Author Archive

  • The Government Cracks Down on Poor Accounting Standards
    , July 30th, 2005 at 12:30 pm

    This time, it’s the SEC that’s up to no good.

  • Requiem for the Researchers?
    , July 29th, 2005 at 9:57 pm

    The New York Times has an interesting story about layoffs on Wall Street. I was stunned to learn that since 2001, Wall Street has shed 55,000 jobs. Read the whole thing.

  • Report: CNOOC Set to Dump Bid for Unocal
    , July 29th, 2005 at 6:17 am

    It looks like CNOOC is giving up its plans for buying Unocal. The Chinese have said that there’s too much political pressure. That’ll teach the communists to mess with big government.

  • Tomorrow’s GDP Report
    , July 28th, 2005 at 9:35 pm

    Wall Street is waiting tomorrow’s GDP report. This will be the first report on how well the economy did for the second quarter. The government reports each quarter’s GDP growth three times, at the end of the each month following the quarter.

    The initial estimate is usually pretty far off the mark. Three months ago, Wall Street got nervous when the initial estimate for the first quarter was just 3.1%. It was later revised to 3.5%, then again to 3.8%.

    I find this very annoying. Look at this AP story from three months, and bear in mind that the entire “back story” is wrong. The economy wasn’t hitting a “soft patch,” and the economy’s performance actually exceeded expectations. Investors didn’t know the whole story until the GDP report was revised.

    These revisions can be pretty big. I’d prefer to see the government hold off on any economic report until it has a good number. Even if it takes several weeks, the market needs to trust this information.

    My guess is that the economy grew by 3.7% for the second quarter. That’s just a guess of a hunch of a prediction. Even if I’m wrong, it won’t change my investment strategy at all. The only important aspect of a GDP report is its trend. The economy has expanded above its long-term trend of 3% for eight straight quarters. This will probably be the ninth.

    If not, we still need more data to confirm a trend. My advice is to watch tomorrow’s GDP report, but don’t act on it.

  • The Most Underrated Stock on the Market
    , July 28th, 2005 at 2:27 pm

    Without a doubt, UnitedHealth Group (UNH) is the most underrated stock on the market. Not only does it grow, but it grows consistently. The company just posted its 23rd straight quarter of earnings growth over 30%. That’s amazing. I’ll be impressed with Google once it can say the same.

    UnitedHealth’s stock is up 17% this year, and that’s after coming off a great last year when it soared over 50%. The shares were up another 39% in 2003. In fact, the stock almost never goes down. For this entire decade, UNH has gained over 670%. Not bad, considering the bear market.

    The company went public in October 1984. It closed its first day of trading at $4-5/8. Adjusted for five 2-for-1 splits, those shares are now worth about $1,700. Owning the stock is like buying a bond with a 20% coupon.

    Despite these great results, many investors overlook UnitedHealth. I guess it’s not as exciting as Google or Amazon, but I’m worried about UnitedHealth’s future. The company just snagged PacifiCare Health Systems for a cool $8 billion, and it raised guidance for the rest of this year. UNH now expects to earn $2.45 to $2.47 a share this year. That still gives the stock a reasonable P/E ratio. This is a stock to buy and hold for the long-term.

  • The Plunging VIX
    , July 27th, 2005 at 6:15 pm

    Do you realize that it’s been nearly two years since we’ve had a 2% move on the S&P 500? That’s the longest streak since the mid-90s. With so little action out there, the day-traders must be pulling their hair out!

    Volatility is closely watched on Wall Street. Many options investors ignore stocks all together and solely play volatility. The Chicago Board Options Exchange has its own volatility index, which is better known as the VIX. Real estate and oil may be bubbles, but the VIX is in the clutches of a ferocious bear. Today, the VIX closed at 10.36, which is just above an 11-year low.

