Archive for March, 2006

  • The Aging Bull?
    , March 20th, 2006 at 2:57 pm

    The current bull market recently celebrated its third birthday. The S&P 500 hit a closing low of 800.73 on March 11, 2003 (it had actually gone even lower in October 2002). Yuo know, there’s nothing like a war to get a stock market moving. We’re up over 63.2% since then.
    But like any three-year-old, this market is starting to get cranky. The S&P 500 has now gone up for six straight days. With an hour left of trading, it looks like the market will close lower.
    The WSJ reports that analysts have been trimming back their earnings forecasts:

    At the start of January, analysts, on average, predicted first-quarter profits would grow 12.6% at companies in the Standard & Poor’s 500-stock index. By Friday, that forecast had been cut to 11%. “We have definitely seen a dramatic pull-down” in analysts’ forecasting patterns as the bull market has worn on, says Thomson Financial research analyst David Dropsey. “It seems like every quarter it gets a little more back to normal.” Normal isn’t necessarily great. Bull markets usually are strongest when they are young, right after a bear market. Investor expectations are low then, and surpassing them is easier. The bull market tends to end, or at least pause, when expectations get well ahead of companies’ ability to deliver.
    The fact that analysts are cutting forecasts again doesn’t necessarily mean the bull market is in trouble. The amount of the estimate cuts still is below average. Thomson Financial has found analysts tend to cut forecasts by about three percentage points as a quarter wears on. Then companies have a way of beating the reduced expectations — by about three percentage points. Lately, the estimate cuts have been less than that.

  • Graco Hits New High
    , March 20th, 2006 at 1:19 pm

    I noticed that shares of Graco (GGG) are at a new all-time high today.
    Graco is one of those stocks that’s not well-known, but it’s been a remarkable stock for many years.
    Since 1976, the stock is up about 20,000%. Not bad for a company that’s nearly invisible to Wall Street. Only seven analysts follow the stock.
    The 80-year-old company makes equipment that measures and dispenses fluid materials. Graco’s products are used everywhere. They even make the pump that puts caramel into Hershey’s Kisses. I’m a fan already.
    You can read more about Graco here and here.
    Here are the financial results for the past 10 years:
    Year……..Sales……….EPS
    1996…….$391.8…….$0.41
    1997…….$413.9…….$0.51
    1998…….$432.2…….$0.60
    1999…….$442.5…….$0.84
    2000…….$494.4…….$1.01
    2001…….$472.8…….$0.92
    2002…….$487.0…….$1.05
    2003…….$535.1…….$1.23
    2004…….$605.0…….$1.55
    2005…….$731.7…….$1.80
    Notice the smooth uptrend. Wall Street expects the company to make $2.08 a share this year on sales of $790 million.
    GGG.bmp

  • More Problems for GM
    , March 20th, 2006 at 12:39 pm

    When Dwight Eisenhower became president, he appointed Charles Wilson, the president of General Motors (GM), as his secretary of defense. During his confirmation hearing, Wilson was asked if he could make a decision that was opposed to GM’s interests. He said that he could but he couldn’t imagine such a situation “because for years I thought what was good for the country was good for General Motors and vice versa.”
    Over the years, Wilson’s answer has been changed to “What’s good for General Motors is good for the country.” Quite the opposite of corporate ruthlessness, Wilson was really conveying civic responsibility.
    Sadly, today’s GM is quite different from Wilson’s. Last week, the company said that it had lost $2 billion more last year than it had originally reported. The company will also miss the deadline for filing its 10-K report. GM also restated results from 2000 to 2004. If you’re keeping score, GM just restated its 2001 earnings in November.
    This company is a financial black hole. For 2005, GM lost $10.6 billion. That’s $18.69 a share. To put it in perspective, the stock is currently trading around $21 a share. In 1955, General Motors was the first corporation to register $1 billion in annual sales. At the time, GM was the one of the largest employers in the world—only Soviet state industries employed more people. Today’s it’s about as profitable.
    The accounting mess surrounds the classification of cash flows at ResCap, the residential-mortgage business of its financing arm, General Motors Acceptance Corp. The company has been trying to sell 51% of GMAC. The restatement will cut GMAC’s 2005 profit to $2.5 billion from $2.8 billion Thanks to the latest bungle, on future deal may be gone forever. Who wants to do business with these people? I expect that the ratings agencies will downgrade GM’s debt again. It’s already junk. It will soon be even junkier.
    GM has $300 billion in long-term debt. That’s over $530 a share of junk debt. So if you pick up a share for $21, you’re also buying $530 of junk-rate liability. Since the current Dow multiple is about 8.2, this means that GM’s debt is worth over 4,300 Dow points. How much longer will this company be a part of the Dow?
    Did I mention there’s also an SEC investigation? And there’s also the issue of Delphi. It looks like GM and Delphi are finally close to an agreement with the UAW on early retirement incentive. GM is liable for pension and health-care obligations for these workers. The company estimates its liability to between $5.5 billion and $12 billion.
    Of the 10 hottest-selling cars in the world, only one is made by GM. To be honest, GM isn’t really a car company. It’s a pension and health benefits company that sells below-cost cars as a side business. The WSJ quoted an accounting professor as saying that it appears that the auto maker “is leasing cars to rental companies at a loss, to keep the plants running.” This is what it’s come to.
    GM’s board has now called for an investigation. I hate to break it to them, but there’s been an investigation going on for some time. Here are the results. Draw your own conclusions.

