Archive for August, 2007

  • Fed Funds & 90-Day Yield
    , August 16th, 2007 at 1:15 pm

    Sometimes a simple chart tells the whole story:
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  • Buffett Buying Dow Jones and Bank of America
    , August 15th, 2007 at 8:53 am

    From Bloomberg:

    Berkshire Hathaway Inc., the investment firm run by Warren Buffett, bought stakes in Dow Jones & Co. and Bank of America Corp. and more than quadrupled its holdings of health insurers UnitedHealth Group and WellPoint Inc.
    Berkshire hadn’t previously disclosed the stakes in Dow Jones, owner of the Wall Street Journal, and Bank of America, the second-largest U.S. bank, though it’s unclear when the company acquired the positions. As of June 30, Berkshire held 2.78 million shares of Dow Jones and 8.7 million shares of Bank of America, the Omaha, Nebraska-based firm said in a filing with the U.S. Securities and Exchange Commission today.

  • Bed Bath & Beyond Reality
    , August 15th, 2007 at 6:30 am

    The selling in Bed Bath & Beyond (BBBY) is getting a bit beyond reasonable.
    Let’s run the history. In early June, the stock’s at $40.50 when the company says Q1 EPS (May) will be 36 to 38 cents. Not good since the Street was looking for 39 cents.
    Naturally, the market freaks because BBBY never warns. They’ve nailed their number for something like 15 straight years. Having them miss is like watching the Orioles two-hit the Yankees. How often is that gonna happen?
    Three weeks later, BBBY reports 38 cents a share. So they were off by a penny and the stock drops to $36. If you’re scoring at home, that’s 450 pennies in missing price for one penny in missing profit. That lost value has a P/E ratio of…many.
    On the call, the company said that Q2 EPS (August) will either be flat or up in the low single-digits. Since last year’s Q2 came in at 51 cents, I take that to mean 51 to 53 cents a share. (I used math on that.)
    There’s been zero news since then and the stock is now below $34 a share. Yes, I know—housing’s a mess, but that’s not all of BBBY’s biz. They’re not Mortgage Mortgage & Beyond.
    The stock is about where it was six years ago when the housing boom was just starting. This is one those companies that regularly churns out top-notch returns-on-equity. No debt, solid ratios—and now, a good price.

  • How to Look at the Market
    , August 14th, 2007 at 11:26 am

    I notice this post by Bruce Bartlett on Andrew Sullivan’s site. I apologize for the length, but I feel I need to post the whole to make my point. Take it away Bruce.

    Two years ago, I first saw problems arising in financial markets. The problem was that the Federal Reserve had been easy for a long time in order help get the economy moving after the recession of 2001. This led to overexpansion of certain sectors of the economy that could not be sustained without a continuation of the easy money policy. In 2005, the Fed began reversing its easy money policy. This inevitably meant that those sectors–in this case, housing–that were dependent on easy money would likely crash. As I wrote in an August 2005 column:
    “The problem here is that just because the Fed is raising rates gradually, the impact will not necessarily be gradual. It could come quite abruptly. Think of a balloon. Whether you blow it up slowly or fast, at some point it is still going to burst. The same thing oftentimes occurs with monetary policy. It may appear that nothing is going on for a long time and then, suddenly, something dramatic happens to show that monetary policy is working as expected.”
    I became very concerned by my analysis, even to the point of shorting the market in anticipation that my view would soon become widespread and lead to a market correction. And then nothing happened. The market sloughed off problems in the housing market and among subprime lenders. When I would talk to Wall Street-types, I was assured that things were under control. Everything was carefully hedged. The balloon wasn’t going to explode, I was told. It would hiss a little air and everything would be fine.
    Contrary to my expectations, the market went up. I closed my short positions, swallowed my losses, and concluded that my analysis was incorrect. Well, I should have had more confidence in myself, because the chickens have been coming home to roost this week exactly as I predicted two years ago.
    One point I am trying to make is that to be successful in the stock market, it is not enough to understand fundamental trends and be correct in your forecast. There’s also the critical problem of timing. If you are too far ahead of the pack, as I was in 2005, the information is essentially valueless. In fact, it can be counterproductive, as it was in my case. Even if I had held my short position all this time, I still would have lost money because even after the steep decline this week, the S&P 500 index is still more than 1,500 points above where it was two years ago. I still would have lost money.
    Over the years, I have observed lots of investors and forecasters making similar mistakes, so I know I am in good company. The trick, as best I can tell, is not to be too much smarter than the market, but just a little smarter. If you are too smart, you move too soon and you end up losing money even though you were basically correct in your analysis. If you are only a little bit smarter, you figure out what’s going on just before everyone else does. There’s a great deal of money to be made with that kind of knowledge.