    We used to have wild moves all the time. There were 41 days of 2% or more moves from July to November of 2002. That’s about two a week. Back then, the VIX soared above 40. But not anymore. We haven’t even had a 1.2% day in nearly three months. There’s just no volatility out there.

    What does it all mean? It’s hard to say. Volatility is often misunderstood. It’s not necessarily a bad thing to have rising volatility. The media loves to wag its finger at an erratic market, but there isn’t a strong correlation between current volatility and future return. There’s a slight—and I mean very slight—relationship between rising volatility and a turn in the market. But it’s too small to be a viable indicator.

    The market started becoming more erratic in mid-1985, but was actually cooling off just before the crash in October 1987. Rising volatility did coincide with bull market of the late-90s. But volatility stayed high through the market crash, and it didn’t start calming down until the market hit rock bottom in October 2002.

    If anything, volatility represents how “content” the market is right now. That’s unlikely to change until events change. As long as volatility is falling, the market is happy to continue doing what it’s doing.

  • Amazon Goes Google
    , July 27th, 2005 at 2:27 pm

    It seems like my local bookstore is about to give up selling books. Whenever I go there, they’ve added a new category of merchandise. You can now get lattes, DVDs, CDs, t-shirts, Winnebagos, you name it. If you want to pick up the latest John Grisham AND a blender, this bookstore’s got you covered.

    That’s why I love Amazon. It’s easy. It’s clean. I don’t have to speak with anyone. That’s about all I ask from a bookstore.

    But for the life of me, I don’t get Amazon’s stock. As a business, the company simply ain’t that great. Amazon just reported earnings, and their profits dropped by 32%. Youch! But Wall Street is partying like it’s 1999 because AMZN beat expectations. Sorry, fells but I’m not impressed. Expectations are already so low, it’s like being surprised by the crisp cinematography of the latest Ben Stiller movie.

    The problem I have with Amazon is that they rely too much on gimmicks. Businesses can use gimmicks, but they can’t live off them. Amazon’s sales were up 26% last quarter. That’s not bad, but a lot of it was due to aggressive discounting. They can’t do that forever.

    Their new Amazon Prime program gives you unlimited two-day delivery for $79 a year. Again, that’s nice, but that’s all that Bezos & Co. want to talk about. I’m suspicious of any company that tries to discount its way to profitability. To win in the long run, a company needs to have something that sets them apart. Something that their competitors can’t do.

    The biggest problem that Amazon faces is that its profit margins are shrinking. In fact, Wall Street is celebrating today because overall margins widened by a tad. But let’s add some perspective, their margins have, for now, briefly stopped falling. That’s not the same thing as growing. Amazon’s margins are still lower than they were one year ago.

    Where are the future sales going to come from? Foreign sales were up 50% last quarter, but in North America, sales were up just 21%. It won’t take long for foreign sales growth to level off. Plus, North American operating profits were only up 9%. Once again, shrinking margins.

    Future revenue could come from “third-party sales.” In essence, Amazon is slowing becoming “Googlized.” Third-party sales are when other companies rent space on Amazon’s site, or Amazon gets a commission of other company’s sales. It’s a fast-growing part of Amazon’s business. This is intriguing and certainly worth paying attention to, but Amazon’s core business is not growing like it should. Either Amazon will prove it can grow without discounting, or its stock will be the one that’s discounted.

    My advice is to enjoy the service, but steer clear of Amazon’s stock.

  • Schoolgirls Beat the Pros
    , July 26th, 2005 at 4:05 pm

    This is a fun story. A British investing contest is won by four Scottish schoolgirls.

    None of the Scots pupils had any knowledge of the stock market before embarking on the contest, entered by 33 UK schools.

    They should start their own fund. Or their own blog! Unfortunately, the contest was only eight months long, so the test is constrained by insufficient data. In other words, they got lucky.

    Which reminds me of another Scot:

    If you can look into the seeds of time,
    And say which grain will grow and which will not,
    Speak to me….

