Archive for 2005

• Google Watch
  Eddy Elfenbein, September 8th, 2005 at 11:17 am

  Google just announced that it hired Vint Cerf, the “Father of the Internet.” He’s new position is Chief Internet Evangelist. Groan.

  MOUNTAIN VIEW, Calif.–(BUSINESS WIRE)–Sept. 8, 2005–Google Inc. today announced that it hired Vinton (Vint) Cerf, the longtime technologist who is widely known as a “founding father” of the Internet, as Chief Internet Evangelist.
  “Vint Cerf is clearly one of the great technology leaders of our time,” said Google CEO Eric Schmidt of Cerf, who co-designed the TCP/IP protocols that were used to develop the Internet’s underlying architecture. “His vision for technology helped create entire industries that have transformed many parts of our lives. We are honored to welcome him to Google.”
  Cerf will continue his leadership in the Internet community, and help Google build network infrastructure, architectures, systems, and standards for the next generation of Internet applications.
  “Google has already made tremendous strides in making access to information on the web a reality for users across the globe, but we’re still in the Internet’s early innings,” he said. “This medium will enjoy wider-spread use than television, radio or phones, and will ultimately expand beyond planet Earth. Google has always believed in doing things differently, and I believe that places us in a unique position to help bring even the wildest Internet visions into reality.”
  Cerf joins Google from MCI, where he led technology advancements since 1982, with a break to return to research at the Corporation for National Research Initiatives from 1986 to 1994. On his return to MCI in 1994, he helped to put MCI on the Internet map. With Robert Kahn, he recently received the ACM’s A.M. Turing Award, considered “the Nobel Prize for computing,” for his achievements in computer networking. Cerf is also working on the Interplanetary Network, a project of NASA’s Jet Propulsion Lab, which aims to extend the Internet into outer space for planet-to-planet communications. He will also continue in his role as the Chairman of the Internet Corporation for Assigned Names and Numbers (ICANN).

  Business Week has more on Cerf’s role.

  Cerf’s hiring comes on the heels of several moves that suggest Google is encroaching on telecom turf. In the past year, the Internet giant has dipped its toe in the Wi-Fi market, sponsoring hot zones in San Francisco and New York City.
  HIGH AMBITIONS. Also, Google has been reported to be buying up chunks of dark, or unused, fiber-optic capacity employed to transmit calls and data at high speeds. And in August it joined the stampede of Internet companies looking to provide voice-over-Internet phone calls when it launched a new instant-messaging tool.
  Indeed, it’s beginning to look like Google harbors ambitions to use the Internet and search tools for delivering everything from voice and data communications to audio and video files. This would resonate with Cerf, who has often predicted voice-over-Internet services will dramatically reshape the phone industry.

• The Fed’s Next Move
  Eddy Elfenbein, September 8th, 2005 at 10:24 am

  To raise of not to raise, that’s the question. After raising interest rates for 14 months, the Federal Reserve may temporarily hold off in the aftermath of Hurricane Katrina. I think that would be a mistake. The Fed needs to send a clear message to the market that it’s serious about attacking inflation.

  The Fed meets again on September 20 and before Katrina, an 11th straight rate increase was basically a done deal. Now, it’s hard to say. The futures market puts the odds of another rate increase at 50%. After 9/11, the Fed cut rates by 50 basis points. The difference is that the economy was much weaker then. The Fed’s rate cut would have come about within a few months without 9/11.

  The economic consequences of Katrina are still hard to gauge. The Congressional Budget Office said that the hurricane will cost 400,000 jobs and zap GDP growth by 0.5% to 1%. Then there’s the inflationary outlook, and that’s even murkier. The good news, however, is that oil prices finally seem to be pulling back.

  I think the best move for the Fed would be to continue raising interest rates. Holding rates artificially low for too long won’t help Louisiana or the markets.

• Bayou Goes Hollywood
  Eddy Elfenbein, September 7th, 2005 at 7:30 pm

  Here’s a strange twist to the tale of Bayou Management. It seems that the fund’s managers were trying to get in the movie business.

