Milton Friedman on the Social Responsibility of Business
Posted by Eddy Elfenbein on November 1st, 2005 at 10:32 am

In 1970, Milton Friedman wrote an article in The New York Times saying that corporations have no social responsibility whatsoever, except to make profits. Thirty-five years later, here he is in Reason magazine debating the same point with Whole Foods’ (WFMI) CEO John Mackey.

I believe Mackey’s flat statement that “corporate philanthropy is a good thing” is flatly wrong. Consider the decision by the founders of Whole Foods to donate 5 percent of net profits to philanthropy. They were clearly within their rights in doing so. They were spending their own money, using 5 percent of one part of their wealth to establish, thanks to corporate tax provisions, the equivalent of a 501c(3) charitable foundation, though with no mission statement, no separate by-laws, and no provision for deciding on the beneficiaries. But what reason is there to suppose that the stream of profit distributed in this way would do more good for society than investing that stream of profit in the enterprise itself or paying it out as dividends and letting the stockholders dispose of it? The practice makes sense only because of our obscene tax laws, whereby a stockholder can make a larger gift for a given after-tax cost if the corporation makes the gift on his behalf than if he makes the gift directly. That is a good reason for eliminating the corporate tax or for eliminating the deductibility of corporate charity, but it is not a justification for corporate charity.

Expeditors International’s Earnings
Posted by Eddy Elfenbein on November 1st, 2005 at 10:18 am

Here’s a nice break from Dell’s news. Expeditors (EXPD) had another great quarter. This is one of those companies that always seems to come through. The company earned 50 cents a share for the third quarter versus 39 cents last year. Expectations were for 46 cents a share.
For the first three quarters, EXPD has made $1.24 a share compared with $1.02 last year. They just grow and grow and grow. Here’s CEO Peter Rose on the third quarter:

“Execution and efficiency were the tale of this record quarter,” said Peter J. Rose, Chairman and Chief Executive Officer. “While we continued to experience significant volume increases in air and ocean freight during the third quarter of 2005, our real profitability increases came from our ongoing efforts to increase productivity in the delivery of our services,” Rose continued.
“This has not been a one year story. If you go back to the third quarter of 2001, you would see that Expeditors has basically doubled in size in the last four years. That is a real accomplishment, particularly when you look at the magnitude of the numbers. And, we didn’t really purchase this growth–we did it ourselves, organically. A stable environment fosters consistent, reliable and focused customer service by eliminating the distractions that employees in merged companies feel. As always, we’d like to formally acknowledge the contribution of each employee to these third quarter results. Once again, you really made it happen,” Rose concluded.

This is the only stock on Wall Street whose 8-K reports are actually fun to read. For more, here’s a good article on Rose and EXPD.

More on Dell
Posted by Eddy Elfenbein on November 1st, 2005 at 9:22 am

I’m still pretty rattled by the news from Dell (DELL). Already, at least two firms have downgraded the stock this morning. In the pre-market, the stock fell below $30. There’s still a lot we don’t know, and won’t know until next week’s earnings report.
Some of my questions are: Were the forecasts overly aggressive? How much of this is due to pricing? Is it just PCs? Is this mostly at the low-end? I was impressed by the company’s frankness last quarter. Let’s see what they have to say now.
I’m still holding on. The shares are too cheap here to let go. The New York Times has more:

Dell, which is known for driving down PC prices, has decided to sacrifice market share for profit growth, said Brent Bracelin, senior research analyst at Pacific Crest Securities in Portland, Ore. “Dell’s been less aggressive in the entry level,” he said, noting that the lowest-price Dell system has moved up to $399 from $299. The company announced in September that it would also market a line of desktop and laptop computers as luxury models.
Much of the industry’s growth is coming from robust demand in China and India. While Dell is reporting strong growth there, others are reporting even stronger growth. Lenovo’s sales, for instance, grew 250 percent worldwide, according to a report by market analysts at IDC. Mr. Smulders, the Gartner analyst, said that part of the problem was that Dell’s direct-sales business model was not outgunning the competition in the smaller cities of China.
Analysts, while observing Dell’s problems, have been optimistic about the company’s prospects. Laura Conigliaro, an analyst at Goldman Sachs, said in a research report in early October that she did not fault Dell’s execution, but said its “biggest miscue was in chasing a higher growth rate for so long.”
She lowered her rating on Dell in August after the company’s second-quarter earnings report signaled that its high-growth days were behind it. But in early October she said she thought that Dell’s 15 percent premium to the Standard & Poor’s 500 seemed “very reasonable.” Ms. Conigliaro could not be reached for comment after the Dell announcement. A few other analysts upgraded the stock in October.
Investors have been wary of the company’s new strategy. The stock was trading around $40 a share during much of 2005 and began falling in August.
“There have been lots of signals that Dell’s business was falling,” Mr. Bracelin said. He said he was not shocked by the news, but he still did not see a clear indication that the company had figured out a way to re-accelerate growth.

For more, you can read this, this and this. And this.

Dell: The True Hollywood Story
Posted by Eddy Elfenbein on October 31st, 2005 at 5:43 pm

Heavens to Murgatroyd! What’s wrong with Dell (DELL) now? I still like Dell, but warnings like this aren’t making it easy.
After the bell, Dell just said that its earnings will be around 39 cents a share, which is at the low-end of expectations. No one ever really means to come in at the low-end of expectations. This is bad. Dell also said that sales will come in at $13.9 billion, which is below the low-end of their previous guidance of $14.1 million to $14.5 million.
Dell said it will also take a charge of 14 cents a share. I really don’t need this. The stock is down in after-hours trading. Dell will report earnings next Thursday.

The Market Today
Posted by Eddy Elfenbein on October 31st, 2005 at 4:30 pm

The stock market finished a lousy October on a positive note today. The S&P 500 rose by 0.72%, while our Buy List increased by 1.33%. For the month, S&P 500 lost 1.75% and our Buy List dropped 1.03%. This doesn’t include dividends. For our tracking purposes, I rebalance the portfolio at the end of each month.
Of our 25 stocks, 21 closed higher today. The best performer was Frontier Airlines (FRNT) which is still doing well after its great earnings report. The stock briefly touched $9.50 a share today. Expeditors (EXPD) hit a new high today ahead of tomorrow’s earnings report. AFLAC (AFL) also hit a new high.
Today saw an unusual split between “early” cyclical stocks and “late” cyclical stocks. Merrill Lynch maintains an index for each group. Today, the early index was up 2.75% (led by retailers) while the late index was up just 0.34% (held back by basic materials). You rarely see a gap that wide. It may be a one-day event, but it fits with our theme that the economy is getting stronger.
There were two contrasting stories today that caught my eye. The first is that oil continues to fall. Oil is now down about 15% from its peak. Here’s a little fact you don’t often here: Oil peaked before Katrina made landfall. The man-made storm has been far worse. It was seven months ago today that Goldman Sachs said that oil could spike to $105 a barrel. Despite all the hysterics, that storm has passed.
The other story was Valero Energy’s (VLO) earnings, and the retirement announcement of its CEO, Bill Greehey. Valero is Bill Greehey. He’s been the top dog there for 30 years. One of the many things I’ve liked about Greehey is that he’s unafraid to criticize analyst estimates. When he thinks they’re too low, he’s says so.
I have to give him a lot of credit. A few years ago, he went around buying refiners on pennies to the dollar. People must have thought he was nuts. Then, all the variables swung his way. For the third quarter, Valero netted $4.37 a share, compared with estimates of $4.23. The company also said that estimates were too low for the fourth quarter. Cramer will go nuts tonight.
Congratulations to Greehey and Valero, but don’t go anywhere near this stock. Oil and energy stocks are going down.
For reasons I’ll never get, today General Motors (GM) said it will keep its quarterly dividend at 50 cents a share. This makes no sense to me. Kellogg (K) got nailed today for its worst loss in three years. The stock dropped 4.9% today as it guided lower.
In other news, Apple (AAPL) said that iTunes users have downloaded more than 1 million videos since October 12. Also, Google (GOOG) came within inches of $375.
Researchers at the University of Massachusetts rank Delaware as the best state to work in. Louisiana is last. The SEC now says it will randomly check up on investment advisors instead of regular five-year visits.
Did you know Barbados has a Fed? Me neither.
Expeditors (EXPD) reports tomorrow (forecast: 46 cents a share) and we have the Fed tribal council meeting (forecast: dark suits, jargon).
And finally, Jeff Matthews has some thoughts on Octobers 1987 and 2005.

