• Today’s GDP Report
    Posted by on November 30th, 2005 at 1:08 pm

    As many of you know, I’ve been saying that the economy is much stronger than a lot of experts think. When the first report on third-quarter GDP came out last month, I wrote: “According to surveys, Wall Street’s estimate for third-quarter GDP growth is 3.6%. That’s way too low. I expect to see a number over 4%. In fact, I wouldn’t be surprised to see a number over 5%.”
    It turned out to be 3.8%. I still thought that was too low. Today I found out that I was right. The government revised GDP growth higher to 4.3%. Today’s report suggests that economic growth is accelerating—the rate of growth is itself increasing. Also, inflation continues to be benign. This is excellent news for investors.
    The market is down a bit today. Quality Systems (QSII) is taking a hit due to an analyst downgrade. Our Buy List is holding up well so far. All told, November has been a great month for the Buy List. I’ll have final numbers later today, but we should be up around 6%, and the S&P 500 is up about 4% (that doesn’t include dividends). Also, Donaldson (DCI) is rallying on its strong earnings announcement from yesterday.

  • Big Value in Small-Caps
    Posted by on November 29th, 2005 at 5:56 pm

    For the last 10 years, small-cap stocks have been the leading sector.

    Looking at 10-year returns of major fund categories, it’s clear that the leading category, small-cap value, got a big leg up during the bull market that began in 2003.
    Among top performers in this group tracked by Standard & Poor’s Micropal the past 10 years has been RS Partners. It’s risen an average annual 17.44% in the 10 years ended Oct. 31 and an average annual 37.9% from March 31, 2003.
    “All companies have benefited from expanding margins in the past few years,” noted David Kelley, a co-manager of RS Partners. “But small caps have seen more margin expansion. The main reason is they have smaller operations and more operational leverage than larger companies.”
    Other leading small value funds were Keeley Small Cap Value, up an average annual 36.4% since the bull market began, and FPA Capital, up 28.3% a year.
    It should come as no surprise that energy has played a big role in these funds’ performance. RS Partners had 16% of its assets in the sector as of Sept. 30, according to data collected by Morningstar. That was more than 1.5 times the S&P 500’s weighting in the sector and nearly twice that of the average small-cap value fund. Keeley Small Cap Value had 21% in energy and FPA Capital 32%.
    Top-performing stocks among these funds’ biggest holdings as of their latest reporting periods included Toronto-listed Compton Petroleum in RS Partners. FPA Capital counted Ensco International among its top holdings. Keeley’s fund had McDermott International and Range Resources.

  • Gold at $500
    Posted by on November 29th, 2005 at 3:52 pm

    Gold finally broke $500 an ounce.

    “People are looking for an alternative investment to U.S. dollar-based instruments. The expectations of inflation in the coming year are very high,” said Albert Cheng, Far East managing director for the industry-backed World Gold Council.
    But jewelry manufacturers and buyers may need time to adjust to the high prices, Cheng said. The council said this month that global demand for gold in the third quarter totaled 838 tonnes, a rise of 7 percent from the same quarter a year earlier, as surging investment demand helped offset a slowdown from the jewelry sector.
    GOLD VULNERABLE
    Some analysts said gold prices could fall to as low as $475 an ounce on liquidation by investment funds to book profits.
    The latest weekly Commitments of Traders report issued by the Commodity Futures Trading Commission on Monday showed the speculative net long position in New York’s COMEX gold were closer to record high levels.
    But the rally was also helped by reports that Russia, Argentina and South Africa had decided to increase the amount of gold in their reserves, reversing a six-year trend of central bank sales, mainly from Europe.
    Platinum stood at $993/996 an ounce after spiking earlier to $1,002. It closed in New York at $989/993.
    This year, not enough platinum is being mined and recycled to meet demand for catalytic converters and jewelry, so fundamentals have factored into the buoyant market.
    Refining and chemical company Johnson Matthey, which provides fundamental analysis of platinum group metals, said in a recent report that 6.71 million ounces of platinum would be used in 2005, exceeding supply of 6.59 million ounces as demand rises from the auto sector and other industries.
    It predicted that output from South Africa, the world’s top producer, would be lower than planned and the shortfall would continue to support prices.

  • Consumer Confidence Rises
    Posted by on November 29th, 2005 at 12:49 pm

    More good news. Consumer confidence had its biggest gain since 2003.