  According to corporate filings with the secretary of state in Nevada, Paid Merchandising, Paid Movie I and Paid Movie II list as their principals IM Partners and Mathew Marino, the brother of Dan Marino, Bayou’s chief financial officer. Both principals list their address as 40 Signal Road, Stamford, Conn., the same address where Bayou once lodged its various hedge funds.
  Those entities agreed to finance a significant portion of “Yellow,” a film produced by Yellow Production about a woman who is haunted by the death of her father, according to a London-based Web site called The Z Review. “They wanted to invest in movies,” said Stephen Brown, the president of Yellow Production. But, he said, “Paid Movie I did not complete the financing of the movie. We took additional steps to secure the balance of the funding.”

• Earnings Outlook
  Eddy Elfenbein, September 7th, 2005 at 2:51 pm

  Nearly every stock in the S&P 500 has reported earnings for the second quarter, and the earnings growth has been fairly impressive. It looks like the final earnings growth number will be about 12.0%. For comparison, at the start of the second quarter, Wall Street was expecting just 8.8% earnings growth. The second quarter marks the eight straight quarter of double-digit earnings growth.

  Nearly 70% of the companies in the S&P that have reported have beaten expectations. For a typical quarter, 59% of companies top expectations. Only 16% of companies have missed estimates compared with 20% for a typical quarter.

  Earnings growth has been heavily tilted to the energy sector which saw its profits grow by 42%. If you take out energy, the rest of the S&P 500 grew its earnings by 8.5%. The earnings growth rate has been slowing dropping for the past quarters, but it should finally started expanding again. Earnings growth should pick up to about 17% for the third quarter. However, this earnings pick-up might be short-lived. For the fourth quarter, profit growth is expected to pull back to 14%. And for next year, earnings are expected to grow at 10.8%. I think Wall Street and the Federal Reserve are still trying to judge the impact of Hurricane Katrina.

  The Consumer Discretionary group, which has seen its profits dip lately, is expected to lead the market next year. Here are the 2006 earnings growth expectations for the 10 major market sectors, note that Energy is last.
  Consumer Discretionary 17.61%
  Information Technology 16.85%
  Health Care 14.89%
  Industrials 14.41%
  Utilities 10.60%
  Materials 10.33%
  Consumer Staples 8.38%
  Financials 6.11%
  Telecommunication Services 4.60%
  Energy -0.50%

• NY Fed to hold meeting on derivatives with banks
  Eddy Elfenbein, September 7th, 2005 at 12:52 pm

  Next week, the Federal Reserve Bank of New York will meet with several top Wall Street firms to discuss credit derivatives. This market has grown rapidly in recent years and there are fears that Wall Street’s paper work is very far behind.

  The Counterparty Risk Management Policy Group recently released a study which highlighted the problem of Wall Street’s growing back log. Alan Greenspan has praised credit derivatives as a good way of controlling risk. The difficulty is that hedge funds have moved into this market. With the rapid trading, no one is sure who owes what to whom. In fact, what’s left of Enron and Citigroup are currently in court fighting over a credit derivative. My guess is that we’re going to hear more about this issue in the next few months.

• WSJ: Steel to Rise by 20%
  Eddy Elfenbein, September 7th, 2005 at 10:35 am

  Today, The Wall Street Journal reports that the price of steel could rise by up to 20% in the aftermath of Hurricane Katrina. This comes on top of another 20% price increase that came last week. The reason for the high prices is that there’s a limited supply of liquid hydrogen which is used to make higher-quality steel.

  Air Products & Chemicals Inc., a major U.S. producer of hydrogen, says it can’t deliver liquid hydrogen to customers because of damage to its plant in New Orleans. The Allentown, Pa., company is uncertain when it can restart production.
  Steelmaker Steel Dynamics Inc., of Fort Wayne, Ind., told customers Friday it is suspending future orders of value-added products such as cold-rolled, galvanized and painted sheet-steel products because Air Products was its main hydrogen supplier. U.S. Steel, Nucor and Netherlands-based Mittal Steel Co. said they have alternate supplies of hydrogen and don’t expect the shortage to affect them greatly.

  The steel group had been a fairly poor industry over the past few decades. But the group has done extremely well is that last 2-1/2 years. Much of steel’s resurgence has been due to China’s insatiable appetite for steel.
  

  The industry got a nice boost last week when Morgan Stanley reported a bright outlook for the sector. Morgan sees China being the critical factor which will help all metal stocks over the next five years.

