DJIA: 7802.62 -99.65 (-1.26%) S&P 500: 956.04 -7.96 (-0.83%) Nasdaq: 1555.54 -6.16 (-0.39%) S&P 1500 Super 205.23 -1.75 (-0.85%) 30-Year Bond 105 10/32 +17/32 5.75% Yield
TransTexas Gas Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TTG)") else Response.Write("(NYSE: TTG)") end if %> jumped $3 1/16 to $18 after the energy exploration and production company reported good test results from wells at its Eagle Point Field in Galveston Bay, Texas. The company reported that it expects to operate two wells, each at 50-75 million cubic feet of natural gas and approximately 7,000 to 11,000 barrels of crude and condensate per day. TransTexas expects revenues from oil production to surpass revenues from gas production, and the two Eagle Point wells will each yield $49 million to $75 million in cash flow in its first full year of production. For the rest of the year, the company expects to drill a minimum of four more wells with a best-case drilling schedule of eight wells in 1998, including these two projects. Because this is a "water-drive" reservoir, where water is driven into the resevoir by its natural formation, the wells can operate at high constant rates of output, making this a high cash flow, lower cost natural gas production operation.
Goody's Family Clothing <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GDYS)") else Response.Write("(Nasdaq: GDYS)") end if %> gained $2 3/8 to $31 5/8 after the value-priced apparel retailer reported an 8.4% increase in same-store sales for December. In addition to revenues being above the company's plans, margins improved from last September and "[i]nventories at the end of the month are well positioned." Proffitt's Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PFT)") else Response.Write("(NYSE: PFT)") end if %> rose $3/4 to $28 1/4 on reporting that it is preliminarily estimating a 7% increase in December same-store sales. Saks Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SKS)") else Response.Write("(NYSE: SKS)") end if %> climbed $1 5/16 to $21 3/8 after reporting a 6.1% gain in same-store sales for the month. Tiffany & Co. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TIF)") else Response.Write("(NYSE: TIF)") end if %> was flat on the day even after reporting a 15% gain in holiday season same-store sales growth in the U.S., with total worldwide sales up 14%. Gap Stores <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GPS)") else Response.Write("(NYSE: GPS)") end if %> climbed $1 3/8 to $37 after the operator of the Gap, Old Navy, and Banana Republic stores reported a 10% increase in December same-store sales.
Illinova Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ILN)") else Response.Write("(NYSE: ILN)") end if %> rose $1 5/8 to $28 15/16 after the parent company of Illinois Power Co. said it will write off certain power generation assets, the cost of which it believes it may not recover under Illinois utility deregulation legislation. Early this week, the company announced that it had concluded an agreement for PECO Energy <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PE)") else Response.Write("(NYSE: PE)") end if %> to manage Illinova's Clinton nuclear power generation facility, which has been shut down since 1996. Illinova said it would earn $1.85 per share (before charges) for fiscal 1997, below the current mean estimate of $2.05 per share. With measures in place that may increase earnings growth in the coming year, Merrill Lynch raised its rating on the company to "long-term buy" from "neutral."
Children's clothing retailer Gymboree Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GYMB)") else Response.Write("(Nasdaq: GYMB)") end if %> jumped $1 7/8 to $28 after reporting that same-store sales for the five weeks ending January 3, 1998 rose 10%. Total sales for the period increased 36% to $53.9 million. Despite rumors to the contrary, many retailers are reporting increased comps for the holiday season. In fact, some number crunchers are reporting that it has been the best season for retailers in recent memory. According to a Bank of Tokyo-Mitsubishi/Schroder Wertheim survey of 85 retailers, December comps came in at 4%, beating expectations of 3.75%. This is the highest reported comparable-store sales since 1992, when sales rose 5.6%.
QUICK TAKES: Micron Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MU)") else Response.Write("(NYSE: MU)") end if %> gained $1 7/8 to $28 3/8 after Lehman Brothers today said a tick upward in spot prices for dynamic random access memory (DRAM) prices was worth a $2 move in the price of the maker of DRAM devices, PCs, and other electronic goods... Sports website operator SportsLine USA <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SPLN)") else Response.Write("(Nasdaq: SPLN)") end if %> gained $3 3/8 to $17 after CBS said it will provide the company with a $11 million in on-air promotion over the coming year, including critical promotion during the Winter Olympic games... Women's clothing retailer Mothers Work <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MWRK)") else Response.Write("(Nasdaq: MWRK)") end if %> added $1 1/4 to $9 after reporting a 10.6% increase in same-store sales in its core maternity stores and a 45.3% increase in same-store sales in its non-maternity stores.