    Consumer confidence rose in November by the most in more than two years as falling gasoline prices encouraged shoppers before the start of the holiday season.
    The Conference Board’s consumer confidence index rose to 98.9 from a revised 85.2 in October, the New York-based research group said today. The gauge was at 105.5 in August, before the full effects of the recent hurricanes were measured, and averaged 97.5 over the past five years.
    Falling fuel prices after post-hurricane highs are increasing confidence and spending, economists said. Consumers splurged over the Thanksgiving weekend at discount retailers such as Wal-Mart Stores Inc., leading the National Retail Federation to predict this will be the second-biggest holiday selling season since 1999. Job creation is also helping sentiment.
    “Confidence was healthy,” said Alan Ruskin, director of U.S. research at 4Cast.com in New York. “A lot of it is normalization post-hurricanes, and the energy prices coming off their highs is part of that.”
    The Conference Board compiles its index of consumer confidence by surveying 5,000 households on general economic conditions, their employment prospects and spending plans. A Bloomberg News survey of 58 economists expected the index to rise to 90.2, with estimates ranging from 86 to 95.3. October confidence was originally reported to be 85. The November increase was the most since April 2003.
    Expectations
    The component of the index that tracks consumers’ expectations for the next six months increased to 88.8 from 70.1 in October, the biggest gain since April 2003. The gauge of optimism about the present situation rose to 114 from 107.8, the biggest jump since December 2004.
    The share of consumers that said jobs were hard to get fell to 23.2 from 25.3 percent last month. The share who said jobs were plentiful in November rose to 20.8 percent from 20.7 percent.
    The percentage of consumers expecting to buy a home increased to 3.1 percent from 2.8 percent. The percentage that plan to purchase major appliances rose to 29.1 percent from 25 percent. The share of those who expect to buy a car fell to 4.9 percent from 6.4 percent.
    The results compare with those from the University of Michigan’s survey of consumer sentiment, which rose to 81.6 in November from a 13-year low of 74.2 the previous month, according to a report released Nov. 23.
    U.S. new home sales unexpectedly rose to a record last month, suggesting people bought houses in anticipation of even higher mortgage rates, a government report showed today. Purchases increased 13 percent, the biggest rise since April 1993, to a 1.424 million annual rate from a September’s 1.26 million pace, the Commerce Department said in Washington.

  • The Morning Market
    Posted by on November 29th, 2005 at 10:32 am

    Don’t worry. Brown & Brown’s (BRO) stock hasn’t been cut in half. The stock split 2-for-1 this morning. So if you own, you now have twice as many shares. Brown & Brown even got a shout-out from Cramer last night. The bad news is that Frontier (FRNT) didn’t split, it’s just down today. The company announced a debt offering and the stock is currently down about 10%.
    The market is regaining some lost ground from yesterday. Energy and small-caps are leading the charge. Dell (DELL) is also looking good.

  • Southwest Goes to Denver
    Posted by on November 29th, 2005 at 5:07 am

    The Wall Street Journal has a front page story this morning about Southwest Airlines (LUV) entering the Denver market. Whenever Southwest enters a new market, its competitors cut and run.
    Not this time.

    Frontier Chief Executive Jeffery Potter caught wind of Southwest’s move the night before the announcement, he recalls. Mr. Potter knew that other airlines, including Alaska Airlines, had successfully competed against Southwest in some cities, and felt reassured that Frontier compared favorably to those airlines, he says.
    Southwest has a near-mythic reputation in the industry as an airline that usually can’t be beat. Airlines far bigger than Frontier, including US Airways Group, had decided to cut back service to cities that Southwest entered.
    Mr. Potter stayed late at his office composing a letter to rally his employees. “We are not about to cower or back away,” Mr. Potter wrote, assuring his employees that “not everything you have heard about Southwest is necessarily true.”
    In an interview, Mr. Potter argued that fliers will prefer Frontier’s extras, such as more legroom in its seats and personal television screens that offer programs and onboard movies for a fee. He maintained that fliers are turned off by Southwest’s first-come-first-serve seating, which sometimes results in long lines of passengers waiting to board.
    “Pricing is Southwest’s big advantage,” notes Frontier spokesman Joseph Hodas. “Take that away, and what do they have?” Frontier immediately matched Southwest’s introductory Denver fares, and Mr. Potter maintains the airline can make money at the lower prices.

