Archive for March, 2006

• Another New High
  Eddy Elfenbein, March 16th, 2006 at 1:34 pm

  Today is another good day for the market. New highs abound! The morning got off on the right foot when the government reported that inflation was tame last month. Inflation was up just 0.1% last month, and the “core rate,” which excludes volatile food and energy prices was also up just 0.1%. You wouldn’t know this by listening to some corners, but the core rate of inflation has been trending slightly lower over the past year.
  The latest word is that Bernanke & Co. will raise rates two more time, and then cool it. Our Buy List is having a decent day. Danaher (DHR) is up for the sixth straight day. This is such a cool little company. The stock is at a new all-time high. I’m also happy to see Bed Beth & Beyond (BBBY) hold onto its gains.
  Here’s what Jon Markman had to say about Brown & Brown (BRO) a few weeks ago:

  The company is scheduled to announce its 2006 first-quarter results in the third week of April, and I think they will show they’re on track to earn $1.28 in 2006, and $1.48 in 2007. At a much-deserved premium price/earnings multiple of 26, that would peg the stock for a move to around $38 over the next 12 months, which would be a 24% move.
  The stock has a tendency to range trade for extended periods, and then move up briskly in the fourth quarter of each year. If you’re interested in starting a new position, you might consider deploying half of your allocation now between $28 and $30, and deploying another half toward the end of the summer, when it could very well be around the same price before its usual end-of-the-year bump up.
  BRO is not totally without risk. It is highly exposed to the hurricane prone Gulf of Mexico region, with 40% of its revenues coming from Florida. Brown’s ability to continually acquire other insurance companies could be severely hindered if they have to write checks to settle customer claims from another brutal hurricane season instead. Yet as we all know by now, big short-term losses only mean one thing to insurance companies: They get to raise rates, keeping the cash machine flowing.
  There’s one curiosity with BRO that I need to note, however. You have to wonder how a company with nearly $1 billion in revenues could have such a strange web site (www.bbinsurance.com). It’s very 1998, and marked by a penchant for zoo animals. Quotes at the top state gems like, “Lemurs eat an entirely vegetarian diet.” If anyone knows what this has to do with selling insurance, let me know.

  He’s right. It is a strange site.
  Fair Isaac (FIC) is rebounding some. Yesterday, the stock got as low as $36.36. It’s currently just a tad above $40. I think the panic has passed. On Tuesday and Wednesday the stock generated volume of 10 million shares, equal to what it did over the previous month. Now I see why the brokers have been making so much dough.
  Next Tuesday, we’ll get earnings reports from Biomet (BMET) and FactSet Research Systems (FDS).
  Outside our Buy List, I’m still having a hard time believing Intel (INTC) is below $20 a share. I’m not wild about the stock. I’ve always thought it was a bit overrated, but the stock is where it was nine years ago.

• Big Profits On Wall Street
  Eddy Elfenbein, March 16th, 2006 at 10:34 am

  Heavens to Murgatroyd! Wall Streetistan is swimming in profits. Thanks to heavy trading volume and a flurry of M&A activity, Wall Street firms are reporting ginormous earnings. The profits are so high, even Wall Street itself is surprised.
  First up was Goldman Sachs (GS) which floored the market on Tuesday. Goldman’s net income soar 64% to $2.48 billion. No one saw that coming. Funny thing, one of the little ironies of Wall Street is that the investment houses are the hardest businesses to read. So whatever it is Goldman does behind those doors, they’re doing a heck of a lot of it.
  Put it this way, Goldman made more coin last quarter than it did during all of 2002. The company’s asset management business (think, hedge funds) doubled. Goldman’s crushed Wall Street’s forecast by 54%. This was their third straight record quarter, and the company raised its dividend by 40%.
  Yesterday, Lehman Brothers (LEH) followed up with another blowout report. Actually, I feel a little sorry for them since Goldman had set the bar so high. Lehman had record earnings of $1.09 billion. Excluding an accounting charge, earning-per-share came in at $3.50, a 26.8% increase over last year’s first quarter. That easily topped Wall Street’s expectation of $3.17 a share. Although, the stock sold off a little at first, so I’m not exactly sure what the real expectations were.
  For the past several years, Lehman has been the shining star of the big houses. The company is traditionally known as a bond house, but Richard Fuld, the CEO, has worked to diversify their business. Plus, he’s probably noticed that the yield curve doesn’t exactly curve anymore.
  Then Bear Stearns (BSC) said this morning that it’s also making some serious cash. Wall Street was looking for $2.95 a share. BA! Bear Stearns made a cool $3.54. Profits jumped 36% to $514.2 million.
  But not everything is great for Bear this morning. There’s also the little issue of the $250 million fine for fraudulent market timing and late trading of mutual funds.