  • Is Oracle a Value Stock?
    , March 20th, 2006 at 9:43 am

    I’m not so sure, but others think so. Just because a stock hasn’t moved doesn’t necessarily mean it’s a bargain. Their core business isn’t growing, and it has to digest some very big mergers.
    The company reports after today’s close. Forbes has a video with more on Oracle’s problems.
    Wall Street is expecting earnings of 18 cents a share. Probably as important as the financial results will be any commentary from Larry & Co. on the integration of PeopleSoft and Seibel.
    I wish Oracle well, but I won’t go near the shares until I see more proof of a strong business.

  • Dell to double workforce in India
    , March 20th, 2006 at 9:37 am

    From Reuters:

    Dell, the world’s top PC maker, plans to double its headcount in India over three years, its founder said on Monday, but there was no word on the location of a planned manufacturing unit in the country.
    “India produces over 200,000 engineers and we see that as an asset for our hardware and software activities,” Chairman Michael Dell told reporters in India’s technology capital, Bangalore.
    Dell said its staff numbers in India would rise to 20,000 over the next three years from about 10,000 now. Dell has set up huge business process outsourcing units to tap India’s vast pool of low-cost English-speaking workers, as other multinationals such as General Electric have done.
    Dell has used India as a base to serve global clients in recent years, but it now considers Asia’s third-largest economy a growing market for desktops and laptops as demand for computers surges across the country.
    Research firm IDC expects the Indian computer market to grow at a compounded annual growth rate of 23 percent until 2010.

  • The Real World Versus the Theoretical
    , March 19th, 2006 at 10:15 am

    Here’s a fascinating “Sunday read” from Harvard Magazine on behavioral economics. The article is long (about 6,000 words), but I think you’ll enjoy it.
    Instead of looking at how the world ought to work in theory, behavioral economists study how people really go about making economic decisions. They’ve found that how decisions are “framed” can have a dramatic impact on what decisions are made.
    For example, people have a very difficult time internalizing risk. David Laibson summaries the phenomenon:

    “There’s a fundamental tension, in humans and other animals, between seizing available rewards in the present, and being patient for rewards in the future,” he says. “It’s radically important. People very robustly want instant gratification right now, and want to be patient in the future. If you ask people, ‘Which do you want right now, fruit or chocolate?’ they say, ‘Chocolate!’ But if you ask, ‘Which one a week from now?’ they will say, ‘Fruit.’ Now we want chocolate, cigarettes, and a trashy movie. In the future, we want to eat fruit, to quit smoking, and to watch Bergman films.”
    Laibson can sketch a formal model that describes this dynamic. Consider a project like starting an exercise program, which entails, say, an immediate cost of six units of value, but will produce a delayed benefit of eight units. That’s a net gain of two units, “but it ignores the human tendency to devalue the future,” Laibson says. If future events have perhaps half the value of present ones, then the eight units become only four, and starting an exercise program today means a net loss of two units (six minus four). So we don’t want to start exercising today. On the other hand, starting tomorrow devalues both the cost and the benefit by half (to three and four units, respectively), resulting in a net gain of one unit from exercising. Hence, everyone is enthusiastic about going to the gym tomorrow.
    Broadly speaking, “People act irrationally in that they overly discount the future,” says Bazerman. “We do worse in life because we spend too much for what we want now at the expense of goodies we want in the future. People buy things they can’t afford on a credit card, and as a result they get to buy less over the course of their lifetimes.” Such problems should not arise, according to standard economic theory, which holds that “there shouldn’t be any disconnect between what I’m doing and what I want to be doing,” says Nava Ashraf.

