Archive for 2006

• It’s Earnings Time
  Eddy Elfenbein, July 20th, 2006 at 4:21 pm

  Three of our Buy List stocks reported earnings today. Here’s the rundown.
  Danaher (DHR) earned, after a few icky charges, 80 cents per share, two pennies more than estimates. The company also raised its estimate range for the year from $3.07 to $3.17 a share, to $3.15 to $3.22 a share.
  I never say I love a stock, but I’m in seriously like with Danaher. The company pegged third-quarter earnings at 77 cents a share to 82 cents a share. The shares gapped up to $65 this morning.
  SEI Investments (SEIC) earned 57 cents a share, also two cents more than estimates. The stock pulled back today, but it had a big day yesterday. The stock is our second-best performer year-to-date.
  Finally, Golden West Financial (GDW) earned $1.25 a share which was four cents below estimates. The stock is down, but there’s not too much to worry about. Since Wachovia (WB) announced the merger, shares of GDW have traded as a proxy for shares of WB. Wachovia, incidentally, reported earnings of $1.18 a share, three cents ahead of estimates.

• The Bambi Cam
  Eddy Elfenbein, July 20th, 2006 at 12:41 pm

  Marketwatch’s tech writer, Bambi Francisco, is in France right now cycling behind the Tour de France.
  Check out these videos she made (here, here and here) from her helmet camera.

• Is the United States Going Bankrupt?
  Eddy Elfenbein, July 20th, 2006 at 11:55 am

  “Come on little girl let your inhibitions run wild!”
  Rod Stewart in Tonight’s The Night (Gonna Be Alright)

  I’ve always admired that lyric. It’s not merely a malapropism, but it goes a step further. It means the exact opposite of what the songwriter intended. You have to admire that.
  I think of this because of the latest academic paper making the rounds. Laurence J. Kotlikoff is wondering if the United States is going bankrupt in his paper called, “Is the United States Going Bankrupt?” I think you pretty much know his answer right now.
  If you pay careful attention you’ll notice that the U.S. is perpetually going bankrupt. Yet strangely, financial crises always seem to happen somewhere else.
  Dr. Kotlikoff makes the sound point that when looking at our financial health, we ought to focus on future liabilities instead of current debt or cash flow. That’s true. I can add an even better way to look at our financial health is to look at our credit-rating. While the credit rating agencies do examine our national debt, the ultimate rating agency does this every day—the free market. Think of the Treasury market as a national FICO score.
  The markets judge America’s fiscal health in the pricing of government debt. Despite all the dire predictions of looming disaster, interest rates on U.S. Treasuries are still quite reasonable. Not that long ago, we would have thought 5% T-Bonds were an impossibility. Now we’re used to them. If we were really in serious trouble, wouldn’t that show up in Treasury prices? Maybe the market is just plain wrong. Yet investors all over the world are eager to lend us money, and that only makes our financial health even sounder.
  Kotlikoff cites a study by Gokhale and Smetters that pegs our “fiscal gap” at $65.9 billion. He then writes: “This figure is more than five times U.S. GDP and almost twice the size of national wealth.” Wait a second. If that’s true, then our national wealth is 2.5 times our GDP. In other words, we’re generating a return-on-equity of 40%. (Of course, this is outlandish, but it’s not my numbers.)
  If we have an ROE of 40% and we can borrow at 5%, doesn’t that mean the U.S. is dramatically underleveraged. Don’t tell Congress. I’d rather not even discuss their inhibitions.
  These analyses usually focus on our looming debt, but they ignore the other part of the picture—our assets. This is what Gary Alexander wrote on this site earlier this year:

  Household wealth refers to household assets minus liabilities. In the Doomsday press, all you read about is the near-$10 trillion in household debts, but have you heard anyone quote the $61 trillion in gross assets, six times the debt totals, resulting in net assets of $51 trillion (61 minus 10). In the 2.5 years since the 2003 tax cut, per capita net worth has increased 16%, and the average household is now 27% better off than in 1998, in the middle of the stock market bubble. And U.S. household wealth has almost doubled since 1995. That’s not counting business, which controls an $11 trillion “savings glut” of hoarded cash.

  As for me, I’ll stick with the free market’s judgment.

• Department of Irony
  Eddy Elfenbein, July 20th, 2006 at 7:12 am

  Stephen Roach questions Ben Bernanke’s credibility.
  This raises two important questions.
  1. What the fuck?
  2. No, seriously…what the fuck?
  For more on Roach, see “Wall Street’s Worst Economist” and “Even Roach is bullish, so is it time to sell?”
  The answer to the latter question was yes. Roach mistimed the market perfectly. Again.