  According to NYSE Regulation, the exchange’s regulatory arm, Bear Stearns engaged in a pattern of deceptive market timing and late trading of fund shares from 1999 through 2003. The trades were designed to take advantage of the time between the markets’ closing and the new share values posted by mutual fund companies.
  Bear Stearns settled the case without admitting or denying the charges. The company will pay $90 million in fines and relinquish $160 million in profits and interest.

  Morgan Stanley (MS) will report is earnings next week, and Merrill Lynch (MER) will follow in April.
  

• Buy List Update
  Eddy Elfenbein, March 16th, 2006 at 5:58 am

  Now that we’re winding up the first quarter, I thought this would be a good time to look at how well our Buy List has done.
  If you’re not familiar with our Buy List, this is a list of 20 stocks that I select each year and start tracking on January 1. The hitch is that the list does not change all year. So I’m stuck with the good, the bad and the ugly. I do this to show investors that you don’t need to do a lot of trading to be a successful investor.
  So how well are we doing? The good news is that we’re up slightly for the year. The bad news is that we’re trailing the market by nearly 2%.
  Through yesterday’s close, our 20 stocks are up an average of 2.46% (not including dividends). The S&P 500 is up 4.38%. Our daily volatility is 8.7% greater than the market.
  We were slightly ahead of the market through mid-February, but this latest surge caught our stocks a bit flat-footed.
  Here’s how our stocks have done:

  Ticker	Stock	Profit
  EXPD	Expeditors International	23.55%
  DHR	Danaher	12.59%
  VAR	Varian Medical Systems	12.59%
  SEIC	SEI Investments	9.38%
  GDW	Golden West Financial	8.56%
  BRO	Brown & Brown	5.86%
  DCI	Donaldson	4.78%
  HD	Home Depot	4.40%
  BBBY	Bed Bath & Beyond	2.63%
  SYY	Sysco	0.00%
  BMET	Biomet	-0.08%
  RESP	Respironics	-0.27%
  AFL	AFLAC	-0.37%
  FDS	FactSet Research Systems	-1.21%
  DELL	Dell	-1.30%
  FISV	Fiserv	-1.92%
  HDI	Harley-Davidson	-2.91%
  MDT	Medtronic	-7.68%
  UNH	UnitedHealth Group	-7.72%
  FIC	Fair Isaac	-11.66%

  Fair Isaac’s (FIC) troubles started just two days ago, but Medtronic (MDT) and UnitedHealth (UNH) come in at #18 and #19. In fact, there’s a good deal of space between them and #17. So much for safety with size! MDT and UNH are two of the largest stocks on the Buy List.
  While I’m a very competitive person, I’m not ready to panic just yet over trailing the S&P 500. Given the short time period, our performance to date is completely normal.
  I still see lots of great bargains on the list. Dell (DELL) below $30 is a good buy. I’m in shock that Bed Bath and Beyond (BBBY) cracked $37 yesterday. Fiserv (FISV) and Harley-Davidson (HDI) are both good buys. The only stock I’m leery of is our best-performing one. Expeditors (EXPD) is a great company, but it looks a wee bit rich at this price.
  As always, my advice is to buy and hold great companies. Don’t worry about oil or moving averages or the Federal Reserve or whatever else we’re being told to worry about.
  Worry about your friends and family. Our Buy List stocks are terrific companies. The great Benjamin Graham said that the market acts like a voting machine in the short term, but a weighing machine in the long term. The voice of reason is quiet, yet persistent.

• See What $1 Million Looks Like
  Eddy Elfenbein, March 15th, 2006 at 4:54 pm

  All 899 square feet. One bedroom and one-and-a-half baths.
  
  On a related note, Google (GOOG) closed at $344.50 today.

