AOL is now just AOL
Posted by Eddy Elfenbein on April 4th, 2006 at 10:47 am

Time Warner’s internet unit, America Online, has announced that it will now be known as AOL LLC. Despite the name change, the service plans to continue sucking.

CSC explores sale of company, plans job cuts
Posted by Eddy Elfenbein on April 4th, 2006 at 10:27 am

Computer Sciences (CSC) announced that it’s going to cut 5,000 jobs, and it may even sell itself. Notice that unlike the car companies, CSC is doing something before it’s too late.
Most of the job cuts will take place in Europe. If the company is sold, I’d expect it to be private equity, or a combination of a major public firm and private equity. Earlier, the Blackstone Group had shown some interest.

Buffett Makes $14 Billion Bet That Global Stocks Won’t Plunge
Posted by Eddy Elfenbein on April 3rd, 2006 at 4:26 pm

Three years ago, Warren Buffett called derivatives “financial weapons of mass destruction.” Now Buffett has disclosed a $14 billion bet on foreign index derivatives.

Booming stocks entice Russians back to market
Posted by Eddy Elfenbein on April 3rd, 2006 at 10:35 am

I noticed this in an article about the Russian stock market:

Russians are estimated to have between $35 billion and $80 billion in foreign currency stashed under mattresses, mostly from cash-in-hand wages and black-market activities such as driving illegal taxis or letting out apartments.
Until recently, they only dared to spend their cash on consumer goods and real estate. Now, many are turning to banks, brokers and mutual funds to beat double-digit inflation.

Hmmm, I wonder how this story will end.

First-Quarter Summary
Posted by Eddy Elfenbein on April 1st, 2006 at 8:15 pm

Overall, our Buy List had a good first quarter. The 20 stocks were up an average of 3.40% compared with 3.73% for the S&P 500.
Here’s how our stocks did:

I’m surprised to see Expeditors do so well. Perhaps the biggest surprise is that Medtronic and UnitedHealth are near the back of the pack.
What really defines the Buy List this year is that it doesn’t have any energy stocks. Energy was the best-performing sector in the first quarter, and that was mainly due to a big surge in January. I still think it’s the right to decision to steer clear of this sector. If energy prices take a big fall, those stocks will be very vulnerable.

Ibbotson Yearbook
Posted by Eddy Elfenbein on April 1st, 2006 at 2:42 pm

I just got my copy of the 2006 Ibbotson Yearbook in the mail. Ibbotson is a money management firm in Chicago that’s best known for keeping long-term performance information on the stock market (the company was recently bought by Morningstar).
The yearbook tracks the monthly performance of stocks, bonds, treasuries and inflation since 1925. It’s a fascinating resource. The yearbooks are available at many libraries, but being a data junkie, I like to get my own copy. You can order a copy here.
The data confirms that the stock market is the best place to be. Over the last 80 years, large-cap stocks have gone up an average of 10.36% a year (dividends and capital gains). One dollar invested in 1925 would be worth over $2,600 today. On average, the market doubles every seven years. Nothing beats it.
When you look at the long-term chart, even ugly periods like 1987 appear as minor blips. It’s true that bear markets can be painful, but the long-term data is clear. The market goes up, up and up. The only hitch is that you have to be patient.
Stocks are also big winners against bonds. Long-term corporate bonds have averaged 5.92% a year. Long-term Treasuries have average 5.47% a year, and T-Bills have returned just 3.71% a year.
Ibbotson also looks at small-cap stocks, and that group has done even better than the large-caps. Since 1926, small-caps have averaged 12.64% a year. By small-cap, Ibbotson generally means stocks that are in the smallest 20% of the market’s universe, although they’ve recently altered their criteria.
Ibbotson also breaks out the performance of each size decile, or 10% slice of the market. What’s interesting is that the returns are almost perfectly rank-ordered—the smallest 10% has done the best, and the largest 10% has done the worst.
Since 1926, the smallest decile has returned an average of 13.96% a year. My only caution about micro-cap investing is that although the “outperformance premium” is very real, it’s not very well-behaved. The relative performance is highly cyclical. It’s either feast or famine.
Micro-caps badly trailed the market during the 1990’s, but over the last seven years, micro-caps have been stellar performers. Since 2000, the micro-cap decile is up 211%. This may be the most underreported market event of this decade.
It’s almost like there’s an invisible bull market going on. Interestingly, the peewees started to cream the big boys in 1999 before the market peaked.. Although the S&P 100 (^OEX) is still about 29% off its all-time high, the broader indexes have been hitting new all-time highs lately. Very soon, the Wilshire 5000 Total Return Index (^DWCT) will hit an all-time high.
Another interesting aspect of small-caps is that the outperformance doesn’t comport with the Capital Asset Pricing Model. In English, this means that the small-caps have done even better than their risk behavior suggests.
Something else I noticed from the Ibbotson data is that, in recent decades, long-term Treasuries have been surprisingly competitive against stocks. Mind you, the stock market is still the big winner. But since 1968, long-term Treasuries have averaged 8.69% a year, which is pretty good compared with the 10.52% for large-cap stocks.
Over the long-term, large-caps have averaged 4.63% a year better than long-term T-bonds. Given the current yield of the 10-year Treasury of 4.85%, this implies a market return of about 9.7% (i.e., 1.0463 * 1.0485).
The yearbook also includes a section with data going back to 1815. Personally, I tend to skeptical of those types of studies since the capital markets were so underdeveloped. During the 19th century, most stocks traded at par, meaning $100 a share. Investors were interested in dividends, not capital gains. The idea of continuously rising indexes is fairly new. Back then, stocks traded much like bonds, except that management decided what the dividend (often annual or semi-annual) would be.
Since there was little inflation (before the Fed) and generous dividend payouts, stock prices had little reason to advance much. By Ibbotson’s numbers, the after-inflation return of the market over the last 80 years is only 7.10%.
Sometimes I think we’d be better off the old way. Imagine a world without inflation and you owned a stock that almost always traded around $100, and every six months you got a check for $3.50 a share. Booyah!

