Market Summary: Thurs. Feb. 28, 2008

Oil, the sinking U.S. dollar, and gold continue to steal the headlines as they approach and break through record levels. The dollar hit new lows as the Fed signaled more rate cuts. Foreign investors exchange (sell) their dollars for other currencies and deposit them in foreign banks that earn more interest. Gold continues its march toward $1000 as the Fed continues to hawkishly monitor growth and ignore short-term inflation. Gold acts as a hedge against inflation so investors buy gold for this protection and it causes the price to increase. Oil’s run is a little exaggerated because of the weakening dollar. Crude oil is traded in U.S. dollars and when the U.S. dollar declines it makes foreign currencies relatively stronger. Thus, it is cheaper for foreigners to purchase oil and they are then willing to “pay up” a little to get their oil.

Why was I, along with most novice investors, stumped by the markets’ behavior the past few days? There were plenty of economic reports that came in much weaker than expected, but the markets didn’t sell off that much, or they even rallied in some instances. This was because expectations were already “baked in” to the prices of stocks. Dave mentioned this term a while ago in one of his articles. Investors knew the number was going to be bad and the prices of stocks already reflected the bad news. Here’s what you have to know: surprises and surprises only move markets and stock prices. If people are expecting a good number, the stock is probably accurately priced. But when a company unexpectedly misses margins or revenues in an earnings report, this is a surprise and the market adjusts the price of the stock accordingly. The market has such low expectations – for economic data as well as for many stocks – that when bad news hits the market, stocks barely move.

Now for today’s happenings…This morning, the preliminary GDP number came in at 0.6% (the same as it did last month for the advanced reading), but analysts’ were looking for an increase to 0.8%. Also, the initial jobless claims number was 374K, up from 354K last week. This caused the major markets to open lower.

The market sold off at 10am after Bernanke commented that he expects “there will be some failures” among smaller banks that invested in real estate. He also noted that the big U.S. banks “have enough [capital] now to remain solvent and remain…well above their minimum capital levels.” He is concerned “that banks will be pulling back and not making new loans and providing the credit which is the lifeblood of the economy” (Source: CNBC.com). He also stated that the U.S. will avert a recession and the economy is not anywhere close to the stagflation scenario that was present in the 70s (Source: CNNMoney.com).

Sprint lost $29.5B (-$10.36 per share) last quarter because they were forced to write-down almost the entire value (goodwill) of their Nextel acquisition that took place only two years ago. Sprint is losing customers fast and as Dave noted, they are a potential takeover target or they might just go under. They also eliminated their dividend. Without this one-time charge, Sprint would have earned $0.21 per share (Source: Bloomberg.com).

Also, Freddie Mac posted a $2.5B quarterly loss, much greater than anticipated (Source: Bloomberg.com). Apple was up big after they reaffirmed their goal of selling 10 million iPhones (Source: Forbes.com). After hours Dell was down after missing revenues (Source: Reuters.com). Kohl’s Q4 profit declined and their guidance was below Wall Street’s expectations. AIG (financial) lost $5.3B last quarter.

Something to note about the rate cuts…everyone has been calling for lower rates so people (who shouldn’t have bought houses) could refinance. However, the Fed rate cuts have not done anything to lower mortgage rates. According to Freddie Mac, “the rate on a 30-year fixed mortgage rose to an average 6.24 percent this week from 6.04 percent a week earlier…The 15-year fixed mortgage rose to 5.72 percent from 5.64 percent.” Why are rates going up? It’s because banks are not giving out home loans. Banks are “taking these rate cuts and pocketing the money…to shore up their own balance sheets” (Source: CNBC.com).

Tomorrow there are no major earnings reports. Data for the PCE (inflation reading) and regional manufacturing productivity will be released.

DJIA 12,582.18 -112.10 (-0.88%)
Nasdaq 2,331.57 -22.21 (-0.94%)
S&P 500 1,367.68 -12.34 (-0.89%)
NYSE Volume 3,858,809,000

2-Yr Bond 1.87% -0.14
10-Yr Bond 3.71% -0.14
30-Yr Bond 4.55% -0.10

Dollar Index 73.721 -0.492
Crude Oil (Apr) 102.59 +2.95
Gold (Apr) 967.50 +6.50

Bull Stocks- Ring Ring

Sprint's Earnings report today only confirms how drastically it is underperforming Verizon and AT&T. However, I covered my S short positions today because I think the company has become a decent takeover target, if for nothing else but their customers. VZ and T can sit and wait for customers to leave S for them, but then customers will mostly split between the 2 and other competitors, or they can go buy S, if for nothing else than their customers. Do I think this will happen? Not necessarily, but it's too big of a risk to have a short position on in my opinion. Should S bounce back into the 9's anytime soon, I would look to buy puts to limit my downside should it get bought out.
The int'l cell service story is a great one, with many great players that are operating extremely well. VIP and MBT are dominating Russia and eastern Europe. MBT is a more established, slower growing company with a nice dividend yield over 3%. VIP is fast growing and expanding into countries (some that have MBT and others that don't). MICC has the broadest exposure with operations in C America, S America, Africa and Asia. It is one of the fastest growing, and focuses on the people who can barely afford cell phones. It does the majority of its business on prepaid cards, and bills by the second instead of the minute.
Bottom line: the wireless provider sector is one to watch, both international and domestic going forward. I think it's a total Bull industry.

Market Summary: Wed. Feb. 27, 2008

Ben Bernanke testifying to Congress was at center stage today. The markets were very choppy as investors digested lots of weak earnings and economic data and Bernanke’s statements regarding the economy. We opened slightly lower this morning because the durable orders and new home sales numbers came in much weaker than expected.

“New home sales fell by 2.8 percent last month to a seasonally adjusted annual rate of 588,000 units, the slowest pace since February 1995,” according to Yahoo! Finance. “The median price of a new home dropped to $216,000 in January, down 4.3 percent from the December median sales price…that was the lowest median price since September 2004.”

The inventory of unsold homes declined, but “the number of months it would take to exhaust the current inventory rose to 9.9 months, the longest period in more than 26 years. Sales fell by 10.3 percent in the Northeast and dropped by 7.6 percent in the Midwest and 2.4 percent in the South.”

The durable orders number declined 5.3% (the market was looking for a 4.0% decline) because of weakness in transportation equipment orders and slower demand for aircraft and vehicle parts (Source: finance.yahoo.com).

Both pieces of data were very weak and point to the economy being in a recession. I was surprised that the market did not sell off more on this news, but once again, no one was expecting a good number.

Fannie Mae and Toll Brothers (homebuilder) reported earnings before the bell. Fannie Mae lost $3.6B during Q4 because of increased loan delinquencies. They reported a loss of $3.80 per share while analysts’ were predicting a loss of $1.24 per share. Fannie Mae and Freddie Mac both popped today on news that regulatory restraints on their mortgage investments will soon be lifted. This Bloomberg.com article explains what this means for these two companies.

Toll Brothers also reported disappointing numbers, but managed to finish the day up 3%. They reported $245M in write-downs and overall they lost $96M. Their EPS was -$0.61 compared with the -$0.50 estimate. The only positive was they had sales of $843M compared with the $818M analysts were expecting (Source: finance.yahoo.com).

The market got a boost in the morning from Bernanke’s comments about the economy and the possibility of future rate cuts. He noted that the Fed is eyeing rising commodity costs and that “the economic situation has become distinctly less favorable.” He said the Fed “will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks.” This is the statement investors were looking for and the market rallied because there is a chance more rate cuts are coming to stimulate the sluggish economy” (Source: Bloomberg.com).

On this news of potential rate cuts, the dollar sunk to an all-time low against many foreign currencies (check out this Bloomberg.com article). Gold also rallied because it is a hedge against rising inflation. Investors expect inflation to increase as the Fed lowers rates to fight slower growth. Oil was down on a bearish inventory report.

The markets have been very difficult to read the last few days. On what would seem to be bearish data, the market rallies, and what seems to be bullish data, the market sells off. There is an expectation that more rate cuts are coming in the next three weeks and investors are looking past the poor economic reports.

