Banco Bilbao buying Compass Bancshares
Posted by Eddy Elfenbein on February 16th, 2007 at 1:12 pm

It happened again! Another one of my favorite banks is getting bought out. Banco Bilbao (BBV) is buying Compass Bancshares (CBSS) for nearly $10 billion.
Just to set the record straight, a Spanish bank is buying out an Alabama bank. Let’s pause and read the sentence again.
Not only is Compass a Dividend Aristocrat, but it’s also in the 10 straight years of increased earnings club. The only other stocks in both groups are Wal-Mart (WMT), Walgreen (WAG) and Synovus (SNV). (Note: There could be a trend here. Synovus is based in Georgia and Wal-Mart hails from Arkansas.)
BBV is offering a 16% premium for Compass. Let’s see if another bidder steps forward.

Top Stocks for the Loooooong Haul
Posted by Eddy Elfenbein on February 16th, 2007 at 12:17 pm

At the TheStreet.com, James Altucher profiles some stocks that have been around for over one hundred years.
If you haven’t done so yet, I urge you to check out James’ new Stockpickr site, the latest in social networks and stock-picking.

CAPM: RIP
Posted by Eddy Elfenbein on February 16th, 2007 at 10:59 am

Here’s a good article from the Financial Times on the demise of CAPM, the Capital Asset Pricing Model. This model tried to explain the trade-off between risk and return in financial markets.
The verdict is that as a theory, it’s all swell. But in practice, CAPM doesn’t explain much. Studies have shown that low-risk stocks (meaning low beta) have done better than they should, and riskier stocks have continually come up short.
Of course, this is hardly the first time that an academic theory has got its ass handed to it by reality. What I find interesting, however, is the use (and abuse) of the concept of risk.
Although we’ve become used to language of risk, it’s actually a rather bizarre idea. Consider that we have just one word for it, but “risk” is used to describe many different things. For example, risk is reflexively assumed to be bad. But what about the risk of missing a great stock? That’s something that I’m always concerned with.
If there’s a trade-off between risk and return, then there’s an assumption that all investors measure risk the same way. The return part is fairly obvious. We can all agree what a 10% move is. But risk is subjective. What I might consider risky, you might not.
Another example is gold. Is gold very risk, or not risky at all? Going by its daily volatility, gold has often been very risky. Gold’s beta, however, is usually negative. I’ve always thought the allure of gold is that it has the least risk of losing its intrinsic value. After all, if we find ourselves living in the post-apocalypse, stocks and bonds aren’t going to be worth much, but gold will still have value (don’t laugh, there are investment advisors who say these things).
Once again, we have one word that’s used to describe many things, and everyone sees it differently.

Dividend Aristocrats
Posted by Eddy Elfenbein on February 16th, 2007 at 8:32 am

Coca-Cola (KO) raised its quarterly dividend from 31 cents a share to 34 cents a share. Coke has now raised its dividend for 45 straight years.
While capital gains are my first true love, dividends are like a friend with benefits. S&P has a list of its Dividend Aristocrats, stocks that have increased their dividend every year for the last 25 years.
Here’s the current list:
Abbott Labs (ABT)
Archer-Daniels-Midland (ADM)
Automatic Data Processing (ADP)
Avery Dennison (AVY)
Bank of America (BAC)
BB&T Corporation (BBT)
Bard (C.R.) Inc. (BCR)
Becton, Dickinson (BDX)
Anheuser-Busch (BUD)
Chubb (CB)
Compass Bancshares (CBSS)
Cincinnati Financial (CINF)
Clorox (CLX)
Comerica (CMA)
Century Telephone (CTL)
Dover (DOV)
Consolidated Edison (ED)
Emerson Electric (EMR)
Family Dollar Stores (FDO)
First Horizon National (FHN)
Fifth Third Bancorp (FITB)
Gannett (GCI)
General Electric (GE)
Grainger (W.W.) Inc. (GWW)
Johnson Controls (JCI)
Johnson & Johnson (JNJ)
KeyCorp (KEY)
Kimberly-Clark (KMB)
Coca Cola (KO)
Leggett & Platt (LEG)
Lilly (Eli) & Co. (LLY)
Lowe’s (LOW)
McDonald’s (MCD)
McGraw-Hill (MHP)
3M Company (MMM)
Altria (MO)
M&T Bank (MTB)
Nucor (NUE)
PepsiCo (PEP)
Pfizer (PFE)
Procter & Gamble (PG)
Progressive (PGR)
PPG Industries (PPG)
Regions Financial (RF)
Rohm & Haas (ROH)
Sherwin-Williams (SHW)
Sigma-Aldrich (SIAL)
SLM Corporation (SLM)
Synovus Financial (SNV)
Questar (STR)
State Street (STT)
Supervalu (SVU)
Stanley Works (SWK)
Target (TGT)
U.S. Bancorp (USB)
V.F. Corp. (VFC)
Walgreen (WAG)
Wal-Mart (WMT)
Wrigley (WWY)
The Dividend Aristocrats Index has not only outperformed the S&P 500, but it’s been less risky as well. Since 1990, the Dividend Aristocrats Index is up over 414%. Throw in dividends and it’s up 725%. The S&P 500 is up 312%, and 485% with dividends. The daily volatility of the Dividend Aristocrats Index has been about 11% less than the S&P 500.
Here’s how the two indexes have performed since 1990 (not including dividends).

