Dell to double workforce in India
Posted by Eddy Elfenbein on March 20th, 2006 at 9:37 am

From Reuters:

Dell, the world’s top PC maker, plans to double its headcount in India over three years, its founder said on Monday, but there was no word on the location of a planned manufacturing unit in the country.
“India produces over 200,000 engineers and we see that as an asset for our hardware and software activities,” Chairman Michael Dell told reporters in India’s technology capital, Bangalore.
Dell said its staff numbers in India would rise to 20,000 over the next three years from about 10,000 now. Dell has set up huge business process outsourcing units to tap India’s vast pool of low-cost English-speaking workers, as other multinationals such as General Electric have done.
Dell has used India as a base to serve global clients in recent years, but it now considers Asia’s third-largest economy a growing market for desktops and laptops as demand for computers surges across the country.
Research firm IDC expects the Indian computer market to grow at a compounded annual growth rate of 23 percent until 2010.

The Real World Versus the Theoretical
Posted by Eddy Elfenbein on March 19th, 2006 at 10:15 am

Here’s a fascinating “Sunday read” from Harvard Magazine on behavioral economics. The article is long (about 6,000 words), but I think you’ll enjoy it.
Instead of looking at how the world ought to work in theory, behavioral economists study how people really go about making economic decisions. They’ve found that how decisions are “framed” can have a dramatic impact on what decisions are made.
For example, people have a very difficult time internalizing risk. David Laibson summaries the phenomenon:

“There’s a fundamental tension, in humans and other animals, between seizing available rewards in the present, and being patient for rewards in the future,” he says. “It’s radically important. People very robustly want instant gratification right now, and want to be patient in the future. If you ask people, ‘Which do you want right now, fruit or chocolate?’ they say, ‘Chocolate!’ But if you ask, ‘Which one a week from now?’ they will say, ‘Fruit.’ Now we want chocolate, cigarettes, and a trashy movie. In the future, we want to eat fruit, to quit smoking, and to watch Bergman films.”
Laibson can sketch a formal model that describes this dynamic. Consider a project like starting an exercise program, which entails, say, an immediate cost of six units of value, but will produce a delayed benefit of eight units. That’s a net gain of two units, “but it ignores the human tendency to devalue the future,” Laibson says. If future events have perhaps half the value of present ones, then the eight units become only four, and starting an exercise program today means a net loss of two units (six minus four). So we don’t want to start exercising today. On the other hand, starting tomorrow devalues both the cost and the benefit by half (to three and four units, respectively), resulting in a net gain of one unit from exercising. Hence, everyone is enthusiastic about going to the gym tomorrow.
Broadly speaking, “People act irrationally in that they overly discount the future,” says Bazerman. “We do worse in life because we spend too much for what we want now at the expense of goodies we want in the future. People buy things they can’t afford on a credit card, and as a result they get to buy less over the course of their lifetimes.” Such problems should not arise, according to standard economic theory, which holds that “there shouldn’t be any disconnect between what I’m doing and what I want to be doing,” says Nava Ashraf.

Economics isn’t like chemistry or physics, it’s a social science. As a result, numbers can sometimes fool us. In finance, a 10% gain and a 10% loss aren’t symmetrical. People fear loss more than the value gain.
The article has this interesting quote from Sendhil Mullainathan:

“We tend to think people are driven by purposeful choices,” he explains. “We think big things drive big behaviors: if people don’t go to school, we think they don’t like school. Instead, most behaviors are driven by the moment. They aren’t purposeful, thought-out choices. That’s an illusion we have about others. Policymakers think that if they get the abstractions right, that will drive behavior in the desired direction. But the world happens in real time. We can talk abstractions of risk and return, but when the person is physically checking off the box on that investment form, all the things going on at that moment will disproportionately influence the decision they make. That’s the temptation element—in real time, the moment can be very tempting. The main thing is to define what is in your mind at the moment of choice. Suppose a company wants to sell more soap. Traditional economists would advise things like making a soap that people like more, or charging less for a bar of soap. A behavioral economist might suggest convincing supermarkets to display your soap at eye level—people will see your brand first and grab it.”

Here’s a well-known example of behavioral economics. Suppose you’re in a roomful of people, and you’re told to choose any integer from zero to 100. All participants are told that a large cash price will go to the person who chooses closest to two-thirds of the average of everyone else’s number. So what number would you choose?
Thirty-three, right? Wait…everyone else will say that. I know: Twenty-two? No…hold on. Everyone else will….
*Thinking*
I got it! The theoretical answer is zero.
In the real world, studies have shown that the average guess is 18.91, so the winning answer is about 13. This of course makes no sense whatsoever. Remember that next time you buy a stock.