  Also, this weekend’s Barron’s noted that Congress will use a $100 million emergency relief fund to help rebuild Louisiana’s roads. That comes right after the huge highway bill that the president recently signed. Barron’s speculated that same of the big winners would include Texas Industries, Nucor and Caterpillar. The highway bill “guarantees a minimum of $227.6 billion for roads between now and 2009; the remaining $59 billion is for transit programs, such as commuter rail lines, and for pork projects, such as the Frank Sinatra waterfront walkway in Hoboken, N.J.”

  The fall of the U.S. steel industry has been pretty dramatic. In fact, most of the major steel companies are no longer American. Mittal Steel is based in the Netherlands. Posco is based in Korea. Gerdau is Brazilian. The best U.S. steel stock is Nucor. Steel stocks are still well off their highs of six months ago, but it rally might not yet be over.

• Microsoft sues European Commission
  Eddy Elfenbein, September 7th, 2005 at 9:54 am

  Microsoft continues its long-running legal battle with the European Commission. Now, Redmond is striking back.

  The Commission imposed sanctions against the software giant, including a record 497 million-euro fine, in March 2004 in a case which also covered the bundling of Microsoft’s Media Player with Windows, but the company has not entirely carried them out.
  Microsoft challenged the Commission’s decision — a case which has yet to go to hearing — and, separately, tried without success to get the sanctions suspended by the court.
  Competition Commissioner Neelie Kroes had warned Microsoft it had to comply by June 1, 2005, or face new enforcement action.
  Microsoft filed a compliance agreement by the deadline.
  But it managed to soften a remedy which required it to share communications protocols — software rules of the road — with all rival makers of server software for small offices.
  Essentially, the Commission and Microsoft agreed that those who received the protocols could not make them public.
  The makers of open-source server software, who publish the source codes for all products they issue, cried foul at this, however, and Microsoft and the Commission decided to leave the issue to the Court of First Instance.

• Seibel Beats the SEC
  Eddy Elfenbein, September 6th, 2005 at 9:23 pm

  Good news for investors. The courts have thrown out a claim by the SEC that Siebel Systems violated Regulation FD. Adopted in 2000, Reg FD (for fair disclosure) requires companies to tell the public the same info as Wall Street.

  Kenneth Goldman, Seibel’s CFO, told a private group that Siebel’s business was looking good. The stock jumped 8% the next day. The SEC went after Seibel although the company felt that this was an unreasonable interpretation of the regulation. In fact, this was the second time that the SEC went after Siebel on Reg FD. Judge George Daniels said that “the statements relied upon by the SEC in its complaint do not support an allegation of nonpublic material disclosure.”

  In his decision, Judge Daniels wrote:

  Such an approach places an unreasonable burden on a company’s management and spokespersons to become linquistic experts, or otherwise live in fear of violating Regulation FD should the words they use later be interpreted by the SEC as connoting even the slightest variance from the company’s public statements. Regulation FD does not require that corporate officials only utter verbatim statements that were previously publicly made.

  Here’s more on the potential aftermath of this ruling.

• The PayPal Wars
  Eddy Elfenbein, September 6th, 2005 at 2:49 pm

  What happens when entrepreneurs build a better mousetrap? The government and business team up to put it out of business.

  Eric M. Jackson’s book, The PayPal Wars: Battles With eBay, the Media, the Mafia, and the Rest of Planet Earth, details the story of PayPal. The company was originally started with a vision of how technology could create an extra-governmental currency system. Soon, eBay and government regulators drove the company from its original goal. It’s a sad story and it ends when PayPal is ultimately bought out by eBay.

• Today’s Market
  Eddy Elfenbein, September 6th, 2005 at 12:50 pm

  The market is doing quite well today. The Dow is up over 100 points and crude oil has finally pulled back a few dollars. Right now, oil is going for less than $66 a barrel. These days, that’s considered a bargain. Today, the market is being led by tech stocks and the cyclical sector. The top industry groups are Real Estate, Paper, Water Utilities and Heavy Construction. Perhaps the best news is that the insurance sector is finally beginning to recover.
  

  Insurance stocks took a big hit last October from Hurricane Spitzer. The industry has been a bargain ever since.