Archive for March, 2006

  • 57-Month High
    , March 14th, 2006 at 4:02 pm

    The S&P 500 closed at 1,297.44, it’s highest close since May 22, 2001. We just nipped out the January 11, 2006 high of 1,294.18.
    The Russell 3000 (^RUA), which is an even broader index, closed at its highest level since January 30, 2001.
    Going even broader, the Wilshire 5000 (^DWC) closed at its highest level since November 8, 2000.
    All told, the S&P 500 was up 1.04% and it was led by the cyclicals. The Morgan Stanley Cyclcal Index (^CYC) was up 1.58%.
    The Buy List was up 0.60% which badly lagged the overall market. The main culprit was Fair Isaac (FIC) which was down 6.6% on news of the new credit scoring system.

  • Jay Walker on Technical Analysis
    , March 14th, 2006 at 3:35 pm

    Jay Walker has a smart new investing blog at Confused Capitalist. Here he nails a well-known technician.

    Here’s a recent prediction by a technical analyst with a national audience, relating to a security then priced by the market in the $69-$72 range for about two weeks … get ready … here it is ….
    The share price has broken below the 10 and 20-day MA’s as is it retreats from an overbought condition. The daily MACD is issuing a sell signal thus consolidation of its recent gains may continue until the share price reaches the oversold lower Bollinger band at about $63, where it would offer a potential buying opportunity. It appears that the stock is in a corrective fourth wave of a five wave Elliot Wave advance. Once the correction is over it appears the stock’s technical target extends to $97, attainable over the next year.
    So, I’ll try put that in English for you … it appears to be priced too high at $69-$72 currently – if it drops to $63, buy it, because it looks like it’s going to $97 within the next year.

    Whenever I read technical analysis it always sounds like “this trend will continue what it’s doing until it stops what it’s doing…and that’s a reversal…unless, of course, it reverses again.”
    When in doubt, I just follow the blue line.

  • Agencies Adopt New Credit Scoring System
    , March 14th, 2006 at 2:59 pm

    One of my favorite Buy List stock, Fair Isaac (FIC), is down sharply today on the news that the nation’s major credit bureaus have created a new credit-scoring system.

    Equifax Inc., Experian and TransUnion LLC, a unit of Britain’s GUS Plc, in a statement said they adopted the “VantageScore” in response to “market demand for a more consistent and objective approach to credit scoring.”
    In the past, the agencies used their own formulas to gauge credit-worthiness. This created the possibility of widely varying scores, which could complicate consumers’ ability to obtain credit cards, auto loans, mortgages or other financing.
    Many lenders now use “FICO” scores, named for Fair Isaac Corp., which developed software used to generate them.
    The VantageScores will range from 501 to 990, compared with the current 350 to 850 range. Higher scores will still indicate greater levels of credit-worthiness, possibly leading to lower interest rates and better borrowing terms.
    “For consumers, it will create some confusion,” said Greg McBride, senior financial analyst at Bankrate.com, a provider of financial data and advice. “Saying you have a credit score of 750, for example, takes on a whole new meaning. It was a good score on the old system but is only fair in the new one.”
    A spokesman for Minneapolis-based Fair Isaac did not immediately return a call for comment.

    Shares of FIC are currently down about 8.6%.

