• All Hail the Dollar
    Posted by on February 19th, 2006 at 4:53 pm

    From some reason, the news media seems unable to report on issues regarding international currencies. I’m not sure why this is, but once people start talking “dollars” and “euros,” everyone’s eyes start to glaze over. Otherwise fine reporters become a mixture of alarmism and incoherence. It’s as if currencies are like, say, very large hurricanes.
    Daniel Gross has an article on today’s New York Times on the growing trend of Latin American countries abandoning their sovereign currencies for the U.S. dollar. Is this a good thing, or a bad thing? I think Dr. Roubini answers the question well.

    “If you have sound economic policies in a country, you don’t need dollarization,” said Nouriel Roubini, professor of economics at New York University’s Stern School of Business. “And if you follow poor policies, I don’t think dollarization will solve your problems.”

    Currencies themselves don’t produce wealth, or the lack thereof. Currencies are only as strong as the economies they support. Disraeli said (rightly): “Our gold standard is not the cause, but the consequence of our commercial prosperity.”

  • Earnings Preview: Home Depot
    Posted by on February 19th, 2006 at 4:10 pm

    From the AP:

    Home Depot Inc. reports earnings for the fourth quarter on Tuesday, Feb. 21 before the market opens. The following is a summary of key developments and analyst opinion related to the period.
    EXPECTATIONS: The world’s biggest home improvement retailer in January forecast fiscal 2005 earnings between $2.64 and $2.67 per share, on sales of at least $81 billion.
    Wall Street expects Home Depot to post earnings of 56 cents per share, the mean estimate of 22 analysts surveyed by Thomson Financial, on $18.74 billion in sales.
    ANALYST TAKE: “We remain very positive on the home improvement sector and Home Depot’s prospects, particularly given current valuation levels,” Lehman Brothers analyst Alan Rifkin wrote in a client note. “Home Depot shares are currently trading in line with the five-year historic low forward price-to-earnings ratio, based on consensus estimates.”
    QUARTER DEVELOPMENTS: Home Depot in January said it would acquire Hughes Supply, one of the nation’s biggest sellers of construction, repair and maintenance products, for $3.19 billion, its biggest ever acquisition.
    Also in January, Home Depot said it would scale back new store openings over the next five years, as it shifts from the retail business in favor of the wholesale commercial and industrial markets. The company, which currently operates 2,043 stores in the United States, Canada and Mexico, said it will open 400 to 500 stores through 2010, down from the 941 it opened since late 2000.
    Earlier this month, the Financial Times reported Home Depot was in talks to buy up to 49 percent of Orient Home, a Chinese retail chain, for more than $200 million. The company declined to comment on the report.
    COMPETITORS: Home Depot competes with Lowe’s Cos., the nation’s No. 2 home improvement chain, which on Feb. 1 said it would bolster its current share buyback program by up to $1 billion. The company is scheduled to report its quarterly results later this month.
    STOCK PERFORMANCE: Home Depot shares are up 3 percent so far this year and trading near a 52-week high of $43.98 it hit in July 2005.

  • Turin Duct-Tape Police Target Non-Sponsors
    Posted by on February 17th, 2006 at 3:45 pm

    First they came for the logos, but my logo wasn’t for an official sponsor, so I didn’t speak out:

    Samsung can’t put its name on its popular flat-screen televisions, even in its own VIP lounge. Workers at Winter Olympic venues are taping over the Dell logos on laptops in the press boxes. The Austrians had to cover up the spiders on their Spyder jackets.
    The advertising police are out in force at the Turin Games, enforcing arcane rules with a vigor unmatched at Olympics past.
    Under International Olympic Committee rules:
    — Sponsor logos are allowed, but only in certain places;
    — Non-sponsors are out, no matter where;
    — Venues must be kept free of advertising.
    Even bottles of Coca-Cola, one of the Games’ biggest sponsors, have been ordered stashed out of view of the TV cameras.
    “We don’t want the Olympic Games becoming, let’s say, a Formula-1 event where sponsors are on cars, on banners, everywhere,” said Cecilia Gandini, the head of brand protection for the Turin organizing committee. Gandini can recite Olympic advertising regulations from memory and spends her days touring venues in search of violations.
    “We want to protect the value of the Olympic Games,” she said.

