Entries for February 2008

Warren Buffett's annual letter to shareholders, which is to be released late this afternoon, will probably provide more insight into Buffett's bond insurance plan but will most likely leave us guessing about his successor at Berkshire Hathaway. Be sure to find a comfy chair: Last year's letter was 22 pages long and contained some 13,000 words. Got a question for Buffett? Submit it to CNBC for Buffett to answer on Squawk Box Monday morning.

Zipcar is hoping to position itself as the Whole Foods of the rental-car industry, CEO Scott Griffith tells Fast Company. The Cambridge, Mass.-based Zipcar, which absorbed Seattle-based Flexcar in late 2007, "is ready to shift into second gear driving toward an IPO, 2 million customers, and $1 billion in annual revenue. High oil prices and environmental concerns should ease its path," according to the story. Zipcar faces some stiff competition from industry giants Enterprise, Hertz, and Thrifty, which are all now offering hourly rentals.

It's official: PowerShares got the go-ahead from the Securities and Exchange Commission to launch the first actively managed exchange-traded fund. Technically, there will be four ETFs (they have not yet begun trading). Here are the proposed names:

• PowerShares Active AlphaQ Fund: seeks to outperform the Nasdaq 100 index with a portfolio of 50 Nasdaq-listed securities.

• PowerShares Active Alpha MultiCap Fund: seeks to outperform the S&P 500 with a portfolio of 50 securities.

• PowerShares Active Mega-Cap Fund: seeks to outperform the Russell Top 200 by investing in mega-cap stocks.

• PowerShares Active Low Duration Fund: seeks to outperform the Lehman Brothers 1-3 Year U.S. Treasury Index by investing in a portfolio of U.S. government and corporate bonds.

Although the funds all aim to beat a specific index, the key here is that they don't track or replicate a benchmark, as traditional ETFs do. The funds' portfolio holdings will be disclosed daily on the PowerShares website.

Endless recession talk is apparently cramping Toll Brothers' profits. According to CEO Robert Toll in the company's first-quarter earnings release: "Ceaseless talk of a recession continues to dampen the mood of consumers, in general, whether or not a recession actually occurs." He added, "For home buyers, we believe this drumbeat, coupled with concerns over mortgages, the direction of home prices, and foreclosures, has kept pent-up demand on the sidelines." Toll Brothers, the country's largest luxury home builder, posted a loss of $96 million, or 61 cents a share, in its fiscal first quarter.

Are we too gloomy on the economy? Money manager and Forbes columnist Ken Fisher might agree with Toll.

Tired of trying to figure out how something as simple as getting a mortgage ballooned into a disaster threatening to sink the world's biggest economy? Let these guys give you a quick primer.

Warning: The slideshow includes some salty language. Stick figures are edgy!

BoingBoing, via Making Light

Murray Coleman at IndexUniverse says he's made the switch from index funds to a portfolio made up purely of exchange-traded funds (with one lone holdout: a bond index fund that's in the process of being converted).

Coleman says it's "illogical to keep buying higher-priced versions of the same benchmarks I've been investing in up to this point." Managed through a no-commission brokerage, Coleman's new portfolio, which takes a total stock market approach, has a total expense ratio of 0.15 percent per year. You can't beat that.

At a January 29-30 meeting, just a bit over a week after slashing interest rates by three quarters of a point, Federal Reserve officials decided to cut again by an additional half a point. Today, newly released minutes from that meeting offer hints at why they made the biggest cuts in interest rates in recent memory.

Lower growth: Fed policymakers saw fourth-quarter growth in gross domestic product slowing to between 1.3 percent and 2 percent, down from an earlier estimate of 1.8 percent to 2.5 percent. (The Commerce Department's initial growth estimate for the quarter, released January 30, was even worse—a meager 0.6 percent.) Economists agree that cooling could easily sink into negative and possibly recessionary territory.

My first thoughts on Fidel Castro's handing off power to his brother Raúl:

Buy: Casinos.

Sell: Classic car part distributors, Dominican cigar companies.

Turns out I wasn't that far off.

A while back, Louis Capital Markets put out a note speculating on which stocks might get a boost if the U.S. embargo on trade with Cuba comes to an end. The firm picked Imperial Tobacco, whose Altaldis subsidiary makes cigars, hotel operator Sol Melia, and mining giant Freeport McMoran. Plus, the United States still has claim to some $7 billion worth of Cuban assets. Big holders include Starwood Hotels (HOT) and OfficeMax (OMX), which have stakes in Cuban telecom and electricity assets, though collecting isn't likely to be much easier under Raúl Castro than his brother.

