• Brain Teaser
    Posted by on July 24th, 2006 at 12:56 pm

    Here’s a fun puzzle I found at Cafe Hayek, via The Stalwart:

    An American tourist goes to a remote island for a vacation. The natives live by a barter system-they have no money. When the tourist tries to pay for his lodging with a check, the owner laughs at first, but then decides that the design on the check is quite attractive and agrees to accept the check in return for lodging. This happens again when the tourist pays for food and some native artwork. The checks are never cashed. They begin to circulate on the island as money, replacing the barter system that had existed before.
    If the checks are never cashed, who pays for the vacation of the tourist? Or is it free?

    What do you think? My thoughts after the jump….

    Read more…

  • Media Star
    Posted by on July 24th, 2006 at 6:46 am

    If you caught Kudlow & Company on Friday, no, that wasn’t an imposter. It was really me! Thanks for all the e-mails. I was nervous, but once it started, it was a lot of fun.
    Here are some interesting numbers that I wanted to pass along. Right now, a one-year Treasury note is yielding 5.18%. That means you can “lock in” the equivalent of 563 Dow points for the next 12 months. The important point is, while doing this, you’re greatly reducing your market risk.
    Think about it. You can walk away from stocks right now, and say “enough of you.” You wouldn’t have to worry about oil prices or Hezbollah or elections, or any icky stuff like that. Those 563 points are locked in and it translates to a future Dow of over 11,430.
    Don’t worry. I’m not saying that investors ought to pull up stakes and head for the hills, but I want to show you how the markets work. There’s a constant battle going on between the stock and bond markets for your money. When bond yields creep up, and earnings growth slows, investors rotate out of stocks and gobble up bonds. When the opposite happens, investors drive stocks higher.
    Earnings growth has been impressive, and I think it will continue to be strong. But Price/Earnings ratios have been compressed. In fact, they’ve compressed and compressed, and compressed some more.
    That’s a rough environment for stock investing. It’s like a runner trying to fight a strong headwind. Even very profitable companies have seen their stocks flat line. But the reason I still like stocks is that earnings are projected to grow by 14.1% for this year, and 10.5% for next year. Plus, that 10.5% number seems a little low. This means that the Dow could advance by, say, 7% and P/E ratios would still have compressed.
    It’s never safe to expect earnings multiples to expand, but even if P/E ratios continue to fall, stocks can still beat bonds. The next thing to watch for is earnings guidance from companies for the third quarter.
    This week, six more Buy List stocks report earnings. Brown & Brown (BRO) reports later today. AFLAC (AFL) and Fiserv (FISV) are up tomorrow. Fair Isaac (FIC) and Varian Medical (VAR) follow on Wednesday. Then Respironics (RESP) on Thursday.

  • Private Equity Strikes Again
    Posted by on July 24th, 2006 at 6:36 am

    The HCA (HCA) deal is on again! I guess no one wants to be on the stock market anymore.
    Last week, the WSJ reported that the deal fell apart at the last minute. Now it looks like Bain, KKR and Merrill Lynch will offer $21 billion for HCA.
    The company is the largest hospital operator in the country. It was started by Bill Frist’s father and brother, although the senator no longer owns any HCA stock.
    Private equity is up 77% this year, and I think it will continue. Companies are sitting on huge amounts of cash. Microsoft (MSFT) currently has about $34 billion in the bank, and ExxonMobil (XOM) has $36 billion.

  • Dell Delivers Another Profit Warning
    Posted by on July 21st, 2006 at 12:06 pm

    From Reuters:

    Dell Inc. slashed its outlook on Friday, warning that quarterly earnings would fall about 30 percent short of forecasts because of a slowdown in the computer market, driving its stock to nearly five-year lows.
    Shares of the world’s biggest personal computer maker fell 12 percent after it issued the disappointing outlook, which it blamed on discounting in a softening market for computers. The result, it said, would be second-quarter earnings of 21 cents to 23 cents a share on revenue of about $14 billion.
    The company, whose sales have slowed in recent quarters amid tough competition from Hewlett-Packard Co. and complaints about poor after-sale services, had been expected to earn 32 cents a share on revenue of $14.2 billion, according to analysts polled by Reuters Estimates.
    “Dell, they are having problems because internally they are in disarray,” said Eric Ross, an analyst at ThinkEquity Partner, who has a “sell” rating on the stock.
    “Dell has done an amazing job of growing, but they don’t know how to retrench very well. Inside Dell, they don’t know where to turn,” he said.
    Rather than its own problems, Dell pointed to broader industry challenges as the reason for its earnings warning. Analysts said those issues could indeed bite rivals like HP, whose stock fell 3.5 percent.
    But they also said any industry troubles would hurt Dell more than others, exacerbating problems that have already caused the company to post disappointing revenue in four straight quarters.

  • At Least the Brits Are Impressed
    Posted by on July 21st, 2006 at 6:40 am

    The London Telegraph looks at U.S. corporate earnings reports for the second quarter, and is impressed:

    America is on track to record its longest unbroken run of profits growth with most of the country’s biggest companies continuing to beat expectations in the unfolding second-quarter results season.
    The better than expected numbers will quell fears that high energy prices and a housing slowdown are holding back the US’s economic expansion. Figures from Thomson Financial show that for every company disappointing Wall Street forecasts, more than five are coming in ahead of target.
    With results already announced by a fifth of the companies in the S&P 500 index, average earnings growth of 13pc so far puts the consensus forecast of 12.8pc growth for the second quarter within reach.
    Hitting that target will see Wall Street celebrating a 12th consecutive quarter of double-digit earnings growth, matching the 1992 to 1995 winning streak. With gains of about 15pc already pencilled in for the third and fourth quarters, the current surge is set to be the longest run of success since 1950.

