Archive for April, 2006

• Oil at $70
  Eddy Elfenbein, April 17th, 2006 at 11:54 am

  Ugh. Today’s not looking so good. Thanks to the moonbats running Iran, oil broke $70 a barrel again, bringing it close to a new all-time record. The energy stocks are soaring, while the health care and consumer stocks continue to be left behind. Expeditors (EXPD) is also lower on an analyst downgrade.
  First, it was the 30-year bond that broke 5%, then the 10-year. Now, the five-year note is closing in on 5%. We’re up to 4.95%.
  Wanna see the impact of a flat yield curve? Citigroup (C) reported good earnings today. For the first three months of this year, the company made $1.11 a share (from continuing ops), nine cents more that estimates. Yet the stock is trading at 11 times this years’ earnings. Plus, the dividend yield is over 4%, which isn’t too far from long-term bond yields. Banks don’t make much money when the yield curve is so narrow.
  Over the weekend, Barron’s had an article on Patterson (PDCO), the dental supply company. Danaher (DHR) recently announced that it’s moving into this sector by buying Sybron Dental (SYD). The Barron’s article is a paid link, but here’s an article from Reuters.

• Worst. Day. Ever.
  Eddy Elfenbein, April 14th, 2006 at 11:08 am

  Six years ago today, the government reported that consumer prices rose 0.7% in March 2000. This totally freaked out the market, especially the tech sector. The Nasdaq Composite plunged 355.49 points, its largest drop ever.
  But that was only the beginning. Before it was all done, the index dropped by another two-thirds. Six years on, the Naz is still down 30%.
  If I had to pick the most absurd moment of the Internet craze, it would have to be November 13, 1998. That’s the day TheGlobe.com went public.
  The company tried to go public once before, but there wasn’t enough interest. The second time, however, worked. The shares were priced at $9. The stock opened at $87, climbed to $97 and finished the day at $63.50.
  Six years ago today, the stock dropped 19% to $3, and by April 2001, the shares were delisted.
  Thanks to the magic of the pink sheets, the stock lives on. TheGlobe.com (TGLO.OB) closed yesterday at 24 cents a share. (The stock split 2-for-1 in 1999).
  Here’s what the chart looks like. This is what’s called “significant net capital migration.” (FYI: I have an MBA).
  Since the market is close today, I thought I’d pass on a few links. The Food and Drug Administration approved a new drug to treat alcoholism.
  Michelle Leder, of Footnoted, has an article in Slate on “2005’s Most Appalling Tax Giveaway.”
  The Indian post office will now invest in the stock market. That can’t be a good sign.
  The Saudi stock market continues to get pummeled.
  And finally, here’s the 1986 World Series on RBI Baseball.

• First-Quarter Earnings
  Eddy Elfenbein, April 13th, 2006 at 5:12 pm

  Harley-Davidson (HDI) was our first Buy List stock to report earnings. There are 12 other Buy List stocks that finished their quarters at the end of March. Here are those stocks with their earnings date and Wall Street’s esimate:
  Stock…………………Date……………EPS
  UnitedHealth……….18-Apr……….$0.64
  Golden West……….20-Apr……….$1.26
  Danaher……………..20-Apr……….$0.64
  Brown & Brown……24-Apr……….$0.36
  AFLAC………………..25-Apr………..$0.70
  Fiserv…………………25-Apr……….$0.59
  Varian………………..25-Apr……….$0.46
  Fair Isaac……………26-Apr……….$0.52
  Respironics…………27-Apr……….$0.37
  Sysco…………………1-May………..$0.32
  Expeditors…………..TBA…………..$0.39
  SEI Investments…..TBA…………..$0.48

