Oil Anarchy Threatens Iraq’s Future
Posted by Eddy Elfenbein on March 14th, 2006 at 12:35 pm

From Reuters:

Rampant corruption and political anarchy have pushed Iraq’s oil industry to the brink of collapse and may drive away the experts needed to save it.
Three years after the U.S.-led invasion of Iraq, the country’s oil exports have sunk to nearly half the level they were under former president Saddam Hussein.
Western-educated technocrats, who built up and ran Iraq’s most vital sector, are in despair as rapid turnover at the oil ministry and state marketer have failed to establish authority.
“Things are worse than ever now. There’s a limit to how much we can take,” said an Iraqi executive, adding that many other veteran oilmen shared his view.

Jeremy Siegel Misunderstands Standard Deviation
Posted by Eddy Elfenbein on March 14th, 2006 at 11:26 am

Jeremy Siegel is a distinguished professor of finance at the Wharton Business School. He’s written many important articles and books on investing and finance (here’s my review of his last book, “The Future for Investors”). However, I’m afraid Dr. Siegel misunderstands a basis mathematical concept.
This is from his most-recent “The Future For Investors” column:

Stock returns are composed of the sum of the average real return on safe bonds, such as U.S. government bonds, which has been about 3 percent, plus an extra risk premium that has averaged between 3 percent and 4 percent per year. This risk premium has propelled stocks above other asset classes in investor returns.
But this premium may be overly generous. Although stocks are indeed much riskier than bonds in the short run, in the long run they are safer. In fact my studies have shown that over periods 20 years or longer, a portfolio of diversified stocks has been more stable in purchasing power than a portfolio of long-term government bonds. As a result, a long-term stock investor gets rewarded for risk that basically only a short-term stock investor endures.

He says that over periods of 20 years or longer, a diversified portfolio of stocks has been more stable than a portfolio of long-term bonds. The problem is, that’s not what his research indicates.
In Chapter 2 of his book, “Stocks for the long Run,” Siegel looks at how stocks and bonds have performed over long periods. His point is that stocks are more volatile than bonds in the short-term, but over time, stocks have a very good track record of beating bonds. That’s a very important point for all investors.
But then, he makes a critical error. On page 33, he writes:

As the holding period increases, the dispersion of the average annual return on both stocks and bonds falls, but it falls faster for stocks than bonds. In fact, for a 20-year holding period, the dispersion of stock returns is less than for bonds and bills, and becomes even smaller as the holding period increases.

His numbers are right, but his conclusion is wrong. By dispersion, he’s referring to standard deviation. If you recall from your high school math, standard deviation measures variation against the mean. What his data shows is that the variation of returns decreases as you have progressively longer holding periods. That’s a tautology. It must happen, but it doesn’t say anything about inherent risk.
What Siegel says is that the variation of stock returns against the mean of stock returns decreases faster than the variation of bonds returns against the mean of bond returns. (That’s a mouthful!) But at no point are we comparing stocks against bonds. It’s merely stocks against themselves and bonds against themselves. Siegel is using the wrong instrument to make his point.
Let’s say we have an asset class that has returned, on average, 10% a year for 100 years. The one-year holding periods might be very volatile. However, the two-year and three-year holding periods will become progressively less volatile. But there’s no insight here, the holding periods have to. They’ll eventually zero in on 10% a year.
Siegel compares the rate at which stocks “zero in” to the rate at which bonds “zero in.” He says that since stocks zero in on their long-term average faster than bonds zero in on theirs, stocks are safer. They may indeed be safer, but his point doesn’t support that conclusion.

Google Mars
Posted by Eddy Elfenbein on March 14th, 2006 at 10:17 am

First, there was Google Earth. Then Google Moon.
Now, there’s Google Mars.

Goldman’s Earnings Surge
Posted by Eddy Elfenbein on March 14th, 2006 at 10:09 am

Well, someone is making money on Wall Street. Goldman Sachs (GS) just reported that its first-quarter profit rose 62% to $2.45 billion, or $5.08 a share. That demolished Wall Street’s estimate of $3.29 a share.
You don’t often see a brokerage firm top its estimates by over 50%, but Goldman has been shooting the lights out lately. Revenues from asset management soared 89%. Whoa. The company also raised its quarterly dividend from 35 cents to 40 cents a share. The stock is up about 50% since June.
We’ll get another snapshot of the profits on Wall Street tomorrow when Lehman Brothers (LEH) reports. The company has regularly beaten estimates for the last several quarters. Interestingly, Lehman’s and Goldman’s stocks have tracked each other remarkably closely for the past several months. In fact, as I write this, both stocks are worth $146 a share.
Bear Stearns (BSC) reports on Thursday and Morgan Stanley (MS) follows next Wednesday.
Graef Crystal has more on executive pay of the Wall Street cheifs.

