Archive for April, 2007

• Sysco’s Earnings
  Eddy Elfenbein, April 30th, 2007 at 11:49 pm

  The Dow was in the black for much of Monday, but after about 2:30, it slipped into negative territory and eventually finished 58 points lower. That ended the Dow’s chances of marking an historic first—20 of 22 up days.
  Before the bell, Sysco (SYY) reported earnings of 35 cents a share. That was a nice improvement over last year’s total of 30 cents, but it was a penny short of Wall Street’s forecast. The market wasn’t pleased and the shares tumbled 4.6% lower. That seems like an overreaction. Nothing seems to be going Sysco’s way this year. The stock is down nearly 11% for 2007. That’s unusual for a stock that’s historically been so stable.
  I also noticed that our favorite micro-cap, Nicholas Financial (NICK), seems to be waking up. The stock doesn’t normally move very much, but it rose 4% on Friday and another 2.6% today. That’s a lot for NICK. Both days had much higher-than-normal trading volume. The company should be reporting earnings soon, but it hasn’t said what day yet.

• 20 of 22 Up Days for the Dow
  Eddy Elfenbein, April 30th, 2007 at 11:02 am

  The Dow is currently up 22 points. If this holds, it will be the first time in the Dow’s 111-year history that it rallied 20 times in 22 sessions.

• Wanted: Berkshire CIO
  Eddy Elfenbein, April 30th, 2007 at 8:13 am

  Get your resumes in!
  Warren Buffett is hiring his replacement:

  With Mr. Munger’s help, Mr. Buffett will whittle down the current contenders to about 20 “real possibilities,” he says, adding that he’ll start reading the letters in earnest after Berkshire’s annual shareholders’ meeting next weekend. From those 20, he will ask for personal investment records going back at least 10 years. Then, after determining whether “the general attitude toward purchase and sale of securities is compatible” with Berkshire, he will fill the job with either one or two people. He plans to hand them up to $10 billion to manage until it is time for them to take over the entire portfolio.
  Mr. Buffett explains that the purpose of the trial run is “to see if their decision-making apparatus works out, hopefully while I’m still alive.”
  What it isn’t, however, is a mentorship program, something many applicants have misinterpreted. He says he isn’t looking for someone to teach, but “for someone who already knows how to do it.”
  The misunderstanding is reflected in dozens of letters from students, professional investors and a surprising number of engineers and lawyers hoping to be apprenticed to the master. “I assure you,” wrote one 20-year-old college student, “although I may be short on experience, I am very long on potential.” A lawyer in Oregon recommended his four-year-old son, characterizing the toddler as a “great negotiator” on issues such as “bedtime, chores, allowance, baths, etc.”

• Erin Brockovich, Corporate Exec
  Eddy Elfenbein, April 30th, 2007 at 7:47 am

  
  Here’s a strange one. Remember that Erin Brockovich chick? Julia Roberts got an Oscar for playing her. Anyway, it turns out she’s now a veep at Save the World Air Inc. (ZEROE.OB).
  No, I’m serious.
  (Via Altucher & Stockerblog.)

• Taxes around the World.
  Eddy Elfenbein, April 28th, 2007 at 10:15 pm

  Citizens for Tax Justice looks at taxes around the world.
  
  (Via Greg Mankiw.)

• Euro So Beautiful
  Eddy Elfenbein, April 28th, 2007 at 10:04 pm

  The euro hit a record high against the dollar. Jurgen Reinhoudt says this is good for the prestige of Europe, but not so good for its economy:

  If the Euro eclipses the U.S. dollar as a reserve currency, the value of the Euro could appreciate still further, making European exports even more expensive than they are now (in addition to causing severe troubles for the United States). In French political terms, this would be a highly undesirable development given that “an exchange rate of $1.40 would endanger” the survival of Airbus. As Airbus struggles “to meet $220bn of dollar contracts from an operation with euro labour costs,” the heat is on. No French political leader would tolerate Airbus going bankrupt, certainly not if a bankruptcy were caused by a European exchange rate considered to be abnormally high.
  But a Euro worth more than $1.40 (or even $1.50) would not just be problematic for Airbus or French exporters. True, Germany and countries that are economically closely linked to it (such as the Netherlands) have the ability to withstand the pressure of an expensive Euro, but France, Spain, and Italy do not.
  A Euro worth more than $1.40 would cause significant difficulties for Mediterranean countries in general—potentially re-launching the political debate over the mandate of the European Central Bank, something that both Sarkozy and Royal have hinted at.
  Unlike the American Fed, which has as a goal to keep growth high, unemployment low, and inflation low, the task of the European Central Bank is simply to keep inflation low, even if this adversely affects economic growth. If European growth were to falter and the Euro were to rise even further in value, many politicians from Southern Europe and France will put heavy pressure on the ECB to lower interest rates. This would lower the value of the Euro but also lead to higher inflation, the mortal enemy of the ECB. It would have all the makings of a fascinating financial feud.
  The discomfort brought about by the Euro’s “low” value to the dollar was mostly a matter of prestige. Now that the Euro is worth far more than the dollar and still rising in prestige (and value), its value is becoming a matter of tangible economic and political concern. Stay tuned.