Tomorrow’s earnings reports include Sears, XM, Freddie Mac, Sprint, AIG, Viacom, Dell, Gap, and Kohl’s. In the morning we will also get the preliminary Q4 GDP number and the initial jobless claims number.

DJIA 12,694.28 +9.36 (+0.07%)
Nasdaq 2,354.47 +9.48 (+0.40%)
S&P 500 1,380.02 -1.27 (-0.09%)

2-Yr Bond 2.01% -0.03
10-Yr Bond 3.85% -0.03
30-Yr Bond 4.65% -0.01

Dollar Index 74.213 -0.550
Crude Oil (Apr) 99.64 -1.24
Gold (Apr) 961.00 +12.10

Corporate Philanthropy

Back in Davos, the retiring Bill Gates issued a challenge to all of the world's business and political leaders (and Bono, I guess) to add social entrepreneurship to their corporate agendas. Bill "urged them to pair the self-interest that is the hallmark of capitalism with interest in the welfare of others, which he asserted was a second important force of human nature."

One of my fondest interests, microfinance, is a key mechanism in play to achieve these goals. But this article isn't about microfinance. It's about corporate philanthropy.

The collective geniuses at McKinsey produced a survey recently entitled "The State of Corporate Philanthropy," where they surveyed a wide collection of corporate executives from many different industries.

"In addition to social goals, the vast majority of companies—nearly 90 percent—now seek business benefits from their philanthropy programs as well. When respondents were asked what business goals they try to reach through philanthropy, they most often say their goals include enhancing the corporate reputation or brand (Exhibit 1). And some 80 percent of respondents say finding new business opportunities should have at least some role in determining which philanthropic programs to fund, compared with only 14 percent who say finding new business opportunities should have no weight."

Sometimes, these business practices can indeed get in the way of the greater good. The Bill and Melinda Gates foundation, the largest charitable foundation in the world, has completely shaken up the philanthropy industry, by running things like a real business - a tight ship where things are only funded if a return (in this case, a sound success of the project's goals) is certain. The Bill and Melinda Gates foundation is doing wonderful things, but, as we all know, nothing is ever black and white.

The New York Times reports that Arata Kochi, the chief of the malaria program at the World Health Organization, recently complained to his boss about the Bill and Melinda Gates foundation's influence on the malaria research. The article says:

Many of the world’s leading malaria scientists are now “locked up in a ‘cartel’ with their own research funding being linked to those of others within the group,” Dr. Kochi wrote. Because “each has a vested interest to safeguard the work of the others,” he wrote, getting independent reviews of research proposals “is becoming increasingly difficult.”

Also, he argued, the foundation’s determination to have its favored research used to guide the health organization’s recommendations “could have implicitly dangerous consequences on the policy-making process in world health.”

Again, there is a lot more information than this quote leads on about, and I strongly suggest you read the article before you cast your own opinion. Also, keep in mind that the Bill and Melinda Gates foundation (home page)is not-for-profit, while the McKinsey article was focused on for-profit companies.

As information becomes more ubiquitous, easier to access, and more intuitive to search, largely thanks to the internet, press is becoming more free, and companies more and more transparent. It is clear that companies, more so than ever before, are becoming cognizant of their social and environmental responsibilities.

Someone is whining about Private Equity again..

The Journal recently covered the beginnings of a lawsuit being filed against basically everyone who has money (Bain Capital, Blackstone, the Carlyle Group, Goldman, JP Morgan, KKR, Mother Merrill....the list goes on), claiming the way PE groups and I Banks buy out firms and take them private is illegal.

Well, LBOs can be pretty shady, and probably relatively unethical, but I'm not so sure about it being actually illegal. Either way, the article does a good job of explaining how these buyouts work, including this awesome graph explaining the process. Essentially, there are a couple key issues: PE groups form 'illegal' bidding clubs in order to rig the bids and fix prices. I won't go into too much detail here, because everything is explained beautifully in that graph.

There is certainly a lot of cloak-and-daggers behind these big bids, though. Barbarians at the Gate is an awesome example. Back in the late '80s there was a huge LBO craze, and the deal behind taking RJR Nabisco private became infamous. Ross Johnson, the CEO of RJR Nabisco gets together with the rest of the C-suite to try to buy back all of RJR Nabisco, whose profits they had been severely deflating through accounting trickery (tricks that are essentially impossible to do post-SoX) and poor performance after black monday. KKR (a private equity group) smells a deal, and things turn into a bid war. As the prices climbed, KKR stared to get nervous, but John Greeniaus, the President and CEO of the Nabisco part of RJR-Nabisco, explained how he could boost profits with essentially no work (like I said, Nabisco's profits were being hidden with sneaky accounting) and KKR dives in.

The price soars from $42 a share to $109 a share, and KKR wins it, EVEN THOUGH they offered a lower bid in the end than Ross Johnson. Apparently, KKR's win was largely due to the fact that their bid was guaranteed, while management's wasn't. Also, Johnson apparently had a ridiculous golden parachute.

The Journal doesn't expect the lawsuit to go very far: "The lawsuit is full of accusations of bid rigging, collusion and other supposedly illegal conflicts. But aside from some circumstantial asides, there is precious little in the way of evidence backing it all up."

Had Romney not dropped out, we would have been hearing a lot more of these kinds of articles - simply as a Liberal interest group attack to hurt Romney's credibility - and a rich PE mogul (Romney founded Bain Capital - one of the firms being sued) is pretty easy to slander.

Just ask poor 'ol Stevie Schwartzman... all he wanted was a multi-million dollar birthday party! Is that so wrong? Oh, I guess it is. Well, at least Steve paid for his.

Sub Prime Mortgage Mess Made Easy

Here is a Powerpoint presentation that makes the whole sub-prime mortgage mess easy to understand. It discusses how so many unqualified people got mortgages and how the big financial institutions packaged them together and sold them as AAA quality securities. You'll get a good laugh out of the high quality graphics.

*When on the netfiles website, click "Sub_Prime_Expl.pps" to access the powerpoint*

Accounting... a winning solution

This is essentially a comment on Fraser's post but it got long and I wanted to put a hyperlink on.

US vs IFRS accounting standards is exactly the topic that PWC's xACT case competition (the one that Wenhold and I did well in the last 2 years) has covered. Fraser summed up the differences between the 2 systems in a beautifully succinct way.

A key thing to remember is that US GAAP started as a principles based system and evolved into what is essentially a rules based systems with statements from oversight bodies, judicial decisions, etc. So essentially we are hitting the reset button (like you do when you're getting your butt kicked in a video game).

There are many big challenges that we will face when this transition starts. PROBABLY, companies will provide reconciliations (comparisons) so that investors can compare the old and the new. This will be hard and time consuming. Most companies will only go back 3 years, making it virtually impossible for investors to have sufficient information to go off of.

For a better solution, the one we proposed in the case competition to be specific, I just put up the executive summary as well as our PowerPoint slides here. For your reference should you want to look at this, it is based upon a fictional country called Slobia which has virtually identical demographics to that of the US but is significantly smaller. Personally, I think it's a very good 2 page word doc summary of the problems facing US GAAP and a creative approach to transition to IFRS.

Market Summary: Tues. Feb. 26, 2008

If you just look at the numbers, it appeared to be a very good day, but I’m skeptical about this rally. The PPI number was reported this morning, and it came in at 1.0%, more than double what economists had predicted. The PPI is now up 7.4% over the last 12 months. The Core PPI was up 0.4% in January and the year-over-year increase is at 2.3%. Also, the Consumer Confidence number dropped to 75.0, which was well below expectations. Just last month, the Consumer Confidence number was 87.3 (Source: Bloomberg.com). Commodities also rallied today. Oil, gold, silver, copper, and wheat were all up significantly. Surprisingly, the market didn’t react too negatively to all this news, especially because it lowers the possibility the Fed will cut rates at their next meeting. I’m not sure what investors were looking at today, except for the fact that expectations might have been so low (the CPI number last week was also higher than expected) the only place to go is up from here.