Investment bank Lehman Brothers Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LEH)") else Response.Write("(NYSE: LEH)") end if %> gained $2 7/8 to $52 7/8 after Standard & Poor's announced yesterday that the shares would be added to the S&P 500 index... Aerospace components manufacturer Howmet International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HWM)") else Response.Write("(NYSE: HWM)") end if %> gained $1 1/4 to $16 1/4 after Morgan Stanley, the lead manager of the company's recent initial public offering, started coverage of the company with a "strong buy" rating... Waters Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WAT)") else Response.Write("(NYSE: WAT)") end if %> was boosted $3 1/8 to $41 3/16 after BT Alex. Brown raised its rating on the chromatography software company to "strong buy" based on its view of prospects for strong fourth quarter earnings growth... Airline seat and automotive safety systems manufacturer Simula Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SMU)") else Response.Write("(NYSE: SMU)") end if %> tacked on $1 to $16 after reporting that it received $40 million in new firm orders and options in its fourth quarter.
Business consultant Thomas Group <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TGIS)") else Response.Write("(Nasdaq: TGIS)") end if %> lost $1 7/8 to $10 3/8 after the company pre-announced earnings in the range of $0.05 to $0.30 per share for the fourth quarter of 1997. The consensus estimate had been for $0.33. Investors took the nebulous forecast to mean that earnings will come in at the lower end of the range. However, the company claims that the uncertainty is de rigueur in its operating model, and if the company books all of its expected "incentive revenues," earnings will actually meet expectations. These performance-oriented revenues (that come on top of fixed fees) are based on "objective measures" such as cycle time reduction, inventory reduction, accounts receivable reduction, and profit improvement, and are recognized as revenue on a monthly basis when earned and approved by the client. This makes Thomas Group quite admirable in the eyes of its customers, since they only pour on the gravy if they see concrete improvements in performance. However, what's good for clients is not good for investors. Taking the company's claims at face value, potentially 84% of its earnings for the quarter will come from these "incentive revenues." That's a lot of uncertainty in a business model.
Indonesian stocks caved in today following a plunge in the value of the rupiah against the value of the dollar. The currency began 1997 trading at 2,362 rupiah to the dollar, but in the last 24 hours has fallen 26%, from 7,900 to 10,700 rupiah to the dollar. Currency traders fear that the Suharto government will not comply with the terms laid out by the International Monetary Fund (IMF) in its $23 billion bailout package. One of the Suharto government's finer moments in 1997 included members of his family working for opposing Indonesia mining companies to be included in the Bre-X mining deal. Today's fear over the terms of the IMF bailout took the Jakarta stock index down 12%. Cellular telecom provider PT Indosat <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IIT)") else Response.Write("(NYSE: IIT)") end if %> fell $3 3/16 to $11 3/8, local telecom monopoly Indonesia Telekom <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: TLK)") else Response.Write("(NYSE: TLK)") end if %> plunged $2 1/4 to $5 11/16, and Gulf Indonesia Resources <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GRL)") else Response.Write("(NYSE: GRL)") end if %> dropped $3 3/8 to $15 1/16.
MedPartners Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MDM)") else Response.Write("(NYSE: MDM)") end if %> and PhyCor Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PHYC)") else Response.Write("(Nasdaq: PHYC)") end if %> announced that they have agreed to terminate their plan to merge because of "significant operational and strategic differences." The $8 9/32 decline to $9 7/8 in MedPartners, a manager of physician practices, has more to do with a late announcement yesterday that it expects to report a fourth quarter loss between $0.20 and $0.25 per share (versus expectations of positive $0.32 per share) than it does with sundry corporate culture and integration issues. PhyCor had dropped $5 9/16 to $24 back at the end of October when it announced its intention to acquire the much larger MedPartners, and today it fell to roughly the same level, slipping $1 5/8 to $24 7/8 after announcing that the deal was off. If the merger was initially deemed essential to PhyCor's long-term growth, investors are now scratching their heads with respect to what they can forecast now. Apparently MedPartners ran into trouble with its medical costs because it accepted flat fee arrangements (made worse by an "open access" policy in California that gives patients easier access to specialists) for services that ended up costing the company considerably more than expected -- an all too common problem with managed care these days.
Banks and savings & loans continued under pressure today as H.F. Ahmanson <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AHM)") else Response.Write("(NYSE: AHM)") end if %>, California's biggest thrift, lost another $1 13/16 to $56 1/16. Washington Mutual <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: WAMU)") else Response.Write("(Nasdaq: WAMU)") end if %> ticked down $3 13/32 to $57 13/16, and the aptly symboled Charter One Financial <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: COFI)") else Response.Write("(Nasdaq: COFI)") end if %> slid $2 5/8 to $54 1/2. Investors are worrying about the compression of the yield curve, but industry net interest income has grown in all but one or two years over the past 50 years. What has caused problems in the past has been loan losses and imprudent capital allocation, not squiggles in margins. As long as the current flat yield curve doesn't last for a number of quarters and banks don't do anything strange with their hedging strategies, most banks and S&Ls will be adequately hedged to handle the current interest rate environment while profiting from increases in non-interest income provided by accelerated mortgage refinancing activity.
