• Two Cheers for Microsoft
    Posted by on July 23rd, 2005 at 9:11 pm

    I think I’m the only person who was impressed with Microsoft’s earnings. Why is everyone so upset? Profits were up 37%. The company beat the Street by two cents a share, and the stock is down. What I saw was a pretty decent report.

    Yes, I know. They warned about big investments for the new versions of Xbox and Windows (Windows Vista). But so what? Those are going to hugely profitable, and not in the distant future either. We’ll start seeing the payoffs next year.

    Let’s look at all the pluses. Xbox is still selling like a champ, and the Server Division is a big moneymaker. As much as people talk about Xboxes, servers are a much bigger business for Microsoft. In the Servers Division, sales were up 16%, and operating profit jumped 32%. On top of that, deferred revenue, which is a sneak peak at future sales, is running very strong.

    I haven’t seen Microsoft this cheap in years. For FY 20006, the company expects EPS of $1.27–$1.32. That gives them a P/E of about 20, or an earnings yield of 5%–which is higher than any point on the yield curve.

    I’m not going to pretend that MSFT is the earnings juggernaut it once was. But at this price, the shares are a solid value.

  • Google Watch
    Posted by on July 21st, 2005 at 5:55 pm

    Google reported its earnings after today’s close. Because it’s Google, and they have to do everything differently, there are several earnings figures you can choose from. For example, the company had net income of $1.19 a share. But it doesn’t end there. If you take out the stock options, Google earned $1.35 a share. Or—depending on taxes—$1.29 a share.

    Wall Street’s consensus was $1.21 a share, but I have no idea which figure that was for. There was a consensus; we just don’t what was consented to. Last quarter, it took the wire services several hours to figure out what the earnings report meant. Since the stock is getting creamed in the after-hours market, I’m assuming the company missed their earnings.

    Sell this stock now.

  • Greenspan on the Hill
    Posted by on July 21st, 2005 at 2:31 pm

    I was surprised to hear Alan Greenspan spend so much time yesterday talking about long-term interest rates. He seems puzzled why long-term rates are still so low.

    This decline in long-term rates has occurred against the backdrop of generally firm U.S. economic growth, a continued boost to inflation from higher energy prices, and fiscal pressures associated with the fast approaching retirement of the baby-boom generation. The drop in long-term rates is especially surprising given the increase in the federal funds rate over the same period. Such a pattern is clearly without precedent in our recent experience.

    He thinks the reason is that, across the world, people are saving too much and not investing enough. The clearly wants high rates, and I think the market will oblige.

  • eBay Keeps Going
    Posted by on July 21st, 2005 at 1:30 pm

    eBay had a great earnings report. I’m simply amazed at how well this company performs.

    Sales jumped 40%, and net income rose by 53%. All told, eBay took in 22 cents a share, which was four cents higher than forecasts. The company also raised its full-year forecast to a range of 82 cents to 83 cents a share. Was it just six months ago that eBay warned of slowing growth, and full-year earnings of 74 cents to 76 cents a share?

    Let’s put today in perspective. Last year, eBay earned 57 cents a share, and the year before that, it made 33 cents a share. So in the last three months, it earned two-thirds of 2003’s profit. The stock is up about 20% higher today.

  • Free the Yuan (and Katie too!)
    Posted by on July 21st, 2005 at 1:05 pm

    It finally happened: The Yuan is free!

    Well, not entirely free. But more free, nonetheless.

    The Chinese government officially ditched its peg to the U.S. dollar. It’s not a big move. The yuan is only 2.1% higher against the dollar.

    The Chinese central bank will now keep to a tight 0.3% band against a basket of currencies. They won’t say what those currencies are, but I assume it includes the dollar, yen and euro, plus a smattering of other Asian currencies.

    Even though the timing was a surprise, this move is hardly big news. I’d have to agree with one analyst who said that this reform is the tiniest thing China could have done. But it does give the Bank of China more flexibility in the future.

    The problem with currency pegs is that they’re simply price-fixing, and price-fixing screws up the normal ebb and flow of capital markets. If you wait long enough, you’ll start to see weird side effects.

    For example, Americans have been gobbling up goods made in China. If it were a country, Wal-Mart would be China’s eighth-largest trading partner. I also think that a lot of the huge demand we’ve seen for things like steel is a consequence of yuan. Also, the Baltic Dry Index, which is a barometer of shipping costs, plunged today to it lowest level in two years. This could be a freefall.

    What happens next is a big mystery. Right now, gold is up and bonds are down. I suspect that long-term bond yields will continue to rise, perhaps to 5%.

  • Lucent’s Word of the Day
    Posted by on July 20th, 2005 at 5:01 pm

    The Newark Star Ledger:

    Generally speaking, we had a good, solid quarter. This is a tough industry,” Lucent Chairman and Chief Executive Patricia Russo said in an interview.

