Wednesday, December 24, 2008

Happy Christmas everyone!

(sorry, I prefer the British version of the greeting!)

I hope you all have a relaxing and enjoyable holiday with your family and friends, however you prefer to spend it.

Me? I'll be watching a non-stop marathon of various versions/editions of Dickens' Christmas Carol. I think I have at least 7 different versions saved on the DVR. What can I say? That's Christmas to me... especially in an area like Durham, North Carolina where it doesn't look quite as Christmas-y as it used to in the upper Midwest where I grew up.

I hope to have more of a "year in review" in the next couple of days, so watch for that.

Once again, Happy Christmas! everyone ...

Tuesday, December 16, 2008

Fed cuts rates; serfs rejoice!

So, the Fed drops rates to almost nothing ... and the markets rejoice!

Ummm... they do know that the Fed is doing this because the underlying economy is really, really weak and we're at serious risk of deflation, right? Right? Now, I'll never turn my nose up at a nice 4-5% one-day rally in the market (particularly after a year like this), but we're not out of the woods by a long stretch.

If the dollar gets weaker (and with rates this low, there's a good chance of that happening before too long), oil and metals get more expensive. And whatever relief we've all been getting from $1.60/gal gasoline all goes "poof!".

There's a curious (and unenviably difficult) conundrum here. I happen to think we ARE (or were) at risk of Japan-style deflation, and a reasonable solution to that is to drop rates. On the other hand, if we get another round of weak-dollar commodity inflation, that means another python-squeeze to the stressed out consumer. And that's bad too.

I'm still waiting for my crystal ball to get back from the shop, so I'm just going to sit tight and keep on doing what I've been doing. Which, in a nutshell, is "prepare for the worst and hope for the best".

Just the FactSet, Ma'am

Well, FactSet (NYSE: FDS) has done it again ... strong revenue and operating income, despite the tough market conditions.

It's interesting to see the subscription numbers; interesting particularly that there hasn't been any apparent impact to all of the hedge funds that are going out of business, nor the spending cutbacks that are going on at bigger institutional shops. So while hedge funds aren't a huge part of FactSet's business (about 6% of subscription value according to this quarter's data), you'd still think there'd be some knock-on effect.

The bottom line is that clients really do see a lot of value in FactSet. Subscriptions generally cost well above $10,000 a year and many firms have multiple subscriptions. That's not a tremendous expense for a shop like T.Rowe Price or Vanguard, but it is more meaningful for smaller shops. It wouldn't surprise me if some firms have made the choice to cut an extra worker or two in order to keep funding the FactSet feeds. Some may see that as heartless, but I think it's a pretty strong affirmation of the perceived value in the product.

This is a company I can love ... the margins are high, the returns on capital are high, the barriers to entry are high, and the growth potential is high. FactSet has a long way to go to catch Bloomberg in terms of the pervasiveness of the product and the features/information offered ... and Bloomberg itself probably still has a ways to go. So, there's plenty of room to grow for a long time to come.

These shares also look pretty cheap ... though so does almost everything these days. This stock probably can't recover until the overall market looks more stable, but this looks like a good one to start accumulating with an eye towards holding it as a long-term core growth position.

Monday, December 15, 2008

Quick note on future commentary

Thought I'd let you all know that there won't be any more Investopedia articles until the new year (if then...).

In the meantime, I'll still be posting thoughts and missives as time and interest allow.

Friday, December 12, 2008

No Bailout ... no real surprise

I have to confess that I'm surprised that so many people seem surprised that the auto bailout failed.

First, you have to remember that the TARP wasn't wildly popular at the time and the logic behind the auto bailout was even more tenuous.

Second, you've got to think that there are some p*ssed off Republican senators looking to settle some scores and show (in a very public fashion) that they're not dead yet, not going away, and not going to rubber-stamp everything the new Congress/Obama administration wants. So, I look at this as a shot across the bow (or, perhaps, into the bow).

Third, and in in line with the first point, look at how the TARP has worked out. Paulson (and Bernanke) went to Congress and said "give us a boatload of money and minimal supervision ... and we're going to use the bulk of the money to buy distressed assets off of bank balance sheets".

In practice, though, we've all seen that the truth is far different -- the TARP has been used as a bank stabilization fund. Now, politicians lie all the time, but they really don't like being lied to (in other words, so long as they're the ones doing the lying, everything is kosher for them). So, I've got to think that a lot of Congressmen are/were thinking "hey, you fooled me once..." and are not inclined to tick off their constituents a second time only to see another BS proposal go south.

