Archive for April, 2007

  • New All-Time High for the Dow: 12,808.63
    , April 19th, 2007 at 4:17 pm

    The Dow rose for the sixth straight day. The Dow has now rallied for 14 of the last 15 days. That hasn’t happened in over 15 years.

  • The Wharton Economic Summit
    , April 19th, 2007 at 3:23 pm

    I apologize for not getting around to this earlier, but I wanted to mention my trip last week to the Wharton Economic Summit. The school turns 125 this year so it’s celebrating with a series of economic conferences around the world, and the largest one was in Philadelphia last week.
    The first thing I have to mention is that if you’re ever in the Philly train station and you need to use the restroom, wait. Just trust me on this. Hold it in. I really can’t stress this enough. I promise I won’t go into the details but I assure you it’s sound advice. What happens in Philly I hope to god, stays in Philly.
    Moving on….
    The conference was in the convention center downtown and it was packed full of big wigs. You couldn’t throw a brick without hitting a C-level somebody. That must be the nice thing about Wharton alumni. Just pick up the directory, grab any name at random and presto, it’s probably someone important. The school is like Skull & Bones, except with more business jargon.
    Here’s an example, I caught up with Art Collins, the CEO of Medtronic (oh, and Wharton ’73). I tried to talk him into making a counter offer for Biomet (it didn’t work, but I tried). I also asked him about Sarbanes-Oxley and he was surprisingly positive about it. He felt that something was needed, and the current law is better than what existed before (in other words, nothing).
    He makes a good point that investor confidence was sorely needed in 2002. Personally, I wish Congress had been a bit more deliberative. Collins said that 404 needs some revising, but he likes the overall impact of SarBox. I think the smarter CEOs see that it’s not going away, so they’re ready to take what they can get. Of course, Medtronic is a big company so SarBox doesn’t impact them nearly as much as it does for smaller companies.
    I asked Collins about compliance costs, and he said it was about $8 million to $10 million. That may sound like a lot, but for Medtronic, it’s less than a penny a share for a $50 stock. Of course, if you’re running a small tech start-up, you’re probably not so thrilled about writing those checks to your accountants.
    One other thing about Collins. He wears nicer suits than me.
    I sat in on a good session about CEO pay. The panel, which was mostly Wharton profs, felt that the issue was very overblown. I think the executive pay issue suffers from what I’ll call the “Parade Magazine Effect.” People are always comparing themselves with how much other people make. One of the professors said if all CEOs suddenly had a 25% pay reduction, it would have a microscopic impact on shareholder equity. Another prof said (I was too far away to make out the names) that the severance packages have gotten out of control. As a shareholder, I don’t mind paying for success. But paying for failure ain’t fun.
    The profs said that one of the problems of CEO pay isn’t the pay itself, but the social blowback of the issue. I think that’s a bigger deal than most people realize. Sometimes I think that companies like Danaher are right. Try to make as little news as possible.
    One of the members of the panel runs a head-hunting firm for hedge funds and private equity. Of course, you don’t find too many people complaining about hedge fund compensation. What I found interesting is that he said that today, half of the positions he places are for “infrastructure” jobs, like lawyers and compliance. In effect, the hedge fund industry is becoming institutionalized. Wasn’t the industry started to get away from that?
    I thought one of the best points made about CEO pay is the overemphasis on pay, while ignoring the potential wealth that executives have in the stock. To give an extreme example, Warren Buffett gets a salary of about $100,000 a year. But when the market fell after 9/11, he probably lost a few billion dollars, even though he couldn’t control what happened. Many executives are in a similar position, but on a smaller scale.
    A typical CEO already owns a great deal of stock, plus a lot of stock options. So if the shares fall for some transient reason, they can be out far more money than what they make in compensation. Yet, the public is still fixated on the Parade Magazine number.
    At lunch, I sat next to two Wharton students from Singapore. Can you imagine what it’s like to go from spotless Singapore to Philly? Dear lord, talk about a culture clash! It sounds like a Fox reality show.
    During lunch, there were two talks. One was by Jeremy Siegel and the other was by Michael Milken. You would have thought that this Milken fellow (Wharton ’70) went straight from Wharton to a career in funding all these wonderful initiatives in medical research and economic development. Any activities in between was politely skipped over.
    Although Siegel seems very reserved on television, he’s surprisingly dynamic in real life. I was able to corner Professor Siegel for a 20-minute high-octane conversation. (By the way, major shout out to Tracy Simon of the Wharton staff for helping me out). He still likes the market and thinks equity prices are a good value versus fixed-income. Although, he said he doesn’t see major differences now between value and growth.
    I asked him why value has outperformed even in this bull market. He said that it’s really a factor of growth still unwinding from the 1990s. I asked him about the earnings slowdown and I was happy to hear that he thinks it’s probably just a mid-cycle reversion to the mean instead of the beginnings of a recession.
    I was also pleased that Siegel agrees with me that there’s no inherent problem in low equity volatility. I’m still confused why so many folks are worried about it.
    Siegel also said that he wants to see higher payout ratios from companies. One thing that I was curious about was why WisdomTree (WSDT.PK), the family of ETFs he runs with Michael Steinhardt and Jonathan Steinberg (Maria’s hubby), is traded on the Pink Sheets. He said that it’s the legacy stock of Individual Investor, and the shares were going to hop over to one of the exchanges in the next few months.
    We also talked about Jim Glassman and Kevin Hassett’s book, Dow 36,000, which relied heavily on Siegel’s book, Stocks for the Long Run. Siegel doesn’t buy their theory about equity premiums fading away (and neither does the market). He felt that their problem was ignoring the real return in treasuries that could be seen by focusing on the TIP spread.
    It was a fun, fasted-paced conversation. (My only disappointment was that Professor Siegel said that he’s not a blog reader!) He always seems to have a fresh and interesting view on the market.
    Here’s my review of his book, The Future for Investors.

