Merck Wins
Posted by Eddy Elfenbein on November 3rd, 2005 at 11:41 am

Merck (MRK) just won its big Vioxx trial. Four years ago, Mike Humeston had a heart attack that came just two months after he started taking Vioxx. The jury said that Merck is not responsible. In August, a Texas jury held Merck liable for the death of Robert Ernst. His widow was awarded $254 million. Merck is appealing that case. Merck’s stock is up about 6% today.
Expeditors (EXPD) is up 4.7% today. Lincare (LNCR) is up 3.2%. Quality Systems (QSII) is up 3.6%. The company is due to report earnings after the close. Fair Isaac (FIC) is up about 3% after its great earnings yesterday.
Brown & Brown (BRO) got two downgrades today. The company has been on an acquisition binge lately. The stock is off about 3%.

Airlines & the PBGC
Posted by Eddy Elfenbein on November 3rd, 2005 at 10:24 am

Guess who’s become a large owner of airline stocks? You, the taxpayer.

The Pension Benefit Guarantee Corp., the federal agency that partially guarantees traditional pensions, recently was awarded 7% of US Airways Group Inc. by a federal bankruptcy court handling the company’s Chapter 11 reorganization, according to the PBGC’s recent filing with the Securities and Exchange Commission. The agency got the shares as compensation for the underfunded pension plans it assumed when the company filed for bankruptcy.
The agency is likely to get an even larger stake — between 15% and 35% of new shares — of UAL Corp.’s United Airlines when it emerges from Chapter 11 in February, after 38 months in court protection, according to a PBGC official. And it’s likely to get sizable chunks of Northwest Airlines, Delta Air Lines and Delphi Corp. — if, as expected, the companies ask the bankruptcy courts to dump their pension plans on the insurer.
Taxpayers stand to benefit if the PBGC’s stockholdings increase in value. Stock sales would bolster the agency’s assets that are used to pay retirement benefits, and possibly forestall the need for a taxpayer bailout of the deficit-ridden federal insurer.

By going under, the companies can finally get ditch of their pension liabilities. But then there’s the question of what the government should do as a shareholder.

When companies seek to shift pension plans to the PBGC in bankruptcy, the agency typically becomes a member of the unsecured-creditors committee that tries to recover assets to cover unfunded liabilities. As a member of the committee, the agency can object to parts of a proposed reorganization plan, including mergers or acquisitions. Its primary role as a committee member is to get as big a share of the assets recovered as possible.
The PBGC’s recoveries are often small because of the relatively low standing of unsecured creditors. The agency has gotten some equity stakes in the past and an occasional board seat. It currently has three board seats, including one with Fansteel Inc., which turned over to the agency a pension plan underfunded by $21 million early last year; the PBGC has a 26% stake in the company. The agency couldn’t immediately provide the names of the other companies for which it holds board seats. The PBGC owned 8% of a new Polaroid Corp. holding company that was created in a 2002 bankruptcy proceeding, and sold the stake a year ago for $31 million.
The PBGC takes the position that the government should not take an active role in corporate management or governance. That’s why it assigns one of its 11 money managers — which primarily invest its pension assets — to manage individual equity holdings. J.P. Morgan Chase & Co., one of its money managers, has taken on the role of managing equity stakes because of its experience. As a fiduciary, the money manager’s role is to monitor whether company management is getting the maximum for its investment.

Remember, the Feds actually made a nice little profit with its loan to Chrysler 25 years ago. Normally, I’m a bit wary of government ownership of industries. The usual side effects are huge operating losses, poor quality and endless union troubles. With the airlines, we already have that.
As usual, the Simpsons has something to say on this subject. When Krusty the Clown is indicted on tax fraud, the IRS seizes all of his assets. Krusty Burger becomes IRS Burger.

Homer: Lesse, I’ll have four tax burgers, one IRS-wich, withhold the lettuce, four dependent-sized sodas, and a FICA-ccino.
Kid: Fill out schedule B. You should receive your burgers in six to eight weeks.

Productivity Surges
Posted by Eddy Elfenbein on November 3rd, 2005 at 9:42 am

Business productivity surged 4.1% during the third quarter, and productivity growth for the second quarter was revised higher to 2.1%. This was the best number in a long time and well above Wall Street’s forecast.
Productivity is an important number to watch because it tells us worker output per hour. Growing productivity changes the entire economic landscape. It basically means that the economy is making less go further. Growing productivity also holds down inflation and takes pressure off the Federal Reserve.
Today, Alan Greenspan will make his final appearance before Congress as Fed chairman. Tomorrow we’ll get the employment report for October.