So, what do the auto companies do now?

If things are as bad as they say, they go bankrupt. And maybe that's not so bad over the VERY long haul (in the short run, it's bad for all of us).

There have to be rewards for success and consequences for failure, and bankruptcy is arguably the ultimate consequence for corporate failure. IF the afflicted automakers can seize the opportunity (and get strong, forward-thinking management in place), then they can restructure their business and find a cost structure, product line up, and business philosophy that makes sense.

If not ... well, life goes on.

Thursday, December 11, 2008

What to buy? Why not Ginnies?

I think you have to have some serious stones to buy equities in a big way right now ... so what does that leave?

How about various GNMA funds? You can get a decent yield and decent security. Fidelity (FGMNX) and Vanguard (VFIIX) both have solid offerings here.

Corporate bonds are pretty interesting too, but you've got to strap in for some serious pain. Corps have gotten crushed already ... and yet, the defaults aren't that bad yet. Sure, people will say "oh, the prices are already discounting the defaults that are to come", but are they really?

I don't think so ... I think there's another leg down coming when those defaults start popping up. So, I agree that corps are cheap now ... but you've got to have a real threshold for pain to buy now.

At least with Ginnies, what's the downside? If the government backing behind Ginnies goes south, let's be honest -- NONE of us will be worrying about our porfolios. A lot of the short-term Treasuries are yielding bupkis, so what else is there?

Maybe some international govt bonds? UK and Japan and the like ...
Something worth pondering.

(and I'm also interested in commodity-related income-producing assets like MLPs, but that's for another time).

Finally a little good news for Amylin

Amylin (AMLN) hasn't had the best run of late.

There have been safety concerns about the drug Byetta (largely overblown), competition concerns from rival drugs (not-so-overblown), and worries about the timing, efficacy, and competitive profile of the long-acting version of Byetta. Making matters worse, Amylin management hasn't exactly conducted themselves in the most up-front and transparent matter, burying notice of a potentially significant delay in the LAR drug in an 8-K.

I don't like companies that put out press releases to trumpet success, but try to bury setbacks in SEC filings that they hope no one will read.

In any case, word today from Lilly/Amylin/Alkermes suggests that the can use a current ongoing study in place of a separate bioequivalence study. That's good news, as this company clearly needs to get the LAR drug on the market as quickly as possible...

(full disclosure - I'm long Amylin, though some days I wonder why...)

Brain death - FINRA-style

The biggest downside to going back to the sell-side has got to be the series of FINRA exams you have to take.

Series 7, Series 63, Series 86, and Series 87 -- the four horsemen of brain death.

You learn such worthwhile things as "manipulation is illegal" and "government bonds are quoted in 1/32'nds of par". Wow...

I'm often amazed at how much you have to know for some jobs (London taxi driver, for one) and how little you have to know for others, at least in terms of the official licensing/testing requirements.

Oh well, enough ranting. Time to go back to studying!

Tuesday, December 9, 2008

Big Oil + Big 3?

So ... the car companies have no cash and desperately need capital in order to retool, restructure, and keep on going.

The Big Oil companies have oodles of cash, but can't seem to find enough worthwhile projects for their investment dollars.

So... how about the big gasoline producers going in and rescuing the biggest users of their products? They get to put cash to work, they get to look like heroes, and they can ensure that gasoline maintains a permanent role in the personal transportation industry.

Okay... I'm not really serious about this...

... but it's kinda fun to think about.

Saturday, December 6, 2008

Whither (Wither?) the Markets?

Equity investors feel like they've gotten smacked around pretty hard over the last 12 - 18 months. Yet, if you compare the equity markets to the credit markets, the equity markets have done quite a bit better in many respects.

So does this mean that the equity markets have to head even lower?

Here are some reasons to say "yes":

1) The economy is in bad shape ... and getting worse. This week's economic data is only confirmation for what a lot of us have been thinking/seeing/forecasting for some time. And the data is probably going to get worse at least through the first quarter of 2009.

2) Mortgage borrowers are in deep trouble. It doesn't matter where you look ... subprime, work-outs, ARMs, even prime borrowers are seeing distress and rising delinquencies. As unemployment and payroll declines are likely to increase, it's reasonable to assume that defaults and foreclosure have still higher to rise.

