Archive for 2005

• Snow Urges China Action on Yuan
  Eddy Elfenbein, October 11th, 2005 at 9:17 am

  Treasury Secretary John Snow and Alan Greenspan are in Asia hoping to convince the Chinese toward more currency reforms.

  TOKYO — U.S. Treasury Secretary John Snow on Tuesday urged China to adopt a more flexible, market-driven currency while applauding the recent upswing in Japan’s economy.
  Snow wrapped up a visit to Japan Tuesday before heading on to Shanghai. The trip comes amid ballooning American trade deficits and increased trade tensions with the two Asian export powers.
  Chinese officials said the currency issue would be discussed during a visit to Beijing this week by Snow and Federal Reserve Chairman Alan Greenspan _ but they gave no sign Beijing would move faster in loosening its controls on the yuan.
  Foreign Ministry spokesman Kong Quan, speaking in a regular press briefing, urged the U.S. side to “heed fully the Chinese position on exchange-rate reform.”
  While in Tokyo, Snow applauded China’s step to cut the yuan’s link to the U.S. dollar but said more action is needed.
  “We are anxious to see the Chinese fulfill the commitment they made to allow market forces to play a larger role in setting their currency’s value over time,” Snow said during a press conference at the U.S. Embassy. “They’ve gotten on the path that allows them to do so and we’d like to see China continue on that path.”
  In July, China halted its decade-long practice of pegging the yuan’s value to the U.S. dollar, choosing instead to let the yuan trade in a narrow band against a basket of currencies of its major trading partners. At the same time, China raised the value of the yuan by 2.1 percent against the dollar.
  But since then, the yuan has gained only about 0.3 percent against the dollar.
  American manufacturers contend the yuan is now undervalued by as much as 40 percent, making Chinese goods cheaper in the United States and American products more expensive in China. U.S. manufacturers contend that is a major reason for the huge trade gap between the two nations.

• Today’s Market
  Eddy Elfenbein, October 10th, 2005 at 5:23 pm

  Today was another market-beating day for us, although the Buy List lost ground. Our Buy List dropped -0.43% today compared with the S&P 500’s -0.72% loss. Our big help today came from Dell (DELL), which jumped 74 cents thanks to the analyst upgrade.
  Eighteen of our stocks fell today, and seven stocks rallied. The biggest losers were Frontier Airlines (FRNT) and Thor Industries (THO), although those stocks have done very well recently. Frontier seems to move completely opposite oil prices.
  The bond market was closed for Columbus Day. After the close, Alcoa reported its earnings—the company is usually the first Dow component to report. The company beat Wall Street’s estimate, but that was after a big warning a few weeks ago. The first major announcement will come tomorrow with Apple’s earnings, plus its double-secret announcement.

• What’s the Worst Thing for Gold Bugs?
  Eddy Elfenbein, October 10th, 2005 at 2:30 pm

  A gold rally. The yellow metal hit an 18-year high this morning. Silver is also up, and copper reached an all-time high.

  Many metals analysts have said a $500 gold price is a matter of when, not if, as invesors show an increased appetite for commodities and hedge their portfolios against inflation. See related story.
  Gold for December delivery briefly touched $479.60 an ounce Monday on the New York Mercantile Exchange, before closing at $478, up 30 cents at its highest ending level since December 1987, according to monthly charts.
  Mining and metals continue to wrestle with “severe inflation/growth jitters,” as well as “supportive underlying commodity fundamentals,” said John Hill, an analyst at Citigroup.
  At the same time, “some traders and metals analysts have become somewhat less bullish on the metals,” said Dale Doelling, chief market technician at Trends In Commodities. That’s a surprise given “that the metals have been able to continue their move higher in spite of the dollar’s strength,” he said.
  The dollar gained against the euro Monday as resolution of the uncertainty surrounding who will be Germany’s chancellor wasn’t seen as a sure path for passage of the economic reforms some see necessary to recharge that nation’s — and the euro-zone’s — economy.

  On CNBC, Jim Grant said that gold’s great advantage is that, unlike central bankers, it’s mute. He said that bonds priced in euros are overpriced, and the financial markets are simply diversifying.