King Win Bids for ExxonMobil?
Posted by Eddy Elfenbein on October 31st, 2005 at 12:47 pm

This has to be one of the weirdest stories I’ve seen in awhile. An unknown Chinese company called King Win Laurel Ltd. has filed to buy out ExxonMobil (XOM) for $450 billion. In cash.
BWAHAHAHAHAHAHA
**wiping tear**
Apparently, they’re serious, or at least, they think they’re serious. This isn’t some Halloween Orson Wells Martians are in New Jersey thing. I’m curious where they keep $450 billion stashed right now.

King Win said it was incorporated in New Zealand on October 21 for the sole purpose of buying Exxon. A call to the Beijing number for King Win in the SEC documents elicited only a busy signal.
“It’s difficult to measure this offer as little is known about how the bidder would finance the transaction,” BOSC Inc. debt analyst Jon Cartwright said. “While our initial feeling is to ignore the offer, it is academically possible that the bidder could receive funding, making this offer real.”
Last year, an entity called King Win Laurel International Ltd. launched an unsolicited offer to acquire Telstra, which was also dismissed as a hoax. King Win Laurel International also launched a bid in 2004 for Restaurant Brands, which was dismissed by New Zealand regulators.

Dr. Evil and I would like to make a counter offer of $450 gazillion bagillion. I’ll even answer the phone.

Scooter Goes Down, Stocks Go Up
Posted by Eddy Elfenbein on October 31st, 2005 at 10:12 am

The Dow had one its best days in months on Friday, even though a top White House aide was indicted. If history is any judge, the stock market doesn’t care much about political scandals in Washington. In fact, stocks have often rallied during political turmoil.

The long-lasting controversy over President Bill Clinton’s financial dealings, punctuated by the suicide of a close adviser, didn’t prevent stocks from enjoying one of their greatest bull markets ever. Stocks did hit trouble in mid-1998, as the Monica Lewinsky scandal was dominating the news. Impeachment talk swirled in the fall, and stocks fell dramatically. But the problem on most investors’ minds then wasn’t Mr. Clinton. It was a Russian debt default, pervasive bond-market damage from the collapse of hedge fund Long-Term Capital Management and the steady slide of Asian economies.
By December, as impeachment loomed, the stock market was recovering, not tanking. From mid-December to mid-January, as the nation was transfixed by the impeachment, the Dow gained 9%, according to The Wall Street Journal’s Market Data Group.
Watergate was probably the scandal that most affected stocks. The Dow industrials entered a bear market at the start of 1973 and stayed in it through 1974, as Richard Nixon’s top aides and, ultimately, Mr. Nixon, himself, resigned. The scandal unquestionably contributed to the market malaise. But it probably wasn’t the main cause. Inflation soared in 1973 and 1974, from less than 4% to more than 12%, according to Ned Davis Research. The Arab oil embargo began in 1973 and continued into 1974. A recession began in late 1973 and lasted until 1975.
“When I think back to the 1970s, they were a time when we were confronted with a serious inflation threat, a loss of credibility on the part of the administration, and monetary policy was also off the rails,” says Stuart Schweitzer, global investment strategist at J.P. Morgan Asset Management in New York.
Oddly, the Dow industrials actually rose in the week and month following the Haldeman and Ehrlichman resignations. The Dow fell more than 15% in the three weeks following the Nixon resignation, in August 1974, but by year’s end, despite continuing uncertainty in Washington, stocks had begun a new bull market.
Market performance surrounding other Washington scandals has been more benign. A recession held stocks down during the Teapot Dome scandal, which involved abusive leasing of Federal oil reserves by Interior Secretary Albert Fall. But the worst was over in October 1923, despite President Harding’s death, and stocks were clearly recovering by the spring of 1924. The 1958 resignation of Sherman Adams, President Eisenhower’s right-hand man who had accepted a vicuña coat from a favor-seeking businessman, was barely a speed bump for the bull market of the time.
The October 1963 resignation of Vice President Lyndon Johnson’s protégé Bobby Baker as a top Senate aide — he was found to have links to organized crime — became an afterthought following President Kennedy’s assassination the next month. Even the assassination proved only a temporary impediment to that period’s bull market.
Stocks rose through the 1986 disclosure of the Reagan-era Iran-Contra scandal, in which money from covert arms sales to Iran was passed on secretly to right-wing fighters in Nicaragua. The market crashed in October 1987, but that was amid concerns over the trade deficit, the dollar, stock valuations and Wall Street excess.

