• Tim Harford on Subsidies
    Posted by on January 1st, 2006 at 2:23 pm

    Here’s part of a fascinating interview with Tim Harford about his book, “The Undercover Economist.”

    Nick Schulz: I was interested to read in your book that you suggested that agricultural subsidies are harmful to the environment. And that might be news to some people. How is that the case and why is that so?
    Tim Harford: And actually let me broaden that. I mean we are talking about all kinds of agricultural protectionism. Agricultural subsidies get the most airtime. But actually more direct trade barriers like taxes and tariffs I think are more serious. They all push the same kind of way. They will push towards having crops grown on land which is not as suitable as it could be if their crops were grown in another country.
    So you have got acres of fertile land in Guatemala that you could grow sugar there. But because of protectionism, the sugar is grown in Florida and the Everglades are destroyed. And meanwhile the Guatemalans are either growing coffee for basically nothing, or like the Columbians, they think, well, maybe we should grow cocaine instead.
    Now this is not a good idea. And I have a little graph — I don’t have a lot of graphs in my book. I prefer the written word. But sometimes the picture is worth 1,000 words — and it’s just a graph of trade barriers for different countries and how much fertilizer they use on their agricultural land. The countries that have the highest trade barriers, Japan and Korea use so much fertilizer. Then it is the EU. They use a lot. American less, but you know they still have quite a lot of protectionism and they still use quite a lot of fertilizer.
    And then countries like Brazil that don’t have a lot of agricultural protectionism don’t use much fertilizer either. And when you think about it, it makes perfect sense. The protectionism is necessary because the land is not good. And the fertilizer is necessary because the land is not good. So free trade in agricultural products is — well it’s good for a lot of reasons. But one of the reasons is it is good for the environment.

  • WSJ: Medtronic’s Looking Good
    Posted by on January 1st, 2006 at 12:37 pm

    The Wall Street Journal takes a look at Medtronic (MDT) and likes what it sees:

    Recalls and safety alerts roiled the market for implantable defibrillators last year. Fortunately for medical-device maker Medtronic of Minneapolis, the bad news mostly has hurt a rival, Guidant.
    Recently, Guidant warned of a shortfall in its sales of these devices, which use jolts of electricity to treat a malfunctioning heart. Many of these lost sales seem to be going to Medtronic. And Medtronic might even benefit from the bidding war that’s erupted over Guidant.
    Gary Ellis, the chief financial officer of Medtronic, says he isn’t surprised to see Boston Scientific offering $25 billion in an effort to beat the $21.5 billion bid that Guidant accepted from Johnson & Johnson. Those companies wouldn’t be offering such sums for Guidant, says Mr. Ellis, if they didn’t envision strong sales for devices sold by Guidant, Medtronic and a third manufacturer, St. Jude Medical.
    Medtronic has been benefiting from its leadership in the implantable-defibrillator market. The stock, which ended 2004 below $50, recently was near $58 and looks as if it could rise further.
    Medtronic trades for about 23 times expected earnings of $2.50 a share for calendar 2006, about the same multiple of future earnings as it did a year ago, and the company’s outlook is even better now.
    Product defects have dogged every defibrillator maker in the past year, but the bad publicity mainly stuck to Guidant, allowing Medtronic to boost its market share to 55% from about 50%.
    Medtronic has a diversified medical-device line. In the next year or so, it expects to launch new products into the growing markets for artificial spinal discs and automated insulin pumps. The company also might enhance its lagging line of cardiovascular devices, such as the tubular stents that prop open pinched heart arteries, if it can acquire Guidant product lines expected to be sold for antitrust reasons by the eventual winner in the bidding.
    A public outcry followed the death in May 2005 of a 21-year-old man whose Guidant defibrillator didn’t work. Doctors complained that Guidant hadn’t warned of potential problems in the product’s circuitry. Since May, Guidant has issued safety alerts covering more than 100,000 units, but it isn’t alone. Medtronic alerted doctors to a potential battery problem in nearly 90,000 of its units, and doctors later replaced about 18,000 of the devices. Yet because Medtronic was more forthright, its reputation fared better than Guidant’s.
    Medtronic’s CFO Mr. Ellis says the defibrillator market remains underpenetrated, and Medicare coverage should allow defibrillator sales to keep growing at 20% a year.
    Medtronic’s spinal and diabetes businesses are expanding nearly as fast. Maybe that’s why J&J and Boston Scientific are so keen to get into Medtronic’s markets.

