Seven Measly Pennies
Posted by Eddy Elfenbein on February 3rd, 2006 at 10:48 am

The plan was to have the last rate hike on January 31, so Ben Bernanke would have a clean slate when he took over the reigns of the Federal Reserve. At least, that was the plan.
Unfortunately, seven pennies conspired against us. That’s the pay raise that American’s earned last month. The average hourly wage increased from $16.34 to $16.41. That may not seem like a lot, but it’s quite worrisome for the Fed, which is paid to worry about these things. Now it look like Mr. Bernanke will have to keep the rate hikes a-coming.
This morning, the government reported that the economy added 193,000 new jobs in January, and the unemployment rate fell to 4.7%, which is the lowest level in 4-1/2 years. Also, the economy added 81,000 more jobs than we originally thought for November and December.
Here’s the futures chart for the July Fed funds rate. Traders have already factored in one more rate increase, and are beginning to learn towards another. Stocks are lower today, and the financial stocks are particularly weak.
The dollar has been rallying all week. For awhile, it looked like the dollar’s surge was tapped out, but after this week, I’m not so sure. The Europeans decided to hold their interest rates at 2.25% this week, although a rate will probably come very soon. (Here’s the dollar against the euro.)
The bottom line is that this economy still has a lot of life in it.

Outsourcing Continues
Posted by Eddy Elfenbein on February 2nd, 2006 at 5:26 pm

After 90 years, Del Monte (FDP) will no longer grow pineapples in Hawaii. Too darn expensive. They’ll now buy them on the open market.

Oshkosh Truck
Posted by Eddy Elfenbein on February 2nd, 2006 at 11:28 am

Oshkosh Truck (OSK) is one of those stocks that no one follows, few have even heard of, and it seems to do nothing but rise. While today is a sluggish day on Wall Street, Oshkosh is rallying on another great earnings report.

Net income at Oshkosh rose to $53.1 million, or 72 cents a share, compared with $40.6 million, or 56 cents a share in the same quarter a year ago.
Oshkosh had forecast earnings of 50 to 55 cents a share. Analysts polled by Thomson First Call expected, on average, 54 cents a share.
Sales in the three months ended Dec. 31 rose about 22% to $790.3 million from $644.9 million.
The stock gained 5% early Thursday to $51.15.
Defense segment sales rose 68.5% to $363.1 million for the quarter, compared to the prior year, as truck, parts and service sales grew primarily as a result of the Iraq war. Oshkosh said an increase in sales of new heavy-payload and remanufactured trucks for the U.S. Department of Defense and of wheeled tankers for the United Kingdom Ministry of Defence “significantly offset” lower Medium Tactical Vehicle Replacement truck sales.
The company said its 2006 earnings would be $2.55 to $2.65 a share. Wall Street’s consensus is $2.70 a share. Its board also declared a quarterly dividend of 10 cents a share, up about 48%, payable Feb. 23 to shareholders of record as of Feb. 16.

Here’s a chart from the past several years. Notice how the P/E ratio has never gotten very high, but the earnings keep pushing along.

Relative Valuation
Posted by Eddy Elfenbein on February 1st, 2006 at 9:39 pm

The Stalwart makes a good point: Google didn’t miss—Wall Street missed. Their earnings were just fine, but the analysts weren’t in the ballpark.
Now we have a perfect example of the fallacy of “relative valuations.” Google’s stock still isn’t cheap. It is, however, cheaper. That ain’t the same, and I’m sure many investors will jump in thinking they see value.
Not only will investors compare Google to where it was, they’ll also compare it other overpriced stocks like Yahoo (YHOO). Relative valuation was one of the methods analysts used during the Internet Bubble. They compared greatly overpriced stocks to each other, and learned nothing in the process.
In today’s trading, Google fell $30.88, or 7.1%, to $401.78. This level was an all-time high just two-and-a-half months ago. I think there will probably be a counter-reaction to today’s sell-off and Google may rise again. But still, Google is easily $100 overpriced.
Today was a flat day for the Buy List. We gained a whopping 0.08%, while the S&P’s gained 0.19%. SEI Investments (SEIC) led the way with a 2.5% increase.
Here’s some news: Two of our Buy List stocks are suing each other. I guess that balances out, but I’d prefer not to see it that way. Medtronic (MDT) is suing Biomet (BMET) for patent infringement.

Medtronic claims that a cervical plate marketed by Warsaw, Ind.-based Biomet infringes three patents it acquired from Gary Michelson last year. The other patents involve surgical implantation methods commonly used in spinal surgeries.

SEI Investments’ Earnings
Posted by Eddy Elfenbein on February 1st, 2006 at 1:27 pm

The earnings season continues to be very good for our Buy List stocks, if not for Google (GOOG). This morning, SEI Investments (SEIC) reported earnings of 50 cents a share, three cents better than estimates. Sales came in at $203.5 million which also topped forecasts.
For 2006, Wall Street expects earnings of $2.05 a share, although I expect that that will be raised over the next few days. Consider that in 2005, SEIC’s earnings-per-share grew 14.4% (from $1.60 to $1.83). Assuming that same growth rate for 2006, the company would earn $2.09 a share. The stock is already up 13% this year.
January was a good month for our Buy List. We were up 2.49%, just below the S&P 500’s 2.54% (not including dividends).
Our next earnings report will be Brown & Brown (BRO) on February 13 and Expeditors (EXPD) on February 14.

From Wall Street to the Super Bowl
Posted by Eddy Elfenbein on February 1st, 2006 at 7:47 am

The WSJ has a neat story about Grant Bowman. At the start of the football season, he was cut by the Pittsburgh Steelers. Bowman was able to get a job on Wall Street with Lehman Brothers.

Then, a week ago Monday, his cellphone buzzed with messages from his mother, his agent and the Pittsburgh Steelers. They all wanted to tell him the same thing: Pack your bags for the Super Bowl.
Mr. Bowman, 25 years old, was tapped at the last minute for a slot on the Steelers’ practice squad. At scrimmages this week leading up to the game, he is playing the role of opposing Seattle Seahawks players to help Pittsburgh’s first-stringers get ready. Though he isn’t likely to play in the big game itself, he will earn a Super Bowl ring for himself if the Steelers win Sunday.

FYI: Cowher hasn’t called me yet. I’ll keep you posted.

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.