This reminds me of the story of when Richard Nixon was asked what he would be doing if he weren’t president. Nixon said that he’d probably be on Wall Street buying stocks. They asked an old-time Wall Streeter what he thought of that. He said that if Nixon weren’t president, he’d also be buying stocks.

Lost on Tech Stocks
Posted by Eddy Elfenbein on October 30th, 2005 at 10:59 pm

In college, I remember my professor telling me that The Wizard of Oz wasn’t really about a girl and her dog who get blown over the rainbow. He said that the story is really a political allegory all about the events of the 1896 presidential election. Since my professor was a former 60’s radical, I just assumed this was some weird LSD/banana peel flashback. I mean, this was just too weird to be true. It had to be a coincidence, like playing Dark of the Moon during, well…The Wizard of Oz.
But slowly, my professor convinced me. He said that L. Frank Baum was mocking the politicians of his day in the guise of an innocent children’s story. The Scarecrow represented the farmers (Baum thought they didn’t have any brains). The Tin Man (factory workers) was heartless. And William Jennings Bryan was the Cowardly Lion who was trying to make it to the White House (Emerald City) on the issue of the gold standard (yellow brick road). Gold is measured in ounces. Oz. Get it? I don’t know who Toto was, but I’m sure he fit in somewhere.
I couldn’t believe it. I felt like my whole childhood had been robbed. Instead of watching the Wizard of Oz, I had really been watching Agronsky & Co. Is anything sacred? Ever since then, I’ve been a cynic. Later, I went to business school and now I do this. You see, the scars never heal.
Now I looked for hidden meanings in everything. Nothing is what it seems. I look for codes in Spaghettios. I was way ahead of this da Vinci person. And now, dear reader, I’m going to share my most brilliant discovery with you. The hit television show Lost is not what it seems. The more I watch it, the more I realize the truth. Lost is an allegory about…tech stocks.
dun dun DUNN!!
Now, this isn’t some “crazy” theory typed out by some “weirdo” on the Interweb. I have “proof.” If you watch carefully, every character is oddly similar—too similar—to a tech stock. The connections are down right eerie. My firm belief is that the producers of Lost are sending us a message. What it is, I know not. All I can say is that I report, you decide.
Let’s look at the characters one-by-one. We’ll start with Dr. Jack Sheppard who is quite obviously a thinly-disguised Microsoft (INTC). Dr. J is the center of the island. He’s the leader and we understand that his fate is tied to the fate of the survivors. Jack is basically an older version of Charlie Salinger on Party of Five. He’s the prissy drama queen who’s in charge. But instead of his parents dying and bravely leading his family onward, it’s a plane crash, and he’s bravely leading the survivors onward. Instead of Jennifer Love Hewitt, we have Maggie Grace. Instead of Scott Wolf, we have sand.
Not only is Microsoft the largest tech stock, it’s easily the most influential. If MSFT says something, others might grumble, but they’ll go along eventually. Jack is arrogant and bossy, but everyone knows that he’s smart. Being a doctor on that island is like making software in today’s economy. At the end of the day, no one can question Redmond. Also, Microsoft would have some of the best flash back scenes. Jack’s father is IBM (IBM). There’s a whole Oedipal subtext floating around.
Hugo “Hurley” Reyes and Google (GOOG). Hurley is everyone’s favorite character. He’s the most fun; Hurley is laid back and funny. But even he has a dark secret. Like the Google Dolls, Hurley is filthy rich, and he has some odd connection to the series of numbers (Google’s algorithms!). I could even see Hurley arguing TNG plot lines with Sergey and Larry. Also like Hurley, Google is a bit overinflated. That fit is just too much. But like Google, we have no idea what the future holds. What does it all mean? In the end, Hurley/Google is an enigma, but we can’t help liking him.
Warning: Plot spoiler.
This concludes Part I of my Lost/Tech Stock Theory. I’ll have more as the market/season develops.