• 65 Years Ago Today
  Eddy Elfenbein, April 27th, 2007 at 2:01 pm

  This is a big year for stock market history buffs. In 2007, we’re celebrating the 100th anniversary of the Panic of 1907 (okay, maybe not celebrate), the 75th anniversary of the 1932 low, the 25th anniversary of the 1982 bull market and the 20th anniversary of the 1987 crash. It’s also been five years since the 2002 low and ten years since the East Asian financial crisis. All in all, happy times for the market history crowd.

  Tomorrow will mark another milestone—65 years since the 1942 low. On April 28, 1942, The Dow bottomed at 92.92.

  That’s not just low. It’s low, low, loooow. The market was still reeling from Pearl Harbor, and the country was starting to realize how much work lay ahead. The only good news was Jimmy Doolittle’s daring raid over Tokyo ten days before.

  But think about how investors must have felt. This was 13 years after 1929, yet the market was still just one-quarter of its peak. The Dow was even 10% below its level from January 1906, more than 36 years before! That would be like the Dow today trying to break 770.

  The night, FDR gave a fireside chat detailing his economic policy for the war. This is part of what he said:

  You do not have to be a professor of mathematics or economics to see that if people with plenty of cash start bidding against each other for scarce goods, the price of those goods (them) goes up.

  Yesterday I submitted to the Congress of the United states a seven-point program, a program of general principles which taken together could be called the national economic policy for attaining the great objective of keeping the cost of living down. I repeat them now to you in substance:

  First. we must, through heavier taxes, keep personal and corporate profits at a low reasonable rate.

  Second. We must fix ceilings on prices and rents.

  Third. We must stabilize wages.

  Fourth. We must stabilize farm prices.

  Fifth. We must put more billions into War Bonds.

  Sixth. We must ration all essential commodities which are scarce.

  Seventh. We must discourage installment buying, and encourage paying off debts and mortgages.

  I do not think it is necessary to repeat what I said yesterday to the Congress in discussing these general principles. The important thing to remember is that earn one of these points is dependent on the others if the whole program is to work.

  Some people are already taking the position that every one of the seven points is correct except the one point which steps on their own individual toes. A few seem very willing to approve self-denial — on the part of their neighbors. The only effective course of action is a simultaneous attack on all of the factors which increase the cost of living, in one comprehensive, all-embracing program covering prices, and profits, and wages, and taxes and debts.

  The blunt fact is that every single person in the United States is going to be affected by this program. Some of you will be affected more directly by one or two of these restrictive measures, but all of you will be affected indirectly by all of them. Are you a business man, or do you own stock in a business corporation? Well, your profits are going to be cut down to a reasonably low level by taxation. Your income will be subject to higher taxes. Indeed in these days, when every available dollar should go to the war effort, I do not think that any American citizen should have a net income in excess of $25,000 per year after payment of taxes.

  Good golly! Can you imagine any politician giving a speech like that?

  In today’s terms, $25,000 is about $315,000.

  I would hardly say this speech was the catalyst, but the market did indeed take off. This was probably the greatest long-term bull market in history.

  Within two years, the Dow was up 50%, and it doubled by 1945. By 1955, the Dow was up fivefold, and it doubled again ten years later. The market really didn’t see any pause until 1966 when inflation started to have a major impact. Twenty four years after FDR’s speech, the Dow had advanced close to 1,000% and that’s not counting dividends.

• First-Quarter GDP Report
  Eddy Elfenbein, April 27th, 2007 at 9:53 am

  
  The government reported today that the economy grew at an annualized rate of just 1.26% for the first three months of the year. That’s pretty weak. It’s the slowest quarter in four years.
  I’m also troubled by the trend. This marks the fourth straight quarter of below-trend growth (the long-term trend is about 3%).
  GDP data is very trend-sensitive. If the economy is growing by over 3%, it tends to stay that way. In the late 1990s, we had 18 straight quarters of over 2.6% growth. If it’s under 3%, it also tends to stay that way. In the early part of this decade, we had 11 straight quarters of under 2.8%.
  The breakout points are very important.

• The Cyclical Rally Lives
  Eddy Elfenbein, April 26th, 2007 at 2:43 pm

  The rally in cyclical stocks is still going strong. Last month, I pointed out that on March 19, the ratio of the Morgan Stanley Cyclical Index (^CYC) versus the S&P 500 reached a 13-year high.
  The ratio backed off some afterward as the cyclicals slightly underperformed the overall market. But that changed last week. This recent leg of the bull market has been greatly helped by the cyclicals. Yesterday, the overall CYC reached an all-time as it closed over 1,000 for the first time.
  The CYC-to-S&P ratio has now fully recovered and it close to making another 13-year high. In fact, it’s not too far from taking out the 1994 high as well.
  Here’s a look at how the ratio has done over the past few weeks:
  
  And here’s how the ratio has done over the last 30 years:
  
  Update: It happened. The ratio made a new 13-year high today. The S&P 500 closed 0.08% lower while the CYC rose 0.02%.

• P/E Ratios Are at a 20-Month High
  Eddy Elfenbein, April 26th, 2007 at 1:55 pm

  
  Thanks to yesterday’s surge, the P/E ratio of the S&P 500 is up to 16.87 (I use smoothed operating earnings). That’s the highest it’s been since August 2005.
  Still, it’s hardly excessive but we’re starting to see the impact of slower earnings growth. At the start of the year, first-quarter earnings were projected to be up 8.7%. They’ll probably be up 4% to 5%. Fortunately, most of the damage is confined to the autos and homebuilders.
  So far.