Expeditors 8-K Report
Posted by Eddy Elfenbein on February 1st, 2006 at 7:16 am

Expeditors International (EXPD) just released its latest 8-K report. The company uses these reports to answer questions from analysts and investors. They’ve also become popular on Wall Street due to their sarcastic and irreverent tone.
I’m afraid that this most recent 8-K is somewhat subdued. Perhaps it’s a new image. Anyway, Expeditor’s management provides a good deal of information. Here’s a sample:

Can you provide an update on year-over-year airfreight and ocean freight volume growth as well as gross yield trends during December 2005 and into the seasonally slow beginning of the new year?
On a year-over-year basis, ocean freight container counts were up nearly 15% in December 2005 while airfreight tonnages were up 21% over the amount recorded in December 2004.
The very beginning of a year is not axiomatically slow and to automatically assume that this will be true, and to make statements to that effect in asking about January 2006 perpetuates a great solecism.

A great solecism? You can read the entire report here.

Is the Nasdaq Overpriced?
Posted by Eddy Elfenbein on February 1st, 2006 at 6:28 am

I often hear people say that the tech bubble never went away, it was simply displaced to the housing market. Please! The housing market is nowhere near as crazy as the tech bubble was. In fact, it’s almost hard to explain how unusual the Nasdaq was in the late-90’s.
Here’s a quick rule-of-thumb I use. Over the last 20 years, the level of the Nasdaq has usually been about one-fifth that of the Dow (in other words, five Dow points for each Nasdaq point). Sometimes it goes higher, sometimes lower, but it usually hasn’t strayed far from that ratio.
To be more specific, the Nasdaq-to-Dow ratio has averaged 18.8% since 1986. The standard deviation has been 1.8%. For 82% of the time, the ratio has been bounded by 17% and 22%. Looking at the graph below, you can see that it’s been a fairly consistent relationship:

You may have noticed that something seems to be missing from the graph. No, you’re eyes aren’t playing tricks on you. I excluded a 27-month period from December 1998 through February 2001. OK, get ready for this. Here’s what the full graph looks like.
Now do you how out-of-whack the Nasdaq got? It didn’t just get to the edge of the range. It demolished the range. The Naz peaked at 50.8% of the Dow. That’s 18 freakin’ standard deviations above the mean. That occurrence is so extreme, one has to ponder the cosmos to put it in any kind of context. We’re talking one over a number with 70 digits. That’s pretty damn small.
Many people think that the tech bubble happened throughout the 1990’s. Not really. The episode was very brief. What’s interesting about the chart above is that if you gaze at it for a bit and see the 27-month hole, your mind’s eye begins to bridge the gap. But of course, that wasn’t what happened. If you had taken a 27-month nap, you would have assumed not much happened.
So where does the Nasdaq stand now? A few days ago, the Nasdaq finally burst through 21% of the Dow, for the first time in five years. If I were a market-timer, this would lead me to think that the market is getting pricey. Since I’m not, it leads me to think that the Nasdaq is getting pricey.
In the larger view, the Nasdaq is high, but it’s still well within the normal range.

Google Misses by 22 Cents a Share
Posted by Eddy Elfenbein on January 31st, 2006 at 4:51 pm

Google (GOOG) reported earnings after the closing bell, and we’re in that awkward period trying to figure what the heck it all means.
By the books, it was a great quarter. Google’s sales soared 86% from $1.03 billion last year to $1.92 billion this year. Net income rose from $204 million to $372 million. On a per-share basis, earnings grew from 71 cents to $1.22.
But Wall Street isn’t concerned with the earnings by official accounting standards. They want to see the corrected, adjusted and altered numbers. By that standard, Google flopped. The company earned $1.54 a share, 22 cents below forecasts.
Opps.
It seems that Google’s tax payment caught analysts off-guard. In the after-hours market, the stock is trading over $62 lower.
Except for Sysco (SYY), our Buy List had a decent day. The sell-off in Sysco wasn’t too surprising since it had such a strong day yesterday. Expeditors (EXPD) and Donaldson (DCI) both hit new highs today; SEI Investments (SEIC) reports tomorrow.
Today was Alan Greenspan’s last day at the Federal Reserve. Tomorrow, Ben Barnanke takes over. The Fed raised rates for the 14th straight time. Here’s the Fed’s statement:

The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 4 1/2 percent.
Although recent economic data have been uneven, the expansion in economic activity appears solid. Core inflation has stayed relatively low in recent months and longer-term inflation expectations remain contained. Nevertheless, possible increases in resource utilization as well as elevated energy prices have the potential to add to inflation pressures.
The Committee judges that some further policy firming may be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance. In any event, the Committee will respond to changes in economic prospects as needed to foster these objectives.
Voting for the FOMC monetary policy action were: Alan Greenspan, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Roger W. Ferguson, Jr.; Jack Guynn; Donald L. Kohn; Jeffrey M. Lacker; Mark W. Olson; Sandra Pianalto; and Janet L. Yellen.
In a related action, the Board of Governors unanimously approved a 25-basis-point increase in the discount rate to 5-1/2 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Kansas City, Dallas, and San Francisco.

