Archive for September, 2006

• Oil Is Down 15% Since July
  Eddy Elfenbein, September 8th, 2006 at 3:53 pm

  Today is another decent day for our Buy List. Since we don’t have any energy stocks, whenever oil falls, the Buy List tends to beat the market. The price of light sweet crude has now dropped over 15% since Bastille Day. I wonder if there will be a Congressional investigation into manipulation from the big oil companies. Eh…prolly not. I think the energy sector has even more room to fall.
  Our big winner today is Fiserv (FISV) which is up over 6% thanks to an upgrade from Prudential. Harley-Davidson (HOG) is inches always from a new 52-week high. The stock, however, is having trouble making it through $60 a share.
  In April 2005, Harley warned of slower sales and stock plunged. Since then, the shares have made an impressive comeback. The company is still doing well, although profits may not grow at quite the same rate as before. The stock is going for about 15.6 times this year’s earnings. Not a bad deal.
  Donaldson (DCI) is still looking good. After Wednesday’s big surge, the stock pulled back some yesterday, but it’s up again today.
  Another overlooked stock is Danaher (DHR). The company will report third quarter earnings on October 19. The current estimate is for 82 cents a share, which is probably too low.
  The big news next week will be the OPEC meeting on Monday, and the CPI report on Friday. The year-over-year headline rate of inflation should have a big drop due to the large number from a year ago. This should happen again next month because last September’s CPI was gigantic. This is a good example of why it’s sometimes important to focus on the core rate of inflation, instead of the headline rate.

• More Problems for Homebuilders
  Eddy Elfenbein, September 8th, 2006 at 12:57 pm

  If you raise interest rates 17 straight times, it begins to have an impact. Today Lennar (LEN) became the latest homebuilder to slash its profit forecast. Last week, Beazer Homes USA (BZH) and KB Home (KBH) both slashed their forecasts.
  Lennar now says it’s going to earn $1.25 to $1.35 a share for the quarter. This is a big cut from the earlier forecast of $1.90 and $1.95 a share. For the full year, Lennar sees earnings of $8 to $8.25 a share, which is down from its previous forecast of $9.25 a share. I have a feeling we’re going to see more earnings warnings in the months ahead.
  Over the past year, the homebuilding sector has been absolutely mauled. The index is down nearly half from last year’s peak.
  

• How Good Are Economic Forecasters?
  Eddy Elfenbein, September 8th, 2006 at 9:52 am

  Not very good according to Martin Fridson. He looked at the median GDP forecast of some 60 professional forecasters.

  The median prediction was in the range of 3.1% to 4.0% in every single quarter. Perhaps not coincidentally, the actual quarterly GDP increase over the past 25 years (1981-2005) averaged 3.14%. The forecasters, in aggregate, perennially thought that one year hence, business conditions would be just about average. In reality however, actual GDP gains gyrated between 0.2% and 7.5%. The forecasters’ nearly inert consensus was all but worthless.

  
  It seems that no matter what happened, the economists always believed in reversion to the mean. Fridson concludes:

  The imprecision of economic forecasts isn’t a comment on the forecasters’ intelligence or work ethic. Rather, it demonstrates that the economy is too complex a system to be adequately captured by existing modeling techniques. The rational response to this realization is a combination of caution and humility.

• Wachovia Upgraded on Golden West Buy
  Eddy Elfenbein, September 8th, 2006 at 12:47 am

  From The Contra Costa Times:

  Shares of Wachovia Corp., the parent of Oakland-based Golden West Financial Corp. (GDW) fell along with the rest of the banking sector on Thursday, failing to react to an upgrade from Standard & Poor’s. S&P analyst Mark Hebeka pointed at the purchase of Golden West as a chief revenue generator, as well as a source of favorable synergy.
  Hebeka upgraded Wachovia to a strong buy from a buy, citing what he sees as a “compelling” valuation and the bank’s “strong growth prospects and sound business strategy.”
  The stock, however, has had trouble recovering from a slump since the acquisition was announced in May and remains 6 percent below its May highs.
  The market has remained skeptical of the transaction because of potential risks associated with Golden West’s portfolio of mortgages, according to Bear Stearns analyst David Hilder, who reiterated an underperform rating on Wachovia’s stock in late July.

• Subliminal Stock Spams
  Eddy Elfenbein, September 7th, 2006 at 3:41 pm

  Ugh:

  Pump-and-dump stock campaigns work by spammers purchasing stock at a cheap price and then artificially inflating its price by encouraging others to purchase more (often by spamming “good news” about the company to others). The spammers then sell off their stock at a profit. Sophos experts report that pump-and-dump stock campaigns account for approximately 15 percent of all spam, up from 0.8 percent in January 2005.
  A new “pump-and-dump” stock spam campaign uses an animated graphic to display a “subliminal” message to potential investors. Animated GIF graphics are composed of a number of frames, which are shown in succession. This is often used for animation on websites, but has recently been adopted by spammers in their attempt to try and avoid detection by anti-spam products.
  In a spam campaign seen by Sophos researchers an embedded image attempts to artificially inflate the price of shares in a company called Trimax. However, unlike the many other similar scam emails the graphic briefly flashes up a message saying “BUY!!!” approximately every fifteen seconds.

