• Stocks and Ideologues
    Posted by on May 9th, 2006 at 11:43 am

    The WSJ is running a series of “where are the now” pieces to celebrate the tenth anniversary of wsj.com. Today’s victim is George Gilder, the editor of the Gilder Technology Report. If you recall, he was the guru who famously ignored things like a stock’s price or its fundamentals, and instead focused on investing “concepts.” Once the crack-up came, Gilder’s portfolio and following shrank dramatically. He even came close to going bankrupt.
    So what went wrong? Barry Ritholtz makes an astute observation: Gilder’s problem is that he’s an ideologue. He’s exactly right. The world of investing is the deathbed of ideologies (ideologies and language don’t mix so well, either) Value investing, growth investing, momentum investing, it doesn’t matter. Once you’re wedded to a concept, you’ve thrown in the towel.
    Stocks and bonds simply don’t care about concepts. It boils down to running a good business that makes things people need. If that’s a concept, there you go.
    I’ll give you a good example of someone’s ideology leading them astray. On June 20, 2003, Paul Krugman wrote in the New York Times that the stock market looked like another bubble. The S&P 500 had raced from a low of 800 three months before to nearly 1,000 by the time Krugman spotted trouble. Dr. Krugman wrote:

    Does the collective wisdom of the investor class perceive an imminent, vigorous recovery that is invisible in the data? The market isn’t always right. It wasn’t right when it sent the Nasdaq to 5000; it wasn’t right in the fall of 2001, the summer of 2002 or the late fall of 2002 — three would-be bull markets that fizzled. And selling by corporate insiders hit a two-year high in May.
    Meanwhile, the average stock is selling at 31 times earnings, twice the historical norm. And if you take into account pension liabilities and the cost of stock options, that number goes above 40.
    A few months ago, some analysts began to argue that because interest rates were so low, even today’s very expensive stocks were a good buy. I don’t agree, but that’s a long discussion. What’s clear, however, is that investors’ big move back into the market has been driven not by careful comparison of returns, but by the fact that stocks are rising — and the fear that if you don’t buy stocks, you’ll miss out on a good thing. The new bull market isn’t forecasting anything; it’s just feeding on itself.

    Well, Krugman was wrong and history has said so. At the time, the stock market was just beginning a nice rally. Sure, it’s easy to have a cheap laugh, and point out when someone big makes a lousy call. That’s not my point. The point is to ask, how could someone as knowledgeable as Krugman make such a poor forecast.
    From reading Krugman, it’s hard to escape the idea that he let his feelings towards President Bush enter his market analysis. That’s when the trouble begins. While I obviously can’t prove that point, the concern is there. The market simply doesn’t care who the president is, or how you vote. Stocks have their own agenda.
    Becoming a good investor involves cutting yourself off from overarching themes. The concepts may offer a convenient explanation of reality for awhile, but stocks become easily bored and before you know it, they’ve moved on. Or as the historian John Lukacs wrote, “the isms have all become wasms.”

  • Comp Hogs
    Posted by on May 9th, 2006 at 10:15 am

    Michelle Leder of Footnoted.org noticed this item in Harley-Davidson’s latest 8-K report:

    In addition, management periodically may provide a director with the use of a motorcycle where doing so may further a Company business objective. The director’s use may also include some personal use, and tax incurred related to such use will be reimbursed by the Company.

  • Behold the Power of Accounting
    Posted by on May 9th, 2006 at 9:50 am

    Here I thought GM was losing money. I mean, the company did say it lost $323 million for the first quarter. I usually don’t take those sorts of announcements lightly.
    But the great thing about GM is that if you don’t like a number on their income statement, you’re perfectly free to choose another. Go ahead. In fact you can just fill in your own! That’s exactly what GM did, and they settled on one of them “positive” numbers.
    Eighteen days after reporting a loss, GM now says that it really make $445 million for the first quarter. Why the change? Accounting, silly.