Erin Burnett, CNBC All-Star
Posted by Eddy Elfenbein on February 16th, 2007 at 7:51 am

And second team all-conference in field hockey.*
But first team of our hearts!
* Those sticks scare the fuck out of me. Seriously, I carry one in my car.

Buffett Buys 1 Million Shares of UnitedHealth
Posted by Eddy Elfenbein on February 15th, 2007 at 3:03 pm

From Reuters:

Warren Buffett’s Berkshire Hathaway Inc bought 1 million shares of insurer UnitedHealth Group in the fourth quarter of 2006, according to a regulatory filing.
Berkshire detailed its holdings for the quarter ended Dec. 31, 2006 in a filing with the U.S. Securities and Exchange Commission late on Wednesday.
In the third quarter, Berkshire did not own any shares of UnitedHealth, the largest U.S. health insurer by market value. The company has overhauled corporate governance procedures and changed its management structure, but still faces a federal investigation into its dating of stock options.

Shares of UNH are up over 4% today.

Laugh & Learn Bunny: Harmless Children’s Toy or Rampaging Drug-Addled Psychopath?
Posted by Eddy Elfenbein on February 15th, 2007 at 12:49 pm

J’accuse.

Fisher-Price recalls Laugh & Learn Bunny toys
Some half million “Laugh and Learn” Learning Bunny Toys are being recalled because of a potential choking danger.
The Consumer Product Safety Commission says the pink pom-pom nose (Alcohol? Coke??) on the toys can come off, posing a danger to young children. The recall does not cover Learning Bunny Toys with noses that are flat or embroidered.
The yellow toy bunny is ten inches high. One ear’s green, the other orange, and it has musical and counting sound effects.

Fisher-Price is owned by Mattel (MAT), which is a stock that’s been catching my eye lately.
First, some background. Shares of Mattel plunged over 80% in 1998 and 1999. The company was nearly ruined by its former CEO, Jill Barad, who led Mattel through the horrible idea of acquiring The Learning Company. Barad finally resigned (not without a very large severance package), and the new CEO, Robert Eckert, has engineered an impressive turnaround.
Despite this little rabbit-killing-kids issue, it’s actually Barbie that’s responsible for 30% of Mattel’s profits. That probably led the company to get a female CEO in the first place. When Barad was first hired, I’ve rarely seen a CEO get better press. Fortunately, female CEOs are more common now than when she got the top job.
In the past year, the stock has nearly doubled. In November, the company raised its dividend by 30% (50 cents a share to 65 cents a share). For the fourth-quarter, the company earned 75 cents a share, eight cents more than expectations. I am concerned about the high level of debt, though. Mattel’s long-term debt is more than twice last year’s profit. I’d like to see that come down some. But there is value here. Shares of MAT now go for about 16 times 2008’s earnings.