• A Rally for Rocks
  Eddy Elfenbein, April 13th, 2006 at 3:29 pm

  Daniel Gross has a good article in Slate on the gold rally. Over the past five years, the yellow metal has been on a tear.
  I’m not a fan of investing in gold. Remember that gold is simply a rock (or element, I suppose). It doesn’t do anything. In 10,000 years, gold will still be a rock.
  Stocks, on the other hand, are part ownership of a corporation. They really do something—they create wealth. A company is individuals coming together to use things, like rocks, to make things that people need.
  This is a huge difference, and it’s why stocks always outperform any other asset class given enough time. It’s the same thing with real estate. A house doesn’t do anything by itself. It just sits there.
  To be sure, there are periods when “hard assets” do better than “paper assets.” The 1970’s is probably the best example. Unfortunately, I’ve never been able to predict when these times come (or go).
  Traditionally, gold does well during turbulent times. Sure, gold will become very valuable in some post-Apocalyptic future. If we’re all going to be riding around the Australian outback with Mohawks ala Mad Max, I wouldn’t mind having a few ounces on me. But even in its role as “traditional store of value,” gold has still been a flop.
  Despite gold’s climb, the price is still below its high of $850 an ounce reached on January 21, 1980. (Like the Nasdaq and the Japanese Nikkei, markets like to peak around new decades.)
  As a long-term investment, gold has been rotten. Some people are saying that gold will soon make a new all-time high. It could, but keep in mind that inflation has increased by over 150% since 1980. Just to keep pace with the stock market’s total return, gold would have to reach $20,000 an ounce.
  Commodity spikes are really suite common, but it’s a mistake to read anything larger into it. If investors are willing to dump good stocks to buy a bunch of rocks, I’m more than happy to help them.
  

• The Goldman/Merrill Insider Trading Scandal
  Eddy Elfenbein, April 13th, 2006 at 12:01 pm

  Wall Street Folly and Deal Breaker own the Goldman Sachs/Merrill Lynch insider trading story. Wall Street Folly even scooped the New York Post.
  It turns out that Gene Plotkin, the 26-year-old (alleged) criminal mastermind, is also a novelist, filmmaker and competitive ballroom dancer.
  Well…Plotkin isn’t the only dancer involved. According to today’s New York Times:

  A dancer, Monika Vujovic, 23, of New York, allowed the defendants to set up an account for her in which illegal trades were made, according to the S.E.C. complaint, which charges her. Her lawyer, Mel A. Sachs, said he was confident that the accusations against his client would be favorably resolved in court.

  The Times being the Times, of course, calls her a “dancer.” The Times of London, however, is a little less delicate and calls her “a stripper.” Apparently, strippers were to be a key element of insider trading scheme. According to the SEC:

  Plotkin and Pajcin also contemplated various schemes involving exotic dancers, including having them garner information from bankers while dancing, and using them to induce investment bankers to provide Plotkin and Pajcin with information.

  I did a little searching and here’s a picture I found from the Tesla Memorial Society of New York‘s Web site.
  
  Monika Vujovic is, as you may have guessed, the one in the center. To her right is the ambassador from Serbia-Montenegro. Come to think of it, the Balkans may be the key to this whole case. According to the NYT:

  (I)t was $2 million in profits made by a 63-year-old retired seamstress in Croatia that tipped off the Securities and Exchange Commission about an ambitious and unusually creative insider trading ring, investigators say. That lead culminated in the arrests yesterday of two junior-level employees at Goldman Sachs and Merrill Lynch.
  The seamstress, Sonja Anticevic, made more than $2 million — a seventeenfold return — on a two-day investment in options on Reebok International after the company announced last August it would be acquired by Adidas-Salomon and the stock surged 30 percent.

• The 10-Year Yield is Over 5%
  Eddy Elfenbein, April 13th, 2006 at 9:41 am

  One of the classic warning signs of an overheated market is rising bond yields alongside higher stock prices led by gold stocks.
  Here’s what happened from July 1986 to December 1987:
  
  The blue line is the S&P 500. The gold line is the Philadelphia Gold/Silver Index (^XAU). To make the chart easier to read, both indexes have been adjusted to 100 as of July 1, 1986. The black line is the yield on the 10-year bond and it follows the scale on the right. It’s hard to believe that yields used to be that high.
  Notice how the rise in gold stocks is highly correlated with higher bond yields. This means that investors were selling conservative assets (the bonds) to buy riskier assets (the gold stocks). Many market observers watch these two to get a feel of the market’s optimism.
  Here’s the same chart since the beginning of 2005.
  
