Archive for 2005

  • The Copper Boom
    , November 16th, 2005 at 1:03 pm

    The government reported that consumer inflation was pretty tame last month. The core and non-core rates both rose just 0.2%. Despite the good inflation news, the gold bugs are very happy today. The yellow metal is up about $8 an ounce and it’s close to an 18-year high. South Africa said that its gold production this year will likely hit an 80-year low. Platinum is doing even better—it’s at a 26-year high and closing in on $1,000 an ounce.
    But that’s nothing compared to what’s happening in the copper pits. Copper is at its highest price ever. Don’t worry, gold is still about 4,000 times more expensive than copper. Recently, a Chinese trader shorted $800 million worth of copper. Since he got slammed in this trade, he may have to soon deliver 200,000 tons of copper. The problem is that the trader has now…disappeared. Now we’re seeing a classic short squeeze. The rumor is that the Chinese government will step in and cover the short, which has pushed prices even higher. These are truly the golden days for copper.
    And to show you that we live in a global economy, the Chilean peso has rallied to a five-year high because Chile is the world’s largest producer of copper. The Chilean peso is one of the few currencies in the world that’s actually gaining against the dollar.
    The big American copper play is Phelps Dodge (PD), which is up 60% since mid-May. There’s also Southern Peru Copper (PCU) and Freeport-McMoRan Copper & Gold (FCX) which have done even better. Phelps Dodge owns about 11% of Southern Peru. Freeport McMoRan is doing so well that it just announced a special dividend and raised its regular dividend.
    During the heyday of inflation in the 1970s, the price of copper rose so much that a penny was nearly worth more than a penny. That can’t happen. Printing money is a big money-maker for the government. By the way, seigniorage is a major no-no for individuals. I don’t mean counterfeiting. I mean seigniorage—printing money for a profit. Not only is it a government-enforced monopoly, it’s actually illegal for you to play the game yourself. I believe it’s a felony. So if you already have two strikes on your record, do not act like your government. They really don’t like that.
    About 20 years ago, the mint worked to correct the problem of having our money actually worth something. (You see, the U.S. dollar is the original faith-based initiative.) The mint changed the penny’s formula from 95% copper/5% zinc, to 97.5% zinc and 2.5% copper.
    Here’s an odd tidbit for you. In 1943, pennies were made from steel due to the war. But a very small number of pennies were accidentally made from copper. Today, these pennies are the Superman Volume #1 of coin collectors (Best. Penny. Ever.) So go quickly and look at all your pennies and see if you have any 1943s. If a magnet sticks to it, then it’s steel. If not, that penny is probably worth a couple million zinc pennies.

  • The Sub-Prime Market is Getting Squeezed
    , November 16th, 2005 at 6:02 am

    Here’s something I haven’t heard too much about. Normally, conventional mortgage rates are about 15%-25% higher than the 30-year Treasury bond yield. (I’m referring to the rate, so when the long-bond is at 10%, you can expect mortgage rates to be about 11.5%-12.5%.)
    Recently, however, the spread has started to widen. Average mortgage rates are now about 35% higher than the 30-year T-bond—this is a level we haven’t seen in four years. In fact, in the last five months mortgage rates have climbed nearly 100 basis points.
    What appears to be happening is that the marginal borrower is getting squeezed from the market. One of the major growth sectors of the last few years has been the market for “sub-prime” loans. This is how Buttonwood describes the sector in the latest Economist:

    “Subprime lending” to people who would not normally be able to make the grade is running at about $500 billion a year. Much of it takes the form of variable-rate, interest-only and negative-amortisation loans. Both debtors and creditors are now more exposed to interest-rate changes.

