Archive for 2005

  • eBay Keeps Going
    , July 21st, 2005 at 1:30 pm

    eBay had a great earnings report. I’m simply amazed at how well this company performs.

    Sales jumped 40%, and net income rose by 53%. All told, eBay took in 22 cents a share, which was four cents higher than forecasts. The company also raised its full-year forecast to a range of 82 cents to 83 cents a share. Was it just six months ago that eBay warned of slowing growth, and full-year earnings of 74 cents to 76 cents a share?

    Let’s put today in perspective. Last year, eBay earned 57 cents a share, and the year before that, it made 33 cents a share. So in the last three months, it earned two-thirds of 2003’s profit. The stock is up about 20% higher today.

  • Free the Yuan (and Katie too!)
    , July 21st, 2005 at 1:05 pm

    It finally happened: The Yuan is free!

    Well, not entirely free. But more free, nonetheless.

    The Chinese government officially ditched its peg to the U.S. dollar. It’s not a big move. The yuan is only 2.1% higher against the dollar.

    The Chinese central bank will now keep to a tight 0.3% band against a basket of currencies. They won’t say what those currencies are, but I assume it includes the dollar, yen and euro, plus a smattering of other Asian currencies.

    Even though the timing was a surprise, this move is hardly big news. I’d have to agree with one analyst who said that this reform is the tiniest thing China could have done. But it does give the Bank of China more flexibility in the future.

    The problem with currency pegs is that they’re simply price-fixing, and price-fixing screws up the normal ebb and flow of capital markets. If you wait long enough, you’ll start to see weird side effects.

    For example, Americans have been gobbling up goods made in China. If it were a country, Wal-Mart would be China’s eighth-largest trading partner. I also think that a lot of the huge demand we’ve seen for things like steel is a consequence of yuan. Also, the Baltic Dry Index, which is a barometer of shipping costs, plunged today to it lowest level in two years. This could be a freefall.

    What happens next is a big mystery. Right now, gold is up and bonds are down. I suspect that long-term bond yields will continue to rise, perhaps to 5%.

  • Lucent’s Word of the Day
    , July 20th, 2005 at 5:01 pm

    The Newark Star Ledger:

    Generally speaking, we had a good, solid quarter. This is a tough industry,” Lucent Chairman and Chief Executive Patricia Russo said in an interview.

    The Wall Street Journal:

    “We continue to make progress,” said Patricia Russo, chairman and chief executive officer of the Murray Hill, N.J., company. “It was another solid quarter of us doing the things we said we would do.”

    Reuters:

    Lucent Technologies Inc., one of the world’s largest makers of telecommunications equipment, on Tuesday said its quarterly net income fell from a year-ago, but beat Wall Street estimates driven by solid demand for wireless equipment.

    Telephony Online:

    Lehman Brothers analyst Steve Levy called Lucent’s results “solid” in a research note issued before the earnings call.

    Reuters II: Lucent’s quarter seen solid, wireless a concern

    Lucent’s Press Release:

    Over the last 90 days, we have made solid progress building on the collaboration that was already taking place in the business,” said Russo.

  • Tom Brown on BofA
    , July 20th, 2005 at 3:32 pm

    I always enjoy reading Tom Brown. He’s one of the sharpest banking analysts around. Here’s a sample of his feelings about the Bank of America/MBNA deal.

    In my opinion, Ken Lewis has morphed into a terrible CEO, and has turned Bank of America into a huge, mediocre financial services conglomerate. My small contribution to the betterment of corporate governance over the next few years will be to work ceaselessly to see to it that Ken Lewis is ousted from his job (without a big severance package) and to see that significant turnover of the board occurs, as well. The best thing that can happen for BofA shareholders, in my view, is that the company be broken up. That is the way to create shareholder value—not by paying an outlandish price for a broken growth company!

    Ouch! Read the whole thing.

  • Your Guide to Earnings Season
    , July 20th, 2005 at 12:15 pm

    I know earnings season can be a bit confusing for investors, so here’s my effort to make this trying time a little less confusing.

