Archive for July, 2006

  • In Defense of Perma-Bullishness
    , July 11th, 2006 at 10:45 am

    Barry Ritholtz had a good post the other day on the awful track record of some of Wall Street’s perma-bulls. I will, however, come to the defense of the perma-bulls. Or at least, my perma-bullishness.
    Don’t get me wrong, I’m all for bashing the outlandish predictions of clueless market observes. I’m a perma-bull not because I think the market will soar dramatically higher. (I’m actually a little skittish right now.) I’m a perma-bull because I avoid trying to time the market.
    If there’s someone out there who’s great at timing the market, that’s terrific. Good for you. There’s no need to send me dozens of e-mails detailing your track record. I believe you. Go do it as much as you want. But for me, it’s never worked. My market calls have been horrible, and I’ve never seen anyone who’s been able to do it consistently. Personally, I don’t even try anymore.
    Remember that timing in the market involves two steps—when to get out and when to get in. Both parts are very tough to do.
    What I find annoying is that it’s easy to attack people who were screaming “buy, buy, buy” at market tops, but no one ever seems to criticize the perma-bears. Why are these folks immune? If some guru has been saying stay away from equities for the last ten years, the fact is that he’s been horribly, horribly wrong. And he should be told so.
    Ironically, I use the benchmark of ten years and we’re coming up on the tenth anniversary of one of the stranger days in the market. On July 15, 1996, the S&P 500 dropped over 2.5%. The next day it dropped another 3.8% intra-day, before rallying and closing modestly lower for the day. Bear in mind that at this point, the market had been climbing steadily higher since late-1994. The market started to crack and in July, and it looked liked it might spiral out of control.
    We now know that the market was really a screaming buy. If you had invested in the S&P 500 on June 30, 1996 and went to sleep for the next ten years, by June 30, 2006, you would have made over 122%. That’s about 8.3% a year. Forget all the big news stories of the past ten years: 9/11, The Tech Bubble, War, Impeachment. Despite everything that happened, an investor would have doubled her money. In fact, after inflation she would have made almost the exact same amount as the market has returned according to long-term studies.
    But that’s not what people were thinking in 1996. For an interesting take, let’s look at this transcript from PBS NewsHour of July 16, 1996:

    ELIZABETH FARNSWORTH: Is one of the great stock market runs in history coming to an end? That’s the question for Wall Street and for many on Main Street after recent large drops in the market, including yesterday’s Dow Jones loss of 161 points. Today saw wild swings, with the Dow rising more than 45 points early, then falling more than 167 points during the afternoon, and coming all the way back up 50 points before closing up 9 1/4 points. What’s going on? To help us understand, we’re joined by Susan Kuhn of Fortune Magazine. Thanks for being with us, Susan.
    SUSAN KUHN, Fortune Magazine: (New York) You’re welcome, Elizabeth.
    MS. FARNSWORTH: Why the wild swings today, what was going on?
    MS. KUHN: Well, Wall Street is having another one of its fun days this summer. Basically the market hasn’t been doing very well in both June and July. This comes after a long spectacular run, so I think it’s catching many people by surprise.
    MS. FARNSWORTH: So today was–it was something of a correction over yesterday, but it, it’s been dropping so much. Why?
    MS. KUHN: Well, I think there’s a lot of concerns. The first is we really haven’t had a break in the market. It’s been going straight up, and you have to wonder, boy, when are people going to start to get nervous, when are they going to take a break? The cause for this one appears to be corporate earnings. Many companies have been reporting earnings for the second quarter that are not matching investor expectation. That seems to be the excuse for people to sell. I was talking to people at Fidelity Investments today, and they’re finding that the volume of calls from individuals and stock funds was up 30 percent over the past few weeks. So clearly many individuals who may be in stocks for a variety of reasons are starting to get nervous.
    MS. FARNSWORTH: And this has been particularly true though. The decline has been particularly marked in technology, high technology stocks, computer companies, that sort of thing, is that right?
    MS. KUHN: That’s true. And technology, Elizabeth, really has been the story of the 90’s. All of us can see we’re getting new computers shipped to our desks. Our children are learning how to play computer games, and if we don’t know how to surf the Internet, we sure feel guilty about not knowing it. Wall Street hasn’t missed that story. In fact, it likes a good story, so it’s been bidding technology stocks up. But, of course, what goes up–what must come down, and that’s what we’ve really been seeing in, in the last couple of weeks. Technology has been taking it pretty hard.