    The Wall Street Journal:

    “We continue to make progress,” said Patricia Russo, chairman and chief executive officer of the Murray Hill, N.J., company. “It was another solid quarter of us doing the things we said we would do.”

    Reuters:

    Lucent Technologies Inc., one of the world’s largest makers of telecommunications equipment, on Tuesday said its quarterly net income fell from a year-ago, but beat Wall Street estimates driven by solid demand for wireless equipment.

    Telephony Online:

    Lehman Brothers analyst Steve Levy called Lucent’s results “solid” in a research note issued before the earnings call.

    Reuters II: Lucent’s quarter seen solid, wireless a concern

    Lucent’s Press Release:

    Over the last 90 days, we have made solid progress building on the collaboration that was already taking place in the business,” said Russo.

  • Tom Brown on BofA
    Posted by on July 20th, 2005 at 3:32 pm

    I always enjoy reading Tom Brown. He’s one of the sharpest banking analysts around. Here’s a sample of his feelings about the Bank of America/MBNA deal.

    In my opinion, Ken Lewis has morphed into a terrible CEO, and has turned Bank of America into a huge, mediocre financial services conglomerate. My small contribution to the betterment of corporate governance over the next few years will be to work ceaselessly to see to it that Ken Lewis is ousted from his job (without a big severance package) and to see that significant turnover of the board occurs, as well. The best thing that can happen for BofA shareholders, in my view, is that the company be broken up. That is the way to create shareholder value—not by paying an outlandish price for a broken growth company!

    Ouch! Read the whole thing.

  • Your Guide to Earnings Season
    Posted by on July 20th, 2005 at 12:15 pm

    I know earnings season can be a bit confusing for investors, so here’s my effort to make this trying time a little less confusing.

    First, Advanced Micro Devices led off earnings season when it said that its profits dropped by 65%, but—and this is crucial—those profits were above Wall Street’s expectations, so the stock went up.

    See? It’s all about expectations.

    Intel’s earnings, on the other hand, were exactly in line with Wall Street’s expectations and the stock went down. So it’s not all about expectations per se. You’re not expected to do what’s expected, but you’re expected to beat expectations. That’s the key. If not, people will expect that other people will sell your stock. So those first people will sell, and you don’t want that.

    Are you following this? Good.

    Now Ford’s earnings dropped by 19%, but it beat expectations by 14 cents. So the stock went down by nine cents. Now an amateur investor might think that Wall Street is simply out of its mind. Not true. The reason Ford why dropped: profit-taking. Some people said it was a correction, but it wasn’t. It was profit-taking. Just trust me on this.

    Now Jamie Dimon of JPMorgan Chase is a very smart CEO. On June 1, he said that their earnings were going to be bad: “Absent any improvements in June, we expect our trading results to be worse this quarter than they were in the third quarter last year, which was a terrible quarter.” Pretty scary. Wall Street took the bait and dropped its expectations. The day of that announcement, the stock went up by a penny. And today, JPMorgan Chase reported that it beat those lowered expectations by two pennies.

    Of course, the stock is down today, but that was unexpected.

  • The Bond Bubble
    Posted by on July 19th, 2005 at 1:05 pm

    How come we never hear about a Bond Bubble? I’m always being told that we’re in a housing bubble. You certainly don’t have to look hard to find someone who’ll tell you that so-and-so stock is “due for a correction.” But everyone seems terrified to criticize the bond market.

    When the Fed lowered rates, bonds did well. When the Fed raised rates, bonds did well. Alan Greenspan called it a “conundrum.” Don’t bond traders ever suffer from irrational exuberance? People just assume that the bond market is always right.

    But now, bonds are falling. It’s only a minor leak so far. The yield on the 30-year T-bond (or at least, it was a 30-year bond when it was issued) reached 4.15% on June 3. The yield got down to 4.18% on June 27, but no lower. Since then, the bond market has backpedaled. Could this be a dreaded double top?

  • China’s Economy
    Posted by on July 19th, 2005 at 10:04 am

    Tomorrow, the Chinese government will report how well their economy did in the second quarter. We all know the economy in China is booming, but these government reports are wildly inaccurate. You can basically choose any number you want. Ten percent? Fine. Eleven point three? Sounds good to me.

    The GDP reports from our own government are pretty bad. But this time, I think this Chinese GDP report is worth watching. It’ll be interesting to see what the government is willing to admit. I tend to think that the Chinese economy is a lot weaker than most people think.

    You have to ignore what the government says, and look for other signs. For example, Huang Power, a huge Chinese power producer, said that profits are going to be down 30%–40% for the first half this year. Also, the cost of shipping goods like iron and coal has plunged recently.

    The U.S. is putting a lot of pressure on China to revalue the yuan. If China doesn’t move, the Senate wants to slap a huge tariff on Chinese products. For now, Greenspan has gotten the Senate back off. Apparently, a revaluation is coming soon. But if the Chinese economy isn’t do well, that could put any monetary reform on hold.