Archive for January, 2006

  • Dell cuts estimate for fiscal 2007 options expense
    , January 6th, 2006 at 2:18 pm

    From Reuters:

    Computer maker Dell Inc. (DELL) on Friday cut its estimate of what it will cost the company to expense options awarded as employee compensation in fiscal year 2007 by 8 cents a share.
    Dell now expects to incur full-year after-tax stock-based compensation expenses of $250 million, or 10 cents a share, for fiscal 2007. That’s below its previous forecast of 18 cents.
    The company said it plans to accelerate the vesting of some “out of the money” stock options. That will reduce stock-based compensation expenses it would otherwise be required to recognize under reporting requirements from new accounting rule, FASB 123R, Dell said.
    The company is fully vesting previously granted stock options that have exercise prices higher than $30.75, Dell’s closing price on Thursday.
    The company’s options typically vest over a five-year period.

    Ironically, it’s one of the benefits of a sagging share price.

  • Share Buybacks
    , January 6th, 2006 at 11:58 am

    The big fad on Wall Street has been to buy back outstanding shares. I’m not a big fan of share repurchases. Personally, I’d rather get the cash. Too often, a company wastes good money on its own bad stock. As I see it, I pay corporate execs to run their businesses, not manage my money.
    According to USA Today:

    A record-breaking number of companies, 1,012, repurchased a record number of shares worth $456 billion last year, says TrimTabs. Buybacks for Standard & Poor’s 500 companies also hit a record at an estimated $315 billion.

    Those are pretty impressive numbers. The share buybacks are starting to have a major effect on earnings. Fewer shares means higher earnings-per-share. The fourth-quarter earnings are expected to grow (or have grown) by 14.9%. This marks the 15th straight quarter of double-digit earnings growth.

  • The Market Today
    , January 5th, 2006 at 5:01 pm

    The S&P 500 has risen every day this year. OK, that’s a little leading misleading, we’re just three-for-three and today’s gain was miniscule. For the record, the S&P 500 closed higher by 0.02 points. To put that in perspective, over an entire year that works out to about 0.4%.
    Still, it was better than our Buy List which is not having a good week. Our Buy List fell 0.39% today. Today’s problem child was FactSet (FDS) which fell nearly 5% because the founder’s estate already sold his shares. (Yep, I don’t understand it either.)
    The market started on a good note. Jobless claims fell to a five-year low. This was a bit of a strange day as technology lead the way, and energy was the laggard. Both the five-year and ten-year Treasuries were unchanged. And Google (GOOG) keeps on chugging along. Today, the stock closed above $450 a share for the first time. The company is now worth $130 billion. Not bad for a couple of kids.
    Lastly, Howard Stern will get 34 million shares of Sirius (SIRI) stock (about $220 million) for meeting subscriber targets. Baba Booey could not be reached for comment.

  • The Equity Premium Puzzle
    , January 5th, 2006 at 2:32 pm

    One of the great puzzles of finance is the “equity risk premium.” This refers to the fact that stocks have historically outperformed bonds. Not only that, they’ve outperformed them by a lot. Finance professors aren’t exactly sure why.
    According to Wikipedia:

    A large number of explanations for the puzzle have been proposed. These include a contention that the puzzle is a statistical illusion, modifications to the assumed preferences of investors and imperfections. Kocherlakota (1996) presents a detailed analysis of these explanation in financial markets and concludes that the puzzle is real and remains unexplained. Subsequent reviews of the literature have similarly found no agreed resolution.
    An alternative explanation for the puzzle has been proposed by Benartzi and Thaler (1995). Applying prospect theory they contend that myopic loss aversion provides a plausible solution to the puzzle. They assert that investors evaluate their portfolio in a relatively short sighted way and that, as loss aversion implies, they are highly sensitive to losses over this time period. The evaluation time period implied in their model by an equity premium of 6 percentage points and a 2x loss aversion multiplier (a general finding of loss aversion research) is approximately one year. This explanation does seem consistent with the data and has not, to date, been rebutted. However, in the absence of a general model of portfolio choice and asset valuation for prospect theory it has not received general acceptance.

    I believe the answer is really quite simple. Stocks have to perform better than bonds. If they didn’t, all of capitalism would come crashing down. A bond is a loan, and a stock is equity, meaning it’s what you do with the loan. In that relationship, there’s an implicit agreement that the borrower will make more money than the lender, otherwise the former wouldn’t borrow and the latter wouldn’t lend. The difference is the equity premium.
    Well, that’s my theory. Now Australian Professor Peter Swan has a new theory. He thinks the equity premium puzzle is due to liquidity:

    In a working paper titled, “Can Illiquidity Explain the Equity Premium Puzzle?”, Prof Swan said that equity markets are highly illiquid compared to government securities such as bonds.
    “My contribution to (the puzzle) is that we can’t just look at the direct impact of transaction costs on returns,” he said.
    “We have to look at the indirect impact in terms of interfering with our ability to achieve desirable risk minimising portfolios.”
    Prof Swan added: “When you take into account indirect effects it would appear that even in small transaction costs do seem explain much of the equity premium puzzle, and a variety of other puzzles as well.”
    His model illustrates that the equity premium is no more than compensation to equity holders for the adverse effects of illiquidity.
    Prof Swan’s work also helps account for the term “irrational exuberance”, a phrase coined by the US Federal Reserve chairman Alan Greenspan.
    According to Robert Shiller, of the Cowles Foundation for Research in Economics and International Center for Finance at Yale University, the term “irrational exuberance” is often used to describe a heightened state of speculative fever.
    “What this is referring to is the high volatility observed in asset prices … the big booms and the crashes we see in stock prices which are not nearly as prevalent in government securities,” said Prof Swan.
    “This is not easily explained within the standard finance paradigm, which states that the price of any stock depends on its expected dividends or earnings.”
    Prof Swan provides a theory for why stock prices are so volatile when dividends are stable and earnings are relatively stable.
    “The biggest benefit of all is from the security that is associated with volatility in the returns and prices for the stock,” he said.
    “We no longer need the new field of behavioural finance to explain excess volatility.”

    I’m not so sure we can ditch it just yet. Certainly, transactions costs play a role, and I think Professor Swan adds an important angle to the debate. However, I can’t help but notice that often the most volatile stocks are the most liquid ones. Who care about a penny spread on Google at $465? A modern investor can invest in something basically resembling “the market” pretty easily. Is it really that much more illiquid? I don’t know but I hope we’ll see more research on this issue.

  • Barry Ritholtz in Business Week
    , January 5th, 2006 at 12:26 pm

    One of my favorite bloggers, Barry Ritholtz, is profiled in Business Week. I just wish he weren’t so pessimistic:

    Why is he so glum? For starters, globalization and pricing pressures will hurt corporate profitability in 2006, says Ritholtz, who now runs independent research company Ritholtz Research and hedge fund Ritholtz Capital Partners.
    “We’ve been in a stimulus-driven, real-estate-dependent economy for some time now,” he says. “As inflation goes higher, and interest rates with it, our consumer-spending binge may slow dramatically.”
    And the good news? Oil prices will fall, predicts the market watcher, who’s now a celebrity blogger. But beyond that, he says foreign stock markets will enjoy most of the action in 2006.

    He’s calling for the S&P 500 to go to 880. Yikes!

  • FactSet Lower Today
    , January 5th, 2006 at 12:18 pm

    FactSet Research Systems (FDS) is trading lower today on the news that the estate of the late founder, Howard E. Wille, has liquidated its shares. The press release makes it clear that the sale has already taken place. Depsite this, the shares are off about 5% right now.
    The company recently reported very strong earnings.

  • Morgan Stanley fires 4 after strip club visit
    , January 5th, 2006 at 7:26 am

    From Reuters:

    Morgan Stanley has fired four employees, including a stock analyst, after they accompanied at least one client to an adult-entertainment club, the Wall Street Journal reported on Thursday, citing people familiar with the matter.
    The newspaper said the stock-research analyst and three sales staffers worked in Morgan Stanley’s institutional-stock division. All four were men, the Wall Street Journal reported.
    Citing people familiar with the matter, the newspaper said the workers were technology-industry specialists who visited a strip club with one or more clients during a conference held by the firm in Phoenix, Arizona, in November.
    A spokesman for Morgan Stanley could not immediately be reached for comment.
    Morgan Stanley paid $54 million to settle charges in July 2004 that it denied women pay rises and promotions, paid them less than men, excluded them from company events, and subjected them to lewd behavior.
    The U.S. Equal Employment Opportunity Commission EEOC brought the charges in 2001 on behalf of hundreds of women, accusing it of engaging in a pattern of sex discrimination since 1995.
    Morgan Stanley denied wrongdoing as part of that settlement.

  • Google Watch
    , January 5th, 2006 at 6:27 am

    This morning’s WSJ has an interview with Safa Rashtchy of Piper Jaffray. The analyst just gave a super atomic wedgie to every Google (GOOG) short on Wall Street by slapping a $600 price target on the stock. His old price target was a wussy $445, which Google just gobbled thanks to…well, Mr. Rashtchy’s new price target. He thinks the search giant can make $11.91 a share in 2007. That’s roughly twice what Google made in 2005.
    One of the wonders of Google is the way they’ve been able to have Wall Street eat out of there hand at the same time the company slams the financial establishment. I’ve always felt that Google’s unconventionality was a bit affected. They seem to relish the role of outsider too much.
    And if you watch carefully, Google has backed down several times when important principles were at stake–principles which they claim they stand for. Never underestimate these moments. There’s a reason why I admire companies like Expeditors (EXPD). A good company shouldn’t be so concerned with attitude.
    The Google Dolls love to quote Warren Buffett but the company is perversely secretive. That’s not at the service of shareholders. The Journal asks Rashtchy about Google’s secrecy:

    Google publicly discloses very little information about itself. How does that affect your ratings?
    I don’t find it particularly difficult because of a couple of reasons. I’ve known Google nearly since it started. And also I’ve covered the search industry longer than other analysts. Google is so big that I liken it to Wal-Mart. If you know the retail market, you have a pretty good chance of knowing how Wal-Mart is doing. I study the broader search market. In reality, Google has a very easy business model. It’s basically how many searches they have done times how much revenue they get per search.
    Having said that, Google discloses very little. It poses some difficulty for analysts, but it really poses more risk for investors. Right now, it is a boom time for Google, and people aren’t that worried about a lack of transparency. Should there be any slip or any miss from expectations, investors could be very concerned and there could be some selloff because investors wouldn’t know what caused it. So, yes, it is a factor.

    No. Not at all. And by that, I mean yes. Investors could become concerned if at some point investors were to become concerned.
    He tells us how well he knows Google, but if he’s such an expert, why has he raised his price target five times since April? His own actions signal that there’s something important he’s consistently missing.
    What annoys me about most about Sarbanes-Oxley or the antics of Governor-to-be Spitzer is that they’re only willing to attack targets once they’re down. Where were they before? I’ll be very blunt. Google is one of the most hostile companies to investors possible. What they’ve been allowed to get away with is ridiculous. And the slate is wiped clean all because the stock has gone up.
    People like Safa Rashtchy aren’t helping things. Google’s rally isn’t going to last forever. Once the shares fall, some white-haired widow will sob to her congressman, and then we’ll hear the indignation: “Wait a minute! This company has two classes of stock; one with ten times the voting power of the other! How come no one told us?”
    Whenver Google is involved it seems to breed weirdness. Just consider the equation of Bear Stearns plus dumb metaphors equaling incoherent drivel. I’ve read this a few times and I’m still lost.

    Today, we are introducing the concept of the Google Ecosystem to investors, and with that, we are raising our rating to Outperform from Peer Perform. In conjunction, we are raising our 2006 price target to $550 from $360, reflecting our long-term belief in the fundamentals and the burgeoning Google Ecosystem.
    An ecosystem is a community interacting as a functional unit that grows and mutually supports the various components within it. While most people associate the ecosystem with nature, we think it also applies to business sectors and believe Google is in the midst of nurturing its own ecosystem — much like Microsoft and IBM did in the past.
    We believe the Ecosystem has five main attributes: Google’s size is developing new sectors as a derivative; Google’s direction and partners should have a resounding effect on existing companies; the Ecosystem should act as self-reinforcing to Google; Google’s hardware competency is underrated and a significant advantage; and the Ecosystem growth should create an economic lift for Google.
    As with any ecosystem, the growth of Google’s Ecosystem is susceptible to many risks, including: increased and unforeseen competition; inability to adapt; dependence on overall Internet access and content growth; global political and economic trends; legal risks; key partners within the Ecosystem; and the enforceability of Google’s many patents.
    The seminal PageRank patent that launched Google’s success in search was filed in 1998 and issued in 2001 to Stanford (not Google). However, we do NOT believe that PageRank is Google’s secret sauce. We think that the patents flowing from Google since 1998 may provide more important insights into Google’s future, and maybe most importantly, act as a barrier to entry to would-be competitors.

    Oh dear lord. This metaphor is like some tiny spider scampering its way across the linoleum of understanding. I, my friends, am the sneaker of logic. I’m still a little dazed but I think we have an ecosystem that faces legal risks? Someone help me out. Perhaps the secret sauce will protect them. I’m just not sure.
    In any event, I’m going to raise my price target on Google to $700. And a sack of magic beans.

  • Whoa Nellie!
    , January 5th, 2006 at 12:30 am

    What a game! Here’s the TradeSports futures contract for USC to win by 7.5 points, as it was traded during the last hour of the game.

  • The Market Today
    , January 4th, 2006 at 6:05 pm

    Another good day on Wall Street. At least this time, we beat the S&P 500. The Buy List gained 0.60%, and the S&P 500 rose 0.37%. The S&P finished at a four-year high at 1273.46. Sixteen of our 20 stocks closed higher today. I was happy to see SEI Investments (SEIC) have a good day. The stock added 2.9% in today’s session.
    J.P. Morgan cut its rating on Lowe’s (LOW), although Home Depot (HD) seems to be have been more adversely affect. Shares of Home Depot dropped 1.8%.
    Outside the Buy List, Google (GOOG) added $10 a share, and it hit a new all-time high. The stock was upgraded by the analyst at Bear Stearns. Yesterday, Safa Rashtchy at Piper Jaffray gave the stock a price target of $600. Google is now inches away from $450 a share. Pfizer (PFE) also had a good day.
    Copper, gold and oil all climbed higher. Gold is now at a 25-year high.