    The health-care agreement between GM and the United Auto Workers union requires the automaker to set aside $1 billion annually in 2006, 2007 and 2011 to offset increased health-costs to retired workers, according to a U.S. regulatory filing on March 31. Union retirees will pay premiums for the first time. It is part of an agreement to get a pretax health-care savings of about $3 billion a year from union workers.
    Preliminary Results
    GM had initially reported a first-quarter cost of $681 million, or $1.20 a share, for the first $1 billion payment to establish the health-care fund. GM Chief Financial Officer Fritz Henderson said at the time that the automaker was still talking to the SEC about how it should account for the payment.
    The company had said the health-care accord will help it reduce structural costs by an annualized rate of $7 billion by the end of this year, with $4 billion in savings in 2006. The automaker today increased the savings to $4.5 billion based on the accounting ruling.

    Bloomberg quotes one analyst as saying “The SEC backed off.” This, of course, has zero effect on the company’s operations, however the stock is rallying on the news.

  • The Baghdad Stock Market
    Posted by on May 9th, 2006 at 7:40 am

    It’s only open four hours a week, and there are just 100 stocks to buy, but the Baghdad Stock Exchange is open for business.

    The trading floor works the old-fashioned way — with bids taken on pieces of paper, the numbers written on a board with magic marker.
    In another unlikely twist, nearly half of the traders are young women. None of them wanted to talk to CBS News – because they were too busy.
    The stock market is being touted as one of post-war Iraq’s few success stories.
    Amazingly, one of the hottest areas of speculation is hotels and tourism. In a place like Iraq, this would surely fall into the futures category — long futures. And don’t even ask about the risk factor.
    “I buy them because they are real-estate and building on very good land, so they are cheap price, so I buy them and I wait,” says Abdul Latif, one of the traders who figures hotels are as good a place as any to try his luck.

  • 1955 Wheaties Commercial
    Posted by on May 9th, 2006 at 12:18 am

    Here’s a Wheaties commercial from 1955 featuring Duke Snider and Stan Musial. You have to pay 75 cents to see the whole thing, but you can see the first 10 seconds for free. The Wheaties boxes march past oil wells, amber waves of grain, and yes, the Arc de Triomphe.
    Enjoy.

  • Dell Warns (Again)
    Posted by on May 8th, 2006 at 5:11 pm

    Expect earnings of 33 cents a share, and sales of $14.2 billion. The Street was looking for 38 cents and $14.52 billion.

    The shortfall in earnings versus previous guidance was driven primarily by pricing decisions in the second half of the quarter that the company expects will accelerate revenue growth in the future.
    “During Q1 we continued to execute on our strategy to reinvigorate growth by making investments in our support infrastructure and product quality and by accelerating pricing adjustments,” said Kevin Rollins, Dell’s Chief Executive Officer. “We are committed to delivering industry leading value to our customers, which ultimately results in industry leading growth for the company.”

    The stock is down to $25 after hours.

  • A Case of the Mondays
    Posted by on May 8th, 2006 at 1:48 pm

    Kind of a blah day so far. Golden West (GDW) is obviously doing very well. The stock opened at $75.89, and it’s been drifting lower since. (Here’s a nice article on the Sandlers.)
    UnitedHealth (UNH) continues to sink. Ugh. The stock dipped below $45 today, hitting a new 52-week low. Medtronic (MDT) also made a new low. Large-cap health care stocks get a frowny face today.
    Watch out for Home Depot (HD). The stock has been in a trading range for nearly a year, but the earnings have been pretty good. The next earnings report comes one week from tomorrow.
    Dell (DELL) had a nice open. The stock is back above $26. The next earnings announcement comes on May 18.
    Danaher (DHR) and Expeditors (EXPD) continue to soar. I never would have guess that Expeditors would be up 60% by May. That’s the fun part of investing.
    The price of gold is pulling back slightly. Is $700 an ounce inevitable? I think it may be. The dollar dropped to an eight-month low versus the yen as it looks like the Fed is near the end of its rate hikes.

  • Criticizing the Deal
    Posted by on May 8th, 2006 at 11:17 am

    The criticism of the Wachovia/Golden West has officially begun:

    “It’s a high price, and this adds more cyclicality to their earnings stream, which always puts downward pressure on its price-earnings multiple,” said Jim Russell, director of core equity strategy at Fifth Third Asset Management in Cincinnati, which owns Wachovia shares.

    It doesn’t seem that high too me. The deal price of $81.07 is only about 15 times this year’s estimate. True, the mortgage biz is getting soft, but few banks can offer GDW’s market position. Wachovia’s shares are down about 5% this morning.