• Does Today’s Nobel Prize Winner Believe in the Bible Code?
  Eddy Elfenbein, October 10th, 2005 at 11:09 am

  Today, Robert Aumann and Thomas Schelling won the Nobel Prize in Economics. Although they haven’t worked together, they’ve both made pioneering contributions to the field of game theory. I’m very happy to see them get recognized for their work, although Don Luskin seems a bit upset that Paul Krugman failed to win (again).
  Professor Aumann is a rather fascinating figure. He’s been a math professor at Hebrew University for the past 49 years. He was born in Germany and his family fled to the United States in 1938. Aumann later graduated from the City College, the “Harvard of the Proletariat,” and did his graduate work at MIT.
  His work is prodigious, however there is one aspect of Aumann’s work that hasn’t been mentioned in any of today’s media reports, and I’m guessing, it won’t be. Aumann is deeply religious and he’s contributed to the controversial field of finding hidden codes buried in the Hebrew Torah. While this strikes most people as the realm of crackpottery and hardly the work of Nobel laureates, I should add that Professor Aumann seems to be an agnostic on the question of Bible Codes. But on the other hand (this is the economics prize after all), he has not dismissed the findings either.
  Finding a code in the Bible is actually an endeavor with a very long history. Over the centuries, many rabbis have poured over the Torah trying to find hidden clues. Funny how the clues usually match up to what they want to be there. But in any event, with the advent of the computer, looking for clues has become much easier. The most-common method is to find letters spaced equal distances apart. For example, every ninth letter of Leviticus is word-for-word, the exact lyrics of Led Zeppelin’s D’yer Mak’er. OK, I made that up, but you get the point.
  Here’s another example:
  
  Well, two men, Ilya Rips and Doron Witztum, used computers to search the Book of Genesis to find the names of famous rabbis and their birth dates buried—upside or backward or forward or diagonal—but equally-spaced apart. Coincidence you say? Surely, you can find anything you want if you look long enough. It’s just like Nostradamus. Not so says Professor Aumann. In fact, Aumann played an important role in bringing their research to respectable peer-reviewed journals.

  When Rips and Witztum made their Torah Codes discoveries, Rips described them to colleagues at The Hebrew University. One, Robert Aumann, a well known game-theorist and also an Orthodox Jew, took a particular interest in the work. He played a prominent role in bringing it to the attention of the scientific community. Being more fluent in English than Witztum and Rips, he rewrote their research report, turning it into the dry, tight, and lucid version that was later published in Statistical Science (and is reproduced in full in The Bible Code). He also arranged for Rips to give a public lecture in the Israeli Academy of Sciences, an event that caused much embarrassment and furor in the Academy. Perhaps most significantly, Aumann, also a member of the American National Academy of Sciences, attempted to have the paper published in the prestigious journal of the Academy, the PNAS. This journal will only publish a paper that is sponsored by an Academy member. Aumann was willing to sponsor the paper, and sent it for peer review to a bevy of world renowned statisticians, among them Harvard’s Persi Diaconis.

  The Bible Coders got a big leap when a reporter from the Washington Post and Wall Street Journal, Michael Drosnin, wrote the book, The Bible Code. In it, Aumann defends the research.

  The science is impeccable. Rips’ results are wildly significant, beyond anything usually seen in science. I’ve read his material thoroughly, and the results are straightforward and clear. Statistically it is far beyond what is normally required. Rips’ results are significant at least at the level of 1 in 100,000. You just don’t see results like that in ordinary scientific experiments. It’s very important to treat this like any other scientific experiment-very cold, very methodical. You test it, and you look at the results.

  While Aumann’s doesn’t appear to be a believer, he has shown more than a passing interest in the field. It’s no small matter when the latest Nobel Prize winner sees the Bible Code as an open question.

• Dell Upgraded
  Eddy Elfenbein, October 10th, 2005 at 9:22 am

  Dell (DELL) was upgraded this morning by Needham. The stock is as cheap as it ever gets. The Street currently expects Dell to earn $1.88 a share for next year. Going by Friday’s close, that means that Dell is going for just 17 times earnings.