Buy What You Hate
Posted by Eddy Elfenbein on February 15th, 2007 at 11:41 am

Peter Lynch used to advise investors to “buy what you know.” Several months ago, Daniel Gross wrote an article called “Buy What You Hate.” He noticed how many highly-profitable companies did poorly in a poll on corporate reputation.
The head of the poll said, “When we do detailed analysis of public perception, we find that a significant portion of the ranking is negatively affected when companies do too well.” I guess the public is pro-profits, but anti-profiteering. But I’m not sure where the line is drawn.
A new study pushes this idea further. It finds that stocks of admired companies haven’t fared as well as the less-admired. “Stocks of Admired Companies and Despised Ones” by Deniz Anginer, Kenneth Fisher and Meir Statman looks at the stock performance of companies in Fortune Magazines poll of most admired companies (BTW, UnitedHealth was ranked #1 in the 2006 survey).
The researchers found that over a 23-year stretch, the stocks of companies in the lower half of reputation (the despised companies) outperformed the admired half, 17.50% to 15.68%.
Before you go out and load up on shares of Initech (BOBS) or Tyrell Corp. (REPL), making money with this type of strategy isn’t so easy. CXO Advisory writes:

Relative returns of the stocks of admired and despised companies vary considerably from year to year and even from decade to decade. During 1983–1995, the mean annualized return of the most admired (top 10%) is 9.9% higher than that of the most despised (bottom 10%). But during 1996–2006, the mean annualized return of the most despised is 9.2% higher than that of the most admired. Overall, during 1983-2006, the mean annualized return of the most despised is 4.0% higher than that of the most admired. Moreover, the effect is not reliably consistent across the spectrum from most admired to most despised.

Financial Times Has Attitude Problem Says Blogger
Posted by Eddy Elfenbein on February 15th, 2007 at 7:16 am

Let’s say that you interviewing Joe Peralla, the investment banker, for a news story. During the interview, Mr. Peralla makes some fairly standard comments about France’s well-known hostility to free enterprise. So, what do you use for a title? If you write for the Financial Times, the answer is easy: “French have an attitude problem says New Yorker.”
New Yorker? Oh dear lord. Apparently, this attitude problem is spreading. Just for the record, the body of the article doesn’t once mention the fact that Peralla is from New York (he’s from Bensonhurst) or even that he’s American. The “New Yorker” tag adds nothing to the article. In fact, Peralla says that it’s the French people he’s encountered who feel that way.
This reminds me of the famous British headline: “Fog in Channel; Continent Cut Off.”

Live from the Senate Banking Committee
Posted by Eddy Elfenbein on February 14th, 2007 at 12:57 pm

I’m here LIVE at the Senate Banking Committee ready to watch Benny B. testify. OK, I’m not LIVE live—I’m actually at a nearby Starbucks, but my scone and I are about to step inside. I probably won’t be able to get a good connection this morning, but don’t despair. I’ll have a complete report later today.

Here’s the deal: In 1978, Congress passed the Humphrey-Hawkins Full Employment Act which requires the Fed chairman to climb out of his cave twice a year, bang his club and appear before Congress. Much jargon follows. The first day is before the Senate Banking Committee, and the following day is in front of the House Financial Services Committee. That’s right, two committees, same job, different names.

I live blogged the hearings from this past summer. It got up to 89 degrees that day. Last night, we got a dusting of snow, and the city is totally paralyzed. If America’s enemies only knew how easily D.C. could fall. The Red Army, that we can handle. Three-quarters of an inch of snow, not so much.

Today is kind of a big deal because the Congressional Democrats are probably under Wall Street’s spotlight more than Big Ben. The current monetary policy seems pretty well understood on Planet Wall Street. But now Congress is being run by these hippy freak liberals, and they’re probably eager to show that they’re not so hippy or freaky.

The hearing begins with senators giving their opening remarks. The chairman is Chris Dodd of Connecticut, who’s also running for president. I’m guessing he’ll drone on. There aren’t a lot of Big Name senators on this committee. I guess Liddy Dole, maybe Chuck Schumer. But it’s mostly the Tim Johnsons, Robert Bennetts and Evan Bayhs-types. If you kinda recognize their name, but you couldn’t place the face, they’re probably on Senate Banking.

The one guy I’m excited to see is Senator Jim Bunning of Kentucky. He’s a retired baseball pitcher, and Hall of Famer. Bunning hates Bernanke. I mean, he HATES him. It’s not personal. He hates all monetary policy that’s not giving away free money. He’s also – how should I say — not the brightest member of the committee. Bernanke, by contrast, has some sort of super-atomic computer brain. Anyway, it makes for great TV.

After the senators give their opening statements, then it’s Bernanke’s turn. His speech is usually posted beforehand on the Fed’s Web site so Wall Street already has an idea what he’s going to say. This speech gets a lot of attention. When Bernanke spoke in July, the market jumped 212 points. After Ben is through, the senators get to ask questions.