• Sherron Watkins Is No Whistleblower
  Eddy Elfenbein, March 15th, 2006 at 2:24 pm

  Sharron Watkins is ready to take the stand at today’s Enron trial. She’s become a mini-celebrity due to her role as the brave whistleblower inside Enron. Watkins was even named one of Time’s “Persons of the Year,” along with two other female whistleblowers. We even had to endure articles asking us if women are really more honest than men.
  Unlike the other two women (Cynthia Cooper and Coleen Rowley), Sherron Watkins is no whistleblower. All she did was write an anonymous letter to Ken Lay. She didn’t go to the media or regulators, and she never followed up.
  You can read the memo here. In it, you can see that she’s not only not a whistleblower, she was actually concerned that others might blow the whistle. I’ll politely skip over the issue of Time, owned by what was once known as AOL Time Warner, pointing out the problems of creative accounting.
  Dan Ackman sums up what Watkins really did:

  A whistle-blower, literally speaking, is someone who spots a criminal robbing a bank and blows a whistle, alerting the police. That’s not Sherron Watkins.
  What the Enron vice president did was write a memo to the bank robber, suggesting he stop robbing the bank and offering ways to avoid getting caught. Then she met with the robber, who said he didn’t believe he was robbing the bank, but said he’d investigate to find out for sure. Then, for all we know, Watkins did nothing, and her memo was not made public until congressional investigators released it six weeks after Enron filed for bankruptcy.

  Don’t feel too bad for her. She already had her $500,000 book deal.

• Cyclical Index Follow-up
  Eddy Elfenbein, March 15th, 2006 at 12:33 pm

  I wrote too soon about the Morgan Stanley Cyclical Index (^CYC) (see here). The cyclicals are having a huge day compared with the rest of the market. The CYC is up 1.04% while the S&P 500 is down 0.05%.
  

• Harley Grows Up
  Eddy Elfenbein, March 15th, 2006 at 11:22 am

  
  Legendary hogmaker, Harley-Davidson (HDI), is facing a mid-life crisis. How do you market a plaything for older white guys to a mass audience?

  As the Baby Boomers who transformed Harley’s rumbling, lumbering bikes from countercultural totems into American icons enter their senior years — the leading edge of the generation is turning 60 this year — they’re increasingly in the market for knee and hip replacements (Biomet!), not Harley’s notoriously bone-shaking bikes.
  That’s forcing the Milwaukee, Wisconsin-based company to scramble to find new customers among women, blacks and Hispanics — groups that have not been traditional Harley-Davidson riders.
  The quest has involved the development and rollout of new products, like the 883 Sportster Low, built for smaller, lighter riders, and new marketing efforts, like Harley’s TV ad campaign during the NCAA tournament this spring.
  And the effort is showing some signs of success. Female ridership has quintupled in recent years. Today, women like Janeen Wingo, a 33-year-old resident of Calumet City, Illinois, who bought a Harley-Davidson 1200 Sportster last summer, account for 1 in 10 of the company’s sales — up from 1 in 50 just 15 years ago.

  Here are Harley’s sales and earnings for the past ten years:
  Year………..Sales (mil)………EPS
  1996……….$1531.2…………$0.47
  1997……….$1762.5…………$0.57
  1998……….$2064.0…………$0.69
  1999……….$2452.9…………$0.87
  2000……….$2906.4…………$1.13
  2001……….$3363.4…………$1.43
  2002……….$4091.0…………$1.90
  2003……….$4624.3…………$2.50
  2004……….$5015.2…………$3.00
  2005……….$5342.2…………$3.41
  Not a bad trend. Wall Street is expecting 2006 EPS of $3.72 on sales of $5.6 billion. The stock is currently going for about 13 times this year’s estimate.

• Fair Isaac Roundup
  Eddy Elfenbein, March 15th, 2006 at 10:25 am

  Yesterday, shares of Fair Isaac (FIC) were knocked down on the news that three credit-reporting companies are creating a rival credit scoring system to Fair Isaac’s FICO. So far, I’m far from convinced that this new system is a serious threat to Fair Isaac.
  The Wall Street Journal quotes Fair Isaac’s CEO, Thomas Grudnowski, who summed up the situation nicely:

  The new VantageScore system developed by the three bureaus competes with the FICO score system developed by market leader Fair Isaac Corp. of Minneapolis, whose proprietary credit-scoring system is used by 80% of the 50 largest banks in the U.S., according to Thomas Grudnowski, chief executive officer of Fair Isaac. About 75% of mortgage-loan originators use Fair Isaac’s FICO scores in their underwriting process, according to Doug Duncan, chief economist of the Mortgage Bankers Association.
  “Because of our low price and high quality, there has got to be a burning platform for customers who want to switch, because there is going to be financial risk,” Mr. Grudnowski said.
  Financial institutions and mortgage companies use credit scores, which are derived from information reported to local and national credit-reporting agencies, to determine which loan applicants are good risks. Your payment history, amount of debt owed, and how long you’ve used credit are some of the factors included in a credit score. Each of the three national reporting agencies currently markets its own credit score to lenders and consumers, as does Fair Isaac, which sells them directly to consumers at myfico.com. The credit bureaus also sell the FICO scores to consumers.
  Fair Isaac’s system uses a scale from 300 to 850, with 850 being the highest score representing a stellar borrowing record. The VantageScore system uses a scale from 500 to 990, which corresponds to an academic letter-grading system from F to A. Therefore, scores higher than 900 earn an A, scores from 800 to 900 a B and so on.