Shares of the only Cuba ETF, the closed-end Herzfeld Caribbean Basin Fund, shot up 22 percent this morning on the news.

Here's a fund that should have a wild ride this week (with Cuban President Fidel Castro announcing his retirement): Herzfeld Caribbean Basin (symbol CUBA). The closed-end fund, which trades on an exchange like a stock, invests in U.S. and Latin American companies that could benefit if trade resumes between the United States and Cuba.

These include Trailer Bridge, a marine freight carrier that runs a fleet of vessels made for shallow waters; Copa Holdings, a Latin American airline that makes daily flights to Havana; Watsco, a Florida-based manufacturer of air-conditioning and refrigeration equipment; Consolidated Water, which supplies potable water in the Caribbean; and Carnival and Royal Caribbean Cruises.

Shares of closed-end funds can be worth more or less than the assets they hold, depending on investor demand. This fund has often traded at a discount to its net asset value over the years, but news events can cause swings in its share price (in February 1996, for example, shares plunged when Cuba shot down two U.S. civilian aircraft). As of last week, the Herzfeld fund was trading at a 7.5 percent discount to its NAV. Jon Ogg at 24/7 Wall Street points out that the fund's total share count is small and its market capitalization is just $12.5 million, so today's moves could be quite exaggerated.

ETFtrends.com offers five categories of exchange-traded funds that may help cushion your portfolio in a downturn: agriculture, gold, silver, foreign currency, and bonds.

In a stateside slowdown, Motley Fool likes ETFs that invest overseas, such as Vanguard All World (symbol VEU), which has half of its assets invested in Europe and a third in Asia. Fool also favors dividend payers, which populate the iShares Dow Jones Select Dividend Index (DVY).

Fearful of further market slides, institutional investors have turned more risk-averse than they have been in past seven years, according to a Merrill Lynch survey. About 30 percent of the 190 fund managers surveyed said they've hedged against further stock sell-offs over the next three months, and 40 percent say they're taking a lower level of risk than normal.

Other highlights of the survey:

• Of managers surveyed, 41 percent are overweight cash, the highest since the aftermath of the September 11 terrorist attacks. Cash levels are at an average of 4.7 percent, up from 3.9 percent in January.

Even as empirical economic data move in the wrong direction for investors, Wall Street's superstition-based indicators continue their upbeat trend.

Just 10 days ago, the New York Giants' upset victory over the New England Patriots pointed the Super Bowl indicator in a bullish direction. And now, investors can take comfort in positive news from the lesser-known Sports Illustrated swimsuit issue indicator as well.

A surprise 0.3 percent increase in January retail sales led by hefty spending on autos sent stocks higher Monday. Wall Street had expected a 0.2 percent drop. Despite some downward revisions to earlier months that could lower fourth-quarter growth and still-weak sales excluding autos, the report offered a bit of hope the United States may still have a chance to avoid recession.

Some analyst reaction:

Michael Woolfolk, Senior Currency Strategist, the Bank of New York, says, "The takeaway from this report is that the U.S. consumer may be in better shape than earlier thought and the Fed's extraordinary measures in January may indeed succeed in averting a recession. The implication for the USD is undeniably positive."

Ian Shepherdson, chief U.S. economist, High Frequency Economics, questions how strong the auto market really is given a 6.4 percent drop in sales by automakers, even if sales at dealers rose by 0.6 percent. Sales, he says, are still "soft and slowing but could have been worse."

Goldman Sachs notes that while the sales gain is nice, "they came off of a reduced base. When the revisions are factored into the mix, this report underscores the weakening trend in consumer spending."

Click through the artfully disheveled habitués of Urban Outfitters' Flickr pool.

Now, take a gander at Mr. Jacob Styer.

What do they have in common?

One bought the other late last month.

Concordville, Pa.-based J. Franklin Styer Nurseries is now part of Urban's forthcoming Terrain concept—the retailer's push to extend its brand of youthful chic to the staid (if lucrative) DIY gardening market dominated by Home Depot and Lowes. The target market is the same wealthy age group (35-45) served by Urban's hot Anthropologie and Free People stores.