For the first time in 19 months, the “measured pace” language is nowhere to be seen.

The Power of a Rumor
Posted by Eddy Elfenbein on January 31st, 2006 at 1:16 pm

Shares of Napster (NAPS) exploded higher today on the rumor that it was going to be bought out by Google (GOOG).
It’s not true, but that’s only slightly hurt the rally.

Update: The rumor started with the New York Post. Napster closed 25% higher.

Alito Is Confirmed 58-42
Posted by Eddy Elfenbein on January 31st, 2006 at 11:30 am

The Senate has just confirmed Judge Alito by a vote of 58-42. I think the futures market at Tradesports did a fairly good job of assessing the final outcome.
The markets are often referred to as “predictions markets” which I don’t believe is accurate. These markets don’t predict what will happen, but they can set odds at what could happen, knowing what we know now.
Even when the market had little information, the futures market indicated that Judge Alito had roughly 62 votes, with a standard deviation of around seven votes. Although the market was a bit optimistic on Judge Alito’s support, it was a reasonable look at his support. In this case, it was fairly accurate.
Over the last two days, trading in the 60+ votes contract was very strong. As it became clear that Judge Alito would fall short of that number, the contracts plunged. Here’s a chart.

Measuring Expected Return
Posted by Eddy Elfenbein on January 31st, 2006 at 7:42 am

One of the basic laws of finance is that risk and return and positively related. Hold on. I didn’t say that quite right. Risk and expected return are positively related.
You see, that’s the hard part. We’re not talking about return itself, but the perception of what it should be, or supposed to be. How, exactly, can we measure expected return?
Finance professors have wrestled with that question for a long time. All the good measurements, like standard deviation are trailing numbers. But we need to know the here and now.
Three researchers, Long Chen, Hui Guo and Lu Zhang, had an idea. They said that to find the expected return of a stock, don’t look at the stock—look at the company’s bonds. Specifically, look at the spread between the company’s bond yield and a Treasury yield of the same maturity. This little trick is not only forward-looking, but it doesn’t lean on unreliable proxies.
Using this method, they found a positive correlation between risk and expected return. The paper is at the Web site of the Federal Reserve Bank of St. Louis, which is a great resource for all sorts of financial data. Here’s a PDF of their paper (warning: It’s written in the incomprehensible secret language of finance professors).

Mittal Steel Vs. Europe
Posted by Eddy Elfenbein on January 31st, 2006 at 6:20 am

Most folks know that Bill Gates is the richest man in the world. And a lot of people are aware that Warren Buffett is second. But not many people, especially Americans, know about the #3 man Lakshmi Mittal.
Mittal is the CEO of the largest steel company is the world, Mittal Steel (MT). The company’s stock is up more than 35% this year. Mittal is a tough businessman and he’s crushed his competition. But now he’s up against his toughest opponent yet, the European elite.
Mittal is trying to buy pan-European steelmaker Arcelor, but the continent is in an uproar.
Writing is the Daily Telegraph, Ambrose Evans-Pritchard wrote Britishly: “Steel has sacred status in the iconology of Europe’s political and economic elite, if for nobody else.”
Indeed. To the EU crowd, Arcelor isn’t merely a company. It’s the symbol of an integrated Europe. Unfortunately, Mr. Mittal has been unkind enough to remind the continent’s elite that symbol or not, Arcelor is a company. In fact, it has assets, much of which may be under employed, a situation Mittal hopes to correct. But he’s facing an uphill battle. Evans-Pritchard writes:

The Coal and Steel Community fathered by Jean Monnet in 1954 was the genesis of what became the European Union, and for a good reason. The French and Germans battled in 1870 and again in 1914-1918 for control of the grim smelting cities of the Moselle, deemed the strategic key to the Continent.
As a marriage of French, Belgian, Luxembourg, and Spanish components, Arcelor is exactly what the EU is supposed to be in the French political mind: a way of fostering industrial champions that bind Europe together and are big enough to give France leverage and clout on the world stage.
“If this raid succeeds, it will bring down one of the rare edifices of industrial Europe, proving that no position is secure any longer in a world of global competition,” said a Le Monde editorial yesterday.

It gets worse. Mittal is even guilty of acting like…an American:

Mr Mittal has not helped his cause with gauche extravagance. His style grates on French and Belgian sensitivities at every level, but especially for the workers of the Lorraine steel belt and the grim rusting hubs of the Meuse.
His £70m house at Kensington Palace Gardens – the most expensive in the world – is surpassed only, in the demonology of the French media, by a £34m birthday bash for daughter Valentine at Paris’s Chateau Vaux le Viscomte in 2004.
Some 5,000 bottles of Mouton Rothschild’s finest were washed down at a cost of £1.8m and Kylie Minogue pocked £320,000 for a half an hour’s turn.