  • Ukraine to Gazprom: Drop Dead
    Posted by on December 31st, 2005 at 6:10 pm

    The fight betweem Gazprom and Ukraine is getting worse. It looks like the state-controlled Russian company is going to shut off all supplies to Ukraine starting tomorrow:

    Ukrainian President Viktor Yushchenko rejected Russian President Vladimir Putin’s proposal to delay a fivefold increase in natural gas prices for three months, likely leading OAO Gazprom to stop supplying the fuel to the former Soviet republic on New Year’s Day.
    “We can’t accept a price of $230” per thousand cubic meters, Ukrainian government spokesman Valentyn Mondrievsky said in a telephone interview from Kiev less than two hours after Putin’s offer was broadcast on Moscow-based Gazprom’s NTV television network.
    “We support Russia’s proposal to switch gas prices to the market, but the price shouldn’t look like economic pressure,” Yushchenko said in an e-mailed statement.
    State-run Gazprom, which supplies about one quarter of Ukraine’s gas and uses the country’s pipelines to supply a quarter of western Europe’s, plans to shut off supplies to Ukraine at 10 a.m. tomorrow if the nation doesn’t agree to pay $230 per thousand cubic meters, up from $50 now. The dispute pits Putin against Yushchenko, who is trying to orient Ukraine more toward western Europe in defiance of the Kremlin.

    Update: Russia halts gas sales to Ukraine.

  • Year-End Summary
    Posted by on December 31st, 2005 at 5:07 pm

    Reuters looks at the final numbers:

    The Dow declined 0.61 percent in 2005, breaking its streak of back-to-back gains for 2003 and 2004.
    Meanwhile, the S&P 500 rose for a third consecutive year, advancing 3 percent — just one-third of its 9 percent gain last year — and its smallest annual gain since 1987.
    The tech-laced Nasdaq also climbed for a third straight year, rising 1.37 percent, helped by multi-digit gains in bellwethers including Google Inc., up about 117 percent for the year, and Apple Computer Inc., up about 122 percent for 2005, on a split-adjusted basis.
    In Friday’s trading, though, Google ended the regular session down 1.3 percent, or $5.29, at $414.86, while Apple rose 0.6 percent, or 44 cents, to $71.89.
    In the broad S&P 500 index, the best-performing sector in 2005 was energy, with a 29.1 percent gain, buoyed by crude oil’s jump to a record price of $70.85 a barrel in the aftermath of Hurricane Katrina in August. The worst-performing S&P 500 sectors were communications, with a 9 percent drop, and consumer discretionary, with a 7.3 percent slide.
    “This was not a year for macro-sector bets — whoever bet on sectors, or indexes other than energy, got extremely frustrated,” said James Paulsen, chief investment strategist at Wells Capital Management in Minneapolis, with $155 billion in assets under management. “This was the year of individual stocks.”

    I think Mr. Paulsen has it exactly right. My suspicion is that 2006 will not be a good year for the energy sector. I think certain individual stocks will stand out, but I’m not so certain about sector plays.

  • The New Buy List
    Posted by on December 31st, 2005 at 12:15 am

    For 2006, I going to track the new Buy List based on Friday’s closing prices. All 20 stocks will be equally weighted. I’m going to assume a portfolio of $1 million, $50,000 for each position. Just in case anyone in the middle of August questions where I get my track numbers from, here are the 20 stocks, with the starting prices and number of shares:
    Company (Symbol)……………….Price……………Shares
    AFLAC (AFL)………………………….$46.42……….1,077.1219
    Bed Bath & Beyond (BBBY)……..$36.15……….1,383.1259
    Biomet (BMET)……………………….$36.57……….1,367.2409
    Brown & Brown (BRO)……………$30.54……….1,637.1971
    Donaldson (DCI)……………………$31.80……….1,572.3270
    Dell (DELL)……………………………$29.95……….1,669.4491
    Danaher (DHR)………………………$55.78………….896.3786
    Expeditors International (EXPD)..$67.51……….740.6310
    FactSet Research Systems (FDS)..$41.16……1,214.7716
    Fair Isaac (FIC)…………………….$44.17……….1,131.9900
    Fiserv (FISV)…………………………$43.27……….1,155.5350
    Golden West Financial (GDW)…$66.00………….757.5758
    Harley-Davidson (HDI)…………..$51.49…………971.0623
    Home Depot (HD)………………….$40.48……….1,235.1799
    Medtronic (MDT)……………………$57.57………….868.5079
    Respironics (RESP)………………..$37.07……….1,348.7996
    SEI Investments (SEIC)…………$37.00……….1,351.3514
    Sysco (SYY)…………………………..$31.05……….1,610.3060
    UnitedHealth Group (UNH)……..$62.14………….804.6347
    Varian Medical Systems (VAR)..$50.34………….993.2459
    The 20 stocks have a combined market value of $458 billion. The average dividend yield is about 0.5%. Twelve of the stocks are in the S&P 500, six are in the S&P 400 Mid-Cap Index and two are in the S&P 600 Small-Cap Index. Home Depot (HD) is our only Dow stock.