In his latest shareholder letter, Bill Miller says Yahoo is in a "tough spot if it wishes to remain independent." (Legg Mason is the second-largest holder of Yahoo, which rejected Microsoft's unsolicited takeover bid on Monday.) Says Miller: "We think it will be hard for YHOO to come up with alternatives that deliver more value than MSFT will ultimately be willing to pay." He goes on to say that Microsoft needs to sweeten its offer if it wants to make a deal and that he expects the company to "do what it takes" to buy Yahoo.

No surprise here: Investors prone to thrill-seeking trade more frequently. Studying a pool of Finnish investors, finance professors from UCLA and the Helsinki School of Economics found that investors' portfolio turnover rates—which measure trading activity—rose 11 percent after each speeding ticket received. The study, Sensation Seeking, Overconfidence, and Trading Activity (.pdf), also found that on average, stocks bought by the thrill seekers performed no better than those they sold.

This just in from Bob Doll at BlackRock:

In our view, the good news is that it seems most of the bad news is already known, and the stock market, at least, has already priced in the likelihood of at least a mild recession. Additionally, we have seen massive monetary and fiscal policy responses and also are seeing some mortgage refinancing activity as a result of lower bond yields. The bad news is that the Fed still has some catching up to do, and the European Central Bank appears unwilling to lower interest rates at present, despite dovish statements. We also continue to see a great deal of turmoil in credit markets, which has been putting enormous amounts of pressure on financial institutions. All told, we believe the positive factors will keep the U.S. economy and nonfinancial corporate profits at least somewhat intact, but we recognize that the risks are clearly to the downside.

In our opinion, the overwhelming amount of negative sentiment in the markets suggests that (from a contrarian perspective) the preconditions for a market rally will eventually come together. The "positive surprise" that sparks such a rally could be how well the nonfinancial corporate sector holds up. We do not believe such a rally will happen, however, before stock prices complete a bottom-testing phase. It appears to us that equity markets are heading toward a secondary bottom (the first having occurred on January 22 before the Fed stepped in with its emergency rate cuts), which should be somewhere in the neighborhood of 1,270 for the S&P 500. Unless we experience a more severe economic downturn than expected, we believe such a level could be the low point for 2008 and could mark attractive buying opportunities.

Interesting commentary from deep-value investor Rich Pzena in his fourth-quarter newsletter:

Momentum investing, almost by definition, is driven by emotion. Investors are looking for what's doing well in the expectation that it will continue to do so and tend to extrapolate trends and ignore valuations. Each peak in momentum investing has a story that investors have bought into, justifying their confidence, as well as their disregard for traditional valuations. In the early '70s, Nifty-Fifty would make money forever. In 1990, fears of inflation drove the market to embrace energy and technology stocks. In the bubble at the turn of this century, the Internet revolution was perceived as making traditional industries irrelevant.

Today, the world seems to have completely adopted the China/India growth story, believing it means a permanent shortage of commodities. At the same time, the subprime crisis is thought to have undermined the world's financial system. This has led to record valuation spreads between commodities and financials... In fact, the spread in valuations is wider now than at any time in the past 55 years. In our experience, the extreme views driving this spread are a perfect example of momentum "groupthink," which rarely turns out to be correct, and we believe present us with an extraordinary value opportunity in financial stocks.

If Yahoo! is serious about staying independent, it could outsource its search business to Google in order make that happen, according to Citigroup analyst Mark Mahaney. He puts the odds of such an agreement at 25 percent—higher than the odds of Yahoo! accepting Microsoft's initial $44.6 billion bid, which it rejected Monday. Still, Mahaney and others say Yahoo!'s falling pre-offer stock price and dwindling share of the search market mean Microsoft's offer remains likely to go through, though the horse trading between the two could go on for weeks.

Real estate investment trusts cratered in 2007, but lately they've been showing some encouraging signs. So far this year, through February 7, REITs are down 0.4 percent, according to the National Association of Real Estate Investment Trusts, or NAREIT. By comparison, the Nasdaq dropped 13.5 percent and the S&P 500 fell 8.8 percent during the same period. This REIT rebound—at least on a relative strength basis—could be a good sign, because, according to the association, "REITs typically precede the direct real estate market on the way down and on the way back up." Over the past year through February 1, REITs plunged 24 percent. Those results are in line with the two most recent downturns, says NAREIT.