Hedge Funds Are the New Mutual Funds
Posted by Eddy Elfenbein on December 27th, 2005 at 9:49 pm

So says Daniel Gross in Slate:

This was the year of hedge funds. The largely unregulated pools of private capital—generally available only to institutions and the rich—have proliferated nearly as fast as adulatory articles about them. Hedge-fund managers have historically been the Garbos of the asset management world: They want to be left alone by the media, by the public, and above all, by the Securities and Exchange Commission. But in recent years—and especially in 2005—they’ve had a coming-out party. Aggressive hedge-fund managers are seeking to shake up management and push restructurings at blue-chip companies like Time Warner and McDonald’s. Others, not content to flip stocks, have taken the reins at well-known companies, as Edward S. Lampert has done at Sears.
As the chart accompanying this article shows, the hedge-fund industry has doubled in the last four years; there are now an estimated $1 trillion in assets in 8,000 funds. Staid institutions like university endowments and state employee pension funds are plunging cash into hedge funds. And investment banks have rolled out funds that allow merely well-off people to invest in them.
Are hedge funds the next big thing in mass investing? And if so, will they suffer the same lousy fate as the last big thing in mass investing—mutual funds? In the 1990s, the mutual-fund industry doubled. Millions of new investors, lured by excellent recent performance, thronged into funds. Today, according to the Investment Company Institute, there are 8,000 U.S. mutual funds with $8.5 trillion in assets. Yet every year, the majority of them underperform broad market indexes—and charge fees for doing so. It turns out the mutual-fund industry expanded well beyond the ability of mutual-fund managers to run the money effectively. Today, mutual funds are a clunky business that relies heavily on marketing, survives on management fees, and fears new competitors.

Read the whole thing.

The Market Today
Posted by Eddy Elfenbein on December 27th, 2005 at 9:06 pm

The yield curve finally inverted today. Unlike most things Wall Street freaks out about, I actually agree that this is a big deal. An inverted yield curve is when short-term interest rates are higher than long-term rates. The norm is that long-term rates are higher. Investors typically get more by shouldering the risk of having their money tied up for a longer period of time. That’s the theory anyway, and it ain’t happening now.
When people aren’t paid to take risks, they stop taking them. The yield curve has often been a good barometer for future economic performance. It’s actually been a lot better than most economists.
Interest rates had been headed this way for along time, but today the yield two-year Treasury note briefly topped the yield on the 10-year Treasury bond. This seemed to scare the market as stocks lost ground all afternoon. The S&P 500 lost 0.96% and our Buy List lost 0.53%.
We can thank our avoidance of energy stocks to today’s out-performance. For December, the Buy List is up 0.95% to the S&P’s 0.57%. The energy sector was clobbered in today’s session. Natural gas prices plunged 10% today, and they’re down 23% since Wednesday.
Frontier Airlines (FRNT) did very well today. Bob McAdoo, the analyst at Prudential, raised his earnings guidance for next year by four cents a share to 12 cents.
Also Boston Scientific (BSX), against all reason, logic and common sense, is sticking by Guidant’s side. Well…at least they get points for loyalty.

Natural Gas Prices are Down 23% in the Last Three Days
Posted by Eddy Elfenbein on December 27th, 2005 at 1:43 pm

From Bloomberg:

Natural gas plunged for a third day in New York as warmer-than-normal weather slashed demand for the furnace fuel.
“The long-range forecast is for more warm weather,” said Michael Rose, director of the trading desk at Angus Jackson Inc. in Fort Lauderdale, Florida. “There’s no doubt about it. When it’s cold in New York, the prices go higher, and when it’s warmer, prices go lower.”
U.S. heating demand will run 30 percent below normal for the next week and 22 percent below normal from Jan. 2 to Jan. 6, according to Weather Derivatives, a Belton, Missouri-based forecaster. New York will have a low tomorrow night of 41 degrees Fahrenheit (5 Celsius), the National Weather Service said. That’s 13 degrees above normal.
Gas for January delivery fell $1.213, or 9.9 percent, to $11.07 per million British thermal units as of 12:29 p.m. on the New York Mercantile Exchange. It was the biggest fluctuation of any commodity today. Gas prices are down 30 percent from a record $15.78 per million Btu on Dec. 13.

The Midday Market
Posted by Eddy Elfenbein on December 27th, 2005 at 11:55 am

The Buy List is having a very good day so far. Right now, we’re up about 0.54% while the S&P 500 is off around 0.36%. Energy stocks are being hit pretty hard. Our big winner so far is Frontier Airlines (FRNT) which is up nearly 4%. Brown & Brown (BRO) has made a new high, and Commerce Bancorp (CBH) is very close to a new high.
The yield curve finally—and very briefly—inverted, meaning that short-term interest rates were higher than long-term rates. I see that the yield on the five-year Treasury is very close to the yield on the ten-year Treasury. This means that investors aren’t being rewarded for lending their money for longer terms. The price for taking “time risk” is zero.
As the 2005 trading year is almost over, it will be interesting to see if the Dow can hold onto its slight gain. Right now, the index is up about 80 points for the year. The S&P 500 is currently up about 4.5% for the year.
Two other things to note: The Wall Street Journal reported that holiday sales were pretty strong. Also, Overstock.com (OSTK) gave an earnings warning. Something tells me this company will not have a smooth future.

Market Report from Vietnam
Posted by Eddy Elfenbein on December 27th, 2005 at 4:26 am

Take a deep breath, here’s the stock market report for the Saigon Times. The Vietnamese exchange opened 2000. Trading is done in the rather unfortunately-named Vietnamese dong.
I really don’t know what most of this means, but I assume it’s a good sign. Free enterprise seems to be catching on. Believe it or not, property prices in Hanoi rival those of New York and Tokyo.
Vietnam has followed the other South Asian countries down the path of economic reform. I guess it’s sort of a domino effect.