The big news that turned the market around came at 9:45 am when announced a $15B stock repurchase plan and boosted their earnings forecast to $8.25 from $8.20. IBM has spent $94B buying back stock since 1995 (Source: Bloomberg.com). This was very good news for the market because it is a sign that not every company is getting squeezed by the slowing economy. IBM, along with HPQ and MSFT, is one of the few big-cap tech companies that posted impressive earnings, and this repurchase program is a sign that the company is healthy and generating enough cash to support operations and the buy-back. Even though this is very positive news, I’m not so sure it warranted a complete market reversal and subsequent rally.

MBIA was back in the news today. Moody’s reaffirmed MBIA’s AAA credit rating (just like S&P did yesterday). Also, MBIA announced they will “stop writing guarantees on asset-backed securities for six months and will separate that business from its municipal unit within five years” (Source: Bloomberg.com). MBIA will also eliminate their quarterly dividend, saving itself $174M per year (Source: CNBC.com).

Google made headlines today after an analyst announced paid clicks declined by 12% from the previous quarter. Paid clicks are the number of times users clicked on an ad-supported link. An analyst from BMO Capital Markets cut Google’s price target to $590 from $690 (Sources: CNNMoney.com, Bloomberg.com). Nielsen Online announced that Google’s January search ranking was 4.22 billion queries, which is 56.9% of the market for online searches. Yahoo! was second with 1.41 billion searches, which is 19% of the market (Source: CNNMoney.com).

The Fed also auctioned $30B using their Term Auction Facility. This was the sixth auction and a total of $160B has been added to the banking system. Funds were auctioned at 3.080% (Source: CNNMoney.com).

In earnings news, Office Depot was down after its Q4 profit declined 85%, more than analysts expected. Macy’s, Nordstrom, Target, Auto Zone, and RadioShack were up after beating earnings estimates. Home Depot missed estimates, but the stock was not down too much (Source: finance.yahoo.com).

The dollar was down big, back to its all-time lows. This decline in the dollar also helped oil prices reach $101.

Tomorrow, the only major earnings reports are from McDermott and Toll Brothers. On the economic front, durable orders and new home sales data will be reported.

DJIA 12,684.92 +114.70 (+0.91%)
Nasdaq 2,344.99 +17.51 (+0.75%)
S&P 500 1,381.29 +9.49 (+0.69%)
NYSE Volume 4,039,788,000

2-Yr Bond 2.00% -0.12
10-Yr Bond 3.86% -0.04
30-Yr Bond 4.66% unch

Dollar Index 74.763 -0.766
Crude Oil (Apr) 100.88 +1.65
Gold (Apr) 948.90 +8.40

A post about Accounting?

What? Accounting? But this is a sexy finance/economics blog! We don't want to hear about dusty old accounting jibber jabber!

Or do we?

Considering one of accounting's primary purposes is to make everything understandable and consistent for financiers to make educated decisions, big changes in accounting are pretty important for everyone. And it just so happens that there are some pretty drastic changes occuring in the US.

Back in November, the SEC announced that foreign companies posting in US exchanges don't have to reconcile to US GAAP (for you finance majors, and Miles, here's a wiki def). Then, a few weeks ago, Chris Cox announced that the US will be dropping US GAAP, and completely switching to IFRS GAAP.

What's the difference? Why the change? Your accounting classes will tell you IFRS is "principles based" accounting, while US GAAP is "rules based." Your accounting classes will probably also tell you that the rules in the US are long, complicated, and very inefficient in their attempt to create consistency in reporting standards. All of the trouble people go to figuring out how to account for complicated leases and such costs a lot - and can be very difficult and timely to properly figure out, as well as adjust for when the SEC tells you you've done it all wrong.

This change means different reporting standards - and thus different market multiples and valuations for NPV, PV of cash flows, etc. Don't worry about the big financial institutions - I'm pretty sure Citadel will figure themselves out. The concern is amongst all you noise traders not understanding the new statements. You will need to learn how things have changed, and take them into account in your investment research in the coming years.

So read up. More to come...

Market Summary: Mon. Feb. 25, 2008

We had another good day on Wall Street thanks to a better than expected home sales number and positive news regarding Ambac and MBIA. At 9am, the markets got a boost because the existing home sales number came in at 4.89M when the market was looking for 4.80M (numbers declined less than expected). “Sales of existing homes fell to the lowest level in nearly a decade in January while the median price for a home dropped for the fifth straight month” (Source: CNBC.com). Even though this wasn’t the best news, everyone on CNBC TV was talking about a potential bottom in the housing market because there are signs of price stabilization. I’m not buying this “hope” that this is the beginning of a bottom. There’s still a lot of room to go lower and I don’t expect things to begin looking better until at least the end of this year. Here’s an in-depth Bloomberg.com article describing the housing market.

The markets traded modestly higher for most of the afternoon until news broke at 1:30 pm regarding the financial health of Ambac and MBIA. S&P affirmed MBIA’s AAA credit rating and removed it from its negative watch list. S&P also affirmed Ambac’s AAA credit rating, but the company remained on the negative watch list because of uncertainty involved with their recapitalization plan (Source: CNBC TV, Bloomberg.com). Stock prices jumped immediately when this news broke, most likely people were covering their short positions (bets that stock prices will decline), and the major indices finished the day up over 1%. The financial stocks also rallied on this news. Remember, these two bond insurers protect over $1T worth of securities and now that they have maintained their AAA rating, banks will not have to write-down assets on their balance sheet in order to reflect the true value of their securities.

In other news, Visa announced they will sell $406M shares between $37 and $42 (totaling more than $17B = the biggest initial public offering). The world is moving from paper to plastic (cash to credit cards) and this extra cash will allow Visa to better meet its customers’ needs (Source: Bloomberg.com). Shares of MasterCard, Visa’s biggest competitor, were down big on the day.

In earnings news, Lowe’s reported a 33% decline in Q4 earnings and gave guidance of $1.50-1.58, well below analysts’ estimates of $1.73. Surprisingly, the stock was beaten up that badly. This report is just another sign that the housing market is bad, but most of the bad news was already priced in the stock (Source CNBC TV).

In the financial sector, Goldman Sachs downgraded Freddie Mac and Fannie Mae because of “potential credit losses…stemming from a 'severe' housing market.” Goldman also downgraded Washington Mutual. According to Bloomberg.com, “Citibank may post a loss of $1.6 billion, or 28 cents a share, for the first quarter, compared with a profit of about $5 billion, or $1.01, a year earlier…shares may fall below $16 as Citigroup is forced to sell $100 billion of assets.” Here are two great articles discussing the Goldman downgrades: Marketwatch.com and CNBC.com.

Take-Two (software game designer of Grand Theft Auto) was up 55% on the day after Electronic Arts announced a $2B take-over bid. “Take-Two rejected a cash offer of $26 a share on Feb. 22, prompting Electronic Arts to take its bid directly to investors. The offer is 64 percent higher than the Feb. 15 closing price, the last day of trading before the announcement was made” (Source Bloomberg.com).

Today’s rally was broad-based, meaning almost every sector was positive. Energy stocks were strong as oil was up, and biotech stocks were also strong thanks to the good news from Genentech the other day. Bond yields continue to move higher (prices going down) and are way off their lows from the beginning of this month. Bonds led the market lower the second half of ’07 and if this upward trend continues, I expect stocks to follow.

Tomorrow’s tone will be set before the market opens when the PPI and Consumer Confidence numbers are released. Foster Wheeler, Home Depot, Macy’s, and Target report earnings tomorrow.

DJIA 12,570.22 +189.20 (+1.53%)
Nasdaq 2,327.48 +24.13 (+1.05%)
S&P 500 1,371.80 +18.69 (+1.38%)
NYSE Volume 3,772,926,000

2-Yr Bond 2.12% +0.10
10-Yr Bond 3.90% +0.10
30-Yr Bond 4.66% +0.09

Dollar Index 75.53 +0.01
Crude Oil 99.41 +0.50
Gold 940.25 -4.35

Bull Stocks- Ring Ring

Continuing my random tour de industries in my bull stocks series, I'm stopping at the cell phone providers. Perhaps the most important characteristic a stock can have in a scary environment like this is a nice big fat SAFE dividend (for a definition of such a dividend, see Altria- MO). There are two gems with just such a dividend in the cell phone space- Verizon (VZ) and AT&T (T). Verizon sports a sexy 4.9% yield. These dividends protect a stock from their price getting hammered because as the price goes down the yield goes up, encouraging people to buy the stock just for the yield, pushing the price right back up. VZ has become somewhat stagnant but looks to revive that with their FiOs internet system (fiber optic super fast internet) that is stimulating growth. VZ is the cheapest of the wireless providers on the last 12 months earnings and the second cheapest on forward earnings.