    The article includes an interesting table. Including fuel costs, Southwest is a bit cheaper than Frontier. Excluding fuel costs, Frontier is cheaper.

  • The Undefeated Colts
    Posted by on November 29th, 2005 at 12:17 am

    Manning.jpg
    OK, I’m officially on the Colts’ bandwagon. This team is incredible. I just watched them dismantle the Steelers. Every part of their game is top notch. They even have the league’s best kicker. Jeez, just give them the trophy right now.
    The Colts are 11-0 and I’m rooting for them to finish the season undefeated. I’m getting tired of the 1972 Dolphins. If you’re not a football fan, the ’72 Dolphins were the last team to go undefeated. Every year the team reunites and celebrates when the last undefeated team goes under. It used to be cute but not anymore. The time has come for another team to finish off a perfect season. Apparently, Don Shula thinks the Colts can do it.
    Since Miami’s annus mirabilis, eight teams have started 10-0. In 1975, the Vikings lost their 11th game to the Redskins 31-30. The 1984 Dolphins made it to 11-0 before losing to San Diego. Miami then went on to lose the Super Bowl to the 49ers—a team which had only lost one game.
    The 1985 Chicago Bears were just scary. They went 12-0 before being losing to the Dolphins in a legendary Monday night game. That was the most-watched game in the history of Monday Night Football. The hype for that game was incredible. It was as big as any Super Bowl. Dear lord, Marino was amazing in his prime. Miami ran rings around the Bears. It’s hard for me to believe that this Friday will mark the 20th anniversary of that game. Yikes!
    I remember how the whole world was waiting for the rematch in the Super Bowl but Miami had to go and lose to New England in the AFC Championship game. I actually felt sorry for the Super Bowl’s promoters. What could have been Ali-Frazier IV turned into football’s equivalent of Grenada. The Bears destroyed the Patriots 46-10.
    In 1990, the Giants and the 49ers made it to 10-0 but both teams got tripped up in Week 11. They met in the NFC Championship game which the Giants won 15-13. And thanks to Scott Norwood’s missed field goal, New York won the Super Bowl.
    The next year, the Redskins started 11-0 before losing to their archrivals, the Cowboys. Washington also went on to win the Super Bowl. In 1998, the Broncos made it all the way to 13-0. Strangely, they lost two straight games before recovering and winning the Super Bowl.
    So I guess history is on the Colts’ side of winning the Super Bowl. I see that in the second-to-last game of the season, the Colts play the Seahawks in Seattle which could be trouble. Shaun Alexander is having a great season, but if the Colts keep playing like this, they’re going 16-0.

  • The Market Today
    Posted by on November 28th, 2005 at 8:11 pm

    The winning streak was finally snapped! The S&P 500 had gone up for seven straight sessions, and 14 of the last 17. But another rally was not to be. The S&P 500 gave back 0.85%, and the Buy List lost 0.70%.
    Let’s thank Thor Industries (THO) for saving us today. This was clearly our big winner. In fact, it was one of the top performers on the entire NYSE. The rest of our Buy List must have been busy shopping online. Only five of our stocks were up, and 20 stocks closed lower.
    Frontier Airlines (FRNT) is now down to $8.89 a share. As I’ve said before, this is an unusually risky stock for our Buy List. Nevertheless, I think it’s a compelling bargain. In my opinion, it’s very likely that Frontier can make 80 cents a share next fiscal year. Considering that sales jumped 22% last quarter, you can see that Frontier has a lot of potential. But the stock is very volatile. It’s worth a shot only if you’re already well-diversified.
    The big news today was Merck’s (MRK) restructuring. This is sad to see from a once-dominant company, but there is a lesson here. Do you ever notice that some companies never announce a “bold, new restructuring plan”? I couldn’t imagine Expeditors (EXPD) announcing “a major cost-cutting initiative.” The reason is that they’re always looking to cut costs. That’s what great companies do. It’s in their blood. They don’t have to announce it.
    Hershey (HSY) also recently announced a reorganization. The Wall Street Journal began an article today with this: “Bank of America Corp. shares are up 9.2% since Sept. 8 — the day Alvaro G. de Molina took over as chief financial officer of the nation’s second-largest bank. A coincidence? Maybe not.” Actually, it is. My apologies to Mr. de Moline, but corporations don’t turn on a dime. Not even several thousand dimes. (Isn’t every bank up 9.2% since September 8?) Reorgs and restructurings and new business plans and new CFOs always start out optimistically. The stocks often respond. I wish them all well. And yes, some do work out, but most never do. I’m sorry, but it’s true.
    On that cheery note, here’s today’s link o’the day: groovystocks.com. Check it out.

