• Betting on Oil
    Posted by on August 24th, 2005 at 10:19 am

    This is good. John Tierney is betting Matthew Simmons on the price of oil. Simmons thinks oil is headed to $200 a barrel by 2010. He’s the author of the latest oil scare book, Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy. Tierney isn’t so worried, but it doesn’t have much to do with Saudi Arabia.

    I didn’t try to argue with him about Saudi Arabia because I know next to nothing about oil production there or anywhere else. I’m just following the advice of a mentor and friend, the economist Julian Simon: If you find anyone willing to bet that natural resource prices are going up, take him for all you can.
    Julian took up gambling during the last end-of-oil crisis, in 1980, when experts were predicting a new age of scarcity as the planet’s resources were depleted by the growing population. Julian had debunked these fears in The Ultimate Resource, which showed how human ingenuity had kept driving down the price of energy and other natural resources for centuries.

    This is exactly right. The price of nearly every commodity has declined almost continuously for centuries. There are occasional price spikes, but they’re all temporary. I won’t guess where this top will be, but the price of oil will certainly fall.

  • How Much Would You Pay?
    Posted by on August 24th, 2005 at 9:48 am

    How much would you pay for a company that made $100 last quarter? I’ll give you some more details. The company had sales of $527, and it’s expecting sales of $640 to $660 next quarter.

    Maybe $2,000? How about $3,000? Or you can be crazy and pay $10,000? If this company were Baidu, the market is offering $180,000. When you put financial numbers in smaller terms, it’s easier to see how crazy Baidu’s valuation is. All I’m doing is dividing Baidu’s real numbers by 15,000. Of course, on the bright side, Baidu used to be worth $350,000 just two weeks ago.

  • Fall of the Homebuilders
    Posted by on August 24th, 2005 at 9:27 am

    After a tremendous rally, the homebuilders have been selling off recently. The industry group peaked on July 28. Then on August 5, Carl Reichardt of Wachovia downgraded Toll Brothers due to a perceived housing slowdown in the Washington, DC market. Several stocks followed Toll Brothers lowered. Since July 28, the group is down well over 10%.

    The news isn’t getting better. Yesterday, the National Association of Realtors reported that existing home sales dropped 2.6% last month. Also, the number of homes for sale on the market increased. Overall, the median home price is now $218,000, a 14.1% increase over last year. Condo sales dropped 5%, compared to a 2.3% drop for single-family homes.

    The market’s concern is if this is a minor pullback or the beginning of a long-term trend. Picking a change of direction of a long-term trend is always a dangerous undertaking. Trends can last much longer than you think. However, I think the best and safest assumption is that the homebuilders are due to head lower.

    D.R. Horton, the largest homebuilder by market value, is down over 17% since July 28. Toll Brothers and KB Home are both down 15.4% (the homebuilders favor names with initials). M.D.C. Holdings is off 14.9%. Lennar and Centex are both off about 13.6%. Pulte is down 12.9%. The best performers are Champion Enterprises, which is down just 10%, and NVR which is down 9.5%.

  • Dividend Aristocrats
    Posted by on August 23rd, 2005 at 5:44 pm

    Standard & Poor’s keeps and index of “Dividend Aristocrats.” These are stocks that have raised their dividend for 25 straight years. Here’s the current list:
    Abbott Labs
    Archer-Daniels-Midland
    Automatic Data Processing Inc.
    AmSouth Bancorporation
    ALLTEL Corp.
    Avery Dennison Corp.
    Bank of America Corp.
    Bard (C.R.) Inc.
    Becton, Dickinson
    Anheuser-Busch
    ConAgra Foods, Inc.
    Chubb Corp.
    Clorox Co.
    Comerica Inc.
    Century Telephone
    Dover Corp.
    Consolidated Edison
    Emerson Electric
    Family Dollar Stores
    First Horizon National
    Gannett Co.
    General Electric
    Grainger (W.W.) Inc.
    Johnson Controls
    Johnson & Johnson
    Jefferson-Pilot
    KeyCorp
    Kimberly-Clark
    Coca Cola Co.
    Leggett & Platt
    Lilly (Eli) & Co.
    Lowe’s Cos.
    May Dept. Stores
    McDonald’s Corp.
    McGraw-Hill
    3M Company
    Altria Group, Inc.
    Merck & Co.
    Nucor Corp.
    PepsiCo Inc.
    Pfizer, Inc.
    Procter & Gamble
    Progressive Corp.
    PPG Industries
    Regions Financial Corp.
    Rohm & Haas
    Donnelley (R.R.) & Sons
    Sherwin-Williams
    Sigma-Aldrich
    State Street Corp.
    Supervalu Inc.
    Stanley Works
    Target Corp.
    U.S. Bancorp
    V.F. Corp.
    Walgreen Co.
    Wal-Mart Stores

    The Aristocrats have outperformed the S&P by over 2% a year for the past 15 years. There’s also a list of European Aristocrats. These stocks have raised their dividends for 10 straight years.
    Atlas Copco AB – A Shares
    Barclays
    Capita Group
    Cobham
    Daily Mail & General Trust ‘A’
    FirstGroup
    Legal & General Group
    Misys
    Morrison Supermarkets
    Novartis AG
    Orkla ASA
    Rentokil Initial
    Roche Holding AG
    Roche Holding AG – Bearer Share
    Royal Bank of Scotland Group
    SCA – Svenska Cellulosa AB – B Shares
    Scottish & Southern Energy
    Svenska Handelsbanken AB – A Shares
    WPP Group

  • Google to Start IM Service
    Posted by on August 23rd, 2005 at 5:36 pm

    Expect Google Talk to be out tomorrow. A new toolbar is coming as well.

  • China National Petroleum to Acquire PetroKazakhstan
    Posted by on August 22nd, 2005 at 2:30 pm

    The Chinese aren’t slowing down. Now, China National Petroleum is buying PetroKazakhstan. This is a Canadian company that does business in Kazakhstan a country that has more oil than the U.S. On his TV show, Jim Cramer thought it was Russian.

    Kazakhstan held 3.3 percent of the world’s oil reserves at the end of 2004, according to data compiled by BP Plc. The country’s 39.6 billion barrels of oil reserves were 35 percent greater than the U.S. total. Kazakhstan produced 1.3 million barrels of oil a day last year.
    The country, which is adjacent to the Caspian Sea, is almost quadruple the size of Texas. About one of every five of the 15.2 million Kazakhs lives below the poverty line, according to U.S. government estimates.

  • More on the VIX
    Posted by on August 22nd, 2005 at 2:07 pm

    Mark Hulbert had a good article on the VIX in the New York Times. I’m glad to see we agree that the VIX is not a good market predictor.

  • The Soap Opera at MassMutual
    Posted by on August 22nd, 2005 at 1:58 pm

    The Wall Street Journal has the details on the great plot at MassMutual. Misuse of the company airplane, charges of padding a retirement account, and it all started with an angry wife nearly barging in on a board meeting.

  • Brokers in Sheep’s Clothing
    Posted by on August 21st, 2005 at 3:13 pm

    I’ve always noticed that a stockbroker is never just a stockbroker. They’re “financial advisors,” or “account executives” or “investment consultants,” anything but a measly old broker. Barron’s has a good article by a broker on how to do business with one:

    If you do choose to deal with a broker, request a full accounting of how much you are paying in fees — and try to negotiate them lower. Point out that E*Trade offers to rebate 50% of your mutual funds’ 12b-1 fees, which are recurring commissions. If your broker suggests moving you into a fee-based account, ask for a comparison based on past and proposed commission activity to see if it’s right for you. Insist that any wrap fee be lowered by at least 15% to 20%. Most brokers can afford that in order to keep a good customer, since the fees are so high to begin with. If your broker suggests mutual funds with loads, ask about lower-cost exchange-traded funds. If he recommends a variable annuity, request a comparison with a no-load fund.

  • The Fall of the Big Drug Stocks
    Posted by on August 20th, 2005 at 9:10 pm

    One of the most surprising developments in recent years has been the market-lagging behavior of the major drug stocks. The pharmaceutical industry is dominated by a small number of very large companies. For years, these stocks have been outstanding performers. They’ve been steady growers with fairly predictable earnings growth.

    In short, there are eight major American drug companies: Merck, Pfizer, Bristol Myers, Johnson & Johnson, Eli Lily, Wyeth, Schering Plough and Abbott Labs. Four of the eight are based in New Jersey.

    The industry has occasionally faltered. Once in the early 1970’s and again after Bill Clinton was elected in the early 1990’s. Once the Clinton health care plan was defeated, the industry hit bottom and started to rally very strongly. But this recent downdraft seems quite different. I’m afraid it might not be a transient sell-off, but a larger trend against drug stocks.

    For 15 years, Schering-Plough was the best-performing drug stock, but it started trailing the market in 1998. The company lost money in 2003 and 2004, and the stock is now lower than it was eight years ago.

    Pound-for-pound, Bristol Myers has been the weakest-performing major drug stock. Still, it’s done very well for investors. The stock started underperforming the market only four years ago. Since 1982, BMY is up over 1,400% including dividends (according to Yahoo’s very unreliable numbers).

    Wyeth, which used to be American Home Products, has performed remarkably similar to Bristol Myers. The stock has trailed the broader market over the past four years, but not as sharply as BMY. The stock is up over 2,100% since 1982.

    Merck’s performance is probably the most surprising. The company was the gold standard of the drug companies. It was conservative and consistent. The company lost some glamour as it was overtaken by Pfizer in recent years. The worst news of late has been Vioxx. Last year, Merck took a massive hit when it decided to stop selling the drug. On September 30, the day of the announcement, the stock dropped 27%. Over 145 million shares were traded that day.

    Up until late-2000, Merck had been a constant market beater. The stock was a huge winner in the 1980’s. It fell sharply in 1992-94 period, but it turned around impressively. Since 1982, shares of Merck are up over 2,000%.

    Pfizer was actually the worst stock in the bunch until 1990. By worst, I mean it merely kept pace with the S&P 500, it didn’t dramatically beat it. Then, in 1990 Pfizer suddenly became a market star. It fell during the 1992-94 period, but not as bad as the others. Once the dust settled, Pfizer took off. Thanks to Viagra, Pfizer soared over 1,000% in just five years.

    Pfzier started trailing the market four years ago, but it’s gotten much worse in the past 15 months. The stock is down over 33% since last year’s high. Since 1982, Pfizer is up over 3,600%.

    Eli Lilly is the toughest stock to figure out. The stock was a big winner in the 1980’s, but it was hit hard in the 1992-94 sell-off. The stock recovered and started to lead the market again. Since 1997, however, Lily hasn’t has any real trend. Over the last few years, the stock has been very volatile and the market doesn’t seem to know what to make of it.

    Johnson & Johnson and Abbott Labs have performed remarkably the same. The stocks track each other like waltzing partners. The big difference is that they’re both involved in other health care markets. That’s why they’re the most stable of the drug stocks and these two are the only ones that have done well in recent years. JNJ has actually beaten the market over the past year. It’s also the biggest winner since 1982. Shares of JNJ have gained over 4,000%.

    Analysts expect JNJ, Lily and Abbott Labs to grow their earnings at a 10% rate for the next five years. That strikes me a very subdued. But the other stocks are even worse. Analysts expect 8% growth from Merck, 6.5% from Pfizer and just 4.5% from Bristol Myers. Schering Plough has the highest at 20.5%, but I suspect that’s because its earnings have been so poor lately.

    Even after the lousy stock performances, I still think that many of these stocks are simply too expensive. This is still very baffling to me. I like to think that stocks can stay big winners for several years, but all things must change. For now, I’d steer clear of the entire sector.