    The value of the Olympic Games?? Oh, dear lord.
    That reminds me of quote attributed to Churchill about the “traditions” of the British Navy: “Don’t talk to me about naval tradition. It’s nothing but rum, sodomy and the lash.”

  • Analyst Watch
    Posted by on February 17th, 2006 at 3:33 pm

    Today, Keith Bachman of Banc of America Securities lowered his rating on Dell to neutral. But he doesn’t think the stock is hopeless.

    Strategic changes that we think could help us get more interested in the stock include selling more partner programs with companies like Google….

    Yep, that’s just what they need.

  • The Small-Cap Effect
    Posted by on February 17th, 2006 at 12:32 pm

    Mark Hulbert in Barron’s on the Small-Cap Effect:

    Just how strong is the statistical and historical support for the notion that the average small-cap stock outperforms the average large cap — the much-vaunted small-cap effect?
    It certainly looks very strong: Virtually every major discussion of small caps’ supposed relative strength refers to the famous Ibbotson Associates data set, which shows that small-cap stocks have significantly outperformed large caps since the 1920s (see Electronic Q&A, “Ibbotson: Small Caps Still Have Big Bang,” Feb. 14).
    What could be stronger than that? Most of the other alleged patterns about which investors spin endless tales have just a fraction of the apparent support that the small-cap effect has.
    Yet, sacrilegious though it may be, I decided to take a closer look at the historical case for small caps’ relative strength, and it turns out that this case is surprisingly weak.
    I reached this conclusion by analyzing data provided on the Website of Dartmouth University finance professor Kenneth French. This comprehensive data set, compiled by French and University of Chicago finance professor Eugene Fama, reflects the performances of virtually all publicly traded U.S. stocks from mid-1926 to the present. It is free and publicly available; those of you who enjoy crunching numbers will find it invaluable.
    Consider first the returns of five different portfolios that Fama and French formed based on the market capitalizations of various stocks.
    The first portfolio contained the 20% or so of stocks that had the largest market caps, while the fifth portfolio had the smallest stocks; the middle three portfolios comprised the roughly 60% of stocks in the middle. Fama and French rebalanced these portfolios yearly to take into account changes in stocks’ market caps.
    At first blush, these portfolios’ returns provide incredibly strong support for the small-cap effect. The average return of the stocks in the portfolio containing the smallest-cap stocks was 17.1% on an annualized basis between mid-1926 and the end of 2005, versus 10.2% for the quintile that had the largest-capitalization stocks — for an impressive difference of 6.9 percentage points annually.
    But, as broadcaster Paul Harvey might say, here’s the rest of the story.
    It turns out that all of the small caps’ extra return comes in January.
    If we focus on all months besides January, the largest-cap quintile has produced a 9.1% annualized return since mid-1926, in contrast to 7.8% annualized for the smallest-cap portfolio. The small caps’ 6.9-percentage-point advantage over the largest caps becomes instead — without January — a 1.3-percentage-point deficit!

    The files at Kenneth French’s site also contain data for size deciles. From June 1932 to the end of 2004, the smallest decile, or 10% of stocks, gained nearly 10,875,000%. January was responsible for 26,170% of the total.
    Here are the annualized micro-cap returns by month from July 1926 to December 2004:
    January………159.82%
    February………25.10%
    March……………1.21%
    April…………….12.86%
    May……………….6.85%
    June………………6.57%
    July……………..22.64%
    August………….8.16%
    September…….-7.75%
    October……….-14.60%
    November……….7.97%
    December………-1.94%

  • Dell’s Earnings
    Posted by on February 17th, 2006 at 11:53 am

    This is from today’s Wall Street Journal:

    For the quarter ended Feb. 3, the Round Rock, Texas, company reported net income of $1.01 billion, or 43 cents a share, up from $667 million, or 26 cents a share, a year earlier. The results exceeded Wall Street’s expectations of 41 cents a share.
    Revenue rose 13% to $15.18 billion from $13.46 billion a year earlier.
    The company said sales outside the U.S. were 43% of its overall revenue for the fourth quarter, up from 40% in the year-earlier period. The company said it gained share in every region during the year. In Europe, revenue rose 18% to $3.7 billion, while Asia Pacific-Japan revenue was up 21% to $1.7 billion.
    Kevin Rollins, Dell’s chief executive, said the company’s success in countries such as China and Germany shows that its direct-sales business model is preferred by people in all regions. Overall demand is “pretty darn healthy,” he said in a conference call with reporters.

