Archive for 2005

  • Google Watch
    , August 18th, 2005 at 9:49 am

    One year after raising a truckload of money in their IPO, Google is going back for more. The company just filed to sell 14.1 million shares of stock. At today’s price, that’s over $4 billion.

    This time, the Google Dolls are going the conventional route. Instead of a Dutch auction, the offering is going to be headed by Morgan Stanley and Credit Suisse First Boston, with Allen & Co. along for the ride. The companies will probably rake in about $150 million from the deal. The underwriters also have the option of buying up 600,000 shares to cover over-allotments.

    I was impressed by this quote:

    “It’s something I wasn’t anticipating,” said Jeffrey Matthews, a partner at Ram Partners LP in Greenwich, Connecticut. The firm owns the shares. “They don’t need the money. Apparently they want more. Fourteen million shares will depress the price.”

    That’s right—they don’t need the money. It’s simply a money grab. At a certain level, I’m a bit impressed. But what will they do with the money? Are they planning a major buyout? Google already has $3 billion in cash. Who knows what they’ll do. Google already owns a nice chunk of Baidu. They could buy the rest without dipping into cash flow. Maybe they’ll bid for Unocal!

    What bothers me is that I never have any idea what they’re doing. The company treats its shareholders horribly. Instead of the being vanguards of the new economy, Google is weird and overly secretive which hints at paranoia.

    Institutional Shareholder Services has a corporate governance rating system. Google got one of the lowest scores ever, just 4.2 on a scale of 1 to 100. Google has a two-tiered share structure, no outside directors and offers no guidance. I’m sure after the stock plunges, some retiree will tearfully tell a Senate subcommittee that they had no idea how Google treated its owners.

  • A Turnaround at HP?
    , August 17th, 2005 at 7:03 pm

    I’m not particularly impressed with Hewlett-Packard’s earnings. The company earned 36 cents a share last quarter, five cents more than expectations.

    The company’s personal computer division, which had lost money in the not-so-distant past, earned $163 million in the third quarter – “despite the fact that this is our seasonally weakest quarter,” Mr. Hurd said. The company reported a profit margin of 2.6 percent in its personal computer division, its best in years.

    That’s still not too good. Some on the Street seem impressed that HP’s earnings grew five times faster than its sales. Yes, that’s true, but only because the company has undertaken dramatic cost-cutting measures. Do you ever notice that Dell never announces a “major cost-cutting initiative”? It’s because they’re always looking out for ways to keep costs down.

    HP still has a long way to go. Dell is the best PC-maker in the business.

  • Mr. Housing Bubble
    , August 16th, 2005 at 6:35 pm

    Mr. Housing Bubble to the rescue. Although, he has enemies!

  • Unconventional Success: A Fundamental Approach to Personal Investment
    , August 16th, 2005 at 4:34 pm

    For the last 20 years, David Swensen has been the manager of Yale’s endowment. And the ol’ chappy has done the Eli proud. The Yalie fund has grown from a measly from $1.3 billion to a respectable UT-like $15 billion. Zounds and Huzzah for the money people!

    Swensen then took pen to paper and was set to let all the wee widdle investors know how to invest just like Yale. But then, a funny thing happened on the way to Easy Street. The book’s thesis took a bit of a detour. I’ll let the Times take over (that’s The New York Times dear heart, not El Paso):

    Instead, it shows why the little guy will never be able to invest the way Yale does.
    For all the “democratization” that has taken place in the world of personal investing the deck is still stacked against the individual. That was Mr. Swensen’s fundamental discovery. And his willingness to change course and turn “Unconventional Success” into a polemic aimed primarily at mutual fund companies, but also at other Wall Street types who fleece the little guy, is to his everlasting credit. After all, he could have told us to buy stocks in companies whose products we buy at the supermarket, like a certain investment genius of a previous era.
    Any regrets about that advice, Peter Lynch?

    Oh lord. Where to start? First, we take a shot at Peter Lynch! I’ve re-read this a few times, and it still comes out of nowhere. Why is Peter Lynch the bad guy? His style of investing hasn’t been shown up at all. In fact, it’s as relevant as ever.