    Several sub-prime lenders have reached boo-yah stock star status. But in the last few months, their stocks have been severely punished. Consider New Century Financial (NEW). The stock was up 87% in 2002, 134% in 2003 and 61% last year. But since August, the stock is down by one-third. American Home Mortgage (AHM) is off by 30%. Annaly Mortgage (NLY) has nearly been cut in half. And one of the biggest stars of all, Impact Mortgage (IMH), is over 60% below its 52-week high.
    Easy credit has been one of the scapegoats for the housing bubble. The Wall Street Journal has an article on C1 this morning about the growth of mortgage loans with less than full documentation. Fully documented loans have dropped from 72% of all mortgages five years ago to just 54% today. As always, bubbles are never the fault of the participants. The participants are merely victims. Who vote.
    I think this is one of the first signs that the Fed’s rate hikes are being felt outside the world of high finance. Before, the fear was that foreign investors, especially from Asia, would pop the housing bubble by pulling out of our debt market. But them foreigners is still there, begging us to borrow their money. If last week’s Treasury auction is any indication, our government debt is as popular as ever. Plus, the greenback keeps soaring and euro is burning (literally). Also, I haven’t seen much evidence that the corporate junk bond market is feeling the pain.
    I think we may be surprised next earnings season to learn about major banks that were overly exposed to the sub-prime market. Or it may even could from areas you wouldn’t expect. Di-Tech, the guys who advertise heavily on CNBC, is owned by General Motors (GM). It’s one of the most profitable areas of the company, which is ironic considering the company is heading towards a negative FICO score.
    Speaking of which, I don’t expect Fair Isaac (FIC), from our Buy List, to suffer. If anything, it might benefit from a more credit-conscious market. Two weeks ago, the company beat expectations by four cents a share. The company is looking for 50 cents this quarter, and $2.15 for this fiscal year (ending in September).

  • The Market Today
    , November 15th, 2005 at 4:55 pm

    I have to admit that I feel asleep about midway through Dr. Bernanke’s hearing today. That’s, of course, far longer than I ever made though a Greenspan performance.
    Let me get to the market first since this was once of the worst days for the Buy List we’ve had in a few days. The S&P dropped 0.39% and the Buy List was down 0.73%. We obviously can’t beat the market everyday, but that’s our objective. Seven of our stocks were up, 18 were down and one was unchanged.
    Our biggest loser was Thor Industries (THO). The stock gave back about 3.8% today, although it had a big day yesterday when it rose 6% on an upgrade. Frontier Airlines (FRNT) took a big hit late this afternoon. Around 1:30, the stock started to sell off. This was surprising since oil continues to fall. The price for oil dropped just below $57 a barrel (fuel costs make up a very large part of airlines costs). Still, the little airline tends to be volatile.
    Our financial stocks were also weak, which could have been due to Bernanke’s “hawkish” testimony. Brown & Brown (BRO) was down 1.7% and Commerce Bancorp (CBH) closed 2.2% lower. St. Jude (STJ) lost a little ground as a result of the J&J/Guidant merger. Some people on the Street thought St. Jude would be next if the Guidant deal fell through. Dell (DELL) was a bit higher today. Don’t tell anyone, but the stock came within a nickel of $30 a share.
    The Dow got as high as 10740, but lost ground in the afternoon. If it held over 10705, it would have been the Dow’s highest close in eight months. The overall market was weighted down by a weak outlook from Target (TGT). As far the dreaded inflation report, wholesale core prices fell 0.3% last month.

  • Dell’s CFO: Our Demise Is “Overworked”
    , November 15th, 2005 at 2:45 pm

    Maybe Dell (DELL) isn’t dead just yet.

    Dell CFO Jim Schneider on Tuesday dismissed talk of the computer giant’s demise as “overworked” and predicted the company will continue to grow, albeit more slowly than in the past.
    The U.S. consumer segment represents 15 percent of Dell’s business, and Mr. Schneider acknowledged the segment had recently declined year-over-year.
    “If you’re good in most parts of the business, but if you have a segment that large, it drags down the P&L,” he said during a presentation at the Raymond James IT Supply Chain Conference in New York City.
    But he dismissed the notion that Dell’s business model was not working and that recent results reflected the company’s demise. He said those predictions were “more than a little overworked right now.”
    Mr. Schneider countered that given the company’s large size, aggressively high growth rates are unreasonable, although he did believe growth was still achievable.
    Mr. Schneider added that Dell performed well in most business segments, growing 20 percent in the international market, although that was balanced by a low consumer growth rate in the United States.

