• Illinois Tool Works (ITW)
    Posted by on October 17th, 2007 at 1:07 pm

    If you’re new to investing, don’t be afraid of companies that sound boring. It’s easy to get caught up in looking for the next Google or Apple, but sometimes boring companies are great investments.
    A perfect example is Illinois Tool Works (ITW). Man, I love that name! In my book, the name alone is worth 15 on the p/e. I guarantee you, you’ll never hear someone say, “Keep your eyes on them, they could be the next Illinois Tool Works.”
    Here’s some 411. ITW is a diversified manufacturer based in…well, Illinois. The company has delivered double-digit earnings growth for 10 straight years. Not many companies can say that. Plus, it looks to do it again this year. Today, ITW reported Q3 EPS growth of 13% and it sees Q4 EPS coming in at 86 to 90 cents, which translates to growth of 11% to 16%. (Wow, even their financials are dull.)
    What they do extremely well is buy dozens of small companies that they then fold into the larger ITW universe. The management team has done a remarkable job of pinpointing small businesses. High ROE, solid margins, strong cash flow. In the last 30 years, the shares are up nearly 100-fold, and that doesn’t include dividends that have steadily grown each year.

  • Guess This Stock?
    Posted by on October 17th, 2007 at 11:29 am

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    Give up?

    Read more…

  • The Free Market and Point Spreads
    Posted by on October 17th, 2007 at 11:03 am

    There will be an interesting test of the free market this weekend. The best team in the NFL, the New England Patriots, is playing the worst team, the Miami Dolphins (although the Rams may challenge that title before the season ends). The game is in Miami.
    I find these things interesting because a point spread is no different from how the stock market works. It’s the judgment of the free market. The point spread for the game is 17 which is about as high as you’ll ever see for an NFL game. Many years ago, you could see games with over 20 points but those days are long gone.
    Still, 17 points seems on the low side. New England’s worst game this year was a 17-point win. I also noticed that the Tradesports contracts to cover are up 53%. Perhaps the line will move. I wonder if the odds makers are simply afraid of an event that appears to be at the margins.
    The question comes up in finance too. Basically, how do you handle a rare event? There just isn’t that much data to analyze when two teams like this meet. For now, the market seems to have selected caution. But how will sophisticated investors (gamblers) handle this?

  • Core Inflation Is Still Tame
    Posted by on October 17th, 2007 at 10:28 am

    The government reported that headline inflation rose 0.3% last month. The good news is that the core rate, which excludes food and energy, is still well-behaved.
    The core rate comes in for a lot of criticism but it’s probably the best short-term indicator of the Fed’s performance. The 12-month core rate has ranged between 1% and 3% for over 10 years.
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  • A Closer Look at Goldman’s Earnings
    Posted by on October 16th, 2007 at 2:19 pm

    Last month, Goldman Sachs (GS) reported amazing earnings. Maybe too amazing:

    Much of the focus is on Goldman’s trading revenue, which totaled a spectacular $8.23 billion, up 70% on the year-earlier quarter. Part of that increase was due to a bold bet that made money if mortgage-backed bonds and financial instruments tied to mortgage values fell in price. Of course, because of the credit crunch, they did plunge in value, netting gains for Goldman that the banks said “more than offset” the losses it saw on the mortgages it was holding.
    It’s impossible to trace exactly how that bet against mortgages was made, but the financial filing does describe some very telling details about what made up the enormous $8.23 billion of trading revenue.
    The interesting data comes from disclosures in the filing about ‘level 3’ assets and liabilities, which are securities and derivatives that can’t be valued according to observable prices in liquid public markets. Because of their illiquidity, Goldman has to attach values to them chiefly according to in-house models and estimates.

  • The Hanger-On
    Posted by on October 16th, 2007 at 1:15 pm

    In New York Magazine, Duff McDonald looks at how Chuck Prince still has a job.

    It’s unlikely the two have ever met, but Citigroup chairman and CEO Chuck Prince and Yankees relief pitcher Luis Vizcaino have something in common. Consider Game 2 in the recent American League divisional playoff series, when Vizcaino was brought into the game in the bottom of the eleventh, after Joe Torre had burned through his best relievers. Nervous Yanks fans could only watch in stupefaction as Vizcaino loaded the bases just in time to face the Indians’ top slugger. How was it that with everything on the line, this was the guy holding the ball? The same is asked about Chuck Prince, who gave up the Wall Street equivalent of a grand slam when Citigroup reported a third-quarter loss of $5.9 billion. The company’s share price now rises when there’s bad news in the hopes that it will lead more quickly to his departure. But despite calls for his ouster from all over Wall Street and from Jim Cramer in this magazine, he’s still very much in the game.
    What the critics fail to fully consider is, who would replace him? With no obvious choice from within—and no eager prospects from without—the bank is suffering from what one might call the Vizcaino Condition: Watch and pray he doesn’t do half as badly as everyone expects.