3) Credit curtailment. If you want to spend money these days, you're pretty much stuck with spending your own money. Banks are willing to lend to prime customers who want to buy worthwhile assets, but the days of cash-out re-fi's to buy motorcycles and Coach bags are over for the time being.

4) Consumer retrenchment. All of the above suggests that people won't have the cash, the liquidity, or the willingness to hit the stores and keep buying. Ultimately, this spreads out from the retailers into the general economy.

5) Global malaise. Corporate investment (capex) and exports can help for a quarter or two, but it's kinda like trying to lift a tank with children's birthday balloons ... the U.S. is a consumer economy and there just isn't enough lift in the export sector to outweigh the consumer sector.

That's an admittedly grim outlook ... but there's one factor to consider.

This mortgage meltdown was fueled (in part) by people with little-or-no-money-down mortgages. When these mortgages reset to untenably high levels, the borrower really doesn't have a lot of equity on the line. Consequently, leaving the keys on the kitchen table and walking out doesn't represent a major hit to the personal balance sheet (at least in states where there's no recourse beyond the mortgaged property).

So, for these people, maintaining the credit cards is more important than the mortgage. As long as they can revolve their debt, they have "money". And as long as they have money, they can spend.

A lot of people, then, when faced with higher mortgage payments and little or no equity (or negative equity), may be strongly tempted to say "screw it ... I'll go back to an apartment". And in so doing, so long as they have credit cards, they can keep spending.

That's admittedly not a strong argument in support of the market, but it's an early Saturday morning theory on why the equity markets might still be a little more buoyant than you would think they should otherwise be.

Thursday, December 4, 2008

One More Step For MannKind (MNKD, PFE, LLY, NVO)

My latest for Investopedia:

Honestly, folks, where else are you going to get Keynesian economic theory and South Park underpants gnomes in the same blog?


Medtronic Sneezes, Investors Feel Sick (MDT, BSX, STJ)

This one is a little old/late (it was published before Thanksgiving), but I forgot to post it up here.

Better late than never!

The Retail Abattoir -- Blood on the Selling Floor


I figured same-store sales were going to be bad, but this is pretty gruesome.

Target - down 10.4%. Macy's - down 13.3%. Nordstrom - down 15.9%. Kohl's - down 17.5%. Ab & Fitch - down 28%. American Eagle - down 11%.

Unless my memory is faulty, last year wasn't exactly a blow-the-doors-off, we're-in-the-money month to remember for retail. So, this is a really dreadful performance relative to a year-ago number that wasn't all that unbeatable.

Wal-Mart was up pretty good (3.4%), and BJ's was pretty strong as well. I suspect other off-price retailers like Dollar Tree will show some growth as well.

Does any of this surprise me? I guess not ... but I have to confess that saying aloud "oh yeah, retail is going to get hammered" is one thing, but seeing high-teens declines in SSS does give one a moment of pause.

At the bottom line, people HAVE to save more, consume less, and improve their personal balance sheets. Unfortunately, the U.S. economic is a retail consumption-driven economy; exports or corporate cap-ex investment can keep things afloat for a few quarters, but they don't drive the ship.

So here's the paradox -- people need to rebuild their balance sheets, but if consumption tails off too much companies will start firing more workers. Those fired workers will, in turn, spend even less than they would if they were just cutting back.

There's some (small) hope that that small cadre of American savers will come out of their bunkers and take advantage of the opportunity inherent in desparate retailers. I know that I've already spent more this holiday season than in the past five years combined; I needed to replace some higher-ticket items and I saw some unbeatable bargains for things I could use (but maybe didn't strictly "need").

But here's the rub -- if people like me are coming into your store, you've got a big problem ... because I'm cheap and I'm only buying your stuff when you're willing to take a de minimus margin on it. And I'm willing to bet that most of my fellow penny-pinchers and Herculean savers are the same way; if we're buying, it's likely at your loss.

So what do we do? I think free marketeers and Libertarians are going to just have to swallow hard and accept some good ole fashioned Keynesian fiscal stimulus. What's more, the American public is going to have to accept the reality that stimulus today means taxes tomorrow.

I know, I know ... fat chance of people realizing that. The majority of voters want to be lied to -- they want to be told that they can eat the whole cake in one sitting, never exercise, and yet wind up slim, trim, and damn-near immortal.

Consequences? Responsibility? Maturity? Feh! That's un-American danggit, and after all ... ME WANTEE!!!

In the meantime, them GNMA bonds are looking better and better...