Good Fashion Sense
Posted by Eddy Elfenbein on December 26th, 2005 at 6:23 pm

One of the best-performing industry groups of last 10 years has been retail apparel stores. I have to admit that this is one phenomenon I never saw coming. It’s also interesting to note that oftentimes, great investments are necessarily from great inventions. Sometimes, just building a better mousetrap is all you need.
Just look at the long-term charts of stocks like Abercrombie & Fitch (ANF), Chico’s FAS (CHS), Christopher & Banks (CBK), American Eagle Outfitters (AEOS) and Urban Outfitters (URBN). They’re all been big winners. Plus, there are some promising up-and-comers like True Logic (TRLG) and Aeropostale (ARO).
So who’s next? Make way for Steve and Barry’s:

Almost everything at Steve & Barry’s — jeans, jackets, hats, athletic pants, cargo shorts, hooded sweat shirts — costs $10 or less, an obvious delight for holiday shoppers. But retailers across the realm, from mass-merchant discounters to higher-end clothiers, are also starting to take notice, retail experts say.
In the garment industry, Steve & Barry’s fits into an emerging category of “extreme-value retailers who go to off-the-beaten-track marketplaces like Madagascar where they can really get tremendous deals,” said Lois Huff of Retail Forward, a consulting firm in Columbus, Ohio.
They cater to tightfisted customers “looking for something that’s ‘good enough’ — decent quality at a great price,” Huff said. “There’s a huge shift in many consumers toward that kind of a mind-set.”
“When somebody discovers a Steve & Barry’s they feel like they’ve found a store that understands and embraces their needs,” echoed Marshal Cohen, chief analyst at market research firm NPD Group Inc. “So what if the color is a slightly different shade of blue! At this price I can buy five of them!”

They’re not public yet, but this is one to watch.

Merry Everything!!
Posted by Eddy Elfenbein on December 24th, 2005 at 6:03 pm

I want to thank all my readers for their support. Have a wonderful holiday season and a happy, healthy and profitable New Year!
– Eddy

Patrick Byrne Goes Off His Meds
Posted by Eddy Elfenbein on December 24th, 2005 at 4:20 pm

Jeff Matthews nails Patrick Byrne, the loopy CEO of Overstock.com. (Via The Stalwart).

Morgan Keegan Downgrades Bed Bath & Beyond
Posted by Eddy Elfenbein on December 24th, 2005 at 3:57 pm

Here’s the bearish case from Morgan Keegan:

We are lowering our rating to Underperform from Market Perform based on valuation and risks to near-term results. We are raising our fiscal year 2006 earnings-per-share estimate to $2.08, predominantly driven by the company’s announcement that it will complete its $400 million share repurchase in fiscal 2006.
Bed Bath & Beyond issued another predictable earnings report last night, although sales growth on a total and comparable basis missed our estimates. Bed Bath & Beyond reported third-quarter earnings per share of 45 cents, in line with our estimate and the company’s guidance issued Sept. 21.
Citing an “extreme” promotional environment, the company reiterated fiscal year 2005 earnings-per-share guidance of $1.89, in line with our estimate but two pennies below the current consensus estimate. The company issued initial guidance for fiscal year 2006, with the underlying assumptions producing earnings per share in the range of $2.08 to $2.10. The guidance is above our prior fiscal year 2006 earnings-per-share estimate of $2.03 but lower than the consensus estimate of $2.19.
The company will lap a tougher comparison in its February quarter, with same-store sales growing 5.1% in fourth quarter of 2004. We believe the discounters in general, and Wal-Mart in particular, could hurt Bed Bath & Beyond’s fourth-quarter results with their aggressive focus on a broader home assortment this holiday season.
Our discount cash flow (DCF) model indicates a fair value for Bed Bath & Beyond shares of $30. We expect the stock to trade down significantly in today’s trading session, but believe there will still be substantial downside potential. The stock closed at 20x our 2006 earnings-per-share estimate of $2.08.

WSJ on Gazprom
Posted by Eddy Elfenbein on December 24th, 2005 at 3:52 pm

Here’s a sample of the Journal‘s look at Gazprom, the Russian natural gas giant.

MOSCOW — Russian President Vladimir Putin signed a long-awaited decree removing all curbs on foreign ownership of shares of OAO Gazprom, the world’s biggest natural-gas company, a move that will turn it into one of the world’s leading emerging-market stocks.
This event, which investors have been anticipating for years, provided a fitting climax to a bullish year that has seen Russia’s main share index soar by 80%, beating most other markets. Under the old rules, foreigners could buy only London-listed American depositary shares in the state-run gas monopoly. Those traded at a premium to shares traded in Moscow, and foreign ownership of Gazprom was capped at 20%.
The changes will eliminate long-held concerns of Western money managers, making Gazprom a must-have stock for big funds. It is unclear how much this will affect Gazprom’s price, as anticipation of Mr. Putin’s decree was factored into the stock.
“This is a landmark event for the whole of our capital market,” said Dmitry Medvedev, Gazprom chairman and Russia’s deputy prime minister. Share liberalization will attract “world-class foreign investors” into the company and allow Gazprom to join “the elite club of the biggest companies” as measured by capitalization, he said.

Yesterday was a fairly quiet day on Wall Street. The S&P 500 gained 0.04% and our Buy List rose 0.10%. Our best stocks were CACI (CAI), Frontier Airlines (FRNT) and Brown & Brown (BRO). Even the long weekend, the market will be closed on Monday.