Welcome Barrons’ Readers
Posted by Eddy Elfenbein on October 30th, 2005 at 6:03 pm

Welcome! Please have a look around. You can learn more about us, check out our Buy List, peruse our archives, shoot me an e-mail. It’s all good.

The Week Ahead
Posted by Eddy Elfenbein on October 30th, 2005 at 5:11 pm

This week, the Federal Reserve holds a tribal council meeting, and will almost certainly raise interest rates for the 12th straight time. This will bring the Fed funds rate up to 4.0%. They’re still not done. Right now, the futures market is telling us that the Fed has two more rate hikes to go.
We’re now entering the tail-end of earnings season. So far, about 70% of companies have beaten expectations, but this is where things get confusing. You see, you’re expected to beat expectations; 70% is the historical average. However. Companies haven’t beaten expectations by the usual expectation (about 2% instead of 3%). That wasn’t expected. We can now expect expectations to change, perhaps more than expected.
Part of the part of problem is that some of the sucky big-caps have sucked more than usual. General Motors (GM), for example, reminded everyone that they suck, which we knew, but they also took their suckiness to a whole new level. They lost $1.92 a share, blowing past Wall Street’s forecast of an 87 cent a share. The stock is now trading roughly on par with the ebola virus.
Discounting for large-cap stocks like GM and Allstate (ALL), the earnings haven’t been too bad. The problem is that the forecasts for next quarter have been weak. This week, we’ll more earnings reports, including stocks like Valero Energy (VLO), Procter & Gamble (PG), Kellogg (K) and Time Warner (TWX).
Outside our shores, there’s an interesting development in Europe. The Europeans might actually raise interest rates. The eurozone hasn’t raised rates in five years. This is a direct consequence of our economy’s strength. The euro has been slipping against the dollar, and Europe’s Greenspan, Jean-Claude Trichet, has pledged to pounce (or hop) on any sign of inflation.
China recently said that its trade surplus will balloon to $90 billion this year, up from $32 billion last year. Obviously, the U.S. is at the other end of that surplus. Wal-Mart (WMT) is currently China’s eighth-largest trading partner. But for all the talk we hear about China and trade, thanks to oil, Russia and Saudi Arabia have trade deficits that are almost as large. Plus, the Saudis have their currency pegged to the dollar. I think it makes sense for the oil producers to diversify into another currencies. OPEC’s president recently said that oil prices are approaching an “acceptable” level. Earlier today, I filled up my tank for $2.51 a gallon. That’s the lowest I’ve seen in these here parts is a long time.
We’re also seeing the first clear signs of a slowdown in the housing market. (Ever notice how the media loves to call the housing market a “bubble,” but that never applies to oil?) New home sales were sluggish and backlogs seem to be growing. And inventories of unsold homes increased as well. The level of unsold homes is the highest in nine years. Plus, median new home prices dropped 5.7% last month, the fourth drop in the last five months. The homebuilding stocks have been getting creamed lately. This could be just the beginning.