This is how two cultures can see the same facts and reach vastly different conclusions. An American’s first thought would be “hey, if he’s willing to pay that much for Kylie Minogue, think what he’ll pay for my shares. Sell! Sell! Sell!”

Jean-Pierre Masseret, president of the Lorraine region, called Mr Mittal an asset-stripper bent on gutting France’s heavy industry.
“Mittal is lying when he says he won’t close any of Arcelor’s operations. He is buying a rival and could perfectly well destroy Europe’s steel industry, which he doesn’t need. The powers that be must take action to stop a stock-market raid that threatens Europe’s vital interests and its strategic future,” he said.

Monsieur Masseret has a lot of Gaul. Has it ever occurred to him that not selling threatens Europe’s vital interests.

“The government must resort to all means possible to block this takeover,” said Nicolas Dupont-Aignan, a leading deputy for the UMP party.
The French Left claims Mr Mittal has already shown his true by colours by shutting down Irish Steel’s operations in Cork as soon as his five-year guarantees elapsed, sacking all 450 workers and leaving the Irish state with a £21m clean-up bill for waste.
Mr Mittal sought to calm the waters in Paris yesterday. “We are not at war here. We’re a European company and this is a good way to protect European jobs in the future,” he said.

Yes, we’re all European. But some of us are more European than others, Lakshmi.

Whether the French can block the bid merely over fears of job losses is a contentious point. Under EU law, states can invoke “public interest” but only if there is a risk to national security, media freedom, and financial probity.
“Asset-stripping as such is not covered,” said an EU official. “Nor is it enough to just say that national security is at risk. This has to be vetted by the commission, which can say no.”
In reality, France could tie up the bid at the European Court for years to come. Whatever it says, Brussels cannot risk a spectacular bust-up with Paris just a year after the French people rejected the European constitution. Such a clash could tip the EU into a downward spiral towards disintegration.
If France’s president, Jacques Chirac, wants to keep Mr Mittal away from Arcelor, he can almost certainly do so.
His first move is an emergency meeting tonight with Luxembourg’s prime minister, Jean-Claude Juncker, who disposes of 5.62pc of Arcelor’s stock.
Mr Mittal may at last have met his match.

Earnings from AFLAC and Fiserv
Posted by Eddy Elfenbein on January 30th, 2006 at 10:33 pm

After the bell, two of our Buy List stocks reported earnings. AFLAC (AFL) said that it netted of 59 cents a share (excluding charges) for the fourth quarter. This was slightly below Wall Street’s forecast of 63 cents a share. However, AFLAC lost three cents a share due to currency translation. The company does most of its business in Japan.
AFLAC is one of my favorite stocks. It’s one of those stocks that consistently delivers. The company also reiterated its EPS growth forecast of 15%-16% for this fiscal year, and raised its dividend from 11 cents to 13 cents a share.
Don’t let the earnings miss fool you, this was a good quarter for AFLAC. Assuming AFLAC earns $2.92 a share for this year, the stock is going for a very reasonable 16 times earnings, which is in line with its growth rate. This is a solid, steady grower. I wish I knew how to quit this stock.
The other stock, Fiserv (FISV), reported earnings of 81 cents a share. Discounting the company’s newly acquired check-processing operations Fiserv earned 56 cents a share which was in line with analysts’ estimates. The company said that it expects to earn $2.46 to $2.53 a share for this year, so it’s trading around 18 times earnings. This is another high-quality stock.
In today’s market, Sysco (SYY) finished 6.2% higher. Only five of our 20 stocks rose, but Sysco’s big day helped the Buy List eek out a 0.03% gain. The S&P 500 rose 0.12%.
Our next earnings report is SEI Investments (SEIC) which is due on Wednesday. Expeditors (EXPD) is also due soon, but they haven’t said what day.
And finally, CNN reported:

The latest Census Bureau report shows median prices for new residences sold in December fell 1.5 percent from the previous month to $221,800. Half of the homes sold for more than the median, the rest for less.

Earnings Guidance
Posted by Eddy Elfenbein on January 30th, 2006 at 1:26 pm

From Hoku Scientific (HOKU):

Based upon projections, the Company expects net income to be in the range of a loss to break even or slightly profitable.

I’m glad that’s all cleared up.

Today is All about Energy Stocks
Posted by Eddy Elfenbein on January 30th, 2006 at 12:50 pm

Energy stocks are rallying and everything else is barely moving. This has become typical of the market in the past few years. Energy stocks either lead the market or trail it badly, while the rest of the market bounces along.
Here’s how the sector ETFs are performing today:
Energy (XLE) +2.52%
Tech (XLK) +0.37%
Materials (XLB) +0.22%
Industrial (XLI) +0.19%
Discretionary (XLY) +0.06%
Staples(XLP) -0.13%
Finance (XLF) -0.12%
Health care (XLV) -0.15%
Utility (XLU) -0.46%