• Lost in Translation
  Eddy Elfenbein, July 20th, 2006 at 7:03 am

  
  The Washington Post provides this handy graphic detailing the market’s and Bernanke’s communication issues.

• I Totally Called Yesterday’s Surge In Tech Stocks!
  Eddy Elfenbein, July 20th, 2006 at 6:22 am

  
  By Geoffrey Fox:

  You all think you’re hot shit because you guessed that the dollar would continue to slide against the euro, but answer me this: Who totally called yesterday’s 0.4 percent surge in technology stock valuations, in spite of their inflated P/E ratio? Who defied conventional wisdom and foresaw the late-afternoon rally after a morning of relatively tepid technology trading? Who is the fucking man? If you said “Geoffrey Fox,” you are correct.

  (more…)

• The Ben Rally
  Eddy Elfenbein, July 19th, 2006 at 5:05 pm

  The stock market had a major surge today for the third time in the past five weeks. Today was our Buy List’s best day of the year. We gained 2.5%.
  Here’s the rundown:
  DELL……………5.29%
  UNH…………….5.23%
  DHR…………….3.73%
  HD………………3.68%
  EXPD……………3.13%
  RESP……………3.03%
  FIC………………2.91%
  BMET……………2.89%
  SEIC……………2.88%
  FDS…………….2.32%
  VAR…………….2.26%
  BRO…………….2.25%
  GDW……………2.24%
  DCI……………..2.14%
  AFL……………..1.98%
  BBBY……………1.27%
  FISV……………1.16%
  HDI…………….1.14%
  MDT…………….1.14%
  SYY……………..0.00%

• UnitedHealth’s Earnings
  Eddy Elfenbein, July 19th, 2006 at 2:33 pm

  UnitedHealth (UNH) posted earnings of 70 cents a share, two cents more than estimates. The company also guided higher for the year.

  UnitedHealth, the largest managed-care company in terms of revenue, is the first such provider to report each earnings season and is typically seen as a harbinger for the rest of the industry. UnitedHealth’s steady gains in health-plan enrollment, higher premiums and still-moderate medical cost growth seemed to allay investor concerns that a price war among health insurers is breaking out anytime soon.
  Investors have wondered about the direction of health insurers’ profits for some time. With the overall market for employer-financed health care stagnant, many insurers are struggling to gain new business without cutting into the robust profit margins that they have enjoyed in recent years.
  But while price competition has gotten much more heated in health-insurance markets such as New Jersey and Florida, UnitedHealth’s chief executive, William McGuire, said there are few signs of a price war in most other places. Enrollment in the company’s fully insured health plans (as opposed to the ones it administers for employers for a fee) did fall by 45,000 members. But much of that decline was due to the sale of some businesses to satisfy regulatory requirements for its PacifiCare acquisition. Otherwise, its overall health-plan membership climbed by 180,000 to 28.3 million enrollees from the first quarter.
  In the earnings report and on a conference call with analysts, UnitedHealth executives steered clear of discussing the inquiries into past stock-option grants to top company executives, including Dr. McGuire. Since questions over the timing of some of those grants first surfaced in March, federal prosecutors, the Securities and Exchange Commission and the company’s board have launched separate inquires, and UnitedHealth has said it may have to restate as much as $286 million in earnings over the past three years.

  The shares are up about 5% today.

• Earnings Champions
  Eddy Elfenbein, July 19th, 2006 at 2:16 pm

  The following stocks have had 10 straight years of increasing earnings:
  NVR (NVR)
  Apollo Group (APOL)
  Moog (MOGA)
  Dollar Tree Stores (DLTR)
  Bed Bath & Beyond (BBBY)
  Compass Bancshares (CBSS)
  City National (CYN)
  Donaldson (DCI)
  Ross Stores (ROST)
  SEI Investments (SEIC)
  Expeditors International (EXPD)
  Toll Brothers (TOL)
  Patterson Companies (PDCO)
  Lincare Holdings (LNCR)
  Home Depot (HD)
  Health Mgmt Assoc (HMA)
  Knight Trans (KNX)
  Harley-Davidson (HDI)
  Paychex (PAYX)
  Applebee’s (APPB)
  Brown & Brown (BRO)
  O’Reilly Automotive (ORLY)
  Hilb Rogal & Hobbs (HRH)
  Heartland Express (HTLD)
  Capital One Financial (COF)
  Copart (CPRT)
  Walgreen (WAG)
  Sysco (SYY)
  Wal-Mart (WMT)
  D.R. Horton (DHI)
  Synovus Financial (SNV)
  General Electric (GE)
  Cathay Gen Bancorp (CATY)
  Trustco Bank Corp (TRST)
  Notice a lot of names from our Buy List.

