A lot of press/regulatory interest as well. From Saturday's Barron's:
"It was Ed Yardeni, the clever chief economist at Deutsche Bank in New
York, who recently wrote about the nation's "Yahoo economy," one that "can
continue to prosper despite all the problems in Asia, Latin America,
manufacturing and commodities."
This economy, he skeptically commented, is "a perpetual prosperity machine.
Soaring stock prices boost consumer confidence. As their retirement
portfolios appreciate along with stock prices, consumers have less need to
save. As they spend more of what they earn, economic growth remains
strong, boosting earnings expectations and stock prices."
It's only natural in a Yahoo economy for investors to gravitate toward online
brokers, even though these outfits have low margins and tough competition.
The online brokers soared early in the week, adding to gains racked up in
January, only to give back some of the advance by Friday. Siebert Financial,
the brokerage firm run by Wall Street veteran Muriel "Mickey" Siebert, was
at the center of the action. Siebert hit a high of 70 5/8 Thursday, up from 12
5/16 on the prior Friday's close, and then fell back to end the week at 35 1/8, up 22 7/8 in the five sessions.
At its peak, Siebert Financial was valued at $1.5 billion, 350 times 1998 profits and over 100 times book value. Mickey Siebert has been the main beneficiary of the runup because she controls over 90% of the stock. The brokerage firm's shares have been so volatile because of a thin float and the impact of the point-and-click day-traders who've driven so many Internet plays. Siebert, incidentally, is only a bit player in the online world."
Facts to consider before the open on Monday, before all you dodo's put in market orders to sell: SIEB is a real company with no SEC issues and NO float to speak of. JBOH, on the other hand, is a crim company under SEC and Grand Jury investigation for fraud and manipulation (read the recent 10 Q, I've posted pieces here).
JBOH has less market share that SIEB on the internet and a massive amount of free trading shares without even including the shares related to the 70 cent convert that screwed the shareholders once already. 14 M out, 6.5 M float, 6.5 M convert, 2.5 M options. Massive dilutions with huge prints of insider selling. You mini mo's effed up, you bought too much. Merlin in big trouble, already sold ahead of you, was not able to get the stock going on Friday as the "Prisoner's Dilema" set in.
The whole banana: interactive.wsj.com
Industrials Revive as the Techs Are Battered
By Andrew Bary
Vital Signs
Some chinks are appearing in the Yahoo economy.
Technology stocks, the market leaders for the past five months, got slammed
last week, while many depressed manufacturing and energy stocks advanced
in another volatile stretch of trading.
The disparity between the new economy and the old was apparent in the
strength of the Dow Jones Industrial Average relative to the Nasdaq index.
The Dow, aided by gains in such stocks as Alcoa, Caterpillar, Minnesota
Mining & Manufacturing and International Paper, fell just 54 points, or 0.6%,
in the five trading sessions, to 9304. The Nasdaq plunged 5.3%, to 2373, in
its worst weekly setback since last fall, because of sharp declines in
Microsoft, Intel, Cisco Systems and a host of other big tech issues.
Friday, the Dow slid less than a point while the Nasdaq declined 1.5% as
institutional investors rotated out of technology and into industrial issues.
The Dow may have held up better than the Nasdaq in the past five sessions,
but the venerable blue-chip index is still lagging behind the Nasdaq so far in
1999, reflecting the 16% advance in the tech sector in January. The DJIA is
up 1.3% in 1999, way behind the Nasdaq's 8.3%. The S&P 500 was off
3.1% last week, to 1239, cutting its year-to-date gain to 0.8%.
What ails the techs? Part of the problem simply is valuation. The leading
stocks have never sported such high price/earnings multiples, both in an
absolute sense and relative to the S&P 500. There also are concerns about
price wars in the low end of the microprocessor market, and that drove down
the stocks of Intel and its pesky rival, Advanced Micro Devices. Then there's
the big picture. The U.S. economy continues to barrel along, raising the risk
that the next move by the Federal Reserve may be to raise rates, not lower
them.
