• Brown & Brown
    Posted by on September 9th, 2005 at 12:50 pm

    One of my favorite insurance stocks, Brown & Brown, was recently upgraded by Legg Mason. I like the stock anyway, but I think it’s especially good right now.

    The company is extremely well run and has never had a lost in nearly 70 years of business. Operating margins are expanding, however legal expenses are weighing them down. Despite rising profits, the stock has been in a trading range for most of the past year.

    The company had two offices in New Orleans. Obviously, they expect too many claims and Brown said that the first estimates will be probably be low. He also said that it probably won’t impact rates nationwide, but it will have a major impact in the south. In fact, Brown said that there will be big problems in Florida in November and December due to a lack of capacity. Firms will simply not underwrite policies. If this is true, it will certainly impact the real estate market. Officials now estimate that the damages of Katrina at $125 billion.

    You can listen to J. Hyatt Brown at Keefe, Bruyette and Woods insurance conference. He’s a bit of a character. I could see him in talk radio. (Brown was actually speaker of Florida State House.) He said that his goal is to grow EPS by 15% ad infinitum. I was surprised to hear him say positive things about Sarbanes-Oxley.

    Here’s a transcript of an interview from a few years ago.

  • Delphi Drops Dividend
    Posted by on September 9th, 2005 at 10:57 am

    Things are going from bad to worse for Delphi. The company has already slashed its dividend twice, now it’s getting rid of it all together. The company should never have been spun-off by General Motors. Delphi is still hanging on to GM which remains its largest customer. The company is threatening to declare bankruptcy if it doesn’t get more concessions from its unions. Despite cutting its dividend, the stock is down today. I don’t see this company lasting to the end of the year.

  • Boom in Baton Rouge
    Posted by on September 9th, 2005 at 10:45 am

    One of the after effects of Hurricane Katrina is that it’s created a real estate boom in Baton Rouge. Local officials have estimated that the city’s population has doubled.

    Demand for residential and commercial property is so strong that rental vacancy is an oxymoron and buyers are bidding against each other for places to live. As available housing dwindles, buyers waive inspections and pay cash for properties they may not have even seen.
    “It’s crazy,” said Herb Gomez, executive vice president of the Greater Baton Rouge Association of Realtors. “(Realtors) are busier now then they have been in their entire careers.”
    Stephen Moret, chief executive of the Chamber of Greater Baton Rouge, said his members are running at full tilt. But it is an unexpected prosperity that he and other merchants are trying to keep in perspective.
    “Everything that’s happening here is against the backdrop of the terrible devastation in New Orleans,” Moret said. “I wouldn’t even call it bittersweet. Awkward is more like it. We’re trying to accommodate the needs of evacuees.”
    The real estate market is red hot, with both commercial and residential properties becoming increasingly scarce and valuable.
    A normal, active month in Baton Rouge would be marked by about 900 existing home sales. In the past 13 days, even the most conservative estimates say inventory has dropped from 3,600 homes to less than 2,500.

  • All-Time High for the DJUA
    Posted by on September 9th, 2005 at 9:39 am

    A lot of market technicians are in a tizzy because the Dow Jones Utility Average just hit an all-time high. In fact, Richard Russell, who is a follower of the Dow Theory, has moved from the bearish camp to the neutral camp. That may not sound like a big deal, but to a loooong-time bear like Russell, it’s an act of major significance.

    Mark Hulbert notes the reason for Russell’s change in outlook.

    The first thing is the new all-time high in the Dow Jones Utility Average. According to Russell, “Normally, the Utility Average will hit its highs well before the final high in a bull market, although there have been times when the Utility Average topped out simultaneously with the bull market high.”

    I think the market may move higher, but it won’t have much to do with the Dow Utility Average. The problem is that many public utilities have been too boring for too long. When some companies tried to break into new businesses, the results were a disaster. The whole industry tanked a few years ago thanks to headlines from the likes of Calpine and Enron. At one point in 2002, the Dow Utility Average was just 36% above its September high—its September 1929 high.

    The good news is that many public utility are very sounds financially. They have strong balance sheet, and most importantly, lots of free cash flow. Since taxes were cut on dividends, utilities have become popular with income investors. Also, the recent Energy Bill loosens some of the heavy handed regulations. For example, the bill eliminates the Public Utility Holding Company Act of 1935 which makes mergers very difficult. The utilities sector has many good smaller companies that are being eyed by larger utes. Even Warren Buffett’s is getting in the act. I wouldn’t be surprised to see a large bank pick up a small utility.

