Archive for July, 2006

• What’s Dragging Down the Market
  Eddy Elfenbein, July 14th, 2006 at 1:12 pm

  
  The market is down for the third day in a row. Since July 3, the S&P 500 has lost close to 4%.
  This is a continuation of the selloff that began in early May. The recent downturn, however, has a very different flavor than inital correction.
  In the first part of the selloff (May 5 to June 13), the energy stocks were hit the hardest. Here’s a chart showing the Oil Services HOLDRs ETF (OIH) in gold, compared with the S&P 500 (in black) and the Morgan Stanely Consumer Index (^CMR) in blue.
  
  This what I wrote on June 13, (Dissecting the Bear):

  Since May 5, the S&P 500’s market value has fallen by $807 billion. That’s a nice chunk of change. Percentage-wise, it comes to -6.74%.
  What’s interesting to note is that since the stock market peaked, long-term interest rates have actually declined. Gold is down by $100 an ounce. This is not a market worried about inflation. If we use some reasonable assumptions, in just five weeks, the market has become convinced that around $50 billion of next year’s corporate profits will not materialize.
  The Big Bad Bear, however, hasn’t treated everyone equally. Here’s the performance of the 10 industry sectors since May 5:
  Utilities………………..+0.78%
  Staples………………..-1.61%
  Telecom………………-2.00%
  Health Care………….-2.28%
  Financials…………….-5.60%
  Discretionary……….-5.68%
  Industrials……………-8.71%
  Energy………………..-11.41%
  Tech…………………..-12.12%
  Materials…………….-13.30%
  Two observations. First, it’s almost the mirror image of the market before May 5. The other is that it’s a pretty wide gap. The bottom three groups, combined, make up just 27% of the S&P 500’s value, but have contributed more than half the losses. The rest of the market has suffered nary a scratch.

  The defensive sectors were pretty safe. But since July 3, the energy stocks have been doing well (i.e., not down a lot), while the rest of the market has been feeling the squeeze.
  Here’s how the sector ETFs have performed from July 3 to this afternoon:
  Utilities (XLU)………………..0.09%
  Energy (XLE)………………..-0.03%
  Health Care (XLV)…………-1.06%
  Staples (XLP)……………….-1.52%
  Financial (XLF)……………..-3.42%
  Industrial (XLI)…………….-5.72%
  Materials (XLB)…………….-5.88%
  Discretionary (XLY)……….-6.16%
  Tech (XLK)……………………-6.59%
  Tech and Materials are still lousy. Utes, Health Care and Staples are holding up OK, but energy has changed sides, going from laggards to leaders.

• Bill Miller’s Streak in Danger
  Eddy Elfenbein, July 14th, 2006 at 11:48 am

  Bill Miller, the manager of Legg Mason’s Value Trust mutual fund (LMVTX), has beaten the market for the last 15 straight years. This year, however, isn’t working out so well.
  Here’s how the fund (black line) has performed year-to-date against the S&P 500 (gold line).
  
  Unless Miller has a big turnaround in the second half of the year, he’ll lag the overall market.
  At the end of March, his top holdings were Sprint Nextel (S), UnitedHealth (UNH), TYCO (TYC), AES (AES), Amazon (AMZN), Google (GOOG), JP Morgan (JPM), Qwest (Q), Aetna (AET) and Eastman Kodak (EK).

• Second-Quarter Earnings Preview
  Eddy Elfenbein, July 14th, 2006 at 10:32 am

  Christine Arnold at Morgan Stanley is bullish on UnitedHealth (UNH). She’s expecting earnings of 68 cents a share and thinks the stock could trade at the high end of its five-year historical range once the options issue is resolved.
  That’s not all. Yesterday, Banc of America Securities upgraded Respironics (RESP) from neutral to buy.
  Here’s a look at our earnings reports due over the next few weeks:
  Harley-Davidson……….17-Jul………$0.91
  UnitedHealth…………….19-Jul………$0.68
  Danaher……………………20-Jul………$0.78
  Golden West……………..20-Jul………$1.29
  SEI Investments………..20-Jul………$0.55
  Brown & Brown…………24-Jul………$0.29
  AFLAC………………………25-Jul………$0.71
  Fiserv………………………25-Jul………$0.60
  Fair Isaac…………………26-Jul………$0.53
  Varian……………………..26-Jul………$0.43
  Respironics……………..27-Jul………..$0.39
  Expeditors……………….1-Aug………$0.26
  Sysco…………………….14-Aug………$0.42

• Investing in Yoga Instructors
  Eddy Elfenbein, July 14th, 2006 at 9:28 am

  Here’s an interesting article from Bloomberg on the phenomenal growth of the school loan market.

  Sales of student-loan backed securities grew almost five times as fast as the $1.97 trillion asset-backed bond market last year, according to the Bond Market Association, a New York-based trade group of dealers and underwriters. Bankers are packaging anything that resembles student debt, including loans for college, primary school, tutorials for casino dealers in California and yoga instructors in Iowa.

  I didn’t know that in bankruptcy, you can wipe out your credit card debt, but not your school loans.

