Google Watch
Posted by Eddy Elfenbein on January 11th, 2006 at 6:43 am

Robin Arnfield writes that Google (GOOG) is being criticized (rightly) for using its own digital-rights management system to control the distribution of copyright-protected videos in its new Google Video Store:

Google announced the Google Video Store last week at the Consumer Electronics Show (CES) in Las Vegas, Nevada. Google’s own proprietary DRM technology represents a challenge to existing DRM systems from Microsoft and Apple, also used to control video distribution over the Internet.
By creating yet another DRM system, Google is restricting rather than enabling the distribution of content over the Internet, critics say.
Commercial Content
DRM is necessary to protect commercial content that Google intends to sell via Google Video Store. CBS shows, National Basketball Association games, Charlie Rose interviews, and vintage episodes from old television series are among the content that will be on sale once the store opens.
To use Google Video Store, viewers will need to install a Google Video application on their Windows-based computers.
The use of yet another DRM scheme would not have generated such a debate were it not for the growing desire of consumers to watch video on devices other than their computers. While a personal computer can carry many kinds of programs to play videos using content-protection software from most any provider, playing video content on mobile devices is impossible if that content is protected by a particular DRM scheme that the mobile device can’t understand.
Mobile phones, iPods, game machines, and portable-DVD players all are being used for viewing videos. These portable devices are hard-coded in their firmware to accept certain kinds of DRM-protected files. If the player does not have the DRM framework already built in to read, for example, DRM-protected Windows Media files, then it cannot play those videos.

The Market Today
Posted by Eddy Elfenbein on January 10th, 2006 at 5:43 pm

The five-day rally came to an end. Alcoa’s (AA) lousy earnings weighed on the Dow as it slipped below 11000. This was the first down day of the year.
Once again, the energy sector led the market and most everything else was flat. The Energy Spyders (XLE) were up over 1%. A few other spyders were barely higher, but the non-energy sector had a rough day. The two-tiered market continues. We have energy, and everything else. The news out of Iran has been the latest catalyst for higher oil prices. I don’t see how it can last. As long as you steer clear of energy, you’ll have a good 2006.
Normally, when energy leads the market, the Buy List lags. Not today. This was a very good day for our Buy List. The S&P 500 dropped 0.04%, but we edged up 0.34%.
Of course, Home Depot (HD) did well for us. Also, Harley-Davidson (HDI) had a very nice day, and Golden West Financial (GDW) hit a new high.
By the way, one of our former Buy List stocks is now trading at a great price. Frontier Airlines (FRNT) fell all the way to $8.47 today. Last week, the company reported that its passenger count for December jumped by 12.8%, and passenger miles rose by 16.2%. The next earnings report will probably be pretty bad (the company has already lowered the bar for expectations), but I think the quarter after that could be very strong.
The big news from the tech sector came from Apple Computer (AAPL). The company unveiled its new computer with Intel’s (INTC) chips. The stock broke $80 a share today. Three years ago, you could have bought Apple for under $7. Apple will report next Wednesday, one day after Intel.
After the bell, Genentech (DNA) reported earnings that were inline with expectations. I was wrong. I thought they would easily beat the Street, but I was right that the stock would fall. Shares of DNA (love that symbol!) are trading lower after hours. Genetech was also named the best company to work for by Forbes.

