• Stuck in a Trading Range
    Posted by on August 16th, 2005 at 1:00 pm

    If the S&P 500 closes above 1,221.13 today, which looks very likely, that will mean that the index has been in a 2% trading range for 26 straight trading days. Since July 12, the S&P has closed as high as 1245.04, and as low as 1221.13. The rest of the time, the index has bounced between those bands (I’m only going by daily closes).

    The market hasn’t been in a trading range this narrow for nearly 10 years. The S&P was caught in a range trading in October 1995, which was just a brief pause during its rally.

    Perhaps the longest trading range in modern market history was in 1963. For 62 straight sessions, between April 15 and July 16, the S&P never closed above 71 or below 69. Although it’s hard to picture a market more dull than this one.

  • Inflation Is Still Tame
    Posted by on August 16th, 2005 at 12:14 pm

    The government reported that consumer prices jumped 0.5% in July. But the “core rate,” which excludes volatile food and energy prices, was up just 0.1%. I think this is more evidence that inflation is not a problem.

    For the last year, consumer inflation has been just 3.2%, and core inflation has been 2.1%. This means that in real terms, the Federal Reserve had interest rates slightly negative. They were handing out money for free. As Fed likes to point out, they’re not raising rates, they’re removing accommodation.

    Despite the rise in oil prices, inflation has not reached the consumer level, and I don’t suspect it will.

  • Dell: The Best Horse
    Posted by on August 15th, 2005 at 7:11 pm

    I’ve been meaning to get to Dell’s earnings report, which came out on Thursday. First, I have to say that Dell is one of my favorite stocks. The company is highly efficient. They know their market, and they rarely make mistakes. I should correct that. The company does make mistakes, but they handle their mistakes very well. In fact, I think that’s of the most important traits which separates a good company from a bad one.

    Dell earned 38 cents for the quarter, which was up 23% from last year. Sales were up 15%, so their profit margins expanded. Dell has now earned 75 cents a share for the first half. Many people don’t realize this, but desktop PCs are just 37% of Dell’s business. The company is involved in several other markets. That’s part of the reason why it’s now “Dell Inc.” and no long “Dell Computer Inc.”

    The stock took a big hit because it missed analyst sales projections. The Street was looking for a 17% rise in sales. The Street seems particularly troubled because Dell rarely misses a forecast. On Friday, Dell lost 7.4%, or roughly $8 billion in market value. The company blames itself. It said it was simply too aggressive with cost-cutting. Dell is selling PCs for as low as $299. The company also said that orders from the federal government have been weaker-than-expected.

    Is this just spin? Or is it really a small glitch that Dell can easily handle.? The truth is that I simply don’t know. The difference with Dell is that I do know that its management has often had these kinds of challenges, and has met them head on. Kevin Rollins, the CFO, said that Dell could have made up for much of the shortfall if it had added $10-$15 to the price of each machine sold during the quarter. Well, that makes sense to me. He also made it clear that it was Dell’s fault but the problem is “one we feel we can fix fairly crisply. We think we can do it, we’ve been doing it now for 10 years.” That doesn’t sound like a company in trouble.

    Why do I give Dell the benefit of the doubt? Let’s look at the big picture. Dell is still gaining market share. This quarter was the 18th straight quarter that Dell met or beat analyst estimates.

    As can be expected, Goldman, Deutsche Bank and several other firms downgraded the stock. But I was pleased to see Lehman Brothers hold firm. The analyst there, Harry Blount, has been a consistent bull on Dell, and he’s been right. On CNBC, he called Dell, “the best horse in the sector.” Except for Apple, the rest of the competition is rough shape. IBM has left the business. Gateway is in trouble, and I don’t even want to go into Hewlett Packard.

    Dell forecast revenue for the current quarter of $14.1 billion to $14.5 billion and earnings per share of 39 cents to 41 cents. Analysts had been expecting Dell to earn 41 cents per share, on average, in the third quarter, on revenue of $14.6 billion.

    Dell is still an excellent company and I see no reason to sell.