    As I read this, Bartlett is saying that his mistake was that he was too intelligent. I’m not trying to make fun of Bartlett, indeed, he’s a very sharp guy. But the bottom line is that he lost money on a trade that wasn’t very intelligent. Sometimes smart people do things that aren’t so smart.
    The key is to evaluate information correctly and within its proper context. Sure, there were lots of problems in the mortgage markets, but that doesn’t mean it will wreck the whole system. Even when disaster comes, it’s usually not disaster. He writes that “chickens are coming home to roost.” Not exactly. As I write this, the Dow is down about 900 points from its high, or about 6.4%.
    The trick isn’t to be just a little bit smarter, but it’s what kind of intelligence. It’s not just the facts you know, it’s being able to think critically about those facts. Bartlett’s comments remind of Gilbert & Sullivan’s Modern Major General who knows “many cheerful facts about the square of the hypotenuse.”
    When people analyze the market, they tend to have a bias towards drama, which usually flatters the analyst.

  • Sysco’s Shares Up on Earnings
    , August 13th, 2007 at 11:51 am

    More good news from Sysco (SYY):

    Food distributor Sysco Corp. on Monday reported better-than-expected quarterly earnings, helped by increased sales despite food cost inflation, sending shares up as much as 5 percent.
    The company, which supplies food and other products to restaurants, cafeterias and other food sellers, reported net earnings of $303.4 million, or 49 cents per share, for the fiscal fourth quarter ended June 30, up from $254.1 million, or 41 cents per share, a year earlier.
    Analysts were expecting the company to earn 46 cents per share, according to Reuters Estimates.
    Sysco said quarterly sales rose 8.5 percent $9.23 billion, above analysts’ expectation of $9.137 billion.
    Food cost inflation, measured by the change in Sysco’s cost of goods, was 6.1 percent.
    The company is targeting long-term annual sales growth of 7 to 9 percent, excluding the impact of major acquisitions, and expects low-to mid-double digit annualized earnings per share growth.
    Analysts expected Sysco’s 2008 profits to grow about 13 percent to $1.78 per share, and revenues to grow 8 percent to $37.83 billion, according to Reuters Estimates.

  • A Modest Proposal
    , August 10th, 2007 at 4:35 pm

    I wish I could buy calls on the phrase “rearranging the deck chairs.” Now that would be a monster trade.

  • Guess What Happens When a Financial System Runs Out of Liquidity
    , August 10th, 2007 at 4:18 pm

    image511.png

  • When Genius Failed 2.0
    , August 10th, 2007 at 2:28 pm

    From Bloomberg:

    James Simons’s $29 billion Renaissance Institutional Equities Fund, which uses computer models to pick stocks, has fallen 8.7 percent so far in August.
    The hedge fund, started two years ago, has declined 7.4 percent for the year.
    “We have been caught in what appears to be a large wave of de-leveraging on the part of quantitative long/short hedge funds,” Simons wrote in a note to investors yesterday.
    Simons has one of the best records in the hedge-fund industry. His Medallion fund, which manages money only for Simons and his employees, has climbed at an average annual rate of more than 30 percent since 1988. The East Setauket, New York- based firm manages a total of $36.8 billion.

  • Ashland
    , August 10th, 2007 at 10:25 am

    What’s the deal with Ashland (ASH)?
    On July 25, the company reported earnings and were decent–not amazing, but decent (20% ahead of expectations). The stock gapped up a bit but eventually closed lower by two cents a share.
    Now fast forward to this week. The 10-Q came out on Wednesday and the shares suddenly plunged 13% in two days. I’m not for or against this stock. I just find it interesting that a big sell-off comes, apparently, out of nowhere. Ashland even had to issue a press release after yesterday’s close saying they “know of no company-specific issues” causing the decline.
    I’ve gone through the 10-Q and nothing looks out of the ordinary. My guess is that some logarithm spotted some metric or ratio or whatever (no taxes?) and he told another logarithm to sell everything immediately.

  • Blankfein Endorses Hillary
    , August 10th, 2007 at 7:18 am

    I can’t imagine his endorsement will sway many people, but it will mean money:

    Goldman Sachs Group Inc. Chairman Lloyd Blankfein endorsed Democratic New York Senator Hillary Clinton’s presidential bid, a day after her opponents sought to portray her business support as more of a burden than a blessing.
    Blankfein’s backing follows an endorsement in April from Morgan Stanley CEO John Mack, who was one of President George W. Bush’s biggest fund-raisers. Clinton has increased her donations from Wall Street constituents during her time in the Senate, and took in at least $424,545 from the top 10 investment banks in the second quarter for her presidential campaign.