    First, Advanced Micro Devices led off earnings season when it said that its profits dropped by 65%, but—and this is crucial—those profits were above Wall Street’s expectations, so the stock went up.

    See? It’s all about expectations.

    Intel’s earnings, on the other hand, were exactly in line with Wall Street’s expectations and the stock went down. So it’s not all about expectations per se. You’re not expected to do what’s expected, but you’re expected to beat expectations. That’s the key. If not, people will expect that other people will sell your stock. So those first people will sell, and you don’t want that.

    Are you following this? Good.

    Now Ford’s earnings dropped by 19%, but it beat expectations by 14 cents. So the stock went down by nine cents. Now an amateur investor might think that Wall Street is simply out of its mind. Not true. The reason Ford why dropped: profit-taking. Some people said it was a correction, but it wasn’t. It was profit-taking. Just trust me on this.

    Now Jamie Dimon of JPMorgan Chase is a very smart CEO. On June 1, he said that their earnings were going to be bad: “Absent any improvements in June, we expect our trading results to be worse this quarter than they were in the third quarter last year, which was a terrible quarter.” Pretty scary. Wall Street took the bait and dropped its expectations. The day of that announcement, the stock went up by a penny. And today, JPMorgan Chase reported that it beat those lowered expectations by two pennies.

    Of course, the stock is down today, but that was unexpected.

  • The Bond Bubble
    , July 19th, 2005 at 1:05 pm

    How come we never hear about a Bond Bubble? I’m always being told that we’re in a housing bubble. You certainly don’t have to look hard to find someone who’ll tell you that so-and-so stock is “due for a correction.” But everyone seems terrified to criticize the bond market.

    When the Fed lowered rates, bonds did well. When the Fed raised rates, bonds did well. Alan Greenspan called it a “conundrum.” Don’t bond traders ever suffer from irrational exuberance? People just assume that the bond market is always right.

    But now, bonds are falling. It’s only a minor leak so far. The yield on the 30-year T-bond (or at least, it was a 30-year bond when it was issued) reached 4.15% on June 3. The yield got down to 4.18% on June 27, but no lower. Since then, the bond market has backpedaled. Could this be a dreaded double top?

  • China’s Economy
    , July 19th, 2005 at 10:04 am

    Tomorrow, the Chinese government will report how well their economy did in the second quarter. We all know the economy in China is booming, but these government reports are wildly inaccurate. You can basically choose any number you want. Ten percent? Fine. Eleven point three? Sounds good to me.

    The GDP reports from our own government are pretty bad. But this time, I think this Chinese GDP report is worth watching. It’ll be interesting to see what the government is willing to admit. I tend to think that the Chinese economy is a lot weaker than most people think.

    You have to ignore what the government says, and look for other signs. For example, Huang Power, a huge Chinese power producer, said that profits are going to be down 30%–40% for the first half this year. Also, the cost of shipping goods like iron and coal has plunged recently.

    The U.S. is putting a lot of pressure on China to revalue the yuan. If China doesn’t move, the Senate wants to slap a huge tariff on Chinese products. For now, Greenspan has gotten the Senate back off. Apparently, a revaluation is coming soon. But if the Chinese economy isn’t do well, that could put any monetary reform on hold.

  • Google Watch
    , July 19th, 2005 at 8:46 am

    Isn’t Google just adorable? Those new fangled Web folks refuse to play by the Wall Street’s rules, and that’s why the Street doesn’t like them. Even though the stock has soared on a gazillion analyst upgrades, deep down, Wall Street isn’t happy. You see, those uptight East Coast squares don’t “dig” what Google is all about. Google does things their Own Way, and they’re not afraid who knows it.

    Like when other companies go public, they’re supposed to use some stuffed-shirt investment bank crammed full of Skull n’ Boners. Not Google. They did their own IPO. You heard right. They used a Dutch auction. Cause it’s democratic. None of that screw-the-little-guy business-as-usual stuff. Yes, it’s true, Google did cut the size and price of the IPO (at the last minute), and it reserved $450 million for nine insiders. Also, the Gooligans made a special class of stock that has ten times the voting power of the common stock. But those are messy details. The larger point is about attitude, and Google’s got it.