"Investors recognize that the fundamentals for technology couldn't be more
favorable, but the stocks largely reflect that," says Byron Wien, chief domestic
strategist at Morgan Stanley Dean Witter. The economy's strength, apparent
in Friday's report of higher-than-expected employment gains in January, has
taken its toll on the bond market, where the benchmark 30-year Treasury fell
four points last week, raising its yield to 5.35%.
Climbing bond yields
make stocks less
attractive in
comparison,
especially the
high-growth,
high-multiple tech
issues whose
valuations hinge on
low interest rates. So
far this year, the
30-year Treasury has
risen in yield by
one-quarter-
percentage point.
Wien's model that
measures the relative
appeal of stocks and
bonds now suggests
that the S&P 500 is
about 15%
overvalued. "This
doesn't mean we're
going to have a
correction. But it
does suggest that the
market will have a
tough time moving
forward unless bonds
rally, because stocks
usually don't get more
than 20%
overvalued," he
observes.
It's also not surprising
that the techs are
starting to give
ground now that
many of their
doubters have thrown
in the towel. The huge
market values of the
Internet stocks have
ceased to amaze, and
there even was
speculation in The
Wall Street Journal
that America Online
or Yahoo might want
to merge with an
established media and entertainment company like Walt Disney, CBS or
Viacom. Such mergers appear doubtful because someone like Disney CEO
Michael Eisner probably wouldn't accept AOL stock -- now trading at 250
times projected fiscal 1999 profits -- in a deal.
Wien has been recommending basic-materials stocks like Alcoa and DuPont,
betting that these out-of-favor issues will benefit from a strengthening
economy. "My theory on the cyclicals is that the risk is wrung out. You may
not make a lot of money, but you're not going to lose a lot."
He could be wrong, of course. The cyclicals started well this year, but then
faded badly later in January. Last week's rally in the sector could be just
another false dawn.
It was Ed Yardeni, the clever chief economist at Deutsche Bank in New
York, who recently wrote about the nation's "Yahoo economy," one that "can
continue to prosper despite all the problems in Asia, Latin America,
manufacturing and commodities."
This economy, he skeptically commented, is "a perpetual prosperity machine.
Soaring stock prices boost consumer confidence. As their retirement
portfolios appreciate along with stock prices, consumers have less need to
save. As they spend more of what they earn, economic growth remains
strong, boosting earnings expectations and stock prices."
It's only natural in a Yahoo economy for investors to gravitate toward online
brokers, even though these outfits have low margins and tough competition.
The online brokers soared early in the week, adding to gains racked up in
January, only to give back some of the advance by Friday. Siebert Financial,
the brokerage firm run by Wall Street veteran Muriel "Mickey" Siebert, was
at the center of the action. Siebert hit a high of 70 5/8 Thursday, up from 12
5/16 on the prior Friday's close, and then fell back to end the week at 35 1/8,
up 22 7/8 in the five sessions.
At its peak, Siebert Financial was valued at $1.5 billion, 350 times 1998
profits and over 100 times book value. Mickey Siebert has been the main
beneficiary of the runup because she controls over 90% of the stock. The
brokerage firm's shares have been so volatile because of a thin float and the
impact of the point-and-click day-traders who've driven so many Internet
plays. Siebert, incidentally, is only a bit player in the online world.
E*Trade Group fell 5 1/4, to 50, after hitting a record 66 7/16. The company
is now valued at $5.5 billion, making its market cap comparable to Lehman
Brothers Holdings'. Ameritrade gained 15 1/4, to 95 1/2, but industry leader
Charles Schwab was off 4 1/4, to 65 1/16. Some of the online brokers now
are being valued at a hefty $10,000 per account.
Perhaps the safest way to play the group is through Toronto-Dominion Bank.
The big Canadian financial-services organization owns Waterhouse Securities,
the U.S. discount broker that's No. 2 in online trading. Toronto-Dominion
said recently that it may sell a minority interest in Waterhouse to the public.
