Archive for December, 2006

• Slowing Growth or Inflation?
  Eddy Elfenbein, December 13th, 2006 at 8:23 pm

  For this week’s Blogger’s Take, Barry Ritholtz posits: “Given the concerns raised by the Fed, what is really the bigger threat to the economy: Slowing Growth or Inflation?”
  Here’s my answer:

  Slowing growth is more important, by far. Through its history, the Fed has basically perfected the art of killing off growth. Stopping inflation? Eh…not so much. In fact, I would say that slowing growth is itself an inflation threat. Personally, I’d like to see the Federal Reserve much less federal, and far more reserved. Monetary policy is always and everywhere a human phenomenon.
  As a general rule, $13 trillion economies don’t start or stop on a dime. Since 1990, when one quarter of GDP growth is above trend (3%), there’s a 60% chance that the following quarter will also be above trend. Conversely, when growth falls below trend, there’s a 64% chance that the following quarter will also be below trend.
  In other words, once you’re stuck in slow growth, it’s hard to break out. During the last recession, we had 11 straight below-trend quarters. We finally broke out, but now the outlook is looking shaky. The last two quarters, and three of the last four, have been below trend.
  Inflation, on the other hand, is—and has been—well contained. The 12-month core CPI has bounced between 1% and 3% for ten straight years. Not once has it left that range. And it’s been over 15 years since it hit 4%, which was during a period of below-trend growth. That’s not a coincidence.

  Other bloggers weighing in include Rob May of Businesspundit.com, Abnormal Returns, Mike Shedlock of Mish’s Global Economic Trend Analysis and Russ Winter of Winter (Economic & Market) Watch.

• Lindsay & the Pacemakers
  Eddy Elfenbein, December 13th, 2006 at 9:09 am

  Today, WallStrip looks at Medtronic (MDT).
  
  Medtronic is simply an amazing company. The medical device maker has increased its dividend every year for the past 28 straight years! In the last 40 years, Medtronic’s stock has split 2-for-1 ten times. That turned every one share into 1,024 shares.
  Ah, but what have you done for me lately? Well, for starters, three weeks ago the company gave us another great earnings report. For the October quarter, MDT made 59 cents a share, three cents more than Wall Street was expecting.
  More importantly (in my mind), Medtronic stood by its earnings forecast for FY2007 and FY2008 (its fiscal year ends in April). For 2007, MDT expects earnings-per-share to range from $2.30 to $2.38. And in 2008, it expects EPS of $2.65 to $2.75. Trust me, not many companies make public forecasts like that.
  This was actually a reiteration of an earlier projection. I always like to see companies stand by their forecasts. This is especially important in Medtronic’s case because the stock’s relative valuation has dropped sharply this year.
  Shares of Medtronic routinely traded above 25 times earnings. But this summer, the stock plunged to a four-year low, even as its earnings and dividends continued to grow. Check out this graph:
  
  The black line (left scale) is the share price, and the blue line is the earnings (right scale). The red is the company’s projection. The two sides of the chart are set at 25-to-1. If anything, the lower end of the forecast appears to be very conservative.
  You can see that the stock really got smacked around. The good news is that its been recovering, but even a $60 share price today would still been on the modest side by historical standards.
  While the P/E ratios have narrowed in general for the overall market, the effect has been even greater on Medtronic. Here’s a chart showing MDT’s P/E compared with the S&P 500.
  
  Here’s Medtronic’s relative P/E ratio, which is probably one of the purest measures of values. The relative P/E ratio is simply the company’s P/E divided by the market’s P/E. Medtronic would often carry an earnings multiple 50% to 70% greater than the market’s. Today, that’s down to 44%, but it’s higher than where it was.
  
