Farrell Predicts Market Crash 2011: It Will Hit by Christmas

Paul B. Farrell

Feb. 22, 2011, 12:01 a.m. EST

Market Crash 2011: It will hit by Christmas

Commentary: The S&P 500 is worth only 910. Get out or lose big

Mr. Farrell, behavioral economics columnist and former Morgan Stanley investment banker, recently wrote a damning commentary on the lies that Wall Street and the Federal Reserve continue to feed you.  Ignore it at your own peril.

There will be another opportunity to buy high dividend stocks at or near the bottom of the next phase down in this Federal Reserve induced bust (bear market).  Keep your invested savings on the sideline in a money market fund.  Make sure you are raising your trailing stops on your winning high dividend stocks.

http://bit.ly/BearMarket

Subscribe today for free at www.myhighdividendstocks.com/feed to discover high dividend stocks with earning power and strong balance sheets.

(Hat tip to Larry)

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Published in: on February 28, 2011 at 1:09 pm  Leave a Comment  

Food Price Inflation Calculator.

Food Price Inflation Calculator

by Richard Daughty
The Daily Reckoning

Previously by Richard Daughty: Buying Silver While It’s Still Relatively Cheap

 

   

Mark Thornton of the Mises Institute writes, “The price of everything seems to have skyrocketed. Only housing, the dollar and inflation-adjusted income are negative.”

I immediately interrupt to wittily say, “Well, housing is going down because nobody wants to buy a still-over-priced-yet-even-lower-quality house that now needs painting, a new water heater, some leaky things fixed and a new roof, especially now that inflation-adjusted incomes are negative!”

The stunned silence at my rudeness was all I needed to continue, “And the ridiculous fiat dollar is going down in purchasing power because the foul Federal Reserve is creating So Freaking Much Money (SFMM) that, vis-à-vis other dirtbag fiat currencies of other dirtbag countries running budget deficits, the dollar is going down in value faster than they are because the Federal Reserve is creating more new money than all the rest of the world’s dumb-ass, dirtbag central banks put together!”

Seeing that everybody is completely stunned by the way I just barged into the conversation with one of my patented Stupid Mogambo Remarks (SMR), I, thus emboldened, powered forward by thoughtfully stroking my chin as if contemplating something profound, whereupon I go on, my voice rising in a crescendo of pain and outrage, “But if you calculate all prices in ounces of gold, you will find that prices will have actually gone down! I’m not sure exactly how to prove it, but this has to mean We’re Freaking Doomed (WFD)!”

Apparently, Mr. Thornton is not sure how to calculate it, either, but is perhaps suggesting that the horror may be found in the fact that “World food and commodity prices are up 28% over the last six months.”

I was surprised that I did not edit his remarks to end with at least one exclamation point, and also surprised at his use of a 6-month time-frame, instead of annualizing it, at least in some simplistic linear manner that a dolt like me can understand.

In doing so, he unwittingly provides an opening for Showoff Calculator Man (SCM), as I happen to be an absolute whiz at multiplying numbers by 2!

Putting my calculator where my mouth is, I quickly crank out 2 X 28% = 56% inflation! See? I CAN do it!

On the other hand, 1.28% X 1.28% = 1.64%, which would seem to be a massive 64% annual inflation when compounded, even more so than the simple 58%. Yikes!

Mr. Thornton ignores me, and goes on, “Higher food prices set off the revolutions in Tunisia and Egypt and the mass protests in countries like Algeria, Jordan, Yemen, Bahrain and Iran. People in these countries buy more unprocessed foods and spend a much higher percentage of their income on food, so they have been severely impoverished by Bernanke’s QE2.”

Of course, being an American, all I really care about is how it affects me, an American, and American prices, and how in the hell I am going to afford higher prices on my American income which has, as he said earlier, gone down when inflation-adjusted.

In that regard, Joel Bowman, Managing Editor here at The Daily Reckoning notes, “Wholesale prices jumped 0.8% in January. The producer price index (PPI) has now jumped 3% over the last four months. And no, that’s not an annualized figure.”

Again, Showoff Calculator Man (SCM) comes to the rescue, and multiplies 3 times 3% to get 9% inflation, which IS an annualized figure, and more than 9% inflation when compounded, and which is scary enough to send me running, running, running, like the paranoid little weasel that I am, to the safety of the Mogambo Secret Bunker (MSB).

I was hurriedly shutting the bunker’s door when I heard Mr. Bowman go on, “Note that the PPI headline number is for ‘finished goods’ – stuff that’s ready to be sold direct to consumers. In the category of ‘crude goods,’ the figures are far worse – up 3.3% in January, and up a staggering 15.8% over the last four months.”

The last four months! That’s almost 48% inflation a year! Man, if ever there was a time to buy gold, silver and oil, this is it! Whee! This investing stuff is easy!

February 26, 2011

Richard Daughty (Mogambo Guru) is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the writer/publisher of the Mogambo Guru economic newsletter, an avocational exercise to better heap disrespect on those who desperately deserve it. The Mogambo Guru is quoted frequently in Barron’s, The Daily Reckoning, and other fine publications.

Published in: on February 27, 2011 at 9:15 pm  Leave a Comment  

Booms, Busts, and Food Prices

  Booms, Busts, and Food Prices

by Gary North

Recently by Gary North: World's Longest-Using WordPerfect Author Abandons WordPerfect After 30 Years

 

   

Maybe you have heard about rising food prices. It is happening all over the world. We hear of Third World rural populations that are trapped by rising food prices.