    Economics isn’t like chemistry or physics, it’s a social science. As a result, numbers can sometimes fool us. In finance, a 10% gain and a 10% loss aren’t symmetrical. People fear loss more than the value gain.
    The article has this interesting quote from Sendhil Mullainathan:

    “We tend to think people are driven by purposeful choices,” he explains. “We think big things drive big behaviors: if people don’t go to school, we think they don’t like school. Instead, most behaviors are driven by the moment. They aren’t purposeful, thought-out choices. That’s an illusion we have about others. Policymakers think that if they get the abstractions right, that will drive behavior in the desired direction. But the world happens in real time. We can talk abstractions of risk and return, but when the person is physically checking off the box on that investment form, all the things going on at that moment will disproportionately influence the decision they make. That’s the temptation element—in real time, the moment can be very tempting. The main thing is to define what is in your mind at the moment of choice. Suppose a company wants to sell more soap. Traditional economists would advise things like making a soap that people like more, or charging less for a bar of soap. A behavioral economist might suggest convincing supermarkets to display your soap at eye level—people will see your brand first and grab it.”

    Here’s a well-known example of behavioral economics. Suppose you’re in a roomful of people, and you’re told to choose any integer from zero to 100. All participants are told that a large cash price will go to the person who chooses closest to two-thirds of the average of everyone else’s number. So what number would you choose?
    Thirty-three, right? Wait…everyone else will say that. I know: Twenty-two? No…hold on. Everyone else will….
    *Thinking*
    I got it! The theoretical answer is zero.
    In the real world, studies have shown that the average guess is 18.91, so the winning answer is about 13. This of course makes no sense whatsoever. Remember that next time you buy a stock.

  • Q&A: General Electric
    , March 18th, 2006 at 12:37 pm

    Hi Eddy, I’m curious on your opinion of GE a “blue chip” that for the past 5 years has underperformed the market to the tune of $10k invested 5 years ago (according to S&P) = about $8k plus.

    Thanks for the email. General Electric (GE) is a great company. It’s one of the bluest of the blue chip stocks. It’s also one of the very few companies that has increased its earnings for ten straight years.
    GE is also titanic. The numbers boggle the mind. The company has over 300,000 employees and a market value of over $350 billion. Owning GE is almost like buying an index fund.
    The stock got absurdly overvalued five years ago. The P/E ratio got as high as 50. Last year, GE earned $1.72 a share so right now it’s going for almost exactly 20 times earnings. That’s a very good valuation for GE.
    The company raised the lower end of its guidance by two cents a share to $1.94 to $2.02 a share (don’t laugh, each penny is worth about $100 million). There’s also a $1 a share dividend which works out to a yield of nearly 3%. That’s equivalent to over 320 Dow points.
    General Electric is a great company, and the shares look very good right now.

  • The NASDAQ Goes Shopping in London
    , March 17th, 2006 at 1:26 pm

    The bidding war for the London Stock Exchange heats up. The newest player is the NASDAQ. The Economist has the story:

    Londoners following the LSE bidding saga had become so used to guessing games about continental exchanges, notably the pan-European Euronext and Germany’s Deutsche Börse, that the Americans’ hostile bid late last week came as something of a surprise. It shouldn’t have. NASDAQ tried unsuccessfully to enter Europe once before with a start-up and has in the past held tentative talks with the LSE. Its cash offer of £9.50 ($16.60) a share, which would cost the Americans £2.4 billion, makes the preceding bid—£5.80, from Australia’s Macquarie Bank, only three months ago—look downright stingy.
    NASDAQ’s offer was rejected outright by the LSE’s management, but is being considered by big shareholders. If the merger does go ahead, it would be a quantum leap in the consolidation of financial exchanges. It could also raise difficult questions of who should regulate the combined entity, and how. A merged firm would be second only to NYSE Group—as the newly listed New York Stock Exchange styles itself—in market capitalisation.

  • GM’s $2 Billion Accounting Error
    , March 17th, 2006 at 11:30 am

    I’m just shaking my head.

