A Warning Sign?
Posted by Eddy Elfenbein on May 16th, 2006 at 12:16 pm

One of the general rules of the thumb on Wall Street is that the stock market tends to follow the long-term bond market. I should stress that this is a very general rule. I’ve never been a market timer, and I’m not going to start now. But I want to show you how the market often reacts.
Here’s a chart of the S&P 500 (black line) versus the American Century Target Maturities Trust—2025 Portfolio (the gold line, symbol: BTTRX) from May 1996 to December 1999. I’m using BTTRX as a proxy for long-term bonds (it’s a mutual fund that holds the Treasuries coming due in 2025).

Notice how closely the two lines followed each other, right until 1999. That’s when long-term bonds started to head down while equites continued to float upward. It was a foreshadowing of what was to come.
Now here are the same two since the summer of 2003.

It’s not exactly the same, but you can see some similarities. The BTTRX is parting ways with stocks.
Here’s the chart one more time, since last August:

Now you can really see it. The two were like waltzing partners right up to the beginning of March. Like I said, I’m not predicting a fall in equities, but the bond market could be.

FactSet Soars on Upgrade
Posted by Eddy Elfenbein on May 16th, 2006 at 11:58 am

Home Depot (HD) opened lower despite its good earnings. The big surprise today is FactSet Research Systems (FDS) which is up over 9% on an analyst upgrade.

Shares in FactSet Research, which provides financial information to investment professionals, rose sharply Tuesday, touching a fresh 52-week high, after Piper Jaffray upgraded the stock citing expected strong demand from investment banks.
Analyst Brett Manderfeld raised his rating to “Outperform” from “Market Perform” and boosted the target stock price to $50 from $44.
“We have increased conviction that FactSet can maintain double-digit internal growth for the next two years at least,” as investment banks increase hiring, the analyst wrote in a note to investors Tuesday.
Manderfeld said FactSet’s investment management products, which help track portfolio composition and performance, are set to deliver higher revenue because new products such as Portfolio Analytics and Marquis “continue to gain traction.”
The analyst also expects the company’s international operations to help bolster revenue. That division accounts for 30 percent of total revenue and is projected to grow 20 percent per year “for the foreseeable future,” Manderfeld said, adding that “the relative immaturity of this market and FactSet’s strong suite of comparable product offerings abroad” will drive the gains.

Home Depot’s Earnings
Posted by Eddy Elfenbein on May 16th, 2006 at 9:37 am

The company’s profits rose 19% to 70 cents a share, three cents more than estimates. Sales were up 13% to $21.5 billion.

The average customer transaction increased to $60.75. Home Depot said its appliance market share grew 1.4 percentage points to 9.9 percent in the first quarter. The retailer is the third- largest seller of appliances behind Lowe’s and Sears Holdings Corp.
Home Depot’s installation sales gained 8.5 percent to $844 million as consumers paid professionals to put in kitchen counters, windows, doors and patios.
Gross margin, or the percentage of sales left after subtracting the cost of goods sold, widened to 33.68 percent from 33.49 percent, Home Depot said. Selling, general and administrative costs fell to 20.4 percent of sales from 21.2 percent.
Nardelli, who turns 58 tomorrow, made about 18 acquisitions last year as he builds the supply division into a unit with $12 billion in revenue. The business will make up about a fifth of sales by 2010, Home Depot has said. Sales to professionals, including those in stores, represent 30 percent of revenue.

Watching the Yuan
Posted by Eddy Elfenbein on May 16th, 2006 at 7:05 am

One of my many, many complaints about the financial media is its alarmism. (This also applies to some prominent financial academics as well.) Everyday, it seems, we’re told about a new Major Concern, that Must Concern Us All. If not addressed, the Major Concern will become a Serious Problem with Serious Repercussions. The longer we ignored the Major Concern, the worse it will get.
And usually, the Major Concern goes away. Sometimes it’s replaced by a younger and thinner Major Concern. Remember the Housing Bubble? It turns out, that was sooo last year. Nowadays, we have to be worried about oil prices. And gold prices! Don’t forget copper! Of course, no one ever calls it a gas bubble (okay, all bubbles are gases, smartie).
In the media’s eyes, when the bad things go up, we’re selfish users. When good things go up, we’re selfish speculators. If you pay attention, you might be able to spot some similarities.
Anywho, there really are things to worry about. But usually, they’re not what everyone else is worried about. And that’s what makes them so troubling. The real mischief is hidden in broad daylight.
Yesterday, China allowed its currency, the yuan, to rise above eight to the dollar (meaning lower than eight, confusing I know). In foreign currency terms, this was a tiny move, about 0.1%. But on the symbolism front, it’s equivalent to one enormous spring roll.
The Chinese government is slowly falling to pressure from the United States to adopt a “more flexible” currency policy. More flexible is diplospeak for “higher dammit.” The U.S. has been seriously pissed that China has pegged its currency too low. Last year, China finally allowed its currency to float. Well…not float float. I guess you could call it “semi-submerged.”
So now everyone is happy that the yuan is going up. Almost everyone. Enter Robert Mundell. He thinks a stronger yuan is a big, massive dumb ass mistake. Although he’s an economist, he might know what he’s talking about. Mundell is one the world’s leading currency experts. He’s a Nobel laureate and considered to be the Father of the Euro (I’d still call for DNA testing, but that’s me).

Mundell says such admonitions are not in China’s interest and would bring about huge problems such as threatening its already wobbly banking system beset by bad loans, cause deflation, increase unemployment, reduce net foreign investment and cut economic growth.
“I think it might drop the growth rate from 10 percent down below 5 percent,” he said. “And that would get the growth rate down to those dangerous levels that they got in 1989 and 1990, the years of the great dissent connected with the Tiananmen Square problem.”
Mundell said China’s stunning growth has given it a much bigger role in Asia’s economy, which wouldn’t be able to escape the effects of ill-advised currency moves by authorities in Beijing.
“It would lower and destroy this process that’s been so important to all Asia, this kind of vertical integration of the Asian economy where the more advanced countries like Korea and Japan have been sending their products to China to be finished and re-exported to the United States,” he said.