AT&T has an almost as attractive 4.6% yield. AT&T, in my opinion is a little more bogged down, just from being a bigger company with more avenues of work, but that also makes it safer than Verizon. Trading at less than 10x forward (2009) earnings, T is downright cheap. It is also better than VZ at translating revenues into earnings, sporting higher margins that are improving. However, there is a lot of growth priced into those forward earnings, exposing the stock to downward revisions by analysts, but with a great dividend, it's hard for the stock to get hit too much.

If you like some international flavor in your life I give you American Movil. If you have a cell phone in or south of Mexico, these guys are probably your provider. The growth is awesome, the company has been growing sales at 25-30% and translating that into 28-30% growth in operating income. Analysts have the stock priced from 28-29% growth each of the next 2 years (2008, 2009), and I think that's conservative. The dividend and, hence, the protection, aren't there however. If you think I'm crazy, I refer you to Carlos Slim, the richest man in the world, owns well over 20% of this company.

Why do I think the time is right for these 3 providers? There was a lot of talk over the last month and even last week about how all these guys are in trouble because competition is getting a lot more severe. Competition amongst cell phone providers severe?!? No kidding, it's been that way for 5 years. These guys are integrating their operations and signing their customers up for more of their products at once (i.e. Cell + internet service), additionally more people are getting data and internet over their phones, offering more revenue and higher margins. It's not like new cell providers are entering the market, if anything consolidation will happen in the US market going forward, the sector is beat down unfairly.

If you're looking for a zero-equity/long-short play, I suggest creating a portfolio of 1 or more of the names above on the long side, and short Sprint. Sprint is the clear laggard in the sector in just about every aspect. Because of Sprint's stock price being so low(<$10), there will be some days where this will move against you because of the high % moves S makes, however over a shorter period (1-2 months) this should pay off very nicely, unless Sprint gets bought out, which is the only reason I don't endorse this as a long term strategy. I currently am long T and AMX and short S on my investopedia portfolio.

What to Watch for This Week

Economic Data:

Monday
January Existing Home Sales

Tuesday
January PPI and Core PPI
February Consumer Confidence

Wednesday
Durable Goods Orders
New Home Sales
Crude Inventories
Ben Bernanke Speech to Congress

Thursday
Q4 GDP (Prelimary; Advanced number was 0.6%)
Initial Jobless Claims
Ben Bernanke Speech to Congress, pt.2

Friday
Core PCE Inflation Data
Personal Income and Spending
Regional Manufacturing Data

Market Summary: Fri. Feb. 22, 2008

Friday was supposed to be a very quiet day for economic and earnings news, but that was not the case. There was a very negative feel in the markets on Thursday afternoon and I expected that to continue into Friday morning, which it did. Stocks opened slightly higher after news that November’s and December’s Producer Price Index (PPI) were revised lower (Nov: +2.6% from +3.2%; Dec: -0.3% from -0.1%). Bonds also rallied on this news. Even with this good economic news, stocks continued their decline. The Dow remained down about 100 points all afternoon. The Nasdaq was the relative laggard because Intuit gave guidance that was below analysts’ expectations. INTU was down over 9% on the day. Other big tech names were also dragging the Nasdaq down, including Apple, Microsoft, IBM, and EMC.

Many of the big financial names were also weak. Freddie Mac and Fannie Mae were downgraded to “sell” by Merrill Lynch because of “weakening macro-economic financial market and credit trends.”

Goldman Sachs, Lehman Brothers, and Bear Sterns had Q1 estimates cut 40% by Sanford C. Bernstein. The analyst said “Market conditions remained challenging through February as troubles spread through a variety of areas within the fixed income market.”

The analyst cut profit estimates at Goldman Sachs by 45% to $3.03, at Morgan Stanley by 12% to $1.49, at Bear Stearns by 41% to $1.59, and at Lehman by 42% to $1.15 (Source: Bloomberg.com).

An analyst at Oppenheimer said Citigroup “will need to raise more capital and may cut its dividend again” (Source: Briefing.com).

MBIA was also in the news today. There was talk on CNBC that a downgrade may be coming for MBIA sometime next week. If they get downgraded, there will be no way they could compete with Buffet (and other AAA bond insurers) in the municipal bond business. Moody’s also downgraded Channel Reinsurance Ltd., a re-insurer that supports MBIA. The downgrade took place because “Channel Re’s capital position has been weakened by its exposure to the U.S. residential mortgage market…and their weakened credit profile could negatively impact the value proposition of its reinsurance relationship with its sole customer, MBIA” (Source: Marrketwatch.com).

Getting away from financials, the treasury market sold-off around noon after a speech by Federal Reserve Bank of Dallas President Richard Fisher. He said the U.S. will avert a “prolonged period of negative economic growth.” Fisher was the only Fed official to vote against the interest rate cuts at their last meeting Jan. 30. He also referenced increasing inflation worries that may prevent the Fed from further cutting rates. He said the recent inflation data was “not encouraging” and he has “heard more concern about inflation than in the past” (Source: Bloomberg.com).

Going into the close, the markets looked very bad for Monday’s open. However, everything changed at about 2:30 when Charlie Gasparino, CNBC’s financial on-air editor, reported that plans for an Ambac bail out were underway and as early as Monday or Tuesday something would be announced. This news sparked at 230 point reversal in the Dow. Gasparino said bankers have made “significant progress” in their recapitalization plan to preserve Ambac’s AAA rating. The banks involved are Citi, Wachovia, UBS, Royal Bank of Scotland, Barclays, BNP Paribas, Dresdner Bank, and Societe Generale. According to Bloomberg.com, Ambac may receive $3B in new capital. The preservation of Ambac’s AAA rating (as well as MBIA’s and FGIC’s AAA rating) would save banks $70B in additional write-downs. The bond insurers back over $2.4T in securities. There is also talk of splitting the municipal bond business from the CDO business.

Because of this news, the financial stocks rallied in the last 30 minutes and the major indices all closed in positive territory. There is now a very optimistic outlook for the beginning of next week assuming some sort of bail out plan for Ambac is conceived. Look for a higher open Monday morning, especially in the financials.

I expect next week to be very volatile with high volume as lots of inflation data is reported.

Here’s a Bloomberg.com market summary for Friday.

Here’s a Briefing.com weekly market wrap up. It’s a pretty good summary of what happened this week.

Some other news…..

Nissan’s CEO said the U.S. auto market is currently in a recession and car-makers are facing difficulties due to higher raw costs (Source: finance.yahoo.com).

“Traders place 100 percent odds that the Fed will cut the benchmark rate by at least half a point by the end of the next meeting on March 18, futures prices show” (Source: Bloomberg.com).

Standard & Poor’s cut GMAC’s credit rating to B+ and Residential Capital’s rating to B. According to CNBC.com, “Both companies face difficult funding environments.”

According to Bloomberg.com, Genentech (DNA) won FDA approval on its drug Avastin for breast cancer treatment. The stock is up 8% in after hours trading.