Why are food prices rising? Simple: because urban people in formerly Third World nations are getting richer. India and China are the obvious examples. As these economies are freed from the regulations that once burdened them, the growing urban middle class bids up the price of food. People with money in their pockets like to eat more and better food. In the bidding war between rural people with little capital and therefore low incomes vs. urban residents with more capital and higher incomes, rural people lose.

The price of food is rising not just in U.S. dollar terms, but in terms of all currencies. This is not a U.S. phenomenon only. This is international.

When we compare the rise in the price of oil since 1999, the rise in the prices of commodities in general (including gold and silver), and the price of food, food remains a bargain. Two charts are here.

COLLAPSE IN 2008

The recession in 2008 drove down the oil price from $147 to $33 in the final five months. This was a collapse. The price of food fell, too, though not to this extent. Silver and gold fell – silver far more sharply than gold. This indicates the degree to which commodities are tied to the worldwide business cycle. Commodity prices fell because the international economy fell.

Commodities are not the initiating force in price inflation; monetary policy is. The prices of raw materials rose in the first decade of the 21st century because central bank policies around the world were expansionary. When the recession hit in 2008, the prices of commodities fell, but not until several months into the recession. (Gold and silver fell in March, before the others fell.)

There is an ancient error, stretching back to Adam Smith, which says that retail prices rise because of cost-plus inflation. Prices for raw materials rise, forcing up retail prices. This was refuted by Carl Menger, the original Austrian School economist, in 1871. He showed that production costs rise in response to bids by entrepreneurs, who in turn expect rising demand for the output of their enterprises. The prices of economic inputs rise in response to expectations.

When, in the second half of 2008, entrepreneurs and speculators finally recognized the extent of the recession, they stopped bidding for as many raw materials. So, the prices of these production goods fell.

It is true that monetary policy affects the business cycle. It is true that QE2 is inflationary. But let us not mistake cause and effect. The increase in commodity prices all over the world ever since early 2009 is the result of simultaneous central bank policies. The Federal Reserve System and other large central banks began inflating in late 2008 to reverse the banking panic by large depositors, not small depositors, who were covered by FDIC rules.

The policies of late 2008 have not produced mass inflation, because commercial bankers have increased their banks' excess reserves at the FED and other central banks. They are not lending all of the money that they are legally entitled to lend.

QE2 has nothing to do with much of anything. Yet.

QE2 AND PRICES

First, QE2 did not get rolling until early in 2011. For most of 2010, the Federal Reserve System was deflating. This is seen in the chart of the adjusted monetary base.

Second, commodity prices rose in 2009 and 2010.

Third, the cause of this increase was the prior monetary policies of central banks, late 2008 to early 2010.

Fourth, the increase in the adjusted monetary base in 2011 indicates that the "exit strategy" of 2010 has ended. Bernanke keeps talking about being ready to adopt an exit strategy when the time is ripe. This is a smoke screen. The FED actually began to adopt a policy that can best be described as an exit strategy in March 2010. It has made a fast exit from the exit strategy in 2011.

That commodity prices could continue to rise in expectation of a QE2-generated recovery later this year is quite possible. It depends on what entrepreneurs expect commercial bankers to do. Will bankers lend? If so, the M1 supply will rise, and so will the M1 multiplier. That will force up prices. But QE2 may fail to persuade commercial bankers to lend. Then the FED will be pushing on a string.

My point is this: you should pay no attention to anyone who tells you that the rise in food prices has been the result of recent Federal Reserve policies. Commodity prices rose in 2010 despite a policy of monetary deflation by the FED. This is rarely discussed by financial commentators.

I think the upward move of commodities will continue until China goes into recession. China's central bank is raising interest rates. As far as we are told, monetary policy remains expansionist. But rising rates for commercial banks will have the effect of making commercial loans unprofitable for some entrepreneurs. They will cease hiring workers. They will cease buying commodities. This is what the Austrian theory of the business cycle teaches. In order to avoid price inflation, the central bank changes course and lets interest rates rise. This ends the boom.

At the margin, Western consumers are not the source of the rise in food prices. The West is rich. It allocates relatively little of its monthly expenditures to food. When Western incomes increase, the bulk of the money does not go to increased consumption of rice, wheat, and corn. This is not the case in the Third World. When people move from the country to work in urban settings, they increase their purchases of food. Their mark of wealth is their ability to buy more food. They bid against each other. They bid against rural residents.

The rising price of oil and food indicates a growing economy worldwide, just as falling prices in the second half of 2008 indicated a contracting economy.

Oil is extremely volatile because of the inability of buyers to store large quantities in reserve. This is not true of foodstuffs. The food is kept in grain elevators. The price of food is less volatile than energy prices, because entrepreneurs who hold grain in reserve can sell into this increased demand. This increases the supply of food available to retail food producers.

DOLLARS AND FOREIGN CURRENCIES

One of the marks of an ill-informed analyst is the absence of any discussion of foreign central bank policies in relation to Federal Reserve policies. Let me explain.

Food in foreign countries is priced in the domestic currency units of those countries. What the Federal Reserve does is not directly relevant to the economies of those countries.

When the FED increases the monetary base by purchasing Treasury debt, this reduces the interest rate of short-term bills, but it can – and did – increase the mid-term rates. This was not what Federal Reserve economists would have imagined. You can see what happened in February.

