Archive for 2006

• Homebuilders This Decade
  Eddy Elfenbein, June 5th, 2006 at 3:14 pm

  Here’s how the Dow Jones Home Construction Index (^DJUSHB) has done since the beginning of the decade:
  
  The sector is down about 25% since April 5.

• Easily Pronounced Stocks
  Eddy Elfenbein, June 5th, 2006 at 3:04 pm

  An academic study finds that easily pronounced stocks do better (via the Kirk Report.)

  One explanation might be that bigger companies simply have more marketing people to dream up a catchy title, or certain business sectors may naturally tend towards simpler, more pronounceable names. But after a thorough statistical analysis, the psychologists concluded that there was no link between a company’s type or size and its stock performance.
  To prove the point, the pair finally analysed how well companies performed on the basis of their three-letter stock ticker code, which a company doesn’t determine itself. Amazingly, pronounceable codes such as KAR still tended to do much better than unpronounceable ones such as RDO. Once again, the pair invested their fictitious $1,000, and found that the fluent codes were $85 up on the first day, although the portfolio was just $20 ahead after a year.

• Severance Furniture?
  Eddy Elfenbein, June 5th, 2006 at 12:37 pm

  From Michelle Leder at Footnoted.org:

  Here at footnoted.org, we’ve seen all sorts of strange severance agreements from a plane to a Porsche. But the severance package outlined in this agreement filed by Manntech (MTEX) late Friday is definitely one of the stranger ones.
  That’s because the company’s former chief legal officer apparently asked for — and received — her office furniture as part of the deal. That’s in addition to a consulting agreement that will pay her $10K a month for the next year. Oh, and there’s also her company car thrown in for good measure. But both of those are pretty standard compared to the office furniture, which the filing very specifically spells out as consisting of “the executive desk, executive chair and two side chairs”. There’s no word in the filing on who will foot the moving expenses, but our bet is on Manntech.

• The Refinery Oligopoly
  Eddy Elfenbein, June 5th, 2006 at 12:13 pm

  Here’s James Surowiecki on oil refineries in the latest New Yorker:

  In a normal marketplace, of course, high prices and profits would drive companies to expand, in an attempt to capture more of the market, or else new players would emerge, hoping to outmaneuver a risk-averse establishment. But the refining industry isn’t a normal marketplace. For one thing, refineries are huge investments—a new one costs at least two billion dollars—and they take a long time to open. This means that although refiners might make more money by opening new facilities and thus serving more customers, they’d rather take the sure money than gamble. It also means it’s hard for new competitors to raise enough capital to enter the market at all.
  What’s more, over the past fifteen years refiners have been buying each other up, creating an industry that’s highly consolidated. In 1993, the five biggest refiners in the U.S. controlled thirty-five per cent of the market. By 2004, they controlled fifty-six per cent. And refining is primarily a regional business. The government allows different states to use different formulations of gasoline—some formulations burn cleaner than others—and in some urban areas a federal requirement determines what formula can be used, depending on the quality of their air. That makes it hard to ship gas across state lines, and shrinks the number of refiners that provide a particular blend of gas, giving each refiner more power. As a result, in many areas the refinery business is more like an oligopoly than like a competitive market. In 2002, a Senate report identified “tight oligopolies” operating in twenty-eight states; in California in 2003, ninety-five per cent of the refining market was in the hands of just seven companies.

• The Fall of the Dollar
  Eddy Elfenbein, June 5th, 2006 at 11:57 am

  This chart says it all:
  

• Introducing Condé Nast Portfolio
  Eddy Elfenbein, June 5th, 2006 at 11:30 am

  We knew that Conde Nast was coming out with a new business magazine. We knew that Joanne Lipman was going to be the editor in chief. What we didn’t know was the magazine’s name.
  It was a battle between Quote and Portfolio. Portfolio won.

  Joanne Lipman, the magazine’s editor in chief, said she liked the name because it conveyed several meanings: a corporate portfolio of brands, a personal financial portfolio and a collection of one’s best artwork.
  “It worked on every level for us,” Ms. Lipman said in an interview in her Times Square office. Better yet, she said, the title reflected the magazine’s content.
  “This is serious business journalism — investigative, narrative, profiles — a commitment to long-form journalism, and telling that story with great design and art,” she said. “This is not a lifestyle publication,” she added. “This is a business publication.”

  The first issue is due out next year. Their Web site is www.cnportfolio.com. Gawker, naturally, has more.

