GDP Report
Posted by Eddy Elfenbein on January 27th, 2006 at 9:55 am

Today, the government released its first report on fourth-quarter GDP growth. They released a GDP report at the end of each month, so this report will be revised twice more.
According to today’s report, the economy grew by 1.1% (annualized) for the last three months of 2005. That’s pretty bad and it’s about half of what economists were expecting.
Until now, the economy had delivered over 3.3% growth for ten straight quarters. So I guess we shouldn’t be too greedy. Also, this was positive growth so we can say that the economy isn’t receding.
The economy has grown at a faster rate over the last 3-1/2 years than it did during the 1990’s.
Reuters is declaring: “GDP growth at weakest in three years.” That’s accurate, but that headline can be used, on average, once every three years. For any set of 12 quarters, one will have to be the weakest. Of course, only three quarters ago we were being warned about the “Slowest GDP growth in 2 years.”

The Market Today
Posted by Eddy Elfenbein on January 26th, 2006 at 4:17 pm

This was the Buy List’s best day of the year. In fact, we more than doubled our second-best day. We also doubled the S&P 500.
The S&P 500 rose 9.15 points to 1273.83, an increase of 0.72%. The 20 stocks of our Buy List rose 1.64%. For the year, we’re still trailing the market 2.05% to 1.49%.
Sixteen of our 20 stock went up. The big winner was Respironics (RESP) which was up 7.20%. Our other big winner was Varian Medical Services (VAR) which was up 5.01%.
Expeditors (EXPD) was also up big, jumping 3.58%. Golden West Financial (GDW) closed 3.66% higher.
Chipotle (CMG) closed at $44 a share, a nice 100% for its first day on the market.
General Motors (GM) dropped 3.35%. The stock is still about five dollars above its 52-week low.
The Oil Service Holders ETF (OIH) has a nice turnaround today and closed 0.60% higher.

Breaking Down The OIH
Posted by Eddy Elfenbein on January 26th, 2006 at 3:58 pm

Here’s a closer look at the 18 stocks in the Oil Service Holders ETF (OIH). This has become one of the most popular exchange-traded funds on Wall Street. Since May 13, the ETF is up 75%.
I’ve thought that this sector has been overpriced for some time. Yet, despite what I think, the stocks keep going up, up, up.
With this chart, I wanted to show you just how high Wall Street’s expectations are. Look at the projected five-year growth rates. It’s rare for a company to grow its earnings 20% a year for five years, much less 30% or 50%. Thess projections are very optimistic.
Note: This is a corrected version of my original post where I had listed the 35 stocks in the Dow Jones Oil Equipment Services Index. Thanks to Roger Nusbaum for pointing me in the right direction. You can see more info on the OIH here.

For Nerds Only
Posted by Eddy Elfenbein on January 26th, 2006 at 2:24 pm

Here’s a fascinating article on Pythagoras’ theorem. Robert P. Crease says that the theorem is about a lot more than the sides of triangles. It’s about “the idea of proof itself.”

How Much Does Government Spending Really Change? Answer: Not Much.
Posted by Eddy Elfenbein on January 26th, 2006 at 1:16 pm

Each January, the Congressional Budget Office releases its massive budget outlook report. This report details what the country is (in theory) going to spend over the next ten years.
The official release date is a big day for public policy geeks. That’s today, and the report was posted at 10 a.m this morning. The CBO’s Web site was so jammed that I couldn’t get through until a few minutes ago.
Personally, I think ten-year forecasts are a waste of time, and I ignore most of that data. What I like to look at is the historical numbers. By the way, the CBO should get major props for presenting so much data in an easy-to-read and accessible format.
What I find fascinating is that despite all political rhetoric we hear, what the government spends each year is fairly consistent. This might upset some people who are convinced that government spending is either out-of-control, or hopelessly being slashed to the done. Sorry, but it’s just not true. The level of government spending is remarkable steady. I’m not saying that there aren’t major changes in spending patterns, but it’s far less than you might think.
Over the last thirty year, total government outlays minus defense spending as a percent of GDP, has averaged 16.31%. Quite simply, that number hasn’t fluctuated much. The high reading was 17.38% in 1983, and the low was 15.39% in 2000. As you might expect, government spending rises in recessions and falls during expansions. The standard deviation is just 0.63%.
Last year, non-defense spending rose to 16.10% from 15.93% in 2004 (this is the government’s fiscal year, which ends on September 30).
Some of you may take issue with me excluding defense spending. I understand that, so like me explain my reasoning. Defense spending can—and has—changed quite dramatically in response to real world events. Over the last 30 years, the standard deviation of defense spending is over 1%, which is higher than the budget as a whole.
I see defense spending as similar to a company declaring a one-time earnings charge. Obviously, defense spending is important and it affects our national debt, but I don’t see it as a reflection of Washington’s spending habit.
Here’s the big CBO report. You can download my data here (which is all pulled from the historical tables of the CBO report), and here’s my chart of non-defense spending as a percent of GDP. As you can see, the budget soared in the 60’s and early 70’s, but since 1976, spending hasn’t changed that much.