  • Pressure from Hedge Funds
    , November 15th, 2005 at 11:26 am

    You know hedge funds aren’t popular when they get blamed for things they didn’t even do. Consider this passage from Forbes on Cendant (CD):

    Spinoffs these days are being driven by the growing influence of hedge funds, where impatient managers buy up shares of a company and pressure managers to sell off parts of a business to spur quick market gains, many experts say. Why wait to grow profit when management can sell to make a quick buck?
    “Hedge funds take an activist approach, poking management with sticks,” said Joseph W. Cornell of Spinoff Advisors of Chicago.
    There’s no indication that Cendant’s Silverman, who worked in private equity earlier in his career, was verbally prodded by any hedge fund managers, but he seems to have adopted their approach.
    Hedge fund returns have eased as the industry has grown to $1 trillion in assets across more than 7,000 funds, spurring managers to take a more activist approach toward seeking gains. The Barclays CTA index of hedge funds shows they’ve returned 7.8% so far this year, down from the consistent double-digit gains to which managers had grown accustomed. And investors have shown they require more return in exchange for the extra risk–new inflows into hedge funds are down almost 50% from the first three months of the year, according to Tremont Capital Management.

    To quote Hoover from Animal House: “They confiscated everything, even the stuff we didn’t steal!” Wasn’t it also Silverman’s approach to be part of a lousy merger to begin with? That wasn’t the fault of any hedge fund.
    The reason Cendant failed was because the business model didn’t make any sense. They tossed a bunch of mediocre businesses together and figured it would make one really good business. It didn’t work. The stock went down and now they’re breaking it up. I’m sorry but I just don’t see a sinister plot at work here.
    The article’s implication, of course, is that these hedge funds are really Gordon Gekko for the new millennium. I’m not quite sure how Cendant is Bluestar, but it’s not my analogy. For the record, Cendant is being broken up to create shareholder value. This isn’t an 80s style LBO deal. They’re undoing a deal that never should have been done. It’s hard to ignore the fact that Cendant’s spin-offs have been doing quite well.
    But hedge fund pressure doesn’t end with “no indication” at Cendant, there’s real live actual indication at OfficeMax (OMX).

    Hedge fund K Capital Partners, the largest shareholder in OfficeMax Inc., put more pressure on the office-supplies retailer to consider selling itself and called for corporate-governance changes that would make a takeover of the company easier.
    K Capital has been critical of OfficeMax, which is based in Itasca, Ill., for the better part of a year and has repeatedly suggested a sale. This spring, the hedge fund mounted a proxy contest; it was called off after the company agreed to appoint another independent director.
    In an open letter sent yesterday to the company’s board, Brian Steck, K Capital’s managing director, said a “detailed turnaround plan,” complete with performance benchmarks, is overdue from OfficeMax Chief Executive Sam Duncan. Mr. Duncan was hired in April. Mr. Steck wrote that “financial and operating performance has been dismal.” Mr. Steck also asked the board to remove a poison-pill provision and declassify the election of directors.
    K Capital holds 8.6% of OfficeMax shares, making it the largest investor according to the most recent securities filings.

    Think of it! They’re actually demanding accountability from the company they own. If you’re keeping score, Staples and Office Depot are doing very well, while OfficeMax has had three straight lousy quarters. There was also the small matter of the accounting fraud, the financial restatements and the CEO getting canned. So now, Mr. Steck is demanding to see a strategy from the management. I think he’s being very generous. I would have sold out a long time ago.
    Don’t look now. They’re at it again. Even the mighty McDonald’s (MCD) is getting pressure from a hedge fund.

    A New York hedge fund wants McDonald’s to spin off its company-owned restaurants, but analysts said the company was unlikely to be persuaded and could be headed for a standoff with investors.
    McDonald’s management has already rejected the call from Pershing Square Capital Management, which will present its plan to the investment community at the Value Investing Congress in New York on Tuesday. The fund holds a 4.9 percent stake in the fast-food company.

    OK, this one probably isn’t a good idea, but at least it’s something. There’s also the story of the frenetic market for credit derivatives. This is a fascinating development on Wall Street. I hope to write more on this later.
    If you’re not familiar with credit derivatives, I’ll skip the details by saying that it’s basically a way to buy insurance on a loan. This market isn’t just growing, it’s exploding. If a company is about to go under, this is a quick way to make (or lose) a lot of money. In other words, the hedge funds are all over it.
    This past week, the betting on GM filing for bankruptcy has soared. Personally, I think the market is getting a bit ahead of itself, but Wall Street may soon face a crisis. How will the fairly-new credit derivatives market, and their hedge fund accomplishes, respond to its first major test? No one really knows. We had a dry run with Delphi that seemed to go well. Although Enron, or what’s left of Enron, is still being fought over in the courts.
    Lastly, I see that when it comes to Eddie Lampert and Sears, all the hedge funds are on the same team.

