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SockMarket (48.23)

March 2010

Recs

3

One Simple Thought, Part 2 :). Global Warming Edition

March 30, 2010 – Comments (2)

It seems that with record heat waves in 03 and 05 in Europe those who believed in global warming spiked. With a very cold winter, especially on the East Coast and here in the Rockies, the number has dropped significantly. Yes, there have been other events, such as Climate Gate, or whatever the hacked email scandal is called, but if it were raining in Maine right now I bet few people would have cared. Similarly if the ice caps were starting to extend to northern Norway and Sweden when Al Gore was publicizing An Inconvenient Truth I doubt very many people would have listened.  

You won’t find anyone who actively says “one season swayed what I think about climate change”, everyone will always point to one scientist who promotes their viewpoint, but judging from the number of people who “believe in it” that seems to be the case.

This seems to be a little ridiculous; it strikes me much the same way as the following analogy: A man has been looking for a solid, stable stock that can provide him with the yield he needs for the rest of his life. He has researched the stock intensively and believes that it is perfect, it is the answer for him, period. Then one day the stock closes slightly down. Distraught the man sells all his shares thinking: boy, it went down, I must have been wrong! I’m glad I got out when I did!

Anyone who is smart enough to have opened an account here knows that you don’t base long term expectations for a company based on what it did for one day; similarly no one should formulate an opinion on global warming by looking out the window. Rather one should study the science involved, read some modeling, and come to their own, now researched conclusions.
  [more]

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4

Just 8 More - For UltraLong's Work

March 29, 2010 – Comments (4)

"Ask A Blunt Man - Secret Stash" is the topic of discussion here. UL posted it about 2 months ago and it has since risen to #2 on the all time blogs list, with 220 recs. In spot #1, with 227 recs, is a post by EverydayInvestor entitled "The Greatest Blog Post in the World" in which he describes how he will write the greatest blog out there (the real greatest blog didn't even make the top 5 all time).  [more]

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27

Since When did Republicans (Excluding Ron Paul) Start Caring About the National Debt?

March 26, 2010 – Comments (26)

It seems to be the new line: "we don't wanna do it, it costs too much". Great, now explain why, only a decade earlier the party voted to cut taxes massively for rich individuals who really didn't need the money. Now Warren Buffett pays the same tax rate as a manual laborer. This is also the party that started our national debt ballooning out in the Reagan era. Most of these people are the same people that were in there in the Bush era and most were in office when they signed the first bailout into law.   [more]

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Not All Bears are Created Equal

March 23, 2010 – Comments (3)

It seems to all too frequent that my kind is all lumped together, we are falsly characterized, labled as:  [more]

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11

One Simple Thought

March 22, 2010 – Comments (29)

We are growing exponentially in every facet of our society from level of capital goods, to population, to GDP (lately even waistlines have not been spared :-) ). Yet many of the resources on which we depend: oil, natural gas, topsoil (necessary to grow plants), iron, etc. are not growing at all. In fact they are being depleted or poisioned (such as accidental salting of topsoil). And, of those resources that do grow such as wood, etc. none grow exponentially.   [more]

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18

The Fallacy of the Share Repurchase

March 12, 2010 – Comments (22)

I get a kick out of it every time I hear a stock recommended because it is currently, or frequently does, repurchase stock. The argument for this is simple: “if they buy back shares (and take them out of circulation), there is still just as much company out there for fewer shares so naturally the shares become more valuable.”

Unfortunately this misses the broad picture. Lets look at 2 scenarios.

Share Repurchase
XYZ Inc. sells a duplicating service, they take little worthless slips of paper and multiply them, if they are successful, into even more worthless slips of paper. Oops, that’s a bank. Lets just say they sell toys. XYZ drags in $100 in net income. Being a share repurchaser they run out and spend that $100 to buy back some shares.

They were able to repurchase 5% of the company with this $100. We will assume that the stock sold for $10 a share before the repurchase so 10 of the 200 shares were repurchased. We will assume the stock is always priced at 10x EPS. So after the repurchase their EPS went from $1 to $1.053. The share price went from $10 to $10.53. BFD, your stock is up 5.2%.

Fine value is up now in the short term but that money is gone to outside (former) shareholders, the company cannot use it now.