DJIA 12,381.02 +96.72 (+0.79%)
Nasdaq 2,303.35 +3.57 (+0.16%)
S&P 500 1,353.11 +10.58 (+0.79%)
NYSE Volume 3,560,735,000

2-Yr Bond 2.02% +0.05
10-Yr Bond 3.80% +0.03
30-Yr Bond 4.57% +0.04

Dollar Index 75.52 -0.08
Crude Oil 98.91 +0.52
Gold 944.60 -1.11

Deutsche Bank Scams Poor Idiots

To break my silence, I thought I'd put up a marginally interesting read about Deutsche Bank (the future employer of Mr. David "Biff" Light and Mr. Daniel Morrison Wenhold). The jist of it is this, Deutsche Bank has been fairly successful in avoiding the whole sub-prime mess, but they're getting hit by lawsuits for selling overly complicated derivatives to corporations and local-government authorities. More or less, they suckered people into undertaking dangerous interest rate swaps (you learn about these in FIN 300 ... maybe?) that made Deutsche shit tons of money at the other peoples expense. Anyways, it's good to know Biff and Danny will be providing their services to such a morally upstanding institution. An interesting read if you've got a minute, but a lot of it is probably over most people's - including mine - heads.

Deutsche Bank - Snakes and Ladders

The Value of Information

I mentioned in my last post "The Long Tail," coined by editor-in-chief of WIRED magazine Chris Anderson. The article mentions:

For too long we've been suffering the tyranny of lowest-common-denominator fare, subjected to brain-dead summer blockbusters and manufactured pop. Why? Economics. Many of our assumptions about popular taste are actually artifacts of poor supply-and-demand matching - a market response to inefficient distribution...

The first is the need to find local audiences. An average movie theater will not show a film unless it can attract at least 1,500 people over a two-week run; that's essentially the rent for a screen. An average record store needs to sell at least two copies of a CD per year to make it worth carrying; that's the rent for a half inch of shelf space. And so on for DVD rental shops, videogame stores, booksellers, and newsstands.

Wal-Mart must sell at least 100,000 copies of a CD to cover its retail overhead and make a sufficient profit; less than 1 percent of CDs do that kind of volume."

How much are these brick-and-mortar stores missing out on? Take book sales: "The average Barnes & Noble carries 130,000 titles. Yet more than half of Amazon's book sales come from outside its top 130,000 titles. " Or DVD sales: The average Blockbuster carries fewer than 3,000 DVDs. Yet a fifth of Netflix rentals are outside its top 3,000 titles."

What is even more interesting than these increased economies of scale is what companies are doing with the sales data they are accumulating. Amazon.com tracks your purchase and even browse history - and offers suggestions for what you might like to by (even packaging items together for you at discounts), Netflix and Tivo both offer suggested viewings based on what you have watched in the past, and countless music services like Rhapsody, Napster, and Last.fm offer similar services in music.

One needs to look no further than Facebook to understand the true projected value of this kind of smart advertising. Microsoft's (albeit controversial) $15 billion valuation stemmed from their expectations that Facebook will be able to leverage all of the information they have about people form their profiles.

A recent article in Fortune magazine, entitled "Walk Softly And Carry A Big Checkbook," had this to say:

"Online marketers track actual behavior, so instead of buying a type of audience, they can buy a click, an inquiry, or even a sale. Every time consumers take such an action, it becomes part of their "clickstream," which follows them around the web. This information trail gives marketers an increasingly sophisticated idea about each of us, allowing htem to craft an ever more tailored online experience."

The management and manipulation of information to build marketing information and create ad revenue is what has driven Google's real success as well.

The same article goes on to talk about where this is taking things - marketers understand that as digital television becomes the standard in 2009, and more people watch shows on their DVR, fewer people will be watching commercials. How will ad agencies respond? GroupM entertainment, a subsidiary of ad holding giant WPP Group (WPP), has decided the best means of doing this is to be part of the content creation of the shows themselves, a strategy they are experimenting with in the show October Road

What effect will this have on the actual content of our favorite shows? We'll have to see....

Market Summary: Thurs. Feb. 21, 2008

We opened higher this morning, but selling pressures continued throughout the day to drive the major indexes down a little over 1%. This morning, there was a handful of neutral to good news that caused us to open higher. The Initial Jobless Claims number came in at 349K, just slightly higher than the expected 345K, Cisco was upgraded by Citigroup, Transocean was upgraded by Goldman Sachs, Terex, a construction and mining equipment maker, handily beat estimates and was up over 7%, and Research in Motion (RIMM) reaffirmed their Q4 guidance and said they expect “net subscriber account additions for the fourth quarter to be approximately 15% to 20% higher than the 1.82 million net subscriber account additions forecast by the company on Dec. 20, 2007” (Source Bloomberg.com).

At 9am, the market turned south on two pieces of data: the January Philadelphia Fed survey on regional manufacturing conditions and the crude inventories report/comments from Boone Pickens. The Phily Fed index came in at -24 when the market was looking for -10. Crude inventories rose to 4.2B barrels – higher than traders were expecting (Source: Bloomberg.com). Also, Boone Pickens, a legendary oil mogul, came on CNBC and said he was shorting oil and natural gas. Oil declined $2.36 on the day and energy stocks were down big.

Other news that weighed on the market included Starbucks announcing they will cut 600 jobs. JCPenney announced Q4 earnings that were in-line with analysts’ estimates, but their Q1 guidance was low. JCP opened up 5% and finished the day flat. Target was downgraded to sell by Citigroup (Source: Bloomberg.com)

Gold futures hit another all-time high on “inflation worries and a slowing economy.” Spot gold finished the day at $945.71 (Source: Bloomberg.com). The U.S. Dollar Index was also down big.

The new MBIA CEO came out and supported the idea of separating their municipal bond business from their CDO (collaterized debt obligations, also known as asset-backed securities) business (Source: Bloomberg.com). Whatever happens to MBIA and Ambac will drive the stock market. Whether they lose their AAA ratings, get capital infusions or government help, or split into multiple businesses, all eyes are on them.

Today’s sell-off was prompted by some poor economic data, but it seemed warranted given yesterday’s late afternoon rally on essentially no news. Bonds rallied big today, almost back to Tuesday’s level before they sold off on inflation concerns. There are no big earnings reports or economic data releases tomorrow, so expect the market to be lower at the open. Sentiment is very negative once again and the only thing really working now is stocks that benefit from rising inflation. All eyes will soon be on the Fed as their March meeting quickly approaches. If market conditions continue to deteriorate, don’t be surprised if the Fed steps in and does an inter-meeting cut like last time.

Market Recap 02.21.08

DJIA 12,284.30 -142.96 (-1.15%)
Nasdaq 2,299.78 -27.32 (-1.17%)
S&P 500 1,342.53 -17.50 (-1.29%)
NYSE Volume 3,592,700.75

2-Yr Bond 1.97% -0.160
10-Yr Bond 3.77% -0.125
30-Yr Bond 4.54% -0.067

Dollar Index 75.60 -0.515
Crude Oil 98.39 -2.36
Gold 945.71 +1.97

Market Summary: Wed. Feb. 20, 2008

Two big events moved the markets today: the January CPI number that came in stronger than expected and the release of the Fed minutes from their January 30^th meeting. The CPI (consumer price index) rose 0.4% while the core CPI (excluding food and energy) increased 0.3%. The market was looking for a 0.3% increase in the CPI and a 0.2% increase in the core CPI. These numbers aren’t outrageously high, but they do throw up a red flag for the Fed when assessing if they should cut rates again. It’s not surprising to see the numbers come in a little stronger than expected given that oil was between $90-100 all of last month. The CPI level is up 4.3% over the last 12 months and the core CPI is up 2.5% - both above the Fed’s “comfort zone” of 2% (Source: finance.yahoo.com). This economic report coupled with moderate declines in the Asian and European markets caused the Dow to be down 60-100 points all morning. The Nasdaq was the relative out-performer thanks to Hewlett-Packard’s strong earnings report after yesterday’s close. HPQ closed the day up 8%. Bonds sold off slightly on this inflation news for the second straight day.

Right at 11am we had a mini 100 point rally right before the Fed minutes were reported. Here are some excerpts (Source: Bloomberg.com):

“With no signs of stabilization in the housing sector and with financial conditions not yet stabilized, the committee agreed that downside risks to growth would remain even after this action (50 bp cut).”

“Demand-pull inflation pressures from emerging-market economies abroad appeared to be continuing, and anecdotal reports from business contracts suggested greater willingness domestically to pass rising costs through to prices.”