Home Depot Wants a HUG
Posted by Eddy Elfenbein on January 10th, 2006 at 1:11 pm

Good news today. Home Depot (HD), one of our Buy List stocks, is buying Hughes Supplies (HUG) for $3.2 billion. Hughes is a neat little company. They’re involved in the wholesale construction supplies biz. This is one of those industries you never think about, but it’s actually very profitable. HD has been slowly dipping its toes in the water in this area. They bought out a couple of businesses last year, but this HUG purchase is the company’s largest acquisition ever.
I really can’t say that this move is much of a surprise. It was only a matter of time. The sector is rapidly consolidating, and in November Hughes said that it was considering “strategic alternatives.” (Hint, hint.) Also, Stephen D. Simpson at the Motley Fool, noticed that in the 8-K report, eighteen senior veeps and higher were set to get cash upon a buyout. So someone was planning ahead.
Home Depot is offering $46.50 a share for Hughes. Yesterday, HUG closed at $38.55, so that’s a pretty nice premium. Right now, Home Depot’s stock is up so Wall Street is pleased. I’m also happy to see that the acquisition should add a few pennies a share to Home Depot’s bottom line this year.
I think it’s interesting that Home Depot it working to build up its other businesses. The old story was that the stock would follow the housing market. I just don’t buy that. The company’s supply division accounts for about 4% of HD’s total revenue. Hughes will probably double that. As successful as Hughes has been, the company still only has about 2% of the wholesale construction market. There’s plenty of room to grow.
I was a huge fan of Lowe’s (LOW) for years (and I still am), but the gap between Lowe’s and Home Depot got to be too wide. I expect to see Home Depot back above $50 a share later this year. This is a great way for HD to start off 2006.
Here’s a chart of Hughes going back to 1992:

Earnings Season
Posted by Eddy Elfenbein on January 10th, 2006 at 6:59 am

Grab a seat. Earnings season is about to get started. This should be the 15th straight quarter of double-digit earnings growth for the S&P 500. But that’s overall earnings growth. Within industries, the profit growth is very uneven:

S&P expects 53.7% growth in energy firms’ fourth-quarter profits.
Van Dijk looks at the median firm in a sector, instead of on a total earnings basis. He expects technology to show continued strength, while health care “will kind of chug along.”
Health care profits are expected to climb 25.3%, according to S&P, while tech earnings rise 10.8%. Financials are slated to gain 6.3%.
Consumer discretionary profits are expected to grow 6.3% while consumer staples actually fall 5%, says S&P.

Alcoa (AA) kicked off earnings season for the Dow by giving Wall Street an Eli Manning-style meltdown. The aluminum company earned 26 cents a share, widely missing the Street’s forecast of 37 cents.
I think the critical area to watch will be the financials. The chart above shows that financials are only expected to grow by 6.3%. I’m curious how much the narrowed yield curve has impacted profitability. Analysts have been trimming estimates for stocks like Citigroup (C) and Fifth Third (FITB).
On our Buy List, Golden West (GDW) still looks great. The stock is trading at 13 times earnings, and that’s after a big rally since October. I thought a former Buy List stock, Commerce Bancorp (CBH), was starting to look too pricey.

James Surowiecki on Employment
Posted by Eddy Elfenbein on January 10th, 2006 at 5:37 am

From the New Yorker:

People who are unemployed stay unemployed, on average, about fifty per cent longer now than they did in the seventies, and only about half as many receive unemployment insurance as did so in 1947. Furthermore, the explosion in health-care costs means that the consequences of forfeiting company health insurance are graver than ever. So even though incomes have risen over the past three decades, they fluctuate much more than they once did. Economists estimate that income volatility is about twice what it was in the early seventies.

