Dow Growing Stronger

The markets percolated around unchanged last week. There’s no real news to report. Earnings came in mostly higher, but buyers never showed up. Microsoft came in especially rosy. That’s good for technology overall, especially when combined with Intel’s glowing report delivered earlier in the month. However, neither managed to get the charts rising again. Outlooks for the rest of the year vary widely and tend to follow the usual bull and bear talking points. There’s not much to do but look at our specific portfolio.

On that score, so far so good. While dropping from its oh-so-glorious performance of 63% above our $3.25 buy price, Maxtor closed Friday at $4.54 which is a still comfortable 40% gain. While the company said it’s canceling plans to make a 2.5-inch hard drive and will therefore lose the money promised to vendors, that didn’t prevent Standard & Poor’s from raising its 12-month target price from $4 to $6. Getting to $6 would give us an 85% gain, but let’s not count our chickens yet.

Meanwhile, the Dow just keeps getting stronger. Longtime readers know that I love the concise list of 30 globe-dominating companies. They make investing easy, particularly when you double their long-term performance or buy them cheap using dividend strategies, two approaches that I track here. Just when you thought the group couldn’t get any stronger, SBC announced that it will buy AT&T; for $16 billion and Procter & Gamble announced that it will buy Gillette for $57 billion.

From The New York Times:

In expanding nationally, SBC hopes to create a company that largely resembles but does not equal the monopoly popularly known as Ma Bell that was broken up in 1984. The acquisition would vault SBC past Verizon Communications, which itself became the nation’s biggest telecommunications company when Bell Atlantic bought GTE in 2000.

In one shot, SBC would now become the biggest long-distance carrier and the largest provider of phone and data services to corporate America. SBC also provides local phone service to more than 50 million customers in its 13 states and holds a 60 percent stake in Cingular Wireless, the country’s biggest mobile phone company.

In taking over AT&T;’s $22 billion corporate phone and data business, SBC will add a new source of revenue that will offset the decline in its residential phone business, which has been shrinking with the spread of cellphones and the Internet.

With AT&T;’s network, SBC will gain the ability to sell services to customers outside its region, which includes California, Texas and Illinois.

By the way, Verizon is also a Dow company. Thus owning the Dow means owning America’s two largest telecom companies.

Although that is an amazing development for the Dow, Proctor & Gamble’s acquisition of Gillette is even more impressive. Following the deal, it will be all but impossible to care for your personal hygiene without buying something made by the new colossus. From MSNBC:

The merger, which must still be approved by regulators and shareholders, would create a company with revenues of more than $60 billion that would have even greater clout against mass-market retailers like Wal-Mart Stores Inc., which have been pressuring consumer product suppliers to keep costs low.

Of course, Wal-Mart is also a Dow company so Dow investors don’t really care who wins that price war. Profits to any of the companies mentioned are profits for us.

Now, if we could just replace General Motors with Toyota, we’d have a near-perfect list of 30 leaders. You did know that GM doesn’t make money selling cars anymore, didn’t you? Although it recently reported profits ahead of Wall Street forecasts, most of them came from the GMAC finance division. Yes, GM now stands for General Mortgage as the company makes more money off home mortgages and insurance than it does off cars. Yet it still bills itself as the world’s biggest carmaker, which it is in terms of sales volume. In my book, though, profits are the true measure. From the BBC:

The bulk of the increase in profits stemmed from GM’s financial services arm, GMAC, which specialises in mortgage lending and insurance. GMAC’s profits climbed 32% on the year to $630m, while earnings from its global car business slumped by more than 90% to $34m. The deteriorating performance of GM’s car unit partly reflected aggressive sales incentives aimed at luring US consumers into showrooms amid intensifying competition from Japanese rivals.

Chief among those Japanese rivals is, of course, Toyota. To see why it would be nice to replace the supposed leading car manufacturer with the true leader, read the Jan. 27th article from the Economist about Toyota’s dominance, which begins thusly:

There is the world car industry, and then there is Toyota. Since 2000 the output of the global industry has risen by about 3m vehicles to some 60m: of that increase, half came from Toyota alone. While most attention over the past four years has focused on a spectacular turnaround at Nissan, Toyota has undergone a dramatic growth spurt all round the world. Japan’s industry leader will soon be making more cars abroad than at home. It has overtaken Ford in global production terms and is set to pass Chrysler in sales to become one of America’s Big Three. In an industry strewn with basket cases, where hardly any volume producer makes a real return on its capital, Toyota is exceptional in that it consistently makes good returns. . . .

I live in Japan. I see the work ethic. You don’t want a Japanese salaryman for a husband or father, but you sure want one making your next car.

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