Entries for March 2008

Some encouraging words from BlackRock's Bob Doll:

Although economic data continues to be weak, we still believe that the bears are too negative. By our analysis, payroll figures, unemployment levels, manufacturing data and retail sales numbers, while hardly robust, do not signal recessionary levels. Additionally, monetary and fiscal stimulus has been aggressive, exports continue to provide a strong tailwind and corporate balance sheets remain flush with cash, which should help with liquidity. At this point, we expect first-quarter gross domestic product to be up slightly and expect that the second quarter will be helped by the pending tax rebate checks.

From a markets perspective, we said a couple of weeks ago that stocks were entering a bottoming process. The important low that occurred in mid-January was echoed on March 17, and we think conditions are looking more positive.... Looking ahead, we believe the extent to which the markets are able to absorb additional bad economic news will determine whether equities are in a base-building phase (as we think) or whether the action since late January represents a temporary reprieve. There will, no doubt, be an ongoing stream of weak data to test the markets, but we remain optimistic that the positive factors we have cited support our contention that markets are in a bottoming process.

Zacks makes the case for investing in World Wrestling Entertainment (ticker symbol WWE). "The company isn't just about a wrestling show on television anymore. It is a completely integrated entertainment company," writes analyst Tracey Ryniec. The company's divisions include live and televised entertainment, consumer products, digital media, and WWE films (direct-to-DVD movies, not theatrical releases).

WWE's strategy, writes Ryniec, involves branding its SuperStars, then leveraging that brand to "boost television ratings, wrestle up more buyers for pay-per-view shows, increase ticket sales at live events, and spark Internet traffic." WWE is also pushing into Latin America and Asia, and it recently boosted its dividend by 50 percent (currently, the stock is yielding 7.7 percent).

Consider how deeply technology will penetrate developing countries, writes David Kirkpatrick of Fortune. "While we may seem to be living in grim economic times, tech companies are facing a future that is anything but grim. If you take the global view—and what technology company doesn't?—there really isn't much uncertainty. While things could slow down for a year or two, there is nowhere to go but up—way up," he writes. So who are the winners?

Among companies I believe are likely to benefit from these trends long term are globally-oriented ones including wireless equipment and phone-makers Qualcomm, Nokia, LG, and Samsung; infrastructure providers Cisco and Juniper; multi-faceted large tech companies IBM and Hewlett-Packard; telecommunications operators Deutsche Telecom, Telefonica, Vodafone, and BT; software firms Microsoft, Oracle, Symantec, VMware, and Salesforce.com; Internet companies Google, Yahoo, eBay, Amazon, and Facebook; and diversified global media companies News Corp., Time Warner (which owns Fortune and CNNMoney.com), Bertelsmann and the about-to-be-created Thomson Reuters.

The tone is mournful over at Portfolio's Tech Observer, where Kevin Maney says Motorola's plan to spin off its handset division "smells more like the death of a great American company." He discusses the company's beginnings as the Galvin Manufacturing Corp. in 1928, founded by brothers Paul and Joseph Galvin (and later renamed "Motorola" to suggest sound in motion). Says Maney: "Motorola's individual businesses might do fine. Perhaps they'll surprise everyone and bounce back. But at the moment, the split seems like a giant step back from greatness—and maybe a step toward that place where you'll find other once-iconic names like Polaroid, Westinghouse, and Sears."

Meanwhile, PC Magazine asks: Can Motorola's handset business stand alone? Deal Journal wonders if the move is just a "cosmetic rearranging" meant to appease investor Carl Icahn.

Separating the mobile phone business isn't a cure-all, writes Morningstar analyst Michael Hodel: "The unit continues to burn cash and lose market share as it struggles to design compelling new products and create a cost structure suitable to effectively serve high-growth markets like India and China. This move adds little to the firm's capabilities in these areas."

Soon, there will be two exchange-traded funds that invest in nuclear energy. On April 3, PowerShares expects to launch the Global Nuclear Energy ETF, which will be tied to an index of 66 stocks that includes reactors, utilities, construction, technology, equipment, service providers, and fuels. "Since 2001, nuclear power plants have achieved lower production costs than coal, natural gas, and oil," said Bruce Bond, PowerShares president and CEO, in a statement. "We believe higher oil prices, rising standards of living, and demand for cleaner sources of energy are favorable trends powering worldwide growth for the nuclear energy industry."

The PowerShares ETF will join the Van Eck Nuclear Energy ETF, which has been around since August. That fund tracks an index made up of 38 companies worldwide that participate in uranium mining, enrichment, and storage; nuclear plant infrastructure; fuel transportation; and energy generation, as well as equipment.

In other ETF news, troubled Bear Stearns managed to launch the first actively managed exchange-traded fund, which began trading Tuesday. The Current Yield Fund YYY resembles an enhanced money market fund, according to the story, and investments include U.S. government securities, corporate debt, mortgage-backed and asset-backed securities, munis, and a few other goodies.

There are now so many books in the "Little Book" investment series that it's hard to keep them straight. Luckily, someone has done that for me. Here, the Simple Dollar reviews all five books and weighs in on the best and worst of the bunch.

