Lost in Translation
Posted by Eddy Elfenbein on July 20th, 2006 at 7:03 am

The Washington Post provides this handy graphic detailing the market’s and Bernanke’s communication issues.

I Totally Called Yesterday’s Surge In Tech Stocks!
Posted by Eddy Elfenbein on July 20th, 2006 at 6:22 am

By Geoffrey Fox:

You all think you’re hot shit because you guessed that the dollar would continue to slide against the euro, but answer me this: Who totally called yesterday’s 0.4 percent surge in technology stock valuations, in spite of their inflated P/E ratio? Who defied conventional wisdom and foresaw the late-afternoon rally after a morning of relatively tepid technology trading? Who is the fucking man? If you said “Geoffrey Fox,” you are correct.

Read more…

The Ben Rally
Posted by Eddy Elfenbein on July 19th, 2006 at 5:05 pm

The stock market had a major surge today for the third time in the past five weeks. Today was our Buy List’s best day of the year. We gained 2.5%.
Here’s the rundown:
DELL……………5.29%
UNH…………….5.23%
DHR…………….3.73%
HD………………3.68%
EXPD……………3.13%
RESP……………3.03%
FIC………………2.91%
BMET……………2.89%
SEIC……………2.88%
FDS…………….2.32%
VAR…………….2.26%
BRO…………….2.25%
GDW……………2.24%
DCI……………..2.14%
AFL……………..1.98%
BBBY……………1.27%
FISV……………1.16%
HDI…………….1.14%
MDT…………….1.14%
SYY……………..0.00%

UnitedHealth’s Earnings
Posted by Eddy Elfenbein on July 19th, 2006 at 2:33 pm

UnitedHealth (UNH) posted earnings of 70 cents a share, two cents more than estimates. The company also guided higher for the year.

UnitedHealth, the largest managed-care company in terms of revenue, is the first such provider to report each earnings season and is typically seen as a harbinger for the rest of the industry. UnitedHealth’s steady gains in health-plan enrollment, higher premiums and still-moderate medical cost growth seemed to allay investor concerns that a price war among health insurers is breaking out anytime soon.
Investors have wondered about the direction of health insurers’ profits for some time. With the overall market for employer-financed health care stagnant, many insurers are struggling to gain new business without cutting into the robust profit margins that they have enjoyed in recent years.
But while price competition has gotten much more heated in health-insurance markets such as New Jersey and Florida, UnitedHealth’s chief executive, William McGuire, said there are few signs of a price war in most other places. Enrollment in the company’s fully insured health plans (as opposed to the ones it administers for employers for a fee) did fall by 45,000 members. But much of that decline was due to the sale of some businesses to satisfy regulatory requirements for its PacifiCare acquisition. Otherwise, its overall health-plan membership climbed by 180,000 to 28.3 million enrollees from the first quarter.
In the earnings report and on a conference call with analysts, UnitedHealth executives steered clear of discussing the inquiries into past stock-option grants to top company executives, including Dr. McGuire. Since questions over the timing of some of those grants first surfaced in March, federal prosecutors, the Securities and Exchange Commission and the company’s board have launched separate inquires, and UnitedHealth has said it may have to restate as much as $286 million in earnings over the past three years.

The shares are up about 5% today.

Earnings Champions
Posted by Eddy Elfenbein on July 19th, 2006 at 2:16 pm

The following stocks have had 10 straight years of increasing earnings:
NVR (NVR)
Apollo Group (APOL)
Moog (MOGA)
Dollar Tree Stores (DLTR)
Bed Bath & Beyond (BBBY)
Compass Bancshares (CBSS)
City National (CYN)
Donaldson (DCI)
Ross Stores (ROST)
SEI Investments (SEIC)
Expeditors International (EXPD)
Toll Brothers (TOL)
Patterson Companies (PDCO)
Lincare Holdings (LNCR)
Home Depot (HD)
Health Mgmt Assoc (HMA)
Knight Trans (KNX)
Harley-Davidson (HDI)
Paychex (PAYX)
Applebee’s (APPB)
Brown & Brown (BRO)
O’Reilly Automotive (ORLY)
Hilb Rogal & Hobbs (HRH)
Heartland Express (HTLD)
Capital One Financial (COF)
Copart (CPRT)
Walgreen (WAG)
Sysco (SYY)
Wal-Mart (WMT)
D.R. Horton (DHI)
Synovus Financial (SNV)
General Electric (GE)
Cathay Gen Bancorp (CATY)
Trustco Bank Corp (TRST)
Notice a lot of names from our Buy List.

