Archive for 2005

  • JPM to Sell Its Insurance Unit
    , November 5th, 2005 at 3:45 pm

    One of the great secrets of Wall Street is that insurance is a highly profitable industry. Warren Buffett built his empire on insurance. Sure, the industry is boring as heck but this is an area where I don’t need any more excitement in my life.
    We have three insurance stocks on our Buy List; AFLAC (AFL), Brown & Brown (BRO) and Progressive (PGR). All three are doing very well.
    A few years ago, the financial services industry underwent a massive consolidation. Everybody bought everybody else. In fact, no one is just a bank anymore. To be really hip, you have to be a “comprehensive financial services organization.” All the cool kids are doing it. Or call yourself a “supermarket.” That’s hot.
    Thankfully, we’re seeing some of that reverse. A number of financial megaliths are selling off their insurance units. Citigroup (C) sold Travelers Life insurance business to MetLife Inc. for $11.8 billion. Now, JPMorgan Chase (JPM) is selling off its insurance business. Last year, JPM completed (ugh) a huge merger with Bank One.
    Speaking of insurance, Berkshire Hathaway (BRKA) reported that its profits fell in half last quarter due to Katrina. The company earned $381 a share, down from $739 a share last year.
    Buffett has also been placing huge bets against the dollar. Between 2002 and 2004, he made a cool $3 billion by going against the greenback. But not lately. This year, Buffett’s dollar gambit has cost him over $900 million as the dollar has rallied.

  • Q&A: Inflation
    , November 5th, 2005 at 1:57 pm

    Hello Eddy,
    I’ve been reading your blog for a week or so now, and I just want to say hello and good luck. I followed a link to your blog from Bill Cara, whom I much admire.
    As I near retirement, yes I’m a so called ‘baby boomer’, (boy do I hate that term), I regard Mr. Greenspan as an American hero. I recall the late 1970s, and early 1980s as a terribly difficult time in our country’s economy. At that time I was raising a young family and trying to get a new business off the ground. Securing a business loan was much more difficult than it is today, and paying 22% interest for a short term loan was the rule.
    Those high inflationary days are long gone, and I will not miss them.
    In fact I fear they’re return. It seems latley, Mr. Greenspan has become the target of unhappy Wall Street pundits and reporters, siting his tight fisted reign as the cause of the slow growth in today’s market. I don’t agree. Mr. Greenspan has returned this economy to normalcy. Now that he is about to retire, what can we expect? Will a new Fed chairman do as well? Will we again see uncontained and uncontrollable infaltion? Be careful what you wish for.
    Good luck, again. I’ll be reading you often.