QUICK CUTS: Fruit producer Chiquita Brands International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CQB)") else Response.Write("(NYSE: CQB)") end if %> got squashed for $7/8 to $14 1/8 after announcing that it sees a wider-than-expected loss for its upcoming fourth quarter... TSI Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TSII)") else Response.Write("(Nasdaq: TSII)") end if %>, a provider of measuring instruments for multiple industries, fell $1 1/8 to $9 after anticipating sales of approximately $20 million and earnings per share between $0.13 and $0.15 in its upcoming third quarter. Estimates were for $0.19... SeaChange International <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SEAC)") else Response.Write("(Nasdaq: SEAC)") end if %>, a provider of software-based products to manage, store, and distribute digital video for television operators and telecommunications companies, sank $5/8 to $6 7/8 after the company announced that it expects its Q4 loss will be greater than the analysts' consensus estimate of a loss of $0.02 per share.
Computer disk drive maker Seagate Technology <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SEG)") else Response.Write("(NYSE: SEG)") end if %> crashed $1 3/8 to $19 1/4 after announcing that "due to continued pricing pressure and weakness in demand for its disk drives" it will not meet its previous expectation of profitability of $0.03 per share for its second quarter. Total revenues for the quarter are projected to be approximately $1.65 billion, versus $1.89 billion for the prior quarter and $2.4 billion for the year-ago period... Paper products maker Georgia-Pacific <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GP)") else Response.Write("(NYSE: GP)") end if %> was cut $3 5/8 to $55 3/16 after getting reduced to "neutral" from "buy" at Bear Stearns... Insurance holding company Risk Capital Holdings <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RCHI)") else Response.Write("(Nasdaq: RCHI)") end if %> dropped $2 3/8 to $21 after Salomon Smith Barney downgraded the shares to "outperform" from "buy."
FOOL
ON THE HILL
An Investment Opinion by
Randy Befumo
The S&P 500 Index fund has become the bugaboo of money managers throughout the world by producing excellent pre-tax returns and almost unparalleled after-tax returns. Although many have written of the inability of money managers to beat this benchmark, the systematic analysis of why this is the case has been lackluster. Perhaps it is this more than anything else that allows tabloid financial journalists to periodically craft fear-mongering stories about an S&P mania, despite the fact that only about 8% of all money invested is indexed.
The Standard & Poor's 500 is an index consisting of 500 large companies with sizable U.S. operations that is maintained by the editorial staff of Standard & Poor's, a subsidiary of McGraw Hill. Although there is no set scientific formula for how companies enter and leave the index, the editors are sensitive to including companies representative of the economy at large and tend to pull out companies in the midst of long-term decline. Although the benchmark has existed since the 1923 in some way, shape, or form, its true rise to prominence only began in the late 1980s with the explosion of the mutual fund marketing machine.
By establishing the S&P 500 Index as the de facto standard for comparing mutual fund returns, the industry ironically set itself up for embarrassing performance thereafter. It has been this embarrassing performance that has driven awareness about the S&P 500 Index funds to the masses, where institutions had been hearing that message for almost 20 years. The original academic work on index investing called it "passive" investing and determined that it was the only logical response to what was termed the Efficient Market Theory (EMT). Because academics could find no predictive factors that explained market outperformance, they reasoned that the best thing investors could do was purchase the "market."
Part of the underlying work in EMT was the discovery that money management ability, like just about any other intellectual pursuit, is distributed along the bell curve. While the distribution of performance was not perfect, most money managers appeared to cluster around the mean while there were much fewer who occupied the extremes at either end in any given year. What has not really been remarked on is why this average mutual fund performance is systematically below that available in an S&P Index fund. While some have speculated that the S&P 500 is really not representative of the market as a whole and not a good benchmark, a more subtle, but powerful reason exists that reinforces one of the basic rules for generating excess returns -- don't spend a lot of money.
By definition, a mutual fund's return is the total return of the stock minus any fees associated with investing the money. Because index funds are managed almost on autopilot, fees for these vehicles are extraordinarily low. On the flip side, managed equity funds routinely have expense ratios of 1.0% or higher, meaning that to match the market after the expenses, the fund actually has to beat the market before expenses. To beat the market clearly and decisively, the pre-expense performance has to be extraordinary. In fact, if you imagine a bell curve measuring returns that has been shifted to the left of the pre-expense mean by a percent or two to account for fees, you can easily see why, by definition, the majority of mutual funds have to underperform the benchmark.
Beyond buying an index fund, the reality of this for your portfolio is quite simple. Index funds generate market performance by keeping expenses low. In their rush to put money into the market, individual investors often run up miscellaneous expenses for trades, investment information, and software that costs them quite a bit more of their total capital than one to two percent. For each dollar you pay to invest, you have to make back that dollar plus some more in order to make any money at all. In order to beat index performance where expenses have been minimized through a pattern of long-term holding, you have to be exceptional. Although there are a few individuals that are exceptional, the majority of people are best served by concentrating on how much they spend to invest or they risk underperforming on a pre-tax basis with the same regularity as professional money managers.
Please see the Motley Fool's Conference Calls page for call information and links to synopses.
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Randy Befumo (TMF Templr), a Fool One
Dale Wettlaufer (TMF Ralegh), Fool Two
Alex Schay (TMF Nexus6), Fool Three
Contributing Writers
Brian Bauer (TMF Hoops), Fool Four
Editor