Archive for 2005

• Mercury Interactive Plunges
  Eddy Elfenbein, November 2nd, 2005 at 3:06 pm

  Of all the ways to commit financial fraud, this has to be one of the lamest.

  In a report filed with the Securities and Exchange Commission, Mercury said an internal investigation — launched after the SEC began an inquiry into the company in Nov. 2004 — found at least 49 cases in which the company misreported the dates on which it issued stock options. The practice, which applied to “the overwhelming majority” of grants issued between January 1996 and April 2002, the report said, likely allowed executives and employees to make more money on their options because it set a lower “strike price” at which the options could be exercised.
  That’s because in almost every case of misdating, the price of Mercury shares on the reported option-grant date was lower than the share price on the actual day the options were issued, the SEC report said.
  By manipulating the grant dates, Mercury “was able to provide employees with the lowest possible exercise price,” says Robert Willens, an accounting and tax analyst with Lehman Brothers in New York. “The lower the exercise price, the better off you are as an employee, so you’d want to cherry pick the dates on which the prices would be set,” he says.
  Mr. Willens said the accounting trick was extremely blatant and somewhat surprising, since such option-grant manipulation is usually easy to detect by auditors. “This isn’t one of your more complex financial crimes,” he said.

  The CEO and CFO have resigned. The stock could be delisted. Shares of Mercury Interactive (MERQE) are down 30% today.

• Midday Market Update
  Eddy Elfenbein, November 2nd, 2005 at 12:08 pm

  All 25 stocks on the Buy List are up, even Dell (DELL). We’re currently ahead of the S&P 500, 1.33% to 0.70%. Progressive (PGR), St. Jude (STJ) and Varian (VAR) are all at new highs.
  Both Lehman and Bear Stearns upgraded the entire airline sector which helped shares of Frontier Airlines (FRNT). Right now, oil is down 40 cents to $59.45 a barrel. The VIX is also lower at 13.87.
  Here’s some good news: Johnson & Johnson (JNJ) said that it may cancel its $25 billion acquisition of Guidant (GDT). Ever since the deal was announced, everything has gone wrong for Guidant. If the deal falls through, it will be good for J&J.
  Finally, Fair Isaac (FIC) is due to report after the close.

• Symantec’s Earnings
  Eddy Elfenbein, November 2nd, 2005 at 11:33 am

  Here’s yet another reason why I hate mergers. Symantec’s (SYMC) earnings got creamed last quarter due to “acquisition costs” related to its buyout of Veritas. The company reported a loss of $251 million compared with a gain of $235 million last year.
  These used to be two great stocks. Symantec was one of the best tech stocks to own after the bubble burst. The Veritas merger was supposed to be this great marriage of storage and security software. At $13 billion, the deal was even larger than Oracle’s (ORCL) bid for PeopleSoft. Also today, Symantec also guided lower for this quarter. The stock is down about 20% today.

• Time Is Out of Joint
  Eddy Elfenbein, November 2nd, 2005 at 6:08 am

  What’s going on with the VIX? The CBOE’s volatility index, which measures the implied volatility of the S&P 500, has suddenly become aligned with the underlying index. On Monday, both the VIX and the market rose. Yesterday, both lost ground.
  That ain’t right. The two indexes disagree with each other more than 80% of the time. Two-day agreements are rare, three straight days is peculiar, and we’ve only had one stretch of four days in a row of alignment in the last three years.
  The WSJ looks at some theories:

  There are differing views about what is going on here, but the consensus seems to be that it is best to assume that yesterday’s move was really just a correction of Monday’s move, and that by now, things are where they belong.
  Frederic Ruffy, analyst at Optionetics Inc., thinks the out-of-tandem moves aren’t coincidental. Instead they are evidence of an adjustment in volatility expectations. This is a “sign that participants in the options market are recognizing that the market is more volatile now,” he said. “There are some long-term trends that are causing volatility to rise,” like interest rates, political uncertainty and concern about energy prices.
  Because volatility expectations are an important part of options prices, the market could be saying that “the premiums for selling and buying S&P 500 options should be higher,” Mr. Ruffy said.

  The VIX has indeed been climbing lately, although at around 15, it’s still pretty tame stuff. The Era of High Volatility (i.e., the first four seasons of Sex and the City), routinely gave us VIXens in 30’s and 40’s.
  Since the market finally turned, volatility has melted away. For a brief shining, and disvolatiled moment on July 20, the VIX dipped into the single digits. Even a month ago, the VIX was still around 12.
  In The Economist, Buttonwood notes that the more volatile environment has been accompanied by changing events.