    Lynch’s main point over the years is to ignore professional investors. He even calls them an oxymoron. Lynch never said to buy stocks in companies whose products we buy at the supermarket. He says that “the amateur investor has numerous built-in advantages that, if exploited, should result in his or her outperforming the experts, and also the market in general.” He’s exactly right. But that’s only half of Lynch’s argument. He also takes down the pros.
    Lynch criticizes the group-think mentality of institutional investors who often have to clear their buys and sells past a committee. Lynch said that some of his best investments ideas have come from the power of common knowledge. That makes perfect sense, and I doubt Mr. Lynch has any regrets.

    Secondly, we learn that despite the democratization that’s taken place, “the deck is still stack against the little guy.” Democratization is even placed in scare quotes as if it’s been a scam from the get go. Oh, please. Yes, Wall Street is being run by the evil plutocrats who are stomping on the throat of the little guy. Just the other day, I saw a phalanx of Morgan bankers marching down Broad Street, “Ooo – eeeee – hoo! Yooo – ho!” To be honest, they didn’t look that scary, but you get the idea.

    Let’s be clear: The sole driver of Wall Street’s history for the last few decades has been the democratization of investing. This has been nothing short of a revolution. The changes have been stunning. Only 30 years ago there used to be fixed commission rates, no discount brokers, no decimal pricing, no IRAs, no 401k’s, no ETFs, no Reg FD, little of any disclose, no Sarbanes-Oxley. Ok, I could do without the last one, but at least they’re trying. In fact, one of the best books on the subject is “A Piece of the Action: How the Middle Class Joined the Money Class,” written by Joseph Nocera, the freakin’ author of this Times’ article (New York Times, not Northwest Indiana).

    The article (Mr. Nocera) continues:

    When Mr. Swensen first took over, Yale’s portfolio held stocks and bonds, period. Like most institutional portfolios of that time, “it was neither diversified nor particularly equity-oriented,” Mr. Swensen recalled. Today, the endowment has barely 5 percent in bond holdings. “The other 95 percent,” he said, “are in places that we think will provide ‘equity like’ returns.”
    Which is not to say it is all in equities. On the contrary, the Yale portfolio is extraordinarily diversified, which both lifts returns and protects against disaster.

    No! No! A thousand times no! Diversification does not in and of itself increase your return. The whole idea of Modern Portfolio Theory is that you can use diversification to lower your risk (protect against disaster) without impacting your return. I’m not being pedantic here. This is the entire foundation of modern financial economics.

    In just a few paragraphs, we’ve taken on a straw man and lost, and now we’ve bravely flattened the efficient frontier.

    Let’s read on, shall we?

    At the end of the 2004 fiscal year, Yale had a mere 15 percent of its assets in domestic equities, and another 15 percent in foreign stocks. It had 15 percent in private equity, and 18 percent in “real assets,” which includes investments in timber and energy. But its biggest percentage, 26 percent, was in something called “absolute return.” That is a category invented by Mr. Swensen in 1990. It means hedge funds.

    This guy owns hedge funds and he’s complaining about how mutual funds fleece the little guy. Does he have any idea how much hedge funds charge? Also, is this guy a manager or does he just pick other managers?

    His new book has given Mr. Swensen a greater appreciation of the enormous advantages he has as an institutional money manager, starting with the obvious fact that he has a staff that spends full-time researching investment possibilities. Thus, he takes it as a given that individuals shouldn’t pick stocks themselves. “I see every day how competitive the markets are, and how tough. So the idea that you can do this yourself, that’s out the window.”

    He’s confusing cause and effect. The markets are competitive precisely because people are picking their own stocks. Yes, it’s hard to beat the market. Very hard. But if you’re well-diversified, it’s hard to lose to the market too. We never hear that part. For books like this, there are only victims. Wall Street is an unending drama of victims and exploitation, us against them. (Duck, I hear more guards coming!)

    This is where the book drowns in its own conventionality. I’m sure the author believes he’s advocating self-denial and conservatism. Swensen indeed picks the right (and easiest) targets, but his entire view of the markets is wrong, wrong and wrong.