  • From the New York Times Conference Call
    Posted by on July 20th, 2006 at 7:42 pm

    Courtesy of Seeking Alpha:

    Peter Appert – Goldman Sachs
    Is the newsprint — can you just give us a rough idea of percentages from each of those?
    Leonard P. Forman
    No, Peter. We don’t disclose that information.
    Peter Appert – Goldman Sachs
    Well, you’re leaving, so now could be the time. By the way, we’re going to miss you a ton, Len.
    Leonard P. Forman
    I signed a non-disclosure agreement, Peter.
    Peter Appert – Goldman Sachs
    Okay, thanks.

  • It’s Earnings Time
    Posted by on July 20th, 2006 at 4:21 pm

    Three of our Buy List stocks reported earnings today. Here’s the rundown.
    Danaher (DHR) earned, after a few icky charges, 80 cents per share, two pennies more than estimates. The company also raised its estimate range for the year from $3.07 to $3.17 a share, to $3.15 to $3.22 a share.
    I never say I love a stock, but I’m in seriously like with Danaher. The company pegged third-quarter earnings at 77 cents a share to 82 cents a share. The shares gapped up to $65 this morning.
    SEI Investments (SEIC) earned 57 cents a share, also two cents more than estimates. The stock pulled back today, but it had a big day yesterday. The stock is our second-best performer year-to-date.
    Finally, Golden West Financial (GDW) earned $1.25 a share which was four cents below estimates. The stock is down, but there’s not too much to worry about. Since Wachovia (WB) announced the merger, shares of GDW have traded as a proxy for shares of WB. Wachovia, incidentally, reported earnings of $1.18 a share, three cents ahead of estimates.

  • The Bambi Cam
    Posted by on July 20th, 2006 at 12:41 pm

    Marketwatch’s tech writer, Bambi Francisco, is in France right now cycling behind the Tour de France.
    Check out these videos she made (here, here and here) from her helmet camera.

  • Is the United States Going Bankrupt?
    Posted by on July 20th, 2006 at 11:55 am

    “Come on little girl let your inhibitions run wild!”
    Rod Stewart in Tonight’s The Night (Gonna Be Alright)

    I’ve always admired that lyric. It’s not merely a malapropism, but it goes a step further. It means the exact opposite of what the songwriter intended. You have to admire that.
    I think of this because of the latest academic paper making the rounds. Laurence J. Kotlikoff is wondering if the United States is going bankrupt in his paper called, “Is the United States Going Bankrupt?” I think you pretty much know his answer right now.
    If you pay careful attention you’ll notice that the U.S. is perpetually going bankrupt. Yet strangely, financial crises always seem to happen somewhere else.
    Dr. Kotlikoff makes the sound point that when looking at our financial health, we ought to focus on future liabilities instead of current debt or cash flow. That’s true. I can add an even better way to look at our financial health is to look at our credit-rating. While the credit rating agencies do examine our national debt, the ultimate rating agency does this every day—the free market. Think of the Treasury market as a national FICO score.
    The markets judge America’s fiscal health in the pricing of government debt. Despite all the dire predictions of looming disaster, interest rates on U.S. Treasuries are still quite reasonable. Not that long ago, we would have thought 5% T-Bonds were an impossibility. Now we’re used to them. If we were really in serious trouble, wouldn’t that show up in Treasury prices? Maybe the market is just plain wrong. Yet investors all over the world are eager to lend us money, and that only makes our financial health even sounder.
    Kotlikoff cites a study by Gokhale and Smetters that pegs our “fiscal gap” at $65.9 billion. He then writes: “This figure is more than five times U.S. GDP and almost twice the size of national wealth.” Wait a second. If that’s true, then our national wealth is 2.5 times our GDP. In other words, we’re generating a return-on-equity of 40%. (Of course, this is outlandish, but it’s not my numbers.)
    If we have an ROE of 40% and we can borrow at 5%, doesn’t that mean the U.S. is dramatically underleveraged. Don’t tell Congress. I’d rather not even discuss their inhibitions.
    These analyses usually focus on our looming debt, but they ignore the other part of the picture—our assets. This is what Gary Alexander wrote on this site earlier this year:

    Household wealth refers to household assets minus liabilities. In the Doomsday press, all you read about is the near-$10 trillion in household debts, but have you heard anyone quote the $61 trillion in gross assets, six times the debt totals, resulting in net assets of $51 trillion (61 minus 10). In the 2.5 years since the 2003 tax cut, per capita net worth has increased 16%, and the average household is now 27% better off than in 1998, in the middle of the stock market bubble. And U.S. household wealth has almost doubled since 1995. That’s not counting business, which controls an $11 trillion “savings glut” of hoarded cash.

    As for me, I’ll stick with the free market’s judgment.

  • Department of Irony
    Posted by on July 20th, 2006 at 7:12 am

    Stephen Roach questions Ben Bernanke’s credibility.
    This raises two important questions.
    1. What the fuck?
    2. No, seriously…what the fuck?
    For more on Roach, see “Wall Street’s Worst Economist” and “Even Roach is bullish, so is it time to sell?”
    The answer to the latter question was yes. Roach mistimed the market perfectly. Again.