Higher rates of limited magnitude have little effect on foreign central banks. They buy U.S. Treasury debt for other considerations than a few hundredths of a percentage point in interest. They buy for reasons of mercantilism: subsidizing their export sectors.

The average resident in a foreign nation bids for food, as for all other scarce resources. But he bids in terms of his nation's currency unit. This has nothing directly to do with the Federal Reserve and QE2. The bidding process raises the price of food. Americans must bid more dollars to buy food. But this demand is in terms of consumers' output, not dollars. Japanese residents bid with yen. Americans bid with U.S. dollars. Chinese residents bid with yuan. But to buy yen, dollars, or yuan, residents must sell their output. They are buying food with their output. This is the fundamental fact of all pricing.

The FED inflates the monetary base. This may or may not lead to increased M1 and a higher M1 money multiplier. At some point, Americans will get their hands on some of this new money. They will bid for goods and services. But they will not bid very much extra for increased food. If Richard Simmons had his way, Americans would bid more for a new Richard Simmons DVD on how to lose weight by this or that technique. They would bid more for fresh fruits and veggies and less for snack foods that most people enjoy eating. Snack foods are more about packaging and taste than about the cost of grains to produce them.

So, what matters most for the price of food in a foreign country is the domestic monetary policy and economic output in that country.

If the central bank of some Asian country tries to keep its currency from rising in relation to the U.S. dollar by inflating the domestic currency, this will affect the price of food there. The increased monetary expansion will fuel the boom phase of the boom-bust cycle. This will goose the economy by lowering nominal interest rates. But this effect would not take place if the central bank did not tamper with the money supply or the interest rate on short-term government bonds.

To blame Bernanke and the FED for the rising cost of food is based on a misunderstanding of the currency markets. It blames a cause which is not in fact the primary cause. The primary cause is rising output – increased bids – in Third World countries that are experiencing economic growth. To the extent that this rising output is based on long-term innovation and capital investment, this is positive. To the extent that it is based on fractional reserve banking and central bank purchases of debt, it is not positive. Rather, it is creating a boom that will turn into a bust, just as it did in the second half of 2008.

DESPERATE CENTRAL BANKERS

Central banks inflate to keep government debt markets solvent. That is their official task. It has been ever since the Bank of England was created in 1694.

Central banks inflate also to keep large commercial banks solvent in a financial panic. That has been their unofficial task for at least a century.

They began doing this as a depression hedge in the early 1930s. John Maynard Keynes announced his last career flip-flop in 1936, with the publication of The General Theory of Employment, Interest, and Money. Here, he set forth his recommended cure for the Great Depression: government spending. This could be done through taxes, borrowing, and monetary inflation. He preferred the second, but he was not limited to it, nor have his disciples been limited. Keynes baptized policies that Western governments had already adopted. He invented a new terminology to cover his tracks. He was merely promoting the crackpot monetary theories of Major Douglas and Silvio Gesell, as he admitted (pp. 353-58).

Bringing Keynesian policies up to date, the unprecedented increases in the monetary base of the Federal Reserve, the Bank of England, and the European Central Bank, beginning in late 2008, were the cause of the reversal of the collapse of the financial markets. This reversed the recession. This led to a recovery of commodity prices after 2008. These effects had impact on the eating habits of Chinese and Indian consumers. China and India are part of the international economy. But the effect on food prices was indirect. They rose because demand for Asian exports recovered. The people involved in the export trade were able to bid up the price of food.

There is talk about food being a bubble sector. Given what happened in the second half of 2008, this is a legitimate conclusion: the bubble popped. If the central banks continue to inflate, and the West's economy avoids another major recession, then food prices will continue to increase. Poor people are becoming less poor, and as they become richer, they will eat more. They will also move from bicycles to motor bikes. Motor bikes consume gasoline.

Commodities rise in price when there is increased demand for them as factors of production. There will be increases in technology in these sectors, but the rate of speed at which Indians and the Chinese are getting richer is greater than increases in production of raw materials. This is a bubble in the sense of central bank policies promoting a boom economy through inflated currencies. But the general upward move of commodity prices, as distinguished from consumer goods prices, will likely continue over the next two decades.

There will be a bust at some point, perhaps in the next few years, and maybe before. Central bankers in China and India will separately decide to put on the monetary brakes in order to avoid mass price inflation. There will be recessions in both nations. This will once again force down the price of food. But this will be a buying opportunity. The long-run trend is up, because the long-run trend of Asian productivity is up.

Bernanke is responsible for persuading all of the FOMC members except Hoenig to vote for the expansion of the monetary base. To the extent that this delays the day of reckoning, when capital is finally priced apart from monetary inflation, the FED is responsible for the bubble in food prices. But this increase has been going on for a decade. This is not recent. It has nothing to do with QE2. Yet.

CONCLUSION

The rise in food prices is a mark of deliverance out of poverty for hundreds of millions of Asians. The fact that they are saddled with imitations of the Bank of England, just as residents of the West are, is unfortunate. It will be even more unfortunate when the era of central banking and the welfare state reaches its apogee and collapses.

The universal bankruptcy of the national welfare states will provide a great opportunity for free market economists to say, "We told you so," and perhaps gain their followers a market for the reconstruction of the political order from the bottom up.