    Yet the stock is trading about 5% lower today. Wall Street’s reaction simply makes no sense. They lower expectations, and the stock falls. They beat expectations, and the stock falls.
    I’ll have more to say on this later. Meanwile, here’s Dell’s conference call from Seeking Alpa.

  • Dell Earned 43 Cents a Share
    Posted by on February 16th, 2006 at 4:09 pm

    Revenues of $15.2 billion.

  • The Fears Under Our Prosperity
    Posted by on February 16th, 2006 at 2:12 pm

    Robert J. Samuelson has an interesting editorial today on the growth of individual instability amid rising collective stability:

    A puzzle of our time is why the economy has become increasingly stable while individual industries have become increasingly unstable. The continuing turmoil at General Motors and Ford simply reflects this more pervasive industrial instability — also in airlines, telecommunications, pharmaceuticals and the mass media, among others. Hardly a week passes without layoffs from some major company, which is “downsizing,” “restructuring” or “outsourcing.” And yet, the broader economy has undeniably become more stable. Since the early 1980s, we’ve had only two recessions, lasting a combined year and four months and involving peak unemployment of 7.8 percent. By contrast, from 1969 to 1982, we had four recessions lasting altogether about four years and having unemployment as high as 10.8 percent.
    A cottage industry of economists is cranking out studies on these questions. One intriguing theory — completely counterintuitive — is that the greater overall stability stems in part from the increased instability of individual industries. You would, of course, expect the opposite: As individual industries became less stable, so would the larger economy.
    But the reality may be more complex. Different industries may go through cycles that are disconnected from each other, argue economists Diego Comin and Thomas Philippon of New York University. All don’t rise and fall simultaneously. To simplify slightly: Housing, autos and farming might strengthen, while computers, airlines and chemicals weaken.
    Assuming there’s something to this theory — which seems a good bet — it helps explain the riddle of why there’s so much anxiety amid so much prosperity. As Americans stock up on BlackBerrys and flat-panel TVs, it’s hard to deny the affluence. But people also look to their employers for a sense of confidence about the future — and here doubts have multiplied, because more companies and industries seem assailed by menacing forces.

  • Medtronic Continued Selling Flawed Defibrillators
    Posted by on February 16th, 2006 at 2:02 pm

    From Bloomberg:

    Medtronic Inc. continued selling flawed cardiac defibrillators for two years after learning that some of them may suddenly quit working, according to company documents filed in a California lawsuit.
    After Medtronic last year recalled the devices, 19,000 people had to have surgery for a replacement, said Medtronic spokesman Rob Clark. At least one of them died from post- surgical complications, according to the man’s widow. Defibrillator patients are vulnerable to potentially fatal heartbeat irregularities, which the $20,000 devices detect and correct using electrical shocks.
    “Medtronic has been taking products they know are not quite right and putting them into people rather than take the loss,” said Hunter Shkolnik, a New York lawyer, who said in a Feb. 13 interview that he represents more than 200 people whose Medtronic devices were recalled. “If you know there’s a problem with a component, you don’t put it out and sell it to people.”
    Medtronic, the leader in the $10 billion-a-year market for heart rhythm devices, told 87,000 patients in February 2005 that the defibrillators implanted in their chests might fail. According to company documents filed in federal court in San Jose, California, the Minneapolis-based company had discovered the flaw in January 2003 and started producing a redesigned product one year later.

  • Danaher Reaffirms Outlook
    Posted by on February 16th, 2006 at 1:53 pm

    One of the easiest stories to ignore is when a company “reaffirms” its outlook. Don’t. This is one of the most underrated things a company can do. I love seeing out stocks reaffirm guidance. Don’t ever worry that they didn’t “guide higher.”
    Yesterday, Danaher’s (DHR) CEO confirmed guidance of 59 to 64 cents a share for this quarter, and $3.02 to $3.12 a share for this year. Danaher earned $2.76 a share last year.