Archive for February, 2006

• Are We Really in an Empire of Debt?
  Eddy Elfenbein, February 24th, 2006 at 1:56 pm

  Gary Alexander has been in financial publishing for over 30 years. His specialty is taking apart the arguments of scare-mongers. Here’s his review of Empire of Debt:

  Agora Publishing was kind enough to send me a free copy of their book, Empire of Debt (by Bill Bonner and Allison Wiggin), and I actually read it cover to cover during my debt-free (paper money, not plastic) Christmas shopping season. All along, I sensed something missing. When I finished the book, I looked in the index to confirm what I already knew. There was a very important word missing. Indeed, it only appeared on one page, according to the index, and that key word is “ASSETS.” How can you write 300 pages about debts without mentioning assets?
  The Empire of Debt, as colorfully written as it was, failed to address the vital question of the corresponding growth in American household, corporate and government assets, which offset debts. The only reference to assets referred to a page describing most assets as “overvalued.”
  Certainly, there will always be people who live beyond their means, and many of them will face a day of reckoning. Each of us probably know some specific people in this category,. Maybe some members of your extended family fit this bill. As a general rule, young people get in debt, and older people pay off their debts and then get rich, but I hate to generalize, so let’s look at the facts.
  On an aggregate basis, Americans are getting richer and are paying down their debts. The stock market crash of 2000-02 (you may have read about that one in the papers) “wiped out $14 trillion of wealth,” it was said, with no mention of the accumulation of wealth before or since. I looked up those figures recently, at the Federal Reserve: Sure enough, net household wealth declined all three years of the crash, from a peak of about $42 trillion at year-end-1999, but it was only down $4 trillion, not $14 trillion, bottoming out at $38 trillion at the end of 2002. Considering the size and scope of that once-in-a-generation market crash, a net decline of 10% in household wealth was not such a huge blow.
  Then, in 2003, the tax cuts boosted our take-home pay for income and growth investments, and the American wealth machine revived with a vengeance
  Year-end Net U.S. Household Wealth
  2002 $38 trillion
  2003 $43 trillion
  2004 $48 trillion
  2005 $51 trillion *
  * Through the third quarter of 2005, not counting a strong fourth-quarter stock market rally.
  Source: Federal Reserve
  Household wealth refers to household assets minus liabilities. In the Doomsday press, all you read about is the near-$10 trillion in household debts, but have you heard anyone quote the $61 trillion in gross assets, six times the debt totals, resulting in net assets of $51 trillion (61 minus 10). In the 2.5 years since the 2003 tax cut, per capita net worth has increased 16%, and the average household is now 27% better off than in 1998, in the middle of the stock market bubble. And U.S. household wealth has almost doubled since 1995. That’s not counting business, which controls an $11 trillion “savings glut” of hoarded cash.
  Here’s another wealth statistic the media missed: In 2005, for the third consecutive year, the number of households with more than $1 million in net worth (excluding their primary residence) has risen. According to TNS Financial Services’ latest Affluent Market Research Program (AMRP) annual survey of U.S. households, the number of millionaires increased 8%, to 8.9 million families as of mid-2005.
  U.S. Millionaire Households (in millions)
  2001: 6.0 million (a decline of 4% from 2000, due to the tech stock bubble)
  2002: 5.5 million (another 9% decline)
  2003: 6.2 million (+13%)
  2004: 8.2 million (+33%)
  2005: 8.9 million (+8%)
  The immediate reaction is that this 61% growth in millionaire households since 2002 is due to the housing bubble, but these figures exclude the household’s primary residence. Most of this gain is from accumulation of common stock. The report said that ownership of stocks and bonds was up (72% of millionaires owned individually held stocks and bonds in 2005, up from 63% in 2003), while their debt decreased substantially. In 2004 the average debt was $179,000. In 2005, that number fell to $165,000, an 8% decrease.
  This annual report reflects and updates the research done by Tom Stanley in his book, The Millionaire Next Door. The vast majority of millionaires are patient, debt-averse investors. The TNS report says “When asked about their investment approach over the past year, 61% of millionaires said their approach has changed very little, indicating they have a strategy and they are sticking to it.” Nor is real estate and its famed “bubble” a driving force behind the increase in the number of millionaires. In fact, ownership in investment real estate was down from 2004, when 50% of millionaires owned investment real estate, including second or vacation homes, compared to 44% in 2005, but these households are not becoming wealthy based on real estate, the report confirmed.
  The AMRP survey is based on a representative national sample of over 1,800 households with a net worth of $500,000 or more, excluding their primary residence. The survey also includes additional interviews of households with $1 million or more in investable assets. They also poll the next rung of the wealth ladder, or what they call the “emerging affluent households,” those with $100,000 to $500,000 in positive net worth, excluding their primary residence. This group has also increased in the past year, from 23.9 million in 2004, to 24.5 million in 2005.
  I cite these facts in detail because nobody else seems to be reporting on the positive side of America’s “debt crisis.” As Sophie Tucker famously said, “I’ve been rich, I’ve been poor. Rich is better.” Most of the poor are young, but then they grow (in wealth) over a lifetime, not suddenly. Over 65% of the Forbes 400 started with essentially nothing. Only 15% inherited their wealth. The migration of wealth from the slackers to the hard-worker, well educated and imaginative innovators is an essential fact of life in a free economy. Those deep in debt, with no exit strategy, will most likely suffer. But the majority of Americans are growing richer almost every year. Unfortunately, that won’t make the evening news, but maybe it should.

