Archive for 2005

  • Morgan Stanley’s Profits Plunge 83%
    , September 21st, 2005 at 2:22 pm

    Apparently, no one invited Morgan Stanley to Wall Street’s summer beach party. All the brokers reported blow-out earnings until Morgan Stanley dropped the ball this morning.

    I should say that if you ignore the “charges,” Morgan’s earnings really weren’t that bad. The problem is, you can’t ignore these charges. The company took a $1 beeellion charge for the sale of its aircraft-leasing business. On top of that, the company has had its costly boardroom drama. Earlier this year, the Group of Eight angry executives finally succeeded in getting rid of CEO Philip Purcell. He left but he took a lot of money with him. Last quarter, Morgan’s compensation charges increased by $178 million.

    There was also bad news from Discover. Morgan’s credit card business saw its profits drop 28%. The company’s retail brokerage division managed pre-tax margins of just 2%, one-tenth of its rivals. Morgan has a long way to go to getting back to a healthy company. These earnings tell me that it’s going to get worse before it gets better.

  • Biomet’s Earnings
    , September 21st, 2005 at 10:55 am

    Biomet, one of the stocks on my Buy List, reported very strong earnings today, although it was one penny per share below Wall Street’s forecast. Still, the company’s profits jumped 66% over last year’s fiscal first quarter. By any standard, that’s impressive growth.

    Sales rose 11% and Biomet earned 40 cents a share compared with 24 cents last year. Wall Street was looking for 41 cents. The company also said it’s expecting earnings of 42 to 44 cents a share for next quarter. The stock is still well below its highs of last year.

    The trouble spot in the industry has been Zimmer, which is another one of my favorites. The stock is down about 20% in the last two weeks. There seems to be concern—and a lot of confusion—over pricing pressures. Katherine Martinelli, an analyst at Merrill Lynch, said that the pricing fears are overblown. She actually sees Zimmer topping its own forecasts on foreign sales. Zimmer will report earnings in late October.

  • Greenspan Strikes Again
    , September 20th, 2005 at 3:44 pm

    No surprise. The Fed raised rates by 25 basis points.

    The Fed raised the overnight bank lending rate a quarter point to 3.75 percent after meeting today in Washington. Fed Governor Mark Olson voted against his nine colleagues to argue that the rate should be held steady, marking the first dissent in a decision since June 2003.
    “Widespread devastation in the Gulf region, the associated dislocation of economic activity, and the boost to energy prices imply that spending, production and employment will be set back in the near term,” the central bankers said in a statement after the meeting. “It is the committee’s view that they do not pose a more persistent threat.”
    The decision shows the Fed remains concerned about potential inflation from energy prices. About 20 percent of the 111 economists in a Bloomberg News survey predicted the Fed might skip an increase today because of risks the economy would slow.
    “The bottom line: The strategy of gradually raising interest rates is not over, and unless the economy softens materially, more quarter-point hikes can be expected,” said Lynn Reaser, chief economist of the Investment Strategies Group at Bank of America in New York, after the decision.
    Treasuries fell, pushing the benchmark 10-year note’s yield up 1 basis point, or 0.01 percentage point, to 4.25 percent at 2:49 p.m. in New York. The Standard & Poor’s 500 Stock Index was little changed.

    The biggest change is that the Fed slightly altered its language. Before, the central bank had always said that inflation was “well contained.” Now the Fed says that “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.”

    ”Measured” doesn’t mean fast or slow. It’s basically a weak word for “limited.” But I already knew that “accommodation” was eventually coming to end. That’s all the Fed said today. The market expects two more rate increases, and possibly a third. I think we’ll see at least three more rate hikes.

  • The Flattening Yield Curve
    , September 20th, 2005 at 1:48 pm

    The Federal Reserve is about to raise interest rates by 0.25%. This will be the eleventh straight rate increase from the Fed. Since banks make much of their money from the difference between long-term and short-term interest rates, the narrowing yield curve is hurting the earnings outlook for many banks. This has hurt smaller regional banks in particular because they tend to be more dependent on the yield curve for their profits.

    One of my favorite banks, Commerce Bancorp, saw its shares take a big hit last Monday. The company said that earnings over the next two quarters will be below expectations. I still like the stock and I think market grossly overreacted. Commerce said it will only be two pennies a share below expectations. But this shows you that some investors are already afraid of the yield curve. The New York Times notes that in the past year, the yield spread between the two-year note the 10-year bond has closed from 168 basis points to just 26 basis points.

