• An Inconvenient Heatwave
    Posted by on July 9th, 2007 at 1:40 pm

    I hope you’re keeping cool wherever you are. It’s 97 here in Washington.

  • Pop!: Why Bubbles Are Great For The Economy
    Posted by on July 9th, 2007 at 1:28 pm

    This is long overdue but I wanted to recommend Daniel Gross’ excellent book, Pop!: Why Bubbles Are Great For The Economy.
    Ever since Charles MacKay’s Extraordinary Popular Delusions and the Madness of Crowds, investment bubbles have gotten a bad rap. Gross comes to their defense and convincingly argues that investment bubbles should be recognized as very positive for the economy. They allocate capital quickly, if not accurately. Plus, when the bubble eventually bursts, prices plunge and there’s tons of excess capacity for the second wave of businesses to make the new technology work. This happened with telegraphs, railroads and now with Web 2.0.
    Gross also includes a fascinating observation. Through the years, government has not been an innocent bystander. In fact, its hand has been quite visible. Government has often been a willing participant in the development of new technologies. In 1843, Congress approved $30,000 for telegraph testing and in the 1850s, taxpayers provided one-fourth of all railroad financing.
    It’s easy to dismiss bubbles as some kind of mass hysteria, but in reality, they do a lot of good.

  • The Quarterly Earnings Myth
    Posted by on July 9th, 2007 at 11:44 am

    Today, Moody’s came out with a report that questions the idea that taking a firm private helps the company because it frees it from quarterly earnings reports.
    CNBC just had a segment on the report and they featured the standard debate of a labor guy against a free market think tank guy, but I think this misses the point of the report. Moody’s wasn’t questioning the efficiency of buyouts, but the idea that quarterly earnings reports stifle companies.
    I haven’t seen the report, but I’m not surprised by the findings. The myth of the quarterly earnings ogre is vastly overrated. This is one of those make-believe issues that sweep over Wall Street every few years. Some folks even want to ditch them. My feeling is that if companies find themselves held hostage to quarterly forecasts, then at some level, it’s their fault.
    It’s very easy for management to downplay the importance of earnings reports. The trouble comes when they consistently play them up, then suddenly face a bad quarter. Here’s a Business Week article describing how several years ago, employees at Cisco loaded up boxes on trucks before midnight to boost their earnings. They failed and the stock missed by a penny a share. The stock fell 13%. So who’s at fault? Unlike many investment writers, I have no problem blaming the investing public. But I’ll also fault management for relying so heavily on earnings reports before.
    The idea that a buyout liberates management is just silly. Also, management still has to answer to their new owners. Does anyone believe that the private equity folks are more patient than the investing public?

  • Gold Versus Stocks
    Posted by on July 9th, 2007 at 10:59 am

    Gold bugs like to point out that gold has risen against the major stock indicies. A better comparison, however, is to look at gold versus the Wilshire 5000 Total Return Index (^DWCT), which includes almost all stocks and their dividends.
    Here’ a look at gold (the gold line, right scale) against the Wilshire 5000 (the blue line, left scale). I made it so both scales match at 12 to 1.
    image492.png
    Gold has indeed done well, but stocks have certainly held their own. Plus, you can see how much less volatile stocks are. Gold is down about 10% from its peak of last year. The peak almost perfectly coincided with this New York Times article. I should have known.

  • Biomet’s Earnings Fall
    Posted by on July 9th, 2007 at 9:13 am

    Since the company is headed to go private, this doesn’t matter very much, but Biomet’s earnings took a tumble last quarter:

    Medical device maker Biomet Inc. (BMET) reported a fall in quarterly earnings, hurt by lower sales in spinal and fixation products segments and a charge related to re-negotiation of some distribution agreements.
    The company, which is being taken private by a group of equity firms for $11.4 billion, posted fourth-quarter earnings of $41.5 million, or 17 cents a share, compared with $100.4 million, or 41 cents in the year-ago quarter.
    Excluding certain items, the company earned 39 cents a share compared with 46 cents in the year-ago quarter.

  • The Original Gilligan’s Island Theme Music
    Posted by on July 7th, 2007 at 3:18 pm

  • Today’s Jobs Report
    Posted by on July 6th, 2007 at 11:22 am

    Today’s employment report was another disappointment. The economy created 132,000 jobs last month, which is just about the pace of population growth, perhaps a bit slower.
    The unemployment officially stayed the same at 4.5%, but to be very precise, it climbed from 4.46% to 4.53%.

  • Nasdaq At 6-Year High
    Posted by on July 5th, 2007 at 10:46 am

    image490.png
    Even though the S&P 500 is off its highs, the Nasdaq keeps moving along.

  • Blackstone & Hilton
    Posted by on July 5th, 2007 at 9:46 am

    Steve Schwarzman is reading my blog! Consider the evidence. Just a few days after I highlighted Hilton’s (HLT) performance over the past few years, Blackstone (BX) announces a $20 billion buyout of the hotel chain.
    Coincidence? Not likely.
    Here are some details    :

    Blackstone will pay $47.50 for each share, Hilton said in a statement. That’s 32 percent more than its closing price yesterday. Barron Hilton, the son of founder Conrad Hilton and co-chairman of the Beverly Hills, California-based company, will get $990 million for his 20.8 million shares.
    The purchase is a record for the hotel industry. Blackstone, the owner of the La Quinta lodging chain, joins Apollo Management LP and Texas Pacific Group in targeting hotel companies for their cash flow and real estate. Worldwide, hotel acquisitions more than doubled in the first half of this year, to $81.4 billion.
    “It’s a classic Blackstone play: the size, the asset class, the management and the brand,” said Michael Pralle, who ran General Electric Co.’s GE Real Estate unit, with $59 billion in assets, before resigning in June to pursue other interests.
    Including the assumption of debt, the transaction totals $26 billion. Hilton, second in the U.S. to Marriott International Inc., has more than 2,800 locations.

    What I find interesting is that going forward, the main mover of BX’s stock will probably be merger announcements, not earnings reports. I would also guess that the market will react negatively initially to most merger announcements from BX, not matter how favorable they are. That’s an unusual drive of a share price, but we may need to learn to expect it.

  • Early Close
    Posted by on July 3rd, 2007 at 10:46 am

    Not much to blog about this week. Volume is very light. Everyone, it seems, is at the beach.
    The market closes at 1 p.m. today. You’ll have to pardon me, I’m having trouble typing while holding my Mimosa.
    Ta!