John Bogle's The Little Book of Common Sense Investing wins for "best investing advice," thanks to its simple premise of investing in index funds. "Bogle's is really the only one yet that has truly convinced me of the benefits of that strategy," says Simple Dollar. Chris Browne's The Little Book of Value Investing gets a nod for "most worthwhile read," because it's essentially a more easily digestible presentation of the concepts in Benjamin Graham's The Intelligent Investor.

At the New York Times, Dealbook's Andrew Ross Sorkin sees the hand of the Federal Reserve in JPMorgan's sweetheart price for Bear Stearns. Aggressive deal makers on the government's payroll include Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke, and Tim Geithner, head of the New York Fed.

Sorkin writes: "In case there is any confusion about who was pulling the strings behind the scenes of JPMorgan Chase's acquisition of Bear Stearns, the curtain was lifted Monday. By raising its bid—with the grudging approval of the Fed—to $10 a share, from $2, JPMorgan exposed what had long been whispered about but no one dared to say aloud: the Fed is officially in the deal-making business."

In a morning note, Citi's Mark Mahaney upgrades Yahoo to a buy as its stock trades below Microsoft's initial offer of $31 a share.

He lists two reasons it's unlikely Microsoft will walk away from the deal:

1) Despite 3-4 years of making online advertising a key strategic priority, MSFT has yet to demonstrate traction—its share of U.S. Online Advertising was flat to slightly down in '07 (7.5% vs. 7.6% in '06); 2) Google's share of U.S. Online Advertising has significantly increased (35% in '06 to 40% in '07) & the DoubleClick acquisition could materially ramp its display ad biz; and 3) No other step could potentially address the scale/liquidity challenge of MSFT's ad platform.

Billions in subprime write-downs couldn't stop China's top banks from growing at rates that would make Bank of America (or Bear Stearns) blush.

For 2007, the Bank of China's net profit climbed 31 percent. At the Industrial & Commercial Bank of China, which hosted the world's largest initial public offering in 2006, profits rose 65 percent. Both are state owned, and both wrote down more than $1 billion because of mortgage and credit losses.

Citigroup's Tobias Levkovich says commodity prices appear to be "on the verge of correcting meaningfully as deleveraging in various asset classes continues to play out." Such a correction could spill into investments in areas such as agriculture, mining machinery and energy equipment, seed and fertilizer stocks, and alternative energy, Levkovich wrote in a note to clients:

"A number of catalysts may be coming together to end the current commodities craze, including the likelihood that developed economies' industrial activity will be weaker than expected by midyear, that China trims production to alleviate pollution before the Beijing Olympics, and that the dollar faces possible currency intervention as Europe and Japan try to maintain export competitiveness, and potential American job losses end inflation fears."

What's the top-performing industry so far this year in the stock market? Nope, it's not discount stores or gold miners (although both are high on the list). Title insurers occupy the top spot, with a 21 percent gain through March 20, according to Morningstar. For those not familiar with the business, title insurance is designed to protect property buyers against liens and other defects to ensure clear ownership.

So what gives? I put the question to Morningstar analyst Jim Ryan, who says title insurance is a misunderstood industry that's often lumped together with mortgage and bond insurance (the six stocks that make up that Morningstar category are down a collective 21 percent over the past year). "People are starting to figure out that a number of things don't affect [title insurers] that affect other companies," Ryan says. "They're really nothing like mortgage insurance or bond insurance. These are very well-capitalized companies with huge reserves that can wait out bad times. What really drives them is the volume of [real estate] transactions."

He adds that title insurers—including Fidelity National Financial and LandAmerica Financial Group—got an extra boost this week when regulators loosened restrictions on the amount of mortgages the government-sponsored Fannie Mae and Freddie Mac can hold on their books. "That just means more transactions for the title companies," Ryan says.

Random Roger is wondering if the entire commodities boom has "broken down by the side of the road like an old car driving up a mountain in the summer."

According to Bespoke Investment, the two largest one-day declines in the commodity sector since 1956 both occurred this week. Regardless, the Reuters CRB Commodities Index is still well above its recently surpassed highs from 2006, points out Bespoke. Year to date, the index is up more than 8 percent.

Commodities are caught up in some of the same woes affecting Wall Street, says the New York Times:

The biggest speculators and lenders in the commodities markets are some of the same giant hedge funds, commercial banks and brokerage houses that are caught in the stormy weather of the equity, housing and credit markets. As in those markets, an evaporation of credit could force some large investors—especially hedge funds speculating with lots of borrowed money—to sell off their holdings, creating price swings that could affect a host of marketplace prices and wipe out small investors in just a few moments of trading.

Vanguard's chief executive, Jack Brennan, who's stepping down within the year, advises investors not to fiddle with their portfolios during a downturn, recession, or in anticipation of a market bottom. On the other hand, rebalancing is a "fine thing," says Brennan in this Q&A:

Should investors alter their portfolios or their investment strategies during a downturn?
We feel that investment portfolios should be managed strategically, with a long-term view, and not tactically, with short-term tweaking. The only "tactic" we advocate is rebalancing a portfolio.... If you want to rebalance your asset mix by buying stocks and selling bonds, within the context of your strategic investment allocation, that's a fine thing. But portfolio changes should not be done in anticipation of a downturn, or a recession, or because the stock market is down. Nor should you change your allocations because you think the bottom has arrived. Your plan should be structured around time frames that are longer than a business cycle and around the core principles of being balanced and diversified.