Soccer Affects the Stock Market
Posted by Eddy Elfenbein on November 2nd, 2005 at 10:05 pm

A Dartmouth study finds that a country’s stock market is affected by its national soccer team.

Match results may “have an important effect” on share prices, Professor Diego Garcia said, commenting on a report released by Tuck School of Business at Dartmouth this week. “There are forces influencing our economies that have little to do with rational thought.”
Stock markets decline 0.39 percent on average after the national team loses in a World Cup game and 0.29 percent in any international match, according to the study, co-written by Massachusetts Institute of Technology’s Alex Edmans and Norwegian School of Management’s Oyvind Norli.
The correlation is the highest in countries with the biggest public support for soccer such as England, France, Germany, Italy and Spain, the report said. In South American nations, the phenomenon is similar, it said.
Soccer “may have an effect on the market since it affects sentiment,” Richard Hunter, head of U.K. equities at Hargreaves Lansdown in Bristol, England, said in a telephone interview today. “Psychology is pervasive in markets.”
Still, there’s no evidence to show that stock markets rise when teams win, the study said.

You can download the paper here.

The Market Today
Posted by Eddy Elfenbein on November 2nd, 2005 at 4:33 pm

This was a terrific day for our Buy List. Every stock was up except for Medtronic (MDT). The S&P 500 was up 1.00% while the Buy List was up 1.87%. Brown & Brown (BRO), Expeditors (EXPD), Progressive (PGR), St. Jude (STJ) and Varian (VAR) made new highs.
Fair Isaac (FIC) just reported earnings of 53 cents a share, four cents more than Wall Street’s estimate. Sales were up 13.1%. The company also guided higher for this quarter.

NYT: Wal-Mart Movie Opens With Fracas in Manhattan
Posted by Eddy Elfenbein on November 2nd, 2005 at 4:02 pm

Funny: A filmmaker makes an anti-Wal-Mart film.
Funnier: Wal-Mart reps buy tickets to see the premier.
Hysterical: The filmmaker throws them out.

Wal-Mart Stores came to Manhattan last night for a peek at a movie about itself. But before it got the chance, a Wal-Mart consultant was told to leave the theater after the director accused him of trying to secretly record the film.
Minutes into the premier of the film, “Wal-Mart: The High Cost of Low Price,” the director, Robert Greenwald, said he spotted the consultant pointing his open cellphone toward the screen. A confrontation ensued in the lobby. “Get out of here,” Mr. Greenwald yelled, according to the director and a Wal-Mart spokeswoman. “This is a disgrace.”
The spokeswoman, Mia Masten, said she and two consultants had bought tickets to the screening “to find out what they were saying so we can correct it.” Ms. Masten said the consultant who was asked to leave, John Marino, was trying to call her because she was running late.
“Why would we record it?” she said, “We bought tickets.”
The incident is the latest chapter in escalating public relations battle between Wal-Mart and its critics. The retailer has set up a rapid response war room in Arkansas to monitor its critics, and sent media specialists to Manhattan as part of the effort.
Rick Jacobs, the chairman of Brave New Films, which is distributing the film, said he was considering filing charges against Wal-Mart and the consultant for attempted piracy. “You can’t just go in and record a movie,” Mr. Jacobs said. “Wal-Mart should know. They are the largest seller of DVD’s in the country.”

One thing that many of Wal-Mart’s critics forget is that the stock hasn’t done very well recently. Since the market low three years ago, Wal-Mart’s stock is down while the S&P 500 is up over 50%. If the stock had merely kept pace with the overall market, Wal-Mart would be worth over $100 billion more than it is today.

Mercury Interactive Plunges
Posted by Eddy Elfenbein on November 2nd, 2005 at 3:06 pm

Of all the ways to commit financial fraud, this has to be one of the lamest.

In a report filed with the Securities and Exchange Commission, Mercury said an internal investigation — launched after the SEC began an inquiry into the company in Nov. 2004 — found at least 49 cases in which the company misreported the dates on which it issued stock options. The practice, which applied to “the overwhelming majority” of grants issued between January 1996 and April 2002, the report said, likely allowed executives and employees to make more money on their options because it set a lower “strike price” at which the options could be exercised.
That’s because in almost every case of misdating, the price of Mercury shares on the reported option-grant date was lower than the share price on the actual day the options were issued, the SEC report said.
By manipulating the grant dates, Mercury “was able to provide employees with the lowest possible exercise price,” says Robert Willens, an accounting and tax analyst with Lehman Brothers in New York. “The lower the exercise price, the better off you are as an employee, so you’d want to cherry pick the dates on which the prices would be set,” he says.
Mr. Willens said the accounting trick was extremely blatant and somewhat surprising, since such option-grant manipulation is usually easy to detect by auditors. “This isn’t one of your more complex financial crimes,” he said.

