Focus: Money & Politics
>> we’re about 20 minutes from “money & politics.” michael mckee is here to tell us what’s on tap. mike?
>> lori, i don’t know if you’re worried about high gasoline prices, but polls show and today’s consumer confidence number suggests americans aren’t really. but members of congress and the president sure are. today, mr. bush taking steps to try to drive down the price of oil and gasoline. we’ll tell you what they are and we’ll speak with senator maria cantwell about what congress should, and can do. bloomberg columnist kevin hassett will join us on the similarities between oil and pin on the noir.
>> a toast to you, mike. a short time ago, amazon.com reported first-quarter results of 12 cents a share, in line with estimates but down from -- it was 10 cents a year ago as the company increased spending. david garrity is director of research at dinosaur securities and joins us with his reaction to the results and what he sees ahead for amazon. welcome. let’s clarify that comparable number, there --10 -- it was 10 cents.
>> the comparable number is 12, so flat earnings year over year.
>> but increase in earnings?
>> they did come in at the high end of the range and you saw a flurry in trading activity after the close as people thought this was a better-than-expected number? but, because the company did come out and raise their operating income forecast for the year slightly on the low and high end but after they finished that text, they say they’re realizing that higher forecast depends on their succeeding in appealing a decision that’s gone against them with respect to one of their major customers, toys ‘r’ us, which could hit them by about $50 million or 10% of the operating income forecast they’re making for the year. so it’s a slippery number.
>> why is amazon equityent they’ll win the appeal against toys ‘r’ us?
>> i guess they think their lawyers are brighter but the thing to keep in mind is the decision has gone decisively against them. the judge in the case had been very critical with respect to amazon management’s attitude towards the court come the case and was sympathetic on the merits on the part of toys ‘r’ us so if amazon is trying to build business by wooing large corporate customers but seen as pursuing the customers in court, it’s difficult from a marketing standpoint to have people come on board if you’re not going to treat them well.
>> it sounds like this could have broader implications for amazon by way of their customers?
>> i think going into litigation against major customers is not a good business practice. but away from the issue, or the court case itself, if you look at their pre cash flows on a trailing 12-month basis, those numbers were down quarter over quarter by 5% so amazon is still very much in a situation where their margins are contracting, having to spend aggressively to stay in front of consumers in terms of trying to deliver entertainment content in a digital format. in this regard, amazon, a pioneer in the field, lags behind companies like apple with itunes. amazon doesn’t have a digital music offering yet.
>> is amazon making up ground against bigger competitors?
>> they’re trying to and arguably spending a lot of money and hiring more people. amazon hired more technical staff last year than google did but we haven’t seen the results, so from that standpoint, i think amazon, for investors, should be a wait-and-see story and i always raise a question in my mind when management raises the forecast but says on the other hand that it’s dependent upon their trying to reverse something that’s already gone against them.
>> so the toys ‘r’ us lawsuit is the headline for you. let me ask you about amazon from an investor perspective. there are five buys, nine holds and eight sells. what is an investor to do?
>> it’s one of the situations where if the investor is looking for clarity, they’re better off with a stock trading at 60 times this year’s consensus number to pull to the sidelines and wait and see where the dust settles. amazon is geared towards the fourth quarter of the year and from that standpoint, if one took a traditional investment approach as one took towards retailers, typically you’d buy the retailers in the third quarter of the year in the expectation that they’d have a decent fourth quarter. obviously, we’re early in the second quarter and investors might want to wait with respect to amazon.
>> wait how long?
>> wait for the stock to pull back towards $30 to $31. i think the stock should test its lows.
>> we’re over $35 on amazon right now. $3 gas, will this help or hinder them?
>> consumers obviously have fixed budgets and from that standpoint they’re going to continue to buy gasoline and i think discretionary purchases, books, music, video, will obviously suffer and amazon is certainly active in that area where you might see slowing growth domestically and overseas.
>> david garrity, thanks so much for joining us.
>> thank you.
>> once again, mr. garrity is director of research at dinosaur securities. the more money flowing into funds, the better for fund managers, usually. we’ll get a report on how larger assets may create problems for some small caps ahead. details when “after the bell” returns.
点击播报
Listen Focus: Funds
>> welcome back. with the russell 2000 on pace to outperform the s&p for the sixth straight year, investors continue to invest money into small cap mutual funds. but that may create a problem for some funds. suzanne o’halloran is here to explain. what problems are you seeing?
>> asset bloat, as the industry coins it, can diminish returns and although pumping up assets can be a symbol of success for a fund manager, returns are liable to suffer if assets get too big. the small cap sector may be facing the biggest risk right now. mutual fund investors are trying to ride the small cap wave. more than $6 billion of new money flowed into small cap funds through february of this year. nearly matching the $7 billion invested in the group during all of 2005. morningstar says assets at about 15% of 600 small cap funds more than doubled last year. fund analysts and industry executives say, as assets and small cap funds rise, future returns may suffer as managers struggle to find enough attractively-priced stocks to buy.
>> in this business, clearly investors follow performance instead of the other way around. when a fund does well, money goes in after it’s all happened and that’s the formula for losing money.
>> the problem can be worse for funds that grow too large. a 2004 study conducted by russ kinnel of morningstar showed that over a five-year period, the smallest funds within their peer group outperformed the largest by 1.33 percentage points. kinnel would like to see several of the biggest small cap funds closed, among them, fidelity small cap stock fund with $5 billion in assets and american small cap world fund with $18 billion in assets. each saw assets grow more than 20% in 2005 and in the last three years, fidelity’s fund returned an average of 29%, the american fund, 34%. fidelity told us, the manager and the firm are always monitoring the fund size and have “a pretty good idea of when a fund should close.” as of april 28, the firm will have closed 10 funds since 2003. a spokesperson for american funds says the small cap world fund has seven managers and 40 analysts, giving the fund the flexibility to “match inflows.” as assets grow, some small cap managers face the problem of not being able to buy and sell stocks in a timely manner.
>> you have to have increasingly larger positions in stocks that are fairly illiquid. so as a consequence, you begin to become the market for that particular stock.
>> out of those 10 fidelity fund closings i mentioned, four will close next week, the most notable is fidelity’s $63 billion contra fund.
>> what about index funds, are they at risk for asset bloat?
>> they’re really not. for index funds, asset size is less of an issue because they mirror the market . but actively traded funds, as they get bigger, they’re more costly to manage and that raises fees for investors.
>> thank you very much. there is still much more ahead on this edition of “after the bell.” we’ll have an update of news from around the u.s. and the world. we’ll also look at the “world’s biggest mover” today.