    Here’s a chart showing the banking sector (black line) against the S&P 500 (gold line). While the banking sector has beaten the broad market over the past few years, the banks have started to lag the S&P 500 over the past few months. Once the Fed stops raising interest rates, and the yield curve widens, the banking sector could stage an impressive rally.
    Banks and S&P 500.bmp

  • Baidu Loses Important Court Case
    , September 20th, 2005 at 10:54 am

    More bad news for Baidu. First, the company’s stock valuation gets slammed by two Wall Street firms. Now, the Chinese search engine loses an important legal battle. The company must pay a small fine and it can no longer direct Web surfers to sites where they can download music illegally. This is particularly sensitive because the Chinese government hasn’t been very good on protecting patents. This has been a sore spot in East/West business dealings and hopefully, this case may signal a change.

    Baidu’s stock has been incredibly popular and the site is a big hit in China, especially among the country’s youth. Google owns 2.6% of Baidu’s stock and some people think that Google’s follow-on offering is designed to raise money for a Baidu buyout. Baidu plans to appeal the court’s ruling.

  • Blame Katrina Part II
    , September 20th, 2005 at 10:22 am

    Hurricane Katrina is being blamed for even more earnings shortfalls. It’s not so much the insurance companies that are using the “blame Katrina” excuse, but it’s coming from some unlikely sources. Earlier, Books-A-Million blamed Katrina for its earnings (although the company is based in Alabama and doesn’t have any stores in New Orleans). Now, a mattress company and a cosmetics company are blaming Katrina for their poor earnings.

  • Brokers on a Roll
    , September 20th, 2005 at 9:55 am

    First, Lehman Brothers had a great quarter. Then Bear Stearns delivered impressive results. Now, Goldman Sachs reports strong earnings.

  • No Housing Bubble
    , September 19th, 2005 at 2:50 pm

    In today’s Wall Street Journal, Chris Mayer and Todd Sinai argue that there’s no housing bubble.

    We, along with Charles Himmelberg, a research economist at the Federal Reserve Bank of New York, computed annual housing costs for 46 housing markets from 1980 to 2004 in a study due to be published this fall in the Journal of Economic Perspectives. Our findings are striking. In none of the hottest housing markets did the ratio of the cost of owning to rent in 2004 exceed the average over the sample period in their own market by more than 13%. The highest was in Portland, Ore. Miami’s ratio was 12% above average. But the ratios in the other oft-cited “bubble” cities such as Boston, L.A., New York and San Francisco were no more than 3% above their long-run averages. A similar pattern arises when we compare a city’s cost of housing to its mean family income.
    By contrast, in the late ’80s, immediately prior to the large house-price declines of the early ’90s, the ratio of the annual cost of owning to rent peaked 52% above the long-run average in San Francisco and New York. Boston and L.A. topped out, respectively, at 37% and 42% above the long-run average. Even allowing for growth in house prices during 2005, it is clear that while owning a house is not cheap, it is not inordinately expensive by historical standards.

  • Google’s $10 Million Man
    , September 19th, 2005 at 2:26 pm

    The New York Times has more on Kai-Fu Lee, the man at the center of the Google/Microsoft battle.

  • Kozlowski Gets 8-1/3 to 25 Years
    , September 19th, 2005 at 2:22 pm

    Bernie Ebbers got 25 years. Rigas got 15 years. Now Denny Kozlowski is getting 8-1/3 to 25 years.

    L. Dennis Kozlowski, whose $6,000 shower curtain and $15,000 umbrella stand made him a symbol of corporate greed, and his former top deputy Mark Swartz were sentenced to 8 1/3 to 25 years in prison for looting Tyco International Ltd.
    Justice Michael Obus sentenced the pair today in state Supreme Court in New York and rejected their request to remain free pending appeals. He ordered them to pay a total of $134.3 million in restitution.
    Kozlowski, 58, the former Tyco chief executive, and Swartz, 45, the former chief financial officer, were convicted in June of 22 felonies each. Their crimes included a dozen counts each of grand larceny, the most serious crime, for awarding themselves and others more than $150 million in unauthorized bonuses and misusing Tyco loan programs.
    “The heart of this case is basic larceny,” Obus said. He called the crimes “extremely serious charges.” Kozlowski and Swartz were also convicted of defrauding shareholders of more than $400 million.
    Obus distinguished the case from those involving corporate scandals at Enron Corp. and WorldCom Inc. “This is not about any other case,” he said.
    WorldCom and Enron filed and largest and second-largest bankruptcies in U.S. history, respectively, after their CEOs were ousted amid claims of accounting fraud. Tyco averted bankruptcy and has a market value of $59.3 billion.

    Next up, Lay and Skilling.