There will be a price to pay. The rising price of food in the boom phase of the great transformation is likely. When poor people get richer, they spend money more on food, but less time producing it. The bubble in food prices is indeed a bubble, because Asian central banks are inflating. But in the long run, food prices and oil prices will rise because newly middle-class people prefer to buy food and fuel with their increased output.

The supreme mark of a more productive economy is the increase in the price of land, meaning the raw materials that land produces. Capitalism is reducing poverty today on a scale never before seen. So, food and fuel prices will rise until new technologies are implemented that allow raw materials suppliers to keep pace with the move from the Asian countryside to the cities. Such innovations will not keep pace for the next 20 years.

Be thankful that you are not some middle-aged peasant trapped in the pre-capitalist economy of some Asian village. For him, this vast increase of urban wealth will be no picnic.

February 26, 2011

Gary North [send him mail] is the author of Mises on Money. Visit http://www.garynorth.com. He is also the author of a free 20-volume series, An Economic Commentary on the Bible.

Copyright © 2011 Gary North

 
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Published in: on February 26, 2011 at 7:55 pm  Leave a Comment  

TIP OF THE WEEK – Quickly Find High Dividend Stocks in Very Specific Industries to Diversify Your Portfolio.

Quickly Find High Dividend Stocks in Very Specific Industries to Diversify Your Portfolio.

Jason Brizic

Feb. 25, 2011

Are you having trouble quickly finding high dividend stocks in for your diversified portfolio?  This tip should help you save time finding high dividend stocks in specific industries.

Ycharts.com can help you find high dividend stocks in very specific industries.  Google Finance’s stock screener is a more of a blunt instrument compared to www.ycharts.com drill down features.  Click on the website’s Sectors tab then follow these instructions.

You can quickly compare two measurements on their charts and you can sort by those same measurements in the table data below the chart.  I set the Y-axis to dividend yield and the X-axis to PE Ratio because I’m looking for high dividends and low PEs.  However, you could also set the metrics to dozens of different combinations.  For example, you could use Price to Sales vs Price to Book Value to find extreme value/contrarian stocks that probably don’t have a dividend.

I’ve written several articles on one of my favorite high dividend stocks.  The stock is Safe Bulkers Inc. (SB).  Click on this link to see the results for the shipping industry:

http://ycharts.com/industries/Shipping/dividend_yield,pe_ratio

Safe Bulkers is amongst the highest dividend yielders with one of the lowest P/E ratio.  I’ve done the fundamental analysis on them, so I know they are solid on earning power and possess a strong balance sheet.

I’m visually screening for stocks with dividend yields over 6% and a P/E less than 25 (preferably under 12).  Some new names jump out at me on the dividend yield vs P/E ratio charts: Paragon Shipping, Knightsbridge Tankers, Navios Maritime Partners, and Teekay Tankers.  I will go investigate the fundamentals (dividend record, earnings power, and strength of balance sheet) to determine if any are worthy of purchase and at what price.

You can go back up the hierarchy to get to other sectors | sub-sectors | niche-sectors

For more tips, go here:

http://www.myhighdividendstocks.com/category/tip-of-the-week

Published in: on February 25, 2011 at 1:02 pm  Leave a Comment  

Central banking and social unrest.

http://www1.eere.energy.gov/biomass/pdfs/global_agricultural_supply_and_demand.pdf

The move in oil began in 1999, during the boom phase of the economy. The recession of 2001 did not reverse the rise of prices.

Oil’s price tumbled sharply in the second half of 2008: from $147 per barrel in July to $33 in December. Since then, it has risen. Food prices also fell sharply. Food prices have risen steadily since late 2008.


  

http://www.fao.org/worldfoodsituation/foodpricesindex/en

The Role of US Debt in the Current Revolution

by Bill Bonner
Daily Reckoning

Recently by Bill Bonner: Revolution in Egypt and Where to Be When Black Swans Appear

 

 

 

Cereal Wars…and Zombie Wars…

Hey, how ’bout that Ben Bernanke… He’s a freedom fighter! Look what he’s done to North Africa!

Seems like every time we pick up the paper another dictator is toppling over. Where does it lead, we wonder? What would a world be like without dictators? Without them, who will the CIA and the State Department give our money to?

On the run this morning (but not quite given up) is Muammar Gaddafi of Libya.

Wait… Is this guy a friend or an enemy? We can’t remember. Wasn’t he a bad guy a few years ago? But recently we’ve heard that he is a good guy. He’s helped with the War on Terror. And he sells oil.

Friend or foe, we don’t know…but whatever he is, he’s beginning to look past tense. As of this morning, reports say he’s lost control of Libya’s second largest city. His troops are firing on protesters in the capital, where he and his loyal guards are holed up in a few government buildings.

His son vows to fight back. He says there will be “rivers of blood” before he gives up.

That “rivers of blood” image was used by Enoch Powell in Britain fifty years ago. It came from Virgil’s Aeneid, in which a character foresees “wars, terrible wars, and the Tiber foaming with much blood.”

Powell was referring to the effects of immigration into Britain from Africa and elsewhere. He thought he saw race wars and power struggles coming as a result.

But the younger Gaddafi uses the language as a threat, not a prophecy.

Still, it didn’t do Powell much good. Maybe Gaddafi will have better luck with it. Most likely, he’ll high-tail it out of the country before the blood is his own. That will bring to three the number of regime changes in the last few weeks. Which leads us to ask: what’s up?