    Except for AES, none of the 15 stocks in the Dow Utility Average is expected to grow faster than the market over the next five years. Here are all stocks in the Dow Utility Average and Wall Street’s estimate for earnings growth over the next five years.
    AES CP 18.0%
    CENTERPOINT ENERGY 9.0%
    TXU CORP 7.0%
    EDISON INTL 6.5%
    WILLIAMS COS 6.5%
    EXELON 5.5%
    DOMINION RES 5.0%
    DUKE ENERGY 5.0%
    PG&E 5.0%
    SOUTHERN CO 5.0%
    FIRSTENERGY 4.5%
    PUB ENTRPR GP 4.0%
    NISOURCE INC 3.5%
    AMER ELECTRIC POWER 3.0%
    CONS EDISON 3.0%

    Here’s a chart of the Dow Utility Average going back to 1970.
    Dow Utility Average.bmp

    You can see that the index is just above the high it hit four years ago. Although the index has grown steadily over the years, it has badly lagged the rest of the market, even adjusting for dividends. At some point, utilities may become attractive, but right now, I’d avoid the sector.

  • Animal Rights Group Halts NYSE Listing
    Posted by on September 8th, 2005 at 5:58 pm

    Life Sciences Research Inc. was all set to begin trading today on the New York Stock Exchange. But less than an hour before the opening bell, NYSE officials told them that the listing was going to be postponed. No reason was given.

    LSR engages in animal testing, so the company is used to receiving hate mail and death threats. But the threat must have been very serious for the NYSE to halt a listing.

    On the Web site of the activist group Win Animal Rights, or W.A.R., a link off of the camouflage-pattern home page led to a page entitled “Puppy Killers on the New York Stock Exchange.” Readers are encouraged to write “polite letters and e-mails and make polite phone calls” to the exchange. The exchange’s address and phone numbers are listed, along with the names and work numbers of two members of the public relations department.
    W.A.R. founder Camille Hankins confirmed that an unknown number of W.A.R. supporters made calls to the exchange. Hankins said she does not advocate threats or violence, and she urged her members to be reasonable and make well-informed arguments against LSR. But she added that she had no control over what others might do.

    The NY Post has more.

  • BW: Chipmakers Face a Chilly Fall
    Posted by on September 8th, 2005 at 12:09 pm

    Business Week takes a look at the chip sector and it doesn’t look so good. Intel and Texas Instruments will provide revenue guidance today. I’m guessing that Intel will tighten the high side of its guidance. TXN is at a 52-week high right now. However, Business Week has to take its mandatory shot at Dell.

    “Dell’s results demonstrated that the industry is in a phase of being unit-rich but revenue-poor,” says Ashok Kumar, an analyst at Raymond James & Associates. “This isn’t only specific to the PC industry but will also be apparent in handsets and in emerging markets as well. Price points will continue to drop.”
    Adding to Intel’s woes, rival Advanced Micro Devices is forcing Intel to push down prices on its Xeon chips for servers, the computers that run Web sites and corporate data networks, notes JPMorgan analyst Chris Danely. Intel may tighten its revenue forecast to between $9.8 billion and $10 billion for the fiscal third quarter and maintain its forecast for gross margin, a yardstick of profit, of about 60%, Danely says. Intel now expects revenue to come in between $9.6 billion and $10.2 billion.

    I think it’s a stretch to say that Dell is “revenue poor.” The company’s revenue shortfall could have been made up very easily last quarter. HP’s Douglas Hurd continues to be the media darling. WSJ has more on HP’s analyst meeting.

  • Google Watch
    Posted by on September 8th, 2005 at 11:17 am

    Google just announced that it hired Vint Cerf, the “Father of the Internet.” He’s new position is Chief Internet Evangelist. Groan.

    MOUNTAIN VIEW, Calif.–(BUSINESS WIRE)–Sept. 8, 2005–Google Inc. today announced that it hired Vinton (Vint) Cerf, the longtime technologist who is widely known as a “founding father” of the Internet, as Chief Internet Evangelist.
    “Vint Cerf is clearly one of the great technology leaders of our time,” said Google CEO Eric Schmidt of Cerf, who co-designed the TCP/IP protocols that were used to develop the Internet’s underlying architecture. “His vision for technology helped create entire industries that have transformed many parts of our lives. We are honored to welcome him to Google.”
    Cerf will continue his leadership in the Internet community, and help Google build network infrastructure, architectures, systems, and standards for the next generation of Internet applications.
    “Google has already made tremendous strides in making access to information on the web a reality for users across the globe, but we’re still in the Internet’s early innings,” he said. “This medium will enjoy wider-spread use than television, radio or phones, and will ultimately expand beyond planet Earth. Google has always believed in doing things differently, and I believe that places us in a unique position to help bring even the wildest Internet visions into reality.”
    Cerf joins Google from MCI, where he led technology advancements since 1982, with a break to return to research at the Corporation for National Research Initiatives from 1986 to 1994. On his return to MCI in 1994, he helped to put MCI on the Internet map. With Robert Kahn, he recently received the ACM’s A.M. Turing Award, considered “the Nobel Prize for computing,” for his achievements in computer networking. Cerf is also working on the Interplanetary Network, a project of NASA’s Jet Propulsion Lab, which aims to extend the Internet into outer space for planet-to-planet communications. He will also continue in his role as the Chairman of the Internet Corporation for Assigned Names and Numbers (ICANN).

