Archive for 2005

• Liftoff for Lipitor
  Eddy Elfenbein, December 19th, 2005 at 12:28 pm

  Our Buy List is having a rotten day so far. No one stock is getting killed, but everything seems to be down about 1%. The only plus is that Medtronic (MDT) hit a new 52-week high.
  The market is being thrown off balance today. The huge gainer is Pfizer (PFE) which is having its best day in 20 years. The company won its big Lipitor patent suit. This is a big, big victory for Pfizer. I’ve been very worried about the company lately. I had mentioned before that I was impressed by its big dividend increase. This is good news, but the stock still has a long way to go.
  Pfizer’s news is also helping Merck (MRK). Both Merck and Pfizer are Dow components, so the Dow 30 is outpacing the Nasdaq and S&P 500 today. Even the entire health care is moving up thanks to Pfizer. That makes me even more discouraged that our health care stocks like Biomet (BMET), St. Jude (STJ) and Stryker (SYK) aren’t responding.
  As I said, the market seems really off balance today. I can’t figure out what’s going on. For example, the three-month T-bill yield is trading higher while the 10- and 30-year bond yields are lower. That’s not so unusual but we haven’t seen anything like it recently. Due to the narrower yield curve, bank stocks are lagging the market. Health care stocks are leading the market higher and industrials and utilities are the poorest sectors. That’s a rather odd combo.
  Here’s a random thought I’m throwing in: Home Depot (HD) seems unusually cheap right. I have to confess that I’m not a big fan of the stores. Whenever I go there, the stores always have that Saigon ’75 feel to them. It’s complete mayhem. The aisles are jammed and the hoards of folks are carrying off anything not bolted down. I guess that’s good for business. Still, I’m always tempted to grab my purchase and bolt to a chopper liftoff from the roof.
  Wall Street currently expects HD to earn $3.03 a share next year (the fiscal year ends at the end of January ‘07). That’s just under 14 times earnings, which is fairly cheap. Last month, the stock had a great earnings report. HD earned 72 cents a share, four cents more than estimates. Lowe’s is probably the better company, but I’m skeptical that its P/E ratio should trade at a 25% premium to Home Depot’s.
  Here’s a three-year chart on Home Depot. You can see that the trailing P/E looks pretty reasonable.
  

• Does the Weather Affect the Stock Market?
  Eddy Elfenbein, December 19th, 2005 at 5:58 am

  One professor says that there’s definitely a possibility that it may:

  Professor Ben Jacobsen’s paper “Is it the Weather?” confirms that there is definitely a strong seasonal effect in stock returns in many countries: stock market returns tend to be significantly lower during summer and autumn months than they are during winter and spring.
  However, says Professor Jacobsen, it is premature to conclude that weather affects stock returns by causing mood changes in investors. “While the effect on the markets is there, we still don’t know why.”

  Click here for the paper.

• Albert Einstein: Physicist, Investor
  Eddy Elfenbein, December 18th, 2005 at 6:35 pm

  From the Independent:

  Albert Einstein and his scientific achievements are world-renowned. Less well-known are his successes as a stock market investor. But it turns out that, in less than 20 years, he and his adviser turned a few thousand dollars into more than $250,000.
  A share certificate signed by the world’s most famous physicist, discovered in the US, fetched €28,000 last week in Berlin. It reveals that Einstein’s 60 shares in May Department Stores alone doubled in value in six years.
  The image of Einstein as stock-market punter does not sit easily with that of Einstein the pacifist and idealist. “Money only appeals to selfishness and always irresistibly tempts its owner to abuse it,” he once said.
  Einstein pulled off the feat of being genuinely non-materialistic, while having more than enough money. On arrival in Princeton in the 1930s, he was asked to name his salary, and arrived at a figure of $3,000. This was turned down, to his surprise, as too low. His accountant, Samuel D Leidesdorf, persuaded him to settle for $17,000.
  Thereafter Leidesdorf advised Einstein, and the share certificate sold last week may indeed represent Leidesdorf’s, rather than Einstein’s, acumen.

• The Colts Finally Fall
  Eddy Elfenbein, December 18th, 2005 at 4:23 pm

  The Colts are finally beaten! Thanks to Michael Turner’s 83-yard rumble, San Diego beat Indianapolis 26-17. Here’s the TradeSports contract for Indy to win. You can see that Turner’s run came shortly after 4 p.m.

• The Undercover Economist
  Eddy Elfenbein, December 18th, 2005 at 1:11 pm

  “A funny thing seems to be happening to economics writing: it’s getting better.”

  Roger Lowenstein is always a good read. Here he is in today’s NYT on Tim Harford’s “The Undercover Economist.”