  • Sprint Nextel
    Posted by on August 15th, 2005 at 6:32 pm

    Today is the day! Sprint & Nextel are now one. The new firm has 80,000 employees. I was glad to see Sprint Nextel get one of the single-letter ticker symbols. The company trades under S, the old symbol for Sears.

    If you’re keeping score at home, the only other open single letters are H, I, J, M, P, U, and W. Presumably, the M and I are to tempt some unnamed NASDAQ stocks over to the dark side.

  • Google Watch
    Posted by on August 15th, 2005 at 10:09 am

    Those wacky Google Dolls are at it again. The company has this really cool idea to scan books from five of the largest libraries in the world. Then people could search the book lines online. Cool, right? Except there’s a wee little problem. It’s called copyright law.

    Publishers are majorly ticked, and Google seems to be genuinely puzzled by this. So Google tried to reach a compromise. At 11:53 p.m. on Thursday night, Google said on their blog that they won’t scan any book that publishers request. So the burden of protecting a copyright lies with the owner! Now, publishers are even angrier. Business Week has the 411.

  • Monday Market Report
    Posted by on August 15th, 2005 at 9:51 am

    Oil seems to be slipping off the high prices it reached last week. The market’s big change of mind recently is that high oil prices are now seen as hurting the economy, not a reflection of a surging economy. As oil has raced higher, bond yields have fallen. On Friday, the yield on the 10-year T-bond dropped below 4.25%. Although, I’m very skeptical that this rally will last.

    We’ve had some good earnings news this morning. Lowe’s earned $1.05 a share, three cents better than estimates. The company also said that third-quarter earnings should come in at or above expectations. Lowe’s is a wonderful company, and I like the stock a lot. However, I’m a bit concerned about a slowdown in the housing sector. It will be interesting to how well Home Depot did last quarter. HD’s earnings come out tomorrow.

    Another stock I like a lot is Sysco. I always find it interesting that the other Cisco gets so much more attention. This Sysco is a major supplier to the food service industry. The company earned 44 cents which was inline with estimates. I’m also happy to see that Sysco is going to expense its stock options, something the other Cisco would never do. Still, Sysco is not growing as fast as I would like. Right now, the market only seems to be concerned with oil.

  • Prices at the Pump
    Posted by on August 12th, 2005 at 1:02 pm

    If you’re in Gustine, CA, feel free to stop by the Shell station on 32932 Sullivan Road. You can fill up your tank for just $3.19 a gallon.

    If you have time, you can motor over to the Shell station in Alamogordo, NM (9th & White Sands). It’ll cost you just $2.18 a gallon.

    According to Google, the gas stations are 1,104 miles apart. It should take you 18 hours and 55 minutes. Of course, you might have to stop for gas.

    Thanks to GasBuddy.com.

  • Sure Sign of a Top
    Posted by on August 12th, 2005 at 12:42 pm

    Business Week is bullish on oil.

    Is any relief in sight?
    Not really. Price drops would come only through one of two ways: Either demand falls or supplies increase. Neither is likely. The U.S. economy has proved to be remarkably resilient in the face of rising oil costs — in large part because the oil shocks of the 1970s. Back then, oil reached its all time high of about $90 per barrel, in today’s dollars.
    Those high prices touched off major improvements in energy efficiency, making energy costs a smaller percentage of the cost of doing business today. That development decreases the chance that soaring prices will cause a recession.
    Meanwhile, economic growth in places like China is fast enough to offset the dampening effect of higher energy prices. So the demand for oil isn’t likely to be reduced — especially when Americans are driving more than ever.
    Neither are supplies going to increase anytime soon. While a debate is raging about how much oil is left in the ground, today’s high prices should stimulate a boom in exploration and oil-field development. That will likely get an added boost from the just-signed energy bill, which offers new incentives for expanding supply. In a few years, therefore, the world will be able to pump more oil. But that’s still years away.
    Another added premium in today’s oil prices comes from the threat of terrorism. With production capacity already nearing its limits, an attack that cut, say, Saudi oil production would send prices soaring. That’s why the price of oil is higher in the futures market than it normally would be in a calmer world, where the chances of a supply disruption are smaller.

    As I mentioned in an earlier post, it was 26 years ago tomorrow that Business Week ran it s famous “Death of Equities” cover. The rumors of their death were greatly exaggerated.

  • Bubbling Crude
    Posted by on August 12th, 2005 at 11:21 am

    I have simple rule that I follow when looking at the oil market. Whatever the traders say, take the opposite view. It’s cheap, fun and easy. Plus, you’ll always find the most reasoned and rational take on the market.

    For example, let’s say some sneezes at a refinery. This means that the traders think the refinery will shut down, so they’ll panic and buy. Oil will skyrocket and cause more panic buying.

    By taking the opposite view, we find that a closed refinery will mean that they’ll buy less oil not more. See? It’s not that hard. Today, the WSJ says:

    In recent weeks a number of refinery incidents have kept pressure on oil prices. The outages have involved units at more than a dozen refineries that together have the capacity to run 3.2 million barrels a day of oil, or roughly 19% of total U.S. capacity. But the actual amount of refinery capacity taken offline, while hard to gauge, is likely much less.

    Likely much less? How about “a teeny tiny drop in the ocean?

    The outages may be just a run of bad luck. But with refineries running near industry highs, analysts say the glitches also could be the result of a U.S. refining system being pushed too hard. “When you push that hard there appear to be a disproportionate number of surprises,” says Mr. Goldstein. Valero says outages are more likely to occur during the summer months when temperatures are high and utilization rates are at their highest.

    Of course, the refinery system is being pushed too hard. Obviously, we need more refineries. But I don’t get how that adds $20 to the price of oil.

    BP said its Texas City outage would have a minimal impact. But analysts and refiners said in today’s environment any development that rattles traders can result in short-term jumps. “There is no reason for crude oil to be at $65 a barrel other than hype in the market,” said Mary Rose Brown, a Valero spokeswoman.

    Thank you, Mary. I won’t predict when oil will fall, but this rally is running on emotions and nothing else.

  • Economist Expect Rates at 4.5%
    Posted by on August 12th, 2005 at 10:43 am

    The Wall Street Journal reports that a survey of economists expects the Federal Reserve to raise interest rates to 4% by the end of the year, to 4.25% by the middle of next year and eventually to 4.5%. Goldman Sachs thinks that the Fed will go all the way to 5%.

    Economists also expect the economy to grow by 4.2% this quarter and 3.6% next quarter. That’s really strong growth. But the real mystery is what will happen with interest rates, especially long-term rates.

    While the Fed has been lifting short-term borrowing costs, longer-term interest rates, as measured by bond-market yields, have remained stubbornly low — a development that Fed chairman Alan Greenspan famously described as a “conundrum.” The problem is particularly vexing for what it might say about future economic conditions: as the spread between short- and long-term interest rates narrows, the prospect of an inverted yield curve – a phenomenon associated with recession — grows.
    But few of the economists surveyed say economic weakness is responsible for the lack of movement in long-term rates. About 43% of the economists say the main reason long-term interest rates have stayed low is because inflation is expected to remain low. A number of others say that foreign central bank demand for U.S. debt, or an excess of saving in the global economy, has tamped down long-term bond yields.
    “It was difficult to see what would cause the economy to perform as weakly as long term yields would suggest,” said Mr. Hooper. “It just didn’t make sense in terms of the economic fundamentals.”
    Still, the economists don’t expect the yield on the 10-year Treasury note to increase by much. They predict, on average, that the yield will reach 4.67% by the end of this year and climb to 4.90% by next summer. The 10-year note finished trading Wednesday at 4.398%.

    This is where I disagree. The yuan revaluation will have a larger impact than most people realize. Also, the Fed has never been able to manage a soft landing for interest rates. The market always gets away from them. Interest rates are going higher, and it’s not going to be pretty.