Visa's newly minted stock surged into the upper $60s today but is now closer to $59 in the final hour of trading. How much is the stock worth? Morningstar analyst Michael Kon estimates Visa's fair value at $74 a share. Writes Kon:

Visa benefits from the secular growth in the use of cards all over the world. We think growth will continue; our base assumption is that processed transactions will grow, on average, by 14% over the next eight years and payment volume—the dollar amount of purchases that flow through the Visa network—will grow by 9% annually over the same period. We also assume that Visa will be able to raise prices by about 5% over the next two years. This results in a revenue growth assumption of 12%, on average, over the next eight years. If Visa manages to grow revenue by only half of our expected growth rates, we would have to cut our fair value to around $37 per share.

Bespoke Investment points out that Visa's market capitalization is currently more than double that of MasterCard.

The Federal Reserve's decision to lower its benchmark interest rate by three quarters of a point to 2.25 percent drew cheers on Wall Street despite the cut being a bit less aggressive than expected. The Dow surged to a new daily high, shaking off jitters before the Fed's announcement to gain more than 325 points, or 2.7 percent in late trading. The Nasdaq and the S&P 500 both climbed more than 3 percent.

The Fed's nod toward the threat of rising inflation in its post-meeting statement, not to mention a growing need to support the ailing dollar, were welcomed despite expectations among futures traders that a full 1 percent cut was in the cards.

Given the huge amount of liquidity and lending options the Fed has ginned up in recent months to help spur lending in the stricken financial sector, lowering interest rates most likely has less of an impact on market sentiment than headlines from the financial and housing sectors. It often takes more than a year for lower rates to spur economic growth. More likely, investor attention will remain focused on unknowns like quarterly earnings reports from at-risk investment banks. Better-than-expected results from Goldman Sachs and Lehman Bros. sparked bullish buying earlier in the day.

News that Abby Joseph Cohen, Goldman Sach's legendary forecaster, has handed off day-to-day market analysis to fellow Goldman economist David Kostin marks the end of an era for one of Wall Street's most influential bulls.

The announcement also comes with a prediction that equities will decline this year, an opinion rarely expressed by Cohen during her tenure, even through much of the late '90s tech bubble.

Kostin's latest forecast? A 6 percent drop in the S&P 500 this year.

BlackRock's Bob Doll points out that "high-profile financial failures," such as what's happening with Bear Stearns, often coincide with market bottoms (boldface is mine):

From an equity markets perspective, investors continue to ask whether we are in the midst of a bottoming process or whether the floor of the markets is about to collapse. Unfortunately, there is no hard and fast way to identify a market bottom. Our best guess is that we are nearing bottom rather than beginning a more significant collapse, and that we are not that far from the bottom. Historical precedent shows that a series of explosive daily moves seems to be the norm for a bear phase to end, and that such moves are necessary prerequisites for allowing the markets to regain their footing. Additionally, we would point out that high-profile financial failures (such as that which has just occurred with Bear Stearns) are often coincident with market bottoms. As such, we believe the market will eventually change direction and tone, although we recognize that this will not happen immediately.

Citigroup says that bottom could be in the neighborhood of 1165 for the S&P 500 index, or 8.3 percent lower than the troughs seen so far. But think of the upside: The typical post-bear-market rally has been almost 42.5 percent, on average, says Citi, and "various metrics would support a better than 20 percent recovery from current levels over the next 12 months."

Bear Stearns stock closed at $30 a share on Friday. Over the weekend, in a deal brokered by the Federal Reserve, JPMorgan agreed to buy the troubled brokerage for $2 a share.

The quick capitulation by one of the Street's biggest investment banks should tell you how dysfunctional the banking system is right now.

Mix in the Fed's extraordinary Sunday-night decision to cut its discount rate and lend directly to its primary dealers just a day before its scheduled meeting on interest rates, and the threat to Wall Street this week is clear.

David Rosenberg, Merrill Lynch's staunchly bearish economist, looks at today's dire headlines in the WSJ (see previous post), the latest cover of Business Week, and other gloomy headlines and considers the possibility that it might be time to start reconsidering his position.

Of that BusinessWeek story, he writes:

This is the most obvious sign that a lot of what we have been talking about for the past year has now become mainstream thought and priced in, or at least largely priced in. Now could be the time to start focusing more on what is going to turn us bullish, seeing as how the consensus has finally caught up to us.

He's not unleashing the bull just yet, however, but says it's time to be reconsidering investments in light of pain already inflicted on markets:

The one thing we have learned in this business is not to marry your forecasts. They rarely if ever love you back. And, when the consensus finally catches up to your views that were once viewed as outlandish, it is very often a very good time to move on. We were early in calling the housing collapse, credit crunch and recession; and it is very likely going to be the case that we will be early again when it comes to calling the turn.