Sorry, Folks
Posted by Eddy Elfenbein on March 31st, 2006 at 12:57 pm

It’s just too nice outside to blog about stocks. I promise I’ll have more later.
This is the last day of the first quarter. The S&P 500 is flat, but it looks like this will be the best Q1 since 1999. The Nasdaq is holding above 2,340.
The Buy List is looking good today, especially Respironics (RESP) and Golden West Financial (GDW).
If anyone needs me, I’ll running around outside with my shoes off.

Harley in China
Posted by Eddy Elfenbein on March 30th, 2006 at 12:13 pm

Harley-Davidson (HDI) is set to open its first dealership in Beijing. They really could have used a couple of Harley’s on the Long March.

The move into China is part of Harley’s push to take its bad-boy image global. In the U.S., the $5.3 billion motorcycle manufacturer rules the heavyweight premium-bike segment with a 48.9% share, well ahead of Japanese rivals such as Honda (HMC) and Suzuki. Overseas is a different story. Although Harley’s international deliveries grew 15% in 2005, the U.S. still represents more than 80% of the company’s sales.
And its biggest foreign market isn’t fast-growth Asia, but Europe, where it sold about 30,000 bikes last year. Canada came next, with 11,700, followed by Japan with 11,400, according to company data. Harley groups China into an “all other countries” category of about 11,200 bikes in 2005.

Today’s GDP Report
Posted by Eddy Elfenbein on March 30th, 2006 at 11:01 am

The government revised GDP growth for the fourth quarter today to 1.7% from the original 1.6%. I think this was a minor slowdown for the economy. Next month, we’ll get our first look at the growth rate for the first-quarter. I think it will be over 4%, perhaps 5%. Over the last three years, the economy has grown by 10.8%.

James Surowiecki on the Newspaper Biz
Posted by Eddy Elfenbein on March 30th, 2006 at 10:52 am

From the current New Yorker:

But McClatchy’s gamble depends on a simple, if often overlooked, fact: newspapers remain a surprisingly robust business and generate tremendous amounts of cash every year. Most of them have profit margins that dwarf those of the average company; McClatchy’s operating margin last year was twenty-eight per cent, while ExxonMobil’s was around sixteen per cent, and the typical supermarket’s is around four per cent. The reach of newspapers remains huge. Daily circulation is around fifty-five million (not including online readers), giving the industry more customers than any other traditional media outlet. And those customers have the kind of demographics that advertisers like; even as circulation has dropped, revenue from print ads has stayed healthy, to the tune of more than forty-seven billion dollars last year. Newspapers are classic cash cows: solidly profitable businesses in a stagnant industry.
So why are newspapers everyone’s least favorite enterprise? One reason is that Wall Street tends to love growth stocks, and to underplay the value of steady cash generation. And no one likes to be in a business that’s losing customers.