The problem that our policy makers don’t see (and this is very far from a partisan issue) is that we may be forcing China to follow the same path as Japan. A higher yuan could cause a deflationary slump. Once started, those aren’t easy to stop.
Or there’s another question. How do we know that the yuan is too low? What if it’s not? Perhaps the reason why we have a massive trade deficit is—how can I put this—because we need to have a massive trade deficit. If not China, there’s always India. Also, it was because the yuan was tied to the dollar that helped stem the Asian financial crisis of the late-1990s.
Senator Chuck Schumer of New York said, “given the importance of this issue, we should approach it with a calm understanding of the facts and not resort to shameless grandstanding.” No, I’m kidding. He’s being a screaming moron. Schumer and Lindsey Graham have sponsored a bill that would impose a 27.5% on all Chinese goods. Why 27.5%? That’s what they claim the yuan is undervalued by.
As for me, I can’t say exactly why the yuan is where it is. But…there it is. And now we’re screwing around with its value for political reasons. There’s your Major Concern right there.

Falling Energy Stocks
Posted by Eddy Elfenbein on May 15th, 2006 at 2:04 pm

I had this brillant plan for the Buy List this year. We were simply going to side-step energy stocks and everything would be fine. At least, that was the plan.
So on the first trading day of the year, energy stocks soared. They kept climbing for the rest of January. No problem. We stayed patient. Soon, energy stocks plunged in February and early March, and the Buy List looked much better compared with the S&P 500.
Then energy stocks started rallying again. Every day it seems that energy are either the best- or worst-performing group. Eventually,the sector surpassed its January peak. Now energy are falling again, and very sharply.
Here’s the Dow Jones Oil and Gas Index (^DJUSEN) since the beginning of the year.

Here’s the past five days.

Earnings Preview: Home Depot
Posted by Eddy Elfenbein on May 15th, 2006 at 11:31 am

Home Depot (HD) reports earnings tomorrow. Wall Street is looking for 67 cents a share, but I think HD has a good shot of beating that. The company has been doing well lately, and the economy is stronger than many poeple realize.
The AP takes a look at the stock.

OVERVIEW: Home Depot, the world’s biggest home improvement chain, has been on an acquisition spree this year. The company on Tuesday said it would pay an undisclosed sum for home improvement loan provider EnerBank USA from CMS Energy Corp., a Michigan-based energy holding company.
In January, Home Depot announced it would pay $3.2 billion to acquire Hughes Supply Inc., a distributor of construction, repair and maintenance products, a deal that closed in March. The Hughes acquisition, the biggest in Home Depot’s history, doubles the size of its segment serving business customers like homebuilders, contractors, municipalities and maintenance professionals.
Recently there were reports that Home Depot was interested in acquiring a stake in Orient Home, a home improvement chain in China, though the company has not commented on any talks.
BY THE NUMBERS: Wall Street expects Home Depot to post earnings of 67 cents per share, the mean estimate of 21 analysts surveyed by Thomson Financial, on $21.52 billion in projected sales. In the first quarter of 2005, the company reported profit of 57 cents a share on sales of $18.97 billion.
ANALYST TAKE: “We expect Lowe’s and Home Depot to stand out on the upside due to easy comparisons, favorable weather, and the lagged impact of supportive economic data points,” Merrill Lynch wrote in a May 2 client note. “We forecast 16 percent earnings per share growth to 67 cents per share on 3 percent (same-store sales). Although higher gas prices create uncertainty, we believe that demand for home improvement remains solid and that Home Depot will continue to show productivity improvements.”
WHAT’S AHEAD: Home Depot has benefited from the strong homebuilding market, which has been on a tear for the past five years, fueled by historically low interest rates that have encouraged people to spend more on home renovations. However, many analysts think demand for home improvement products could start to wane, as the housing market cools and the Federal Reserve continues raising interest rates.
STOCK PERFORMANCE: Home Depot shares recently traded around $40 a share on the New York Stock Exchange. The 52-week high was $43.98, hit in July. The stock is more or less flat so far this year.

Random Market Fact
Posted by Eddy Elfenbein on May 15th, 2006 at 7:05 am

It’s been nearly four years since the Dow fell for seven straight sessions. The modern record is 12 straight losing days which happened twice. The first time was from July 29 to August 13, 1941. The second time was from January 9 to 24, 1968.
The longest winning streak came in 1987, which was for unlucky 13. In fact, it was the first 13 sessions of the year. The Dow also rose 12 straight times in 1929 and 1970. The streak in 1929 came on the heels of a six-session winning streak, leading to unmatched 18-of-19 record.

Boomhauer’s Wikipedia Page
Posted by Eddy Elfenbein on May 14th, 2006 at 8:45 pm

For your Sunday reading pleasure. From the Internet:

Read more…

Google Trends: Real Estate Bubble
Posted by Eddy Elfenbein on May 14th, 2006 at 2:08 pm

I haven’t heard much about the real estate bubble lately. Google Trends shows that it was last year’s Big Worry.

The Pirahã Tribe of Brazil
Posted by Eddy Elfenbein on May 13th, 2006 at 11:45 am

Here’s a fascinating article on the language of the Pirahã Tribe of Brazil. Their language has no numbers or subordinate clauses. In fact, the concept of “numbers” totally baffles them.
This is a language like no other. The Pirahã seem only to understand the here and now. Their language apparently contradicts what were beleived to be universal laws of language.