Author Archive

• The Federal Reserve Probably Paid More to the U.S. Treasury than the Bottom Two-Thirds of Taxpayers Combined
  Eddy Elfenbein, November 15th, 2011 at 10:11 am

  Here’s a follow-up to an arresting stat I uncovered earlier this year. Bear with me, I need to explain this fully.

  In 2010, the Federal Reserve made a profit of $81.7 billion. Only a very small portion of that is distributed to the Fed’s shareholders which are the member banks. The rest goes to the U.S. Treasury and last year that totaled $79.3 billion.

  Technically, this payment isn’t a tax but a rebate. To quote David Merkel, “The Fed doesn’t pay taxes; they remit excess seigniorage revenue to the Treasury, which they gather through punishment of savers.”

  It’s just about impossible for a central bank to lose money so if you’re ever offered the chance to become one, my advice is to do it.

  How does the Fed’s contribution compare to what Americans paid in taxes?

  That’s hard to say exactly. The Tax Foundation has the most recent numbers available which are from 2009 so we’re not comparing the same data. Please note that I’m aware of this.

  Using some very rough interpolation, we can see how much the lower two-thirds of taxpayers paid. According to the 2009 numbers, the bottom 50% of taxpayers paid a total of $19.5 billion in income taxes. The third quartile (between 50% and 25%) paid $90.4 billion in taxes. Two-thirds of that is roughly $60 billion. In fact, it’s almost certainly less due to the progressive nature of the tax code.

  One we add that to the lower half, we have a very good estimate of what the bottom two-thirds paid to Uncle Sam.

  As I said, this isn’t an exact comparison but we can assume it’s a very good estimate of what taxpayers said in 2010. Those figures probably won’t be available for another 12 months.

• Morning News: November 15, 2011
  Eddy Elfenbein, November 15th, 2011 at 5:19 am

  Monti Faces Political Resistance on Italy Cabinet

  German, French GDP Grew in Q3 on Spending

  Lending a Hand to Banks, but Not to Nations

  Bank of America Sale Highlights End of Era for Foreign, China Banks

  Tighter Oversight of China Bank Risk Needed: IMF

  Thai Floods May Shift Japan Investment to Indonesia, Vietnam

  Crude Oil Settles -85c At $98.14 On Europe Worries

  Buffett’s Stake in Century-Old IBM Bolsters Berkshire’s Economic Defenses

  Earnings Swooned 44% at Lowe’s in Latest Quarter

  Google’s Android Tops 50% of Smartphone Sales

  MF Global and the Problems With Murky Accounting

  Barclays Capital Rises, ‘Big-Boy Checkbook’ in Hand

  UBS Names Ermotti Permanent CEO

  Anadarko Raises Colorado Oil Tally

  Roger Nusbaum: Not Much In The Way Of Innovative Thinking

  Paul Kedrosky: Just Spell My Ticker Right

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• Good Interview With Buffett
  Eddy Elfenbein, November 14th, 2011 at 10:07 pm

• More Troubles From Europe
  Eddy Elfenbein, November 14th, 2011 at 10:13 am

  The stock market is down slightly this morning on more concerns from Europe that Mario Monti, the interim Prime Minister of Italy, is trying to form a government. The government held a bond auction today that didn’t go very well. When you’re in the bond market’s doghouse, there’s not much you can do. The auction of a billion euros’ worth of five-year notes went off at a yield of 6.29%.

  The other news this morning is that Berkshire Hathaway ($BRKA) has bought a $5.5 billion stake in IBM ($IBM). Warren Buffett also said that he strayed from his usual method of selecting stocks:

  Buffett, in a CNBC interview, said he bought about 64 million shares of IBM, which cost around $10.7 billion. Berkshire started buying the shares in March with a goal to build a $10 billion position, he said.

  Buffett also said IBM did not know that he was building a stake, and that the company was finding out about his investment for the first time as he said it on CNBC.

  The legendary investor said he has always looked at IBM’s annual report — his preferred method of identifying companies to invest in — but this year, “I read it through a different lens.”

  Buffett said follow-on conversations with various technology executives throughout the Berkshire conglomerate convinced him to start building the stake.

  Last month I pointed out that IBM has grown 18-fold over the last 18 years which is nearly 18% annualized.

• Stock Buybacks Surge
  Eddy Elfenbein, November 14th, 2011 at 9:37 am

  I’ve said here many times that I’m not a fan of stock buybacks. I think they’re a waste of shareholder money and I’d much rather see that money flow to shareholders in the form of cash dividends. Unfortunately, the tax code isn’t very helpful in these matters.

  Bloomberg notes that share buybacks have surged recently. This year may be the third-highest ever for buybacks. Only 2006 and 2007 were higher. Even Warren Buffett joined in the buyback parade, and just a few days ago, Amgen announced a very large buyback.

  Buyback announcements reached $119.8 billion in the third quarter, up 67 percent from a year earlier, as the S&P 500 slumped 14 percent in the biggest drop since the end of 2008, according to data compiled by Birinyi and Bloomberg. Companies spent at least $150.6 billion on their own stock in the three months ending Sept. 30, more than any quarter since the final period in 2007, the data show.