  I like the way the company is responding. MarketWatch quotes Ron Totaro, a Fair Isaac veep:

  But Fair Isaac’s Totaro says lenders face significant hurdles in switching to new score models.
  Some credit-granting firms “have been using a FICO score for 20 years in many cases. It’s embedded in lenders’ computer systems, lending processes…you can constantly go back and compare apples to apples on how a portfolio is performing or how you need to adjust your lending criteria,” he said.
  While the credit-reporting agencies’ announcement today was a surprise, he doesn’t see the new product as a significant threat.
  “We’ve been dealing with folks trying to come up with another type of credit score and it really hasn’t impacted us. We don’t see this particular item impacting our business in any way,” Totaro said.

  Yes, it’s not so easy to kill the king. Here’s Grudnowski again, this time in Business Week:

  Fair Isaac Chief Executive Tom Grudnowski said in an interview that FICO scores are deeply embedded in the way lenders evaluate loan applications. The biggest challenge for the credit bureaus, he says, will be to prove that their score is so much better that it justifies ripping up the way they do things now. Says Grudnowski: “There’s got to be a really compelling reason to convince an institution to change.”

  There are also anti-trust concerns. I’m not so sure three companies can get together so easily to take on a market leader.
  The stock is below $37 this morning. I’ll gladly buy more if it goes any lower.

• The Middle East Markets Get Pummeled
  Eddy Elfenbein, March 15th, 2006 at 7:32 am

  Some people think the Middle East is living in another century. Well, the region apparently just arrived at 1929.
  The stock markets across the Arab world dropped dramatically yesterday. The Dubai Financial Market dropped 11.71%, which is eerily similar to the 11.73% that the Dow lost on October 29, 1929. Since its January high, the Dubai index is now off over 44%. But the good news is, they don’t run our ports!
  I don’t mean to say “I told you so,” but I did, in fact, tell you so four months ago. (Dubai: Do Sell).

  This is a good time to remember that there’s an interesting correlation between market crashes and the largest buildings in the world. The Empire State Building went up just as our market crashed. The Petronas Towers were built as the Asian Tigers fell apart. The World Trade Center and Sears Tower accompanied the crash of the early 1970s. Even the Nasdaq’s shiny new office was opened just before its bubble burst.
  The price of oil is already well below its high price. What’s good for consumers here isn’t good news for Dubai. I think Dubai is ready for a fall.

  And it’s not just Dubai. The pain is being felt all across the region. Since February 25, the Saudi Index is down 28%. According to Bloomberg: “Finance Minister Ibrahim al-Assaf said his government won’t intervene to stop the slide, the Saudi-owned television station Al-Arabiya reported.” So the state-owned media is telling us that the state won’t intervene in the markets. Somehow, I’m not relieved.
  In Egypt, the government is working to prop up shares. The main index there, the CASE 30 Index, has doubled in each of the last three years. The index dropped 5.9% yesterday.
  The Kuwaiti index is down 17% since February 7, and there have been protests for the government to do something.
  For all the pain of a market crash, I’d like to believe that a financial crisis is an important step towards democracy. I even found a very sensible editorial against government intervention here. I hope the authorities behave reponsibly like a mature democratic country would, and not do anything dumb or silly to play upon public anger.

• Credit Derivatives Market Expands to $17.3 Trillion
  Eddy Elfenbein, March 15th, 2006 at 6:13 am

  From Bloomberg:

  Credit-default swaps, which pay compensation in the event of borrowers defaulting on their debt, expanded 105 percent in the full year, leading an increase in the $236-trillion market for derivatives, or contracts based on underlying assets. The market’s growth was slower than 123 percent increase in 2004, ISDA said in a report today at its annual meeting in Singapore.
  Regulators are worried that credit derivatives are increasing too quickly for banks to control. The Federal Reserve Bank of New York has demanded action to tackle a backlog of contracts left unsigned for weeks or months, and for banks to address a shortage of bonds to settle contracts.

  Weeks or months?