• Mixed Market
    Posted by on November 7th, 2005 at 12:34 pm

    The AP at 11:22:

    Stocks Move Lower As Oil Slides Below $60

    The AP at 12:22:

    Stocks Climb As Oil Slides Below $59

  • Are Low-Priced Stocks Better?
    Posted by on November 7th, 2005 at 11:59 am

    I’m often asked why the Buy List doesn’t have more lower-priced stocks. I’ve never understood this. It seems that investors would much rather buy a lot of shares in a low-quality, low-priced stock that a small amount of shares in a high-quality, high-priced stock.
    My advice it to completely ignore the price range of a stock (though, don’t ignore its value). I’d much rather buy a small number of shares in a high-quality $80 stock, than many shares of poor $10 stock. With the advent of discount brokers, commission costs are pretty reasonable.
    IBD has more to say:

    Cheap stocks often end up at fire-sale prices for a reason. They may keep missing profit or sales views. They might be the target of a lawsuit or probe. Or they could hail from an ailing industry.
    Another risk with penny stocks: lower trading volume. Mutual funds and other big investors are less likely to buy cheap stocks, since they can’t take big stakes without drastically moving the stock price.
    Light volume also makes such stocks more prone to wild price swings, since only a few cents up or down can result in a big gain or loss.
    Instead of seeking low-priced stocks, look for stocks priced at $10 a share or higher. They should sport strong earnings, sales, profit margins and return on equity.

    I think people see a low-priced stock and think, “gosh, it’s so cheap–it just can’t go any lower.” Well, it can. I remember my finance professor said that “zero is a long way down.” A $100 stock can drop 99% and it’s still at $1. It can drop another 99% and it’s still at a penny. It can keep dropping 99% many more times and still not be at zero. Zero is a long, long, long way. That’s how low it can go.

  • Morning Market Report
    Posted by on November 7th, 2005 at 9:48 am

    The earnings season is just about over. We still have a few more earnings reports to go. On Thursday, we’ll get Dell’s (DELL) earnings report. The company’s quarter ended on October 31, so they’re actually pretty quick to report. Dell recently warned Wall Street that its earnings won’t be as strong as previously thought. Dell was already the subject of a negative article in Barron’s this weekend, plus one in Business Week this morning.
    Apple Computer (AAPL) had another downgrade this morning. This is the second downgrade recently due to valuation. I also see that Google (GOOG) is poised to open higher, and it will probably make a run on $400 a share. The stock went public last August at $85.
    The Wall Street Journal quoted Michael Panzner, head of sales trading at Rabo Securities USA, as saying, “It’s almost like things haven’t cratered, so let’s be optimistic.” As odd as that sounds, I think he’s got it. Oil looks to fall again today, and we’re headed to a higher open.
    U.S. News & World Report has an article on Frontier Airlines (FRNT). If you’re not familiar with the airline, the article does a nice job of explaining what Frontier is about. Here’s a sample:

    Frontier and similar airlines have benefited from the overall growth in travel and customers’ increasing frugality. One of Frontier’s assets is geography, says Denver-based Mike Shonstrom, a senior vice president of research with Emerging Growth Equities of King of Prussia, Pa. Denver is the nation’s fifth-busiest airport, and Shonstrom says the city’s location near the country’s midsection means most flights reach 1,000 miles, which creates efficiencies not found in short hops. With ski season boosting winter flights, and vacation jaunts to Mexico and Florida padding spring and fall, the year-round business is solid. “We still hear a lot of people getting on the planes say, ‘What a great airline. We’ve never heard of you before,'” Potter says. Then he adds: “They’re finding us.”
    Potter promotes a go-slow business philosophy. He downplays the idea of Frontier’s becoming a major national airline. It has no first class, and that holds true for its single-story corporate headquarters, a few miles down the road from the airport runways. The CEO’s modest office looks out across the parking lot at a Courtyard by Marriott. Potter recalls his first day on the job, as a vice president of marketing, in 1995. A local newspaper story had said Frontier might go out of business. Now sitting in the CEO chair, Potter earned just over $275,000 in salary and an additional $11,000 plus in stock and 401(k) matching funds for the 2005 fiscal year.

    Frontier also has its sights set on Canada.
    The least-surprising story this morning is that Guidant (GDT) is suing Johnson & Johnson (JNJ) to complete their $25.4 billion merger. Guidant also reported today that its earnings plunged by 60%, which of course will be Exhibit A in J&J’s defense.

