• Q&A: Stop-Losses
    Posted by on November 4th, 2005 at 2:15 pm

    I’m fairly new to trading, what do you typically put a stop lost at and do you use trailing stops.
    Thanks

    I don’t use stops at all. Truthfully, I think they’re a diversion. I understand some people like the psychological comfort of a stop-loss. IBD’s Bill O’Neil has long advocated using a 7% stop-loss point. If that’s what you’d like, then go right ahead, but I don’t think there’s a need to. You either own a stock or you don’t.
    A good example of how stops can come back to haunt you is what happened to the market after 9/11. Gobs of great stocks got pummeled in the panic-selling when there was no reason to sell. I would hate to have been stopped out then.
    Also, different stocks have different volatilities. It may be perfectly natural for a stock like Google (GOOG) to swing 10% a day, but a stock like Brown & Brown (BRO) is very stable. Also, volatility is itself volatile, so these hard “7%” rules can box you in.
    Too many investors get emotionally involved in the day-to-day volatility of their stocks. The great thing about investing is that it rewards not paying attention! What’s not to like?
    – Eddy
    If you have any stock questions, feel free to e-mail me at eddy@crossingwallstreet.com. I’m happy to give you my opinion on any stock or investing in general; however per SEC rules, I’m not allowed to give personal portfolio advice.

  • The Midday Market
    Posted by on November 4th, 2005 at 12:01 pm

    Outside of a few tech stocks, the market is fairly weak today. The Dow is down 37 points. The S&P 500 is off about 0.40%, and our Buy List is down 0.26%
    Stock like Oracle (ORCL), Cisco (CSCO) and Symantec (SYMC) are higher today, as is Starbucks (SBUX). The caffeine company reported October sales jumped by 21% last month. The yield on the 10-year T-Bond broke out to a 16-month high today. The dollar is at a high this year against the euro, and a two-year high against the yen.
    Our Buy List is having a mixed day. Quality Systems (QSII) is lower despite its good earnings report. Frontier Airlines (FRNT) came within two pennies of $10 a share.
    Also, Business Week takes a look at Ikea.

  • Fortune: Englander May Settle With Spitzer
    Posted by on November 4th, 2005 at 11:28 am

    Fortune reported that hedge fund legend Izzy Englander may cough up $100 million to settle securities fraud charged with Eliot Spitzer. According to the government, Englander’s Millennium used a series of unusual trading tactics.

    People close to the case say Millennium devoted some $1 billion to its trading strategy, opening up thousands of mutual fund accounts to disguise what the firm was doing. Allegedly the firm even deployed a byzantine trading tactic that involved creating subsidiaries with peculiar names such as Osaykanu LLC (Oh-Say-Can-You LLC, apparently) to hide its trading.

    Englander has amassed an enviable record on Wall Street. He reportedly manages money for established clientele like Duke Univeristy. But the Millennium fund isn’t your typical money management operation.

    Millennium, with around $5 billion in assets, is an “odd duck compared to other hedge funds we’ve looked at,: says a private detective who specializes in hedge fund reconnaissance.

    There are private detectives who specialize in hedge fund recon! What would Sam Spade think?

    For one thing, it consists of a labyrinth of entities with different names. Millennium, which has upwards of 100 traders, has tended to be more of a sophisticated day-trading shop, say experts. “Englander takes traders off the street, gives them a pile of money, and says, ‘Here’s a chair and computer — go trade’,” says someone familiar with the firm.
    Many former employees of Millennium counter that Englander is very serious about running his business. Says Peter Feinberg, a former Millennium trader who now heads institutional equity trading at Oppenheimer & Co.: “Izzy’s an absolute straight shooter.”
    That’s certainly the way Englander would like his investors to think of him: an upmarket guy who deploys an overwhelming array of ultra-sophisticated models that would just baffle mere civilians. But to maintain an edge, Millennium adapted an “almost anything-goes” mode, according to some former traders.