  But low inflation, low interest rates and untroubled confidence in safe hands at the helm are fast becoming things of the past. Oil-price hikes have helped to push up inflation around the world. The Fed was expected to raise short-term rates again on Tuesday, to 4%, and looks likely to do so at least once more in the next three months. The European Central Bank may soon follow its tough talk on inflation with some tough action. Japan is more likely to raise rates than to cut them. Alex Ypsilanti, a strategist at Merrill Lynch, points out that over the past ten years the troughs in volatility have come one-and-a-half to two years after the low points in three-month dollar LIBOR (interbank) rates. The Fed started raising rates 16 months ago.

  What does it all mean? Perhaps the era of high oil, trading ranges, low volatility and low long-term interest rates is coming to an end. As is often with financial markets, important turning points don’t announce themselves. At least not until they’ve made themselves quite comfortable.
  I get the feeling that the times they are a-changing. Even the Japanese market made a new high yesterday. Although they had a little trouble when a computer glitch shut the market down. Apparently volume has exploded and no one saw it coming.

• The Market Today
  Eddy Elfenbein, November 1st, 2005 at 5:23 pm

  OK class, today’s lesson is on diversification. Even though Dell (DELL) is on our Buy List, we not only beat the market today, but we were up while the market was down.
  That’s di-ver-si-fi-ca-tion. Even if one of your stocks gets a super-atomic wedgie, you can still make money. It really works.
  The Fed’s rate hike put a slight damper on Wall Street today. Our two-day rally came to an end as the S&P 500 dropped 0.35%, but the Buy List gained 0.32%. Our big winner was Expeditors International (EXPD) which surged to a new high on great earnings. Fair Isaac (FIC), the credit scorer, reports tomorrow. The current estimate for FIC is 49 cents a share.
  Dell (DELL) closed down 8.3% on 105 million shares. It was the most active stock today. Did you see that Frontier Airlines (FRNT) got to $9.60 today? The stock is up over $2 from its lows of two weeks ago.
  Dell didn’t drag down the entire tech sector like I thought it would. The Nasdaq was down 0.29%. The Nasdaq 100, which is the 100 largest nonfinancial stocks on the Nasdaq, fell 0.17%. That index is traded under the QQQQ symbol.
  Outside our Buy List, Procter & Gamble (PG) reported earnings of 77 cents a share, one penny ahead of estimates. P&G is a great company, but I’m very nervous of the merger with Gillette. I like Gillette too, but I hate mergers. I judge all mergers guilty until proven innocent. I’m rooting for them, but I’ll pass on the shares.
  Electronic Arts (ERTS) earned 16 cents a share, which is about half of what it made last year. The stock got absolutely trashed earlier this year. Wall Street was expecting earnings of 5 cents a share so this is good news.
  TXU Corp. (TXU), which had been a juggernaut for a few years, missed expectations today and fell 10.2%. The company raised guidance for next year. Interestingly, even though their profits plunged, their earnings-per-share increased due to heavy share buybacks. Also, Ford (F) and General Motors (GM) reported dramatically lower sales for October. This is a reflection of the end of employee pricing.
  Here’s a chart of Dell today.
  
  If you haven’t done so, check out The Kirk Report. Also, Footnoted.org is digging through the third-quarter earnings reports.

• Found Deep Within a 10-Q Report
  Eddy Elfenbein, November 1st, 2005 at 3:34 pm

  From Fieldpoint Petroleum‘s (FPP) 10-Q report:

  Administration
  Office Facilities- The office space for the Company’s executive offices at 1703 Edelweiss Drive, Cedar Park, Texas 78613, is currently provided by the majority shareholder at a cost of $2,500 per month as of December 31, 2004.
  Employees – As of March 31, 2005, the Company had 4 employees. The Company considers its relationship with its employees satisfactory.

  Take that, Wal-Mart.