  • Barron’s on Dell
    Posted by on November 6th, 2005 at 11:56 am

    Jay Palmer looks at Dell (DELL).

    The problem for Dell is that, in the U.S. market, Dell’s not the problem. Corporate PC sales, which account for maybe 85% of demand, continue to grow, at an unexciting pace. On the consumer side, Dell’s unit sales continue to grow at a slightly faster clip than the market as a whole, which according to both IDC and Gartner is rising at around 11% a year. But for over a year now, the biggest and fastest growing sector has been basic PCs that list at $300 to $400. Though Dell’s super-efficient direct-sales business model allows it to make money where many others can’t, at ever-decreasing prices, revenue growth is slow and the profit can be measured in pennies. In short, while Dell may be selling more, it is earning less revenue and less profit from each one.
    Unit and revenue growth overseas is better, about 17% in terms of units worldwide, according to industry watchers, but here Dell isn’t faring well. In the hottest markets, China and India, buyers prefer to play with a machine before buying. Few are used to buying over the phone or Internet, leaving Dell at a competitive disadvantage to rivals like HP and Lenovo, which mostly sell through retail chains.
    “The PC business is no longer a growth market, for Dell or for anyone else, and it never again will be,” says John Enck of the Gartner Group. “There is no conceivable way that Dell can significantly outgrow the market as a whole and there is no way that the company can ever return its growth to the high levels of yesteryear.”
    Dell would dispute that, but clearly market trends are seriously inhibiting its ability to boost growth. One much-touted solution, of course, was the company’s big push into servers and consumer products, like printers, flat-screen TVs and MP3 music players. All play to company strengths and, if you talk to Dell Chief Executive Kevin Rollins, you’ll get an earful on the big potential. Even so, given signs HP is making a comeback in servers and the ongoing low margins in big-ticket consumer electronics, the jury is still out.
    At the stock’s current price, there are still more than a few die-hard fans. They argue that if there was ever a company capable of masterminding a return to growth, it’s Dell. That’s probably true, but it’s no longer enough. If Dell’s revenue fails to grow faster, and certainly if the company continues to miss earnings targets, it will be time to admit that Dell is past its best.

  • Sorry Charlie
    Posted by on November 6th, 2005 at 8:31 am

    Greenspan puts Cong on notice: Curb huge deficits

  • The New York Times on Energy Stocks
    Posted by on November 6th, 2005 at 6:20 am

    If we only knew the author’s opinion:

    Shareholders may wish to take their profits before the prices erode further, but many investment advisers make a persuasive case for holding firm. In this view, cyclical ups and downs will continue, but they are mere blips that do not fundamentally alter a very long-term upward trend in prices for energy commodities and stocks.
    Demand for energy keeps rising while new sources of supply grow scarcer, a reality that is unlikely to change, some fund managers and market strategists say. Fossil fuels will eventually become too expensive for everyday use, but there will be good money to be made from producing whatever power source comes next, they predict. And many of the producers, they say, will be the same companies pumping oil today. The energy industry’s knack for playing a long game, plotting strategy based on assumptions of economic, political and technological developments many decades ahead, makes energy stocks worth holding onto, the investment advisers say.

  • The Medallion Fund
    Posted by on November 5th, 2005 at 4:25 pm

    Perhaps the biggest enigma on Wall Street is the Medallion Hedge Fund. This is the super-secret, super-successful hedge fund run by Jim Simons, a former math professor.
    The fund is currently around $5 billion in size and it’s creamed the market over the last seventeen years. The fund has made over 30% a year net of fees. Those fees? Think 44% of profits and 5% of assets.
    But what’s really odd is that almost nothing is known about the fund. It’s a black box. Simons goes out of his way to hire people not from Wall Street. About one-third of the fund’s staff has Ph.Ds. It’s all quant-based, and whatever those algorithms are, they work.
    This is from Simons’ Wikipedia page:

    Simons is said to be superstitious and slightly eccentric. His favorite number is 13. He is known to wear the same necktie throughout an entire year, as long as his hedge fund does not have a losing streak of any length. He has been known to show up at formal business meetings without socks.

    (He’s a blogger at heart!)
    Simons now wants to create a mega-fund that will manage $100 billion. If you’re interested, there are still open slots. The minimum is $20 million.
    There’s an important question at hand: Can a fund be that large as still be successful? The academic research says no. In fact, open-end mutual funds haven’t been that large and successful. Fidelity Magellan started running into trouble when it reached that size. It’s now down to a wee $50 billion.
    No hedge has ever gotten larger than about $22 billion. That’s the point where both Julian Robertson and George Soros started to get hit with losses. If any can be successful at $100 billion, Simons can.