The answer comes from our old friend, Jim Davidson. He pins the revolutions on Ben Bernanke. Behind the popular discontent is neither the desire for liberty nor the appeal of elections. It’s food. And behind soaring food prices is Ben Bernanke.

The Arab world is a model Malthusian disaster, says Davidson. Populations have ballooned. Food production has not. Which makes Arab countries the biggest importers of cereals in the world. And when the price of food goes up, the masses rise up too.

From Jim’s latest newsletter, Strategic Investment:

Food prices hit an all-time high in January. According to the UN’s Food and Agricultural Organization (FAO) “the FAO Food Price Index (FFPI) rose for the seventh consecutive month, averaging 231 points in January 2011, up 3.4 percent from December 2010 and the highest in both real and nominal terms” since records began. Note that prices have now exceeded the previously record levels of 2008 that sparked food riots in more than 30 countries. “Famine-style” prices for food and energy that prevailed early in 2008 may also have helped precipitate the credit crisis that Federal Reserve Chairman Ben Bernanke described in closed-door testimony “as the worst in financial history, even exceeding the Great Depression.”

This time around, the turmoil surrounding commodity inflation has taken center stage with more serious riots and even revolutions across the globe. Popular discontent is not just confined to “basket case” countries like Haiti and Bangladesh as in 2008. High food prices have roiled Arab kleptocracies with young populations and US backed dictators such as Tunisia, Egypt, Bahrain and Yemen. Even dynamic economies have been affected. Indeed, all of the BRIC countries, except Brazil, have witnessed food rioting.

Well, how do you like that, Dear Reader? All those billions of dollars spent propping up dictators – $70 billion was the cost of supporting Hosni Mubarak in Egypt alone – and then the Fed comes along and knocks them down.

The Fed lowers the cost of money so speculators can borrow below the rate of inflation. And then it prints up trillions more – just to top up the worlds’ money supply.

Is it any wonder food prices rise? Imagine you’re a farmer…or a speculator. You can sell food. Or you can hold it in storage. You know the food is valuable. You know the world has more and more mouths to feed every day. You know food production is limited. And you know Ben Bernanke can print up an unlimited number of dollars. What do you do?

Do you sell immediately? Or drag your feet…holding onto your valuable grain as the price hits new highs?

Davidson continues:

While Mr. Bernanke modestly declines the credit for de-stabilizing much of the world, close analysis confirms that he played an informing role. His QE2 program of counterfeiting trillions out of thin air has helped ignite a raging bull market in raw materials with food and commodities – up 28% in the past six months. The fact that the US dollar has heretofore been the world’s reserve currency means that almost all commodity prices are denominated in dollars. As a matter of simple math, when the dollar goes down, the prices of commodities tend to go up.

Today, Libya. Tomorrow…Yemen? Or Saudi Arabia.

In North Africa, Cereal Revolutions…

In North America, Zombie Wars…

Yes, the battle rages in the Dairy State. And yes, Nobel Prize winner Paul Krugman (Economics!) has no idea what is going on:

It’s “not about the budget. It’s about power.”

He thinks it is a battle between the rich and powerful, whom he calls the “oligarchy,” and the decent lumpenproletariat. Wisconsin’s governor is trying to bust the union, says Krugman, so that the elite can ride roughshod over poor government workers, cut their pay, and reduce their benefits (thereby downsizing the state’s budget deficit).

It’s not about money, says the New York Times columnist. He’s wrong, as usual. The Zombie Wars are always about money. There is less money available and more zombies who want it.

In the present case, rather than hire honest people to work at market rates…Krugman wants the state to be forced to deal with a privileged union. Union zombies should bargain with government zombies, he says. Together, in cooperation, not in conflict, they should figure out how to rip off the taxpayer.

Stay tuned…the Zombie Wars are just beginning.

Reprinted with permission from The Daily Reckoning.

February 24, 2011

Bill Bonner is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21st Century and The New Empire of Debt: The Rise Of An Epic Financial Crisis and the co-author with Lila Rajiva of Mobs, Messiahs and Markets (Wiley, 2007). Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning.

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Published in: on February 25, 2011 at 12:31 pm  Leave a Comment  

UPDATE – SeaDrill (SDRL) Basic Financial Metrics.

UPDATE – SeaDrill (SDRL) Basic Financial Metrics including 4Q2010 results. 

This high dividend stock has some concerning long term debt loads; otherwise, all other basic financial metric look good.  The company operates 42 oil rigs some of which specialize in deep water drilling.  It has a modern fleet and the company thinks that they will benefit from oil company’s need for safe, reliable drilling in the wake of the BP oil spill.  Keep in mind that all mentions of the trailing 12 months or last 12 months are 1Q2010 through 4Q2010.  SeaDrill reported 4Q2010 and full year results today (February 25th, 2011).

I believe that SeaDrill would be an excellent buy at around $20.00 per share.  The stock price closed at $37.32 today.

Disclosure: I don’t own SeaDrill (SDRL).

Dividend history.  SeaDrill started paying dividends in 2008.  It has steadily increased its dividend for the last few quarters.

1Q2010 dividend =  $0.50 per share; 2Q2010 = $0.60; 3Q2010 = $0.61; and 4Q2010 = $0.65

1Q2011 dividend = $0.675 per share plus a extraordinary dividend of $0.20

Sales per share.  SeaDrill’s sales for trailing 12 months ended 4Q2010 were $4,066,900,000.  At the end of 4Q 2010 there were 443,308,487 shares outstanding.  By dividing $4,066,900,000 by 443,308,487, we get sales per share of $9.17.