Q&A: General Electric
Posted by Eddy Elfenbein on March 18th, 2006 at 12:37 pm

Hi Eddy, I’m curious on your opinion of GE a “blue chip” that for the past 5 years has underperformed the market to the tune of $10k invested 5 years ago (according to S&P) = about $8k plus.

Thanks for the email. General Electric (GE) is a great company. It’s one of the bluest of the blue chip stocks. It’s also one of the very few companies that has increased its earnings for ten straight years.
GE is also titanic. The numbers boggle the mind. The company has over 300,000 employees and a market value of over $350 billion. Owning GE is almost like buying an index fund.
The stock got absurdly overvalued five years ago. The P/E ratio got as high as 50. Last year, GE earned $1.72 a share so right now it’s going for almost exactly 20 times earnings. That’s a very good valuation for GE.
The company raised the lower end of its guidance by two cents a share to $1.94 to $2.02 a share (don’t laugh, each penny is worth about $100 million). There’s also a $1 a share dividend which works out to a yield of nearly 3%. That’s equivalent to over 320 Dow points.
General Electric is a great company, and the shares look very good right now.

The NASDAQ Goes Shopping in London
Posted by Eddy Elfenbein on March 17th, 2006 at 1:26 pm

The bidding war for the London Stock Exchange heats up. The newest player is the NASDAQ. The Economist has the story:

Londoners following the LSE bidding saga had become so used to guessing games about continental exchanges, notably the pan-European Euronext and Germany’s Deutsche Börse, that the Americans’ hostile bid late last week came as something of a surprise. It shouldn’t have. NASDAQ tried unsuccessfully to enter Europe once before with a start-up and has in the past held tentative talks with the LSE. Its cash offer of £9.50 ($16.60) a share, which would cost the Americans £2.4 billion, makes the preceding bid—£5.80, from Australia’s Macquarie Bank, only three months ago—look downright stingy.
NASDAQ’s offer was rejected outright by the LSE’s management, but is being considered by big shareholders. If the merger does go ahead, it would be a quantum leap in the consolidation of financial exchanges. It could also raise difficult questions of who should regulate the combined entity, and how. A merged firm would be second only to NYSE Group—as the newly listed New York Stock Exchange styles itself—in market capitalisation.

GM’s $2 Billion Accounting Error
Posted by Eddy Elfenbein on March 17th, 2006 at 11:30 am

I’m just shaking my head.

General Motors Corp. shares and bonds fell on Friday after the automaker increased its 2005 loss by $2 billion due to accounting errors, raising questions about the company’s management and renewing doubts about its long-term survival.
Late Thursday, GM said its 2005 loss was $10.6 billion, including new charges related to job losses, its finance arm, GMAC, and the bankruptcy of former subsidiary Delphi Corp.
GM also said it would delay filing its annual report and would restate results for the years 2000 through 2004 after mistakenly accounting for cash flows from a mortgage unit. It also said it had incorrectly accounted for certain supplier payments, including those from Delphi, and vehicle leases.

What other company could make this announcement and have its shares trade modestly lower?
Here’s how some GM bonds are doing:
Maturity…………Coupon……..Price………..YTM
April 2016……….7.7%………..73.50………12.373%
March 2021……..8.8%………..72.50……..13.019%
July 2021………..9.4%………..76.50……..12.962%
July 2023………..8.25%………72.25……..12.112%
June 2024……….8.1%………..69.75……..12.291%
Sep 2025………..7.4%………..68.62……..11.46%
May 2028………..6.75%………68.88……..10.36%
July 2033………..8.375%……..73.62…….11.572%
May 2048………..7.375%……..64.09…….11.56%
These bonds are unsafe at any price.