  • Looking at Cyclical Stocks
    , March 14th, 2006 at 2:28 pm

    One of the market stats I like to keep an eye on is how well the Morgan Stanley Cyclical Index (^CYC) is doing relative to the S&P 500 (^SPX). The cyclical index is made up of stocks that are most sensitive to the business cycle.
    It’s important for investors to know if their stocks are cyclical or non-cyclical businesses. Some businesses see their earnings soar or crumble solely due to where we are in the economy. Probably the best example of this is the homebuilders. Even the worst homebuilder makes money when times are good. But when the housing market dries up, it does so dramatically. In fact, the real key to these businesses is working your way through the rough patches. Energy is another good example.
    To get my reading, I simply divide the cyclical index by the S&P 500 and this gives me a very rough gauge of how well the economy is doing. I also like this ratio because it follows very definite trends (see the chart below). For example, the cyclical index bottomed out at 0.308 on September 21, 2000 and hit its recent peak at 0.651 on December 28, 2004. That means that cyclical stocks did more than twice as well as the rest of the market.
    I’m not bright enough to pick the tops of the bottom of this cycle (I’d be filthy rich if I knew how!), but I like to know where we are in the cycle. Since the ratio hasn’t made a new high in over a year, I’m inclined to think that we’re now in the downswing of the economy. The last such period lasted for nearly 6-1/2 years. I should add that following this index gives you lots of false tops and false bottoms. Cyclicals zoomed in April 1999, but it still wasn’t the bottom of the cycle. Also, cyclicals were hit hard when the market reopened after 9/11, but the cycle still has three years to go.
    Cyclical stocks generally outperform the market when the market is rising, so you get a double whammy from owning cyclicals. To be honest, I’d rather know when the tops of bottoms of this cycle are rather than the tops and bottoms of the overall market.
    The performance of small-cap stocks also closely follows the fate of cyclical stocks. The reason is that more small stocks are in economically sensitive areas than large-cap stocks.
    Don’t count the cyclicals out just yet. Today, the cyclical index is having one of its best days of the year.
    doc642.bmp

  • Oil Anarchy Threatens Iraq’s Future
    , March 14th, 2006 at 12:35 pm

    From Reuters:

    Rampant corruption and political anarchy have pushed Iraq’s oil industry to the brink of collapse and may drive away the experts needed to save it.
    Three years after the U.S.-led invasion of Iraq, the country’s oil exports have sunk to nearly half the level they were under former president Saddam Hussein.
    Western-educated technocrats, who built up and ran Iraq’s most vital sector, are in despair as rapid turnover at the oil ministry and state marketer have failed to establish authority.
    “Things are worse than ever now. There’s a limit to how much we can take,” said an Iraqi executive, adding that many other veteran oilmen shared his view.

  • Jeremy Siegel Misunderstands Standard Deviation
    , March 14th, 2006 at 11:26 am

    Jeremy Siegel is a distinguished professor of finance at the Wharton Business School. He’s written many important articles and books on investing and finance (here’s my review of his last book, “The Future for Investors”). However, I’m afraid Dr. Siegel misunderstands a basis mathematical concept.
    This is from his most-recent “The Future For Investors” column:

    Stock returns are composed of the sum of the average real return on safe bonds, such as U.S. government bonds, which has been about 3 percent, plus an extra risk premium that has averaged between 3 percent and 4 percent per year. This risk premium has propelled stocks above other asset classes in investor returns.
    But this premium may be overly generous. Although stocks are indeed much riskier than bonds in the short run, in the long run they are safer. In fact my studies have shown that over periods 20 years or longer, a portfolio of diversified stocks has been more stable in purchasing power than a portfolio of long-term government bonds. As a result, a long-term stock investor gets rewarded for risk that basically only a short-term stock investor endures.

    He says that over periods of 20 years or longer, a diversified portfolio of stocks has been more stable than a portfolio of long-term bonds. The problem is, that’s not what his research indicates.
    In Chapter 2 of his book, “Stocks for the long Run,” Siegel looks at how stocks and bonds have performed over long periods. His point is that stocks are more volatile than bonds in the short-term, but over time, stocks have a very good track record of beating bonds. That’s a very important point for all investors.
    But then, he makes a critical error. On page 33, he writes:

    As the holding period increases, the dispersion of the average annual return on both stocks and bonds falls, but it falls faster for stocks than bonds. In fact, for a 20-year holding period, the dispersion of stock returns is less than for bonds and bills, and becomes even smaller as the holding period increases.

    His numbers are right, but his conclusion is wrong. By dispersion, he’s referring to standard deviation. If you recall from your high school math, standard deviation measures variation against the mean. What his data shows is that the variation of returns decreases as you have progressively longer holding periods. That’s a tautology. It must happen, but it doesn’t say anything about inherent risk.
    What Siegel says is that the variation of stock returns against the mean of stock returns decreases faster than the variation of bonds returns against the mean of bond returns. (That’s a mouthful!) But at no point are we comparing stocks against bonds. It’s merely stocks against themselves and bonds against themselves. Siegel is using the wrong instrument to make his point.
    Let’s say we have an asset class that has returned, on average, 10% a year for 100 years. The one-year holding periods might be very volatile. However, the two-year and three-year holding periods will become progressively less volatile. But there’s no insight here, the holding periods have to. They’ll eventually zero in on 10% a year.
    Siegel compares the rate at which stocks “zero in” to the rate at which bonds “zero in.” He says that since stocks zero in on their long-term average faster than bonds zero in on theirs, stocks are safer. They may indeed be safer, but his point doesn’t support that conclusion.

