Day One
Posted by Eddy Elfenbein on January 3rd, 2006 at 11:20 pm

2 p.m. made all the difference….
At 2 p.m., the market got the minutes from the latest Fed meeting and a rather blah day turned into a darn good rally. The good news is on the first day for our new Buy List, our stocks were up 0.78%. The bad news is that our stocks were creamed by the broader market. The S&P 500 was 1.64%.
Basically, today was a microcosm of 2005. Energy stocks were up huge. Google (GOOG) was up by $20 a share, or $6 billion in market value. Oil soared over $63 a barrel. The S&P 500 Energy Index (^GSPE) was up 4.5%. Just like much of last year, most of the other sectors were bunched together. Make no mistake though, this was a good day for stocks. Today was the best rally since October.
The whole Russia versus Ukraine thing really spooked traders in the commodity pits. I mean, aren’t those two always fighting?
My strategy for ’06 was just not working today. The sectors I like least (energy, gold, materials and tech) were the market leaders. My favorite areas pulled up the rear. Our best stock was surprisingly, Golden West Financial (GDW). I love GDW, but it’s normally so quiet. Fair Isaac (FIC), Dell and Donaldson (DCI) also did well. Our health care stocks were particularly weak today.
The irony is that one year ago we had the complete opposite news. The Fed minutes indicated that there could be rates increases through 2005, and the Dow lost about 100 points.
I think the rally in the dollar may soon come to an end. Of course, much of the media has been calling for that for some time. The European Central Bank just raised interet rates for the first time since 2000.
Two other things to note: In Slate, Daniel Gross weighs in on declining volatility.
Lastly, it’s good to see Charles back at the Kirk Report.
Let’s hope Day Two goes a lot better than Day One!

This Day in Market History
Posted by Eddy Elfenbein on January 3rd, 2006 at 3:36 pm

From Gary Alexander at Investorplace.com:

The best January day in market history was January 3, 2001, when the Dow gained 299.6 points. That was chicken feed compared to the +14.2% ONE-DAY move up in NASDAQ! It came a year after the market’s peak, when everyone thought the worst was over: NASDAQ soared from 2291.86 to 2616.69 on one day. It’s safe to say that kind of a NASDAQ gain won’t happen in one day, any time soon.
January has long been one of the best months of the year. January has seen the most cumulative Dow gains of any month since 1950. Since 1970, January is the best month of the year for NASDAQ and the S&P 500 (it is second-best on the Dow). January is also the most volatile month, with the highest average daily point changes.
Don’t let today’s morning action throw you into a funk. The first trading day is often down early, but the Dow has been up on the first trading day of the year in 10 of the last 15 years. The same is true of the second day of the year — up 10 of the last 15 years. Combined, the two days have been bullish.
Except for last year and 2000, the first two trading days of the year have been net UP in 8 of the last 10 years, and up a rather consistent 1.5% in up years from 1996 to 2002. (That’s about 160 Dow points these days):
1996: +76.95 (+1.5%)
1997: +95.82 (+1.5%)
1998: +70.74 (+0.9%)
1999: +129.76 (+1.4%)
2000: -496.19 (-4.3%)
2001: +158.90 (+1.5%)
2002: +150.64 (+1.5%)
2003: +260.06 (+3.1%)
2004: +90.15% (+0.9%)
2005: -152.23 (-1.4%)
The Three BEST Januarys since 1950 Were All Double-Digit Gains:
As measured by the S&P & The Dow
1987: +13.2% & +13.8%
1975: +12.3% & +14.2%
1976: +11.8% & +14.4%
The WORST Januarys since 1950 Were Single-Digit Losses, all ending in “Zero”
Year… S&P + Dow
1960: -7.1% & -8.4%
1970: -7.6% & -7.0%
1990: -6.9% & -5.9%
GOLD’S GREATEST YEARS OPENED STRONGLY
On January 3, 1974, Gold hit a record $121 an ounce in London, but Americans couldn’t buy it yet. Gold rose to $200 on the last day of of 1974, when Americans were finally allowed to own it.
On January 3, 1980, Gold hit a record high of $634 an ounce, rising rapidly to $850 by Monday, January 21, 1980. After hitting $660 again in the fall, gold hasn’t been over $600 in the last 20 years.

