Newton's In Search Of The Perfect Investment. Technology Investor.
8:30 AM Friday, April 22, 2005: Dumb.
Dumb. Dumb. Nasdaq buys Instinet. It's obvious someone is going to buy Archipelego.
And it had to be somebody desperate like the New York Stock Exchange. Dumb. Look
at all the gains we could have made:
SBC buys AT&T. Q.E.D. Somebody will want MCI. Turns out to be Verizon and
Qwest. Even better. Two morons bidding against each other.
It doesn't matter if there's any logic to these mergers. (There isn't.) What
matters is there's frenzy. It's easier to buy, than to run your business
better. Better to buy the disaster you don't know than fix the disaster you
do know. Remember Verizon still provides voice mail to its dead employees.
Whom am I to criticize?
I'm just as dumb, letting these obvious money-making opportunities slip through
my fingers. From now on, here are the rules:
+ When a company announces a bid for another company, we find all the other
companies in the field that could be bought.
+ Then we find all the companies that could do the buying.
That's it. End
of story. By the way, Qwest yesterday raised its bid for MCI to $30 a share.
I bet Verizon will raise theirs too.
Time Warner and Comcast are buying Adelphia, beating out a last minute bid by
CableVision. Now who will CableVision buy? Another cable company, I bet.
Bear market rallies are ALWAYS more violent than bull
market rallies. Yesterday,
the Dow rose 206 points, or 2.06%, its biggest point gain since
were four reasons: Greenspan
spoke positively, jobless numbers fell, there were some good corporate earnings,
and the fact that the markets were tremendously oversold. Markets don't go down
in straight lines.
As you know, I'm
not bullish. BUT, there are those who are. And it behooves me to give them equal
time. From today's Wall Street Journal Online by Steve Liesman:
We Can Learn About Gap Between Earnings, Stock Prices
the stock market was convinced we were about to start a new war, or that some
other calamity was imminent.
Not since the
eve of war with Iraq has there been such a wide gap between earnings and stock
prices. With the recent market selloff -- even counting Thursday's stock market
rally (i.e. yesterday's) -- the forward price-earnings ratio of the S&P
has shrunk to 15.21, just a bit above the 14.72 hit on Oct. 20, 2002, according
to Thomson Financial.
I'm no raging
bull, and I enjoy a big fat bear story just like any financial journalist. (Both
good news and bad news are good for my business.) But this is getting a little
whacky. "There's a huge disconnect between the marketplace and the
value of the companies and the earnings that are coming out," David Dropsey,
research analyst at Thomson Financial, told me this week.
Let's take a look at the running total of profits and forecasts that Mr. Dropsey
puts together every day during earnings season.
We went into
the quarter with the consensus estimate calling for S&P 500 earnings growth
of 7%. (Please see my article from Feb. 184). By April 1, that number
had sheepishly risen to 8.2%.
Where are we
now? Try 11.9% with about 40% of the S&P reporting.
Thomson and most other Wall Street firms talk about operating earnings, a non-standard,
non-official accounting method that excludes certain write-offs, or other expenses
or gains that companies claim are not central to their operations. This is a
debatable proposition and it's generally far better for investors to look at
earnings reported under Generally Accepted Accounted Principles and compare
them with operating earnings to see if the exclusions make sense. However, there
are, as far as I know, no running analyst estimates of GAAP earnings. So, the
extent to which profits beat or miss expectations -- that is, the extent to
which markets may be correctly or incorrectly priced relative to earnings --
can only be measured by using the consensus operating-earnings estimates.)
With that said,
there's every chance that the 11.9% first-quarter earnings gains could
go higher. The reason: financials. They represent half of the S&P
500 market capitalization, and so far their earnings are up 7% compared with
a year ago. The estimate had been for a 1% gain. But only half the financials
have reported. If the rest of the financials do as well, first-quarter results
will "continue to ramp up at an accelerated rate," Mr. Dropsey says.
Among the reasons
for the gains: Banks are lending more and the mergers-and-acquisitions and IPO
activity flow nicely to their bottom lines.
potentially good news on earnings, including forecasts for the third and fourth
quarters, but we need to pause now to look at what has spooked the markets so
The Fed's Beige
Book this week gave investors an overload of contradictory information. Sure,
the overall economy was said to be expanding, but growth was characterized in
a more cautious tone than a month earlier.
The Beige Book
[A]ll twelve Federal Reserve Districts indicate that business
activity continued to expand
Kansas City and San Francisco noted solid
growth, Chicago and Dallas characterized growth as moderate, and Atlanta reported
a robust pace. By contrast, while citing positive growth, New York and Cleveland
mentioned uneven progress across sectors."
than half of the districts said that retail activity was up, the remainder used
words like subdued, deteriorated or disappointing.
could process slower growth if it hadn't been forced to download depressing
details on inflation: "Price pressures have intensified in a number of
Districts, and most report that high or rising energy prices are a concern across
This, of course,
causes a brain short-circuit. How can we have rising inflation and slowing or
uneven growth? The brain grasps for something to hold onto and settles on the
only word that comes to mind: stagflation.
