• AP: Half of Damaged Refineries Near Restarting
    Posted by on September 5th, 2005 at 10:08 pm

    Some good news from the Gulf Coast. The AP reports that half of the refineries that were knocked out by Katrina are close to restarting.

  • The Future for Investors Is Bright
    Posted by on September 1st, 2005 at 11:21 pm

    Investors ought to listen to Jeremy Siegel.

    The Wharton finance professor has written a new book, “The Future for Investors: Why the Tried and the True Triumph Over the Bold and the New,” and once again, he’s doing investors a service and making Wall Street professionals very uncomfortable. Siegel has even declared an important change in his own philosophy. “The Future for Investors” is the talk of Wall Street, and it could lead to a major shift in investors’ attitudes.

    Fans of Siegel already recognize him as one of the sharpest observers of the stock market. Five years ago, right as the NASDAQ bubble peaked, he wrote an op-ed for the Wall Street Journal titled “Big-Cap Tech Stocks Are a Sucker’s Bet.” It was a message that many didn’t want to hear. The article actually earned him hate mail, but few investment opinions have been so vindicated by history. Within three years, the NASDAQ lost three-fourths of its value. Investors who listened to Siegel could have saved themselves from huge losses.

    His argument wasn’t particularly novel at the time. Many others had questioned the NASDAQ’s meteoric rise. But this time, the warning signal came from a man who made his reputation as an advocate of “buy-and-hold” investing.

    In 1994, Siegel’s first book “Stocks for the Long Run,” showed that if you waited long enough, stocks have historically been the best asset class to own—even after adjusting for risk. Of course, for most people, the “waiting long enough” is the hard part. The book was a surprise hit and it helped launch index funds into mainstream of investing. Today, over $1 trillion is tied to indexing.

    In his new book, Siegel has made an important change: He now thinks you can beat the indexes. But the key is not focusing on the fastest-growing companies, but instead, buying the “tried-and-true.” His research shows that Wall Street’s stalwarts have done better than its upstarts. In fact, he thinks that the fastest-growing stocks are often the ones you most ought to avoid. As you might imagine, this book is not sitting well within the growth-obsessed canyons of Wall Street.

    For the book, Siegel completed a mammoth research project delving into the total return of the entire S&P 500, stock-by-stock, since 1957. He found that the stocks with the best total return—capital gains and reinvested dividends—were not the companies with the fastest growing profits. The top-performing stocks were often relatively dull companies in mature industries.

    For example, Siegel compared the stocks of IBM and Standard Oil of New Jersey (now ExxonMobil). For decades, IBM was synonymous with growth. In the eyes of investors, IBM wasn’t merely a company—it was “the future” in corporate form. Standard Oil, on the other hand, was a dinosaur, a busted trust making-do in the computer age.

    Since 1950, IBM has outpaced Standard Oil in nearly every aspect of business performance. IBM grew faster (per-share) in terms of revenue, earnings and dividends. Yet, Standard Oil gave investors a better return for their money. How could this be?

    The reason, says Siegel, all comes down to valuation. Investors simply paid too much for IBM. Siegel doesn’t think this was just one misjudgment. He believes investors routinely pay too much for growth. Siegel calls this the “growth trap,” and by avoiding it, he thinks investors can do what they’ve been told they can’t—beat the averages.

    Seigel’s insight is that growth alone doesn’t translate into returns. Consider these facts: Since 1957, the railroad sector has shrunk from representing 21% of the S&P 500, to just 5% today. Yet, railroad stocks have actually outpaced the index. Financial stocks have grown from 1% of the S&P 500 to over 20% today, and they’ve underperformed the index. But everyday investors are told to invest in fields like biotechnology because “it’s the future.” While it may be the future, investors aren’t being told that it may not be the best investment to make for the future.

    Siegel found that the firms that have been added to the S&P 500 have actually diluted the index’s performance. Even the 20 largest stocks in the S&P have outperformed the rest of the index. And the returns of initial public offering have been “dreadful.”

    Mind you, Siegel isn’t saying that emerging companies aren’t growing, but he argues that their share prices routinely fail to live up to expectations. The growth trap isn’t limited to stocks either. He says it can induce investors to overpay for investing in emerging countries as well.

    Siegel examines why investors continually fall for the growth trap. One of reasons investors ignore the “tried-and-true” is that they overlook the importance of dividends. Without reinvesting dividends, the after-inflation return of the stock market drops by one-third. In the case of Standard Oil and IBM, the computer company had far greater capital gains. But it was reinvested dividends that tilted the race to Standard Oil.

    Siegel found that the stocks with the highest dividend yields performed the best over the long-term. Despite the common belief that high yields are a sign of slow growth, Siegel found that many companies like Crane, Royal Dutch, Hershey and Wrigley all delivered solid growth while paying out above-average dividends. He also found that stocks with low price/earnings ratios consistently did better than stocks with higher multiples.

    What about the current S&P 500? I looked at the 200 largest stocks in the index to see if I could find my own list of tried-and-true stocks. My first step was to cut out all the stocks with a price/earnings ratio greater than 15. Siegel says that, “The first mistake people make is paying too much for a stock. They think price is secondary and that ‘growth will bail me out.’ They’re wrong.”

    After that, I removed all the stocks with a dividend yield under 3%. I was left with a list of 20 bargain-priced Wall Street stalwarts.

    Included in this group was Altria (formerly Philip Morris) which was hardly a surprise. Siegel identifies it as the single best-performing S&P stock since 1957. Investors made nearly 20% a year in Altria. Today, the tobacco giant trades at just 14.3 times earnings while its dividend yields a generous 4.3%. That’s more than you get with a 10-Year Treasury bond.

    Merck is another stock with an impressive history that made it onto my list. According to Siegel, it’s the seventh top-performing S&P stock since 1957. The shares have been severely punished lately. Merck’s stock is down over 65% since late-2000. Despite the price wreckage, the company has not only continued to pay a dividend, it has increased its payout each year. Merck currently trades at 14 times earnings, and it boasts a dividend yielding 4.7%.

    I wasn’t surprised that no tech stocks made the cut, but I was surprised to see that half the members of the list were financial stocks. They don’t come more tried-and-true than Citigroup. The financial services titan earned more than $17 billion last year, but the stock is only going for 14.5 times earnings and the dividend yields 3.7%. The other financials stocks are Washington Mutual, Bank of America, BB&T, Keycorp, National City, PNC Financial, U.S. Bancorp, Wachovia and Wells Fargo (a favorite of Warren Buffett).

    In 1957, the largest stock on the market was AT&T. If all the descendents were brought together again, it would still be the most valuable company in the world. Two of Ma Bell’s many spin-offs, Verizon and Bellsouth, make it onto the list.

    The company with the lowest price/earnings ratio on the list is Ford Motor, which goes for just 7.3 times earnings. High oil prices have hurt American carmakers. Ford’s stock is down over 30% this year and it currently yields 4%. According to Siegel’s research, Ford has been another market-beater over the long haul.

    On the opposite end of high oil prices is ChevronTexaco. As fuel prices have climbed, so have the company’s profits. Perhaps the market thinks its earnings are unusually high, which often happens to cyclical stocks. The company trades with a price/earnings ratio of just 8.3, and it pays a 3.1% dividend.

    Also on the list are two utilities, Duke Energy and American Electric Power. Both yield 3.9%. The market has been rewarding utility stocks lately as investors have become more defensive. The remaining two stocks on the list are Weyerhaeuser (forestry) and Sara Lee (consumer goods).

    Of course, none of these stocks is a guaranteed winner. The economy changes rapidly, and new technologies displace well-entrenched companies. Siegel also points out that we’re going through a demographic revolution. He devotes the second half of his book to the impact of demographics on our financial system. While many other authors predict doom, Siegel thinks changing demographics will help save our financial system, especially the emerging economies of the Third World.

    Five years after the worst market crash since the Great Depression, it’s refreshing to hear an optimistic voice. Siegel’s thesis is certainly controversial and will be debated in the coming months and years. But now that the Federal Reserve has raised interest rates at eight straight meeting, and Greenspan has warned of “froth” in the real estate market, and Goldman Sachs said that oil could jump to over $100 a barrel, it’s wise for investors to focus on the opening line of Siegel’s book: “The future for investors is bright.”

  • China Allows Yuan Forwards Trading
    Posted by on September 1st, 2005 at 1:34 pm

    China announced that it will allow currency forwards to be traded. I think this is a good move and it was bound to happen once China allowed the yuan to float. China also raised limit on how much foreign currency a company can hold.

  • Arizona Funds Might Belong to Bayou
    Posted by on August 31st, 2005 at 11:17 pm

    More leads in the case of the Bayou hedge fund. Investigators have located $101 million in Arizona that might belong to Bayou. It’s hard to say because no one exactly knows. The hedge partners aren’t talking and their lawyer just quit. Gretchen Morgenson has more.

  • Yum! Brands
    Posted by on August 31st, 2005 at 11:03 pm

    The Economist has an article about Yum! Brands, the fast food restaurant that’s as successful as it is unknown.

    China might seem an exotic market for an American fast-food firm, but it is a logical one. Yum!’s core business is not really making food, but feeding people, and China is where the people are. Yum! gives them what they appear to want, repackaging it often enough to keep it interesting. Yum! is, in its way, as plain and simple as a huge company could be. Its key values are persistence, ingenuity and good humour. It is living proof that in the food industry, as in the newspaper business, you will never go bust by under-estimating the public taste. But you have to do it cheaply, efficiently and on a very large scale.

  • Hurricane Katrina
    Posted by on August 31st, 2005 at 10:58 pm

    The damage from Hurricane Katrina is simply overwhelming. Communities on the Gulf Coast have been wiped out. Thousands of people have been evacuated, and no one can say when power will be restored. Insurance companies estimate the losses at $26 billion.

    The mayor of New Orleans said thousands might be dead, and President Bush said it could take years to recover. Just by looking at today’s big winners (ExxonMobil, Home Depot), you could tell what was on Wall Street’s mind. Yesterday, gasoline futures soared 20%, the biggest move ever. And today, all 29 energy stocks in the S&P 500 went up.

    At times like this, it seems almost callous to talk about investments and financial markets. But markets are the medium of investment, and that’s what will help rebuild the Gulf Coast.

    The investing landscape has changed. Before, I was convinced that long-term interest rates were headed higher. No longer. In the last two days, long-term rates have plunged. The yield on the 10-year Treasury bond came within a hair of falling below 4% today. The Federal Reserve will probably raise interest rates one more time, but after that, the outlook is unclear.

    The economy had been strong. Up till now, consumers have been able to withstand higher energy prices. Could this simply be too much to bear? My initial feeling is to be optimistic. The S&P 500 held above 1,200 and saw a nice rally today. The market is still well above where it was in April and May. I’m still a bull, but Katrina’s reminds why it’s important to be conservative because risk is the event you never saw coming.

  • White House to Open Strategic Reserve
    Posted by on August 31st, 2005 at 8:50 am

    Today, the White House announced that it will open the Strategic Petroleum Reserve in order to cushion the oil market in the aftermath of Hurricane Katrina. I doubt this will have much of an impact outside of the very near term. For now, crude oil fell below $70 a barrel.

    The government also reported the economy grew by 3.3% for the second quarter, slightly below its original forecast of 3.4%. There will be one more update to this number at the end of September. I wouldn’t be surprised to see second-quarter growth revised higher.

    Economists that the economy will grow by 4.1% for this quarter but that’s before the impact of Katrina is taken into account.

  • The Onion: Google Announces Plan To Destroy All Information It Can’t Index
    Posted by on August 31st, 2005 at 7:21 am

    MOUNTAIN VIEW, CA—Executives at Google, the rapidly growing online-search company that promises to “organize the world’s information,” announced Monday the latest step in their expansion effort: a far-reaching plan to destroy all the information it is unable to index.
    “Our users want the world to be as simple, clean, and accessible as the Google home page itself,” said Google CEO Eric Schmidt at a press conference held in their corporate offices. “Soon, it will be.”
    The new project, dubbed Google Purge, will join such popular services as Google Images, Google News, and Google Maps, which catalogs the entire surface of the Earth using high-resolution satellites.
    As a part of Purge’s first phase, executives will destroy all copyrighted materials that cannot be searched by Google.
    “A year ago, Google offered to scan every book on the planet for its Google Print project. Now, they are promising to burn the rest,” John Battelle wrote in his widely read “Searchblog.” “Thanks to Google Purge, you’ll never have to worry that your search has missed some obscure book, because that book will no longer exist. And the same goes for movies, art, and music.”
    “Book burning is just the beginning,” said Google co-founder Larry Page. “This fall, we’ll unveil Google Sound, which will record and index all the noise on Earth. Is your baby sleeping soundly? Does your high-school sweetheart still talk about you? Google will have the answers.”
    Page added: “And thanks to Google Purge, anything our global microphone network can’t pick up will be silenced by noise-cancellation machines in low-Earth orbit.”
    As a part of Phase One operations, Google executives will permanently erase the hard drive of any computer that is not already indexed by the Google Desktop Search.
    “We believe that Google Desktop Search is the best way to unlock the information hidden on your hard drive,” Schmidt said. “If you haven’t given it a try, now’s the time. In one week, the deleting begins.”
    Although Google executives are keeping many details about Google Purge under wraps, some analysts speculate that the categories of information Google will eventually index or destroy include handwritten correspondence, buried fossils, and private thoughts and feelings.
    The company’s new directive may explain its recent acquisition of Celera Genomics, the company that mapped the human genome, and its buildup of a vast army of laser-equipped robots.
    “Google finally has what it needs to catalog the DNA of every organism on Earth,” said analyst Imran Kahn of J.P. Morgan Chase. “Of course, some people might not want their DNA indexed. Hence, the robot army. It’s crazy, it’s brilliant—typical Google.”
    Google’s robot army is rumored to include some 4 million cybernetic search-and-destroy units, each capable of capturing and scanning up to 100 humans per day. Said co-founder Sergey Brin: “The scanning will be relatively painless. Hey, it’s Google. It’ll be fun to be scanned by a Googlebot. But in the event people resist, the robots are programmed to liquify the brain.”
    Markets responded favorably to the announcement of Google Purge, with traders bidding up Google’s share price by $1.24, to $285.92, in late trading after the announcement. But some critics of the company have found cause for complaint.
    “This announcement is a red flag,” said Daniel Brandt, founder of Google-Watch.org. “I certainly don’t want to accuse of them having bad intentions. But this campaign of destruction and genocide raises some potential privacy concerns.”
    Brandt also expressed reservations about the company’s new motto. Until yesterday’s news conference, the company’s unofficial slogan had been “Don’t be evil.” The slogan has now been expanded to “Don’t be evil, unless it’s necessary for the greater good.”
    Co-founders Page and Brin dismiss their critics.
    “A lot of companies are so worried about short-term reactions that they ignore the long view,” Page said. “Not us. Our team is focused on something more than just making money. At Google, we’re using technology to make dreams come true.”
    “Soon,” Brin added, “we’ll make dreams clickable, or destroy them forever.”

  • Citi Slickers
    Posted by on August 31st, 2005 at 6:17 am

    So many Citigroup execs are jumping ship, you’d think the bank was Hewlett-Packard. That’s not quite fair—the Hewlett-Packard employees are getting laid off. The Citigroup folks are voluntarily leaving en masse. Funny, I’d think it’d be a good joint to work for. Huge salary, nice office, no heavy lifting. Be that as it may, the top brass is rushing for the exits.

    The latest is Marjorie Magner, the consumer banking chief. She got nailed by a taxi in New York. While recovering, she decided what she wanted to do with her life and apparently it has little to do with being one of the most powerful women in world finance. Her unit (think credit cards) makes more money than Wal-Mart. What could be more powerful than that? Well, she’s considering a career in the entertainment industry (I’m not making this up). The stock sold off on the news. It’s kinda hard to analyze that one.

    Then there’s Robert Willumstead. Remember him. Me neither. Anyway, he was the guy Sandy Weill brought in to quiet down the “Sandy has no heir” choir. Well, Willumstead is out too. And by “out” I mean, “an office, car and driver until he finds a job.” Oh, and did I mention the $18 million? That too.

    Wall Street wants to know what’s going on. The answer is that Citigroup is being de-Sandyfied. All the negative karma is fleeing and taking its money with it. Ironically, when Weill chose Chuck Prince to be the new CEO, the Street thought it was because Sandy would still be in charge. He’d be the bank’s Dick Cheney to Chuck Prince’s George Bush. Few people thought that Prince would ever be king. But now Prince is in charge and he’s giving the bank an extreme makeover.

    Firstly, Citigroup needs to change its strategy of aggressive growth through mergers. Actually, that’s not a choice. The Federal Reserve put Citigroup on Double Secret Probation—no mergers until they’re clean. During the Sandy Years, Citigroup was the banker of choice to all the all future members of Cell Block D—Enron, Parmalat, WorldCom, Adelphia. I think they even did a few deals with Suge Knight. It’s all a little hard to remember.

    The big difference now is that Prince is a lawyer. His top priority is cleaning up Citigroup’s regulatory reputation as a bank of easy virtue. One of the moves he’s made is that he’s hired more lawyers. In fact, Willumstead complained of too many Indians in the head office. Magner also complained of micro-managing. Sandy used to let them do whatever they wanted.

    Perhaps the biggest surprise was when CNBC reported that Sandy was bolting as chairman of the board. The board told him that if he walked, he’d have to give up his lifetime perks. Sandy backed down.

    Today, Citigroup’s stock is barely above its 52-week low. The shares are down 17.3% since April 1, 2004.Obviously, the flattening yield curve hurts the bank, but Wall Street wants to see what Prince can do. I won’t go near this stock until it can prove its turned around.

  • Hope for Dell
    Posted by on August 30th, 2005 at 11:15 pm

    Daniel Gross has more on the recent anti-Dell noises. I still think it’s a thesis looking for a story.

    Despite this rash of bad news, it’s too early to write either the Dell-is-doomed or Dell-is-back story. Dell’s business model isn’t broken, and it’s not fundamentally challenged. No, for every trend, there comes a time when you can no longer simply extrapolate the results of the past into the future. It happens to every great company and to every great brand. Dell’s stock still trades at a significant premium to the market. Investors are willing to pay far more for a dollar of Michael Dell’s earnings than they are for a dollar of the S&P 500’s earnings today because they think his will grow faster. To a degree, Dell has finally fallen victim to the same malaise that has affected the other gigantic stock stars of the 1990s: Wal-Mart, General Electric, Microsoft, and Citigroup. They have undergone ungainly transitions from supercharged growth to merely impressive growth. At 21, Dell has belatedly entered its awkward adolescence.

    That’s an important reminder, but I disagree. Dell is still able to deliver astonishing growth. The company’s sales growth rate has actually accelerated in the past few years (13.6% in 2002, 17.1% in 2003, 18.7% in 2004; although just l5.3% YTD).

    Here’s more on the falling prices in the PC industry.