Archive for April, 2013

• S&P 500 = 1,588
  Eddy Elfenbein, April 10th, 2013 at 1:52 pm

  The stock market continues to roll higher. The S&P 500 has been as high as 1,588.94. The index broke the 158 level 30 years ago this week.

  

  I think Wall Street is pleased by today’s Fed minutes. I’ve read through them and nothing really jumps out at me. It’s pretty much as I expected.

  On our Buy List, boring little Moog ($MOG-A) is up more than 3.5% today. Stryker ($SYK) finally got to $67 today, another new 52-week high. SYK has been a great stock for us this year. It’s already up 22% on the year for us.

• New All-Time Intra-Day High
  Eddy Elfenbein, April 10th, 2013 at 9:43 am

  Here are a few items I wanted to highlight this morning.

  Despite the resurgence of fear in the media recently, the stock market continues to do well. The S&P 500 has jumped up to another all-time high this morning. In fact, the index finally took out its intra-day high of 1,576.09 from October 11, 2007. Today’s high was (so far) 1,576.10.

  The Federal Reserve accidentally emailed out its Fed minutes five hours early. The minutes are starting to get more coverage in the media since traders are looking for any clue that QE is coming to an end. For now, I think they’re misinterpreting rather pedestrian comments as firm policy positions. QE isn’t coming to an end but it’s very reasonable for the Fed officials to discuss when that ought to happen.

  Bed Bath & Beyond ($BBBY) will release its fourth-quarter earnings today. In last week’s CWS Market Review, I said that it would be out on Monday. My apologies for the error. This report will cover the important holiday season for BBBY.

  Microsoft ($MSFT) has come to life recently. The shares are close to breaking above $30 per share. The company is joining other tech outfits in complaining to the EU that Android is a below-cost competitor.

  The Ford Focus was named the best-selling car in the world. Last year, Ford ($F) sold just over 1 million units, up 16% from 2011.

• Morning News: April 10, 2013
  Eddy Elfenbein, April 10th, 2013 at 7:36 am

  U.S. Seeks Less Austerity in Euro Zone

  BoJ Bazooka Sends Japanese Debt Reeling

  The Mystery of China’s Export Numbers

  WTO Cuts 2013 Trade Forecast After Record Slow Growth In 2012

  Obama Budget Targets Millionaires, Replaces Sequester Cuts

  Obama Nominee Pledges Case-by-Case Review of Gas Exports

  Lenders Used Aid to Repay TARP

  Retiree Health Benefits: Facing Extinction?

  Scant Relief in Foreclosure Payouts

  Trading Case Embroils KPMG

  First Solar Issues Optimistic Guidance; Shares Jump 48%

  Blackstone Solicits Partners for Dell Bid

  J.C. Penney: A National Disgrace

  Jeff Carter: New Pitching Idea for Startups

  Howard Lindzon: Momentum Wrap – Back Near All-Time Highs. Here Comes The Sun?

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• So What if We Had a Flat Tax?
  Eddy Elfenbein, April 9th, 2013 at 10:24 am

  Last year, the CBO released a report on historical effective tax rates. I ran through the data with an odd goal in mind. I wanted to see if I could replicate the existing tax burden with a simple flat tax.

  I don’t mean to say that I’m a flat tax advocate. I simply wanted to look at what Americans actually pay and see if I could mimic the real thing with the simple rules of a flat tax.

  The answer is, not really, at least not very accurately. The CBO report only gave me eight data points to work with.

  Still, this type of analysis has value. In fact, there are emerging fields of study, like Chaos Theory, that look to find simple rules that lie beneath highly complex structures.

  Here’s what I was able to come up with. The graph below is my Faux Flat Tax going back to 1979. The blue line follows the left scale and is the flat tax rate. The black line follows the right scale and is the standard household deduction. The deduction is in 2009 dollars.

  

  For 2009, I came up with a tax rate of 29.81% and a deduction of $41,541. So every penny a household makes under that is completely tax free. Every penny above it is taxed at 29.81%. That includes everything—income taxes, social security, Medicare, corporate taxes, the whole shebang. And most importantly, we can abolish the IRS (wait for applause).

  I realize these aren’t quite the numbers that most flat taxers have in mind, but my goal is mimicry. I took the current tax code “as is” and tried to be revenue neutral. Obviously, if I had more data points I could be more accurate.

  Looking at the table does reveal some interesting information. When the two lines rise, the tax code becomes more progressive (higher taxes on the rich and less on the poor). When both lines fall, the reverse happens.

  What I find interesting is that despite using just eight data points, there seems to be some continuity through the years. So even if I had much more data, I think this is a reasonable approximation of what a clear-the-table flat tax would look like.

