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Buzz Bits

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Mini-Minyan Mailbag: Cheap without having great businesses 4:05 PM

My coiffure may not have budged up there on the roof, but the breeze sure as hell blew my my skirt up nicely. Bracing.

Appropos of the CD discussion on the Buzz: I was lucky enough to have flagged this thing as dead money at best in June. Classic example of a stock the Street has loved and lusted after all the way down.

Obviously, the company's a virtual banking fee generator, which is one explanation. Another is opaque financials that let an analyst claim the stock's cheap without it actually having great businesses:

Excerpt: "Yet Cendant stock, stagnant for two years and recently trading around 21.36, continues to behave as if it will be dead money, despite management's new religion of returning cash to investors and the near-universal acclaim of Wall Street analysts (nine of 10 rate the stock a Buy).

When, as with Cendant, a stock is widely declared cheap (at 15-times `05 estimates and 13-times `06 numbers) and yet persistently underperforms, it's time to look below the surface for reasons."


Thanks,

Minyan Michael Santoli

If it's in the Game... - Adam Warner 3:33 PM

Every time I look at a tech option I haven't watched in a while, two things happen. I hit up the implied volatility of the option, and it seems cheap, pre-earnings. Then I look at the 52 week chart, and that "cheap volatility" I see is actually a 52-week high. That's how pathetic it's gotten in tech-option land.

ERTS fits this pattern to a tee. November's are trading at a mid-40's volatility. A few years ago, you'd have wanted to back up the truck and buy everything option at these prices. Now, that same level is a "surge."

Halloween trick - Fil Zucchi 3:17 PM

I just finished going through Morgan Stanley's research on Cendant (CD). I had played with this name in the past and in the mid 'teens I had a sense that it might be cheap enough to merit a couple of hours of digging. Alas, my senses appear to need a tune-up.

Not even Mother Morgan can put lipstick on this pig. The sum of the parts price target of $24'sh after CD breaks up, seems entirely based on "we hope" and "we think" assumptions that the businesses will improve, while virtually every data point suggests precisely the opposite. Most striking

  • MWD's acceptance on its face of the idea that real estate transactions will decrease but that they will be offset by rising sale prices.
  • Travel demand has moderated, but it's still healthy if the consumer does not go in the tank.
  • Costs in the rental car business are getting worse, pricing is under pressure, but "we see a possible upside scenario where price increases stick and auto manufacturers can't sell cars at retail and must dump them in the rental market."
  • Closing rates on timeshares are going south, but the outlook is decent. No explanation given for why the outlook is decent.
  • Travel services - Orbitz, Cheap Tickets, etc. - let's just say the analyst could not find any words to spin those.

I see an upside scenario that tomorrow I'll wake up 6'8", 210lbs and 3% body fat and my agent will tell me to get ready for the NBA draft. Shrooms anyone?

Afternoon stagger - Kevin Depew 3:16 PM

Toddo pointed out the bounce in the PHLX Housing Sector (HGX) earlier, but check out the Morgan Stanley REIT Index (.RMZ), as it was earlier teetering on a potential new sell signal at 780. The Dow Utilities are also in danger of a potential new sell signal with a move below 388... if/and/or when. We don't anticipate our anticipators.

Also, don't think for a moment that I too didn't notice Minyan Michael Santoli's hair, perfectly unmoved in the extreme gusty conditions atop Rockefeller Center. Yes, I noticed his perfectly still hair. And I wept. I used to have hair like that. Back in the day. And if I had known then what I know now, I too would be like Mike and glue that stuff down so it never comes off. But then, you know what they say, grass don't grow on the playground.

Sniff Sniff! - Todd Harrison 2:41 PM

  • NYSE breadth--and Nazz breadth for that matter--are flatter than Fokker's first...
  • If the first move is the false move...
  • Note the homies as they catch a bid. There is all sorta resistance at HGX 507-514 (we have some room until we get there).
  • The energy patch is trying to lift. Again, XOM $58 is THE level to monitor in that complex.
  • What am I doing? More watching than guessing. I am hangin' with Hoofy above S&P 1195 although it's gettin' hot in here (so hot). Right or wrong, I'm sans emotion and not participating in the spin cycle (I love 'em, I hate 'em, I love 'em, I hate 'em...)
  • T-Minus 27 hours till Succofest...

Boom-Boom Bigalow - John Succo 2:28 PM

I now have my answer as to whether Boom-Boom will continue with Fedspeak.