Fed Blogging
Posted by Eddy Elfenbein on July 19th, 2006 at 9:40 am

This might be an Internet first but I’m live blogging Ben Barnanke’s Humphrey-Hawkins testimony.
In 1978, Congress passed the Humphrey-Hawkins Full Employment Act. Most of the bill’s original aims were stripped out, but one important development did come about. The chairman of the Federal Reserve is now required to testify on Capitol Hill twice a year. Before that, most Americans had little idea what the Fed was, what it did and who was in charge. Perhaps, they still don’t, but still, the Fed chairman must make twice-a-year visits to Congress.
This usually happens once in the middle of summer and again in the middle of winter. Today is summer’s turn (and DC is in the midst of a blistering heat wave). Bernanke starts today in the Senate Banking Committee and tomorrow, he heads over to the House Financial Services Committee.
The Chairman of the Banking Committee is Richard Shelby, a Republican from Alabama, although he started off his career as a Democrat. The hearings usually start off with some comments by committee members, then Bernanke’s testimony, and finally some questions from the senators. There’s also an accompanying report on monetary policy on the Fed’s Web site.
The senator’s questions are often pretty embarrassing. The fact is, monetary policy is far less influential than many people realize. Sorry folks, but it won’t improve your golf swing. The members of Congress used to ask Alan Greenspan his opinion of everything. These guys are just bureaucrats—smart bureaucrats—but still bureaucrats. Jim Grant said that the Fed has two functions; set interest rates and give speeches. That’s about right.
This testimony will receive particular scrutiny since it appears that the Fed’s interest rate campaign is coming to an end. Or perhaps, it’s merely a temporary pause. Over the last two years, the Fed has raised the Fed funds rate by 0.25% for the 17 straight meetings. The rate has climbed from just 1% to 5.25%. We’re now at the point where the overnight rate is roughly equal to long-term rates. In other words, the yield curve is flat.
The yield curve is vitally important to the financial community. When the yield curve is wide (short-term rates are below long-term rates), it’s easy for banks to make money. Just borrow from the Fed and buy long-term Treasury bonds. You keep the difference. In Vegas, this is known as the “vig.”
When the yield curve narrows, or even inverts, it becomes much harder for banks to make money. Banks become far more selective in making their loans. Not surprisingly, an inverted yield curve is often a warning sign of a slowing economy.
The futures maket indicates that Wall Street is evenly split on the Fed’s next move. Historically, the stock market loves declining rates and hates rising rates. It almost doesn’t mind the level, just the direction. The next Fed meeting will be on August 8, and I think a pause from the Fed could spark a rally. That’s why today’s testimony is so important.
One of the problems of monetary policy is that to work, it has to be secret. So we want to know everything that the Fed is thinking, but please don’t tell anyone. The FOMC meetings are private. The minutes are released three weeks later, and the transcripts are released five years later. As a result, every public utterance is a potential clue for what Bernanke is thinking. A few weeks ago, he made some comments to Maria Bartiromo at a dinner party and it moved the market. I think he’s learned not to do that again.
Here goes:
9:53: I made it! I’m in the (air-conditioned) Dirksen Senate Building.
Two young aides are talking right by me. One asked the other if he went to see John Roberts yesterday. The guy said yes, and the first asked if it was “cool.” Apparently, it was. Yep, I’m in DC.
9:57: Dude, I totally got an awesome seat. Third row inside aisle baby. Benny will be like twelve feet from me. This is better than my first Dead show. This is so cool! (Wait…did I just write that?)
10:03: Benny is in the house! Dark suit. I guessed right. He’s sitting at the table and there’s like eight photographers snapping away in his face. He’s right next to me. Turn on your TV. I’m the guy three rows directly behind him. Look, I’m waving.
10:05 Shelby has gaveled the meeting to order. It’s showtime!
10:10: The senators are making their opening statements. Ugh. Here’s something you don’t see on TV. Senator Sarbanes is talking, but Senator Carper is yakking away with everyone around him. He’s jumping all around. There are aides walking in and out all the time. Did you know that Congress is really run by aides who look 12 years old, and think John Roberts is cool?
10:24 Senator Bunning is reading his opening statment. He’s really laying into Ben. He’s “disappointed” with the rate hikes. Where’s the inflation, says he. This is very strange because he’s passionate but his public reading skills are extremely poor.
10:32 Elizabeth Dole is making her opening statement. She seems really nice. Eight GOP members showed up to just four Democrats. The Dems are taking turns criticizing the economy.
10:41: Senator Carper said that Bernanke is a rare witness who actually listens to the opening remarks. He said that cabinet members just look at their blackberries or read the paper. Ben is taking notes and everything. Such a good boy.
10:43: Ben has much less hair than I thought. That’s not a criticism. Just something I noticed.
10:45: Dodd just showed up, now it’s eight to five. By the way, senators now use charts to make their points. So you have a twelve-year-old aide hold up some big chart while you talk. Where do they make the charts? Is there like a Kinko’s in the basement?
10:49: Now it’s Benny’s turn. This is from the Fed’s Web site which seems to be following closely.