The Market Today
Posted by Eddy Elfenbein on January 9th, 2006 at 6:52 pm

The rally continues. Now we know what to do whenever the market stalls—just indict another Bushie. First, it was the Scooter Frogmarch Rally, and now it’s the fellow who dresses like a mafia don. What’s Ed Meese up to these days?
Today, the S&P 500 rose 0.37% and our Buy List added 0.71%. Finally. I was getting tired of trailing the market. Of course, the big news today was that the Dow cracked 11000. This was the first time since before 9/11. According to Bloomberg, the index “had risen above that level a total of 19 separate occasions, all between 1999 and 2001, remaining there an average of 6.7 days before retreating. The longest the Dow stayed above 11,000 was for a period of 24 days starting in August 2000, while it’s held for only one day on five occasions.” Today ends 302 consecutive closes between 10000 and 11000. If USC could fall, so can Dow 11K.
My concern is that some of the Dow’s strength recently has come from General Motors (GM), and that just ain’t gonna last. The real strength in the market today was in the smaller stocks. The Russell 2000 (^RUT)surged over 700 to close at a new all-time high. The S&P 400 Mid-Cap Index (^MID) rose 0.78%, and the Small-Cap 600 Index (^SML) rose 1.11%. Good news for the little guys.
The market’s shift away from mega-caps is one of the most persistent trends of the last few years. Since the S&P 500’s highest close nearly six years ago, the index is down 15.5%. But the S&P 100 (^OEX), the top 100 stocks in the S&P 500, is off by 29.5%. I wouldn’t be surprised if the non-100 of the S&P 500 is at an all-time high. I’ll see if I can find some numbers on that.
What I liked about today’s market is that it was led by financials and consumer goods stocks. Before today, approximately 98.4% of the rally was solely due to Google and gold. OK, I made that number up, but damn…it sure seems that way.
Sixteen of our 20 stocks went up today. The big winner was Respironics (RESP) which added over 4.2%. The stock had slowly drifted lower during much of December, so it was nice to see some gains there. Did anyone notice that Dell (DELL) is back above $31? Good, me too. The stock got to $33ish, pulled back and then bounced off $30. If I was a technician, I would probably have seen it coming. In any event, I still think it’s an excellent buy . Also, Medtronic (MDT) hit a new high today. In October, this was the stock that raised its estimate for 2006, 2007 and 2008. That impresses me.
Tomorrow, Genentech (DNA) will report its earnings. The Street has gone nuts for this stock. Now, it’s at that stage where people may start to cast some doubt its way. For the last several quarters, Genentech has destroyed the Street’s estimate. The current estimate is for 34 cents a share, which is a joke. That’s way too low. There’s no question they’ll beat, but by how much?
I wouldn’t be surprised to Genetech beat by two or three cents a share, and still fall after the earnings report.

The 2006 Playboy Stock-Picking Contest
Posted by Eddy Elfenbein on January 9th, 2006 at 3:24 pm

Four of the five playmates are beating me, and not in the fun way.
For the year so far:
Amy McCarthy +8.47% (Jenny’s sister)
Amy Sue Cooper +4.65%
Lindsay Vuolo +3.44%
Kara Monaco +2.25%
Me +2.1%
Jillian Grace -1.26%

Fourth-Quarter Earnings Reports
Posted by Eddy Elfenbein on January 9th, 2006 at 2:24 pm

The fourth-quarter earnings season is about to start. Here’s a partial list of when our stocks on the Buy List are expected to report:
Harley-Davidson (January 19)
Unitedhealth Group (January 19)
Golden West Financial (January 24)
Varian Medical Systems (January 25)
Danaher (January 26)
Fiserv (January 30)
Sysco (January 30)
Dell (February 16)
Donaldson (February 28)
Bed Bath & Beyond (April 5)
I’ll update this as more companies make their info available.

Dow 11000
Posted by Eddy Elfenbein on January 9th, 2006 at 2:20 pm

We did it. Now only 723 more points to a record high.

Corporate Bond Offerings Soar
Posted by Eddy Elfenbein on January 9th, 2006 at 1:09 pm

We’re in the midst of a booming market for corporate bond offerings. So Wall Street is following Uncle Sam’s lead and going massively into debt. In January, Wall Street will float $50 billion worth of government bonds, plus another $20 billion of junk bonds. Will the 80’s ever end?
The WSJ notes that Avon (AVP) will use proceeds from its bond offering to finance its share-buyback plan. Wha? This makes no sense to me. Sure, it would great a move assuming the CFO can accurately time the bond and stock markets. But that’s not what the CFO should be doing, and that’s not the person I’d go to for my timing needs. I’ll worry about that. You guys run your business. Capisce?