  This happens while the market is trading at some of the lowest valuations of the past two decades.

• Morning News: November 14, 2011
  Eddy Elfenbein, November 14th, 2011 at 5:23 am

  With Clock Ticking, an Economist Accepts a Mandate to Rescue Italy

  France Keeps a Watchful Eye on Turmoil in Italy

  EU Must Embrace ‘Political Union’: Merkel

  Merkel the Populist

  Japan’s Economy Emerges From Post-Quake Slump on Export Rebound

  Asia Stocks, Copper Rise on Japan GDP

  Iraq Criticizes Exxon Mobil for Its Deal With the Kurds

  ‘Enough’s Enough’ on Undervalued Yuan: Obama

  Banks Quietly Ramping Up Costs to Consumers

  Boeing Cements Wide-Body Lead Over Airbus

  Afren Rises After Completing Nigerian Oil Asset Purchase

  Mitsubishi UFJ Financial Group H1 Net Profit Jumps, Raises Full-year Forecast

  Mizuho Net Falls 25%, Plans 3,000 Job Cuts

  J&J-Bayer Blood Thinner May Enter $1 Billion Market

  Jeff Miller: Weighing the Week Ahead: Will the Volatility Continue?

  Stone Street: SEC, NASDAQ, NYSE Finally Do, Er, “Something” To Combat Reverse Merger Abuse…

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• Academic Study: Seeing a Scary Movie Can Cause You to Sell Your Stocks
  Eddy Elfenbein, November 13th, 2011 at 12:24 am

  Yeah…right.

  Watching a scary movie can frighten you into selling your stocks too soon, a new study suggests.

  The researchers explained that this is due to something called “social projection,” in which people’s own current feelings and inclinations heavily influence their assessment of others’ state of mind and preferences.

  This means that an investor who is scared assumes that other investors are also scared and that their fears will drive stock prices lower, prompting the investor to sell early, said study co-author Eduardo Andrade, an associate professor in the business school at the University of California, Berkeley.

  “If I’m scared, I tend to project that you are scared,” he said in a university news release. “If I feel like selling, I project that you are also going to sell, and that pushes me to sell earlier rather than later in anticipation of a drop in stock value.”

  In this study, the researchers examined whether emotions completely unrelated to the stock market could influence investor behavior. They had one group of volunteers watch horror movies while another group watched documentaries about Benjamin Franklin and Vincent Van Gogh.

  After watching the movies, the volunteers participated in a stock market simulation experiment. Those who watched the horror movies were more likely to sell early than those who watched the documentaries, the investigators found.

  But fear triggered early selling only when participants were told that the value of the stock was affected by other people, not when they were told the stock value was randomly determined by a computer, where social projection was not a factor.

  The findings suggest that being able to control fear is beneficial for investors.

  “Generally speaking, those who made more money were those who decided to stay longer in the simulation game,” Andrade said.

  The study is published in the November issue of the Journal of Marketing Research.

  I’m more than a little skeptical of overly-cutesy studies like this. The only comment I’d add is that a documentary on the life of Vincent Van Gogh could be pretty effing scary.

• Stryker To Cut 1,000 Jobs
  Eddy Elfenbein, November 11th, 2011 at 12:07 pm

  From Reuters:

  Medical device maker Stryker Corp said it will cut 5 percent, or about 1000 jobs to largely offset costs related to the scheduled implementation of the new Medical Device Excise Tax in 2013.

  “While it is still uncertain whether the device tax will exist in its current form come 2013, we believe that companies across the space will make moves to mitigate the P&L impact of the new excise tax,” Susquehanna International Group analyst David Turkaly wrote in a note.

  The maker of hip and knee replacements and surgical products, which expects to save about $100 million from the restructuring, said it will record $85-$95 million of the entire $150-$175 million charge in the current quarter.

  Stryker expects to complete the restructuring activity by 2012-end.

• CWS Market Review – November 11, 2011
  Eddy Elfenbein, November 11th, 2011 at 8:49 am

  Just when I thought the market was getting back to something resembling normal, the S&P 500 got hit for a 3.67% loss on Wednesday. In the five weeks preceding that (more precisely, from October 3rd to November 8th), the index gained 16.1% which is an impressive rally for such a short period of time. But once again, Europe’s mess is our pain.

  The latest worry is Italy and truthfully, the story in Italy is basically the same as the story in Greece, except that it’s much larger which means that it’s potentially far worse. If need be, Greece can be tossed aside. Italy can’t. It’s perfectly positioned in no man’s land: too big to fail and too big to save. Italy is the third-largest economy in Europe and it holds $2.6 trillion in debt. That’s more than Greece, Ireland, Spain and Portugal combined. If that’s defaulted, well…people notice that sort of thing.

  Investors have grown very weary of holding Italian bonds and I don’t blame them. The yield on the ten-year bond there shot up past 7% which is the trigger point at which other countries have sought bailouts. In the realm of international finance, the bond market is the court of no appeal; once that’s turned against you, the end is certainly near. Your business or economy can be a complete wreck but as long as someone is willing to lend you money, you can stay alive. But once the money train ends, you’re done. James Carville, the former political advisor to President Clinton, once said that he’d prefer to be reincarnated as the bond because “you can intimidate everybody.” He’s right.