  Here are Medtronic’s numbers for the past several quarters:
  Quarter………..EPS………….Sales
  Jul-01…………$0.28………..$1,455.70
  Oct-01………..$0.29………..$1,571.00
  Jan-02………..$0.30………..$1,592.00
  Apr-02………..$0.34………..$1,792.00
  Jul-02…………$0.32………..$1,713.90
  Oct-02………..$0.34………..$1,891.00
  Jan-03………..$0.35………..$1,912.50
  Apr-03………..$0.40………..$2,148.00
  Jul-03…………$0.37………..$2,064.20
  Oct-03………..$0.39………..$2,163.80
  Jan-04………..$0.40………..$2,193.80
  Apr-04………..$0.48………..$2,665.40
  Jul-04…………$0.43………..$2,346.10
  Oct-04………..$0.44………..$2,399.80
  Jan-05………..$0.46………..$2,530.70
  Apr-05………..$0.53………..$2,778.00
  Jul-05…………$0.50………..$2,690.40
  Oct-05………..$0.54………..$2,765.40
  Jan-06………..$0.55………..$2,769.50
  Apr-06………..$0.62………..$3,066.70
  Jul-06…………$0.55………..$2,897.00
  Oct-06………..$0.59………..$3,075.00

• Happy Birthday, Mr. Chairman
  Eddy Elfenbein, December 13th, 2006 at 8:44 am

  Ben Bernanke turns 53.
  

• “Substantial”
  Eddy Elfenbein, December 12th, 2006 at 2:15 pm

  For the fourth straight meeting, the Federal Reserve didn’t change interest rates. Here’s the statement:

  The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent.
  Economic growth has slowed over the course of the year, partly reflecting a substantial (NEW!) cooling of the housing market. Although recent indicators have been mixed (also new), the economy seems likely to expand at a moderate pace on balance over coming quarters.
  Readings on core inflation have been elevated, and the high level of resource utilization has the potential to sustain inflation pressures. However, inflation pressures seem likely to moderate over time, reflecting reduced impetus from energy prices, contained inflation expectations, and the cumulative effects of monetary policy actions and other factors restraining aggregate demand.
  Nonetheless, the Committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.
  Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; William Poole; Kevin M. Warsh; and Janet L. Yellen. Voting against was Jeffrey M. Lacker, who preferred an increase of 25 basis points in the federal funds rate target at this meeting.

  The “substantial” is new. That sounds like there was some debate about that one. If I had to guess, I’d say there was some debate at previous meetings. The “although recent indicators have been mixed” used to be just “going foward.” That entire sentence was added last time.
  The vote was the same as in October. Jeffrey Lacker wanted higher rates for the fourth straight time. This is Lacker’s last meeting with a vote as the chairs rotate at the end of the year. Hoenig, Minehan and Moskow will get votes at the next meeting in January.
  It’s now been over five months since the Fed last raised rates. It’s not unusual for the Fed to cut rates so soon after a series of increases. The Fed cut rates in July 1995, less than five months after an increase. And at the start of 2001, the Fed lowered rates seven months after an increase.
  Real rates are still rather modest for an economic expansion.
  

• Breaking: Transcript of Today’s Fed Meeting
  Eddy Elfenbein, December 12th, 2006 at 1:45 pm

  I’m afraid I can’t disclose my sources, but I got hold of a transcript of today’s FOMC meeting.
  I’ll warn you, it’s a bit rough:

  (more…)

• Goldman’s Profits Up 93%
  Eddy Elfenbein, December 12th, 2006 at 10:00 am

  Another blow-out quarter for Goldman Sachs (GS).
  
  The famous Price/Earnings Ratio comes under frequent attack, but you can see from the chart Goldman’s stock has followed its earnings rather closely. Goldman just capped off the most profitable quarter in Wall Street history. The firm made $3.15 billion in the November quarter, nearly doubling what it made last year. Revenues soared 47% to $9.41 billion. All told, Goldman made $6.59 a share, which beat Wall Street’s consensus by 42 cents. Once again, the profits were driven by trading:

  Fourth-quarter trading revenue rose 55 percent to $5.24 billion, accounting for more than half of the firm’s income. Revenue from fixed-income, currencies and commodities trading rose 58 percent to $3.1 billion, including the Accordia gain. Equities trading revenue jumped 52 percent to $2.13 billion.