Investment

ABC Corp. has the same profits, trades on the same basis (10x EPS), has the same number of shares outstanding, and those shares sell for $10 a share as well. ABC has good management so they decide to invest the money in something other than their own shares. They have two options:
1) If they have debt pay it down. Not only does this immediately improve the balance sheet but it will bring in added profits as well
2) If they don’t have #1 then they should invest the money. The general rule is that an investment should throw off enough earnings within a 10 year period to pay for itself, so to make math easy on me we will say that the company invests the money in something that earns 10% of the investment, $10, a year. This adds $0.05 to EPS. The company is now worth $10.5 per share, with added earnings potential. If the investment works out better than planned and EPS rise any more than the minimum for a good investment you just made money.
Further money spent in this way creates more future growth because total earnings, not just EPS. When you are raking in more money you can more easily finance further growth, so you are more likely to expand when the opportunity arises.

As can be expected the fund (PKW) that tracks companies making share repurchases of over 5% (hence the above figure) underperformed the market when times were good (from inception in late 2006 until the market crash in Oct 08) and slightly outperformed it when things turned ugly. (I chalk up the outperformance to the fact that only moderately healthy companies (or better) could afford to buy shares back so it inadvertently weeded out companies in major trouble).

Honestly I cannot understand why anyone would buy a stock because it is repurchasing shares, or even why they would consider it a positive thing. If I found out about a major share repurchase I might even consider selling. Hopefully I have swayed at least some of you.  
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4

Analysis: Greece's Crisis Could Presage America's (from Yahoo)

March 11, 2010 – Comments (1) | RELATED TICKERS: D , E , BT

WASHINGTON – Greece is a financial basket case, begging for international help. Is America heading down that same road?

Many of the same risky financial practices that now imperil the Greeks were at the center of the all-too-recent U.S. meltdown.

As with Greece, America's national debt has been growing by leaps and bounds over the past decade, to the point where it threatens to swamp overall economic output. And in the U.S., as in Greece, a large portion of that debt is owed to foreign investors.

Not good, if these debt holders begin to wonder if they'll be paid back. A foreign flight from U.S. Treasury securities could sow financial chaos in the United States, as happened when many investors lost faith in Greek bonds.

It's something that could affect all Americans. The U.S. has never defaulted on a debt, and even the hint of such a possibility could send interest rates soaring and choke off a fragile recovery.

How long can the United States remain the world's largest economy as well as the world's largest debtor?

"Not indefinitely," suggests former Federal Reserve Chairman Alan Greenspan. "History tells us that great powers when they've gotten into very significant fiscal problems have ceased to be great powers."

After all, Spain dominated the 16th century world, France the 17th century and Great Britain much of the 18th and 19th before the United States rose to supremacy in the 20th century.

"Unless we do things dramatically different, including strengthening our investments in research and education, the 21st century will belong to China and India," suggests Norman Augustine, the former CEO of Lockheed Martin who chaired a 2009 bipartisan commission studying the nation's top challenges.

The Greek government has taken stiff austerity steps in an effort to get a lifeline from the European Union, sparking strikes and violent demonstrations. Greek unions say a second nationwide strike in a week — planned for Thursday — will shut down government services, close schools and halt public transport and ground flights for 24 hours.

Some of the same risky strategies used by U.S. hedge funds and other professional investors in a failed effort to profit from subprime mortgages in this country — and which led to the 2008 financial near-collapse — are now being employed by those betting that Greece will default on its debt.

Greek Prime Minister George Papandreou, who met with President Barack Obama at the White House on Tuesday, is calling for "decisive and collective action" here and in Europe to crack down on such rampant speculation and unregulated bets. He is also seeking more favorable European interest rates for loans.

Speaking at the White House, Papandreou welcomed support from Obama and some European leaders for such efforts and for the austerity measures taken by his own government. He said it shows the "labor and sacrifices are not wasted. Of course, our struggle is not ended, it continues."

Many economists say it's a stretch to compare the U.S. economy, by far the world's largest, to Greece and other distressed small economies of southern Europe. They say many of Greece's problems are unique to that nation and aggravated by a monetary system that rigidly binds 16 nations to the same currency, the euro.

But others argue it may only be a matter of time before the U.S. faces a similar, and potentially graver, crisis.

"Someday it will happen if we don't get our act together on spending, our debt under control and our economy to grow faster," said Allen Sinai, chief global economist for New York-based Decision Economics Inc., which provides financial advice to corporations and governments.