• Watch for Falling Stocks
  Eddy Elfenbein, October 9th, 2005 at 4:44 pm

  Barron’s sees value in Wal-Mart (WMT):

  At a recent price of about 44, the shares are trading at just 14.6 times estimated earnings for next year, the stock’s lowest multiple since 1995. And for the first time in practically as long, Wal-Mart’s P/E isn’t any higher than the broad market’s; it has often been about 30% higher.
  The world’s largest retailer is famous for its “everyday low prices,” but investors today may be getting something even better: a once-in-a-decade low price.
  While the stock has been sliding for the better part of two years, it could soon get a lift from a variety of forces — from changes in Wal-Mart’s management and merchandise to Americans’ renewed zeal for bargains in a time of high gas prices. Just last Thursday, the Bentonville, Ark., behemoth reported that same-store sales climbed 3.8% in September, at the high end of estimates, easing fears about the hurricanes’ impact. The news caused Wal-Mart’s stock to buck the day’s drop in the Dow and climb by 1%.
  That may be just the beginning. Citigroup analyst Deborah Weinswig thinks the shares can rise more than 40% over the next year, to $63. Says she: “In an environment like this, with higher gas prices, the idea of a hypermarket where you can do one-stop shopping is a success.”

  Business Week has an article on Wal-Mart’s new Metro 7 fashion line. Wal-Mart is indeed getting cheap, but I’d think it may become even cheaper in the future.

• Ben Stein Defends Energy Stocks
  Eddy Elfenbein, October 9th, 2005 at 4:32 pm

  In The New York Times, Ben Stein stands up energy stocks. He says that the surge in oil stocks shouldn’t be compared to the Internet bubble of a few years ago.

  With the greatest respect for my fellow seers, there are a few things desperately wrong with the analogy—and with this whole line of reasoning.
  First and foremost, Internet stocks largely had no or negligible earnings. They were valued on hype and rumor. They were not traditional securities with earnings and dividends. They had no value except their trading value. When they did have profits, they often sold at 100 or more times those earnings.
  On the contrary, oil and gas stocks have had spectacular earnings. Take a look at those of Exxon Mobil,BP or Valero. Those stocks’ price-to-earnings ratios are far below, not above, the ratios for the S.& P. 500-stock index as a whole. Take a look at the royalty trusts like those for Prudhoe Bay on the North Slope of Alaska and the Permian Basin in west Texas. The P/E ratios for these trusts – vehicles that energy companies created to transfer interests in their properties directly to their stockholders, who became unit holders in the trusts – are also far lower than even the P/E ratio of the blue-chip Dow Jones industrial average.
  And it’s important to remember that these ratios are for the last quarter, before the spectacular hurricane-related price increases for the products they sell. It’s entirely possible that their earnings will rise, not fall, at least in the short run, as the storm-related prices take some space on their books. (Of course, they will also have costs to repair their facilities, but those costs can be spread out over years.)
  Generally speaking, there is a bubble in a security or an asset if its price rises faster than its earnings. Hence the bubble in Internet stocks, which often had no earnings, and perhaps now in residential property, as prices rise faster than imputed rent. But if a security rises quickly in price because its earnings and prospective earnings also rise quickly – where’s the bubble?

  I think this is a bit of a straw man argument. While the flimsiest Internet stocks crashed and burned, so did many tech stocks with real earnings. Stocks like Cisco, Microsoft and Dell all saw their stocks plunge. These stocks shouldn’t be compared to the likes of TheGlobe.com. Cisco, for example, did have a bloated P/E ratio, but it also delivered amazing earnings growth quarter-after-quarter for several years.
  The lower earnings multiples for energy stocks is not a sign of good value, it’s really a sign that these are cyclical stocks, and the market sees the end of the cycle coming soon. Instead of comparing energy stocks of today, with Internet stocks of few years ago, we should compare them to energy stocks of 15 and 25 years ago. My fear is that the problem isn’t bloated energy stocks, but bloated energy prices.

  But some people say energy prices are in a bubble themselves. Maybe yes and maybe no. Certainly, when oil and gas and electricity production resumes along the Gulf Coast, one would expect energy prices to fall. I am positive that they will fall, and indeed they have already started to fall. But let’s remember that these are world prices. What has been taken off line in Louisiana and Texas is a lot of United States production but only a small fraction of world production. What has moved the price so much this year is the global imbalance of supply and demand.
  Yes, prices reflect storm damage and storm-related scarcity to some extent. No doubt about that. But the prices, which were already rising before the storms, have now retreated to pre-Katrina levels (at least for oil, if not natural gas) and may have already passed through the storm bubble and come out on the other side.
  There is a real problem in energy commodities as far as consumers are concerned. We are using energy a lot faster than we find it. As I have written before, price is how we allocate energy products when demand is rising faster than supply, or vice versa. We are seeing the world’s people start to suck the oil from the earth at a particularly breathtaking rate.