    Thanks for your e-mail. I absolutely agree with you about inflation. I’m happy the days of inflation are long gone. Just thinking about the music and clothing is enough to scare me.
    Inflation is nothing but bad news for an economy. The U.S. economy suffered years of uncontrolled inflation. One of the worst aspects of inflation is that it builds upon itself. A little inflation begets more which begets still more. By January 1980, inflation was beginning to spiral out of control. The price of gold spiked to over $800 an ounce.
    I’ve always felt that there’s another criticism of inflation that economists miss. Inflation is cruel. It rewards debt and punishes people who save. People who live on fixed-income watch helplessly as a lifetime of savings is melted away. It’s a stealth tax on capital, and it’s never voted on. Inflation rewards people who speculate in gold and silver, while stocks and bonds fall far behind.
    Look at what the Dow did over 17 years.
    December 31, 1964 close: 874.13
    December 31, 1981 close: 875.00
    Twenty-five years ago, two Texas brothers tried to buy all the silver in the world. They would have gotten away with it too, if it weren’t for a bunch of meddling kids (i.e., the CFTC).
    But stocks are claims on real assets. It’s part ownership in a corporation that grows and thrives; creates jobs and builds wealth. But 25 years ago, people were buying rocks.
    Inflation also does damage to a society. In Weimar Germany, deutschmark were printed in notes of 50 trillion and 100 trillion. Inflation also hit France in the years before 1789. A debased currency breaks the bond been the government and the governed.
    What creates inflation? That’s easy. It’s simply excessive M2 growth based on a three-month moving average against the implicit price deflator…eyes getting heavy…can’t stay awake.
    I don’t worry about any of that, and I hope I can assuage your fears of inflation coming back. I always hear that inflation in on the “verge of coming back.” But it never does and I don’t think it will. The reason is that EVERYONE is worried about inflation.
    Inflation is now broadly recognized as a Very Bad Thing. In the 1950’s and 1960’s, central bankers weren’t concerned about inflation. They were New Dealers. They lived and breathed the idea of preventing a repeat of the 1930’s. It never occurred to them that monetary policy could cause inflation. That was actually a very controversial idea. Even in the 1970’s many economists still thought that inflation was a necessary evil. It was merely the by product of affluence.
    Now we know that it’s all the Fed’s fault. Even the most clueless American has probably heard the name Alan Greenspan. But how many Americans know his predecessors? You don’t often hear the name Marriner Eccles? William McChesney Martin? Back in the day, nobody knew who they were. No one parsed their speeches. Here’s an example: After the stock market crashed in 1929, the Federal Reserve actually raised interest rates. Dear lord! We now know that that’s the biggest, dumbest, wrongest thing you could possibly do. We’ve learned that mistake, and now we have a new conventional wisdom. That’s why I’m not worried about inflation.
    Over the last 20 years, I’ve consistently heard that inflation is about to come back. But it never does. Oh sure, Hurricane Omicron Delta will wreck some oil rigs, and that will cause a price spike here and there. But general price inflation? Naw, ain’t gonna happen.
    While you salute Alan Greenspan, don’t forget Paul Volcker too. During the 1981-82 recession, he had to have Secret Service protection. That was the Fed’s glory days. But nowadays, the Federal Reserve is overrated. It’s important, but it’s not all important. The best advantage we have is that the Fed realizes its own limits. This Bernanke fellow seems like a perfectly nice chap, and I have no reason to think he’ll do a bad job.
    Today, if the Fed makes a misstep, there’s a gigantic international currency market ready to pounce. That’s the Big Story today, not inflation. The volume of currency transactions is nearly $2 trillion. Every day. The Fed is just another player in that game.
    I hope you don’t mind if I put this in Baby Boomers term. If the economy is the Beatles, the Fed is the drummer. Sure, it’s nice to have a Ringo. But even without him, the band plays on.

  • The Market Today
    , November 4th, 2005 at 7:01 pm

    A late afternoon rally pushed us in the black for the day. Well…barely, but I’ll take it. This was a nice end to a good week. The S&P 500 rose 0.20 points (yes points, not percent) for a total gain of 0.02%. On an annualized rate, that’s less than 5% a year. I’ll still take it. The Buy List pulled back slightly; we lost 0.13% today, but November is treating well so far. This month, the Buy List is up 2.39% and the S&P 500 is up 1.09%.
    Our problem child today was Quality Systems (QSII). This I just don’t get. The company reported very good earnings yesterday. The stock rose at the open, and promptly fell to a 3.34% loss. I have no idea what caused the sell-off. The important news is that QSII had a great quarter. I’ll take that too.
    Frontier Airlines (FRNT) had a hectic day. When I saw the stock open, and nearly run to $10, I felt like a baseball player on a team whose pitchers had a no-hitter going through six or seven innings. Everyone is thinking the same thing, but no one wants to mention it. You don’t even want to sit near the guy. But I had to go and blog it around noon today. What was I thinking? I’m sorry, it’s all my fault. Our no-hitter got broken up by back-to-back home runs. Frontier plunged to $9.44, then closed at $9.63. For the day, we lost 9 cents. Once again, I’m sorry.
    Did anyone notice that AFLAC (AFL) is almost at a new high? Good, me too.
    The major action lately is definitely going on in the energy sector. We’re at one of those important “tipping points” in a bull market. This can happen for any sector, or even the entire market. So far, energy stocks have mauled every bear’s growl. They’ve flattened all non-believers. No prisoners. No mercy. Every sell-off has been fought back with another rally.
    Then in October, the sector started to break down again. But the selling was much harder than anything we’ve seen before. Was this the end? The Dow Jones Energy Index (^DJUSEN) finally found a bottom on October 20. That was a 15.8% “correction” in just 11 days.
    So now the question is: Was this just another pullback in the long-term trend, or was this a signal that the long-term trend had trended out? Normally, the bulls love to buy on any pullback. And predictably, we’ve now had the reversal. The index rallied about 10% off its low through yesterday. But then today came. The index got nailed for a 2.51% loss. That’s a tough loss on a day like this. The signs are all around us. Add in the productivity report. Add in the inflation report. Add in oil prices. The message is clear: Energy is out of power.
    Here’s a chart YTD:
    energy.bmp