Earnings per share. SeaDrill’s earnings per share of $2.64 for the trailing 12 months were calculated by dividing net income (income statement) by outstanding shares (balance sheet).  They earned $1,171,600,000 over the last 12 months.

Dividends per share. By dividing $989,900,000 in dividends paid in the last 12 months by 443,308,487 shares outstanding, we find that Safe Bulkers had dividends per share for the last 12 months of $2.23 per share.

Cash flow per share. The cash flow per share of $3.73 for the last 12 months was calculated by taking net income of $1,171,600,000 and adding back in the depreciation of $479,800,000, which has no impact on cash flow (income statement), and then dividing by the 443,308,487 shares outstanding (balance sheet).

Dividend yield. SeaDrill’s stock had a dividend yield on December 31st, 2010, of 6.57 percent.  The dividend yield is calculated by dividing the annual dividend per share of $2.23 per share at the close of 2010 by the stock price of $33.92.

Now let’s begin our analysis of the ability of SeaDrill to meet its maturing loan obligations and current cash flow needs by computing its liquidity and debt coverage ratios.

Quick ratio

The quick ratio is an important liquidity ratio that is computed by removing inventory from current assets and then dividing by the remainder by current liabilities.  This information can be found on SeaDrill’s balance sheet.  Since inventories are typically the least liquid of a company’s current assets and are likely to produce a loss if liquidated, it is prudent to look at the firm’s ability to cover short-term liabilities without relying on them.  The rule of thumb is that a company with a quick ratio over 1 or better indicates that it could cover all current liabilities with the liquid assets it has on hand, thereby reducing any need to cut its dividend.

SeaDrill’s quick ratio for the last 12 months is 1.15, more than the standard rule of thumb that you would like to see.  The higher the ratio, the better we like the company.  SeaDrill’s quick ratio climbed up to 1.15 from 0.82 at the end of 3Q2010.

Calculation: $2,883,000,000 current assets in 4Q2010 and no inventory divided by $2,514,300,000 in current liabilities in 4Q2010.

Debt coverage ratio

The short-term debt coverage ratio allows you to quickly see if the company’s short-term debt obligations can easily be paid by using the cash that is being generated from company operations.  This ratio is calculated by dividing income from operations ($4,040.8 M) by current liabilities ($2,514.3 M) or short-term debt (balance sheet).  This ratio should equal at least 2.0.

SeaDrill’s short-term debt coverage ratio equals 1.61 for the last 12 months.  This means that the company is generating less than twice the cash flow it needs from operations to pay off all of its short-term obligations.  Taken by itself, this ratio would indicate that the dividend is pretty tenuous and would also indicate that there is insufficient operating income to offset a slightly lower liquidity position if that were indicated by the company’s quick ratio.

Valuation ratios

There are two important ratios that can help you identify companies with good value characteristics.

Price-to-sales ratio. We rank companies with low price-to-sales ratios higher than those companies whose stock is pricey relative to the sales being generated.  You can calculate the ratio by dividing the stock price at the end of 4Q2010 ($33.92) by sales per share ($9.17).  SeaDrill’s price-to-sales ratio for the last twelve months is 3.70, which is not better than our 2.00 rule of thumb ratio that we use to indicate good value.

Price-to-earnings ratio (P/E). Also known as the price-to-earnings multiple, this ratio tells you how expensive the stock is from a price standpoint given earnings that the stock is generating.  Historically, stocks are a good value when the ratio or multiple is below 10, but we consider stocks that have a P/E of less than 12 – the lower the ratio the better.  You can calculate the ratio by dividing the stock’s price by the earnings per share being generated.  SeaDrill’s price-to-earnings ratio for the last 12 months was is 12.85 ($33.92 stock price divided by $2.64 per share).  It is about the higher today (close price on 2/25/2011 of $37.32 divided by $2.64 EPS).

Dividend ratios

Dividend coverage ratio. This ratio shows how secure the dividend is based on the cash flow being generated by the company.  Instead of applying the cash flow to analyze whether the company can meet its debt obligations, we analyze this ratio to assess how easily the company can keep making its dividend payments.  To calculate this ratio, you divide cash flow per share ($3.73) by dividend per share ($2.23).  The higher the dividend coverage from cash flow, the better we like it.

SeaDrill has a dividend coverage ratio of 167 percent.

Dividend payout ratio.
This ratio tells you how much profit the company is paying out to shareholders in dividends.  Once again, the higher the better, so long as the ratio does not exceed 100 percent.  Since a company can only pay dividends from current or retained earnings, it is a warning sign if a company is paying dividends that exceed current earnings.

SeaDrill’s dividend payout ratio is 84.5 percent and is calculated by dividing its dividend per share ($2.23) by earnings per share ($2.64).  We tend to look for companies that have payout ratios of at least 50 percent, which to us indicates that company is committed to rewarding shareholders through dividend payouts.  However, SeaDrill is a very new company (less than 5 years old), so that is a nice dividend payout for such a young company.

Growth ratios

One-year revenue growth ratio.  This ratio measures the one-year percentage change in revenue growth.  It is calculated by subtracting last year’s revenue ($3,325 million) from the current year’s revenue ($4,066.9 million) to find the difference ($741.9 million), and then dividing that difference ($741.9 million) by last year’s revenue ($3,325 million) to find the percentage change.  SeaDrill’s revenue growth rate for 2010 is 22.31 percent indicating that revenue has improved by slightly more than double our 10 percent rule of thumb.