  • What’s the Hottest Market in the World?
    Posted by on November 4th, 2005 at 11:08 am

    It’s Brazil.
    The Brazil iShares (EWZ) are about 500% in the last three years. According to S&P, Brazil’s market trades at just 10.7 times trailing earnings. Brazil’s Fed recently lowered short-term interest rates to 19%.
    President Bush is currently in South America at the Summit of the Americas. He’s trying to revive the hemisphere-wide free trade agreement.
    Here’s a three-year chart of EWZ.
    brazil.bmp

  • Jobs Report
    Posted by on November 4th, 2005 at 8:58 am

    The government reported that nonfarm payrolls increased by 56,000 in October. This was about half of what Wall Street was expecting. The unemployment rate fell from 5.1% to 5%. Also, the jobs growth number was revised lower for August (148,000 instead of 211,000) and higher for September (a loss of 8,000 instead of a loss of 35,000).
    The EU reported that unemployment in Europe fell to 8.4% from 8.5%. Poland has the highest jobless rate of 17.7%. Over a third of young people are out of work. The lowest unemployment goes to…Ireland! Just 4.3%.
    The bond market is currently selling off. Long-term yields are headed to another six-month high. Also this morning, Prudential downgraded Apple Computer (AAPL) due to valuation. This might weigh on the morning’s trading. Frontier Airlines (FRNT) said that it will resume flights to Cancun, which had been suspended due to Hurricane Wilma. The company has also received approval to expand its Cancun service to Indianapolis.

  • Brown & Brown’s Downgrade
    Posted by on November 3rd, 2005 at 5:19 pm

    Here’s Sandler O’Neill’s downgrade of Brown & Brown (BRO).

    We are lowering our rating to Hold from Buy based on valuation. Brown & Brown is currently trading at 18.9x our forward twelve month earnings per share (EPS) estimate and at a 16% premium to next year’s EPS growth rate.
    While we believe the company’s valuation premium relative to peers is warranted, given the company’s consistent operating performance, we believe additional multiple expansion in the near-term will be more challenging.
    Since upgrading the stock to Buy on June 9, 2005, Brown & Brown has appreciated 24%.
    We continue to view the company’s operating landscape as attractive and could turn more positive on the stock should property and casualty premium pricing harden more than we expect in Brown & Brown’s territories.

    They’re right. The stock has rallied lately, but what I’m afraid they’re missing is how strong BRO’s earnings growth has been. For proof, you can see that BRO (black line) has consistently outperformed its peer group (gold line) over the past few years, and its P/E ratio (lower graph) is still pretty cheap compared with recent history. The earnings multiple is about where it was in 2002, and the stock is much, much higher.
    bro.bmp

  • The Market Today
    Posted by on November 3rd, 2005 at 4:44 pm

    The market rallied for the second day in a row, and for the fourth time in the last five days. The S&P 500 gained 0.43%, and our Buy List gained 0.32%. The bond market was weak again as long-term yields made new highs. The 10-year yield is up to 4.64%.
    The broader market was helped by Merck (MRK). It seems that Merck was simply unprepared for the first Vioxx trial. By all reports, the company’s defense at this recent trial was overwhelming. The stock rallied today. Qualcomm (QCOM) and CVS (CVS) also had great days. Just a few weeks ago, Apple Computer (AAPL) fell below $48 after its earnings. The stock broke through to another new high today at $61.85.
    Four months ago, Oracle (ORCL) hired Microsoft’s former CFO Greg Maffei as CFO. But then, no one seemed to know his status. The company wouldn’t discuss it and an analyst conference was canceled last week. The stock sold off sharply this morning on very heavy volume. The company just confirmed that Maffei has resigned.
    Guidant (GDT) has been sued by Eliot Spitzer. Now that it seems like Johnson & Johnson will walk away from its proposed merger. There’s been some speculation that St. Jude Medical (STJ), one of our Buy List stocks, might be J&J’ next target. St. Jude was up over $2 yesterday.
    The big winner today on our Buy List was Fair Isaac (FIC). The stock gained 5.5% in the wake of its great earnings. Lincare (LNCR) was up 4.7%. Congrats to Frontier Airlines (FRNT)! It was named #1 for on time performance. Quality Systems (QSII) just reported earnings of 43 cents a share, three cents more than estimates. Revenues were up 39%. The stock closed up 2.9%.
    Our laggards included Brown & Brown (BRO) which had two downgrades. Also, Thor Industries (THO) dropped 4.5% due to Fleetwood’s (FLE) poor sales report.
    Remember how Sarbanes-Oxley was going to increase transparency? Well, the compliance costs are weighing down lots of small companies. One publicly-traded stock has had enough, and they’re going private. Net effect: less transparency. (Via Luskin.)
    And finally, Random Roger has some thoughts on Pfizer (PFE).