  • Q&A: Stop-Losses
    , November 4th, 2005 at 2:15 pm

    I’m fairly new to trading, what do you typically put a stop lost at and do you use trailing stops.
    Thanks

    I don’t use stops at all. Truthfully, I think they’re a diversion. I understand some people like the psychological comfort of a stop-loss. IBD’s Bill O’Neil has long advocated using a 7% stop-loss point. If that’s what you’d like, then go right ahead, but I don’t think there’s a need to. You either own a stock or you don’t.
    A good example of how stops can come back to haunt you is what happened to the market after 9/11. Gobs of great stocks got pummeled in the panic-selling when there was no reason to sell. I would hate to have been stopped out then.
    Also, different stocks have different volatilities. It may be perfectly natural for a stock like Google (GOOG) to swing 10% a day, but a stock like Brown & Brown (BRO) is very stable. Also, volatility is itself volatile, so these hard “7%” rules can box you in.
    Too many investors get emotionally involved in the day-to-day volatility of their stocks. The great thing about investing is that it rewards not paying attention! What’s not to like?
    – Eddy
    If you have any stock questions, feel free to e-mail me at eddy@crossingwallstreet.com. I’m happy to give you my opinion on any stock or investing in general; however per SEC rules, I’m not allowed to give personal portfolio advice.

  • The Midday Market
    , November 4th, 2005 at 12:01 pm

    Outside of a few tech stocks, the market is fairly weak today. The Dow is down 37 points. The S&P 500 is off about 0.40%, and our Buy List is down 0.26%
    Stock like Oracle (ORCL), Cisco (CSCO) and Symantec (SYMC) are higher today, as is Starbucks (SBUX). The caffeine company reported October sales jumped by 21% last month. The yield on the 10-year T-Bond broke out to a 16-month high today. The dollar is at a high this year against the euro, and a two-year high against the yen.
    Our Buy List is having a mixed day. Quality Systems (QSII) is lower despite its good earnings report. Frontier Airlines (FRNT) came within two pennies of $10 a share.
    Also, Business Week takes a look at Ikea.

  • Fortune: Englander May Settle With Spitzer
    , November 4th, 2005 at 11:28 am

    Fortune reported that hedge fund legend Izzy Englander may cough up $100 million to settle securities fraud charged with Eliot Spitzer. According to the government, Englander’s Millennium used a series of unusual trading tactics.

    People close to the case say Millennium devoted some $1 billion to its trading strategy, opening up thousands of mutual fund accounts to disguise what the firm was doing. Allegedly the firm even deployed a byzantine trading tactic that involved creating subsidiaries with peculiar names such as Osaykanu LLC (Oh-Say-Can-You LLC, apparently) to hide its trading.

    Englander has amassed an enviable record on Wall Street. He reportedly manages money for established clientele like Duke Univeristy. But the Millennium fund isn’t your typical money management operation.

    Millennium, with around $5 billion in assets, is an “odd duck compared to other hedge funds we’ve looked at,: says a private detective who specializes in hedge fund reconnaissance.

    There are private detectives who specialize in hedge fund recon! What would Sam Spade think?

    For one thing, it consists of a labyrinth of entities with different names. Millennium, which has upwards of 100 traders, has tended to be more of a sophisticated day-trading shop, say experts. “Englander takes traders off the street, gives them a pile of money, and says, ‘Here’s a chair and computer — go trade’,” says someone familiar with the firm.
    Many former employees of Millennium counter that Englander is very serious about running his business. Says Peter Feinberg, a former Millennium trader who now heads institutional equity trading at Oppenheimer & Co.: “Izzy’s an absolute straight shooter.”
    That’s certainly the way Englander would like his investors to think of him: an upmarket guy who deploys an overwhelming array of ultra-sophisticated models that would just baffle mere civilians. But to maintain an edge, Millennium adapted an “almost anything-goes” mode, according to some former traders.