    Notice how much of that could be say today. If you look for a reason to be worried about the stock market, guess what? You’ll find it.
    Investors always believe that they’re in the middle of the some period of two extremes. People are always waiting for “the dust to settle.” If you look at any period, that’s what’s on investors, “we’re waiting for the dust to settle.”
    If we play with the data a little bit, we can say that the S&P 500’s entire return over the last 10 years came on just 15 days (not including dividends). That’s over 2,500 trading sessions. This means that the stock market was net flat over 99% of the time. All your money was made during that 1%, or roughly one day every eight months. In other words, the dust is most likely settled, and it has been for quiet some time.
    Truthfully, I’m getting a bit too clever with numbers here, but it is factually correct. To be a successful market timer, you need to be that good. You have to hit that 1% all the time. Being a perma-bull, I know I’ll always hit it.

  • Earnings Season Gets Off to a Shaky Start
    , July 11th, 2006 at 9:35 am

    Second-quarter earnings season begins this week and so far, it’s not looking too good. Alcoa (AA) was the first Dow component to report, and despite its record earnings, sales came in below Wall Street’s forecast. The stock opened lower today.
    Also Lucent (LU) warned that its earnings would be below expectations. I’ve never understood the appeal of this company. At the end of the 1990s, Lucent reached $84 a share. Soon after, it dropped to 55 cents. Now it’s back to about $2.30 a share. Fortunately, Lucent will soon be someone else’s problem. The company is being bought out by the French firm Alcatel.
    EMC (EMC), another star stock from the 1990s, had a dud quarter. Here’s a great example of a company blowing too much of its money on share buybacks. On top of that, the company is paying far too much for RSA Security. I knew there was a problem when they didn’t provide any earnings guidance. Officially, the company blamed its earnings shortfall on “inventory mix.” I have no idea what that means.
    Advanced Micro Devices (AMD) has gotten clobbered this year. I have to admit that I missed the AMD story and I didn’t realize how much ground the company had gained. Last week, the company lowered its sales estimate for the quarter, and the stock fell sharply in yesterday’s trading.
    The first earnings from our Buy List stocks won’t be until next week. Harley-Davidson (HDI) will start earnings season for us when it reports earnings next Monday.

  • Weak Employment Report
    , July 7th, 2006 at 9:15 am

    The highly anticipated jobs report came out today. Last month, the economy created 121,000 nonfarm payrolls which is 64,000 less than what economists were expecting.
    The May payroll number was revised higher to 92,000 from 75,000. The April number was pared back to 112,000 from 126,000. The unemployment rate stayed the same at 4.6%. How will this affect the market? It’s hard to say just yet. According to the futures market, Wall Street thinks there’s a 63% chance of another rate hike coming.

  • Manscaping Comes to CNBC
    , July 6th, 2006 at 1:46 pm

    CNBC’s segment on the marketing of Philips Norelco’s Bodygroom Shaver. I think Melissa Francis handles it gracefully.

  • Upcoming IPOs
    , July 6th, 2006 at 10:14 am

    Business Week looks at five upcoming IPOs to “approach with caution.” My favorite is BioVex, a small biotech company:

    The company, which is being led to market by Janney Montgomery Scott and Stifel Nicolaus, is also developing a vaccine for genital herpes, but it has not yet begun the long clinical-trials process. At this point, BioVex has no product revenues—it has received funds from “potential collaborative partners.”
    One other thing that might make an investor think twice: According to BioVex’s SEC filing, the company’s “independent accountants have expressed substantial doubt about our ability to continue as a going concern.”