    Business Week has more on Cerf’s role.

    Cerf’s hiring comes on the heels of several moves that suggest Google is encroaching on telecom turf. In the past year, the Internet giant has dipped its toe in the Wi-Fi market, sponsoring hot zones in San Francisco and New York City.
    HIGH AMBITIONS. Also, Google has been reported to be buying up chunks of dark, or unused, fiber-optic capacity employed to transmit calls and data at high speeds. And in August it joined the stampede of Internet companies looking to provide voice-over-Internet phone calls when it launched a new instant-messaging tool.
    Indeed, it’s beginning to look like Google harbors ambitions to use the Internet and search tools for delivering everything from voice and data communications to audio and video files. This would resonate with Cerf, who has often predicted voice-over-Internet services will dramatically reshape the phone industry.

  • The Fed’s Next Move
    Posted by on September 8th, 2005 at 10:24 am

    To raise of not to raise, that’s the question. After raising interest rates for 14 months, the Federal Reserve may temporarily hold off in the aftermath of Hurricane Katrina. I think that would be a mistake. The Fed needs to send a clear message to the market that it’s serious about attacking inflation.

    The Fed meets again on September 20 and before Katrina, an 11th straight rate increase was basically a done deal. Now, it’s hard to say. The futures market puts the odds of another rate increase at 50%. After 9/11, the Fed cut rates by 50 basis points. The difference is that the economy was much weaker then. The Fed’s rate cut would have come about within a few months without 9/11.

    The economic consequences of Katrina are still hard to gauge. The Congressional Budget Office said that the hurricane will cost 400,000 jobs and zap GDP growth by 0.5% to 1%. Then there’s the inflationary outlook, and that’s even murkier. The good news, however, is that oil prices finally seem to be pulling back.

    I think the best move for the Fed would be to continue raising interest rates. Holding rates artificially low for too long won’t help Louisiana or the markets.

  • Bayou Goes Hollywood
    Posted by on September 7th, 2005 at 7:30 pm

    Here’s a strange twist to the tale of Bayou Management. It seems that the fund’s managers were trying to get in the movie business.

    According to corporate filings with the secretary of state in Nevada, Paid Merchandising, Paid Movie I and Paid Movie II list as their principals IM Partners and Mathew Marino, the brother of Dan Marino, Bayou’s chief financial officer. Both principals list their address as 40 Signal Road, Stamford, Conn., the same address where Bayou once lodged its various hedge funds.
    Those entities agreed to finance a significant portion of “Yellow,” a film produced by Yellow Production about a woman who is haunted by the death of her father, according to a London-based Web site called The Z Review. “They wanted to invest in movies,” said Stephen Brown, the president of Yellow Production. But, he said, “Paid Movie I did not complete the financing of the movie. We took additional steps to secure the balance of the funding.”

  • Earnings Outlook
    Posted by on September 7th, 2005 at 2:51 pm

    Nearly every stock in the S&P 500 has reported earnings for the second quarter, and the earnings growth has been fairly impressive. It looks like the final earnings growth number will be about 12.0%. For comparison, at the start of the second quarter, Wall Street was expecting just 8.8% earnings growth. The second quarter marks the eight straight quarter of double-digit earnings growth.

    Nearly 70% of the companies in the S&P that have reported have beaten expectations. For a typical quarter, 59% of companies top expectations. Only 16% of companies have missed estimates compared with 20% for a typical quarter.

    Earnings growth has been heavily tilted to the energy sector which saw its profits grow by 42%. If you take out energy, the rest of the S&P 500 grew its earnings by 8.5%. The earnings growth rate has been slowing dropping for the past quarters, but it should finally started expanding again. Earnings growth should pick up to about 17% for the third quarter. However, this earnings pick-up might be short-lived. For the fourth quarter, profit growth is expected to pull back to 14%. And for next year, earnings are expected to grow at 10.8%. I think Wall Street and the Federal Reserve are still trying to judge the impact of Hurricane Katrina.

    The Consumer Discretionary group, which has seen its profits dip lately, is expected to lead the market next year. Here are the 2006 earnings growth expectations for the 10 major market sectors, note that Energy is last.
    Consumer Discretionary 17.61%
    Information Technology 16.85%
    Health Care 14.89%
    Industrials 14.41%
    Utilities 10.60%
    Materials 10.33%
    Consumer Staples 8.38%
    Financials 6.11%
    Telecommunication Services 4.60%
    Energy -0.50%