  • JPM to Sell Its Insurance Unit
    Posted by on November 5th, 2005 at 3:45 pm

    One of the great secrets of Wall Street is that insurance is a highly profitable industry. Warren Buffett built his empire on insurance. Sure, the industry is boring as heck but this is an area where I don’t need any more excitement in my life.
    We have three insurance stocks on our Buy List; AFLAC (AFL), Brown & Brown (BRO) and Progressive (PGR). All three are doing very well.
    A few years ago, the financial services industry underwent a massive consolidation. Everybody bought everybody else. In fact, no one is just a bank anymore. To be really hip, you have to be a “comprehensive financial services organization.” All the cool kids are doing it. Or call yourself a “supermarket.” That’s hot.
    Thankfully, we’re seeing some of that reverse. A number of financial megaliths are selling off their insurance units. Citigroup (C) sold Travelers Life insurance business to MetLife Inc. for $11.8 billion. Now, JPMorgan Chase (JPM) is selling off its insurance business. Last year, JPM completed (ugh) a huge merger with Bank One.
    Speaking of insurance, Berkshire Hathaway (BRKA) reported that its profits fell in half last quarter due to Katrina. The company earned $381 a share, down from $739 a share last year.
    Buffett has also been placing huge bets against the dollar. Between 2002 and 2004, he made a cool $3 billion by going against the greenback. But not lately. This year, Buffett’s dollar gambit has cost him over $900 million as the dollar has rallied.

  • Q&A: Inflation
    Posted by on November 5th, 2005 at 1:57 pm

    Hello Eddy,
    I’ve been reading your blog for a week or so now, and I just want to say hello and good luck. I followed a link to your blog from Bill Cara, whom I much admire.
    As I near retirement, yes I’m a so called ‘baby boomer’, (boy do I hate that term), I regard Mr. Greenspan as an American hero. I recall the late 1970s, and early 1980s as a terribly difficult time in our country’s economy. At that time I was raising a young family and trying to get a new business off the ground. Securing a business loan was much more difficult than it is today, and paying 22% interest for a short term loan was the rule.
    Those high inflationary days are long gone, and I will not miss them.
    In fact I fear they’re return. It seems latley, Mr. Greenspan has become the target of unhappy Wall Street pundits and reporters, siting his tight fisted reign as the cause of the slow growth in today’s market. I don’t agree. Mr. Greenspan has returned this economy to normalcy. Now that he is about to retire, what can we expect? Will a new Fed chairman do as well? Will we again see uncontained and uncontrollable infaltion? Be careful what you wish for.
    Good luck, again. I’ll be reading you often.