  By the way, if you’re interested in working for Goldman, you can take their “where do I fit in” quiz. Good luck!

• Jim Cramer–Cub Reporter
  Eddy Elfenbein, December 11th, 2006 at 4:53 pm

  Way back when, Jim Cramer used to be president of the Harvard Crimson. The paper has all of his stories archived online.
  Here’s JJC’s very first article, from March 16, 1974, about being a vendor at the Vet. Apparently, he’s always had the heart of a trader.

  As soon as the 1973 campaign began, I rushed down to Veteran’s Stadium to watch not the Phillies, but the professional vendors. I noticed two types of real hawkers: the 40-year veterans who sell year-round, and the college kids from the Mainline area who work from May to September. I realized I couldn’t vie with the aging hustlers. These lower-deck professionals had techniques and aisle space-rights not to be violated by any rookie.
  So I decided to go to the lucrative upper-deck trade and challenge the successful students. I went to the upper deck commissary and demanded to sell hotdogs. I hoped to combine the style of Veteran’s Stadium fixture Charlie “Hotdog” Frank and the hustle of the nouveau-riche dog-men. Nevertheless, lacking the seniority to sell the high-profit-margin dogs, I settled back to the 35-cent cokes and prayed for an instant heat wave.

  This just in, Carter beat Ford.

• Bambi on What Yahoo Did Wrong
  Eddy Elfenbein, December 11th, 2006 at 3:51 pm

  Bambi Francisco does a good take down on how Yahoo (YHOO) missed, and keeps missing, the ball.

• Craig’s List: Delightfully Communist
  Eddy Elfenbein, December 11th, 2006 at 12:58 pm

  DealBook writes about the appearance of Craig’s List at the UBS global media conference.
  When one analyst asked how CL plans to maximize its revenue, the company said, “um yeah, we’re really not interested in that stuff.”
  A riot nearly broke out.

  Following the meeting, Mr. Schachter wrote a research note, flagged by Tech Trader Daily, which suggests that he still doesn’t quite get the concept of serving customers first, and worrying about revenues later, if at all (and nevermind profits). Craigslist, the analyst wrote, “does not fully monetize its traffic or services.”
  Mr. Buckmaster said the company is doubling in size every year, as measured by page views and listings.
  Larry Dignan, writing on Between the Lines blog at ZDNet, called Mr. Buckmaster “delightfully communist,” and described the audience as “confused capitalists wondering how a company can exist without the urge to maximize profits.”

  A Web site that doens’t run ads? What-EVER!

• Smith & Nephew Poised to Bid for Biomet
  Eddy Elfenbein, December 11th, 2006 at 10:32 am

  Whoa, this is big. The Financial Time‘s Alphaville is reporting that Smith & Nephew is in merger talks with Biomet (BMET). Coming after Golden West Financial, this would be our second Buy List merger of the year.

  Smith & Nephew is in preliminary merger discussions with Biomet, its US rival best known for its artificial hips and other replacement joints, in a deal that could double the size of the British healthcare group. While sources stressed last night that the talks were at a very early stage, the deal is aimed at creating an orthopaedic specialist worth up to $20bn and capable of competing against the US sector leaders, Zimmer and Stryker.
  Morgan Stanley, Biomet’s financial adviser, was drafted in to work on the company’s options in the spring following the sudden resignation of its co-founder and president, Dane Miller. Biomet is believed to have also held discussions with JPMorgan private equity.
  S&N is valued at £4.8bn ($9.2bn), while Biomet’s market cap is $8.9bn. S&N would likely demerge Biomet’s dental business, which has been valued at $2bn. Zimmer has been mooted as a possible buyer.

  Biomet is up big today. My hope is that they accept nothing less than $45 a share.