    Some of the biggest stars in the hedge-fund and money-management worlds are pulling hard for Sears Chairman Edward Lampert — who also runs ESL Investments Inc., a hedge fund with about $10 billion in assets — to turn around the retail chain. They have been betting on Sears shares, and some funds have added to their positions or established new ones in recent months, even as the stock has tumbled in value.
    “To some extent, it’s a faith bet on Lampert, I’ll admit that,” says Whitney Tilson, who runs New York hedge fund T2 Partners LLC, a $110 million firm that has been buying Sears shares. “Hedge funds worship Eddie.”

    Ironically, after yesterday’s close, the big story was that Amazon.com (AMZN) is being added to the S&P 500. This is Wall Street’s equivalent of becoming a “made man.” Salute! This is especially impressive when you remember that Amazon doesn’t make that much money. Maybe they’ll start getting more pressure form hedge funds. Oh wait, isn’t that what Jeff Bezos used to do?

  • Johnson & Johnson to Acquire Guidant for $63/Share
    , November 15th, 2005 at 9:18 am

    Johnson & Johnson (JNJ) has finally agreed to buy Guidant (GDT) for $21.5 billion. This works about to about $63.08 a share, which is far less than the original offer of $25.4 billion, or $76 a share.
    Honestly, this is a rotten deal for J&J and I was hoping they could walk away from it. My guess is that the legal troubles would simply have been too much. The merger was nearly sunk as Guidant had to recall thousands of pacemakers. According to Eliot Spitzer, Guidant’s strategy was to not tell anyone about the defective pacemakers and maybe no one would notice.
    Once Plan A didn’t work out, Guidant settled on Plan B—beg for a lower price. J&J wanted to lower the price to $60 a share, Guidant wanted $69 a share. Plan C was to sue so they settled on $63 which will be about half in cash and half in stock.
    I’m very nervous for Johnson & Johnson. This is one of the great companies on Wall Street. The company has raised its dividend for the last 43 straight years. Sales have increased for 72 straight years. Now they’re going to merge with a company that they just had a very public fight with. This is not good.

  • Expeditors International’s 8-K
    , November 15th, 2005 at 6:03 am

    Expeditors (EXPD) just released its latest 8-K report. If you’re not familiar with Expeditors—or for that matter, 8-K reports—I encourage you to give it a read. The company uses these public disclosure reports to answer questions from analysts and shareholders. Their answers are anything but your standard corporate boilerplate. I look at boring reports all day long and trust me—nobody does anything quite like this. Here are some examples:

    While we’re on this topic, it is our observation that some seem to believe that if there are no backlogs at the ports and/or airports, we must not be experiencing a very strong peak season. It may just be us, but having a fair number of “peak season” scars on our back, we think that this perception is incorrect. The logic behind this assertion makes about as much sense as the postman only facing a challenging canine situation as they are being bitten.
    Postal carriers are obviously smarter than this, and are renowned for taking proper evasive action in order to deliver the mail under any four-legged situation. They quickly and fully understand that once a set of incisors are imbedded in your gluteus maximus, the time for planning is long gone. At this stage, it’s too late to solve the problem, and you’re relegated to hoping you can manage your way through it.
    Just as the growling or simply prowling canine custodian on the front porch sends a message to the postman of potential trouble ahead, a supply chain sends out “peak season” growls of its own and these typically happen long before we are in the teeth of a substantial backlog. The attentive and attuned managers, like the astute postman, will move to mitigate their exposure, rather than plowing blindly forward hoping to avoid being bitten.

    And later, the company takes a shot at the “Street high” forecast.