  • Ignore the NASDAQ Composite
    , July 26th, 2005 at 2:59 pm

    Of all the major indexes, the NASDAQ is the worst. I don’t mean that the NASDAQ market is overpriced. I mean that, as an index, it’s horrible. It tells us almost nothing. An index should be an accurate reflection of what the market, or a sector, is doing. In this regard, the NASDAQ is lousy.

    The NASDAQ Composite is a capitalization-weighted index of about 3,200 stocks. That sounds like a lot, but it doesn’t do the job. The problem is that the largest stocks are gigantic, while the vast majority of the stocks are puny. This is true for the market as a whole, but it’s far worse on the NASDAQ.

    The seven largest stocks on the NASDAQ are (in order) Microsoft, Intel, Cisco, Amgen, Dell, Google and Oracle. Together, they make up about 25% of the index. Compounding the problem is that many of these stocks overlap. Not that they own each other’s shares, but their businesses are heavily tied to one another. Every time Dell makes a sale, Microsoft and Intel aren’t far behind. So you basically have a few highly correlated Gullivers drowning out three thousand Lilliputians. Outside of these behemoths, there are very few blue chip stocks on the NASDAQ. Of the S&P 100, just eight stocks trade on the NASDAQ.

    I understand why the NASDAQ likes to tout their index. They’re proud of their exchange, and they want more business. That’s great, but I don’t see why so many investors slavishly monitor the index. It doesn’t help anyone. I’d particularly like to see the media stop giving it such a prominent place in the news.

    If you want to see how the market is doing, look at the S&P 500. That’s 70% of the market. The S&P 500 is nearly five times the size of the NASDAQ Composite, even though it has one-sixth the number of stocks. The Russell 3000 is even broader. The Wilshire 5000 is broadest of all. These indexes aren’t hard to find, yet the NASDAQ is omnipresent, and it’s only about 15% of the market.

    Let’s say you want to know how tech stocks are doing. Look at the S&P 500 tech index. Or trade the tech spyders. But if you want to know how well the market is doing today, the NASDAQ is about the last place to look.

  • Viva le Resistance!
    , July 26th, 2005 at 9:49 am

    After losing the 2012 Olympics and having the EU Constitution shot down, France finally won a big victory. The ugly American invaders have been repulsed. The object of their desire—yogurt.

    Let me explain. Yesterday, Pepsi said that it’s not interested in buying Danone. Big whoop, right? Well, to the French, it is.

    Danone’s stock started to rally a few weeks ago on rumors that Pepsi was interested in buying them. The company is one of the world’s largest dairy and water companies. Danone is very profitable and owns several well-known brands. In America, they sell Evian water and Dannon yogurt.

    While most people would welcome an interest in buying them, the French had their berets in an uproar. The thought of losing Danone to a foreign company, especially an American company, was simply too much to bear. Sacre bleu!

    The French political establishment jumped (or hopped) into action and rallied around Danone. Several prominent political figures promised that they would do whatever needed to be done to protect French industry from a hostile takeover. All the while, neither Danone nor Pepsi confirmed the rumors.

    The French media had a field day. Le Figaro described Pepsi as “the American Ogre.” (L’ogre Américain!) Thierry Breton, the finance minister, warned Pepsi that “this is not the Wild West.” I’m curious how many cowboys live in Pepsi’s hometown of Purchase, NY. The prime minister, Dominique de Villepin, went on to talk about “defending France’s interests.” He even called Danone, “a flower of our industry.” (Monsieur de Villepin is also the author of four books of poetry.)

    How times have changed! Only four years ago, Danone was considering downsizing. In France, the company became public enemy #1. People boycotted their products. Today, the company is a “flower.” Well, it turns out that Danone isn’t exactly French either. It was started in Spain in 1919. Danone gradually became “French” through mergers. Ironic, non?

    Some people think that L’affaire D’Pepsi was started by Danone itself to win political favor. If that’s true, maybe they’re more American than they realize.