    General Motors Corp. shares and bonds fell on Friday after the automaker increased its 2005 loss by $2 billion due to accounting errors, raising questions about the company’s management and renewing doubts about its long-term survival.
    Late Thursday, GM said its 2005 loss was $10.6 billion, including new charges related to job losses, its finance arm, GMAC, and the bankruptcy of former subsidiary Delphi Corp.
    GM also said it would delay filing its annual report and would restate results for the years 2000 through 2004 after mistakenly accounting for cash flows from a mortgage unit. It also said it had incorrectly accounted for certain supplier payments, including those from Delphi, and vehicle leases.

    What other company could make this announcement and have its shares trade modestly lower?
    Here’s how some GM bonds are doing:
    Maturity…………Coupon……..Price………..YTM
    April 2016……….7.7%………..73.50………12.373%
    March 2021……..8.8%………..72.50……..13.019%
    July 2021………..9.4%………..76.50……..12.962%
    July 2023………..8.25%………72.25……..12.112%
    June 2024……….8.1%………..69.75……..12.291%
    Sep 2025………..7.4%………..68.62……..11.46%
    May 2028………..6.75%………68.88……..10.36%
    July 2033………..8.375%……..73.62…….11.572%
    May 2048………..7.375%……..64.09…….11.56%
    These bonds are unsafe at any price.

  • First Two Rounds By Seed
    , March 17th, 2006 at 9:27 am

    I hope your brackets are going well. Here are the records of the first two rounds by seed since the NCAA tournament expanded to 64 teams 21 years ago.
    First Round…..Second Round
    #1 84-0………….72-12
    #2 80-4………….53-27
    #3 70-14………..39-31
    #4 67-17………..37-30
    #5 57-27………..30-27
    #6 59-25………..33-26
    #7 51-33………..14-37
    #8 38-46………..9-29
    #9 46-38………..3-43
    #10 33-51………17-16
    #11 25-59………10-15
    #12 27-57………14-13
    #13 17-67………3-14
    #14 14-70………2-12
    #15 4-80………..0-4
    #16 0-84………..0-0
    In the first round, the #9’s have a winning record over the #8’s, and the #6’s have done better than the #5’s.
    It ain’t easy for the Cinderellas. Only two of the #14’s and three of the #13’s made it to the Sweet 16. All five got knocked out in the third round.
    Fourteen #12’s have gone on to the Sweet 16. What’s remarkable is that the #12’s actually have a winning record in the second round. They’re 10-12 against the #4’s and 4-1 against the #13’s. The third round isn’t so nice as they usually have to face the #1. They’re 1-13 in the third round. The only #12 to make it to the Final 8 was Missouri four years ago, but they had to beat a #8, not a #1. (The table doesn’t include yesterday games as the #12’s went to 2-1.)
    The #11’s have had worse luck than the #12’s in making it to the Sweet 16, but three have gone on to the Final Eight and one made it all the way to the Final Four (LSU in 1986).
    Only six #10’s have made it to the Final 8, and none has made it to the Final 4.
    Number 9 is a deceptively good seed. Even though they have a winning record against the #8’s, they always have to face a #1 next. Of the three times that #9 has made it to the Sweet 16, only one made it to the Final 8 and that team lost (BC in 1994).
    Never have all four #1’s made it to the Final 4, but they’ve never been shut out either.
    Here’s the total number of wins by seed:
    #1: 281
    #2: 202
    #3: 148
    #4: 128
    #5: 98
    #6: 110
    #7: 71
    #8: 57
    #9: 50
    #10: 56
    #11: 39
    #12: 42
    #13: 17
    #14: 16
    #15: 4
    #16: 0
    So if you’re brackets give you the number of points per seed, this is the total value of each seed (in descending order):
    #6: 660
    #10: 560
    #4: 512
    #12: 504
    #7: 497
    #5: 490
    #8: 456
    #9: 450
    #3: 444
    #11: 429
    #2: 404
    #1: 281
    #14: 224
    #13: 221
    #15: 60
    #16: 0
    So if your brackets give you points by seed, then you want to choose 1, 2, 3, 4, 6, 8, 10 and 12 in the first round. Then 4, 6, 8 and 10 in the second round. Four and 6 in the third round, and 6 in the fourth round.
    After that, you’re on your own.
    Disclaimer: In no way does Crossing Wall Street Global Financial Holdings Incorporated (and Discount Weenie Hut) or its associated affiliates condone or approve of recreational office gambling.