Purge GM from the Dow?
Posted by Eddy Elfenbein on January 3rd, 2006 at 2:38 pm

Business Week asks if GM (GM) should be replaced in the Dow.
My answer is a resounding: Duh!
And take Alcoa (AA) with you.
First, there’s a little back story involved. The Dow Jones Indexes are owned coincidentally enough by Dow Jones & Co. (DJ). The company also publishes Barron’s and the Wall Street Journal. Business Week is owned by McGraw Hill (MHP) which also owns Standard & Poor’s, which coincidentally enough, owns the S&P Indexes. So we have a little inter-indexian warfare going on.
I’ll be very simple: The Dow is a lousy index. The big advantage it has is age. The Dow is a price-weighted index which means that it’s calculated by adding up the 30 stocks and multiplying by a variable (about eight) to get the magic number.
The S&P 500 is much better and it’s the one I follow most closely. The stocks are weighted by market value and it uses 500 stocks. Over the past few decades, the Dow has slowly lost ground relative to the S&P 500.
Forty years ago, the Dow was about 10 times the S&P. Thirty years ago, it was nine times. Twenty-five years ago, it fell below eight and twenty years ago, it fell below seven. Beginning in the mid-80s, the Dow regained some of its lost ground. The Dow generally falls less than the market as a whole during bear markets, and trails it during bull markets.
The bursting of the tech bubble was good news for the Dow. By the market’s low, the index vaulted all the way to 9.75 times the S&P. Since then, it’s been three-and-a-half rough years for the Dow. The ratio is back down to 8.6.
General Motors now has a market value of roughly $10 billion, about one-twelfth that of Google (GOOG). Its debt, which is rated as junk, represents about 4,000 Dow points. The company is simply no longer a good barometer of the American economy.
Here’s an interesting tidbit on the Dow. The editors of the Wall Street Journal changed the index in 1939 by tossing out IBM (IBM). They added it back in 1979. In those 40 years, IBM gained 22,000% If the editors had left the index alone, the Dow would now be about 35% higher than where it is.
All the historical benchmarks would be different. The Dow would have cracked 1,000 in 1961 instead of twelve years later. Behold the power of one really great stock!

Walgreen’s Earnings Report
Posted by Eddy Elfenbein on January 3rd, 2006 at 1:53 pm

Walgreen’s (WAG) is a great company. I came close to adding it to this year’s Buy List, but I think it’s a bit pricey, especially compared with CVS (CVS). For the most part, I simply buy great companies and don’t worry so much about the price. If you look historically, the great stocks are almost always overpriced, but they stay that way. Walgreen’s is one of the few times where I think it’s wise to stand back.
The company reported good earnings today:

The drugstore chain earned $345.6 million, or 34 cents per share, in the three months ended Nov. 30, up from $328.6 million, or 32 cents per share, a year ago. Excluding stock options expensing, Walgreen said it would have earned 36 cents per share.
Revenue grew 10 percent to $10.9 billion from $9.89 billion. Same-store sales at locations open at least a year increased 7.2 percent for the period.
Analysts expected earnings on average of 33 cents per share, on sales of $11.02 billion, according to a Thomson Financial survey.
Walgreen shares, which gained 15 percent in 2005, rose 37 cents to $44.63 in early trading on the New York Stock Exchange.
Walgreen said prescription revenue, which accounts for about 65 percent of its sales, rose 10 percent overall and almost 8 percent at pre-existing stores. The drugstore firm added that its profit margin increased slightly to about 27.5 percent of sales because of growth in generic drug sales, though this was partly offset by a shift to lower profit-margin products outside its pharmacy operations. Walgreen said the lower-priced generic drugs also “slowed the company’s sales line.”
Expenses for selling, occupancy and administration increased slightly. The company attributed this to stock options expensing, higher store salaries and the absence of a gain from litigation settlements that occurred in the previous year.
The company operates about 5,100 stores in 45 states and Puerto Rico. Rick Hans, director of finance, said Walgreen remains on track to reach its goal of 7,000 stores by 2010.

How’s this for a 20-year chart?

Best Starbursts
Posted by Eddy Elfenbein on January 3rd, 2006 at 12:40 pm

4. Yellow (why?)
3. Pink (has its moments)
2. Orange (quite yummy)
1. Red (disco!)
FYI: The list also works for Slurpees.

The Not-So-Invisible Hand of the Editor
Posted by Eddy Elfenbein on January 3rd, 2006 at 12:00 pm

It’s not a joke if it needs an explanation. Take a guess what the NYT’s editor probably added in this column by Paul Krugman:

So here’s the bottom line: yes, northern Virginia, there is a housing bubble. (Northern Virginia, not Virginia as a whole. Only the Washington suburbs are in the Zoned Zone.)

Krugman makes a good point that we really have two housing markets. The “Zoned Zone” of America which is greatly overpriced, and “Flatland,” which is still reasonably priced.

Oil over $62
Posted by Eddy Elfenbein on January 3rd, 2006 at 11:01 am

The new year is getting off to a rough start. Oil has soared over $62 a barrel over concerns in Russia. The country finally restored natural gas shipments to normal levels. Still, the standoff has worried traders.
Energy stocks are up, and most everything else—including the new Buy List—is lower.