 

One-year earnings growth ratio.  This ratio measures the one-year percentage change in earnings growth.  It is calculated by subtracting last year’s earnings ($1,353.1 million) from the current year’s earnings ($1,171.6 million) to find the difference ($181.5 million), and then dividing that difference ($181.5 million) by last year’s earnings ($1,353.1 million) to find the percentage change.  SeaDrill’s earnings growth rate was negative 13.41 percent in 2010, which is way below than our 10 percent rule of thumb for earnings growth rate.  SeaDrill paid off a significant amount of short term debt and that took earnings growth negative.

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Published in: on February 24, 2011 at 7:22 pm  Leave a Comment  

SeaDrill (SDRL) Higher Ahead of Earnings.

Seadrill Higher Ahead of Earnings

Written by Christian Paolinetti   

Wednesday, 23 February 2011 11:03

New York, February 23rd (TradersHuddle.com) – Shares of Seadrill Ltd. (NYSE:SDRL) are trading higher by +0.36% ahead of its quarterly earnings release. Seadrill, the offshore drilling contractor is expected to release its quarterly results on February 24th.

Wall Street Analysts consensus calls for a profit of $0.76 a share on $1.13 billion revenue.

Seadrill estimates have a range of $0.07 a share. The high estimate calls for profit of $0.8 a share and the low estimate is calling for a profit of $0.73 a share, a year ago for the quarter the company reported $0.74 a share.

Seadrill Ltd. (NYSE:SDRL) provides contract drilling services to the oil and gas industry. The Company operates in shallow to ultra-deepwater areas in harsh and benign environments utilizing a versatile fleet, which includes drillships, semisubmersible rigs, jackup rigs, and tender rigs.

Link to original article: http://www.tradershuddle.com/20110223171933/Earnings/seadrill-higher-ahead-of-earnings.html

SeaDrill (SDRL) is a high dividend stock, but it does not have a strong balance sheet.  Its high current liabilities outweigh its current assets (quick ratio).  I will be looking for improvement in the quick ratio in its 4Q2010 earnings report tonight.  Check back for updates later tonight.

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Published in: on February 23, 2011 at 10:52 am  Leave a Comment  

Bad News for Mortgage REIT AGNC. Housing Prices Headed Lower.

The financial press is reporting today that house prices are headed back down following the ill conceived government stimulus known as the “First Time Home Buyer” subsidy.

http://www.reuters.com/article/2011/02/22/us-usa-economy-confidence-idUSTRE71L3XL20110222

I believe these continued adverse developments in the broader residential mortgage market will negatively impact the earnings of high dividend stock American Capital Agency Corp. (AGNC).  The following risk excerpt from AGNC’s 2009 annual report states the risk quite succinctly:

Continued adverse developments in the broader residential mortgage market may adversely affect the value of the agency securities in which we invest.

In 2008 and 2009, the residential mortgage market in the United States experienced a variety of unprecedented difficulties and changed economic conditions, including defaults, credit losses and liquidity concerns. Many of these conditions are expected to continue in 2010. Certain commercial banks, investment banks and insurance companies announced extensive losses from exposure to the residential mortgage market.  These losses reduced financial industry capital, leading to reduced liquidity for some institutions. These factors have impacted investor perception of the risk associated with real estate related assets, including agency securities and other high-quality RMBS assets. As a result, values for RMBS assets, including some agency securities and other AAA-rated RMBS assets, have experienced a certain amount of volatility. Further increased volatility and deterioration in the broader residential mortgage and RMBS markets may adversely affect the

performance and market value of our agency securities.

We invest exclusively in agency securities and rely on our agency securities as collateral for our financings.  Any decline in their value, or perceived market uncertainty about their value, would likely make it difficult for us to obtain financing on favorable terms or at all, or maintain our compliance with terms of any financing arrangements already in place. The agency securities we invest in are classified for accounting purposes as available-for-sale. All assets classified as available-for-sale are reported at fair value, based on market prices from third-party sources, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders’ equity. As a result, a decline in fair values may reduce the book value of our assets.  Moreover, if the decline in fair value of an available-for-sale security is other-than-temporarily impaired, such

decline will reduce earnings. If market conditions result in a decline in the fair value of our agency securities, our financial position and results of operations could be adversely affected.

There really is a double-dip recession.  It never went away.  Federal Reserve counterfeiting and government stimulus just papered over the problems for many months.  The structural problems caused by fractional reserve banking and government deficit spending are not only present, but they have worsened.  Prices must drop to clear markets and to bring supply and demand into balance.

There is a glut of unemployed people, there is a glut of houses, and businesses are not hiring.  These facts are finally imposing reality on some people.  More people will default on their mortgage payments when housing prices decline.  They will join a growing number of strategic defaulters (people who could make their mortgage payments but chose not to).  This occurs because their loans exceed the dollar price of their homes and also due to the resentment against bankers who receive Federal Reserve and US government bailouts.

Look at this chart.  The trend is clearly down.  Keep this in mind as you watch the short video clip at the end of this article.

[D]ata showed single-family home prices fell in December, bringing them closer to the low seen in 2009.