    For example, Google has broken Wall Street’s most sacred rule—they refuse to provide earnings guidance. Imagine that! They’re not afraid to stand up to those bullying Wall Street analysts. At their Analyst Day, Google said that their CFO would speak. But it turned out to be the company’s chef—the Chief Food Officer. Get it? The Chief Financial Officer didn’t even address the analysts. Investors have to understand that Google is an unconventional company. It’s like what Larry Page wrote, “Google is an unconventional company.”

    When they had their first public earning report, the Googloids released it early on their Web site (www.google.com, incidentally). Youch! That must have infuriated those arrogant Wall Street sheeples. And after Google blew away analysts’ forecast for the fourth-quarter, you can just imagine how angry Douglas Anmuth of Lehman Brothers was when he had to raise his price target from $190 to $230. Or when Prudential raised their target to $260. Or Goldman Sachs raised theirs to $265. On the inside, it must have killed them.

    But that’s ancient history. Now Google’s stock is up to $300—a 250% gain in less than a year. But don’t worry, success hasn’t changed them. The Google Dolls are still mavericks. They’ve said that they’re not going to split the stock. (Are they allowed to do that?) Anmuth is showing a brave front. Last week he raised his price target yet again (to $350 from $275). Smith Barney is up to $360. How high will they go? I’m sure Wall Street will give those nerdy whippersnappers their comeuppance. Until that time comes, Jim Cramer quietly tells us “Google’s still cheap!”

    Perhaps Google is changing their ways. Google’s CEO, Eric Schmidt said, “One of the great secrets of Google is that we are not quite as unconventional as we say we are.” Maybe so. As for me, I’m waiting for Thursday’s earnings report. The consensus estimate is for $1.20 a share. I have no idea what it will be, but whatever it is, I hope Wall Street won’t be too angry.

  • Idiot Award
    , July 18th, 2005 at 5:19 pm

    If you plan to fax out bogus stocks tips to one million people, it’s a good rule to avoid faxing the Securities and Exchange Commission.

    The SEC said that the original fax, handwritten by Yafa, appeared to be an urgent message from a financial planner intended for a client named “Dr. Mitchel.” The fax, sent on Dec. 15, 2004, recommended the purchase of shares of AVL Global Inc., saying that the price was about to triple.
    Among the fax recipients was the commission’s San Francisco office, an apparently inadvertent slip, said Marc Fagel, the commission’s head of enforcement in the city.

  • Stocks Vs. Real Estate
    , July 18th, 2005 at 10:30 am

    The Apprentice #3, Kendra Todd, was on yesterday’s Bulls & Bears. I admit, I was hoping to see her cry again, but alas, no such luck. Now loose in the real world, Kendra is a real estate agent in Florida. Her segment dealt with which is a better investment right now, stocks or bonds. In Kendra’s opinion, it’s real estate. Definitely, real estate.

    Now, let’s make this clear. Real estate is a nice investment. I hope everyone owns their own home. But in the long run, real estate will never, ever, ever, ever outpace stocks. Never. This isn’t just my opinion, it’s reality. It won’t happen because it can’t happen.

    A house is simply an asset. No matter how hard it tries, it will never be anything more than an asset. A house does its job by just sitting there. But a stock is different. A stock is part ownership in a corporation. A corporation is people using assets to create wealth. This ain’t just a matter of definitions.

    You can buy a share of stock of a company that can buy a house. A house can’t invest in a corporation. You can form a corporation and issue stock. With the proceeds, you can do cool things, like…buy a house and rent it for profit. After a while, you’ll have enough money to buy another house. Then another and another. Soon, you’ll have a nice stable of houses. That’s what businesses do—they grow. If they don’t grow, they’re replaced by businesses that do. It’s that simple, and a house can never do that.

    I know people treat stocks like lottery tickets. And sure, stocks often act like lottery tickets. But ultimately, stocks are claims on real assets. Stocks are a unique investment. No other investment offers you what stocks can do. That’s why every analysis of long-term returns shows that stocks always beat everything else. For the long run, stocks are the best investment to own. Period.