  The problem is that the price of oil has been falling since the hurricanes, not due to the hurricanes. The market’s reaction has been to undue its previous overreaction. All energy bubbles begin differently, but they all end the same way.

  In the meantime, the integrated major oil companies, refiners and royalty trusts own a great deal of a commodity that is rapidly disappearing and is rapidly rising in price. As oil companies drain their reserves faster than they find new ones, their P/E ratios may fall to levels usually associated with royalty trusts, but they will still own a supervaluable asset.

  Higher prices won’t translate into higher profits if there is indeed a failing supply. A diminishing supply will ultimately mean lower revenue for everyone.
  IT used to be that oil prices could be punctured on a moment’s notice. Just ask Midland, Tex., which suffered greatly in the oil bust of the 1980’s after Saudi Arabia raised its output a few notches. Oil prices are already correcting in the short run. But there is a real question now as to whether the Saudis can raise output in a meaningful way, and no one else seems to have a lot of spare capacity. Add to that the fact that a lot of the world’s oil producers don’t like us much (a subject for a future column). That is very good news for Midland.

  The U.S. economy is far more resilient to higher energy prices than it used to be. So far, we’ve able to absorb this “energy shock” to our system without hurting the consumer. This may soon change, but as of yet, there’s no compelling evidence.
  The real story of our new foreign policy is that, far from being obsessed with oil, we’re finally not kowtowing to energy-producing countries. We no longer have to.

  Does this mean that energy stock prices will not correct in the short run? Without question they will correct. Stocks usually correct in the short run after an immense climb.
  But are we in a bubble of energy stocks as bubbles are usually defined? No, and the long-term future for entities that own a great deal of a commodity that they bought cheaply – many of the majors have billions of barrels that cost them well under $10 a barrel – and that may stay in desperately short supply looks pretty good to me.
  Would I bet the ranch on it? No, but then I don’t own a ranch. I may bet a cow, although I don’t own a cow, either.

  But what will energy stocks do with all their profits? It doesn’t just disappear. All that surplus profit will be reinvested in new technologies and greater efficiency that will, over time, lower the price of energy.

• Advanced Micro Devices
  Eddy Elfenbein, October 8th, 2005 at 3:58 pm

  On Tuesday, Advanced Micro Devices (AMD) will report its earnings for the third-quarter. The Street estimate is for eight cents a share, but I can’t ever recall seeing such a wide range of forecasts for one stock. The high forecast is for 18 cents a share, and the low is for one penny a share. That’s a huge range, and it’s particularly interesting considering how widely-followed AMD is. Right now, 30 analysts have placed estimates on AMD’s earnings.
  There are 28 estimates for next year’s earnings. The high is for 97 cents a share, the low is 35 cents a share, for an average of 64 cents a share.
  Clearly, the conventional wisdom is the very fluid on AMD. That’s usually indicates that the stock is poorly valued. In fact, it probably helps explain why AMD has done so well recently. Last quarter, the company made three cents a share, compared with the Street’s estimate of a five cent loss. The quarter before that, AMD lost four cents a share compared with Wall Street’s forecast of a two cent gain.
  I think AMD is a wildly over-praised company, but this earnings report—and Wall Street’s reaction—will be interesting to watch.

• Wallace & Gromit: The Curse of the Were-Rabbit
  Eddy Elfenbein, October 7th, 2005 at 5:55 pm

  Wallace & Gromit: The Curse of the Were-Rabbit. Very cute. I give it 3-1/2 stars.
  

• Our Buy List
  Eddy Elfenbein, October 7th, 2005 at 4:52 pm

  We had another market-beating day. Sure, we barely beat the market, but it still counts. The Buy List was up 0.40% today compared with 0.37% for the S&P 500. For the week (and month and quarter), we’re down -2.14% compared with a loss of -2.68% for the S&P 500. Today, fifteen stocks went up, nine went down, and little Frontier Airlines (FRNT) was unchanged. Our best stock today was Expeditors (EXPD), and several of the financial stocks brought up the rear. Generally, it was a pretty uneventful day.
  Next week should be a good week as Wall Street finally gets some earnings reports. Apple’s (AAPL) earnings on Tuesday will get a lot of attention. The first of our stocks will start reporting the week after next. On the economic front, the CPI will come out on Thursday.