Wednesday, December 3, 2008

Auto Bailouts -- Damned if you do, damned if you don't

So, now the auto companies reportedly want even more money from the gum'mint -- now the bailout request is up to $34B. That's a curious strategy ... if at first you don't succeed, come back and ask for more.

Has this worked for anybody? I mean, when you were a kid and unsuccessfully asked your parents for a toy, did you come back and ask for a more expensive toy after you were told "no"?

Still... I'm not sure the economy can afford the estimated 6M+ job losses that would come in short order if the automakers are allowed to fail. So, that puts us all in the terrible position of having to hold our nose and do "something".

Now me, personally, I'd favor simply having the government step up and promise to provide whatver DIP (debtor-in-possession) funding the companies need if/when they go into bankruptcy. BUT ... there are those who say that consumers wouldn't buy from a auto company that had gone bankrupt, since they wouldn't trust that the warranty would be honored.

I guess that's where the comparisons to the airline industry starts to fall apart. It's true that airlines have been in and out of bankruptcy for decades and it doesn't seem to present much of a hurdle to people buying tickets. But here's the thing -- when you buy an airline ticket, your liability is clearly defined and it's short term (you know exactly how much you've spent, probably less than $1,000, and you know exactly how long you're at risk (until your trip is complete)). With a car, though, you're looking at a much larger expenditure and you never really know when you'll need that warranty to come through for you.

Maybe Paulson is going to announce that he's taking TARP money and establishing a new federal warranty guaranty program. After all, it wouldn't be the stupidest thing that man has done yet (more's the pity...).

Here's a final parting thought -- if the U.S. automakers are gasping now, what happens over the next few years as Chinese and Indian automakers start entering the U.S. market? Tata is coming ... Chery is coming ... and they're bringing friends.

Unless the auto companies have serious and far-reaching plans to fundamentally alter the way they do business, and that includes competing with still more low-cost competitors, this is just an inefficient means of assembling money into a nice, big pile and then torching it.

Tuesday, December 2, 2008

Recession Today ... Depression Tomorrow?

So, we finally get word that we're officially in a recession. Gee, what a relief that it's "official", right?

One of the things I find interesting (and maybe ominous) about this is that the start of the recession was dated as December 2007. Given that I think we're going to bottom out in the spring of next year, that suggests we might actually get a technical "depression" -- after all, one of the definitions of depression is 18 months (or more) of recession.

Now, I don't care a whit about labels; labels work well on canned goods, but not so well on economic conditions. But I can't help but wonder what (if any) the impact on consumer confidence will be if newspapers start splashing "Officials: U.S. in Depression" on their headlines.

Don't get me wrong, I think the "blame the media" fad in the U.S. over the past 10 or 15 years is deplorable and idiotic. But it's foolish to think that constant repetition of a message doesn't ultimately lead a high percentage of the listeners toward accepting/believing it. So if people hear the word "depression", maybe they panic and spend even less.

Well, enough on this for now ... good luck to us all.

Monday, December 1, 2008

Memo to JNJ -- WTF?

I've been a Johnson & Johnson shareholder for some time ... but more and more I'm wondering why.

Today JNJ announced that it's paying a little more than $1B for Mentor -- a company known mostly for breast implants and wrinkle treatments. This follows other phenomenally successful JNJ buys like Conor in recent years (tongue firmly in cheek for those who don't know my sarcasm).

Now, is there real growth potential in the aesthetic and reconstructive segments of health care? Sure. Elective cosmetic procedures are going to slow to a trickle during this recession, but I don't care so much about that ... they'll be back eventually and whether that's 2010, 2011, or 2012 isn't all that important to me. What's more, JNJ does have some exposure to that market already and could (arguably) use more products to leverage it existing salesforce there.

But more and more I wonder if JNJ management really has a plan and, if so, whether that plan is worth hanging around for as a shareholder. I'm not universally opposed to growth-by-acquistion in the med-tech space, and companies like Medtronic have shown that it can be a successful strategy. But I am opposed to serial acquirers who add little to the businesses they buy.

There's plenty of interesting cardiology, neurology, and radiology technologies out there, to say nothing of life sciences and diagnostics. These are technologies that serve real diseases, have solid reimbursement, and can be cornerstone growth platforms for a health care company. Instead, JNJ goes the way of fake ta-ta's.

I hope I'm wrong about this and it turns out that JNJ isn't overpaying for a non-strategic asset, but I'm increasingly feeling that it may be time to sell my JNJ shares and move on to the next big idea.