Archive for January, 2006

• Oil over $62
  Eddy Elfenbein, January 3rd, 2006 at 11:01 am

  The new year is getting off to a rough start. Oil has soared over $62 a barrel over concerns in Russia. The country finally restored natural gas shipments to normal levels. Still, the standoff has worried traders.
  Energy stocks are up, and most everything else—including the new Buy List—is lower.

• Big Profits in Title Insurance
  Eddy Elfenbein, January 2nd, 2006 at 12:42 pm

  The stock market is closed today. I hope you’re enjoying another nice long weekend. I noticed this story in the Journal about the title insurance industry. Not too long ago, I had no idea what title insurance was. Now that I follow the industry, I have a hard time believing that everyone doesn’t know about it. I won’t call it a “scam,” but it’s hard to imagine this is not only legal, but lenders make title insurance mandatory.

  Title insurance protects homeowners against competing claims for their property. Here’s an interesting historical tidbit for you: Title insurance played an important role in the history of our two greatest presidents. In the 1750’s, Lord Fairfax, the only peer living in North America asked a young man named George Washington (a distant relative) to survey some of his land in the western part of Virginia. By “some land,” I mean half the darn state. Fairfax owned some five million acres. Earlier, the Virginia House of Burgesses tried to do what governments like to do, claim some of his land for itself.

  About 60 years later, and not that far away, a Virginia-born farmer named Thomas Lincoln bought a small farm in Kentucky. At this time, this was frontier country. He built a log cabin there and soon, he and his wife had a son. Then along came a man with a competing claim to the farm and the court ruled against the Lincoln family. They had to move and the legal costs were a great hardship to the young family. They were able to lease another farm and soon, the same things happened again.

  Thomas Lincoln was fed up with Kentucky and moved to Indiana which had recently been surveyed by the Federal government, so land claims were more secure. Or at least, they were supposed to be more secure. Shortly after the family got in Indiana, Thomas’ wife Sarah died. The whole episode left a great impression on Abraham Lincoln and it may have led him to study surveying and the law.

  America has been very fortunate to have avoided the ugly land claims problems of the Old World, and that’s were title insurance comes in. I believe that title insurance is required by law in most states. So you have a product that few people know about, no one even thinks about, the prices vary greatly and I can’t imagine there are too many claims. The profits are enormous and the risk is low, so sign me up! Well, the Journal notes that the industry is coming under some criticism:

  Critics say that the problem with the business is that often consumers don’t take note of the fact that they need the coverage until they sit down at the closing.

  They say homebuyers are often steered to insurers by real-estate agents, homebuilders, lenders or others who don’t ultimately pick up the tab.
  In addition, regulators and consumer advocates also note that title-insurance underwriters face relatively little risk. For example, over the past 10 years title insurers have spent an average of under 5% of operating revenue on insured losses, according to the A.M. Best/American Land Title Association report. By contrast, property/casualty insurers spent roughly 80% of earned premiums, the report says.

  Industry officials and some outside analysts, however, argue that the two industries are different. Title insurers, for instance, spend a lot of their money up front on researching titles — spending that isn’t reflected in the loss figures. “It’s a multimillion-dollar investment,” says Lorri Lee Ragan, an association spokeswoman. “It’s not like a Google search.”

  In addition, unlike auto, life, or property/casualty insurers, which collect premiums on an ongoing basis, for example, title insurers get paid only once, when they issue a policy, but need to have reserves on hand to pay claims that may not be filed for years.

  To give you an example of how profitable some title insurers are, here’s a long-term graph of Fidelity National Financial (FNF, the black line) compared with ExxonMobil (XOM, the gold line). Now ask yourself, when was the last time you heard anyone complain about Big Title?

  

• Options Boom
  Eddy Elfenbein, January 1st, 2006 at 6:20 pm

  Barron’s notices the booming business in options:

  For the 13th time in 14 years, option trading volume grew in 2005 at a record pace, and it’s beginning to exhaust superlatives and test the thesaurus. More than 1.5 billion options traded in the U.S., a 27% jump from 2004. These included nearly 1.37 billion stock options (up 26%), and about 135 million index options (up 38%), according to the Options Clearing Corp. The 10 busiest trading days in history? They all occurred in 2005.

• Remembrance of Januaries Past
  Eddy Elfenbein, January 1st, 2006 at 5:17 pm

  Historically, January has been a good month for the stock market but not in recent years. In 2000, January had its seven-year win streak broken. Since then, the S&P 500 has fallen in four of the six Januaries of this decade. (Yikes, is this really the seventh year of the decade??)
  We’ve had some spectacular Januaries in the past. In 1975 and 1976, the S&P 500 rose over 12% in the first the month of the year. It jumped 13% in “the year we will not mention” (hint: between 1986 and 1988). The 25 Januaries from 1975 to 1999 average an annualized growth rate of 39.4%. The other 11 months together averaged 15.4%.