• Accounting Footnotes
  Eddy Elfenbein, December 18th, 2005 at 1:03 pm

  Ellen Simon takes a closer look at accounting footnotes:

  One-time charges
  At some companies, one-time charges have become a way of life. Consider Eastman Kodak Co., which has taken one-time charges for each of the last 14 quarters. By treating the charges as extraordinary events, the company can say its earnings would be ever-so-much stronger without them. But, considering that the charges seem unrelenting, that argument looks wobbly.
  Bianco crunches 10 years’ worth of one-time charges across the S&P 500 to “normalize” them. In 2006, one-time charges will cost the aggregate S&P 500 $5 a share in earnings per share, he estimates.
  Pension accounting
  Under current pension accounting rules, a company can legally book a pension credit, even if its pension fund is losing money. How does this accounting magic work?
  Under a process called “smoothing,” the company can set an assumed return for its pension fund. Across the S&P 500, that assumed return is 8.22 percent, according to Howard Silverblatt, editor of quantitative services at S&P.
  That would be a stellar return in today’s market, especially because pension funds are almost always diversified. With interest rates near historic lows and equity returns anemic at best, it’s the rare fund manager who is getting the assumed return.
  But, thanks to smoothing, a company doesn’t actually have to see that return to act as if it did. It can add its expected return right into its net earnings, even if the actual return differs greatly.
  “You’ll see amounts on the balance sheet for the pension plan,” said David Zion, accounting analyst at Credit Suisse First Boston. “What I would counsel is to completely ignore that amount. It’s meaningless. In many cases, it’s completely misleading.”
  Instead, he said, look for pension information in the annual report. Read the footnotes, which will tell you what the fund’s actual return is. Then do the math yourself.
  A tiny change in one assumption in a pension plan can mean big bucks. For instance, Lucent Technologies Inc. changed the mortality assumptions for its plan. The change is expected to reduce its 2006 pension credit by approximately $50 million, according to the company’s filings with the Securities and Exchange Commission.
  How much do aggressive return-on-asset assumptions cost the stocks in the S&P 500? Bianco calculates the cost at $1 to $2 a share for 2006.
  Stock Options
  “Most companies will be required to expense employee stock options beginning in 2006, but earnings guidance and analyst estimates for many companies have yet to reflect this cost,” Zion said in an October research note. “In fact, there are only 96 companies in the S&P 500 where the analyst consensus earnings estimate includes the cost of stock options.”
  How much will options really cost? About $2 to $3 a share across the S&P 500, Bianco estimates.

• Weekend Link-A-Rama
  Eddy Elfenbein, December 17th, 2005 at 10:26 am

  Here are a few links that you might enjoy this weekend.

  James Surowiecki on the Xbox 360.
  The Economist on the U.S. economy.
  Chet Currier on a renaissance for annuities.
  James Hamilton on the gold standard.
  Barron’s on the Irving Kahn, the Dean of Wall Street. He turns 100 on Monday: “Kahn could be on the job for a while longer because he’s a member of an extraordinarily long-lived clan. His oldest sister, Helen “Happy” Reichert, is 104, and his younger brother, Peter, is 95. Kahn’s other sister, Lee Reichart, died in the past year at 101.”
  The most popular investing books at Amazon.com.
  And lastly, RIP: The The Earl of Kimberley (read it, trust me).

• The Market Today
  Eddy Elfenbein, December 16th, 2005 at 5:34 pm

  Are the Elliott Wavers onto something? Once again, the Dow couldn’t break through 10940, which is one of those pesky Fibonacci numbers. Today, the Dow got to 10940.34 before backing off. The high for the year is 10950.55, reached back in March. Coincidence? Not bloody likely!
  The overall market dropped for the second straight day. The S&P 500 gave back 0.28% and our Buy List fell 0.15%. However only seven of our stocks were up, 17 were down and one was unchanged. Our big winner today was Frontier Airlines (FRNT) which jumped 46 cents, or 5.6%. The airline sector was particularly strong today. Medtronic (MDT) is another stock that’s been strong recently. The stock is very close to a new 52-week high.
  Volume was heavy for today’s session. Today was a “quadruple witching” day when futures and options on stock indexes and individual stocks expire.
  Oil dropped nearly $2 a barrel today. That’s very good news. I’m still holding to my thesis that we’re in a bear market for risk-taking. The VIX (^VIX) fell to 10.15 today, which is very close to a 12-year low. The index was slightly lower this past summer.
  I’ve also been talking about the “dual market,” energy and everything else. Today was a perfect example. Look at the performance of the sector spyders for today:
  Health Care…………0.25%
  Financials…………….0.25%
  Industrials…………..0.19%
  Utilities……………….0.00%
  Staples………………-0.04%
  Technology…………-0.14%
  Discretionary……….-0.21%
  Materials…………….-0.37%
  Energy………………..-2.43%
  Everyone is not only bunched together, but barely moving, and then there’s energy at the extreme. There’s just so little volatility in this market.
  Outside our Buy List, Oracle (ORCL) fell 1.09%. I expect that next week will be slow. We’ll get another update on third-quarter GDP. I’m rooting for another upward revision. Also, Biomet (BMET) reports earnings, as do two other stocks I like Bed, Bath & Beyond (BBBY) and FactSet Research Systems (FDS).
  Today’s link: The Stock Bandit. Enjoy.