    The financial markets are not a game of one side opposite another. That’s simply a metaphor that people use to understand how the market operates. It’s easy to understand. If you wanted to write a stock market book at any time for the last 70 years, just throw the words “big shot,” “fleeced,” “screwed,” and “little guy” in the title and off you go.

    Just in the past few years, we’ve seen dozens of these types of books. The former head of the SEC even jumped in with “Take On the Street: What Wall Street and Corporate American Don’t Want You to Know.” See. You’re the victim of “them.” Never of the SEC of course. Another one is “You got Screwed! Why Wall Street Tanked and How You Can Prosper,” by someone calling himself James Cramer. I’m sure he means well.

    This us-against-them view is just a metaphor and nothing else. Thanks to democratization, this metaphor is like some cartoon cat getting clanged on the head by the frying pan of reality. I guess that’s actually a simile, but you see where I’m going. I hate to break it to some people, but there’s no one “in charge” of the economy, or Wall Street. There’s no board room with a dozen fat bald white guys sitting around conspiring against you, and perhaps ruling the world during their breaks.

    Financial markets are hugely decentralized structures with countless participants who aren’t coordinating with another, but they influence each other nonetheless. In fact, understanding this is one of the best arguments in favor of free enterprise. (James Surowiecki’s “The Wisdom of Crowds” is a good book on this subject.) Looking for Wall Street experts is like asking who’s the king of a traffic jam. It just doesn’t exist.

    What is it about mutual funds Mr. Swensen finds offensive? Just about everything. He hates the way the loads and all the hidden fees mean that the investor is always behind the eight ball. (When I asked him about hedge fund fees, which are much higher, Mr. Swensen replied: “I don’t mind paying a lot for actual performance. Besides, when we negotiate fees, it’s sophisticated investor versus fund manager. It’s a fair fight.”)
    Yuck! What Buffett and Lynch have been saying for years is that anybody can do what they do. Unlike Mr. Swensen, Buffett makes it’s clear that he doesn’t have a large staff. The last thing Warren Buffett would call himself is sophisticated. He steers clear of tech stocks because he freely admits that he doesn’t understand them.
    So does Mr. Swensen offer any hope at all? Some. He thinks we’d all be better off sticking with index funds, instead of trying to beat the market. He thinks we should get our index funds from Vanguard, with its rock-bottom fees. (As a not-for-profit company, Vanguard also doesn’t have the central conflict of interest.) We should have a diversified portfolio of index funds, for the same reason Yale does. We should be disciplined in our approach, especially in rebalancing our portfolio to stick to our diversification targets. Of course, this invariably means paring back on winners and increasing our investment in laggards.

    We should be unconventional by investing in index funds. The very idea of an index fund is that you’re following everybody else. Yet Swensen constantly wants to portray himself as some brave non-conformist standing against the herds of Wall Street sheeple. This is the most synthetic dissent possible. Swensen wants to inherit the moral glamour of being a maverick, while not actually doing anything to depart from the conventional wisdom.

    There’s nothing wrong with being conventional. Swensen is from the very heart of the Wall Street establishment. He’s the manager of Yale’s endowment! Christ, they’re not going to turn that over to Nelly.

    That’s fine being a member of the establishment. Just don’t tell me how unconventional you are. People who are truly unconventional usually have no clue how marginal they are. It just doesn’t occur to them. They’re not self-conscious because they don’t friggin care. That’s part of the unconventionality. But Swensen insists on telling us how different he is. In fact, this is second book, and the second one with the “unconventional” in the title (Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment and Unconventional Success: A Fundamental Approach to Personal Investment).

    Swensen makes several references to his contrarian strategy of investing in a passively managed index fund. First off, there’s no such thing as a passive fund. Every fund, index or not, have a built-in bias. If you’re investing in an S&P 500 index fund, you’re inherently buying dollar futures. That’s an active investment. You’re also skipping small-cap stocks. Even if you get a total market index fund, you’re still skipping bonds and commodities. You can never escape making an active decision with any fund. And by the way, an index fund by definition doesn’t pare back on winners and lean towards laggards. Since the indexes are weighted by market value, the index funds do just the opposite.

    I don’t much like index funds, but they’re not the worst thing out there. Some people simply don’t have the time of inclination. That’s fine, but they’re probably not going to read Swensen’s book anyway.