• Fed Blogging
  Eddy Elfenbein, July 19th, 2006 at 9:40 am

  
  This might be an Internet first but I’m live blogging Ben Barnanke’s Humphrey-Hawkins testimony.
  In 1978, Congress passed the Humphrey-Hawkins Full Employment Act. Most of the bill’s original aims were stripped out, but one important development did come about. The chairman of the Federal Reserve is now required to testify on Capitol Hill twice a year. Before that, most Americans had little idea what the Fed was, what it did and who was in charge. Perhaps, they still don’t, but still, the Fed chairman must make twice-a-year visits to Congress.
  This usually happens once in the middle of summer and again in the middle of winter. Today is summer’s turn (and DC is in the midst of a blistering heat wave). Bernanke starts today in the Senate Banking Committee and tomorrow, he heads over to the House Financial Services Committee.
  The Chairman of the Banking Committee is Richard Shelby, a Republican from Alabama, although he started off his career as a Democrat. The hearings usually start off with some comments by committee members, then Bernanke’s testimony, and finally some questions from the senators. There’s also an accompanying report on monetary policy on the Fed’s Web site.
  The senator’s questions are often pretty embarrassing. The fact is, monetary policy is far less influential than many people realize. Sorry folks, but it won’t improve your golf swing. The members of Congress used to ask Alan Greenspan his opinion of everything. These guys are just bureaucrats—smart bureaucrats—but still bureaucrats. Jim Grant said that the Fed has two functions; set interest rates and give speeches. That’s about right.
  This testimony will receive particular scrutiny since it appears that the Fed’s interest rate campaign is coming to an end. Or perhaps, it’s merely a temporary pause. Over the last two years, the Fed has raised the Fed funds rate by 0.25% for the 17 straight meetings. The rate has climbed from just 1% to 5.25%. We’re now at the point where the overnight rate is roughly equal to long-term rates. In other words, the yield curve is flat.
  The yield curve is vitally important to the financial community. When the yield curve is wide (short-term rates are below long-term rates), it’s easy for banks to make money. Just borrow from the Fed and buy long-term Treasury bonds. You keep the difference. In Vegas, this is known as the “vig.”
  When the yield curve narrows, or even inverts, it becomes much harder for banks to make money. Banks become far more selective in making their loans. Not surprisingly, an inverted yield curve is often a warning sign of a slowing economy.
  The futures maket indicates that Wall Street is evenly split on the Fed’s next move. Historically, the stock market loves declining rates and hates rising rates. It almost doesn’t mind the level, just the direction. The next Fed meeting will be on August 8, and I think a pause from the Fed could spark a rally. That’s why today’s testimony is so important.
  One of the problems of monetary policy is that to work, it has to be secret. So we want to know everything that the Fed is thinking, but please don’t tell anyone. The FOMC meetings are private. The minutes are released three weeks later, and the transcripts are released five years later. As a result, every public utterance is a potential clue for what Bernanke is thinking. A few weeks ago, he made some comments to Maria Bartiromo at a dinner party and it moved the market. I think he’s learned not to do that again.
  Here goes:
  9:53: I made it! I’m in the (air-conditioned) Dirksen Senate Building.
  Two young aides are talking right by me. One asked the other if he went to see John Roberts yesterday. The guy said yes, and the first asked if it was “cool.” Apparently, it was. Yep, I’m in DC.
  9:57: Dude, I totally got an awesome seat. Third row inside aisle baby. Benny will be like twelve feet from me. This is better than my first Dead show. This is so cool! (Wait…did I just write that?)
  10:03: Benny is in the house! Dark suit. I guessed right. He’s sitting at the table and there’s like eight photographers snapping away in his face. He’s right next to me. Turn on your TV. I’m the guy three rows directly behind him. Look, I’m waving.
  10:05 Shelby has gaveled the meeting to order. It’s showtime!
  10:10: The senators are making their opening statements. Ugh. Here’s something you don’t see on TV. Senator Sarbanes is talking, but Senator Carper is yakking away with everyone around him. He’s jumping all around. There are aides walking in and out all the time. Did you know that Congress is really run by aides who look 12 years old, and think John Roberts is cool?
  10:24 Senator Bunning is reading his opening statment. He’s really laying into Ben. He’s “disappointed” with the rate hikes. Where’s the inflation, says he. This is very strange because he’s passionate but his public reading skills are extremely poor.
  10:32 Elizabeth Dole is making her opening statement. She seems really nice. Eight GOP members showed up to just four Democrats. The Dems are taking turns criticizing the economy.
  10:41: Senator Carper said that Bernanke is a rare witness who actually listens to the opening remarks. He said that cabinet members just look at their blackberries or read the paper. Ben is taking notes and everything. Such a good boy.
  10:43: Ben has much less hair than I thought. That’s not a criticism. Just something I noticed.
  10:45: Dodd just showed up, now it’s eight to five. By the way, senators now use charts to make their points. So you have a twelve-year-old aide hold up some big chart while you talk. Where do they make the charts? Is there like a Kinko’s in the basement?
  10:49: Now it’s Benny’s turn. This is from the Fed’s Web site which seems to be following closely.