• WSJ: AOL Nears Deal With Google
  Eddy Elfenbein, December 16th, 2005 at 12:57 pm

  The Wall Street Journal is reporting that Time Warner (TWX) is close to a deal with Google (GOOG) for AOL. Microsoft (MSFT) has apparently been shut out.

  The deal won’t likely be finalized until next week after Time Warner’s board meeting on Wednesday.
  A person close to the situation says the deal being negotiated would allow AOL to sell advertising among the search results provided by Google on its Web properties. Google is also likely to promote AOL’s Web properties among the sponsored links in its search results.
  Microsoft had hoped to convince AOL to use MSN’s search engine instead of Google’s. Time Warner had been in talks with Microsoft throughout the year, but in September began talking to Google as well.
  A Google spokeswoman declined to comment. Time Warner spokesman declined to comment. A Microsoft spokeswoman couldn’t immediately be reached.
  The contest illustrates how far companies are willing to go to secure a chunk of the quickly expanding market for Internet advertising, by far the fastest-growing advertising medium; online sales in the third quarter rose 34% to $3.1 billion from a year earlier, according to PricewaterhouseCoopers LLP. Search ads, which display ads based on queries users enter into search engines, are the biggest segment of that market.
  The deal also comes at a difficult time for Time Warner, as hedge-fund investor Carl Icahn wages a dissident campaign to replace a majority of the media giant’s directors.
  Microsoft has also struggled for a firm foothold in the online ad landscape, where its MSN unit, whose search ads are currently sold by Yahoo, has lagged behind Google in market share and in its ability to woo large Internet advertisers.

• Oracle’s Earnings
  Eddy Elfenbein, December 16th, 2005 at 5:52 am

  Oracle (ORCL) reported its earnings after yesterday’s close. Let’s start with the good news. No one was seriously injured or maimed. That’s not always a given when your CEO owns his own jet fighter.
  The bad news is that Oracle’s profits skidded 2%. All told, the company netted 15 cents a share but charges for its acquisition binge shaved off four cents a share.
  At this price, I think Oracle’s stock is a bit cheap but I’m not a buyer. No way. The company faces several major problems. Obviously, the most important is that its core business simply isn’t growing that fast. Last quarter, database license sales grow by just 5%. I’m sorry but that’s pretty dismal. That stock has been stuck in neutral for the last few years and I’m not sure things will get better any time soon.
  The thing about Oracle is that it’s still overwhelmingly a database stock. If anything, the database market has become even more competitive. You have Microsoft and IBM closing in. I’ll give Larry & Crew credit for realizing the trouble they’re in. They understand that something must be done, and quick. Hence, the acquisition boom. Let’s just say that Oracle has made a lot of investment bankers happy this year. And it’s not just Siebel and PeopleSoft. Oracle has spent $16 billion this year on over a dozen acquisitions. That’s almost as much as Steinbrenner.
  But it’s the buying spree that makes me nervous. The three most terrifying words on Wall Street are growth, acquisition and by. At the high-end of enterprise software, there’s nobody left. It’s just SAP and Oracle—that’s it. Look at what happened to Siebel earlier this year. It’s almost as if Larry saw the ghost of Christmas Future. The Siebel board fired their CEO after less than a year, and was able to get Oracle to take the bait for a buyout. OK, even I’m not that cynical, but still…it happened.
  The shareholders want action. If Oracle’s stock continues to go nowhere, Larry may need his fighter for self-defense. (Although I’m partial to the idea of Redwood being declare a no-fly zone.) If not air or land, there’s always the sea. Ellison also owns the world second-largest yacht, a 450-footer. I’m guessing that’s a par three.
  Don’t get me wrong. I love Larry. He’s a genius. If anybody can pull off a swarm of blockbuster deals, he can. I’d love to be his wingman (or first mate), but Oracle has to start putting up better numbers. Then it’ll be worth a serious look.
  
  Addendum: Wall Street Folly has the transcript of Oracle’s conference call.