Yesterday the Fed said it would hold the fed funds rate steady at 5.25%. This was widely expected. But market traders were placing bets on the wording of the statement. They said if the Fed took "elevated" out when referring to inflation, we would see a nice rally. The dreaded word is gone, yet the Dow finished slightly lower for the day.
The Blackstone Group was one of the most highly anticipated IPOs in recent times. It went public last Friday. The offering price was $31 per share. As commonly happens with an IPO, the stock opened much higher. It finished the first day of trading at $35. That's considered a success. But the stock has closed lower every day since. Just two days later, it was selling below the offering price. That's considered a miserable failure. Compare Blackstone to Google, which never sold below its offering price.
In recent periods, investors were reacting positively to all news. Good news was considered grounds for a rally. So was bad news. But now there seems to be more skepticism in the markets. Even on days when stocks initially rally, they later give up much of the gains. This bull market is losing its steam.
Friday, June 29, 2007
Tuesday, June 19, 2007
Speculating on a Microsoft and Yahoo! Deal
Google (GOOG), one of my favorite overvalued stocks, is a great company. It dominates internet search and makes a bundle selling ads. Microsoft (MSFT) and Yahoo! (YHOO) haven't been able to compete. Will they finally team up to beat Google?
This is pure speculation, but there is reason to believe that Microsoft and Yahoo! will be cooperating more closely in the near future. Yesterday, Yahoo! announced that CEO Terry Semel is resigning. He is being replaced by founder Jerry Yang. But the most interesting part of the management shake-up is that CFO Susan Decker is being promoted to president. The media is already speculating that one day soon Decker will be named Yahoo!'s CEO.
Decker's promotion is key to a Microsoft deal. I say this because Decker was recently appointed to Berkshire Hathaway's board of directors. Warren Buffett's board also includes Microsoft founder Bill Gates. This arrangement will give Decker and Gates plenty of opportunity to get to know one another much better. They will primarily be discussing Berkshire business at Berkshire board meetings, but you can bet they will also have lots of time to strategize about how Microsoft and Yahoo! can work together to battle Google.
This is pure speculation, but there is reason to believe that Microsoft and Yahoo! will be cooperating more closely in the near future. Yesterday, Yahoo! announced that CEO Terry Semel is resigning. He is being replaced by founder Jerry Yang. But the most interesting part of the management shake-up is that CFO Susan Decker is being promoted to president. The media is already speculating that one day soon Decker will be named Yahoo!'s CEO.
Decker's promotion is key to a Microsoft deal. I say this because Decker was recently appointed to Berkshire Hathaway's board of directors. Warren Buffett's board also includes Microsoft founder Bill Gates. This arrangement will give Decker and Gates plenty of opportunity to get to know one another much better. They will primarily be discussing Berkshire business at Berkshire board meetings, but you can bet they will also have lots of time to strategize about how Microsoft and Yahoo! can work together to battle Google.
Monday, June 18, 2007
Enlightened Leadership Should Encourage Guidance
Here we go again. The latest attack on quarterly earnings guidance comes from the Aspen Institute, a non-profit organization that according to its website is "dedicated to fostering enlightened leadership and open-minded dialogue." Promoting the elimination of guidance, however, is anything but enlightened. So in the hope of fostering some dialogue, here is my argument against eliminating guidance.
There is a widespread misconception that earnings guidance is bad because it causes investors and corporate executives to focus on short-term results rather than the long term. While no one doubts that running a corporation with the long term in mind is the better approach, it is wrong to believe that guidance is the problem. Investors certainly do focus on quarterly earnings numbers, but not because corporations give out guidance. They focus on quarterly results for only one reason--the SEC requires corporations to report results on a quarterly basis. It is because of this SEC requirement that investors form quarterly expectations. If the SEC told corporations to report results on a monthly basis, investors would form monthly expectations. This has nothing to do with guidance. Eliminating guidance will in no way stop investors from forming expectations.
Guidance is valuable information. After all, who knows better what a corporation is likely to earn, a bunch of Wall Street analysts or the corporation's own management? If guidance is not provided, analysts' earnings estimates will simply become more inaccurate. Earnings surprises would become bigger. By the way, there are at least two academic studies in circulation that prove this point. And in an era in which regulators are trying to promote more disclosure, how much sense does it really make to tell corporations to stop providing guidance?
The truth is that those who want to end guidance are upset about the volatility that occurs when corporations miss the earnings estimate by just a penny or two. They believe the ensuing sell-off is unjustified. They are probably right about this. However, instead of grabbing the opportunity to buy more shares at a lower price, as any self-respecting long-term investor should do, they want to eliminate volatility by eliminating guidance.
Furthermore, if they would really like to see a greater focus on the long term, perhaps they should petition the SEC to eliminate quarterly reporting altogether. There was a time when corporations had to report results just once a year. However, many corporations reported quarterly results long before a change in the law required them to do so. They did this for one simple reason: their investors demanded the information. This is exactly why corporations provide guidance. If investors want quarterly guidance, should we not be encouraging corporations to provide it?
There is a widespread misconception that earnings guidance is bad because it causes investors and corporate executives to focus on short-term results rather than the long term. While no one doubts that running a corporation with the long term in mind is the better approach, it is wrong to believe that guidance is the problem. Investors certainly do focus on quarterly earnings numbers, but not because corporations give out guidance. They focus on quarterly results for only one reason--the SEC requires corporations to report results on a quarterly basis. It is because of this SEC requirement that investors form quarterly expectations. If the SEC told corporations to report results on a monthly basis, investors would form monthly expectations. This has nothing to do with guidance. Eliminating guidance will in no way stop investors from forming expectations.