    Thanks for your e-mail. I absolutely agree with you about inflation. I’m happy the days of inflation are long gone. Just thinking about the music and clothing is enough to scare me.
    Inflation is nothing but bad news for an economy. The U.S. economy suffered years of uncontrolled inflation. One of the worst aspects of inflation is that it builds upon itself. A little inflation begets more which begets still more. By January 1980, inflation was beginning to spiral out of control. The price of gold spiked to over $800 an ounce.
    I’ve always felt that there’s another criticism of inflation that economists miss. Inflation is cruel. It rewards debt and punishes people who save. People who live on fixed-income watch helplessly as a lifetime of savings is melted away. It’s a stealth tax on capital, and it’s never voted on. Inflation rewards people who speculate in gold and silver, while stocks and bonds fall far behind.
    Look at what the Dow did over 17 years.
    December 31, 1964 close: 874.13
    December 31, 1981 close: 875.00
    Twenty-five years ago, two Texas brothers tried to buy all the silver in the world. They would have gotten away with it too, if it weren’t for a bunch of meddling kids (i.e., the CFTC).
    But stocks are claims on real assets. It’s part ownership in a corporation that grows and thrives; creates jobs and builds wealth. But 25 years ago, people were buying rocks.
    Inflation also does damage to a society. In Weimar Germany, deutschmark were printed in notes of 50 trillion and 100 trillion. Inflation also hit France in the years before 1789. A debased currency breaks the bond been the government and the governed.
    What creates inflation? That’s easy. It’s simply excessive M2 growth based on a three-month moving average against the implicit price deflator…eyes getting heavy…can’t stay awake.
    I don’t worry about any of that, and I hope I can assuage your fears of inflation coming back. I always hear that inflation in on the “verge of coming back.” But it never does and I don’t think it will. The reason is that EVERYONE is worried about inflation.
    Inflation is now broadly recognized as a Very Bad Thing. In the 1950’s and 1960’s, central bankers weren’t concerned about inflation. They were New Dealers. They lived and breathed the idea of preventing a repeat of the 1930’s. It never occurred to them that monetary policy could cause inflation. That was actually a very controversial idea. Even in the 1970’s many economists still thought that inflation was a necessary evil. It was merely the by product of affluence.
    Now we know that it’s all the Fed’s fault. Even the most clueless American has probably heard the name Alan Greenspan. But how many Americans know his predecessors? You don’t often hear the name Marriner Eccles? William McChesney Martin? Back in the day, nobody knew who they were. No one parsed their speeches. Here’s an example: After the stock market crashed in 1929, the Federal Reserve actually raised interest rates. Dear lord! We now know that that’s the biggest, dumbest, wrongest thing you could possibly do. We’ve learned that mistake, and now we have a new conventional wisdom. That’s why I’m not worried about inflation.
    Over the last 20 years, I’ve consistently heard that inflation is about to come back. But it never does. Oh sure, Hurricane Omicron Delta will wreck some oil rigs, and that will cause a price spike here and there. But general price inflation? Naw, ain’t gonna happen.
    While you salute Alan Greenspan, don’t forget Paul Volcker too. During the 1981-82 recession, he had to have Secret Service protection. That was the Fed’s glory days. But nowadays, the Federal Reserve is overrated. It’s important, but it’s not all important. The best advantage we have is that the Fed realizes its own limits. This Bernanke fellow seems like a perfectly nice chap, and I have no reason to think he’ll do a bad job.
    Today, if the Fed makes a misstep, there’s a gigantic international currency market ready to pounce. That’s the Big Story today, not inflation. The volume of currency transactions is nearly $2 trillion. Every day. The Fed is just another player in that game.
    I hope you don’t mind if I put this in Baby Boomers term. If the economy is the Beatles, the Fed is the drummer. Sure, it’s nice to have a Ringo. But even without him, the band plays on.

  • The Market Today
    Posted by on November 4th, 2005 at 7:01 pm

    A late afternoon rally pushed us in the black for the day. Well…barely, but I’ll take it. This was a nice end to a good week. The S&P 500 rose 0.20 points (yes points, not percent) for a total gain of 0.02%. On an annualized rate, that’s less than 5% a year. I’ll still take it. The Buy List pulled back slightly; we lost 0.13% today, but November is treating well so far. This month, the Buy List is up 2.39% and the S&P 500 is up 1.09%.
    Our problem child today was Quality Systems (QSII). This I just don’t get. The company reported very good earnings yesterday. The stock rose at the open, and promptly fell to a 3.34% loss. I have no idea what caused the sell-off. The important news is that QSII had a great quarter. I’ll take that too.
    Frontier Airlines (FRNT) had a hectic day. When I saw the stock open, and nearly run to $10, I felt like a baseball player on a team whose pitchers had a no-hitter going through six or seven innings. Everyone is thinking the same thing, but no one wants to mention it. You don’t even want to sit near the guy. But I had to go and blog it around noon today. What was I thinking? I’m sorry, it’s all my fault. Our no-hitter got broken up by back-to-back home runs. Frontier plunged to $9.44, then closed at $9.63. For the day, we lost 9 cents. Once again, I’m sorry.
    Did anyone notice that AFLAC (AFL) is almost at a new high? Good, me too.
    The major action lately is definitely going on in the energy sector. We’re at one of those important “tipping points” in a bull market. This can happen for any sector, or even the entire market. So far, energy stocks have mauled every bear’s growl. They’ve flattened all non-believers. No prisoners. No mercy. Every sell-off has been fought back with another rally.
    Then in October, the sector started to break down again. But the selling was much harder than anything we’ve seen before. Was this the end? The Dow Jones Energy Index (^DJUSEN) finally found a bottom on October 20. That was a 15.8% “correction” in just 11 days.
    So now the question is: Was this just another pullback in the long-term trend, or was this a signal that the long-term trend had trended out? Normally, the bulls love to buy on any pullback. And predictably, we’ve now had the reversal. The index rallied about 10% off its low through yesterday. But then today came. The index got nailed for a 2.51% loss. That’s a tough loss on a day like this. The signs are all around us. Add in the productivity report. Add in the inflation report. Add in oil prices. The message is clear: Energy is out of power.
    Here’s a chart YTD:
    energy.bmp