Three Stocks I’m Watching
Posted by Eddy Elfenbein on May 17th, 2006 at 9:39 am

Here are three stocks I’ve been watching.
optionsXpress Holdings (OXPS) is an online broker. As the name suggests, the company specializes in options, an area not well-served by the larger online brokers.
The company has experienced very fast growth. For the last quarter, sales were up 73% and profits jumped 84%. Still, it reported 29 cents per share which was merely inline with forecasts so the stock has pulled back some.
The company now has about 180,000 customers. I’ve never used the service so I can’t say how good it is, but others seem to like. My fear is that the big online guys will move to squish OXPS.
Cintas (CTAS) is one of the largest companies that no one knows. The company makes business uniforms and other pieces of flair.
The stock did very well through the 1990’s, but this decade has been rough. The business is still doing very well, but its valuation has crumbled. The P/E ratio has plunged from about 60 at the beginning of 1999 to just 22 today.
This isn’t a fast-growing business, but it’s a solid, well-run company that has consistently delivered earnings. For this year, Cintas said its expects earnings of $1.92 to $1.96 a share compared with $1.74 last year.
Investors Financial Services (IFIN) is similar to SEI Investments (SEIC). The company provides asset-administration services for the financial services industry. IFIN had a bad first quarter but the company still sees profits for the year of $2.32 a share.

Consumer Inflation +0.6%
Posted by Eddy Elfenbein on May 17th, 2006 at 9:01 am

This morning, the CPI for April came in at +0.6%, which topped forecasts by 0.1%. The core rate was 0.3%, which was also 0.1% higher-than-expectations.
The market is not taking this well. Gold is up strongly in what looks to be its largest jump since 9/11. Gold reached $730 an ounce last week, but had fallen back.
Hewlett-Packard (HPQ) had a great earnings report yesterday. Profits for its second quarter jumped 51%, and earnings from the PC division rose 69%. Even AMD (AMD) got a little rise out of the report. H-P also said that it will consolidate 85 data centers into six large centers. The move should help the company save $1 billion.
Dell (DELL) reports tomorrow after the close.

Happy Birthday Wall Street
Posted by Eddy Elfenbein on May 17th, 2006 at 7:08 am

On May 17, 1792, 24 brokers signed the Buttonwood Agreement:

We the subscribers, brokers for the purchase and sale of public stock do hereby solemnly promise and pledge ourselves to each other, that we will not buy or sell from this day on for any persons whatsoever any kind of public stock at a less rate than one-quarter percent commission on the specie value of, and that we will give preference to each other in our negotiations.

The first shares traded were for the Royal Googloe Parchment Seeke Co. at a price of three crowns and four shillings.
Ok, not really, but the other stuff is true.

President Bush’s Financial Disclosure Form
Posted by Eddy Elfenbein on May 16th, 2006 at 11:24 pm

Just as I suspected: He’s rich.
So is the Veep.

Dell Below $24
Posted by Eddy Elfenbein on May 16th, 2006 at 12:57 pm

Shares of Dell (DELL) are now below $24. Including cash, Dell is going for less than $20 a share. Earnings are due out on Thursday.

James Surowiecki on Hedge Funds
Posted by Eddy Elfenbein on May 16th, 2006 at 12:47 pm

In the current New Yorker (hat tip: Abnormal Returns):

In the past five years, hedge funds have become a new power on Wall Street; the number of funds has doubled, to more than eight thousand, and the assets they control have tripled, to more than a trillion dollars. In the process, they’ve also become a favorite scapegoat for bad financial news, blamed for everything from inflating the housing bubble and demolishing stock prices to jacking up the price of oil. A German politician has called hedge funds “locusts” of the global economy, while William Donaldson, the former head of the S.E.C., has warned that “disaster” looms if hedge funds aren’t regulated. The title of a recent column made the point nicely: “Instruments of Satan.”

Ouch.

A Warning Sign?
Posted by Eddy Elfenbein on May 16th, 2006 at 12:16 pm

One of the general rules of the thumb on Wall Street is that the stock market tends to follow the long-term bond market. I should stress that this is a very general rule. I’ve never been a market timer, and I’m not going to start now. But I want to show you how the market often reacts.
Here’s a chart of the S&P 500 (black line) versus the American Century Target Maturities Trust—2025 Portfolio (the gold line, symbol: BTTRX) from May 1996 to December 1999. I’m using BTTRX as a proxy for long-term bonds (it’s a mutual fund that holds the Treasuries coming due in 2025).

Notice how closely the two lines followed each other, right until 1999. That’s when long-term bonds started to head down while equites continued to float upward. It was a foreshadowing of what was to come.
Now here are the same two since the summer of 2003.

It’s not exactly the same, but you can see some similarities. The BTTRX is parting ways with stocks.
Here’s the chart one more time, since last August:

Now you can really see it. The two were like waltzing partners right up to the beginning of March. Like I said, I’m not predicting a fall in equities, but the bond market could be.

FactSet Soars on Upgrade
Posted by Eddy Elfenbein on May 16th, 2006 at 11:58 am

Home Depot (HD) opened lower despite its good earnings. The big surprise today is FactSet Research Systems (FDS) which is up over 9% on an analyst upgrade.