  • Google Mars
    , March 14th, 2006 at 10:17 am

    First, there was Google Earth. Then Google Moon.
    Now, there’s Google Mars.

  • Goldman’s Earnings Surge
    , March 14th, 2006 at 10:09 am

    Well, someone is making money on Wall Street. Goldman Sachs (GS) just reported that its first-quarter profit rose 62% to $2.45 billion, or $5.08 a share. That demolished Wall Street’s estimate of $3.29 a share.
    You don’t often see a brokerage firm top its estimates by over 50%, but Goldman has been shooting the lights out lately. Revenues from asset management soared 89%. Whoa. The company also raised its quarterly dividend from 35 cents to 40 cents a share. The stock is up about 50% since June.
    We’ll get another snapshot of the profits on Wall Street tomorrow when Lehman Brothers (LEH) reports. The company has regularly beaten estimates for the last several quarters. Interestingly, Lehman’s and Goldman’s stocks have tracked each other remarkably closely for the past several months. In fact, as I write this, both stocks are worth $146 a share.
    Bear Stearns (BSC) reports on Thursday and Morgan Stanley (MS) follows next Wednesday.
    Graef Crystal has more on executive pay of the Wall Street cheifs.

  • It was 20 Years Ago Today
    , March 13th, 2006 at 12:02 pm

    Microsoft went public. Believe it or not, you couldn’t even use margin to buy Nasdaq stocks back then.
    Bill Gates initially didn’t want to go public and he held it off as long as he could. The problem he had was that many of his employees were worth tons of money on paper, but they had no way to sell their shares. Could you imagine employees striking unless the company goes public? How would Marx have explained that one?
    Since the company didn’t need to raise much money, the offering was pretty small. They floated about 3 million shares priced at $21 a share. The IPO was a big hit and MSFT closed trading on March 13, 1986 at $28 a share.
    The stock didn’t do much for the first six months.
    However, things started to move and since then, MSFT has split nine times, seven 2-for-1’s and two 3-for-2’s. That comes to 288-for-1. So that $21 offering was worth 7.29 cents.
    The stock reached its all-time high close on December 27, 1999 at $59.56 (split adjusted). (On December 30, the stock reached an intraday high of $59.97.) Basically, the stock gained an average of 1% a week for 14 years.
    Microsoft fell back to $20 a share, and has been remarkably flat for the past few years. The stock has bounced between $22 and $30 for the most of the last four years.
    The company started paying a dividend three years ago. Also, there was the gigantic $32 billion special dividend that the company paid out in late 2004. That payment was close to the $38 billion that the government paid out in tax rebates in the summer of 2001.
    MSFT.png
    Here’s a chart showing the trailing four quarters of Microsoft’s sales, gross income, operating income and net income (in thousands). You can really show how the business started to level off at the beginning of the decade.
    doc167.png
    The amazing part of Microsoft’s business is its gross income. The teeny space between the black and green lines shows how little it costs Microsoft to makes its software. Microsoft’s gross income is usually over 80%. It’s actually gotten higher over the years.
    At the beginning of the decade, Microsoft had a trailing P/E ratio of over 70. Today, that number is down to 22.

  • Merck Goes for Pfizer
    , March 13th, 2006 at 11:06 am

    I knew the drug stocks were cheap. The German Merck is offeting $18 billion for the German Schering. FYI: This isn’t the U.S. Merck (MRK), or the U.S. Schering Plough (SGP).
    I hope this signals a bottom for drug stocks:

    Merck said it expected annual synergies of 500 million euros, to be fully reached by 2009. It said the deal would have a positive impact on adjusted earnings per share (EPS), increasing its 2005 figures by more than 10 percent, even without synergies.
    Merck said the 14.6-billion-euro payment would be financed by a combination of existing funds, debt and equity.
    The company will initially finance the takeover through existing cash and bridge financing from Bear Stearns, Deutsche Bank and Goldman Sachs.