  To their credit, the Italian government has gotten intimidated. They’ve promised to fast-track reforms and that helped the markets recover a bit on Thursday. The European Central Bank has jumped in, starting to buy Italian debt in an effort to push down yields. Also, Prime Minister Berlusconi has promised to step down after a new budget deal is reached. Yesterday the Italian government auctioned off some one-year debt and that went much better than expected.

  As I said last week, my fear is that all these moves merely treat the symptoms without curing the disease which is an inherently dysfunctional currency union. In fact, I’m not sure that the ECB can ultimately help Italy. We might really be seeing the end of the euro. In last week’s CWS Market Review, I said that the currency might be able to survive in a smaller union. Now we learn that France and Germany have been talking about exactly that for the past several months. For the euro to live, the periphery of Europe needs to start growing again and soon, and that won’t be easy with their new-found austerity. For now, I think the most-probable path will be a much weaker euro. This mess is going to get worse before it gets better.

  One beneficiary of the nervousness in Europe is the U.S. bond market. Two weeks ago, the yield on the 10-year note broke above 2.4%, and that was a move I was happy to see. Investors are well-advised to shift out of these safe assets in exchange for riskier assets like high-yielding stocks. On Wednesday, however, the yield on the 10-year got as low 1.93%. Things could be changing. On Thursday, the Treasury auctioned off a new batch of 10-year notes and the demand was the lowest it’s been in nearly two years.

  Now let’s turn to our Buy List. Some of the higher-yielding stocks I like right now include AFLAC ($AFL), Johnson & Johnson ($JNJ), Reynolds American ($RAI) and Sysco ($SYY). This week we had a last trickle of earnings reports for this earnings season. On Friday, Moog ($MOG-A) delivered a great earnings report. For their fiscal fourth quarter, Moog made 83 cents per share which was 10 cents more than Wall Street’s estimate. That also represented 17% growth over last year.

  

  The more I look at Moog’s number, the more I like them. For all of 2011, Moog earned $2.95 per share. For 2012, the company sees sales increasing by 8% to $2.52 billion and EPS rising 12% to $3.31. Wall Street had been expecting $3.25 per share.

  As a business Moog is very profitable, but as a stock it’s dull as dirt and that suits me just fine. The shares are basically flat for the year, but if you’re able to get MOG-A for less than $40 (which is 12 times forward earnings), then you’ve gotten yourself a good deal.

  On Monday, Sysco ($SYY) reported quarterly earnings of 55 cents per share which topped Wall Street’s estimates by thee cents per share. Overall, the company had a very good quarter though demand wasn’t nearly as strong as I’d like. The good news, though not for consumers, was that Sysco’s bottom line was helped by higher food prices. I’m not so worried about factors that may impact Sysco’s business in the short term.

  Here’s the important part: Sysco has raised its quarterly dividend for the last 41 years in a row, and I expect to see #42 very soon. However, the increase will probably be very modest. My guess is that the board will bump up the quarterly dividend from 26 cents to 27 cents per share. That would give the shares a yield of close to 4%. In this environment, that’s not bad. Sysco is a good buy up to $30 per share.

  After the closing bell on Tuesday, Leucadia National ($LUK) reported a loss of $291 million for the third quarter. I have to explain that LUK refuses to play the quarterly earnings game. Since no analysts on Wall Street cover the stock, which is basically a large closed-end fund, the earnings report can be misleading. What’s hurt Leucadia lately is its holding of Jefferies ($JEF). LUK’s stock dropped more than 12% on Wednesday.

  That’s all for now. The bond market will be closed on November 11th in honor of Veterans’ Day. Next week will be the last full week of trading before Thanksgiving. Be sure to keep checking the blog for daily updates. I’ll have more market analysis for you in the next issue of CWS Market Review!

  – Eddy

• Morning News: November 11, 2011
  Eddy Elfenbein, November 11th, 2011 at 6:48 am

  Economist Named to Lead Greek Unity Government

  Italy Looks to New Government Led by Mario Monti

  Europe’s Banks Turned to Safe Bonds and Found Illusion

  Invisible Bank Run Becomes Conversation With 7% Italy Yield

  China New Loans Rise More Than Expected in Loosening Signal

  APEC CEOs to World Leaders: Boost Trade and Growth

  In MF Global’s Wake, Regulators to Audit All Futures Firms

  US Stocks Rise As Jobs Data Fuel Optimism

  Jobless Claims in U.S. Fall to Lowest Level in Seven Months

  Sinopec to Pay Galp $3.5 Billion for Brazilian Oil Stake

  GE Predicts Growth Above 10% in Emerging Markets

  Zynga Leans On Some Workers to Surrender Pre-IPO Shares

  Latest Starbucks Concoction: Juice

  Disney Profit Jumps 30% on Theme Parks, TV

  Layoffs Tip Spain’s Telefónica Into Loss

  Phil Pearlman: Apple and the Genius Premium

  Howard Lindzon: Timestamps Matter and Sometimes You Just Have To Call the Authorities

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