Mind you, we
are miles from what I would call real stagflation, which is flat or negative
growth and rising prices. As Janet Yellen, president of the San Francisco Federal
Reserve Bank told me this week, stagflation is on her radar screen, but "I
would not overblow the parallels between the 70s and now. What we are seeing
is something far more limited. Inflation expectations remain longer-term very
well contained. Wage and salary growth and compensation overall is well contained.
Productivity growth remains extremely solid. I think the fundamentals on inflation
going forward are excellent."
What most economists
see right now is slower growth that still remains in a range of 3.25%
to 3.75%, which is above long-term trend. Even with higher inflation, that would
hardly fit the description of stagflation.
acknowledged the soft-patch of growth we hit in March (see last week's column),
but suggested higher oil prices had a similar impact last summer and the economy
waved it off. She added that while higher oil prices could damp growth, they
were as much a sign of solid global activity, suggesting that she favored further
hikes in the Federal Reserve's overnight lending rate in the face of higher
us back to our earnings forecasts. One of the more remarkable aspects of first-quarter
earnings is that companies are making money despite high oil prices. Take out
energy, and the 11.9% S&P gain so far in the first quarter shrinks
only to 8.9%, or just a little less than the twice what the estimate
was in April.
estimates for the third and fourth quarters are solidly in the double-digits
whether you include energy or not. The consensus calls for 16% earnings
growth for the S&P 500 in the third quarter, up from 14.3% on April
1, and for 12.2% growth in the fourth quarter. Those are solid numbers
and don't suggest either an overall economic or profits slowdown.
The big caveat
to this is that the economy doesn't end up responding evenly to high oil prices.
That is, it rolls along for a while amid these higher prices, going through
these ups and downs, and finally reaches a tipping point that causes a recession.
possibility and the likelihood can't be known. But here's another possibility:
The last time the P/E ratio on the S&P was this low, (remember, back in
October 2002) the S&P 500 Index a year later was 30% higher.
Take that past-performance
data for exactly what you think it's worth."
The chances of you dying on the way to get your lottery tickets is greater than
your chances of winning.
I used to tell my reporters that they should quote statistics when:
1. They seem plausible.
2. No one has better statistics (i.e. ones that contradict them).
3. They say the statistics with authority.
Yes, I have no
idea if this statistic is accurate. But it fulfills my three criteria.
Prisons were not pleasant. But they served
as a deterrent of sorts.
Prison was a dismal, unhealthy place. About 30 people died there every year.
Physicians often refused to enter the prison and people passing by held
their noses. Newgate was notorious for its overcrowding, unhealthy environment
(lack of air and water, and epidemics). Newgate did not supply its prisoners
with bedding and clothing. These things had to be purchased from the keepers.
the commitment of a prisoner is made out," wrote Thomas Fowell Buxton,
in Prison Discipline, "he is handcuffed to a file of perhaps
a dozen wretched persons in a similar situation, and marched through the streets,
sometimes a considerable distance, followed by a crowd of impudent and insulting
gazers; exposed to the stare of every passenger: the moment he enters prison,
irons are hammered on to him; then he is cast into the midst of a compound of
all that is disgusting and depraved. At night, he is locked up in a narrow cell,
with, perhaps, half a dozen of the worst thieves in London, or as many vagrants,
whose rags are alive, and in actual motion with filth; he may find himself in
bed, and in bodily contact, between a robber and a murderer; or between a man
with a foul disease on one side, and one with an infectious disorder on the
other. He may spend his days deprived of free air and wholesome exercise. He
may be prohibited from following the handicraft on which the subsistence of
his family depends. He may be half starved for want of food and clothing and
fuel. He may be compelled to mingle with the vilest of mankind, and, in self-defense,
to adopt their habits, their language, and their sentiments; he may become a
villain by actual compulsion. ...
Your guess: Why
is Harry writing about debtors prisons? He clearly has someone in mind. Don't
lend money to your friends. They closed Newgate in 1827, sadly.
in hotel rooms: From
today's Wall Street Journal: "Bedbugs nest on or near mattresses
and feed at night by biting and sucking the blood of people as they sleep. They
can cause itchy red welts and considerable, lingering anxiety. They're nearly
impossible to get rid of without treating bedding and furniture with powerful
pesticides. (Throwing everything away works, too.) The good news is that bedbugs
are not known to transmit diseases."
today startles even bug experts. Gary Bennett, a professor of urban entomology
at Purdue University, has studied insects for 50 years and says he hadn't seen
a case of bedbugs until recently. He didn't think they existed in significant
numbers but became a believer last year when one of his students was bitten
in a hotel in Salt Lake City. "You know infestations are on the rise when
someone in the entomology department gets bedbugs," Dr. Bennett says.
were created in order to make weather forecasters look good. But
it wasn't always so. Once upon a time, life was simple:
This week's columns
were among the best I've written. I hope you learned something reading them.
I certainly learned something writing them. I hope you enjoy this weekend as
much as I plan to. Hug the kids. Kiss the spouse. Get some exercise.
This column is about my personal search for the perfect investment. I don't
give investment advice. For that you have to be registered with regulatory authorities,
which I am not. I am a reporter and an investor. I make my daily column -- Monday
through Friday -- freely available for three reasons: Writing is good for sorting
things out in my brain. Second, the column is research for a book I'm writing
called "In Search of the Perfect Investment." Third, I encourage
my readers to send me their ideas, concerns and experiences. That way we can
all learn together. My email address is .
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