  • Eaton Vance Hits New High
    , April 19th, 2007 at 12:32 pm

    EV1.gif
    Shares of Eaton Vance (EV) are at a new high today. Since its 1975 low, the stock is up over 300,000%. The gold line is the S&P 500 which looks flat by comparison. It’s only up a measly 1,600%.

  • First-Quarter Earnings Parade
    , April 19th, 2007 at 9:47 am

    Lots of earnings this morning. Danaher (DHR) reported earnings of 78 cents a share, one penny ahead of expectations. Sales were up 20% to $2.56 billion, which was also more than expectations. I really like Danaher. It’s a quiet company that consistently churns out the profits. The company also said that it expects second-quarter earnings of 88 to 93 cents a share, and full-year earnings of $3.70 to $3.80 a share. No surprises here.
    Harley-Davidson’s (HOG) earnings were down from last year due to a strike at its York, PA factory, but the numbers were still pretty good. HOG earned 74 cents a share compared with 86 cents last year, and sales dropped 8.3% to $1.18 billion. That sounds rough but Wall Street was expecting even worse, EPS of 72 cents on sales of $1.10 billion. The good news is that the strike is behind them, and their business still looks good.
    UnitedHealth Group (UNH) had earnings of 74 cents a share, after charges, which beat Wall Street’s forecast by three cents a share. The company sees second-quarter earnings of 80 to 82 cents a share, and full-year earnings of $3.42 to $3.46 per share.
    Melissa Davis at the TheStreet.com wrote:

    But investors will no doubt stew over another metric entirely. Notably, UnitedHealth’s all-important medical-cost ratio—reflecting the amount of each premium dollar spent on patient care—for the commercial book of business ticked up to 81.2% in the latest quarter and forced the company to raise its MCR projection for the entire year.
    UnitedHealth offered two major reasons for this troubling development, both of which could worry the market. The company blamed much of the change on inadequate reserves, signaling a rare misstep in this department, and the rest on higher utilization of consumer-directed health plans.

    Yesterday, Amphenol Corp. (APH) reported very good quarterly results. The company made 43 cents a share compared with 31 cents last year. These results beat the Street by two cents a share, although one penny was due to a tax benefit. APH also slightly raised guidance this year to $1.75 to $1.80 per share. The previous estimate was for $1.73 to $1.78 per share. I always like to see a company revise or reiterate future guidance. The better companies don’t leave Wall Street guessing.

  • Yesterday’s Power Lunch
    , April 18th, 2007 at 2:18 pm


    Did he say “Sanjana”?

  • Protecting GM’s Image
    , April 18th, 2007 at 12:26 pm


    It’s funny, but true. GM’s book value per share is $-9.62.

  • Wall Street and the Priceless Pooch
    , April 18th, 2007 at 10:24 am

    Bloomberg interviews Matthew Klein, who has a new book out called “Con Ed.” I apologize for the long quote, but it’s needed to convey my point:

    Klein: I was one of those prototypical Silicon Valley technology entrepreneurs. I was out in Silicon Valley for about 10 years. I started a couple of technology companies. And I raised, oh, $50 million in venture capital. My companies employed around 500 people.
    But where my story differed a little bit from the typical glamour puff-piece you read about in the business press (IRONY ALERT) is that my companies tanked. They utterly stunk up the place. So I went through a period where, in about one day, I had to lay off 400 people. My companies lost millions of dollars. It was an incredibly painful experience; it was incredibly humiliating. And only one good thing came out of that experience.