  • Broker Haggle Guide
    Posted by on November 28th, 2005 at 2:19 pm

    Forbes presents the “Broker Haggle Guide.” My advice: It never hurts to ask.

  • Today’s Make-Believe Issue: We Have Too Much Cash
    Posted by on November 28th, 2005 at 11:41 am

    Here’s a great example of one of my pet peeves about the financial media. No matter how good the news is, we can always find a negative angle. The writer’s goal is what paragraph do we drop the crucial “but” line in.
    Here’s how you start: Great news! Corporations are making record profits.

    This year, the companies in the Standard & Poor’s 500-stock index are on track to pay out more than $500 billion to shareholders in the form of dividends and share repurchases, or buybacks, according to S&P. That’s up more than 30% from last year’s record — and equivalent to nearly $1,700 for every person in the U.S.
    “This is an enormous amount of money being paid, to some degree, in unison,” says Howard Silverblatt, an equity-market analyst at S&P in New York.
    The outpouring of cash from corporate coffers in the U.S. is just one aspect of a world-wide phenomenon. With interest rates low, unprecedented amounts of capital are sloshing around the globe, in search of better returns. Pension funds, mutual funds and insurance-company accounts, for example, have some $46 trillion in assets, up almost a third from five years ago.
    The flood of dividends and share buybacks is a direct result of record U.S. corporate profits and is welcome news for shareholders, particularly because dividends are taxed at lower rates and share prices have been flat; since the beginning of the year, the Dow Jones Industrial Average has risen a paltry 1.4%.
    Just this month, 23 companies in the S&P 500 have boosted their dividends, including General Electric Co. and toy maker Mattel Inc., which also expanded their share-repurchase plans. For the year as a whole, 275 companies in the S&P 500 have raised their dividends; only eight have cut them.

    Sounds good. In every episode of “Behind the Music,” you always get the line that goes something like: “Just when it seemed like nothing could go wrong for Styx, everything went wrong.”

    But there could be an economic downside to the cash glut.

    Uh oh.

    The fact that companies have been sitting on so much cash is, in some respects, a vote of no-confidence in U.S. economic prospects: At least some companies may be signaling they can’t find enough profitable ways to reinvest their earnings, so they are simply returning it to shareholders.

    Attack of the indefinite pronouns! In some respects, some journalists may use a few of them as a vote of no-confidence in a threadbare theme. By the way, what might some investors being doing with some of their dividends? Burn them or invest in the economy? It doesn’t say so we’ll simply never know.

    Through dividends, a company, in effect, distributes part of its profits directly to shareholders. Share buybacks, in which a company buys some of its own shares outstanding, can benefit shareholders in other ways: They can boost the company’s share price, and they can also be a smart corporate investment if the company correctly judges that its stock is undervalued.

    Or it can be a complete waste of money. Just ask shareholders of Cisco.

    Some economists call the payouts this year an ominous development that may be stealing from future economic growth, since they suggest companies are having trouble spotting new products, projects or services they think will boost their growth. “These payments keep the economy growing more slowly because that money isn’t flowing into capital spending,” says Milton Ezrati, chief economist at Lord Abbett Funds in Jersey City, N.J. “If businesses are giving up on innovation, we have problems.”

    Giving up on innovation? Was that what TheGlobe.com was? No one told me. And now for our final paragraph.

    The good news for dividend fans is that it looks like there’s ample room for these checks to grow from here. Today, 385 companies in the S&P 500 pay dividends, down from a peak of 469 in 1980. And even though billions are going out the door, dividends only comprise about 32% of payers’ profits. Historically, companies have paid out about 54% of their profits as dividends.

    So it turns out there’s no issue at all. Dividends are rising and they’re still far below their historic level. Yet somehow the economy was able to grow and innovate in the past. Why can’t the media?