• The Bank of Japan Raises Rates
  Eddy Elfenbein, July 14th, 2006 at 7:18 am

  For the first time in six years, the BOJ has increased interest rates. The overnight rate has been lifted from near-zero to 0.25%.

  The bank’s decision means the end of deflation is near, said Prime Minister Junichiro Koizumi, speaking in Jordan. It’s too early to discuss the timing of another rate increase, Tanigaki said today, adding that the government will closely watch the effect of the move. Today’s decision was “appropriate,” Chief Cabinet Secretary Shinzo Abe said.
  The government opposed the bank’s last rate increase in August 2000. Seven months later, the bank had to cut rates back to almost zero as an Internet-led global economic boom faltered.
  Fukui said in an interview on May 31 that the bank must “carefully gauge the impact the first rate increase will have on the burden for companies” and the overall economy before increasing rates again.
  The Bank of Japan on March 9 ended a five-year deflation- fighting policy of pumping up to 35 trillion yen ($303 billion) into the banking system. Consumer prices have now racked up seven months of gains, unemployment is at an eight-year low and lending by banks grew at the fastest pace in a decade in June.

• Rosneft IPO Priced at $7.55 a Share
  Eddy Elfenbein, July 14th, 2006 at 7:13 am

  Rosneft’s offering will raise $10.4 billion.

  The company said in a statement that the pricing gives Rosneft a total value of $79.8 billion, a higher market capitalization than Russia’s biggest oil producer, Lukoil. The shares are due to start trading next Wednesday in London and on Russian exchanges.
  Preparations for the highly anticipated offering come as Russia shows off its oil-fueled economic clout, hosting leaders from the world’s richest democracies in St. Petersburg for the Group of Eight summit this weekend.
  Despite the anticipation, the listing has been dogged by OAO Yukos, which has sought to stop the IPO. The company sought a last-minute injunction at a British court late Thursday. It was unclear whether the injunction would be granted.
  After a jittery start, bankers say investors’ appetite rose throughout the marketing process for the IPO. Rosneft said Friday that the listing was 1 1/2 times oversubscribed, with total demand at $15 billion. Strategic investors accounted for 21 percent of the demand, with international investors from the U.S., Europe and Asia having made 36 percent of bids. Russian investors had bid for 39 percent of the shares while Russian retail investors had applied for 4 percent of the stock.

• Dow -166.89
  Eddy Elfenbein, July 13th, 2006 at 4:20 pm

  For the eighth time in the past nine weeks, the S&P 500 dropped by over 1.1%. That only happened once in the previous 29 weeks. The index is now 1.5% from its June low,

• To the Home Depot Haters
  Eddy Elfenbein, July 13th, 2006 at 2:02 pm

  Oh for the love of carbs, people. This Home Depot (HD) nonsense is getting out of control. I can’t believe what I’m seeing. The stock’s popularity is somewhere between Hamas and Diptheria, and it’s getting worse. In the less than three months, shares of HD have plunged over 20%. And the stock made another 52-week low today.
  Now there’s a lynch mob after CEO Bob Nardelli. He’s even getting blamed for things he’s had nothing to do with. To quote Hoover from Animal House: “They confiscated everything, even the stuff we didn’t steal!”
  To be honest, I’ve never been terribly impressed with Nardelli. He was one of Jack Welch’s protégés at GE. Nardelli rose through the ranks at GE to lead its Power Systems division. He did a great job there but I think he’s a bit too rough around the edges to be the corporate face of Home Depot, or any other company for that matter. Perhaps that’s why Jack Welch passed him over to be GE’s next top dog. In any event, Home Depot jumped at the chance, and made him their CEO in December 2000.
  There’s an important point to remember. Nardelli didn’t start Home Depot. He was the rock star manager brought in to take over from the founder. Just because he thrived in the GE system, doesn’t mean he’ll be effective at a major company in an entirely different industry. In fact, it doesn’t make much sense at all.
  Sadly, the loudest protests concerns Nardelli’s pay. This is really a lame issue. Last year, he raked in $32 million, and over $120 million in the last five years. Yes, yes, I know. It would be great to see CEOs get paid the same as teachers. Give me a petition and I’ll sign it, but I’m not going to pretend that CEOs can be found on the cheap.
  The fight against CEO pay has probably caused shareholders more problems than the pay itself. In 1993, Congress capped the tax deductibility of salaries at $1 million, so CEOs fought back by issuing stock options. This led to companies slashing dividends payments which, in turn, increased the market’s volatility. Then we had the battle to expense stock options. Now we have the battle on back-dating, which in some cases, is perfectly legal. Chris Cox said that the 1993 law deserves “pride of place in the museum of unintended consequences.” Let’s keep the pay issue is proportion. Nardelli’s compensation last year works about to about 1.6 cents a share. This isn’t exactly soaking a $34 stock.
  The anti-Bob furor got even louder when the company said that it would no longer provide same-store sales figures. Again, I’d prefer to see this number. (Except that, Lowe’s (LOW) always creams HD’s same-store sales.) But when I hear these critics yell and scream, I don’t think they understand what Nardelli is trying to do.
  Let’s look at HD’s position from management’s point of view. They have a maturing retail business and strong competition from Lowe’s. The difficulty is that they’re running out of prime retail spots. So Nardelli is shifting HD’s strategy. If they decide to go to war with Lowe’s and play the game of “who can open up the most new stores,” Home Depot will lose, and lose badly. Remember what happened to Rite Aid?
  Instead, he’s doing something different. He’s focusing the business on commercial customers. This is a huge market segment, and it makes sense for HD to shift the battle to this front. I didn’t quite “get it” until HD made its bid for Hughes Supply. This was Home Depot’s largest acquisition in its history. Now I see how committed HD is. Plus, the company has been quietly snatching up several smaller wholesale suppliers, even one in China. Notice how they’re acting before the problems get worse.
  While, I’d prefer to see HD report the same-store sales figures, I understand why they’re not doing it. It’s simply not going to be a key component of its business strategy. Last week, however, Nardelli back-tracked and told Maria Bartiromo that HD may go back to reporting same-store sales.
  The really big showdown came at the company’s annual meeting in May. This was a PR disaster. None of the outside director showed up. The meeting was just 30 minutes long, and Nardelli refused to answer any questions about his pay. Shareholder activists were furious and they urged shareholders to withhold their support of HD’s directors.
  In the past, the company has given the results of the votes at the annual meeting. Um…not this year. The company eventually said that 10 of the 11 directors saw over 30% of their votes withheld. That ain’t good. Of course, shareholders have another way of voting—they can sell, and that’s what’s been happening.
  But Home Depot is not like Dell. The company is still doing very well. In fact, Home Depot has beaten Wall Street’s estimate for the past few quarters. The company has also reiterated its earnings guidance. We’re not seeing those ugly earnings warnings that have hit so many others. In May, Home Depot said that it expects earnings growth of 10% to 14% this year, which translates to per-share earnings of $2.99 to $3.10. This means that HD is going for just 11 times this year’s earnings. That seems pretty darn cheap to me.
  