  I’m not impressed. Bob Pisani is down to 11 seconds.
  In other news: “Suri Cruise Photos Expected to Fuel Stock Market Rally.”

• It Just Can’t Get Any Bigger
  Eddy Elfenbein, September 7th, 2006 at 1:16 pm

  Peter Lynch said he remembers people telling him 25 years ago that Wal-Mart (WMT) just couldn’t get any bigger. That’s an argument against a stock you should always ignore. With capitalism, profits are like jello…there’s always room for more.
  Check out this chart of Eaton Vance, the asset manager (EV):
  
  Pretty spiffy, no? Thirty years ago, you could have picked up some shares for about $4 a piece. Adjusted for splits, that comes to 2.7 cents a share. In thirty years, the stock is up 1,000-freaking-fold.
  So what’s Eaton Vance’s current market share of the mutual fund industry?
  One percent.

• How Important Are Resistance Levels
  Eddy Elfenbein, September 7th, 2006 at 12:07 pm

  Mark Hulbert writes that the Wilshire 5000 Total Return Index (^DWCT) is closing in on its all-time high of 47.84098 and wonders about the psychological impact:

  Yet I don’t know of any advisers who are focusing on the 47.84098 level. So it’s hard to see how it is a psychological barrier for the market.

  Ahem…just for the record, I’ve written about the pending new high here, here and here.
  But there is the question of how seriously the market takes resistance levels. I don’t have much faith in technical analysis, but that’s not because the market doesn’t think it’s unimportant. Resistance levels clearly play a role. The Wilshire 5000 Total Return Index came oh so close to a new high before backing away.
  The Dow flirted with 1,000 six years before it finally broke through. The NASDAQ didn’t fall apart until it jumped above 5,000, which was also half of the Dow.
  But Hulbert is right, the market can’t be watching the Wilshire Total Return, can it? The thing about financial markets is that they’re smarter than we realize. There’s a reason to what happens, even if we may not recognize it.
  For example, there’s a fascinating correlation between the progress of the Smoot-Hawley tariff bill through Congress in 1929 and the reaction of the stock market. But at the time, the financial media wasn’t at all focused on this disastrous tariff bill.
  The stock is a collection of millions of participants, and collectively it has almost a magic eye that’s focused on certain events. Even though no one (well, almost no one) has been talking about the Wilshire 5000 Total Return Index doesn’t mean the market is ignoring it.

• Tyler Cowen on China and Trade
  Eddy Elfenbein, September 7th, 2006 at 11:47 am

  You know how our trade deficit with China is ruining us? Tyler Cowen says to think again:

  The Chinese keep the yuan low, relative to the dollar, by buying up United States Treasury securities; as of early 2006, the Chinese central bank held up to $470 billion in Treasury securities. This huge accumulation of relatively low-yielding assets is the investment strategy of risk-averse bureaucrats, but it may bring longer-term benefits. Those assets can someday be sold or otherwise transferred to underdiversified Chinese financial institutions. The accumulation gives the Chinese a stake in American prosperity and signals that the Chinese are committed to long-term participation in the global economy. On the American side, the Treasury market is more liquid and the budget deficit can be financed at lower cost.

• Best Day of 2005
  Eddy Elfenbein, September 6th, 2006 at 5:09 pm

  Thanks to Donaldson (DCI) gaining 16%, today was our best day of the year against the rest of the market. The S&P 500 was down -0.99%, while the Buy List gained 0.06%.
  For the year, however, we’re still trailing the market 4.16% to 0.65%. Aside from Donaldson, we have three more earnings reports this month. FactSet Research Systems (FDS) reports on September 19. The next day, Biomet (BMET) and Bed Bath & Beyond (BBBY) will report.

• Energy Is Starting to Fade
  Eddy Elfenbein, September 6th, 2006 at 12:59 pm

  The Energy Sector is getting smacked around today, and frankly, it’s long overdue. Two weeks ago, I mentioned how the Dow Jones Oil & Gas Index (^DJUSEN) kept making charges at 500, but the index couldn’t seem to break through. Right after my post, it happened again. The index hit 500, and wham-o—it’s back down again.
  Today oil is down to $68.25 a barrel. Less than two months ago, oil came within a hair of $80. According to GasBuddy.com, prices at the pump have turned sharply lower in the last month. The average price for gas is down about 30 cents a gallon.
  What’s going on here? One of the reasons for the fall in oil prices is that we’re now at the end of the driving season in the U.S. There was also yesterday’s news of the huge oil reserve found in the Gulf of Mexico. Experts are saying it’s the biggest find in a generation. The well was drilled underneath 7,000 feet of water, and then another 20,000 feet of seabed.
  The Oil Services Index ETF (OIH) is down about 2% today. Big energy stocks like Occidental Petroleum (OXY) and Schlumberger (SLB) are down over 3%. So what is doing well? The second-best performer on the NYSE today is our very own Donaldson (DCI).