Shares in FactSet Research, which provides financial information to investment professionals, rose sharply Tuesday, touching a fresh 52-week high, after Piper Jaffray upgraded the stock citing expected strong demand from investment banks.
Analyst Brett Manderfeld raised his rating to “Outperform” from “Market Perform” and boosted the target stock price to $50 from $44.
“We have increased conviction that FactSet can maintain double-digit internal growth for the next two years at least,” as investment banks increase hiring, the analyst wrote in a note to investors Tuesday.
Manderfeld said FactSet’s investment management products, which help track portfolio composition and performance, are set to deliver higher revenue because new products such as Portfolio Analytics and Marquis “continue to gain traction.”
The analyst also expects the company’s international operations to help bolster revenue. That division accounts for 30 percent of total revenue and is projected to grow 20 percent per year “for the foreseeable future,” Manderfeld said, adding that “the relative immaturity of this market and FactSet’s strong suite of comparable product offerings abroad” will drive the gains.

Home Depot’s Earnings
Posted by Eddy Elfenbein on May 16th, 2006 at 9:37 am

The company’s profits rose 19% to 70 cents a share, three cents more than estimates. Sales were up 13% to $21.5 billion.

The average customer transaction increased to $60.75. Home Depot said its appliance market share grew 1.4 percentage points to 9.9 percent in the first quarter. The retailer is the third- largest seller of appliances behind Lowe’s and Sears Holdings Corp.
Home Depot’s installation sales gained 8.5 percent to $844 million as consumers paid professionals to put in kitchen counters, windows, doors and patios.
Gross margin, or the percentage of sales left after subtracting the cost of goods sold, widened to 33.68 percent from 33.49 percent, Home Depot said. Selling, general and administrative costs fell to 20.4 percent of sales from 21.2 percent.
Nardelli, who turns 58 tomorrow, made about 18 acquisitions last year as he builds the supply division into a unit with $12 billion in revenue. The business will make up about a fifth of sales by 2010, Home Depot has said. Sales to professionals, including those in stores, represent 30 percent of revenue.

Watching the Yuan
Posted by Eddy Elfenbein on May 16th, 2006 at 7:05 am

One of my many, many complaints about the financial media is its alarmism. (This also applies to some prominent financial academics as well.) Everyday, it seems, we’re told about a new Major Concern, that Must Concern Us All. If not addressed, the Major Concern will become a Serious Problem with Serious Repercussions. The longer we ignored the Major Concern, the worse it will get.
And usually, the Major Concern goes away. Sometimes it’s replaced by a younger and thinner Major Concern. Remember the Housing Bubble? It turns out, that was sooo last year. Nowadays, we have to be worried about oil prices. And gold prices! Don’t forget copper! Of course, no one ever calls it a gas bubble (okay, all bubbles are gases, smartie).
In the media’s eyes, when the bad things go up, we’re selfish users. When good things go up, we’re selfish speculators. If you pay attention, you might be able to spot some similarities.
Anywho, there really are things to worry about. But usually, they’re not what everyone else is worried about. And that’s what makes them so troubling. The real mischief is hidden in broad daylight.
Yesterday, China allowed its currency, the yuan, to rise above eight to the dollar (meaning lower than eight, confusing I know). In foreign currency terms, this was a tiny move, about 0.1%. But on the symbolism front, it’s equivalent to one enormous spring roll.
The Chinese government is slowly falling to pressure from the United States to adopt a “more flexible” currency policy. More flexible is diplospeak for “higher dammit.” The U.S. has been seriously pissed that China has pegged its currency too low. Last year, China finally allowed its currency to float. Well…not float float. I guess you could call it “semi-submerged.”
So now everyone is happy that the yuan is going up. Almost everyone. Enter Robert Mundell. He thinks a stronger yuan is a big, massive dumb ass mistake. Although he’s an economist, he might know what he’s talking about. Mundell is one the world’s leading currency experts. He’s a Nobel laureate and considered to be the Father of the Euro (I’d still call for DNA testing, but that’s me).

Mundell says such admonitions are not in China’s interest and would bring about huge problems such as threatening its already wobbly banking system beset by bad loans, cause deflation, increase unemployment, reduce net foreign investment and cut economic growth.
“I think it might drop the growth rate from 10 percent down below 5 percent,” he said. “And that would get the growth rate down to those dangerous levels that they got in 1989 and 1990, the years of the great dissent connected with the Tiananmen Square problem.”
Mundell said China’s stunning growth has given it a much bigger role in Asia’s economy, which wouldn’t be able to escape the effects of ill-advised currency moves by authorities in Beijing.
“It would lower and destroy this process that’s been so important to all Asia, this kind of vertical integration of the Asian economy where the more advanced countries like Korea and Japan have been sending their products to China to be finished and re-exported to the United States,” he said.

The problem that our policy makers don’t see (and this is very far from a partisan issue) is that we may be forcing China to follow the same path as Japan. A higher yuan could cause a deflationary slump. Once started, those aren’t easy to stop.
Or there’s another question. How do we know that the yuan is too low? What if it’s not? Perhaps the reason why we have a massive trade deficit is—how can I put this—because we need to have a massive trade deficit. If not China, there’s always India. Also, it was because the yuan was tied to the dollar that helped stem the Asian financial crisis of the late-1990s.
Senator Chuck Schumer of New York said, “given the importance of this issue, we should approach it with a calm understanding of the facts and not resort to shameless grandstanding.” No, I’m kidding. He’s being a screaming moron. Schumer and Lindsey Graham have sponsored a bill that would impose a 27.5% on all Chinese goods. Why 27.5%? That’s what they claim the yuan is undervalued by.
As for me, I can’t say exactly why the yuan is where it is. But…there it is. And now we’re screwing around with its value for political reasons. There’s your Major Concern right there.