Toronto-Dominion, whose shares are traded in both New York and Toronto,
has appreciated lately, rising 1 7/8 last week to 43 3/4. However, that's still a
relatively modest 17 times the profits projected for its October 1999 fiscal
year. It's estimated that Waterhouse could be worth as much as $4 billion-$5
billion. If that estimate is accurate, investors effectively are paying just 12
times estimated 1999 profits for the bank earnings. That multiple is below
those of other major Canadian banking companies.
In the weak tech sector, Microsoft fell 15, to 160; Intel was off 13 3/8, to
127 9/16; Cisco dropped 10 5/16, to 101 1/4, but Dell Computer rose 7/16,
to 100 7/16. Dell used to be a favorite of short-sellers, who felt its P/E was
crazy, given the nature of its business. Dell's valuation has ceased to be a hot
topic because of the even loftier multiples on the Internet stocks. But it's
worth noting that the computer maker now is quoted at a steep 70 times
projected 1999 profits, commanding a premium to both Microsoft and Cisco,
which probably have more secure franchises.
While the techs were weak, industrial stocks came to life. DuPont gained 4,
to 55 1/8; Alcoa was up 6 3/8, to 89 1/2; Caterpillar rose 3, to 46 1/4 and
Boeing added 2 1/2, to 37 1/4 . Energy issues also rallied, a week after many
had hit 52-week lows. Chevron rose 4 3/8, to 78 7/8; Texaco gained 4 5/8,
to 52; Atlantic Richfield added 5 1/2, to 62 15/16, and Shell Transport &
Trading tacked on 3 3/16, to 33 11/16. The advance came despite a $1 drop
in oil prices to $11.80 a barrel. The oils were mentioned favorably in this
space last week.
Most of the brokerage stocks fell, as did many consumer issues. But
Berkshire Hathaway was up 10%, to $71,600 a share, after the New York
Times highlighted PaineWebber analyst Alice Schroeder's bullish report on
the company. That writeup was featured in this column on January 25. In it,
Schroeder argues that Berkshire stock is worth anywhere from $91,000 to
$97,000.
The Trader, Part 2
Return to The Trader, Part 1
The Dow Industrials fell 54 points or 0.6% to 9304 in the week, but the index held up better
than both the S&P 500 and Nasdaq. The Dow was supported by gains in Alcoa, 3M,
International Paper and DuPont. IBM and General Electric fell.
Opportunity often arises when market leaders temporarily disappoint Wall
Street.
Progressive, the Ohio-based auto insurer whose growth and profitability have
been its industry's envy, recently reported fourth-quarter growth in earnings
and premiums that failed to match the Street's very optimistic estimates.
Result: The stock, which fell 7 3/4 last week, has slipped to 117 1/4 from an
early-year high of 174.
The concern now is that rising competition in the auto-policy business will
crimp Progressive's profit growth, which has averaged 19% annually over the
past five years.
But some observers believe the market overreacted, and that Progressive will
be a big winner in the next few years because of its low operating costs,
strong underwriting results and savvy management. Peter Lewis, Progressive's
chairman since 1965, is an industry legend.
"Progressive and Geico are grabbing market share at the expense of everyone
else," says Peter Russ, an analyst with Laidlaw Global Securities in New
York. Progressive now controls 4% of the fragmented U.S. auto insurance
market, ranking it fifth in the industry. Progressive's original niche was serving
high-risk motorists, but in recent years, the company has targeted low-risk
drivers via direct sales. The insurer is seeking to raise its profile with a big ad
campaign that included sponsoring the half-time show at the Super Bowl.
Geico, a unit of Warren Buffett's Berkshire Hathaway, and Progressive have
been roiling the auto insurance market by undercutting rivals like Allstate that
rely on agents to generate sales. Their low-cost direct-sales approach permits
Geico and Progressive to offer inexpensive rates.