    (more…)

  • Yahoo Watch
    , April 18th, 2007 at 9:48 am

    After the close yesterday, Yahoo (YHOO) reported earnings of 10 cents a share, a penny below forecasts. The stock is down about 11% this morning.
    I think this is just the beginning. It looks like Panama has been completely overrated. I wish I could say I was surprised. I wouldn’t go near Yahoo until it’s at most $12 a share, which is about 60% below where it is now.
    The AP noted:

    ”When you sift through everything, there is not a whole lot to get excited about right now,” said Cantor Fitzgerald analyst Derek Brown.
    After subtracting advertising commissions, Yahoo’s revenue totaled $1.18 billion. That figure fell about $25 million shy of the average analyst projection.

    Interestingly, the AP story began:

    Investors were f – ) again until the Internet icon‘s disheartening first-quarter results ruined the mood.

    Texting has hit the big time. Although, many news outlets changed it to:

    Investors were falling in love with Yahoo Inc. again until the Internet icon’s disheartening first-quarter results ruined the mood.

    Soon, they may be working Ctrl+Alt+Del into their ledes.
    Seeking Alpha has a roundup of analysts’ reactions to Yahoo’s earnings.
    Business Week writes that Yahoo’s next search will be for a new CEO. The company quotes CFO Sue Decker:

    Chief Financial Officer Sue Decker attributed the decline to the phaseout of Microsoft’s search ad business and rising costs of driving traffic to Yahoo sites.

    That’s like saying “we attributed the decline to our lousy business model.”
    I say that Decker will replace Terry Semel before the summer is over.

  • Warren Buffett, Hell Inch Closer to Rendezvous
    , April 18th, 2007 at 7:48 am

    gp%5Bvm%20%3D0949f.jpg
    Fortune asks if Warren Buffett is “helping to support genocide in Darfur.”

    Berkshire has become a target of the divestment campaign because it owns 2.3 billion shares of PetroChina Co., a subsidiary of the state-controlled China National Petroleum Corp. (CNPC). CNPC has extensive operations in Sudan; it owns a major stake in Sudan’s national oil consortia.
    China and Sudan are engaged in a marriage of convenience. For its part, China gets oil – Beijing purchased more than half of Sudan’s oil exports in 2005. China’s growing demand for energy has led the Chinese to cultivate close relationships with many oil-rich African nations.
    In return, Sudan gets money, weapons and political backing from China. Because about 70 to 80 percent of Sudan’s oil revenue is funneled into its military, China’s oil assets in Sudan are “an undeniable and well-documented enabler of Khartoum’s genocidal policy in Darfur,” according to the Sudan Divestment Task Force.

    Hmm…seems like a bit of a stretch to me. I’m not so sure Warren can take the blame on this one. Now, about that annoying Cockney gecko….

  • Breaking: The S&P 500 Is in the Black for Millennium
    , April 17th, 2007 at 7:00 pm

    It took awhile, but the S&P 500 is now positive for the millennium. In your face, bears! It’s also up for the century. And decade! (All in one day, woo!)
    The S&P 500 closed today at 1471.48 which is just 0.15% higher than the December 31, 1999 close of 1469.25.
    That’s 7-1/4 years for 0.15%.
    Of course, the bad news is that inflation has increased by 22% since then. Meaning, today’s 1471.48 is more like 1206. But dividends have added about 12.5% (not much, but we’ll take it).
    But not all stocks are flat. The story of the decade, I mean millennium, is small-cap and value.
    Here’s a rundown of some major indexes since December 31, 1999:
    S&P 600 Small-Cap Value…………129.84%
    S&P 600 Small-Cap………………….115.01%
    S&P 400 Mid-Cap Value……………109.02%
    S&P 600 Small-Cap Growth……….98.15%
    S&P 400 Mid-Cap………………………97.07%
    S&P 400 Mid-Cap Growth…………..84.92%
    Dow Utilities……………………………..82.35%
    Dow Transports…………………………70.70%
    Morgan Stanley Cyclical……………..68.33%
    Russell 2000……………………………..64.23%
    Morgan Stanley Consumer………….36.02%
    S&P 500 Value………………………….29.95%
    Dow………………………………………….11.10% (29.03% w/divs)
    Russell 3000………………………………8.19%
    Wilshire 5000…………………………….7.95% (20.49% w/divs)
    Russell 1000………………………………4.60%
    S&P 500…………………………………….0.15%
    S&P 100………………………………….-15.04%
    S&P 500 Growth………………………-23.75%
    Nasdaq…………………………………….-38.15%
    Nasdaq 100……………………………..-50.51%
    Here’s how the 10 S&P 500 Industry Sectors have fared:
    Energy……………………………………..128.23%
    Financials…………………………………..52.87%
    Materials……………………………………50.94%
    Utilities……………………………………..46.96%
    Staples……………………………………..34.99%
    Healthcare…………………………………27.57%
    Industrials…………………………………20.99%
    Discretionary……………………………….3.97%
    Telecom……………………………………-48.75%
    Tech………………………………………..-54.70%