• Tim Harford on Subsidies
  Eddy Elfenbein, January 1st, 2006 at 2:23 pm

  Here’s part of a fascinating interview with Tim Harford about his book, “The Undercover Economist.”

  Nick Schulz: I was interested to read in your book that you suggested that agricultural subsidies are harmful to the environment. And that might be news to some people. How is that the case and why is that so?
  Tim Harford: And actually let me broaden that. I mean we are talking about all kinds of agricultural protectionism. Agricultural subsidies get the most airtime. But actually more direct trade barriers like taxes and tariffs I think are more serious. They all push the same kind of way. They will push towards having crops grown on land which is not as suitable as it could be if their crops were grown in another country.
  So you have got acres of fertile land in Guatemala that you could grow sugar there. But because of protectionism, the sugar is grown in Florida and the Everglades are destroyed. And meanwhile the Guatemalans are either growing coffee for basically nothing, or like the Columbians, they think, well, maybe we should grow cocaine instead.
  Now this is not a good idea. And I have a little graph — I don’t have a lot of graphs in my book. I prefer the written word. But sometimes the picture is worth 1,000 words — and it’s just a graph of trade barriers for different countries and how much fertilizer they use on their agricultural land. The countries that have the highest trade barriers, Japan and Korea use so much fertilizer. Then it is the EU. They use a lot. American less, but you know they still have quite a lot of protectionism and they still use quite a lot of fertilizer.
  And then countries like Brazil that don’t have a lot of agricultural protectionism don’t use much fertilizer either. And when you think about it, it makes perfect sense. The protectionism is necessary because the land is not good. And the fertilizer is necessary because the land is not good. So free trade in agricultural products is — well it’s good for a lot of reasons. But one of the reasons is it is good for the environment.

• WSJ: Medtronic’s Looking Good
  Eddy Elfenbein, January 1st, 2006 at 12:37 pm

  The Wall Street Journal takes a look at Medtronic (MDT) and likes what it sees:

  Recalls and safety alerts roiled the market for implantable defibrillators last year. Fortunately for medical-device maker Medtronic of Minneapolis, the bad news mostly has hurt a rival, Guidant.
  Recently, Guidant warned of a shortfall in its sales of these devices, which use jolts of electricity to treat a malfunctioning heart. Many of these lost sales seem to be going to Medtronic. And Medtronic might even benefit from the bidding war that’s erupted over Guidant.
  Gary Ellis, the chief financial officer of Medtronic, says he isn’t surprised to see Boston Scientific offering $25 billion in an effort to beat the $21.5 billion bid that Guidant accepted from Johnson & Johnson. Those companies wouldn’t be offering such sums for Guidant, says Mr. Ellis, if they didn’t envision strong sales for devices sold by Guidant, Medtronic and a third manufacturer, St. Jude Medical.
  Medtronic has been benefiting from its leadership in the implantable-defibrillator market. The stock, which ended 2004 below $50, recently was near $58 and looks as if it could rise further.
  Medtronic trades for about 23 times expected earnings of $2.50 a share for calendar 2006, about the same multiple of future earnings as it did a year ago, and the company’s outlook is even better now.
  Product defects have dogged every defibrillator maker in the past year, but the bad publicity mainly stuck to Guidant, allowing Medtronic to boost its market share to 55% from about 50%.
  Medtronic has a diversified medical-device line. In the next year or so, it expects to launch new products into the growing markets for artificial spinal discs and automated insulin pumps. The company also might enhance its lagging line of cardiovascular devices, such as the tubular stents that prop open pinched heart arteries, if it can acquire Guidant product lines expected to be sold for antitrust reasons by the eventual winner in the bidding.
  A public outcry followed the death in May 2005 of a 21-year-old man whose Guidant defibrillator didn’t work. Doctors complained that Guidant hadn’t warned of potential problems in the product’s circuitry. Since May, Guidant has issued safety alerts covering more than 100,000 units, but it isn’t alone. Medtronic alerted doctors to a potential battery problem in nearly 90,000 of its units, and doctors later replaced about 18,000 of the devices. Yet because Medtronic was more forthright, its reputation fared better than Guidant’s.
  Medtronic’s CFO Mr. Ellis says the defibrillator market remains underpenetrated, and Medicare coverage should allow defibrillator sales to keep growing at 20% a year.
  Medtronic’s spinal and diabetes businesses are expanding nearly as fast. Maybe that’s why J&J and Boston Scientific are so keen to get into Medtronic’s markets.