Russ's view: Progressive's earnings can grow 15% annually over the next five
years, resulting in a doubling in the stock. And this assumes no expansion in its
price-earnings multiple.
Progressive recently reported a 22% jump in fourth-quarter operating net, to
$1.38 a share, below Street expectations of $1.54. This shortfall and
slower-than-expected premium growth of 10% prompted a flurry of
downgrades from Street analysts. Progressive had operating profits of $6.01
a share in 1998, up from $4.46 in 1997. This year, Russ expects $6.75.
Progressive, it should be said, isn't on the bargain counter, trading at 17 times
estimated 1999 profits. Allstate stock, in contrast, trades at 36 -- just 11
times projected 1999 earnings.
Russ says Progressive is worth the price, given its growth prospects and
strong track record. The company's market value is now $8.5 billion. It
should be noted that many value-oriented investors think Allstate is also a
good buy.
CNA Financial, the property and casualty insurer controlled by Loews Corp.,
has been a weak market performer in recent years. CNA was unchanged at
35 1/4 last week, down from a 52-week high of 53.
The company has been hurt by rocky industry conditions and by reductions in
Wall Street profit estimates for 1999, which now center around $2 a share.
CNA's investment portfolio has been run conservatively by the Tisch family,
which controls Loews. The vast bulk of CNA's investments are in high-grade
bonds. The Tischs did make a shrewd equity investment for CNA by
purchasing 20 million shares of an upstart firm, Global Crossing, which
provides undersea fiber-optic communications. Global Crossing has been a
big winner, mushrooming in market value to over $12 billion and lifting the
value of CNA's stake to $1.25 billion, versus just $20 million initially.
Thanks to the Global Crossing's appreciation, CNA's book value may now
be about $51 a share. Global Crossing rose 10 5/8, to 63 1/2, last week and
has more than tripled since its August initial public offering. Both CNA and
Loews are due to report fourth-quarter profits this week.
A series of coming mergers, including International Paper-Union Camp and
AT&T-Tele-Communications Inc, are due to close by the end of the current
quarter. This will give Standard & Poor's the opportunity to replace up to
seven members of the S&P 500.
Which companies will be added? The interest is high among Wall Street pros
because of the strong price appreciation enjoyed by several stocks, notably
America Online, that were added to the S&P at yearend 1998. These stocks'
gains were driven largely by price-insensitive purchases by the giant S&P
index funds.
One way to play the index effect is to purchase the largest stocks in the S&P
400 mid-cap index because those issues have a good chance of eventually
joining the S&P 500, according to Merrill Lynch's quantitative research
group.
The mid-cap index is a kind of farm team for the S&P 500, with its winners
often moving up to the big leagues. "In 1998, 25 of the 48 additions to the
S&P 500 came from the S&P mid-cap index. And of those 25 mid-cap
stocks, 21 were from the top 40," comments Diane Garnick, a Merrill Lynch
analyst.
The top 10 stocks in the mid-cap index now are Aflac, Office Depot, Best
Buy, Harley-Davidson, Cintas, Linear Technology, Maxim Integrated,
Cadence Design Systems, Lexmark International, and Biogen. Garnick's top
choices for inclusion: Cintas and Harley.
The growing "index" effect caused by changes in the S&P 500 is spurring a
host of other trading strategies.
Many investors simply wait until new additions to the index are announced.
This strategy involves buying those stocks on the announcement date and
selling them at the close of trading on the date of their inclusion in the S&P,
when purchases by index funds typically peak. There generally is a gap of
several days between the announcement and the actual inclusion.
This strategy worked well in late December because the stocks added to the
S&P -- AOL, Firstar, Compuware and Solectron -- rose sharply ahead of
their inclusion in the benchmark index.
As soon as new stocks join the S&P, the index cowboys often short them.
Why? Because index-related buying often results in stock-price appreciation
beyond what fundamentals dictate. This short-selling strategy also has been
profitable so far in 1999, because three of the four stocks added in late 1998
are off markedly. AOL, the quarter's sole winner, is up 3%.
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