The U.S. economy continued to expand at a brisk rate, on balance, over the first half of 2006. Spending in the first quarter, which was especially robust, was temporarily buoyed by several factors, including federal spending for hurricane relief and the effects of favorable weather on homebuilding. The pace of the expansion moderated in the spring, to some degree because the influence of these special factors dissipated. More fundamentally, consumer spending slowed as further increases in energy prices restrained the real incomes of households. In addition, home sales and new homebuilding dropped back noticeably from the elevated levels of last summer, partly in response to higher mortgage interest rates. Outside of the household sector, increases in demand and production appear to have been well maintained in the second quarter. Demand for U.S. exports was supported by strong economic activity abroad, and business fixed investment remained on a solid upward trend. Early in the year, as aggregate output increased rapidly, businesses added jobs at a relatively robust pace, and the unemployment rate moved down further. Since April, monthly gains in payroll employment have been smaller but still sufficient to keep the jobless rate steady.
Thus far in 2006, inflation pressures have been elevated. Higher prices for crude oil contributed to a further run-up in domestic energy costs; this year’s increases, combined with the steep increases in 2004 and 2005, not only boosted the prices of gasoline and heating fuel but also put upward pressure on the costs of production for a broad range of goods and services. Partly as a result of these cost pressures, the rate of core consumer price inflation picked up. Nevertheless, measures of inflation expectations remained contained, and the rate of increase in labor costs was subdued, having been held down by strong gains in productivity and moderate increases in labor compensation.
Taking a longer perspective, the U.S. economy appears to be in the midst of a transition in which the rate of increase in real gross domestic product (GDP) is moving from a pace above that of its longer-run capacity to a more moderate and sustainable rate. An important element in the transition is the lagged effect of the changes in monetary policy since mid-2004, changes that have been intended to keep inflation low and to promote sustainable economic expansion by aligning real economic activity more closely with the economy’s productive potential. Moreover, longer-term interest rates have risen, contributing to increased borrowing costs for both households and businesses. Over time, pressures on inflation should abate as the pace of real activity moderates and, as futures markets suggest, the prices of energy and other commodities roughly stabilize. The resulting easing in inflation should help contain long-run inflation expectations.

Ok, here’s the money part:

For inflation, the central tendency of the forecasts is an increase in the price index for personal consumption expenditures excluding food and energy (core PCE) of 2-1/4 percent to 2-1/2 percent over the four quarters of 2006; in 2007, the forecast shows a slower rate of 2 percent to 2-1/4 percent, which is similar to the rate of core PCE price inflation in 2004 and 2005.

There’s much more, but that gives you a feel.
I’m surprised the Fed has such a bold prediction of slowing core inflation. Here’s a chart I did last month of core and non-core inflation. The trend seems to be upward.
11:16: He’s done. That was faster than I thought. Ben has a clean delivery. He strikes me as a no-nonsense guy.
11:18: It’s question time!
11:37: Here’s another thing you don’t see on TV. Ben and the senators have this little clock thing in front of them with a light thing. The question time starts at 10 minutes with a green light and counts down. When the time hits one minute, the light turns yellow. And when time runs out, the light goes red. This seems to be rather liberally enforced. Sarbanes ran a full minute over. If I ran the committe, I’d have it like the Oscars and strike up the band when people run over. I can see Ben’s clock right in front of me. Here, I’ll wave again (did you see me?).
11:52: Yikes, my battery is dying. Let’s just ignore the metaphorical implications. I’m going to power down for a few minutes.
12:23: I’m up again. Yuck, these questions are boring. I think everyone heree is worried about home prices. Now my stomach is growling. I hope nobody heard that.
12:37: We’re done. Shelby just gaveled us out.
12:42: Wow! I just checked the market and we’re rolling. The Dow is up 150! Benny’s got to talk this way more often.