• Patterson Lowers Guidance
  Eddy Elfenbein, February 24th, 2006 at 10:06 am

  One of my favorite “watch list” stocks reported earnings yesterday. Patterson Companies (PDCO) earned 39 cents a share, which was inline with Wall Street’s estimates. Last year, Patterson earned 36 cents a share.
  If you’re not familiar with Patterson, it’s a dental, pet and rehabilitation supply distributor. Don’t laugh, it has one of the best records for long-term growth. For several years, Patterson consistently delivered 20% earnings growth quarter after quarter.
  But year last, that streak abruptly came to a halt. For two straight quarters, Patterson increased its EPS by just one penny. I find that pretty unnerving since I place a lot of emphasis on a company’s consistency (just look at our Buy List).
  Companies aren’t like athletes that hit slumps. They also don’t turn things around so easily. It does happen, but it’s much less frequent than most people imagine. High-quality companies usually stay high quality, and low-quality ones stay low quality. The reason I like to focus on numbers like return-on-equity is that it tends to be a fairly consistent metric for a company.
  For whatever reason, Patterson has lost its mojo. The company just lowered its guidance for this year to $1.42 to $1.44 a share, from its earlier forecast of $1.44 to $1.46 a share. That may seem small, but it shows us that the company is not moving in the right direction. It also means that shares of PDCO are going for about 25 times next year’s earnings. I can find better growth for less elsewhere.

• Oil Prices Soar
  Eddy Elfenbein, February 24th, 2006 at 9:23 am

  From the AP:

  Crude-oil futures soared nearly $2 a barrel Friday after a Saudi official reported an explosion at a major oil refinery in eastern Saudi Arabia.
  Light, sweet crude for April delivery rose $1.97 to $62.51 a barrel in electronic trading on the New York Mercantile Exchange by afternoon in Europe. Brent crude futures for April initially jumped $1.96 to $62.50 on London’s ICE Futures exchange.
  Nymex gasoline advanced more than 3 cents to $1.550 a gallon, while heating oil gained 4 cents to $1.7066 a gallon. Natural gas futures fell 12 cents to $7.335 per 1,000 cubic feet.
  The pan-Arab satellite channel Al-Arabiya TV reported the authorities foiled an attempt to bomb the refinery with two vehicles packed with explosives. The channel did not give a source for the report.
  Earlier Al-Arabiya quoted its reporter in the kingdom as saying shots and an explosion were heard, and they may have been part of an attempt to attack the refinery.
  The oil official, who spoke on condition of anonymity, said he did not know the cause of the explosion.