• Danaher CEO raises low end of Q2 profit outlook
  Eddy Elfenbein, June 5th, 2006 at 9:53 am

  More good news from Danaher:

  Diversified manufacturer Danaher Corp. expects to report second-quarter earnings of 75 cents a share to 78 cents a share excluding items, President and Chief Executive Officer Lawrence Culp said in a statement on Monday.
  The low end of the forecast was slightly higher than the company’s previous forecast of 73 to 78 cents, Culp said. It came as Culp spoke at an investor conference in New York.

• Meriwether to Get Lifetime Achievement Award
  Eddy Elfenbein, June 5th, 2006 at 7:20 am

  This has got to be a joke.
  John Meriwether, the former head of Long Term Capital Management, is getting the Alternative Investment News‘ 2006 Lifetime Achievement Award.
  Let’s skip over the fact that someone is giving out lifetime achievement awards for hedge fund managers, but John Meriwether???
  This clown not only saw his fund blow up, but nearly took down the global financial system while doing it. That’s an achievement alright.

• More on the P/E Ratio
  Eddy Elfenbein, June 5th, 2006 at 6:11 am

  Barry Ritholtz was kind enough to link to my post about the P/E ratio of the S&P 500 hitting a 10-year low. I have to confess that I wasn’t trying to make a bullish call for stocks. I was simply pointing out that P/E ratios are at a 10-year low. I think it’s fascinating is that the bull market has seen its P/E ratio shrink over time. I believe that’s unprecedented. (Barry included a counter post from Scott Frew.)
  But I want to use this opportunity to make a few important points. The first is that ALL financial measurements are flawed. Some are worse than others. This doesn’t mean we ignore them, but we do have to recognize each one’s limitations.
  Of course, I was the one who raised P/E ratios in the first place so let’s zero is on that one. (Don’t get me wrong: I love the P/E ratio. I love despite the flaws). The first problem is that the P/E ratio mixes two types of data. One number—the price—is a fixed point number, it lives in a specific point in time. Earnings, however, is a rate. It tells how much money was made between two specific points. It’s as if we’re comparing dollars to miles-per-hour.
  This isn’t wholly unkosher, but we do have to look out for pitfalls. For example, P/E ratios often rise at the beginning of a bull market because prices tend to anticipate earnings. (Not only that, prices can even influence earnings.)
  The P/E ratio is also highly dependent on pay out ratios, meaning how much of its profits a company pays to its shareholders (the owners) in the form of dividends. When companies pay out a larger share of their profits as dividends, earnings multiples should be lower. According to Professor Robert Shiller’s latest data, only about one-third of corporate profits are paid out as dividends. That’s very near the lowest percentage in all his data, which stretches back more than 130 years. It’s far lower than 1929 or 1987.
  P/E ratios also influenced by long-term interest rates. This is for two reasons. The first is that borrowing costs are a major business expense, so if the cost of renting money falls, companies will be more profitable. The second, and more important reason, is that bonds compete against stocks for investors’ dollars. So higher bond yields means that stocks have to adjust and offer investors more “bang for the buck,” hence lower earnings multiples. The reverse is true for lower rates. It’s a never-ending battle between bonds and stocks. Periodically, gold likes to jump in the battle, too.
  Twenty-five years ago, long-term Treasury yields climbed over 15%, and it was common to see P/E ratios in the high-single-digits. While bond yields have crept up recently, we’re still in a period of low long-term yield relative to the last thirty years.
  And finally, the P/E ratio is a fine general gauge of market sentiment, but it’s still far from perfect. As Barry said, “cheap stocks can get cheaper.” That’s very true. Also, expensive stocks can get even more expensive. Much more. I’ll give you a good example. According to Dr. Shiller’s data (his P/E ratio data uses trailing earnings for the last 10 years), the P/E ratio reached 26 in February 1996. That was highest reading since October 1929.
  But if you sold out, you would have been kicking yourself. Four years after October 1929, the S&P 500 was down by two-thirds. But four years after February 1996, the S&P had doubled. Thanks for nothing Mr. P/E Ratio!
  As long-time readers know, I’m a perma-bull. This doesn’t mean I’m always bullish. It just means that I avoid timing the market. When you realize how many different variables affect the market stock, it’s simply overwhelming. The moral of the story is to look at all financial data, but don’t be a slave to any.

• Bon Voyonage
  Eddy Elfenbein, June 4th, 2006 at 12:04 am

  The WSJ looks at why the Vonage IPO sucked. In other news, Vonage sucks.

  In response to some written questions yesterday, the company said the IPO wasn’t mishandled and that it will not be deterred “from executing on our business plan and serving our customers.” The company also noted that it remains under a legally mandated quiet period.

  (Wince.)
  Update: Here come the lawsuits.