Death Cross for the S&P 500
Posted by Eddy Elfenbein on July 18th, 2006 at 3:30 pm

The market is down for the fifth straight day:

The market has given back all of its gains since November. Since then, the Fed has raised rates an additional 125 basis points.
Mark Anderson of Alt Energy Stocks notes that today’s close could confirm a death cross–where the 50-day moving average falls below the 200-day moving average.
On a side note, Death Cross would be a cool name for a band.
Update: We just barely missed a Death Cross. The 50 DMA is 1264.487. The 200 DMA 1264.325.
The 50 DMA has been higher than the 200 DMA continuously since November 2004.
Since 1950, the 50 DMA has been higher than the 200 DMA for about 68% of the time. When it’s higher, the S&P 500 grows by 7.24% at an annualized rate. When it’s lower, the S&P 500 grows by just 0.95% annualized.

The Advertising Slogan Generator
Posted by Eddy Elfenbein on July 18th, 2006 at 2:34 pm

Crossing Wall Street needs what every good organization needs, a slogan. So we’ve turned to the folks at Advertising Slogan Generator.
Just hit refresh and a new slogan pops us. Here are some of our favorites:

Good Honest Crossing Wall Street Since 1896
Every Kiss Begins With Crossing Wall Street
If Only Everything in Life was as Reliable as a Crossing Wall Street

It’s like they know us!

9/11 Options Part II
Posted by Eddy Elfenbein on July 18th, 2006 at 1:57 pm

Barry Ritholtz lays down a challenge to me and Professors Ribstein and Bainbridge.
So Barry, but I won’t bite.
Let me briefly restate my argument. I am not an apologist for these executives. Nor am I saying that they’re “fine human beings.” I am, however, a critic of the unfair accusations made against them in Saturday’s WSJ. It was highly unprofessional journalism.
The article used stilted language and sloppy juxtapositions to create a sense that these were shadowy executives using illegal or unusual methods to profit off people’s misery. It wasn’t illegal. It wasn’t unusual, and some of them didn’t make money.
In fact, the article later goes into detail explaining just that, which in my opinion, makes the journalism even worse. They introduce the charge and back away from it. That’s like saying, “they say he’s a wife-beater, which I don’t believe.” Then don’t say it.
If you want to ban stock options, fine. If you want to call them greedy, fine. If you want to say that they’re lousy executives and don’t serve shareholders well, go right ahead. But it’s grossly unfair to imply that they profited off 9/11, or were uncaring to the suffering of the terrorist attacks.
(Do you want an example of war profiteering? How about…paying to avoid military service and then selling shoddy guns to the army. Just like J.P. Morgan.
About Richard Whitey, well…the less said the better. And Thomas Lamont, Ned’s great-grandfather btw, was rather a big fan of Mussolini. Not to mention, he drove Keynes nuts at the Paris Peace Conference of 1919.)
Actually, I do own both Home Depot (HD) and UnitedHealth (UNH), so perhaps I do meet Barry’s challenge. What’s more, I’ve defended both positions on this site, and suffered the consequences. My Buy List is free for all to see.
Were the actions of the executives slimy? Probably. Evil? No.
Update: Here’s Professor Ribstein’s response. Also, John Carney has a vote tally at DealBreaker.

The NASDAQ-to-Dow Ratio
Posted by Eddy Elfenbein on July 18th, 2006 at 10:36 am

Every so often I like to look at the ratio of the NASDAQ Composite to the Dow 30. Traditionally, the Dow goes for about 5 times the NASDAQ, or a NASDAQ-to-Dow ratio of 0.2.
As you can see from this chart, the 5-to-1 rule has held up surprisingly well for a long time:

If you have a sharp eye, you may have noticed that something seems…missing from the chart. Well, you are right. I cut out two-and-a-half years from the chart.
Here’s what the whole thing looks like.
That really shows you how crazy the NASDAQ got. At its peak, the ratio topped 0.5. Yet even after all that madness, the traditional range reasserted itself.
As of yesterday’s close, the NASDAQ was going for 0.1896 of the Dow which is a bit below the heart of its long-term range.