• Fiserv to Buy Back 5.6% of Its Stock
  Eddy Elfenbein, February 23rd, 2006 at 5:47 pm

  Sloppy day today. The cyclicals were particularly weak. The Consumer Index (^CMR) actually closed slightly higher, and our Buy List beat the S&P 500 for the second day in a row. The metals got punished today, which I like to see.
  Home Depot (HD) announced today that it’s increasing its share buyback program by $1 billion. As I’ve mentioned before, I not a big fan of share repurchases. I’d rather just get a dividend.
  Fiserv (FISV) said that it will repurchase up to 10 million shares. Considering the size of the company ($8 billion market cap), that’s huge. It works out to 5.6% of the company’s stock.
  What I find so interesting about Fiserv is the way the stock’s P/E ratio has collapsed in recent years. It’s always tricky predicting where a stock’s P/E ratio ought to be, but let’s look at the facts. Fiserv’s earnings multiple has been dropping like a stone, and it’s lower now than it was during much of the 1990’s (see below). Also, Fiserv’s earnings have increased pretty consistently for the past few years.
  

• Consumer Prices Rise 0.7%
  Eddy Elfenbein, February 23rd, 2006 at 11:30 am

  I usually don’t go too much into macroeconomics, but I wanted to say a few words about inflation. Yesterday, the government reported that consumer prices rose 0.7% last month. This has some people worried that inflation is coming back, or perhaps it’s already here. Call me a doubter. Of course, if you’ve been anywhere near a gas pump, you know we have inflation there. But so far, it doesn’t seem to be many other places.
  Mind you, inflation is bad news, especially for stocks. The problem with inflation is that it builds upon itself, and it can easily get out of control. For more details, feel free to ask Jimmy Carter what he’s up to these days.
  Personally, I think the inflation that we’re seeing is fairly tepid. Some in the inflationophobic camp point to low interest rates and the rising prices of commodities, especially gold. That’s certainly an issue, but major price increases have not been passed on to consumers. At least, not yet. I also believe that gold’s ability to predict inflation is vastly overrated (this is heresy to some).
  When we look at consumer inflation it’s also important to look at what economists call the “core rate.” This is the regular inflation rate except for food and energy prices. This often gives us a better picture of what inflation is really up to because prices for food and energy can be very volatile.
  Over the last 15 years, the core rate has been a slowly descending line. Or in the case of my chart below, a slowly descending red line. The core rate even got down to one single percent two years ago. What’s striking about the progress of core inflation is the steadiness of the trend. For the last ten years, there hasn’t been a single alarming bump in the overall trend. Even the jump from 1% to 2% has lost its oomph.
  Despite looking at the core rate, people do in fact spend money on food and energy. On my chart, the regular rate of consumer inflation is represented by the black line. That trend has been far more erratic, and the overall rate of consumer inflation is on the rise. However, it doesn’t appear to be much outside the band of the last 15 years. You can see that overall inflation jumped in the late-90s, but it was still well under control. Even if inflation is coming back, the evidence we have so far is quite modest.
  

• The Market Is Closing in on a New High
  Eddy Elfenbein, February 22nd, 2006 at 1:22 pm

  The market is looking good today. If the S&P 500 closes above 1294.18, it will be our highest close in 57 months. Right now, we’ve very close.
  Over the past few years, small stock indexes have done much better than the S&P. In fact, they’ve hit all-time highs in recent weeks, however, small stocks have underperformed the market since the beginning of the year.
  One of the important lessons of investing in the stock market is that stocks don’t move rationally. At least, not in the short-term. We have all these hi-tech toys that are used to analyze things that really don’t make much sense on closer inspection.
  Trends are often much stronger and longer-lived than you think. For example, Home Depot (HD) had a good earnings report and the stock basically ignored it. Medtronic (MDT) also had a good report, and the stock is weaker today.
  As long as the earnings are good, I’m not concerned about those stocks. Their time will come. Remember, if the Dow were to accurately reflect its underlying value, it would move about four or five points each day.
  Expeditors (EXPD), Danaher (DHR) and Donaldson (DCI) are all at new highs today. As much as I like Expeditors (which is a lot), I have to admit that its shares are fairly pricey. Yet, the stock keeps going up. Who am I to say stop?
  On the other hand, we have Bed Bath & Beyond (BBBY) which is very cheap, and its shares seem to be going nowhere. It’s time will also come. I don’t know when, but I’m holding on.
  Dell (DELL) postponed an analyst meeting. I don’t think it’s anything to worry about. I noticed this factoid from the article: “Concerns about growth have held back Dell’s shares, which trade at about 15 times estimated fiscal earnings per share for the coming year, the same as No. 2 PC maker Hewlett-Packard Co. That is a discount, since Dell’s estimated long-term growth rate is about twice that of HP, according to Sanford C. Bernstein analyst Toni Sacconaghi.”
  Twice the long-term growth rate, yet it trades with the same P/E ratio. Like I said, this isn’t always rational.
  For the year, our Buy List is up 2.98% versus 3.57% for the S&P 500.