First Two Rounds By Seed
Posted by Eddy Elfenbein on March 17th, 2006 at 9:27 am

I hope your brackets are going well. Here are the records of the first two rounds by seed since the NCAA tournament expanded to 64 teams 21 years ago.
First Round…..Second Round
#1 84-0………….72-12
#2 80-4………….53-27
#3 70-14………..39-31
#4 67-17………..37-30
#5 57-27………..30-27
#6 59-25………..33-26
#7 51-33………..14-37
#8 38-46………..9-29
#9 46-38………..3-43
#10 33-51………17-16
#11 25-59………10-15
#12 27-57………14-13
#13 17-67………3-14
#14 14-70………2-12
#15 4-80………..0-4
#16 0-84………..0-0
In the first round, the #9’s have a winning record over the #8’s, and the #6’s have done better than the #5’s.
It ain’t easy for the Cinderellas. Only two of the #14’s and three of the #13’s made it to the Sweet 16. All five got knocked out in the third round.
Fourteen #12’s have gone on to the Sweet 16. What’s remarkable is that the #12’s actually have a winning record in the second round. They’re 10-12 against the #4’s and 4-1 against the #13’s. The third round isn’t so nice as they usually have to face the #1. They’re 1-13 in the third round. The only #12 to make it to the Final 8 was Missouri four years ago, but they had to beat a #8, not a #1. (The table doesn’t include yesterday games as the #12’s went to 2-1.)
The #11’s have had worse luck than the #12’s in making it to the Sweet 16, but three have gone on to the Final Eight and one made it all the way to the Final Four (LSU in 1986).
Only six #10’s have made it to the Final 8, and none has made it to the Final 4.
Number 9 is a deceptively good seed. Even though they have a winning record against the #8’s, they always have to face a #1 next. Of the three times that #9 has made it to the Sweet 16, only one made it to the Final 8 and that team lost (BC in 1994).
Never have all four #1’s made it to the Final 4, but they’ve never been shut out either.
Here’s the total number of wins by seed:
#1: 281
#2: 202
#3: 148
#4: 128
#5: 98
#6: 110
#7: 71
#8: 57
#9: 50
#10: 56
#11: 39
#12: 42
#13: 17
#14: 16
#15: 4
#16: 0
So if you’re brackets give you the number of points per seed, this is the total value of each seed (in descending order):
#6: 660
#10: 560
#4: 512
#12: 504
#7: 497
#5: 490
#8: 456
#9: 450
#3: 444
#11: 429
#2: 404
#1: 281
#14: 224
#13: 221
#15: 60
#16: 0
So if your brackets give you points by seed, then you want to choose 1, 2, 3, 4, 6, 8, 10 and 12 in the first round. Then 4, 6, 8 and 10 in the second round. Four and 6 in the third round, and 6 in the fourth round.
After that, you’re on your own.
Disclaimer: In no way does Crossing Wall Street Global Financial Holdings Incorporated (and Discount Weenie Hut) or its associated affiliates condone or approve of recreational office gambling.

Another New High
Posted by Eddy Elfenbein on March 16th, 2006 at 1:34 pm

Today is another good day for the market. New highs abound! The morning got off on the right foot when the government reported that inflation was tame last month. Inflation was up just 0.1% last month, and the “core rate,” which excludes volatile food and energy prices was also up just 0.1%. You wouldn’t know this by listening to some corners, but the core rate of inflation has been trending slightly lower over the past year.
The latest word is that Bernanke & Co. will raise rates two more time, and then cool it. Our Buy List is having a decent day. Danaher (DHR) is up for the sixth straight day. This is such a cool little company. The stock is at a new all-time high. I’m also happy to see Bed Beth & Beyond (BBBY) hold onto its gains.
Here’s what Jon Markman had to say about Brown & Brown (BRO) a few weeks ago:

The company is scheduled to announce its 2006 first-quarter results in the third week of April, and I think they will show they’re on track to earn $1.28 in 2006, and $1.48 in 2007. At a much-deserved premium price/earnings multiple of 26, that would peg the stock for a move to around $38 over the next 12 months, which would be a 24% move.
The stock has a tendency to range trade for extended periods, and then move up briskly in the fourth quarter of each year. If you’re interested in starting a new position, you might consider deploying half of your allocation now between $28 and $30, and deploying another half toward the end of the summer, when it could very well be around the same price before its usual end-of-the-year bump up.
BRO is not totally without risk. It is highly exposed to the hurricane prone Gulf of Mexico region, with 40% of its revenues coming from Florida. Brown’s ability to continually acquire other insurance companies could be severely hindered if they have to write checks to settle customer claims from another brutal hurricane season instead. Yet as we all know by now, big short-term losses only mean one thing to insurance companies: They get to raise rates, keeping the cash machine flowing.
There’s one curiosity with BRO that I need to note, however. You have to wonder how a company with nearly $1 billion in revenues could have such a strange web site (www.bbinsurance.com). It’s very 1998, and marked by a penchant for zoo animals. Quotes at the top state gems like, “Lemurs eat an entirely vegetarian diet.” If anyone knows what this has to do with selling insurance, let me know.

He’s right. It is a strange site.
Fair Isaac (FIC) is rebounding some. Yesterday, the stock got as low as $36.36. It’s currently just a tad above $40. I think the panic has passed. On Tuesday and Wednesday the stock generated volume of 10 million shares, equal to what it did over the previous month. Now I see why the brokers have been making so much dough.
Next Tuesday, we’ll get earnings reports from Biomet (BMET) and FactSet Research Systems (FDS).
Outside our Buy List, I’m still having a hard time believing Intel (INTC) is below $20 a share. I’m not wild about the stock. I’ve always thought it was a bit overrated, but the stock is where it was nine years ago.