It was 20 Years Ago Today
Posted by Eddy Elfenbein on March 13th, 2006 at 12:02 pm

Microsoft went public. Believe it or not, you couldn’t even use margin to buy Nasdaq stocks back then.
Bill Gates initially didn’t want to go public and he held it off as long as he could. The problem he had was that many of his employees were worth tons of money on paper, but they had no way to sell their shares. Could you imagine employees striking unless the company goes public? How would Marx have explained that one?
Since the company didn’t need to raise much money, the offering was pretty small. They floated about 3 million shares priced at $21 a share. The IPO was a big hit and MSFT closed trading on March 13, 1986 at $28 a share.
The stock didn’t do much for the first six months.
However, things started to move and since then, MSFT has split nine times, seven 2-for-1’s and two 3-for-2’s. That comes to 288-for-1. So that $21 offering was worth 7.29 cents.
The stock reached its all-time high close on December 27, 1999 at $59.56 (split adjusted). (On December 30, the stock reached an intraday high of $59.97.) Basically, the stock gained an average of 1% a week for 14 years.
Microsoft fell back to $20 a share, and has been remarkably flat for the past few years. The stock has bounced between $22 and $30 for the most of the last four years.
The company started paying a dividend three years ago. Also, there was the gigantic $32 billion special dividend that the company paid out in late 2004. That payment was close to the $38 billion that the government paid out in tax rebates in the summer of 2001.

Here’s a chart showing the trailing four quarters of Microsoft’s sales, gross income, operating income and net income (in thousands). You can really show how the business started to level off at the beginning of the decade.

The amazing part of Microsoft’s business is its gross income. The teeny space between the black and green lines shows how little it costs Microsoft to makes its software. Microsoft’s gross income is usually over 80%. It’s actually gotten higher over the years.
At the beginning of the decade, Microsoft had a trailing P/E ratio of over 70. Today, that number is down to 22.

Merck Goes for Pfizer
Posted by Eddy Elfenbein on March 13th, 2006 at 11:06 am

I knew the drug stocks were cheap. The German Merck is offeting $18 billion for the German Schering. FYI: This isn’t the U.S. Merck (MRK), or the U.S. Schering Plough (SGP).
I hope this signals a bottom for drug stocks:

Merck said it expected annual synergies of 500 million euros, to be fully reached by 2009. It said the deal would have a positive impact on adjusted earnings per share (EPS), increasing its 2005 figures by more than 10 percent, even without synergies.
Merck said the 14.6-billion-euro payment would be financed by a combination of existing funds, debt and equity.
The company will initially finance the takeover through existing cash and bridge financing from Bear Stearns, Deutsche Bank and Goldman Sachs.

243,000 New Jobs
Posted by Eddy Elfenbein on March 10th, 2006 at 10:01 am

The economy created 243,000 new jobs last month. The unemployment rate ticked up to 4.8%. Wages were up slightly, although that’s been sluggish lately.
The yield on the 10-year bond (^TNX) is up sharply this morning. It’s now at the highest level since June 2004. The yield is very close to breaking that level and reaching its highest point since July 2002.

Six Years Ago Today
Posted by Eddy Elfenbein on March 9th, 2006 at 2:05 pm

The Nasdaq first broke 5,000. The index reached its highest close on March 10, 2000 at 5048.62. Ah, good times those were.
Thirty-one months later, the Nasdaq closed at 1114.41, a loss of 77.9%.
It’s roughly doubled since then, although the Nasdaq is still over 55% off its high.
Assuming the average long-term growth rate of stocks, the Nasdaq should make a new high around May 2014.

Hansen Keeps Growing
Posted by Eddy Elfenbein on March 9th, 2006 at 1:45 pm

If there’s a leading candidate for “Stock of the Decade,” it’s probably little Hansen Natural Corp. (HANS). The company is known for its Monster Energy drink, which is essentially a mixture of sugar and caffeine. I’m told that people actually drink this. I’m guessing it’s the perfect beverage to keep you wired to play video games all night.

Personally, I don’t judge the products. I’m just interested in making money. And Hansen makes gobs of it. Three years ago, you could have picked up the shares for about $2 a piece. Since then, the stock has exploded.

Today the stock nearly hit $110 a share as the company reported another quarter of astounding growth. This is still a pretty tiny company, but let’s look at these numbers. Sales grew 83.9% to $133.6 million! Whoa.

At the bottom line, Hansen made 75 cents a share, which more than doubled last year’s fourth quarter net of 31 cents a share. Since the stock is still largely uncovered, we really can’t say that there’s a “Street consensus.” Nevertheless, the average of the three analysts came to 62 cents a share. The highest was looking for 67 cents a share, so in that sense I guess we can say that Hansen beat expectations.

For the year, sales were up 85.4%, and the company earned $2.59 a share compared with 86 cents last year. I have no idea how to value a stock like that. I have no idea even how to start! But I have a feeling that the biggest profits have already been made in Hansen.

Update: Hansen took a big hit after Cramer appeared on CNBC at 3:30.

Now, Cramer clears up his view:

OK, the venues collide. When I started my radio show today, which now airs live, I said that I thought that Hansen was taking share away from Coke and Pepsi, which makes it a good situation. I subsequently went on “Stop Trading” and said I thought it was clear that people were buying it today because of the soda weakness described in The New York Times. I then feel that I let myself get painted into an unfair corner where I didn’t like HANS.

Of course, you can’t go out in one medium and say you like it, and then say you don’t in another. That’s just ridiculously inconsistent. It is true that the “tape” turned down after my radio broadcast, making it seemingly difficult to sustain the rally in Hansen. But this decline off of “my comments” was way too harsh.

My long-term view on Hansen is that it is a share-taker and a valuable stock. My short-term view is that you can buy some, but expect it to go lower because the tape is so bad. The truncated style of “Stop Trading” created a false impression of negativity and I deeply regret the contrast between mediums, as it should not have come out that way.

Um…glad that’s all cleared up.

The Brazilian Market
Posted by Eddy Elfenbein on March 9th, 2006 at 10:24 am

The ETFs have had a huge run-up. Are they starting to show some weakness?