• America Movil
  Eddy Elfenbein, February 22nd, 2006 at 12:17 pm

  Here’s an interesting article on America Movil (AMX). The company is the largest cellphone company is Latin America. Carlos Slim, who’s the fourth-richest man in the world, bought TelMex from the Mexican government in the early 90s. A few years later, he spun-off America Movil. The company now has over 90 million subscribers, including six million in the U.S.
  The company is hugely profitable in Mexico and it’s used its success there to move into other Latin American markets. In the last three years, shares of AMX are up 650%.
  

• Medtronic Reports Inline Earnings
  Eddy Elfenbein, February 21st, 2006 at 4:20 pm

  After the bell, Medtronic (MDT) reported earnings of 55 cents a share, matching Wall Street’s forecast:

  Medtronic, Inc. today announced record revenue for the quarter ended January 27, 2006, of $2.770 billion, a 9 percent increase over the $2.531 billion recorded in the third quarter of fiscal year 2005. On a constant currency basis, growth was 12 percent with a negative currency translation impact of $72 million or 3 percent.
  As reported, third quarter net earnings were $670 million or $0.55 per diluted share, an increase of 23 percent and 22 percent respectively over the prior year third quarter. Excluding the litigation charge included in the prior year third quarter, net earnings and earnings per share increased 20 percent.
  “Solid overall growth was again led by our two largest product lines, implantable defibrillators and spinal products. These two product lines accounted for about 45 percent of the corporation’s revenue and, on a constant currency basis, they collectively grew 22 percent compared to the prior year third quarter,” said Art Collins, chairman and chief executive officer of Medtronic. “This year’s growth reflects the impact of ongoing investments; for example, during this quarter R&D expenditures increased 16 percent to $280 million.”

• TheStreet.com Initiates Dividend
  Eddy Elfenbein, February 21st, 2006 at 12:04 pm

  Good news! TheStreet.com (TSCM) has announced its first-ever quarterly dividend! The company is going to pay out 2.5 cents a share. Booyah! That works out to $2.5 million a year.
  Hold up! Where exactly will this money come from? Aren’t dividends supposed to be from profits?
  Well, the company isn’t exactly profitless. After several years of gushing money, TheStreet finally registered a profit in 2005. A whopping $246,000. Or a penny a share (slightly less actually). That’s about what a 7-11 makes.
  Due to discontinued operations, that EPS number jumps to 23 cents, but it’s still hardly comforting. First, they’re discontinuing operations. They shuttered their brokerage and research businesses last year. Now they’re focusing on subscriptions for revenue, and that rose by 3% last year.
  The company still has over $30 million in cash so they can pay dividends for a while. But I hope they don’t think they’re fooling anyone.

• Radio Shack’s CEO resigns
  Eddy Elfenbein, February 21st, 2006 at 10:58 am

  As we celebrate George Washington’s birthday, we should remain that our nation’s first chief executive didn’t go to college. Likewise, David J. Edmondson, Radio Shack’s chief executive, also didn’t earn a college degree.
  Unlike Edmonston, Washington didn’t lie about it. The good news is that Edmonston will get a $1.5 million severance package.