The S&P/Case Shiller composite index of 20 metropolitan areas declined 0.4 percent in December from November on a seasonally adjusted basis, as expected.

For the year, prices fell 2.4 percent, slightly more than the 2.3 percent decline analysts had forecast.

While the composite held above its 2009 low, 11 cities hit their lowest levels since home prices peaked in 2006 and 2007, the report showed.

Unadjusted for seasonal impact, home prices fell 1 percent for the month, leaving them just 2.3 percent above their April 2009 troughs, S&P said.

VIDEO: House prices drop; Case-Shiller: 10 city index

Robert Shiller, Yale University Professor of [Keynesian] Economics, and David Blitzer, S&P 500 Index Committee chairman, discusses [housing price] declines in the 10 and 20 City Indices.

VIDEO http://on-msn.com/HousingDown

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Published in: on February 22, 2011 at 1:41 pm  Leave a Comment  

This 7.10% yielder is increasing its earning power. ((SeaDrill, SDRL, high dividend stocks))

SeaDrill is a high dividend stock currently yielding 7.10%.  It has an increasing earning power, but a little too much short term debt to make it a buy at today’s price of $36.61 per share.

SeaDrill (SDRL) just announced that it has a new contract with Thailand Chevron for its T12 tender rig.  The contract is for three years with a two year option.  The contract is worth approximately $132 million.  This will be the fifth SeaDrill rig that is contracted with Thailand Chevron.

Original article: http://www.offshoreenergytoday.com/thailand-seadrill-chevron-agree-132-million-contract-for-t12-tender-rig/

The T12 tender rig was built in 1Q2010 and went into contracted service with PTTEP for one year.  The existing contract ran from April 2010 to April 2011.  The dayrate in USD was $85,000.  That equates to approximately $31.025 million revenue per year from the T12 rig.

The new contract will increase T12 revenue generation by about 41%.  The new contract is for $132 million over three years.  That equates to about $44 million per year (+$12.975 million per year over the existing contract).  That also equates to a USD dayrate of about $120,500.

SeaDrill has a lot of short term debt.  If SeaDrill can deliver increased revenues with the rest of its fleet, then they might be able to pay down its short term debts to improve its balance sheet.  SeaDrill will be a worthy investment once they improve their balance sheet.

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Published in: on February 21, 2011 at 12:32 pm  Leave a Comment  

Daytona 500 Stocks.

I just discovered the Stock Car Index (SCARX) while surfing for info on NASCAR during the Daytona 500.  The purpose of this mutual fund is to:

The investment seeks growth of capital and current income by investing in the Companies of the StockCar Stocks index. The fund invests in the companies of the StockCar Stocks index. The index consists of 40 companies that support NASCAR's Sprint Cup Series. The companies in the index either sponsor NASCAR Sprint Cup racing teams or races, or they earn money from NASCAR Sprint Cup events.
 
 
Some of the 40 companies that support NASCAR are dividend payers.  Here are the top ten holding of the fund:
 

Top 10 holdings

Security

Net Assets

 

SPDR S&P 500

6.22%

 

Ford Motor Company (F)

5.49%

 

Infineon Technologies AG ADR (IFNNY)

3.44%

 

Stanley Black & Decker (SWK)

2.77%

 

Sony Corporation ADR (SNE)

2.67%

 

Aflac, Inc. (AFL)

2.57%

 

Aaron's, Inc. (AAN)

2.52%

 

O'Reilly Automotive, Inc. (ORLY)

2.46%

 

Caterpillar Inc. (CAT)

2.38%

 

Office Depot, Inc. (ODP)

2.37%

 

 
The largest holding is the S&P500 itself which only yields 1.71%.  The fund must own one of the S&P500 ETFs.
 
Next is Ford Motor company.  Ford (F) is currently yielding zip, zero.
 
In third place is Infineon Technologies (IFNNY).  It does not pay a dividend.
 
In forth place is tool company Stanley Black & Decker (SWK).  Stanley is the first consistent dividend payer in this fund.  I see dividend growth going back to 1986 with this stock.  It is currently yielding about 2.16%.
 
You might not not think of Sony when you think of NASCAR, but Sony (SNE)  is #5 in this mutual funds holdings.  You might also be surprised to learn that it is a dividend payer, albiet a small payer at a yield of 0.78%.
 
Insurer Aflac (AFL) comes in sixth and is the second consistent dividend payer and dividend grower in the top 10 holdings.  Aflac's dividends go back to 1986 on the Google Finance charts.  They yield about 2% on average.
 
Aaron's Inc (AAN) rides in seventh position yielding a misley 0.24%.  But at least they pay a dividend.
 
O'Reilly Automotive Inc. (ORLY) is drafting Aaron's  in eigth place.  It doesn't pay a dividend and never has.
 
Our nineth place company is Caterpillar Inc. (CAT).  Caterpillar is a consistent dividend payer and dividend grower.  Right now it is yielding 1.66%.
 
Rounding out our top ten is Office Deport (ODP).  The Office does not pay a dividend.
 
Not mentioned is AT&T (T), but they have sponsored cars in the past.  AT&T is a consistent high dividend payer.  It yields 6.2%.
 
As I write this during the Daytona 500 commercials there are 40 laps remaining.  Much of the favorites have been taken out in various crashes.
 
I would like to see the aging Mark Martin win his first Daytona 500.
 
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Published in: on February 20, 2011 at 3:37 pm  Leave a Comment