The CEO and CFO have resigned. The stock could be delisted. Shares of Mercury Interactive (MERQE) are down 30% today.

Midday Market Update
Posted by Eddy Elfenbein on November 2nd, 2005 at 12:08 pm

All 25 stocks on the Buy List are up, even Dell (DELL). We’re currently ahead of the S&P 500, 1.33% to 0.70%. Progressive (PGR), St. Jude (STJ) and Varian (VAR) are all at new highs.
Both Lehman and Bear Stearns upgraded the entire airline sector which helped shares of Frontier Airlines (FRNT). Right now, oil is down 40 cents to $59.45 a barrel. The VIX is also lower at 13.87.
Here’s some good news: Johnson & Johnson (JNJ) said that it may cancel its $25 billion acquisition of Guidant (GDT). Ever since the deal was announced, everything has gone wrong for Guidant. If the deal falls through, it will be good for J&J.
Finally, Fair Isaac (FIC) is due to report after the close.

Symantec’s Earnings
Posted by Eddy Elfenbein on November 2nd, 2005 at 11:33 am

Here’s yet another reason why I hate mergers. Symantec’s (SYMC) earnings got creamed last quarter due to “acquisition costs” related to its buyout of Veritas. The company reported a loss of $251 million compared with a gain of $235 million last year.
These used to be two great stocks. Symantec was one of the best tech stocks to own after the bubble burst. The Veritas merger was supposed to be this great marriage of storage and security software. At $13 billion, the deal was even larger than Oracle’s (ORCL) bid for PeopleSoft. Also today, Symantec also guided lower for this quarter. The stock is down about 20% today.

Time Is Out of Joint
Posted by Eddy Elfenbein on November 2nd, 2005 at 6:08 am

What’s going on with the VIX? The CBOE’s volatility index, which measures the implied volatility of the S&P 500, has suddenly become aligned with the underlying index. On Monday, both the VIX and the market rose. Yesterday, both lost ground.
That ain’t right. The two indexes disagree with each other more than 80% of the time. Two-day agreements are rare, three straight days is peculiar, and we’ve only had one stretch of four days in a row of alignment in the last three years.
The WSJ looks at some theories:

There are differing views about what is going on here, but the consensus seems to be that it is best to assume that yesterday’s move was really just a correction of Monday’s move, and that by now, things are where they belong.
Frederic Ruffy, analyst at Optionetics Inc., thinks the out-of-tandem moves aren’t coincidental. Instead they are evidence of an adjustment in volatility expectations. This is a “sign that participants in the options market are recognizing that the market is more volatile now,” he said. “There are some long-term trends that are causing volatility to rise,” like interest rates, political uncertainty and concern about energy prices.
Because volatility expectations are an important part of options prices, the market could be saying that “the premiums for selling and buying S&P 500 options should be higher,” Mr. Ruffy said.

The VIX has indeed been climbing lately, although at around 15, it’s still pretty tame stuff. The Era of High Volatility (i.e., the first four seasons of Sex and the City), routinely gave us VIXens in 30’s and 40’s.
Since the market finally turned, volatility has melted away. For a brief shining, and disvolatiled moment on July 20, the VIX dipped into the single digits. Even a month ago, the VIX was still around 12.
In The Economist, Buttonwood notes that the more volatile environment has been accompanied by changing events.

But low inflation, low interest rates and untroubled confidence in safe hands at the helm are fast becoming things of the past. Oil-price hikes have helped to push up inflation around the world. The Fed was expected to raise short-term rates again on Tuesday, to 4%, and looks likely to do so at least once more in the next three months. The European Central Bank may soon follow its tough talk on inflation with some tough action. Japan is more likely to raise rates than to cut them. Alex Ypsilanti, a strategist at Merrill Lynch, points out that over the past ten years the troughs in volatility have come one-and-a-half to two years after the low points in three-month dollar LIBOR (interbank) rates. The Fed started raising rates 16 months ago.

What does it all mean? Perhaps the era of high oil, trading ranges, low volatility and low long-term interest rates is coming to an end. As is often with financial markets, important turning points don’t announce themselves. At least not until they’ve made themselves quite comfortable.
I get the feeling that the times they are a-changing. Even the Japanese market made a new high yesterday. Although they had a little trouble when a computer glitch shut the market down. Apparently volume has exploded and no one saw it coming.