    Analysts said the purchase will dilute Wachovia’s operating earnings per share by some 2.5 percent in the first year, and increase its exposure to volatile mortgages.
    Gimme Credit analyst Kathleen Shanley wrote that the thrift’s loan portfolio, 63 percent of which is in California, “could be vulnerable in a prolonged downturn.”
    Prudential Equity Group LLC analyst Michael Mayo downgraded Wachovia to “underweight” from “neutral weight,” saying the purchase “dilutes long-term growth rates.”
    Gary Townsend, an analyst at Friedman, Billings, Ramsey & Co., downgraded Wachovia to “market perform” from “outperform,” seeing no “strategic imperative” for the purchase.

  • The Beatles Lose
    Posted by on May 8th, 2006 at 9:19 am

    The Beatles lost their “Apple v. Apple” lawsuit against Apple Computer (AAPL). The computer company is legally allowed to use its apple logo on its iTunes music store (heck, even the judge admitted that he owned an iPod).

    Apple Corps, which claimed that the computer company had broken a 1991 agreement in which each side agreed not to enter into the other’s field of business, said it would appeal. (BA! Appeal, apple…get it?).
    Judge Edward Mann of Britain’s High Court ruled that Apple Computer used the fruit logo in association with the store, not the music, and thus did not breach the agreement.
    “I conclude that the use of the apple logo…does not suggest a relevant connection with the creative work,” Mann said in his written judgment. “I think that the use of the apple logo is a fair and reasonable use of the mark in connection with the service, which does not go further and unfairly or unreasonably suggest an additional association with the creative works themselves.”

  • GDW’s ride from $0.25 to $80
    Posted by on May 8th, 2006 at 7:33 am

    In 30 years, Golden West’s stock has climbed from 25 cents a share to over $80. The WSJ has more:

    The long-running boom in the nation’s real-estate market has led to an impressive run of profitability at mortgage lenders like Golden West, whose shares were trading Friday near their all-time high. But with recent signs of some softening in real estate, Wachovia investors are sure to be asking whether the sale is a sign that the Sandlers view the market as having topped out. While Golden West has a conservative track record for underwriting loans, increased competition could raise the risk that loans the company has provided will sour, leaving Wachovia to deal with the losses.
    If approved by shareholders and regulators, the combination of the two financial companies would establish banking pillars on both coasts of the U.S., as well as offices the two companies have in between in states such as Texas. Golden West will add about 10,000 employees to Wachovia’s current employment level of about 97,000. Wachovia said it plans to cut less than 1% of the expense base of the combined companies, but added that no employees who deal directly with customers are likely to lose their jobs. The deal is expected to close in this year’s fourth quarter.
    Buying Golden West will let Wachovia extend its brand name across 285 branches in 10 states, where Golden West currently flies the World Savings Bank banner. The deal will make Wachovia the sixth-largest deposit-taker in California, the most-populous U.S. state, though its market share of about 5% would trail far behind those of Bank of America Corp., Washington Mutual Inc. and Wells Fargo & Co., based on the latest Federal Deposit Insurance Corp. data. Wachovia said the deal would add to its per-share profit, excluding expenses and amortization triggered by the acquisition, by the end of the second year after the purchase.
    Golden West’s primary appeal is its clout in adjustable-rate mortgages, or ARMs, on residential properties, generated through offices in 39 U.S. states where Golden West drums up business from local real-estate agents, mortgage brokers and directly from consumers. Wachovia Chairman and CEO G. Kennedy Thompson has been pushing hard over the past year to beef up the bank’s consumer-lending operation, complaining that its offerings have been weak.
    The lending business has been good to Golden West, last year resulting in net profit margins of 44% on revenue of $3.4 billion. Investors have flocked to the company, pushing Golden West shares up 10% over the past year, and by more than three-and-a-half-fold since 2000. On Friday, the company’s shares traded at about 14.4 times current earnings, according to data compiled by CapitalIQ. That placed it slightly above the average for U.S. thrifts, which trade at 14.1 times, and above rivals Washington Mutual (12.3 times) and Countrywide Financial Corp. (10.1 times).

    GDW.bmp