Big Profits On Wall Street
Posted by Eddy Elfenbein on March 16th, 2006 at 10:34 am

Heavens to Murgatroyd! Wall Streetistan is swimming in profits. Thanks to heavy trading volume and a flurry of M&A activity, Wall Street firms are reporting ginormous earnings. The profits are so high, even Wall Street itself is surprised.
First up was Goldman Sachs (GS) which floored the market on Tuesday. Goldman’s net income soar 64% to $2.48 billion. No one saw that coming. Funny thing, one of the little ironies of Wall Street is that the investment houses are the hardest businesses to read. So whatever it is Goldman does behind those doors, they’re doing a heck of a lot of it.
Put it this way, Goldman made more coin last quarter than it did during all of 2002. The company’s asset management business (think, hedge funds) doubled. Goldman’s crushed Wall Street’s forecast by 54%. This was their third straight record quarter, and the company raised its dividend by 40%.
Yesterday, Lehman Brothers (LEH) followed up with another blowout report. Actually, I feel a little sorry for them since Goldman had set the bar so high. Lehman had record earnings of $1.09 billion. Excluding an accounting charge, earning-per-share came in at $3.50, a 26.8% increase over last year’s first quarter. That easily topped Wall Street’s expectation of $3.17 a share. Although, the stock sold off a little at first, so I’m not exactly sure what the real expectations were.
For the past several years, Lehman has been the shining star of the big houses. The company is traditionally known as a bond house, but Richard Fuld, the CEO, has worked to diversify their business. Plus, he’s probably noticed that the yield curve doesn’t exactly curve anymore.
Then Bear Stearns (BSC) said this morning that it’s also making some serious cash. Wall Street was looking for $2.95 a share. BA! Bear Stearns made a cool $3.54. Profits jumped 36% to $514.2 million.
But not everything is great for Bear this morning. There’s also the little issue of the $250 million fine for fraudulent market timing and late trading of mutual funds.

According to NYSE Regulation, the exchange’s regulatory arm, Bear Stearns engaged in a pattern of deceptive market timing and late trading of fund shares from 1999 through 2003. The trades were designed to take advantage of the time between the markets’ closing and the new share values posted by mutual fund companies.
Bear Stearns settled the case without admitting or denying the charges. The company will pay $90 million in fines and relinquish $160 million in profits and interest.

Morgan Stanley (MS) will report is earnings next week, and Merrill Lynch (MER) will follow in April.

Buy List Update
Posted by Eddy Elfenbein on March 16th, 2006 at 5:58 am

Now that we’re winding up the first quarter, I thought this would be a good time to look at how well our Buy List has done.
If you’re not familiar with our Buy List, this is a list of 20 stocks that I select each year and start tracking on January 1. The hitch is that the list does not change all year. So I’m stuck with the good, the bad and the ugly. I do this to show investors that you don’t need to do a lot of trading to be a successful investor.
So how well are we doing? The good news is that we’re up slightly for the year. The bad news is that we’re trailing the market by nearly 2%.
Through yesterday’s close, our 20 stocks are up an average of 2.46% (not including dividends). The S&P 500 is up 4.38%. Our daily volatility is 8.7% greater than the market.
We were slightly ahead of the market through mid-February, but this latest surge caught our stocks a bit flat-footed.
Here’s how our stocks have done:

Fair Isaac’s (FIC) troubles started just two days ago, but Medtronic (MDT) and UnitedHealth (UNH) come in at #18 and #19. In fact, there’s a good deal of space between them and #17. So much for safety with size! MDT and UNH are two of the largest stocks on the Buy List.
While I’m a very competitive person, I’m not ready to panic just yet over trailing the S&P 500. Given the short time period, our performance to date is completely normal.
I still see lots of great bargains on the list. Dell (DELL) below $30 is a good buy. I’m in shock that Bed Bath and Beyond (BBBY) cracked $37 yesterday. Fiserv (FISV) and Harley-Davidson (HDI) are both good buys. The only stock I’m leery of is our best-performing one. Expeditors (EXPD) is a great company, but it looks a wee bit rich at this price.
As always, my advice is to buy and hold great companies. Don’t worry about oil or moving averages or the Federal Reserve or whatever else we’re being told to worry about.
Worry about your friends and family. Our Buy List stocks are terrific companies. The great Benjamin Graham said that the market acts like a voting machine in the short term, but a weighing machine in the long term. The voice of reason is quiet, yet persistent.

See What $1 Million Looks Like
Posted by Eddy Elfenbein on March 15th, 2006 at 4:54 pm

All 899 square feet. One bedroom and one-and-a-half baths.

On a related note, Google (GOOG) closed at $344.50 today.