GM has $284 billion in debt and roughly 560 million outstanding shares. That comes to about $500 a share in debt. Since GM is a Dow component, and each dollar in share price is equal to about 8 Dow points, GM’s debt represents around 4,000 points on the Dow.

    So if you buy one share of GM for $35, you’re picking up more than 14 times that in debt. If you buy it on margin, you’re borrowing money to borrow money. All you need is a pinky ring and 1978 Cadillac to complete the outfit. Nearly 90% of GM’s debt is for GMAC, which is its financing arm.

    Fortunately, GMAC is one of the few parts of GM that’s actually making money. The problem is that the overall company’s lousy credit rating is holding back GMAC’s profitability. Lower-rated debt means higher borrowing costs. On top of that, interest rates are rising.

    One solution is to spin off GMAC. In fact, GMAC recently announced a deal to sell $55 billion in car loans to Bank of America over the next five years. But that doesn’t solve anything. It simply let’s some of the crew jump ship. There is the option of Chapter 11. It’s not unthinkable, but time is running out.

    The new bankruptcy law goes into effect on October 17. If GM wants to move, it had better do so before then so it can take advantage of the older, more lenient law. I’m sure some airline will be taking the plunge, but airlines are always declaring bankruptcy.

    The bad news gets even worse. A few years ago, GM spun off Delphi Automotive. Delphi’s bankruptcy seems to be an almost certainty. But here’s the problem: GM makes up half of Delphi’s business. So if Delphi goes, GM is also screwed. Unless, GM tries to save Delphi. But who will save GM?

    I’m not sure, but if you pay taxes, I think you already may know the answer.