If you’re watching on TV, I’ll try to get a seat right behind Benny. The first few rows are reserved, but I’ll do what I can. I’m wearing a blue shirt with a gold tie. (And the gold tie isn’t a political statement, it’s just one of my few clean ones.) Here’s a clue to my vast readership. Whenever Ben says “net capital inflows,” I’ll cough really loud. So listen for me, ok. Ben is probably good for three or four of those. That cough is me (or maybe Bunning).

Here’s my take on how this will play out. I think the big story will be, “Barnanke Warns Inflation Threat Remains.” That’s an easy story, and it almost writes itself. (Update: Score one for CWS! FT: Battle against inflation not quite won, warns Bernanke.) In July, he stunned me, and everybody else, by saying that the Fed’s model sees core inflation cooling off later this year. That was a darn good call, and I think Bernanke tremendously increased his cred. The Fed had raised rates for the 17th straight time only three weeks before he spoke, plus oil prices peaked just five days before, but we didn’t know that at the time.

The 12-month rolling rate of core inflation peaked in September, and has gradually ticked down since. I think it will be natural for Bernanke to say that the war isn’t over just yet.
Also, if you see any other “Bernanke Warns” headlines, please send them my way.
Here’s how I see it:

#1

Barnanke Warns Inflation Threat Remains

High Probability:

Bernanke Warns on Deficits
Bernanke Warns on Economy

Could Happen:

Bernanke Warns on Trade
Bernanke Warns on Income Gap

Long Shot:

Bernanke Warns on Raven-Haired Reporters
Bernanke Warns on Spiders

9:42: OK, I made it. Great seats, right behind Ben. It’s interesting how few people are actually here. All I see are a few aides mingling around, and a TV crew. That’s it. Here’s a picture.

So Bernanke drinks Deer Park. Another scoop for blogs! Greenspan used to do shots of Jagermeister. God, I miss him.

9:51: No senators are here yet. I dunno…last-minute make-up? By the way, I think the real fireworks will be tomorrow when Barney Frank takes the stage.

10:08: Bernanke just walked in. Geez, the photographers are going crazy. Here’s another shot:

Sorry for the blurriness, but this is how close I am. I could touch his beard. (I won’t.) But still!

10:12: Dodd is speaking. He’s being very generous to Ben. Right now, he’s going on about health care costs, real median family income, blah, blah, blah.

10:20: Senator Bayh said that he’s not going to have an opening statement. Well, that’s one way not to stick your foot in your mouth.

10:27: Bunning is being surprisingly nice to Bernanke. He said that he was afraid that Bernanke was going to be a “carbon copy” of his predecessor. Although he said that he wasn’t going to let him off that easy, “even though it’s Valentine’s Day.” Thankfully, most of the senators’ statements are fairly brief.

10:34: Now Bernanke is speaking. Here’s his statement from the Fed’s Web site. This is the money paragraph:

The projections of the members of the Board of Governors and the presidents of the Federal Reserve Banks are for inflation to continue to ebb over this year and next. In particular, the central tendency of those forecasts is for core inflation–as measured by the price index for personal consumption expenditures excluding food and energy–to be 2 to 2-1/4 percent this year and to edge lower, to 1-3/4 to 2 percent, next year. But as I noted earlier, the FOMC has continued to view the risk that inflation will not moderate as expected as the predominant policy concern.

That’s good news. I see that the market has a nice bump up this morning. Bed Bath & Beyond (BBBY) is up to a new high. So is FactSet Research Systems (FDS).

I count twelve senators; Tester, Casey, Brown, Menendez, Bayh, Reed, Shelby, Bennett, Hagel, Bunning, Sununu and Martinez. No Dole or Schumer, although the latter was around earlier.

Here a few quick comments on Bernanke’s statement. Most of his comments are descriptive, not projections, but he did give some very general forecasts. I’m glad to see that the Fed sees inflation continuing to ebb this year and next. That’s the big news of the day. I also thought it was interesting that the Fed is slightly lowering its GDP growth expectations for this year (2.5% to 3%, down from 2.75% to 3%).

Something that caught my ear was Bernanke’s emphasis on inflationary expectations. Here’s what he said:

Another significant factor influencing medium-term trends in inflation is the public’s expectations of inflation. These expectations have an important bearing on whether transitory influences on prices, such as those created by changes in energy costs, become embedded in wage and price decisions and so leave a lasting imprint on the rate of inflation. It is encouraging that inflation expectations appear to have remained contained.