    But don’t tell me that the market can’t be beaten. It can be beaten, it’s just very, very hard. This isn’t just a hope of mine either. The economy runs on the fact of its inefficiency. People find innovations and new ways of doing things. If regular people can do that every day, there’s no reason why they can’t beat the market.

    There is a reason we as a culture have accorded hero-like status to great investors like Warren E. Buffett and Peter Lynch. For all the cultural reinforcement we get that investing is something anybody ought to be able to master, we know in our bones it’s not true. Mr. Buffett and Mr. Lynch are like great athletes, who have the skill and the emotional makeup to do something well that the rest of us can only dream about.
    That describes David Swensen, too. What he has to say is worth listening to. But will we ever truly hear it?

    Buffett and Lynch are not at all like great athletes. I believe anyone can do what they’ve done and Buffett and Lynch have repeatedly said so. Another successful manager of a college endowment was John Maynard Keynes. He multiplied the wealth of King’s College, Cambridge from 30,000 pounds to 380,000 pounds. Keynes felt he didn’t need to put much effort into the job. Each morning, he got his investing work out of the way before breakfast so he could get on with more important work. I doubt he ever used a hedge fund either!

    If I thought investing for the masses was a lousy idea, I’d say so. I’m not interested in being a populist for the sake of populism. The reason everyone can invest for themselves is because that’s what free enterprise is. Mr. Swensen’s worldview is so wrong, he doesn’t realize how wrong he is. His concern for the welfare of average investors is admirable, but he ought to care a lot less. I wish he understood that his concern isn’t helping. This worldview has outright contempt for individual investors. Swensen feels that investors simply can’t be trusted. For example, he also writes about Social Security reform, and to little surprise, he’s against it.

    Another point that bugs me is that if this is what he really believes, then he should give us some strategy to change the landscape. But Swensen just wants individual investors to accept their lot in life.

    This book was written with one thing in mind—to get good reviews. It sounds like it’s judicious. He uses lots of jargon. It sounds like it’s focuses on self-denial. It sounds like it’s unconventional (after all, it tells us many times). I have no doubt this book will get many positive reviews. But it gives the wrong message to investors.

  • Stuck in a Trading Range
    , August 16th, 2005 at 1:00 pm

    If the S&P 500 closes above 1,221.13 today, which looks very likely, that will mean that the index has been in a 2% trading range for 26 straight trading days. Since July 12, the S&P has closed as high as 1245.04, and as low as 1221.13. The rest of the time, the index has bounced between those bands (I’m only going by daily closes).

    The market hasn’t been in a trading range this narrow for nearly 10 years. The S&P was caught in a range trading in October 1995, which was just a brief pause during its rally.

    Perhaps the longest trading range in modern market history was in 1963. For 62 straight sessions, between April 15 and July 16, the S&P never closed above 71 or below 69. Although it’s hard to picture a market more dull than this one.

  • Inflation Is Still Tame
    , August 16th, 2005 at 12:14 pm

    The government reported that consumer prices jumped 0.5% in July. But the “core rate,” which excludes volatile food and energy prices, was up just 0.1%. I think this is more evidence that inflation is not a problem.

    For the last year, consumer inflation has been just 3.2%, and core inflation has been 2.1%. This means that in real terms, the Federal Reserve had interest rates slightly negative. They were handing out money for free. As Fed likes to point out, they’re not raising rates, they’re removing accommodation.

    Despite the rise in oil prices, inflation has not reached the consumer level, and I don’t suspect it will.

  • Dell: The Best Horse
    , August 15th, 2005 at 7:11 pm

    I’ve been meaning to get to Dell’s earnings report, which came out on Thursday. First, I have to say that Dell is one of my favorite stocks. The company is highly efficient. They know their market, and they rarely make mistakes. I should correct that. The company does make mistakes, but they handle their mistakes very well. In fact, I think that’s of the most important traits which separates a good company from a bad one.

    Dell earned 38 cents for the quarter, which was up 23% from last year. Sales were up 15%, so their profit margins expanded. Dell has now earned 75 cents a share for the first half. Many people don’t realize this, but desktop PCs are just 37% of Dell’s business. The company is involved in several other markets. That’s part of the reason why it’s now “Dell Inc.” and no long “Dell Computer Inc.”