  • What’s the Hottest Market in the World?
    , November 4th, 2005 at 11:08 am

    It’s Brazil.
    The Brazil iShares (EWZ) are about 500% in the last three years. According to S&P, Brazil’s market trades at just 10.7 times trailing earnings. Brazil’s Fed recently lowered short-term interest rates to 19%.
    President Bush is currently in South America at the Summit of the Americas. He’s trying to revive the hemisphere-wide free trade agreement.
    Here’s a three-year chart of EWZ.
    brazil.bmp

  • Jobs Report
    , November 4th, 2005 at 8:58 am

    The government reported that nonfarm payrolls increased by 56,000 in October. This was about half of what Wall Street was expecting. The unemployment rate fell from 5.1% to 5%. Also, the jobs growth number was revised lower for August (148,000 instead of 211,000) and higher for September (a loss of 8,000 instead of a loss of 35,000).
    The EU reported that unemployment in Europe fell to 8.4% from 8.5%. Poland has the highest jobless rate of 17.7%. Over a third of young people are out of work. The lowest unemployment goes to…Ireland! Just 4.3%.
    The bond market is currently selling off. Long-term yields are headed to another six-month high. Also this morning, Prudential downgraded Apple Computer (AAPL) due to valuation. This might weigh on the morning’s trading. Frontier Airlines (FRNT) said that it will resume flights to Cancun, which had been suspended due to Hurricane Wilma. The company has also received approval to expand its Cancun service to Indianapolis.

  • Brown & Brown’s Downgrade
    , November 3rd, 2005 at 5:19 pm

    Here’s Sandler O’Neill’s downgrade of Brown & Brown (BRO).

    We are lowering our rating to Hold from Buy based on valuation. Brown & Brown is currently trading at 18.9x our forward twelve month earnings per share (EPS) estimate and at a 16% premium to next year’s EPS growth rate.
    While we believe the company’s valuation premium relative to peers is warranted, given the company’s consistent operating performance, we believe additional multiple expansion in the near-term will be more challenging.
    Since upgrading the stock to Buy on June 9, 2005, Brown & Brown has appreciated 24%.
    We continue to view the company’s operating landscape as attractive and could turn more positive on the stock should property and casualty premium pricing harden more than we expect in Brown & Brown’s territories.

    They’re right. The stock has rallied lately, but what I’m afraid they’re missing is how strong BRO’s earnings growth has been. For proof, you can see that BRO (black line) has consistently outperformed its peer group (gold line) over the past few years, and its P/E ratio (lower graph) is still pretty cheap compared with recent history. The earnings multiple is about where it was in 2002, and the stock is much, much higher.
    bro.bmp

  • The Market Today
    , November 3rd, 2005 at 4:44 pm

    The market rallied for the second day in a row, and for the fourth time in the last five days. The S&P 500 gained 0.43%, and our Buy List gained 0.32%. The bond market was weak again as long-term yields made new highs. The 10-year yield is up to 4.64%.
    The broader market was helped by Merck (MRK). It seems that Merck was simply unprepared for the first Vioxx trial. By all reports, the company’s defense at this recent trial was overwhelming. The stock rallied today. Qualcomm (QCOM) and CVS (CVS) also had great days. Just a few weeks ago, Apple Computer (AAPL) fell below $48 after its earnings. The stock broke through to another new high today at $61.85.
    Four months ago, Oracle (ORCL) hired Microsoft’s former CFO Greg Maffei as CFO. But then, no one seemed to know his status. The company wouldn’t discuss it and an analyst conference was canceled last week. The stock sold off sharply this morning on very heavy volume. The company just confirmed that Maffei has resigned.
    Guidant (GDT) has been sued by Eliot Spitzer. Now that it seems like Johnson & Johnson will walk away from its proposed merger. There’s been some speculation that St. Jude Medical (STJ), one of our Buy List stocks, might be J&J’ next target. St. Jude was up over $2 yesterday.
    The big winner today on our Buy List was Fair Isaac (FIC). The stock gained 5.5% in the wake of its great earnings. Lincare (LNCR) was up 4.7%. Congrats to Frontier Airlines (FRNT)! It was named #1 for on time performance. Quality Systems (QSII) just reported earnings of 43 cents a share, three cents more than estimates. Revenues were up 39%. The stock closed up 2.9%.
    Our laggards included Brown & Brown (BRO) which had two downgrades. Also, Thor Industries (THO) dropped 4.5% due to Fleetwood’s (FLE) poor sales report.
    Remember how Sarbanes-Oxley was going to increase transparency? Well, the compliance costs are weighing down lots of small companies. One publicly-traded stock has had enough, and they’re going private. Net effect: less transparency. (Via Luskin.)
    And finally, Random Roger has some thoughts on Pfizer (PFE).