Respironics Soars
Posted by Eddy Elfenbein on January 26th, 2006 at 11:21 am

It’s a good day so far. Respironics (RESP) is soaring. The stock is currently up about 8%. Until today, it had been one of the poorer-performing stocks on our Buy List.
Danaher (DHR) is doing well. The stock is up about 2.6% today. Varian Medical Systems (VAR) is also having a strong day. The stock is up about 2.8% to a new 52-week high. The stock is up over 12% for us, year-to-date. Expeditors (EXPD) and SEI Investments (SEIC) are also looking good.
We don’t have any more earnings results this week. The next three Buy List stocks to report will be Sysco (SYY), Fiserv (FISV) and AFLAC (AFL) on Monday.
Today is the kind of market action I like to see. The energy sector is down sharply. The Energy Spyders ETF (XLE) is off 1.48%, and the Oil Service Holders ETF (OIH) is down 2.35%. The Financial Spyders ETF (XLF) is leading the market, rising 1.3%. The Consumer Staples ETF (XLP) is also doing well, currently up 0.6%.
As long as those core sectors do well, the overall market rally can last. When the market becomes so tilted towards energy and tech, I get concerned that a downturn is near.
Update: Chipotle (CMG) opened at $45.

The Super Bowl Indicator
Posted by Eddy Elfenbein on January 26th, 2006 at 10:08 am

No matter who wins the Super Bowl, the indicator points to good news for investors.

GM’s Earnings Report
Posted by Eddy Elfenbein on January 26th, 2006 at 10:00 am

What a disaster! General Motors (GM) lost a stunning $4.8 billion last quarter, or $8.45 a share. This is GM’s fifth straight quarterly loss. Bear in mind that this is a $23 stock, and they lost $8.45 a share! That loss comes to over $50 million a day. This figure includes “one-time” items which amount to $3.6 billion, or $6.36 a share. Excluding those charges, GM only lost $2.09 a share. Wall Street was expecting a loss of 12 cents a share. As lousy as Ford’s earnings were, they at least beat the Street.
President Bush said that the automakers should develop “a product that’s relevant.” Ouch.

Danaher & Respironics
Posted by Eddy Elfenbein on January 26th, 2006 at 9:38 am

This morning, Respironics (RESP) reported earnings of 36 cents a share which was inline with Wall Street’s expectations:

Fiscal second-quarter net income was $24.1 million, or 33 cents per share, compared with $20.1 million, or 28 cents, a year ago. Net income for the current quarter included stock compensation expenses representing about 3 cents per diluted share after taxes.
Excluding items, the company reported a profit of 36 cents per share, matching the average analyst estimate, according to Reuters Estimates.
Net sales totaled $257.9 million, up 14 percent. Foreign currency exchange rates reduced revenue by about by 1 percent during the quarter.
Domestic revenue increased 15 percent to $176.9 million.
For fiscal-year 2006, Respironics forecast earnings per share, excluding equity compensation expense, in the range of $1.46 to $1.48. Earnings per share estimates for the quarter ending March 31, are expected to be 40 cents to 41 cents, excluding items.

Danaher (DHR) earned 81 cents a share, which beat estimates by one penny a share:

Industrial tool maker Danaher Corp. on Thursday said fourth-quarter profit rose 20 percent, helped by stronger demand for professional instruments used in environmental science and medicine.
Earnings increased to $261.6 million, or 81 cents per share, from $217.7 million, or 67 cents per share, a year earlier.
Analysts on average expected profit of 80 cents per share, according to Reuters Estimates.
Sales also topped forecasts, rising 14 percent to $2.26 billion. Revenue rose 24 percent in Danaher’s professional instrumentation division, its biggest, to $1.17 billion.
Chief Executive Lawrence Culp said in a statement that he was confident the company would be able to deliver “excellent results in 2006,” but did not issue a specific earnings forecast.

Also, Chipotle’s (CMG) IPO price was raised for the second time. The stock will now go public at $22, or 38 times earnings.

The Devil Wears Prada
Posted by Eddy Elfenbein on January 25th, 2006 at 5:50 pm

MarketWatch:

When Ben Bernanke steps into Alan Greenspan’s shoes at the Federal Reserve on Feb. 1, he’ll be under pressure to prove he’ll be vigilant on inflation, several Wall Street economists say.

Motley Fool:

In two weeks, Ben Bernanke will try to fill the shoes of the venerable Alan Greenspan as Federal Reserve chairman and begin to shape policy for the largest free market economy in the world.

Portsmouth Herald News:

Academician has big shoes to fill as Fed Reserve head

San Diego Union Tribune:

Big shoes to fill

U.S. News and World Report:

Following the legend of Greenspan, Bernanke certainly has big shoes to fill.

St. Petersburg Times:

One focus is the transition at the Federal Reserve Board, where Alan Greenspan is on his way out as chairman and Ben Bernanke is stepping into those extra-large shoes.

Black Enterprise:

Big Shoes to Fill

The Daily Yomiuri

It will not be easy for Bernanke, who is tasked with overcoming domestic and external problems that could short-circuit the currently sound U.S. economy and to fill the big shoes of Greenspan, who has won international recognition for his economic policies.

NPR:

In terms of his role as a political player, analysts agree he has some big shoes to fill.

Investors Business Daily

Bernanke knows he has big shoes to fill.

Smart Money:

You’d think Alan Greenspan shows up to work in a clown costume with all the talk about the next Federal Reserve chairman having big shoes to fill.

The Onion:

Greenspan, Entourage Demolish Hotel Room