  Same thing. Money is leaving bonds for gold. It’s not so much that gold is rising, but it’s that gold is rising at the expense of bonds. That tells us that investors are chasing higher returns and they’re willing to take on more risk to do it.
  At the same time, more conservative stocks are being left by the wayside. Note what I said yesterday about health care stocks lagging the market.
  I’m not predicting a crash, or even a bear market, but I’m taking notice that the market’s attitude is shifting. The yield on the 10-year Treasury broke 5% this morning, and gold is at $600 an ounce.
  I thought the market’s reaction to General Electric‘s (GE) earnings report was interesting. GE is the bluest of all blue chips. The company posted earnings of 41 cents a share, two cents more than Wall Street was execting. Yet, the stock fell. The stock is trading at 17 times this year’s earnings, and that’s still too much for some investors.

• The Election Cycle
  Eddy Elfenbein, April 12th, 2006 at 4:38 pm

  Wall Street likes to think of itself as hi-tech and forward-looking, but in reality, the Street is nearly impervious to change. Remember decimal pricing? We adopted the base-10 numbering system some nine centuries after the Visigoths. That’s how fast this place moves.
  Only twenty years ago, the Nasdaq didn’t allow margin. And thirty years ago, Wall Street ran on fixed commissions. Can you imagine if any industry was run like that today? Think of what would happen if the price of every new car was fixed. America would make lousy cars that no one would buy, and Detroit would lose billions of dollars. Pretty scary.
  One of Wall Street’s oldest and oddest traditions is taking off for Good Friday. Bear in mind that Wall Street hates to take off any day. Trading on Saturdays lasted into the 1950’s. Almost no other business takes Good Friday off. Even the Feds are open. But every year, Wall Street shuts down for Good Friday. Strangely, the stock exchange was open for Good Friday in 1898, 1906 and 1907.
  I’m not sure where Holy Week stands in the canon of seasonal trading rules. I’m generally not a big fan of these bits of wisdom. You’ve probably heard the ones like “sell in May and go away.” I’ve always wanted to start my own. The best I got was “buy at Michaelmas and sell at Tet.” It hasn’t caught on.
  Despite my misgivings, there does seem to be a weak four-year pattern to stock prices. The market has made several important bottoms during mid-term election years. I would never base an investment decision off this fact, but the history is there. The difference between the four-year cycle and the other seasonal trading rules is that this one is based on some logic.
  The idea is that the incumbent president pushes up the economy for Election Day, then everything falls apart afterward. I ran through the Ibbotson numbers and this is what I got.
  
  The year before the election, the market is up an average of 18.2%. In fact, the market goes on a very smooth upward climb through the election year as well, averaging another 12.6%. The problems begin about mid-way through the post-election year. Even discounting 1929, the pattern is still there.
  The market hits a brick wall during the summer of the post-election year, and it stays flat for the next 14 months. Then, right before the mid-term elections, the market starts to rally and the cycle starts over again.
  Until recently, it looked like the market was following its traditional pattern. In 2002, the S&P 500 bottomed on October 9, just a few weeks for the mid-term elections. The market then rallied strongly before stalling last summer. But in October, the index ignored history and turned higher, and it’s being doing well ever since.

• Danaher to Buy Sybron Dental
  Eddy Elfenbein, April 12th, 2006 at 9:46 am

  Wow. I didn’t see this one coming.
  Sybron Dental (SYD) is a great company. As the name suggests, they make products for the dental profession. I always knew this was a profitable sector, but the stock I prefered to track was Patterson (PDCO). Of course, if Patterson could make dental supplies and pet supplies, I supposed Danaher, a tool company, can buy a dental supplier.
  Here are Sybron’s sales and EPS for the past few years.
  Year……….Sales………….EPS
  2000………$418.8……….$0.87
  2001………$439.5……….$1.07
  2002………$456.7……….$0.90
  2003………$526.4……….$1.46
  2004………$574.0……….$1.54
  2005………$649.7……….$1.85
  Danaher (DHR) is paying $47 a share, which is a 12% premium. It’s also about 26 times this year’s estimate of $1.82 a share.
  Danaher also said that first-quarter earnings will be slightly above the high-end of its forecast of 61 to 64 cents a share. The company said that sales for the first quarter were $2.14 billion, which was above the Street’s estimate of $2.08 billion.
  Shares of DHR are up this morning to a new 52-week high. I love it when a plan comes together.