The most important comment I took from their announcement was that the economy is being augmented by hurricane rebuilding.

So the destruction of capital is good I guess, just like money is free.

As we watch Japanese stocks take off, we see relentless raising of our short term interest rates and the Fed convinces us that they are in control.

If capital is finite, as I believe it is, then the repatriating of that capital back into Japan causes that capital to become more expensive.

That is what is driving our rates higher.

Fun Fact... - Jason Roney 2:13 PM

Today marks only the 13th time that SP opened lower and remained lower until 2pm on the day of an FOMC release (intraday data only goes back to 1987), and you have to go back to Sep 2002 for the last occurrence. Of those, it closed lower 9 of 12 and below the open price 9 of 12.

DeMark at the spot - Kevin Depew 1:53 PM

Just a heads up to Minyans that Thursday, November 3 there will be another opportunity to pick up some fascinating market wisdom from Tom DeMark, sponsored by Thomson Financial.

Those of you who were in Ojai for MIM2 remember that the sessions Tom ran there were outstanding and extraordinarily valuable, especially since his public appearances are so rare.

I plan to be there this Thursday, so hope to see some familiar faces. Here are the details:

When: Thursday, November 3, 2005

5:00-6:00 Exclusive Media Demonstration
6:00 - 8:00 Customer Event (Media Invited to Attend)

Where: 195 Broadway
Fourth Floor
Thomson Hall
New York, NY 10007

Please register for this event by e-mailing allison.hagan@thomson.com

Mini Minyan Mailbag: DELL Tha Funkee Homosapien - Jason Roney 11:55 AM

Prof. Roney,

Can you run a query of the historical bias when Dell (DELL) gets hammered? I remember one for Intel (INTC) back in August I believe.
Minyan H

MH -

I ran a query based on "Dell opens down 5% and open is at least 20 day low" to see what happened to the stock and the NDX going forward.

It has occurred 11x in the last 10 years. I looked out 3,5,10,20 days and obtained very mixed performance results. The last time was Aug '05 of course. Prior to then June '02, Sep '01, Aug '01, Dec '00, Oct '00, Sep '00, Oct '99, Feb '99, Oct '98, and Oct '97. It's hard to draw any meaningful conclusion from the output unfortunately.

Z-pak, baby - David Miller 11:47 AM

The Zithromax patent expiration will affect Pfizer (PFE) less than it will (has) affect the Croatian company PLIVA (PLVGK.PK). PLIVA licensed the drug to Pfizer and it was essentially the only big revenue generator the company had. After an aborted attempt earlier this year to acquire branded products, PLIVA has decided to sell off much of its business and focus on generics.

DeVibe from Lehman Scribe Jeff DeGraaf - 11:34 AM

"With volume levels expanding, our breadth indications on the NYSE again eclipsed 3:1. Though we were willing to give Friday's strength the benefit of the doubt, yesterday erased any questions of confirmation. Strangely, even though Friday's breadth wasn't as firm as Monday's, the TRIN Friday was far more bullish than yesterday's.

Volume flows (up/down) were more robust Friday, providing a .51 TRIN reading, yesterday they were evenly matched with breadth, and only provided a .92 reading. The price gain in SPX terms was not enough to qualify, but on the NASDAQ price and volume allied for the 2nd day of accumulation in a row."

Walking the fine line between omnipresent and annoying - Kevin Depew 11:31 AM

  • Among other interesting things, Greg Weldon looks at both the Dow Transports and the NYSE Real Estate Income Fund (RIT) in his excellent piece today. I have a bit of a higher level than he does for the potential Transports break, based on a point and figure chart: 3550 would confirm a spread triple bottom break and violate the conventional long-term trendline from the March 2003 lows.
  • Meanwhile, the RIT will give break a double bottom on a point and figure chart at 17.
  • Note that Dec. Gold has broken the spread triple bottom we highlighted earlier on the Buzz.
  • The PHLX Gold & Silver Index's bullish shakeout pattern remains intact for now. But a move below 102 would void the shakeout and violate the trendline from the May lows.

"I wanna new drug, one that won't make me sick" - David Miller 11:26 AM

Amgen (AMGN) and Abgenix (ABGX) has a drug in development called panitumumab (p-mab). It is hailed as a next-generation Erbitux, primarily on the theory it will have fewer side effects.

A study reported here at ECCO in Paris showed, however, that 100% of patients who got p-mab in combination with FOLFIRI for colorectal cancer had problems with their eyes (ocular side effects). 75% of patients had a rash. 42% of the 24 patients in the study dropped out because of side effects, 50% of those because of the ocular side effects.