  • Expeditors Aims for 15% Growth
    , July 6th, 2006 at 9:58 am

    Expeditors International of Washington (EXPD) is our best-performing stock on the Buy List this year. Since January, shares of EXPD are up over 60%. Reuters takes a closer look at the company:

    Logistics company Expeditors International of Washington Inc. is aiming for long-term annual growth through taking business from competitors and fueled by robust expansion of global trade, the company’s top executives said on Wednesday.
    “We’re going to stick to our core business, continue seeking opportunities to take market share and open new offices,” Chief Executive Officer Peter Rose told Reuters in an interview at Expeditors headquarters in Seattle.
    Rose co-founded Expeditors in 1981 with $350,000. In 2005 the company, which specializes in ocean and air freight forwarding, reported revenue of $3.9 billion and net profit of $218.6 million. That was up from $3.32 billion revenue and net income of $156.1 million in 2004.
    Chief Financial Officer Jordan Gates said Expeditors does not provide a short-term outlook, but usually “shoots for annual growth of 15 percent.”
    “That remains the long-term goal,” he said.
    Since its founding Expeditors has experienced single-digit growth only twice Rose said: in 1991 when the first Gulf War was fought and in 2003 when the Iraq War began.
    Much of the company’s growth has been fueled by growing global trade, in particular trade from Asia to North America as U.S. manufacturing has shifted overseas.
    Expeditors now has 180 offices worldwide, including 33 in China, and plans to open 50 to 100 more around the world over the next five years, Rose said.

  • The North Koreans Shoot Down the Dow
    , July 5th, 2006 at 2:17 pm

    The North Korean missile launch has rattled the markets. The launch was a dud but it managed to hit all the major indexes today. The bond market is also trading lower.
    Once again, I’m surprised by the strength of the energy sector. The Dow Jones Oil and Gas Index (^DJUSEN) is now up to 483. Just three weeks ago, the index closed at 421.72. Oil is back over $75 a barrel.
    On our Buy List, Expeditors (EXPD) is feeling the most pain. The stock was downgraded by Stephens. Bed Bath & Beyond (BBBY) continues to baffle me. The stock reached a new 52-week low today despite its decent earnings report from two weeks ago. Many of the retailers are weak today. As strange as BBBY, Home Depot (HD) is getting ridiculous. The stock also made a new 52-week low, and it’s going for close to 11 times next year’s earnings.

  • Earnings Reports
    , July 5th, 2006 at 11:18 am

    Thirteen of our Buy List stocks ended their quarter in June. Here’s when those stocks are due to report earnings, and Wall Street’s current estimate:
    Harley-Davidson……….17-Jul………$0.91
    UnitedHealth……………19-Jul………$0.68
    Danaher………………….20-Jul………$0.78
    Golden West……………20-Jul………$1.29
    AFLAC……………………..25-Jul………$0.71
    Fiserv……………………..25-Jul………$0.60
    Varian……………………..26-Jul………$0.43
    Expeditors……………….1-Aug………$0.26
    Sysco…………………….14-Aug………$0.42
    Brown & Brown………….TBA………..$0.29
    Fair Isaac………………….TBA………..$0.53
    Respironics……………….TBA………..$0.39
    SEI Investments………..TBA………..$0.55

  • Rosneft’s IPO: “A Sale of Stolen Goods”
    , July 5th, 2006 at 10:55 am

    The lawyer representing, Mikhail Khordorkovsky, the founder of Yukos, is claiming that Rosneft’s IPO is a sale of stolen goods. It’s hard to disagree with him.
    Yukos was essentially looted by the Kremlin and turned over to Rosneft. George Soros agrees and he think the IPO should be blocked:

    “I think that Russia is working as a monopoly supplier and it is essential for Europe to have a coordinated energy policy to be able to stand up as equal partners in negotiating with Russia,” Soros said.

    The IPO is scheduled for next week.