  • It’s Over
    Posted by on December 30th, 2005 at 11:26 pm

    Well, it’s all over. The year 2005 ended on a bit of a sour note. The Dow finished the year in the negative. Today, the Dow dropped 67 points, and S&P 500 fell 6.13 points to finish at 1248.29. For the day, the S&P 500 lost 0.49% and the Buy List lost 0.90%. For December, the S&P 500 lost 0.1% and the Buy List fell 0.04%. For the fourth quarter, the S&P 500 gained 1.67% and our Buy List gained 4.68%. All in all, this has been a good time for us.
    Earlier I mentioned how the market likes to find certain numbers on the last day. At today’s close, the S&P 500 rose by 3.001% for the year (not including dividends). Also, Bill Miller’s Legg Mason Value Trust beat the market for the 15th straight year, although it was close. The fund returned 6.02% beating the S&P 500 with dividends by just 0.59%. Manu Daftary of the Quaker Strategic Growth Fund kept his eight-year streak alive.
    The broadest stock index, the Wilshire 5000, was up 4.56% for the year.
    Here’s the big change of the last 12 months. At the end of 2004, the 10-year Treasury bond yielded 4.22%, today it yields 4.39%. But the two-year Treasury jumped from 3.07% a year ago to 4.41% today. It pays you slightly more than the 10-year yield.

  • An Hour to Go….
    Posted by on December 30th, 2005 at 2:44 pm

    It’s a pretty lousy day on Wall Street so far. Every stock on the Buy List is lower except for Frontier Airlines (FRNT). Unless things change very quickly, it looks like 2005 will be a negative year for the Dow. Today will mark the 298th straight day that the Dow will close between 10000 and 11000.
    The S&P 500 has been a better performer this year. Last month, the index was able to break out to new highs. As recently as two weeks ago, the S&P 500 got to 1272, a level it hadn’t seen since June 2001. But the index is still about 18% below its all-time high set in 2000.
    Today, the S&P 500 is in a nasty fight with 1,250. The indexes like to flirt with these year-end numbers. In 2003, the Nasdaq closed out the year at 2003.37. If the S&P ends at 1250, it will represent about a 5% gain for the year, including dividends. That’s about half the long-term average. Value has a narrow lead over growth this year, and mid-caps have beaten both small- and large-cap stocks.
    I’m still amazed that interest rates are so low. The 10-year bond is also stuck in a trading range. Right now, an investor can lock-in a yield of roughly 4.4% for the next ten years. In my opinion, that’s absurdly low. Several of our stocks on the Buy List (and the new Buy List) will probably grow their earnings more over the next three years than that bond will do over the next decade.
    I’m not so sure that stocks are a great value but they look a whole lot better than bonds. Plus, you can get about the same yield by buying a two-year bond.

  • Footnote of the Year
    Posted by on December 30th, 2005 at 1:01 pm

    Michelle Leder of the indispensable Footnoted.org has this year’s “Footnote of the Year,” courtesy of Kerr-McGee (KMG):

    An annual stipend provided to facilitate involvement in community activities accounted for 96% of Mr. Corbett’s Other Annual Compensation in 2004.


    Oh dear lord. The CEO of Kerr-McGee got an effing stipend from the company to give to charity! What part of charity does he not get? (Well, I guess that would be ALL of it.)
    In other news, a pack of angry Chihuahuas attacked a police officer.

  • Motorola
    Posted by on December 30th, 2005 at 12:21 pm

    I have to confess that I’ve always felt that Motorola (MOT) was a bit overrated. Maybe I’ve been a bit too harsh. Yeah it’s a good stock, but is it really that good? Nevertheless, I’m very happy to see the company have success this year. Thanks to the little Razr phone, the company has been humming along.
    Motorola beat earnings every quarter this year and Wall Street has been revising its estimates higher. Right now, the Street expects MOT to earn $1.29 a share. So the stock is going for about 17.5 times next year’s earnings.
    Investors Business Daily has more the Razr:

    In his third-quarter earnings conference call, Motorola Chief Executive Ed Zander said the Razr was the most popular flip-open phone this year.
    Analysts say sales only accelerated this quarter. Piper Jaffray expects 11 million Razr phones will be sold worldwide in the fourth quarter.
    Cell phone retailers say the Razr was hot during the holidays. While many service providers give away cheaper phones for free to attract subscribers, the Razr has become a relatively low-cost option.
    A $350 phone a year ago, Cingular today offers a Razr phone for $99 with a two-year service plan.
    “It’s our top-selling device,” said Cingular spokesman Ritch Blasi.

    Now that it’s the end of the year, I can look back on all my mistakes from 2005. I should have been paying more attention to Motorola when the stock was at $15 earlier this year. All the signs were there.

  • The Final Day of 2005
    Posted by on December 30th, 2005 at 10:11 am

    We’re coming down the wire, and the Dow is inches away from where it was one year ago. The Dow closed out 2004 at 10783.01. Yesterday, the index finished 10784.82. So in one full year, we’ve moved less than two points. The S&P 500, however, is up about 3.2% for the year, not including dividends. Small- and mid-cap stocks have done better than the large stocks.
    Yesterday, the S&P 500 dropped 0.30% and our Buy List gave back 0.31%. The market is down this morning.
    The New York Times has an interesting article on Intel (INTC). The company is planning a major shift in strategy by focusing on the consumer. Business Week has more.