    I actually talked with McDonald a few months ago about Chuck Prince and Citi. My take is that human nature will always blame a bad plan’s failure on execution, first, and the idea itself last. The reason Citigroup is struggling is that the company, as presently constructed, doesn’t make sense and it should be broken up.
    The financial supermarket idea sounds great on paper but it just doesn’t work. It never works, and Citigroup will keep learning that lesson. People can blame Prince all they want, but it’s the idea that has to go.
    This year is the 20th anniversary of the movie Wall Street, the big crash and the book Bonfire of the Vanities. How many of today’s first-year MBAs would know that Sherman McCoy’s firm was based on Salomon Brothers? There’s a name that’s completely disappeared, but imagine if Citigroup revived it. Spin it off! According to the most-recent 8-K, Citigroup has assets of over $2.3 trillion. Why so big?
    Earlier I pointed out that Citigroup’s Management Committee has 125 members. Is that really needed? The last papal conclave had just 115 members. Sure, both entities have global operations and strong brand names. (Granted, the analogy break down once we come to Bob Rubin, but you see my point). I failed to see the advantage of having a company that’s so large.
    Let me also add that I think Sallie Krawcheck will easily become Prince’s replacement. Unfortunately, I don’t think she’ll have any more success.

  • Duck and Cover
    Posted by on October 16th, 2007 at 11:07 am

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    The first Boomer applies for Social Security:

    The baby boomers’ stampede for Social Security benefits has begun.
    The nation’s “first” baby boomer, a retired teacher from New Jersey, applied for Social Security benefits Monday, signaling the start of an expected avalanche of applications from the post World War II generation.
    Social Security Commissioner Michael Astrue called it “America’s silver tsunami.”
    Kathleen Casey-Kirschling applied for benefits over the Internet at an event hosted by Astrue. Casey-Kirschling was born one second after midnight on Jan. 1, 1946, gaining her recognition as the first baby boomer — a generation of nearly 80 million born from 1946 to 1964, Astrue said.
    “She’s leading the way for her generation,” Astrue told reporters.
    Casey-Kirschling will be eligible for benefits after she turns 62 next year. She said she taught seventh graders for 14 years at a school near Camden, N.J., before retiring and volunteering for the Red Cross in Gulf Coast areas hit by Hurricane Katrina.

  • Third-Quarter Earnings Reports
    Posted by on October 16th, 2007 at 11:05 am

    Earnings season gets underway for out stocks this week. On Thursday, Danaher (DHR) and UnitedHealth (UNH) report. Then on Friday, Harley-Davidson (HOG) reports. I think HOG is due for a lift soon.

  • Medtronic Pulls Defibrillation Leads
    Posted by on October 15th, 2007 at 10:36 am

    Ugh.

    Medtronic Inc. has suspended distribution of its Sprint Fidelis defibrillation leads after identifying five patient deaths in which a lead fracture may have been a contributing factor.
    Medtronic shares fell nearly 5 percent in premarket trading.
    A defibrillator monitors a patient’s heartbeat; if it senses an abnormal heart rhythm, it delivers an electronic shock to reset the heart to a normal beat. A defibrillation system consists of a device implanted near the shoulder with one or more leads connecting the device to the heart.
    Medtronic said Monday it had discovered a “small chance of fractures in particular locations” on Sprint Fidelis models 6930, 6931, 6948 and 6949. The company is asking doctors to stop implanting the leads and return all unused leads to Medtronic.
    A fractured lead “can cause the defibrillator to deliver unnecessary shocks or not operate at all,” said Daniel Schultz, director of the Food and Drug Administration’s Center for Devices and Radiological Health.
    The company is not recommending that patients with such a lead have it removed, since they “are more likely to experience complications from removal.” Instead, Medtronic said, doctors can reprogram the device to alert the patient that a fracture may have occurred. Possible indicators could include audible alerts or inappropriate shocks.

    The stock is getting crushed today. The shares went as low as $50.20.

  • UNH Below $50
    Posted by on October 12th, 2007 at 12:24 pm

    If you’re looking to add new money to the market, consider shares of UnitedHealth (UNH). I really am surprised to see the stock going for less than $50. I’m not sure what the market is expecting. The stock is going for about 12.6 times next year’s earnings estimate. Yet, the company will probably grow its earnings about 17% this year, and 14% next year.