• Dell Revamps Pricing Structure
  Eddy Elfenbein, July 13th, 2006 at 12:20 pm

  From the AP:

  Dell Inc. outlined plans Thursday to simplify pricing and reduce the number of mail-in rebates for consumers and small business as part of the computer maker’s recent $100 million initiative to improve customer service.
  Beginning next month, Dell said it hopes to reduce the number of promotions per product line by 70 percent and the number of promotions for any single product by 80 percent within the next 18 months.
  Ro Parra, senior vice president of Dell’s Home and Small Business Group, said the new system should make it easier for customers.
  “They told us what they wanted and we’re delivering what they asked for,” he said.
  The move comes as Dell shares have hovered near a 52-week low following several analyst reports questioning its future growth prospects and tough competition from Hewlett-Packard Co. and other computer makers.
  While Dell saw its revenue grow by 6 percent in the first quarter, HP’s jumped 10 percent. During the same period, worldwide PC shipments grew from 13.8 percent to 14.9 percent for HP, according to research firm Gartner. Dell, meanwhile, saw its share slip to 16.5 percent from 16.9 percent last year.
  Shares of the Round Rock, Texas, gained 13 cents Thursday on the Nasdaq Stock Market to $22.51. The stock price has ranged in the past year from Wednesday’s close of $22.38 to $41.99.
  The plan announced Thursday will take effect in August, beginning with a reduction in mail-in rebates for Inspiron laptops and Dell televisions. Rebate cutbacks for Dimension desktops will come later in the year, followed by other electronics and accessories, software and services.
  Part of the plan, Parra said, will involve doing away with paper-based rebate forms in favor of system for customers to file for their rebates electronically.

  The shares are back up to $22.50 (Woo!).

• Sterling Bancshares
  Eddy Elfenbein, July 13th, 2006 at 10:24 am

  Investor’s Business Daily looks at one of my favorite regional banks, Sterling Bancshares (SBIB):

  Sterling, with $3.7 billion in assets, focuses on Texas’ three largest markets: Houston, Dallas and San Antonio. It has 26 branches in its home base area of Houston and seven each in the Dallas and San Antonio markets.
  The firm competes mostly with large banks based outside Texas. These banks, which tend to go after much bigger loans, include Bank of America, (BAC) JPMorgan Chase (JPM) and Wells Fargo. (WFC)
  “It’s a bit of an underserved market that Sterling’s going after,” Cardenas said. “I think that’s a big part of their success.”
  There’s still room to grow in those markets.
  Sterling has less than 3% of Houston’s deposit market. It holds 1% or less in the Dallas and San Antonio markets.
  “(Sterling’s) management team has had excess capital for many years, but they haven’t wasted it by overspending,” Arfstrom said. “They’ve been patient and prudent.”
  The company could buy its way into a bigger share of its markets. Sterling has plenty of experience in this area, having acquired nine banks over the past seven years.
  It also has been quick to hire folks away from banks that have been acquired by other firms.
  “Our ability to pick up people from banks that have either announced they’re selling or (have been) sold to others has just been a windfall for us,” Bridgwater said on the conference call.