  Notice, for example, how the two lines tended to track each other somewhat for most of the 1980s and early 90s. So there was some method to the madness. The relationship only broke down over the past few years as we’ve seen larger deductions and lower tax rates. The big spike in deductions near the end represents the effect of the payroll tax holiday.

  One of the drawbacks of my flat tax is no matter how impressive my R-square is (.9994 in 2009), any small deviation can be rather unpleasant for certain taxpayers. That’s the messiness of using a simple model to replace a complex one. The flat tax doesn’t quite capture the right “bend” of the current tax burden. For example, under my flat tax, households making $93,800 would have a tax hike of more than $1,400. I don’t think they would be terribly impressed by my stab at being revenue neutral.

  As a general rule, my flat tax is close to the current burden but it tends to be slightly more progressive. The major reason is due to social insurance taxes. Since so many lower-income workers are completely exempt from any taxation under my theoretical flat tax, it’s made up for with higher taxes at the upper end.

  Let me explain how I got my numbers. I apologize but this is going to get mathy. In the data files of the CBO report, Tab 1 has the effective tax rates and Tab 3 has the pre-tax income for eight subsections; the lowest four income quintiles, plus four subsections for the top quintile (percentiles 81 to 90, 91 to 95, 96 to 99 and the Top 1%).

  If you run a scatter plot with the X-axis being the eight income points and the Y-axis being the tax paid (income times effective tax rate), you get this:

  

  That’s for 2009. Using the trend line function, I added a linear trend line and the linear equation is also included. In the equation, y = mx + b, m is our flat tax rate and b/m is the deduction. As you can see, that’s how I got 29.81%.

  Here’s the Flat Tax Data I used for the computations. Columns B through I have the household incomes for the eight groups (note that the definition for household income changed in 1986), columns J through Q have the taxes paid and columns R through Y have the effective tax rates.

  On lines 35 to 66, I list the flat tax info. Column B has the tax rate by using the SLOPE function. On Column C, I get the deduction by using the INTERCEPT function.

• Morning News: April 9, 2013
  Eddy Elfenbein, April 9th, 2013 at 7:34 am

  China’s Stocks Rise Most in 2 Weeks After Inflation Slows

  In Berlin, Treasury Secretary Talks Up Policies To Spur Demand

  European Leaders Keep Telling Themselves The Same Huge Lie — And It’s Ruining The Economy

  Emerging Asian Economies on Track for Solid Growth, Development Bank Says

  Christie’s to Be First Foreign Independent Auction House in China

  Bernanke Says Fed to Press Banks to Curb Liquidity Risk

  Fannie Mae Profit May Swell Treasury Coffers as Debt Limit Looms

  Ford Focus Grabs Global Sales Crown as World Buys Small

  GE Buys Lufkin for $3.3 Billion as Immelt Adds to Energy

  Billabong in Talks Over $300 Million Takeover

  5 Things Ron Johnson Did Right At JC Penney

  Caribou Coffee Closings: Chain Reveals Massive Nationwide Shutterings, Chicago Area Hit Hard

  Wary of China, Companies Head to Cambodia

  Cullen Roche: Economic Surprise Indices Turning Lower

  Joshua Brown: Merrill: How to Play the Bond Market

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• The Yen Continues to Weigh on AFLAC
  Eddy Elfenbein, April 8th, 2013 at 1:58 pm

  AFLAC ($AFL) is back below $50 and the culprit isn’t hard to spot — the weaker yen. Since October, the yen has gotten hammered by the U.S. dollar.

  In March, the yen staged a quick relief rally, but that recently collapsed. It now takes 99 yen to buy one U.S. dollar. In October, it took just 78. I think we’re going to break 100 soon.

  The reason for the big change is that Japan’s new government is aggressively trying to weaken its currency in order to help their economy. The Nikkei Index has responded by shooting up from 9,000 to as high as 13,200. That’s a huge move for such a short time period.

  AFLAC said in their 10-K that if the yen averages 100 for this year, that will shave 87 cents off their operating earnings-per-share. At 100 yen to the dollar, AFLAC’s earnings range would be $5.99 to $6.19 per share for 2013.

  Exchange Rate	EPS Range	Growth Rate	Yen Impact
  79.81	$6.86 to $7.06	3.9% to 7.0%	$0.00
  85	$6.60 to $6.80	0% to 3%	-$0.26
  90	$6.37 to $6.57	(3.5%) to (0.5%)	-$0.49
  95	$6.17 to $6.37	(6.5%) to (3.5%)	-$0.69
  100	$5.99 to $6.19	(9.2%) to (6.2%)	-$0.87

• R.I.P.: Margaret Thatcher
  Eddy Elfenbein, April 8th, 2013 at 12:30 pm

  Margaret Thatcher died today at the age of 87. Here’s the intro of a post I a wrote few years ago comparing Britain in the 1970s to General Motors:

  In 1979, the British economy was in free fall. Inflation was spiraling out of control. The unions were demanding commensurate pay increases, and when they didn’t get them, they struck. The country that had stood up to the Luftwaffe was failing apart. The garbage men went on strike and soon piles of “rubbish” dotted the countryside. Even the gravediggers went on strike and corpses were gruesomely left unburied.