“A relatively low real federal funds rate now appeared appropriate for a time…and the availability of credit to consumers and businesses appeared to be tightening, likely adding to restraint on economic growth.”

“Strains remained evident in a number of other financial markets, and credit conditions had become generally more restrictive. Against this backdrop, participants expected economic growth to remain weak in the first half of this year before picking up in the second half, aided in part by a more accommodative stance of monetary policy and by likely fiscal stimulus.”

The Fed also adjusted their expectations for three key economic measurements in 2008. They lowered their GDP outlook to 1.3-2.0% from their Nov. ’07 prediction of 1.8-2.5%.

They raised their unemployment estimate to 5.2-5.3% from November’s prediction of 4.8-4.9%. They also raised their core PCE estimate (consumer inflation number) to 2.0-2.2% from 1.7-1.9%. What I got from the Fed minutes…They see the economy continuing to slow and more rate cuts may be necessary to stimulate growth. However, it seemed like these rate cuts will be short-lived. Once growth returns (and some stability comes to the financial system), they will immediately raise rates to counter rising commodity costs.

After the Fed minutes were released, stocks rose on the hopes of more rate cuts will be coming soon. Also helping the rally was a great earnings report from Transocean, the world’s largest offshore driller. RIG reported quarterly earnings of $3.40/share while analysts’ were only looking for $2.54/share. Their revenues increased 75% (year-over-year), but they fell short of the $2.3B analysts estimated by $0.2B (Source: Briefing.com).

Energy stocks were also leading the market higher as oil finished the day at $100.74, up 73 cents. Gold also hit another all-time high amidst inflation talk and a slowing economy. There was also talk by Bill Ackman, a very powerful activist investor, of breaking up the bond insurers, Ambac and MBIA.

The major telecom stocks, Verizon and AT&T, were downgraded by Credit Suisse today. The analyst mentioned concerns of a “potential wireless price war and macroeconomic weakness.” Earnings estimates for Verizon, AT&T, and Sprint Nextel were also cut for 2008 (Source: CNN Money). These stocks were all down big in the morning, but they recovered nicely by the close.

Check out the new "Market Recap"

I'll update this info as soon as the bell rings everyday. Right now, the data is in HTML form (yeah CS105) and my hope is to soon have it linked to Yahoo! Finance or some other website so it will continually update throughout the day. For now, ENJOY!

Market Summary: Tues. Feb. 19, 2008

We started the day off on a positive note from Wal-Mart, the world’s largest retailer, thanks to their strong earnings report – their Q4 numbers beat analysts’ expectations. This was taken as a very positive sign that the consumer was still spending. However, their full-year guidance of $3.43/share fell slightly short of analysts’ estimates. WMT was up 22 cents on the day. (Source: CNBC TV)

Oil was leading the market higher as crude prices touched $100. Oil and energy stocks, as well as many of the commodity-related stocks (agriculture, metals & mining, alternative energy) were up huge today. According to Bloomberg.com, “March crude oil rose $4.51, or 4.7 percent, to settle at $100.01 a barrel, a record closing price…Gasoline for March delivery climbed 4.4 percent to close at a record $2.6031 a gallon after an explosion shut down Alon USA Energy Inc.'s Big Spring, Texas, refinery. Natural gas advanced to the highest levels in 15 months on forecasts that colder weather in the eastern half of the U.S. will spur demand.” On CNBC today, an analyst was cautious about the huge run-up in crude prices saying that there are “supply concerns,” but also lots of “fund buying and speculation.” Gold, copper, and silver prices were also up big.

The inflation story is back once again. The story is two-fold: there is a growing world-wide demand for commodities (especially in China, India, Brazil, and Russia) and there are talks of supply shortages for many of these goods, specifically oil (Source: CNBC TV). If prices continue to rise the Fed will be forced to keep rates at 3.0% in order to keep inflation under control. Many of the financial stocks were down because of the possibility of no more rate cuts. The CPI number comes out tomorrow, and although it is from last month, will be a very telling indicator of what the Fed can or can’t do to stimulate economic growth at its next meeting. The rising commodity prices caused bonds to sell off (yields up).

The market turned in the afternoon, led by a downturn in tech stocks. According to Bloomberg.com, Apple “cut the price of its least-expensive iPod, the Shuffle, to $49 after sales of its media players slowed last quarter.” Also, Google had an alarming note in their recently filed 10K report. “As you'll recall, one reason Google gave for its light revenue in Q4 was the reduction of “accidental clicks.” Based on the language in the 10K, it appears this impact may continue in Q1 and beyond.” Google also stated that they “may continue to take steps to reduce the number of accidental clicks…and these steps could negatively affect our near-term advertising revenues” (Source: finance.yahoo.com). Google shares were down $21 on the day.

In other news, MBIA CEO resigned and will be replaced by the former CEO. Credit Suisse was down 5% after announcing “they had overvalued their holdings in asset-backed securities by $3B” (Source: Bloomberg.com).

Are more write-downs on the way? According Oppenheimer & Co., financial companies “may have to record $70B of additional costs if the bond insurers fail” (Source: Bloomberg.com).

After the bell, Hewlett-Packard reported strong earnings. They recorded Q4 EPS of 86 cents vs. analysts’ estimates of 81 cents. They had a 13% increase in revenue growth and a 38% increase in income. Shares are up 4.5% in after-hours trading. Also, Crocs was slaughtered in after-hours trading after giving lower guidance for ’08 and much higher than expected inventories. Medco Health Solutions was up 5% after they raised guidance and beat analysts’ expectations from Q4 (Source: CNBC.com).

The Future of Music

I have a particular interest in the music industry - an interest which only partially comes from the actual content.

The music industry right now is an incredible crossroads of business, technological innovation, the concept of property, and, least we forget, artistry.

Obviously, the biggest concern, and the reason for the big four (Sony BMG, EMI, Universal, and Time Warner) hemorrhaging money is the illegal downloading of music. They've tried to stop the world - with DRM, with the threat of lawsuits, with the shutting down of P2P sites, but this has never seemed to be a real solution.

So how are people making money today? The big example has been Yael Naim's "New Soul" which sold like digital hot-cakes on the itunes store after it received heavy ad-exposure from the MacBook Air commercials.

O'Reiely Radar explains here that

Until the 1980s, record companies looked to radio to break new artists. Until five years ago, the place to launch new performers was music video. For most of this decade, the breakdown of traditional music channels has led to new songs being noticed via video games, television shows, and -- most of all -- commercials. Whoever is programming the music for Apple's television commercials may be, right now, the most powerful talent scout in the record industry.

But this is essentially the same formula as the 90s coming through a different medium: Find a hit, put it on heavy rotation, this time through advertising instead of radio. How can artists still make enough money? There have recently been a few innovations discussed here.

How relevant are all of the extra parties in the music industry? David Byrne, one of my personal favorites, discusses in Wired magazine, the future of the music industry. Admittedly, he held pretty lofty expectations, and he gave a few concessions on his own personal blog here and here.

Low cost of recording and the demise of the big 4 is certainly a good - but the big issue has always been exposure. Record companies have always been the best possible means of marketing to he largest public. Some artists have gained exposure the old-fashioned way - touring. Dispatch toured heavily, and promoted file sharing of their songs to gain popularity. By the time they approached a big record label, their own indie record had sold very well. Prince released his entire CD in a British newspaper for free, and continued to sell out an 21 show tour. Radiohead released their entire album In Rainbows essentially for free on their website, and when their CD hit stores in January, reached #1 on Billboard. Aerosmith is releasing a Guitar Hero: Aerosmith game this summer.

How successful, or, more importantly, repeatable will these innovations be? The jury is still out. I personally believe that Chris Anderson's Long Tail (by the way READ THIS ARTICLE) describes not only the future of music, but all other forms of digital (or potentially digital) entertainment. I'll write about it in a later post.

What to Watch for This Week

Economic Data:
Wednesday:
January CPI - up 0.4% (market was looking for 0.3%)
January Core CPI (excluding food and energy) - up 0.3% (market was looking for 0.2%)
January Housing Starts - 1012K, up from 1004K last month (market was looking for 1015K = essentially an "in-line" report)
January Building Permits - 1048K, down from 1080K last month (market was looking for 1040K)

Thursday: Initial Jobless Claims (last week = 348K; market expects 345K tomorrow)Earnings Reports:
Tuesday: Crocs, Hewlett-Packard, Medco Health Solutions, Medtronic, Office Max, Ultra Petroleum, Wal-Mart, Whole Foods, and Zix (this one's for you, Rod)
Wednesday: Garmin, Inverness Medical Innovations (Jim Cramer loves this one), and Transocean
Thursday: Barrick Gold, JCPenney, and Newmont Mining
Friday: Calgon Carbon and Nicor Gas

Market Summary: Fri. Feb. 15, 2008

I would say Friday’s performance was good (even though the markets ended the day slightly down) given the negative news that hit the market in the morning. One thing to take note was the low volume. This was because the markets will be closed Monday for Presidents’ Day and many traders/investors were gone for the extended holiday.

The consumer confidence (actually called the Michigan Consumer Sentiment Index) number came in well below expectations. According to CNBC, the reading of 69.6 (market was looking for 76.5) was the lowest in has been since Feb. 1992!

Also, Best Buy (the retailer who has been kicking Circuit City’s butt) came out with some bad news. They lowered their full-year guidance and hinted at a decline in consumer spending. The CEO said that “soft domestic customer traffic in January, coupled with our near-term outlook, now indicate that our fourth-quarter revenue will fall short of our planned targets.” Best Buy stock declined 2.5% and most “chip” stocks were also down (Intel, ADM, and NVIDIA). (Source: Bloomberg.com)

We got some inflation data (regarding import and export prices) and it was stronger than expected. Food prices were up 3.1% and gas prices were up 5.5%. (Source: CNBC TV)

The only major earnings report came from Abercrombie & Fitch and they gave mixed numbers. For their fourth quarter, they achieved record revenues, but it fell short of analysts’ expectations. Also, their guidance for ’08 was below what The Street was looking for. The stock was down only 0.87%. (Source: TheStreet.com)

There was news that FGIC (the bond insurer that was just downgraded by Moody’s) might consider splitting up its business to save its ratings on its only profitable part – municipal bonds. According to Bloomberg.com, the major bond “insurers use their AAA ratings to back about $2.4 trillion of debt.” If a downgrade occurs, that debt is not worth $2.4 trillion anymore. It just disappears! Two very important names to pay attention to are Eliot Spitzer (NY governor) and Eric Dinallo (Superintendent of the New York State Insurance Dept.). These two individuals have been in the news a lot recently and they have lots of control/regulatory power over the bond insurers.

Microcrazy

Everyone's favorite journal has more to say about Microsoft's history. Apparently, Microsoft has always paid a pretty hefty premium for their acquisitions. As the article noted, "The average one-day premium for tech deals since 2000 is 25%, according to Dealogic. The average premium for Microsoft’s deals since during the same time is 43%."

What is their motivation? I'm sure Microsoft may suggest that they simply aren't bothered, and don't want to waste time competing, like Murdoch did with Dow Jones (the publishing firm which owned the Wall Street Journal) offering a 65% premium.

Normally, prices shoot up when an aquisition is announced (look at around May 1, 2007 on this chart showing Dow Jones and other papers), hacking away at any hope for a profitable deal. Or a bid war may ensue (as Bellz noted with News Corp. jumping into the deal).

Clearly, from this perspective, one might assume that Microsoft simply doesn't want to bother with this kind of fight. But, oftentimes, very human mistakes are made, and pay too much because other buyers jump in and a nervous, frenzied, suspicious fight ensues. Jack Welch, the greatest leader since the Pharaohs, calls it "deal heat," (Winning by Jack Welch page 237) and admits that it has affected him in the past as well. This was very common practice in the .com bubble, when companies were being bought left and right, and such buyout practices continue to today in the tech industry. It's an easy assumption to make that Microsoft's corporate culture is just to jaded to bother getting a better, more Buffetlike, price.

Market Summary: Thurs. Feb. 14, 2008 (Updated 02.18.08)

Today Ben Bernanke stole the show and what he said caused the markets to sell off. If you remember his last "interim" statement, he used the word "substantive." There was a sense of urgency then to lower rates because things looked like they were spiraling out of control. In today's message there was no sense of urgency to lower rates. Once again he said inflation concerns could prevent them from aggressively lowering rates, and this caused investors to sell, sell, sell.

He did hint that the Fed is ready to lower rates at their next meeting given the slowing economy. He said the Fed "will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks." This is pretty much standard language for "we'll cut rates if the economy is still slow/slowing." He also noted that the Fed lowered their projections for economic growth in 2008 -- the first two quarters will be slow (not contracting) and things are expected to pick up the second half of the year.

He stated that "more-expensive and less-available credit seems likely to continue to be a source of restraint on economic growth" and that the "outlook for the economy has worsened in recent months, and the downside risks to growth have increased." Here's the Bloomberg.com article summarizing Bernanke's comments.

Moody's (the rating agency) downgraded FGIC to AA (from AAA). MBIA and Ambac both rallied because Moody's said that they are better positioned in terms of capital and no government bail out will be necessary. Here is an article describing the situation. CNBC discussed the idea of more write-downs if the bond/mortgage insurers continue to get downgraded. This new dragged on all the financial stocks.

Intel was down big today, as was tech, because Goldman Sachs removed Intel from its "conviction buy" list. The stock was down 3% on the day. Comcast beat analysts' estimates, announced a $6.9B buyback plan and a quarterly dividend - this caused the stock be be up big on the day.

UBS (a Swiss bank) was down big after they reported a quarterly loss of $13.7B because of huge write-downs. The stock was also downgraded to "hold." Here's an article describing UBS's financial situation and the causes of all their problems.

Liz Claiborne (higher-end women's retailer) gave a sub-par outlook for their 4th quarter and most retailers were down on this news.

After the bell, Chipotle reported somewhat disappointing earnings (only 25% growth) and the stock was getting crushed. CMG is a high-growth, high-multiple stock so when they disappoint investors, the stock gets crushed.

Market Summary: Wed. Feb. 13, 2008

What am I currently seeing in the markets (or more importantly, what should you be seeing in the markets)? Tech has sold off very hard the last two months - almost too much. There were very high expectations for tech in Q4 '07 because these companies were supposedly immune to this credit crunch/slowing economy that has become the talk of the elections. Expectations were too high and at the slightest miss of earnings, sales, margins, etc., tech sold off hard and fast. Now we are at the point (or at least we were three days ago) where expectations are too low for tech. Estimates have come down a great deal and the "big money" has pulled out billions of dollars and moved into different sectors - retailers, financials, homebuilders. We've set a bottom for a lot of the big names (Apple and Google) and soon enough the "big money" will make its way back in. For investopedia, I got into tech last week and I'm sticking with it until the earnings estimates start to get bumped up. When the estimates go up, the "big money" will follow and that's when you'll catch the biggest gains. Tech will not get back to the same level it was three months ago, but it will certainly be higher than where it is now.

I think the market is in good shape (until the next Fed meeting) and the only thing holding us back is the mortgage/bond insurers. There is so much uncertainty with them regarding whether or not they have enough capital. Now the financials (Citi, Merrill, JPMorgan, etc.): the major write-downs are behind us, although I do not expect them to go away. The Fed is helping out with the lowered rates so they can actually make a profit when they lend. Currently, the bond market has stabilized (2-year treasuries at 1.9-2.0% and the 10-year at 3.6-3.7%) and it signaling the Fed will have to cut again in March. I believe the Fed will cut again, it's just a matter of 25 or 50 bp. The only real negative thing I have heard is in regard to jumbo mortgage rates -- according to CNBC, rates have actually gone up after the Fed cut 125 bp. It will take some time to actually see the results of the Fed rate cuts. Also, the dollar has stabilized against most major currencies, well off its lowest levels. Oil has also been trading in a range ($85-95) for some time now, mostly because of recession fears and that oil demand will be lower when the economy slows.

On the consumer side, retail stocks have spiked because of the Fed cuts and the stimulus package (just got signed by President Bush today - here's the Bloomberg.com article). You've missed the big move, but long term they still are a good play because they were beaten down so bad the second half of '07. In news today, January retail sales rose 0.3% when analysts were expecting a decline. Here’s an article describing what caused this report to be better than expected. Some people on CNBC said today this report might allow the Fed to keep rates at 3%, but that is mostly likely not the case. The Fed is cutting aggressively to keep the global financial system afloat, not to keep America out of a recession. The Fed just can't look at one backward-looking piece of data - they have to take on a much broader view of the economy's health.

What moved the markets today? Lots of good earnings reports. Coca-Cola's earnings increased 79% year-over-year and revenues increased 24%. Applied Materials (semiconductor) beat estimates and was up 10%. This was the main reason tech was stronger than the rest of the market today and because tech was the laggard yesterday. Deere's profit was up 54%, but their guidance was only "okay" and shares were down about 1%. Venezuela announced they would stop selling oil to Exxon Mobil after Exxon's seizure of Venezuelan assets.

Back to Yahoo! and Microsoft once again. There was news that News Corp. (Rubert Murdoch) might be interested in taking a stake in Yahoo!. Here's the Bloomberg.com article. This move was most likely done to prevent Microsoft from acquiring Yahoo!. I don't know if Yahoo! will take the deal (although nothing has been formally offered) but I can foresee some sort of bidding war between Microsoft and Yahoo!'s shareholders.

Tomorrow, pay attention to Ben Bernanke's testimony to Congress regarding the economy and financial system. He probably won't say anything we already don't know, however, it will be the focus of the day.

Bull Stocks - Vice

Recession or not, there's one stock on the market right now that is a disgustingly good play. Altria (MO), aka Phillip Morris. Altria sells cigarettes under several brands, the most notable being Marlboro. Obviously this is a recession proof market, if anything people smoke more when they're stressed, this makes it a very safe play even if things with the economy get worse. Altria currently trades at 16x trailing twelve months earnings but we have a major catalyst here. Altria is splitting into 2 companies: one with US exposure and Phillip Morris International (PMI). PMI will be exposed to the hot growing places like China, apparently people in China love to smoke if they can afford it, and many of them are just getting enough money to afford it. Each shareholder will receive one share of each company when the split is consummated in March. The PMI shares will earn a higher multiple given their faster growth. On top of that PMI will begin with a 13BN share repurchase plan in place and a 65% dividend payout ratio in place. In english, PMI will have authorization to repurchase well over 10% of its shares outstanding. Share repurchase means there are fewer shares which boosts earnings per share and thus stock price. The 65% payout ratio means that 65% of earnings will be paid out in dividends. This ratio is only slightly less than Altria's current payout ratio, which gives the company a 4% yield right now, well above treasuries.

All that said, the Domestic Phillip Morris isn't exactly a bad thing to own right now either. You have the recession resistant product mix, and a shift to smokeless tobacco. The new domestic company will start with a 7.5BN repurchase program and a 75% dividend payout ratio. Meaning at current prices, the company would probably yield closer to 4.5%. The secret play in here that some people don't factor in is that Altria owns over a quarter of SAB Miller, yes the beer brewer. If you are inspired by Coors' numbers, Altria is a way to sneak in the back door on the beer play while getting the catalyst that the split should provide.

Market Summary: Tues. Feb. 12, 2008

Stocks were up big in early trading today, but gradually sold off as the day progressed; the Dow finished up 1% while the Nasdaq was flat. Apple and Research in Motion (RIMM) – maker of the BlackBerry – were the main laggards in technology. People were mostly likely taking profits in Apple (normal trading volume and no news) because it had run up 10% off its recent lows and 8 million BlackBerry users were out of service yesterday due to a nationwide outage.

We opened higher this morning thanks to a variety of positive reports. Monsanto raised its profit forecast $0.20 for 2008. Schering-Plough (drug company) was up 6% because they reported earnings of $0.27/share when analysts were expecting only $0.24/share (excluding one time items). Schlumberger (oil and gas company) was up after an upgrade from Bear Sterns. Not really a market-move, but intriguing to some (DLight), Molson Coors reported better than expected sales and earnings and the stock was up big. Here’s the link to the Bloomberg.com article if you’d like to read more.

General Motors reported mixed results. They reported a net loss of $722M, but excluding one-time items they made $0.08/share. Analysts were looking for a loss of $0.64/share. This profit was because of a $1.6B, or $2.82/share, tax credit. Here’s the article that discusses GM’s domestic and international sales as well as the new CEO’s objectives.

Yesterday, the Fed auctioned $30B in their Term Auction Facility (28-day loans) and results came out today. $30B was auctioned off at 3.01%. This was the first time the interest rate was above the Fed funds target rate, a signal that demand is not as great as it was in the previous three auctions were the interest rates were all below the Fed funds target rate. The total bids received were $58.4B. Here’s a finance.yahoo.com article describing the auction.

Probably the most important news on the day came from Warren Buffet. He announced that he would like to take on $800B in municipal bond liabilities from the troubled insurers, specifically MBIA, Ambac, and FGIC. Because of this news, the financial stocks were rallying; however Ambac and MBIA were down 15% each. According to Bloomberg.com, “MBIA and Ambac dropped on concern Buffett's proposal would leave them with mortgage securities that caused more than $5 billion of losses last quarter.”

Also, the 6 largest American banks decided to put a 30-day freeze on foreclosure proceedings in an attempt to give lenders ample time to work out delinquencies. This cnnmoney.com article describes the current housing slump and how this freeze might help homeowners that are struggling to make their payments.

Market Summary: Mon. Feb. 11, 2008

Today was a very good day for the markets considering the bad news from AIG. We opened this morning lower thanks to weakness in the European and Asian markets and news that AIG’s auditor found accounting errors that may have underestimated losses. Here is the Bloomberg.com link describing the situation. There was also news that Fitch Ratings (one of those rating agencies) might lower AIG’s AA credit rating. Because of all this news AIG’s stock was down 12% and all other financials were also down.

On average, the major indexes finished the day up about 0.5%, and if it wasn’t for the bad news from AIG, we would have seen at least a 2% rally.

Dow Jones announced they will be removing Altria and Honeywell from the Dow Jones Industrial Average, and Bank of America and Chevron will replace them. Here’s the link to the article. Dow Jones explained that Altria is now too small and too focused of a company after their recent split and Honeywell is too levered to the industrial sector which is less important in today’s economy. Because of the rising important of the financial and energy sectors in today’s economy, Bank of America was added because it is the country’s biggest bank by deposits and Chevron is a major integrated company.

Energy stocks were up big again today (thanks to another rally in crude oil – up to $93.67) due to extreme cold weather in many parts of the country.

Back to the Yahoo! – Microsoft battle. There were rumors that Microsoft might up its bid for Yahoo! and this prompted RBC Capital Markets to downgrade Microsoft’s stock. MSFT traded below $28 today. Yahoo! released a statement today saying that the bid “is not in the best interests of Yahoo! and their stockholders and that it substantially undervalues Yahoo!.”

Just recently, Microsoft announced they will take their bid directly to the Yahoo! shareholders instead of letting the Yahoo! board of directors decide. Here is the Bloomberg.com article describing the situation.

In earnings new, Darden Restaurants (Red Lobster, Olive Garden, and LongHorn Steakhouse) offered guidance that surpassed analysts’ estimates. Hasbro, the toymaker, also posted results that beat estimates. This was great news for many restaurants and retailers and it gives us insight as to how the consumer might be spending its money in these uncertain times.

Also, struggling Motorola was in talks with Nortel Networks regarding a possible joint venture in order to combine their wireless departments. Motorola has been struggling recently as Nokia has stolen market share. This joint venture could also result in the expansion of WiMax, which is a large-scale wireless network that has proven itself yet.

Upcoming economic reports to watch:

1) Results from today’s Term Auction Facility by the Fed

2) Tues - February National Association of Home Builders housing index

3) Wed - January CPI and January housing starts

4) Thurs - January leading indicators, February Phily Fed survey