    The stock took a big hit because it missed analyst sales projections. The Street was looking for a 17% rise in sales. The Street seems particularly troubled because Dell rarely misses a forecast. On Friday, Dell lost 7.4%, or roughly $8 billion in market value. The company blames itself. It said it was simply too aggressive with cost-cutting. Dell is selling PCs for as low as $299. The company also said that orders from the federal government have been weaker-than-expected.

    Is this just spin? Or is it really a small glitch that Dell can easily handle.? The truth is that I simply don’t know. The difference with Dell is that I do know that its management has often had these kinds of challenges, and has met them head on. Kevin Rollins, the CFO, said that Dell could have made up for much of the shortfall if it had added $10-$15 to the price of each machine sold during the quarter. Well, that makes sense to me. He also made it clear that it was Dell’s fault but the problem is “one we feel we can fix fairly crisply. We think we can do it, we’ve been doing it now for 10 years.” That doesn’t sound like a company in trouble.

    Why do I give Dell the benefit of the doubt? Let’s look at the big picture. Dell is still gaining market share. This quarter was the 18th straight quarter that Dell met or beat analyst estimates.

    As can be expected, Goldman, Deutsche Bank and several other firms downgraded the stock. But I was pleased to see Lehman Brothers hold firm. The analyst there, Harry Blount, has been a consistent bull on Dell, and he’s been right. On CNBC, he called Dell, “the best horse in the sector.” Except for Apple, the rest of the competition is rough shape. IBM has left the business. Gateway is in trouble, and I don’t even want to go into Hewlett Packard.

    Dell forecast revenue for the current quarter of $14.1 billion to $14.5 billion and earnings per share of 39 cents to 41 cents. Analysts had been expecting Dell to earn 41 cents per share, on average, in the third quarter, on revenue of $14.6 billion.

    Dell is still an excellent company and I see no reason to sell.

  • Sprint Nextel
    , August 15th, 2005 at 6:32 pm

    Today is the day! Sprint & Nextel are now one. The new firm has 80,000 employees. I was glad to see Sprint Nextel get one of the single-letter ticker symbols. The company trades under S, the old symbol for Sears.

    If you’re keeping score at home, the only other open single letters are H, I, J, M, P, U, and W. Presumably, the M and I are to tempt some unnamed NASDAQ stocks over to the dark side.

  • Google Watch
    , August 15th, 2005 at 10:09 am

    Those wacky Google Dolls are at it again. The company has this really cool idea to scan books from five of the largest libraries in the world. Then people could search the book lines online. Cool, right? Except there’s a wee little problem. It’s called copyright law.

    Publishers are majorly ticked, and Google seems to be genuinely puzzled by this. So Google tried to reach a compromise. At 11:53 p.m. on Thursday night, Google said on their blog that they won’t scan any book that publishers request. So the burden of protecting a copyright lies with the owner! Now, publishers are even angrier. Business Week has the 411.

  • Monday Market Report
    , August 15th, 2005 at 9:51 am

    Oil seems to be slipping off the high prices it reached last week. The market’s big change of mind recently is that high oil prices are now seen as hurting the economy, not a reflection of a surging economy. As oil has raced higher, bond yields have fallen. On Friday, the yield on the 10-year T-bond dropped below 4.25%. Although, I’m very skeptical that this rally will last.

    We’ve had some good earnings news this morning. Lowe’s earned $1.05 a share, three cents better than estimates. The company also said that third-quarter earnings should come in at or above expectations. Lowe’s is a wonderful company, and I like the stock a lot. However, I’m a bit concerned about a slowdown in the housing sector. It will be interesting to how well Home Depot did last quarter. HD’s earnings come out tomorrow.

    Another stock I like a lot is Sysco. I always find it interesting that the other Cisco gets so much more attention. This Sysco is a major supplier to the food service industry. The company earned 44 cents which was inline with estimates. I’m also happy to see that Sysco is going to expense its stock options, something the other Cisco would never do. Still, Sysco is not growing as fast as I would like. Right now, the market only seems to be concerned with oil.