This information is not reflected on the abstract available on the ECCO site, so I thought I'd pass it along.

NDX Additions - MV News 10:51 AM

Each December the Nasdaq reviews stocks for potential additions and replacements to the Nasdaq-100. This year the 2005 rebalance will be effective December 16 on the close, with new additions probably known by December 12, if past history is a guide.

Companies that are now included in the NDX, but likely to complete acquisitions, include NXTP, MACR and TLWT.

Of course, GOOG is at the top of the list as a possible addition, but other names mentioned prominently on the street include: ATVI, CKFR, EXPE, NVDA, RHAT and URBN. This is not an exhaustive list, but those are the stocks mentioned most frequently.

Selective service - Kevin Depew 9:57 AM

See the Internet HOLDRs (HHH) testing important resistance at 62. A move to 63 would be a quadruple top breakout. I continue to see improvement in the long-term relative strength of select tech versus the S&P 500.

It is decidedly not widespread improvement, as was the case in the mid 90s, or on the opposite side - widespread relative strength deterioration versus SPX - as was the case in January and February 2000. Rather, it is occurring in pockets of very select, specialized groups.

In the Franklinian spirit, or for a hundred dollars... - MV News 9:46 AM

The US Dollar Index (DX/Y) is testing important resistance in the 90.25 area. The next level is 90.50. Not today's business, more than likely, but a move to 91 would be a significant breakout for the DX/Y if that were to occur.

Dude, you are not getting a Dell - Sanjay Somaney 9:26 AM

The single major issue with Dell (DELL) is that they have stumbled mainly on a way too aggressive pricing policy which has eaten into the margins.

Gartner estimates that PC shipments in 2005 will be up over 12% but revenues will grow by less than 100 bips. Therein lies the problem. The PC business is running at a standstill, and as companies continue to make PC's cheaper day by day, margins will continue to get compressed.

Also, Apple (AAPL) seems to be making some serious inroads into market share even though many still consider (maybe wrongly so) the Mac a niche product. Also, my techie friends tell me that more and more problems are cropping up with Dell systems, indictaing a quality control issue in Round Rock as well.

However, those thinking that DELL is a systemic problem in techland are plain wrong. At best it's company specific and at worst it's sector specific. Just IMHO.

(Position in AAPL)

"I'm gonna tear you apart...and your friend too." - David Miller 8:43 AM

Nabi Biopharma (NABI) is absolutely getting taken apart in pre-market trading after it reported a failed Phase III trial and a halt to development of the failed drug and another drug in development that shared the same underlying technology.

This is an abject lesson of why you must focus on fundamentals and not the fact that a company is a buyout candidate. While I'm not sure an analysis of the fundamentals would necessarily have allowed you to avoid this morning's detonation completely (repeating the last Phase III looked like a low hurdle), keeping your position sized to that risk in "ignorance" of the potential takeout reward should have helped prevent the loss from becoming debilitating.

Say What? - Kevin Depew 8:13 AM

A look at news and opinion from around the world:

  • Derided in the US, the flat tax is a winner in Europe, according to South Carolina's TheState.com.
  • The Boston Globe's Alex Beam wants "Manhattan Projects for Everyone" after Ray Kurzweil and Bill Joy last month asked for "a new Manhattan Project" to defend against biological viral threats.
  • Richard Beales in the Financial Times takes a look at the "first driving test of the credit derivatives industry."
  • Also in the Financial Times, Morgan Stanley's Stephen Roach discusses the "rising risk of a hard landing."
  • Arch Puddington writes about the "Soft Underbelly of Freedom" in today's Wall Street Journal. I have no idea whether or not it's an interesting piece, I just wanted to use the name Arch Puddington in a sentence.

House, M.D. - Greg Collins 8:11 AM

RW Baird punts bellweather biotech company Genenetch (DNA) to neutral from outperform based on the potential for reduced revenue growth as well as valuation.

The consensus for some time from the folks I've spoken to is that the company is a best of breed longside candidate given the solid fundamentals but it's difficult to get excited at current prices. DNA is up nearly 30% ytd while the Amex Biotech Index (BTK) is up roughly 16%. A look at the chart shows resistance at 91.70 / 95 with support at 84-86. Critical support stands at 80 (where it bounced in Sep/Oct).

Keep in mind also that DNA is a 41% weight in the Biotech HOLDRs (BBH).

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