Big Profits in Title Insurance
Posted by Eddy Elfenbein on January 2nd, 2006 at 12:42 pm

The stock market is closed today. I hope you’re enjoying another nice long weekend. I noticed this story in the Journal about the title insurance industry. Not too long ago, I had no idea what title insurance was. Now that I follow the industry, I have a hard time believing that everyone doesn’t know about it. I won’t call it a “scam,” but it’s hard to imagine this is not only legal, but lenders make title insurance mandatory.

Title insurance protects homeowners against competing claims for their property. Here’s an interesting historical tidbit for you: Title insurance played an important role in the history of our two greatest presidents. In the 1750’s, Lord Fairfax, the only peer living in North America asked a young man named George Washington (a distant relative) to survey some of his land in the western part of Virginia. By “some land,” I mean half the darn state. Fairfax owned some five million acres. Earlier, the Virginia House of Burgesses tried to do what governments like to do, claim some of his land for itself.

About 60 years later, and not that far away, a Virginia-born farmer named Thomas Lincoln bought a small farm in Kentucky. At this time, this was frontier country. He built a log cabin there and soon, he and his wife had a son. Then along came a man with a competing claim to the farm and the court ruled against the Lincoln family. They had to move and the legal costs were a great hardship to the young family. They were able to lease another farm and soon, the same things happened again.

Thomas Lincoln was fed up with Kentucky and moved to Indiana which had recently been surveyed by the Federal government, so land claims were more secure. Or at least, they were supposed to be more secure. Shortly after the family got in Indiana, Thomas’ wife Sarah died. The whole episode left a great impression on Abraham Lincoln and it may have led him to study surveying and the law.

America has been very fortunate to have avoided the ugly land claims problems of the Old World, and that’s were title insurance comes in. I believe that title insurance is required by law in most states. So you have a product that few people know about, no one even thinks about, the prices vary greatly and I can’t imagine there are too many claims. The profits are enormous and the risk is low, so sign me up! Well, the Journal notes that the industry is coming under some criticism:

Critics say that the problem with the business is that often consumers don’t take note of the fact that they need the coverage until they sit down at the closing.

They say homebuyers are often steered to insurers by real-estate agents, homebuilders, lenders or others who don’t ultimately pick up the tab.
In addition, regulators and consumer advocates also note that title-insurance underwriters face relatively little risk. For example, over the past 10 years title insurers have spent an average of under 5% of operating revenue on insured losses, according to the A.M. Best/American Land Title Association report. By contrast, property/casualty insurers spent roughly 80% of earned premiums, the report says.

Industry officials and some outside analysts, however, argue that the two industries are different. Title insurers, for instance, spend a lot of their money up front on researching titles — spending that isn’t reflected in the loss figures. “It’s a multimillion-dollar investment,” says Lorri Lee Ragan, an association spokeswoman. “It’s not like a Google search.”

In addition, unlike auto, life, or property/casualty insurers, which collect premiums on an ongoing basis, for example, title insurers get paid only once, when they issue a policy, but need to have reserves on hand to pay claims that may not be filed for years.

To give you an example of how profitable some title insurers are, here’s a long-term graph of Fidelity National Financial (FNF, the black line) compared with ExxonMobil (XOM, the gold line). Now ask yourself, when was the last time you heard anyone complain about Big Title?

Options Boom
Posted by Eddy Elfenbein on January 1st, 2006 at 6:20 pm

Barron’s notices the booming business in options:

For the 13th time in 14 years, option trading volume grew in 2005 at a record pace, and it’s beginning to exhaust superlatives and test the thesaurus. More than 1.5 billion options traded in the U.S., a 27% jump from 2004. These included nearly 1.37 billion stock options (up 26%), and about 135 million index options (up 38%), according to the Options Clearing Corp. The 10 busiest trading days in history? They all occurred in 2005.

Remembrance of Januaries Past
Posted by Eddy Elfenbein on January 1st, 2006 at 5:17 pm

Historically, January has been a good month for the stock market but not in recent years. In 2000, January had its seven-year win streak broken. Since then, the S&P 500 has fallen in four of the six Januaries of this decade. (Yikes, is this really the seventh year of the decade??)
We’ve had some spectacular Januaries in the past. In 1975 and 1976, the S&P 500 rose over 12% in the first the month of the year. It jumped 13% in “the year we will not mention” (hint: between 1986 and 1988). The 25 Januaries from 1975 to 1999 average an annualized growth rate of 39.4%. The other 11 months together averaged 15.4%.