  • Quotes From Chariman Alan
    Posted by on November 3rd, 2005 at 2:41 pm

    viva greenspano.gif
    Here are some quotes from Greenspan’s testimony today.
    On the yield curve:

    That used to be one of the, I guess, most accurate measures we used to have to indicate when a recession was about to occur and when a recovery was about to occur.
    It’s lost its capability of doing so in recent years. The markets have become far more complex and the simple relationships that that yield curve slope indicated no longer work.

    On low long-term bond yields:

    Disinflationary pressures, the excess savings pressures, have more than offset the expectational concerns that rising supplies of U.S. Treasury debt have out there. I think that’s going to change.

    On energy prices:

    We have been able to absorb that to a large extent because
    we have an extraordinarily more flexible economy than we had back in the mid-1970s.
    The fact that the use of energy is much less than it was has enabled us to absorb the energy shock with nowhere near the type of consequences that we confronted in the earlier period.

  • Fair Isaac’s Earnings
    Posted by on November 3rd, 2005 at 1:05 pm

    I wanted to say more about Fair Isaac’s (FIC) earnings report. I was very impressed. The company holds a near-monopoly position in the industry. Last quarter, gross margins expanded from 64% to nearly 67%. Operating margins jumped to 26% from 21%.
    The company also raised guidance for next year to $2.15 a share. Here’s a report from Reuters, but catch what’s at the bottom.

    –The company said shares used in computing earnings per
    share for the latest third quarter were about 67.2 million,
    compared with about 80.4 million in the year-ago period.
    –The provider of analytics and decision technology said it
    expects first-quarter earnings to be about 50 cents per share,
    excluding the impact of stock-options expensing. It said
    revenue for the quarter would be $207.0 million.
    –Six analysts on average expect the company to earn 48
    cents per share, excluding special items, and four analysts
    expect revenue of $212.4 million for the first quarter,
    according to Reuters Estimates.
    –Fair Isaac said for fiscal 2006 it expects the earnings
    to be about $2.15 per share, excluding the impact of
    stock-options expensing. It said revenue for the year would be
    $860 million to $900 million.
    –Nine analysts on average expect the company to earn $2.06
    per share, before special items, and six analysts expect
    revenue of $875.5 million for 2006.
    (Reporting by Debiprasad Nayak in Bangalore)

  • The Alito Portfolio
    Posted by on November 3rd, 2005 at 12:10 pm

    Forget his opinion on the Commerce Clause, why the hell does Judge Alito own Bristol-Myers (BMY)? Did he see their earnings report? WTF? Bush wants this man on the Supreme Court! I hope the senators grill him on this. Bristol-Effing-Myers?? Well, let’s just burn the Constitution while we’re at it.
    He also owns Disney (DIS), Intel (INTC), McDonald’s and ExxonMobil (XOM), plus a ton of Vanguard funds. Wow, how 1972.
    Here’s his financial disclosure form.
    If you ask me, Roberts has a much better portfolio. (1/8 interest in a cottage in Koncklong, Limerick, Ireland??)