Tuesday, June 19, 2007

Contrarian takes on morning market news

Here's a few thoughts on this mornings market moving news:
---Best Buy is selling off due to an earnings report of an 18% decline in profit, and that has impacted the overall market as well. Best Buy also lowered estimates for full year profitability. It makes sense that their stock price would decline, but is this a meaningful signpost for consumer health that should impact the overall market. Maybe not, big maybe not. Best Buy's sales were up 14% year over year, in the expected range, and not a small number. The consumer is still spending. Best Buy's margins were compressed because the consumer bought more lower margin products like laptop computers and because the prices that Best Buy was able to charge for flat screen televisions declined. Could one possibly say that the consumer is still spending, the consumer is spending more on items with a more utilitarian purpose, and that despite market worries about inflation competition is keeping prices well under control. This may not be perfect for Best Buy or other retail electronics chains, but the economic news is not necessarily bad.
---Yahoo is trading up on news that CEO Semel is stepping down and being replaced by co-founder Jerry Yang. Why is this good news? It simply shows further disarray at Yahoo. Semel just said he was in for the long haul a few weeks ago. Yang now says he is, and that he is "digging in" for the fight against Google. Bad choice of words as in wars of attrition the underdog either loses or lures the opposition into mutual self destruction. He'll hire more engineers and grow. That sounds like more expenses directed by a leader who is a technologist through and through by most accounts, and not necessarily a business leader. Yahoo still has an excellent franchise, but on this news one should consider selling into the liquidity of false hopes. Yahoo either needs a new owner, a great partner, or a significant inflow of new blood.
---Housing starts and new housing permits came in around or slightly better than the average of analyst estimates, but they are not encouraging. The news is focusing on the 2% decline in housing starts almost totally as evidence that the slide continues, which was known before 8:30am. The more frightening number by far should be the 3.1% increase in new housing permits. A permit is admittedly a long way from a completed building, but assuming the intention to follow through it shows a housing industry, however diffuse, that in total hasn't got the message that we don't need more inventory. Adjustment will only take place after capitulation.

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