• Harley Earns 86 Cents a Share
  Eddy Elfenbein, April 12th, 2006 at 9:34 am

  I was a bit too optimistic. Harley earned 86 cents a share.

  Before the opening bell, the Milwaukee-based company reported first-quarter earnings of $234.6 million, or 86 cents a share, up from a year-ago profit of $227.2 million, or 77 cents a share.
  Revenue rose 4% in the latest three months to $1.29 billion from $1.24 billion in the same period a year earlier.
  These results compared to an average estimate of analysts polled by Thomson First Call for a profit of 86 cents a share in the March period on revenue of $1.29 billion.
  “Our dealers continued their retail sales growth momentum from the second half of 2005 as motorcycle sales increased by approximately 7 percent worldwide in the first quarter, said Jim Ziemer, the company’s president and CEO. “With the increased seasonality in our business, we are pleased with this retail sales performance.”
  Global retail sales of the company’s motorcycles improved 6.9% in the first quarter from a year ago — U.S. sales saw a 5.8% increase for the period, while international sales jumped 11.6%. Gross margin for the quarter edged higher to 38.4% from 37.6% last year.
  Looking ahead, Harley-Davidson said it plans to ship 78,000 of its 2006 model year motorcycles in the second quarter. It also expects production for the second quarter to include 13,000 2007 model year motorcycles that won’t be shipped until the third quarter.
  The company anticipates wholesale unit growth of 5% to 9% and annual earnings per share growth of 11% to 17% for calendar 2006 with its wholesale shipment target still between 348,000 and 352,000 motorcycles.

• Harley’s Earnings Preview
  Eddy Elfenbein, April 11th, 2006 at 5:50 pm

  Harley-Davidson (HDI) reports tomorrow morning. This stock could easily go for $60 a share. I wouldn’t be surprised to see HDI earn 88 cents a share.

  EXPECTATIONS: Analysts polled by Thomson Financial expect the Milwaukee-based company to earn 86 cents per share in sales of $1.29 billion.
  ANALYST TAKE: “Based on our positive view of first quarter retail sales, we believe Harley will report a solid quarter,” Edward Aaron of RBC Capital Markets, wrote in a note to investors. He predicted Harley would match the consensus prediction,
  “On balance, we estimate high single-digit U.S. retail growth on a slightly negative comparison in quarter one.”
  Robin M. Farley of UBS Investment Research agreed that the first quarter’s warmer weather could drive its sales up, but questioned how much of that gain will take away from sales later in the year.
  Farley predicted earnings of 84 cents per share for the quarter.
  QUARTER DEVELOPMENTS: In March, Harley named Thomas E. Bergmann as its chief financial officer and vice president. He takes over for vice president and treasurer James Brostowitz, the acting financial chief since April 2005.
  Bergmann was most recently chief executive of USF Corp., a transportation and logistics company which was acquired by another company in May 2005.
  Also in March, Harley announced plans to open its first dealership in China. Beijing Harley-Davidson, partnered with dealer Beijing Feng Huo Lun, opened Saturday in the country’s capitol city.
  The store will sell several Harley models, parts, accessories, merchandise and collectibles. It will offer rider training and events including organized rides.
  COMPETITORS: Harley competes with Germany’s Bayerische Motoren Werke AG, or BMW, along with the motorcycle division of Honda Motor Co.
  STOCK PERFORMANCE: Harley shares have risen 2.9 percent since the beginning of the year. On Tuesday, shares closed up 2 cents at $52.97 on the New York Stock Exchange.