With signs pointing to a weaker recovery than after other post-World War II recessions, U.S. consumer spending is likely to remain unimpressive and the jobless rate high for some time. Sinai said that suggests there won't be enough growth to push down federal deficits by much. "It's a political keg of dynamite," he said.

Greece's national debt now equals more than 100 percent of its gross domestic product, the broadest measure of economic activity. U.S. debt — now $12.5 trillion — is fast closing in on the same dubious milestone.

Nearly all of Greek's debt is held by foreign governments and investors. In the United States, roughly half is owned by global investors, with China holding the largest stake.

By contrast, Japan's debt is proportionately even bigger — about twice its GDP — but the impact is cushioned by the fact that most is held by Japanese households.

"The more open you are to the rest of the world, the more likely you're going to have a problem if you start running large deficits and large debt loads," said Mark Zandi, founder of Moody's Economy.com, and a frequent adviser to lawmakers of both parties.

Zandi does not see any major fallout from the Greek fiscal crisis in the United States for now, other than a possible temporary hit on potential European export markets.

However, he said, "global investors at some point are going to start demanding a higher interest rate. And that's our moment of truth. If we don't address it by cutting spending and raising taxes, some combination of the two, then we're going to have a problem."

Polls show growing public anger over deficits and government spending. The issue is a potent one for the upcoming midterm elections, and a particular liability for majority-party Democrats.

Calls have sounded from both sides of the political aisle for deficit reduction. And Obama last month set up a bipartisan deficit commission to find ways to get the country's budget deficit, now adding more than $1 trillion a year to the national debt, under control.

But the panel is a weak substitute for what Obama really wanted — a commission created by Congress that could force lawmakers to vote on remedies to reduce the debt.   [more]

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Instead of Redesigning the My CAPS page...(What I Would Like to See in CAPS)

March 10, 2010 – Comments (3)

I would rather see other, actually useful, features added, like:

 

Blog Display

- change the 'Most Active Bloggers' box on the 'Blogs' page to the most recs per blog, with the following requirements for people to be included in the list: must have written more than 10 blogs, must have written one in the last 2 months

- add categories to the blogs. I am not sure how difficult it would be but having 3 categories, 1 for reporting news, 2 for general (probably political) opinion and macro-econ pieces (including where the market is headed, etc.), 3 for single company or sector writeups. This would allow viewers to filter what they want to look at more easily. Authors could tag posts to put them in the correct category. My only worry with this is, aside from possible programming difficulties, if one category gets very popular everyone may post everything in it.

 

My CAPS

- change the way dividends are counted. why not take the yield and add it to the stock gain column?

 

Blog Writing

- make it easy to insert pictures. currently I have to copy the text from my blogspot blog to do it.

- get an underline button!

- I am not sure why but spellcheck does not work in the text boxes so either changing that or adding a spellcheck feature would be handy

 

Stock Pages

- seeing % change in a chart is nice but frequently I would rather see the actual numbers. Having a way to change back and for would be good (or just replacing the CAPS rating on the left side would work)

- being able to sort active (or all picks) by 2 variables at a time (ie member rating and date picked) would be useful as well

 

I realize several of these are impractical for one reason or another, but nevertheless, this is what I would like to throw them out there to see what people think and what TMF thinks they can do.
  [more]

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6

A Not-So-Academic CAPS Research Project (3 Quick Questions)

March 09, 2010 – Comments (9)

Something that has been floating around in my brain for a few weeks now is: with 200 active picks, a good CAPS rating probably is due more to good macro-analysis or a good mechanical model more than to skill as an investor. So I am putting that to the test. Feel free not to answer, for some this is a very personal matter, and some may worry that it will affect their following on CAPS (I doubt it) but if you want to the questions are below:  [more]

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George Soros on FInancial Regulation & Our Current Recovery

March 08, 2010 – Comments (5)

 WE HAVE just passed through the worst financial crisis since the second World War. The only relevant comparisons are with the Japanese real estate bubble which burst in 1991 and from which Japan has still not recovered, and with the Great Depression of the 1930s. What differentiates this crisis from the Japanese experience is that the latter was confined to a single country, while this crisis has involved the entire world. What differentiates it from the Great Depression is that this time the financial system was not allowed to collapse but was put on artificial life support.  [more]

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6

In Honor of National Grammar Day: a Couple Humerous Mistakes

March 04, 2010 – Comments (4)

“Toilet out of order, please use floor below.”