• The Fed Raised Rates
  Eddy Elfenbein, November 1st, 2005 at 2:19 pm

  The Federal Reserve just raised interest rates for the 12th straight time. The Fed funds rate now stands at 4%. The Fed will probably raise rates on December 13 and January 31, which will be Alan Greenspan’s last meeting. After that, Ben Bernanke takes over.
  The market has barely budged since mid-morning.
  Here’s the full statement:

  The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 4 percent.
  Elevated energy prices and hurricane-related disruptions in economic activity have temporarily depressed output and employment. However, monetary policy accommodation, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity that will likely be augmented by planned rebuilding in the hurricane-affected areas. The cumulative rise in energy and other costs have the potential to add to inflation pressures; however, core inflation has been relatively low in recent months and longer- term inflation expectations remain contained.
  The Committee perceives that, with appropriate monetary policy action, the upside and downside risks to the attainment of both sustainable growth and price stability should be kept roughly equal. With underlying inflation expected to be contained, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured. Nonetheless, the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability.
  Voting for the FOMC monetary policy action were: Alan Greenspan, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Roger W. Ferguson, Jr.; Richard Fisher; Donald L. Kohn; Michael H. Moskow; Mark W. Olson; Anthony M. Santomero; and Gary H. Stern.
  In a related action, the Board of Governors unanimously approved a 25-basis-point increase in the discount rate to 5 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas and San Francisco.

• All Eyes on the Fed
  Eddy Elfenbein, November 1st, 2005 at 11:47 am

  We’re about two-and-a-half hours from the Fed announcement. It’s mostly a soggy day so far. Financial stocks are lagging, although I’ve been surprised by how well they’ve done over the past few weeks. Bill Cara thinks the Financial Spyders (XLF) are “headed for a tumble soon.”
  Energy stocks are positive even oil is slightly lower today. Utility stocks are down the most. The Dow Utility Index is now down pretty sharply off its early October high. The index is still up about 17% this year, and over 130% in the last three years.
  If you recall, the Dow Utility Index plunged in late-2002. At one point, it was less than 20% above its September high.
  Its September 1929 high.
  Dell (DELL) is getting squashed this morning. It seems to have found some stability around $29.30 a share. Keith Bachman at Banc of America Securities reiterated his “buy” although he trimmed his forecasts and lowered his price target.
  Expeditors (EXPD) is up to a new high, as is Progressive (PGR). It’s a good day for dull stocks! Despite Dell’s news, the Buy List is ahead of the market today. At least, so far.

• Milton Friedman on the Social Responsibility of Business
  Eddy Elfenbein, November 1st, 2005 at 10:32 am

  In 1970, Milton Friedman wrote an article in The New York Times saying that corporations have no social responsibility whatsoever, except to make profits. Thirty-five years later, here he is in Reason magazine debating the same point with Whole Foods’ (WFMI) CEO John Mackey.

  I believe Mackey’s flat statement that “corporate philanthropy is a good thing” is flatly wrong. Consider the decision by the founders of Whole Foods to donate 5 percent of net profits to philanthropy. They were clearly within their rights in doing so. They were spending their own money, using 5 percent of one part of their wealth to establish, thanks to corporate tax provisions, the equivalent of a 501c(3) charitable foundation, though with no mission statement, no separate by-laws, and no provision for deciding on the beneficiaries. But what reason is there to suppose that the stream of profit distributed in this way would do more good for society than investing that stream of profit in the enterprise itself or paying it out as dividends and letting the stockholders dispose of it? The practice makes sense only because of our obscene tax laws, whereby a stockholder can make a larger gift for a given after-tax cost if the corporation makes the gift on his behalf than if he makes the gift directly. That is a good reason for eliminating the corporate tax or for eliminating the deductibility of corporate charity, but it is not a justification for corporate charity.

• Expeditors International’s Earnings
  Eddy Elfenbein, November 1st, 2005 at 10:18 am

  Here’s a nice break from Dell’s news. Expeditors (EXPD) had another great quarter. This is one of those companies that always seems to come through. The company earned 50 cents a share for the third quarter versus 39 cents last year. Expectations were for 46 cents a share.
  For the first three quarters, EXPD has made $1.24 a share compared with $1.02 last year. They just grow and grow and grow. Here’s CEO Peter Rose on the third quarter:

  “Execution and efficiency were the tale of this record quarter,” said Peter J. Rose, Chairman and Chief Executive Officer. “While we continued to experience significant volume increases in air and ocean freight during the third quarter of 2005, our real profitability increases came from our ongoing efforts to increase productivity in the delivery of our services,” Rose continued.
  “This has not been a one year story. If you go back to the third quarter of 2001, you would see that Expeditors has basically doubled in size in the last four years. That is a real accomplishment, particularly when you look at the magnitude of the numbers. And, we didn’t really purchase this growth–we did it ourselves, organically. A stable environment fosters consistent, reliable and focused customer service by eliminating the distractions that employees in merged companies feel. As always, we’d like to formally acknowledge the contribution of each employee to these third quarter results. Once again, you really made it happen,” Rose concluded.

  This is the only stock on Wall Street whose 8-K reports are actually fun to read. For more, here’s a good article on Rose and EXPD.