Guidance is valuable information. After all, who knows better what a corporation is likely to earn, a bunch of Wall Street analysts or the corporation's own management? If guidance is not provided, analysts' earnings estimates will simply become more inaccurate. Earnings surprises would become bigger. By the way, there are at least two academic studies in circulation that prove this point. And in an era in which regulators are trying to promote more disclosure, how much sense does it really make to tell corporations to stop providing guidance?
The truth is that those who want to end guidance are upset about the volatility that occurs when corporations miss the earnings estimate by just a penny or two. They believe the ensuing sell-off is unjustified. They are probably right about this. However, instead of grabbing the opportunity to buy more shares at a lower price, as any self-respecting long-term investor should do, they want to eliminate volatility by eliminating guidance.
Furthermore, if they would really like to see a greater focus on the long term, perhaps they should petition the SEC to eliminate quarterly reporting altogether. There was a time when corporations had to report results just once a year. However, many corporations reported quarterly results long before a change in the law required them to do so. They did this for one simple reason: their investors demanded the information. This is exactly why corporations provide guidance. If investors want quarterly guidance, should we not be encouraging corporations to provide it?
Tuesday, June 12, 2007
Interest Rate Sell Off
Stocks are selling off as the yield on the 10-year note climbs. At last look, it's standing at 5.26%. Just a couple of months ago, it was down around 4.5%. My expectation that interest rates would rise was one reason I cited for my bearishness on stocks in the June 18 issue of Forbes magazine.
Many economists have been betting that the Fed would cut short-term interest rates. I've been saying that what the Fed does is largely irrelevant. The yield on the 10-year note is much more important. I believe the Fed was hoping that the 10-year yield would rise so it would not have to raise short-term rates anymore. Now that it has, the Fed can breathe more easily.
The Fed's next opportunity to change rates comes on June 28. Now that the yield curve is cooperating with its wishes, my guess is that the Fed will take no action. The higher 10-year yield will keep a lid on inflation by keeping the economy from overheating. The bigger risk right now is too much of an economic slowdown.
Many economists have been betting that the Fed would cut short-term interest rates. I've been saying that what the Fed does is largely irrelevant. The yield on the 10-year note is much more important. I believe the Fed was hoping that the 10-year yield would rise so it would not have to raise short-term rates anymore. Now that it has, the Fed can breathe more easily.
The Fed's next opportunity to change rates comes on June 28. Now that the yield curve is cooperating with its wishes, my guess is that the Fed will take no action. The higher 10-year yield will keep a lid on inflation by keeping the economy from overheating. The bigger risk right now is too much of an economic slowdown.
Wednesday, June 06, 2007
Here Comes the Bear
The June 18 issue of Forbes magazine contains my column explaining why I am bearish on stocks. Although Google is one stock I panned, it just keeps going up. I firmly believe that the growth rate assumptions built into Google's valuation are unsustainable. After all, if Google's growth doesn't slow, it will eventually own all the assets in the world. When a high growth firm realizes that growth is slowing, it often starts acquiring other high growth companies. That often ends in trouble. Google seems to be going down this path.
The two other stocks I panned, Starbucks and Whole Foods, are already showing signs of weakness. I've been bearish on Starbucks for a while--largely because of rising gasoline prices. I just don't see how anyone but the very rich can afford to buy $5 lattes on a daily basis.
The two other stocks I panned, Starbucks and Whole Foods, are already showing signs of weakness. I've been bearish on Starbucks for a while--largely because of rising gasoline prices. I just don't see how anyone but the very rich can afford to buy $5 lattes on a daily basis.
Giving Thanks to the Military
I'm spending the week in Carlisle, PA at a National Security Seminar at the U.S. Army War College. Civilian guests such as myself have been put into small seminar groups that consist primarily of military officers from all the various branches. The groups also include a small number of officers from select foreign nations. We've been debating all kinds of issues from the war in Iraq to the economy. The experience has been absolutely outstanding. I would say that the most surprising--and pleasant--thing I have discovered is the tremendous degree of independent thought and diversity of opinion that exists in the military. While I have always held in high esteem those who serve our country through military service, my respect for them has grown tremendously. It is extremely comforting to know that our military ranks are filled with so many intelligent individuals. Knowing how much these people sacrifice for our country, I can't help but feel a little ashamed that I have never served in the same way.
Friday, June 01, 2007
All News is Good News
The market is in one of its euphoric phases where all news is good news. Gasoline prices set all-time highs and stocks rally. Oil prices go higher and stocks rally. The housing market shows signs of falling apart and stocks rally. GDP growth all but disappears and stocks rally. The yield on the 10-year note closes in on 5% and stocks rally.
In fact, other than a fairly robust jobs market, there really isn't a lot of good news out there. Yet investors keep pushing stock prices higher. As I explain in the new issue of the Forbes Growth Investor, demand for shares is strong thanks to private equity firms, M&A activity, and share buybacks. And in my column in the June 18 issue of Forbes magazine, I explain why I'm bearish on the market. I also pan some stocks that I think could get hurt when consumer spending slows.
In fact, other than a fairly robust jobs market, there really isn't a lot of good news out there. Yet investors keep pushing stock prices higher. As I explain in the new issue of the Forbes Growth Investor, demand for shares is strong thanks to private equity firms, M&A activity, and share buybacks. And in my column in the June 18 issue of Forbes magazine, I explain why I'm bearish on the market. I also pan some stocks that I think could get hurt when consumer spending slows.
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