“Automatic washing machines. Please remove all your clothes when the light goes out.”   [more]

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7

2 Dividend Stocks

March 03, 2010 – Comments (4)

The market seems to have an infatuation for dividend stocks, as of late, so that, coupled with low interest rates, has made finding a good dividend paying stock a tricky business. These days getting a great yield on a safe stock just isn't possible so I went for the next best: either a great yield on a risky company or a decent yield on a safe stock. So without further ado I introduce to you my two picks:

Diamond Offshore Drilling (DO)


I just found this one this morning so I know VERY little about them. However there appears to be plenty to like. First off they have a great dividend, $8/yr, which translates to a yield of about 9.2%. Not bad for a stock that has managed to stay between 60-100 (except for a spike to $135 when oil went soaring back in 08) over the past 4 years. They do slowly trend up, about 4% a year over the past 4 years, but they really hike the dividend, up 1,500% in that time. Normally I am not a fan of dividend growth but when you start with a very good base yield and add in substantial growth on top I really can't complain. Further my growth company screen, which selects the likes of: Bidu, Infosys, CTRP, and RIMM and has beaten the market by about 36% over the last 2 years (that's as far back as I can backtest) recommends DO.

Going of pure statistics we have more to like:

- a P/E of 11 based on last quarter's earnings and about 9 based on TTM earnings.

- 0.62 PEG

- ROE of 39% and ROA of 21%

- Operating margin of 52% and profit margin of 38%

- Anticitrade claims that it is about 20% undervalued at the moment

The only worry here is that 9% of shares are short. Why I am not sure but that seems to be a high number for a company that looks this good.

Again I am no expert on this company but it seems that they have had excellent growth, given a few new contracts they have gotten and what appears to be signs of good management means that the growth should continue. This coupled with an already strong dividend makes this stock an excellent choice, in my book. Disclosure: I bought a small position today.

 

Eli Lilly (LLY)

Not a fast mover, not a fast gainer. Usually not a great dividend payer but currently you can get 5.7% on them. Looking at the past 20 or so years the chart really doesn't look marvelous, it ran up from 1995-2000 from $14/share to about $90 and then has been slowly sinking, with the rest of the drug makers. It currently sits at $34.

The earnings tell a different story, having declined slightly after 2000 for a couple years but then increasing nicely the past several. However I really can't see much decline from here. They are trading at about 10x last quarter's (annualized) earnings and about 8x TTM earnings. Further between 2003-06 they introduced a very sucessful group of drugs, including Byetta, Cialis, Alimta, and Cymbalta. The dividend is also safe as the payout ratio is about 50%.

I am purely after a safe yield but if one wants to make a case for appreciation I figure it would look something like this:

- P/E is 8. Industry average is about 14, which would represent a 38% gain (with the price going to $47 a share)

- they have a very strong pipeline with the addtion of ImClone and several prominent looking drugs of their own in the pipeline (only issue is that one drug may be having issues in Phase 3 trials)

- Like most other large, high dividend paying stocks they move, at least partially, based upon the dividend. The 5 year average yield is about 3.8% which would put the price at about $52 a share (a 53% appreciation).

- baby boomers are aging. Over the coming years more and more people will be needing more and more medical care.

 

So as I see it I am getting a safe, easy 5.7% in a position that will help anchor my portfolio. And if people start to look at its peers or history for valuation it could appreciate significantly. I see little downside risk, although Anticitrade claims that the conservative fair price is about $30 a share. Anyway I like the stock and plan to pick up a small'ish position for several of the portfolios I manage.   [more]

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3

Buy, Buy American Pie

March 03, 2010 – Comments (0) | RELATED TICKERS: PIE

This is a bit out there but nevertheless it has some good points, not to mention being an excellent spoof.  [more]

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11

Thank You Senator Jim Bunning

March 01, 2010 – Comments (15)

Sarah Palin stormed the bestseller list last year with "Going Rogue"-a political memoir whose title coyly referenced the former GOP vice presidential nominee's supposed defiance of the consultants running the McCain campaign. But this year we have a new poster boy for the Going Rogue playbook: GOP Sen. Jim Bunning of Kentucky. For the past week, Bunning has been single-handedly blocking more than a million Americans from receiving unemployment and COBRA health insurance benefits, as of today, when their benefits funded under the 2009 stimulus law run out. The suspension of benefits affects everyone from doctors to government employees.  [more]

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