  The U.S. economy continued to expand at a brisk rate, on balance, over the first half of 2006. Spending in the first quarter, which was especially robust, was temporarily buoyed by several factors, including federal spending for hurricane relief and the effects of favorable weather on homebuilding. The pace of the expansion moderated in the spring, to some degree because the influence of these special factors dissipated. More fundamentally, consumer spending slowed as further increases in energy prices restrained the real incomes of households. In addition, home sales and new homebuilding dropped back noticeably from the elevated levels of last summer, partly in response to higher mortgage interest rates. Outside of the household sector, increases in demand and production appear to have been well maintained in the second quarter. Demand for U.S. exports was supported by strong economic activity abroad, and business fixed investment remained on a solid upward trend. Early in the year, as aggregate output increased rapidly, businesses added jobs at a relatively robust pace, and the unemployment rate moved down further. Since April, monthly gains in payroll employment have been smaller but still sufficient to keep the jobless rate steady.
  Thus far in 2006, inflation pressures have been elevated. Higher prices for crude oil contributed to a further run-up in domestic energy costs; this year’s increases, combined with the steep increases in 2004 and 2005, not only boosted the prices of gasoline and heating fuel but also put upward pressure on the costs of production for a broad range of goods and services. Partly as a result of these cost pressures, the rate of core consumer price inflation picked up. Nevertheless, measures of inflation expectations remained contained, and the rate of increase in labor costs was subdued, having been held down by strong gains in productivity and moderate increases in labor compensation.
  Taking a longer perspective, the U.S. economy appears to be in the midst of a transition in which the rate of increase in real gross domestic product (GDP) is moving from a pace above that of its longer-run capacity to a more moderate and sustainable rate. An important element in the transition is the lagged effect of the changes in monetary policy since mid-2004, changes that have been intended to keep inflation low and to promote sustainable economic expansion by aligning real economic activity more closely with the economy’s productive potential. Moreover, longer-term interest rates have risen, contributing to increased borrowing costs for both households and businesses. Over time, pressures on inflation should abate as the pace of real activity moderates and, as futures markets suggest, the prices of energy and other commodities roughly stabilize. The resulting easing in inflation should help contain long-run inflation expectations.

  Ok, here’s the money part:

  For inflation, the central tendency of the forecasts is an increase in the price index for personal consumption expenditures excluding food and energy (core PCE) of 2-1/4 percent to 2-1/2 percent over the four quarters of 2006; in 2007, the forecast shows a slower rate of 2 percent to 2-1/4 percent, which is similar to the rate of core PCE price inflation in 2004 and 2005.

  There’s much more, but that gives you a feel.
  I’m surprised the Fed has such a bold prediction of slowing core inflation. Here’s a chart I did last month of core and non-core inflation. The trend seems to be upward.
  11:16: He’s done. That was faster than I thought. Ben has a clean delivery. He strikes me as a no-nonsense guy.
  11:18: It’s question time!
  11:37: Here’s another thing you don’t see on TV. Ben and the senators have this little clock thing in front of them with a light thing. The question time starts at 10 minutes with a green light and counts down. When the time hits one minute, the light turns yellow. And when time runs out, the light goes red. This seems to be rather liberally enforced. Sarbanes ran a full minute over. If I ran the committe, I’d have it like the Oscars and strike up the band when people run over. I can see Ben’s clock right in front of me. Here, I’ll wave again (did you see me?).
  11:52: Yikes, my battery is dying. Let’s just ignore the metaphorical implications. I’m going to power down for a few minutes.
  12:23: I’m up again. Yuck, these questions are boring. I think everyone heree is worried about home prices. Now my stomach is growling. I hope nobody heard that.
  12:37: We’re done. Shelby just gaveled us out.
  12:42: Wow! I just checked the market and we’re rolling. The Dow is up 150! Benny’s got to talk this way more often.