    You did not comment on the fourth quarter 2005 outlook this time; sometimes you do and I am aware that normally the third and fourth quarter are fairly similar. Anything different with this trend?
    We did not provide color in our third quarter 2005 earnings concerning the outlook for the fourth quarter largely because we wouldn’t really know what to say at this point. The concern is that we really don’t know whether what we experienced during the third quarter was a meaningful trend that will carry forward into the fourth quarter or was a material acceleration of the shipping patterns from what we would typically expect to handle in the fourth quarter in anticipation of the possibility that extra transit time would be required. From a freight volume standpoint, October 2005 was a very strong month, as it usually is, but making any comment about the fourth quarter requires us to read the “tea leaves” as it were with respect to the last two months of 2005.
    That all having been said, if we had to make estimates, and we don’t, we would not automatically get overly aggressive with a fourth quarter estimate. We also have to wonder about the motives of someone who is way outside the group consensus. Is $.54 a real estimate or is it a transposition of $.45 that pride will not allow you to correct? We know that $.54 is way above the other estimates, we just wonder why? This is especially true given the underlying opinion of the stock.

    I think you can see why I feel more confident about investing in a company like this.

  • NY Post: A Hedge Fund for the Unwashed Masses
    , November 14th, 2005 at 6:23 pm

    Oh dear lord….

    Middle-class investors who dream of the fat returns corporate titans and institutions earn from hedge funds can now wake up to such an opportunity.
    A European investment company has opened a street-level Midtown office selling hedge fund-like investments opportunities with minimum deposits of just $5,000.
    The company, called Superfund, opened its doors recently on Fifth Avenue, across the street from the Public Library and doors away from a Burger King and Subway shop.
    Not your typical location for trolling for investors in managed futures funds, but then again…

  • The Market Today
    , November 14th, 2005 at 3:52 pm

    Until today, Abbott Labs (ABT) was the one large drug maker than hadn’t been completely body slammed by the market. Well, today was the day. The company said that one of its drugs designed to prevent heart attacks…doesn’t. The stock dropped about 7.3% today. This is getting sad. I can’t find any survivors in this group.
    Today was another ho-hum day on Wall Street. Only nine of our 25 Buy List stocks were up today, but thanks to big gains from Quality Systems (QSII) and Thor Industries (THO), the Buy List was up 0.13%, and the S&P 500 was down 0.08%.
    On Thursday, Friday and the early part of today, the volatility index (^VIX) fell below 12, which is an extremely low reading. The index climbed a bit higher today. The VIX is basically Wall Street’s version of Punxsutawney Phil. If the VIX doesn’t see his shadow, that’s six more weeks of a dull market.
    The Dow is now just 3 widdle points from 10700. Twice today, we crossed 10700, but it was not to hold. Tomorrow might be more interesting as Ben Bernanke begins his confirmation hearings. I’m not expecting anything interesting but it will be refreshing to hear a Fed chair who speaks in English.

  • Hewlett-Packard Will Earn 49 Cents a Share
    , November 14th, 2005 at 1:31 pm

    Since this market is boring me to tears, I’ve decided to make a completely worthless prediction. Nothing is too good for my readers, so here you go. On Thursday, Hewlett-Packard (HPQ) will report earnings of 49 cents a share. Exactly Four Nine. Write it down. The current estimate is for 46 cents a share, so I’m really being brave here. Look at me. I’ve just bucked the trend.
    OK, this isn’t any special insight on my part. The reason for my brave stand has nothing to do with financial analysis or industry trends, or stuff like that, but I think the media needs it. Let’s just give it to them. It’s basically along the lines of Linus and the Great Pumpkin. You can’t beat up Dell for so long without having something…anything…to fall back on.
    I don’t want to brush off what Hurd & Crew have done, but H-P still has a long way to go to becoming a competitive player again. Don’t underestimate how much Carly smashed up this company. When you’re in survival mode, it’s not so hard to get a jump out of your financials. Sure, you can improve your margins if you lay off 15,000 people. Hell, we do that all the time as CrossingWallStreet. But at the same time, you just laid off 15,000 people! Come to think of, isn’t canning people right and left what got so many folks angry at Carly? Oh right, plus that whole Compaq thing. Nearly forgot.
    (By the way, Carly is working on her book. My advance preview: Three hundred pages of someone else’s fault.)
    I see Market Watch tells us, “New H-P chief Hurd already winning turnaround praises.” These stories just write themselves. String a few things together, add some quotes and call it a theme. I wish Hurd success, but please. Things hardly could have gotten worse around there. By turn around, we mean that the stock has now doubled. Doubled, I tells ya! It’s now only 2/3 off its high instead of 5/6.
    So mark my words: 49 cents a share. (Or maybe 48.)