  The winter of 1978-79 was called the Winter of Discontent, echoing the opening lines of Richard III. The situation was so bad that Her Majesty’s government had to apply for a loan from the IMF. This was back in the days when that had some sense of shame to it. You were even expected to pay it back.

  A reporter asked the Prime Minister, James, Callaghan, his opinion of the “the mounting chaos in the country.” Callaghan said: “Well, that’s a judgment that you are making. I promise you that if you look at it from outside, and perhaps you’re taking rather a parochial view at the moment, I don’t think that other people in the world would share the view that there is mounting chaos.”

  That was it. British socialism died right there. The commanding heights were nothing more than a literal heap of trash. The next day, The Sun‘s headline read: “Crisis? What Crisis?”

• Morning News: April 8, 2013
  Eddy Elfenbein, April 8th, 2013 at 8:01 am

  IMF’s Lagarde Says Substantial Part of Global Economy Better

  Luxembourg ‘Open’ To Bank Transparency, Luc Frieden

  Italy To Pay 40 Billion Euros Of State Debt To Companies

  Unemployment Woes: Americans Drop Out Of Labor Force As Job Market Stagnates

  How Dismal Were March’s Job Numbers?

  How The Feds Will Know If You Have Health Insurance

  The Top Tax Scams to Watch For

  Why Amazon’s Jeff Bezos Invested in ‘Business Insider’

  Carl Icahn Refuses To Drop Proxy Fight Option In Dell Proposal, WSJ Reports

  On JOBS Act Anniversary, Why Can’t Everyday People Invest In Startups?

  HP Board Revamp Gives CEO Chance to Shake Off Troubles

  China’s Xi Warns Against Regional Chaos as Korea Tensions Rise

  The Difference In Unemployment Between People Who Graduated From College And Those Who Didn’t Is Gigantic

  Deposit Insurance After Iceland and Cyprus

  Roger Nusbaum: The Big Picture for the Week of April 7, 2013

  Be sure to follow me on Twitter.

• What Risk Premium?
  Eddy Elfenbein, April 5th, 2013 at 1:06 pm

  More fun from the Ibbotson Yearbook. Here’s a look at large-cap stocks dividend by long-term Treasury bonds, also known as the risk premium (although short-term rates are more often used).

  The risk premium is one the most important ideas in finance. In short, it tells us how much you get paid to take on the risk of owning stocks instead of guaranteed government bonds. (Note: According to Ibbotson, the Treasury bond data series is based on a 20-year T-bond.)

  I disagree with most mainline thinking on this issue in that I believe the risk premium is much lower than is commonly believed. Most academics think it’s around 5% or so. I think the long-run premium is probably about 2%. Eric Falkenstein thinks it doesn’t exist at all.

  According to the Ibbotson numbers, large-cap stocks have outperformed Treasury bonds by an average of 3.93% per year since 1925.

  

  But as the chart shows, that data series is very volatile. Government bonds have outperformed large-cap stocks since November 1980. That’s more than 32 years of no risk premium. Since May 1969, the risk premium has been a grand total of 0.77%. Over the last 12 years, it looks really ugly. Treasury bonds have beaten large-caps by a painful 207% to 24% margin.

  Due to the ultra-low yields for Treasuries, I suspect large-caps will outperform bonds by 5% in the intermediate range. The yield on the 20-year T-bond closed yesterday at 2.6%. If we assume a 2% risk premium, that translates to a return for stocks of 7.6%, and that includes dividends which currently run around 2%.

• March NFP: +88K
  Eddy Elfenbein, April 5th, 2013 at 8:32 am

  Yikes, this morning’s jobs report was ugly. The economy added just 88,000 nonfarm payroll jobs in March, and 95,000 of those were private sector. Wall Street had been expecting a gain of 190,000 total, and 200,000 private sector jobs. This is the biggest NFP “miss” in more than three years. The labor force participation rate has fallen to its lowest point since 1979. The Dow is off 137 points right now. January’s NFP was revised higher to 29,000, and February by 32,000. The unemployment rate fell to 7.6%. There’s now an all-time record 101.7 million Americans over the age of 16 without a job. That’s an increase of 28 million since 1999.

  

  Here’s a look at the plunge in the labor force participation rate: