• 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.

  • Google Watch
    Posted by on July 19th, 2005 at 8:46 am

    Isn’t Google just adorable? Those new fangled Web folks refuse to play by the Wall Street’s rules, and that’s why the Street doesn’t like them. Even though the stock has soared on a gazillion analyst upgrades, deep down, Wall Street isn’t happy. You see, those uptight East Coast squares don’t “dig” what Google is all about. Google does things their Own Way, and they’re not afraid who knows it.

    Like when other companies go public, they’re supposed to use some stuffed-shirt investment bank crammed full of Skull n’ Boners. Not Google. They did their own IPO. You heard right. They used a Dutch auction. Cause it’s democratic. None of that screw-the-little-guy business-as-usual stuff. Yes, it’s true, Google did cut the size and price of the IPO (at the last minute), and it reserved $450 million for nine insiders. Also, the Gooligans made a special class of stock that has ten times the voting power of the common stock. But those are messy details. The larger point is about attitude, and Google’s got it.

    For example, Google has broken Wall Street’s most sacred rule—they refuse to provide earnings guidance. Imagine that! They’re not afraid to stand up to those bullying Wall Street analysts. At their Analyst Day, Google said that their CFO would speak. But it turned out to be the company’s chef—the Chief Food Officer. Get it? The Chief Financial Officer didn’t even address the analysts. Investors have to understand that Google is an unconventional company. It’s like what Larry Page wrote, “Google is an unconventional company.”

    When they had their first public earning report, the Googloids released it early on their Web site (www.google.com, incidentally). Youch! That must have infuriated those arrogant Wall Street sheeples. And after Google blew away analysts’ forecast for the fourth-quarter, you can just imagine how angry Douglas Anmuth of Lehman Brothers was when he had to raise his price target from $190 to $230. Or when Prudential raised their target to $260. Or Goldman Sachs raised theirs to $265. On the inside, it must have killed them.

    But that’s ancient history. Now Google’s stock is up to $300—a 250% gain in less than a year. But don’t worry, success hasn’t changed them. The Google Dolls are still mavericks. They’ve said that they’re not going to split the stock. (Are they allowed to do that?) Anmuth is showing a brave front. Last week he raised his price target yet again (to $350 from $275). Smith Barney is up to $360. How high will they go? I’m sure Wall Street will give those nerdy whippersnappers their comeuppance. Until that time comes, Jim Cramer quietly tells us “Google’s still cheap!”

    Perhaps Google is changing their ways. Google’s CEO, Eric Schmidt said, “One of the great secrets of Google is that we are not quite as unconventional as we say we are.” Maybe so. As for me, I’m waiting for Thursday’s earnings report. The consensus estimate is for $1.20 a share. I have no idea what it will be, but whatever it is, I hope Wall Street won’t be too angry.

  • Idiot Award
    Posted by on July 18th, 2005 at 5:19 pm

    If you plan to fax out bogus stocks tips to one million people, it’s a good rule to avoid faxing the Securities and Exchange Commission.

    The SEC said that the original fax, handwritten by Yafa, appeared to be an urgent message from a financial planner intended for a client named “Dr. Mitchel.” The fax, sent on Dec. 15, 2004, recommended the purchase of shares of AVL Global Inc., saying that the price was about to triple.
    Among the fax recipients was the commission’s San Francisco office, an apparently inadvertent slip, said Marc Fagel, the commission’s head of enforcement in the city.

  • Stocks Vs. Real Estate
    Posted by on July 18th, 2005 at 10:30 am

    The Apprentice #3, Kendra Todd, was on yesterday’s Bulls & Bears. I admit, I was hoping to see her cry again, but alas, no such luck. Now loose in the real world, Kendra is a real estate agent in Florida. Her segment dealt with which is a better investment right now, stocks or bonds. In Kendra’s opinion, it’s real estate. Definitely, real estate.

    Now, let’s make this clear. Real estate is a nice investment. I hope everyone owns their own home. But in the long run, real estate will never, ever, ever, ever outpace stocks. Never. This isn’t just my opinion, it’s reality. It won’t happen because it can’t happen.

    A house is simply an asset. No matter how hard it tries, it will never be anything more than an asset. A house does its job by just sitting there. But a stock is different. A stock is part ownership in a corporation. A corporation is people using assets to create wealth. This ain’t just a matter of definitions.

    You can buy a share of stock of a company that can buy a house. A house can’t invest in a corporation. You can form a corporation and issue stock. With the proceeds, you can do cool things, like…buy a house and rent it for profit. After a while, you’ll have enough money to buy another house. Then another and another. Soon, you’ll have a nice stable of houses. That’s what businesses do—they grow. If they don’t grow, they’re replaced by businesses that do. It’s that simple, and a house can never do that.

    I know people treat stocks like lottery tickets. And sure, stocks often act like lottery tickets. But ultimately, stocks are claims on real assets. Stocks are a unique investment. No other investment offers you what stocks can do. That’s why every analysis of long-term returns shows that stocks always beat everything else. For the long run, stocks are the best investment to own. Period.

  • CNOOC & Unocal
    Posted by on July 16th, 2005 at 5:38 pm

    This is starting to look bad. Now, CNOOC is meeting with Unocal’s board to get them to change their mind and support CNOOC’s bid.

    On Friday, Senator Dorgan said that he is going to introduce legislation that would block the deal no matter what. It’s hard to say how much support this bill would have.

    What’s not being said is that CNOOC is simply offering too much for Unocal. This is a clear sign of two separate tops. One is that the oil market is too hot. The other is that China has way too many dollars. Bear in mind that CNOOC’s deal is all cash, while ChevronTexaco is offering stock and cash.

    I fail to see how CNOOC’s ownership of Unocal is a threat to our national security? They can’t take the oil and run off. Most of Unocal’s oil is in Southeast Asia anyway. Why is Congress so worried now? For the last few years, the Chinese government has been gobbling up U.S. Treasuries. Perhaps they want a little more than 4%. Of course, paying $18 billion for Unocal, they’ll be lucky if they get 4%.

  • Procter & Gamble Wins European Union Approval to Buy Gillette
    Posted by on July 15th, 2005 at 2:18 pm

    The EU has approved the Gillette/P&G merger. It all came down to toothbrushes. To placate the Eurocrats, P&G decided to sell its SpinBrush line of battery toothbrushes. Otherwise, the combined P&G and Gillette would have over half the European toothbrush market.
    The Europeans concern isn’t that consumers might be harmed, but that P&G/Gillette’s competitors will be harmed. We—meaning the U.S.—used to believe that “portfolio effects” were important, but we gradually learned that it simply doesn’t hurt consumers. The Europeans still hold to this theory, and it’s what led the EU to block the GE/Honeywell deal four years ago.

  • Looking for a Bubble?
    Posted by on July 15th, 2005 at 9:29 am

    If you’re looking for an investment bubble, you might want to consider shipping stocks. The Holy Grail of the shipping industry is something called the Baltic Dry Index. Although most people have never heard of it, the index, which measures the cost of shipping goods by sea, is probably one of the world’s most-watched economic barometers.

    Thanks to the China’s insatiable demand for iron, the index has had an amazing rise since 9/11. The index rose from 900 in 2001 to over 6,200 last December. As you might expect, the shipping initial public offerings are coming fast and furious. There were three more in June alone. Earlier this year, a company went public with just two employees. As bubbles inflate, the quality of new offerings often tends to go down. The breaking point may be soon. The Baltic Dry Index has plunged over 60% lately. It’s now around 2,400.

    The reason for the fall may be signs of a slowdown in China. The lower shipping costs are felt all over the world, and the late IPOs may be left holding the bag.

  • S&P’s Four-Year High
    Posted by on July 15th, 2005 at 8:56 am

    The S&P 500 closed at a four-year high yesterday. And why not? Earnings are up and bond yields are down. That’s your formula for higher stock prices.

    There’s little reason to believe that bond yields are headed higher. That’s what ended the rally earlier this year, but now it’s clear that inflation has been tamed. Even though oil has headed up, it hasn’t translated into across-the-board higher prices for consumers. In fact, higher equity prices might be a sign that oil is headed lower.

    What will be interesting to watch is the future of short-term interest rates. Although the Fed has raised rates nine times so far, the yield on three-month Treasury bills is lower than the Fed Funds rate. This may mean that the market is getting uncomfortable with these rate increases. The futures market expects two more rate increases this year.