Austerity is not Discretionary

This is the most important article from a high level Washington insider in years.  David Stockman is the former Reagan Budget Director and Congressman.  He resigned because the congress refused to cut spending and Reagan went along with them.  Here is the wikipedia entry on him http://en.wikipedia.org/wiki/David_Stockman.  He discusses the future of the US economy in terms of the coming US sovereign debt crisis.  The Keynesians have created the mess and they will not get us out of it using the same failed methods.  Ignore the implications of this interview at your own peril.

http://www.caseyresearch.com/cdd/david-stockman-austerity-not-discretionary

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Published in: on July 30, 2012 at 12:31 pm  Leave a Comment  

TIP OF THE WEEK: An Open Letter to Warren Buffett

Warren Buffett is a genius investor but an economic ignoramus.  He has been paraded around by statists in government for his willingness to be taxed more.

This is a excellent article on why Warren Buffett should stop acting like a guilt ridden billionaire who wants the government to raise taxes on everyone.  It explains in very clear terms why Marx’s exploitation theory is complete wrong and why capitalism has improved all individuals standards of living.

http://mises.org/daily/6134/An-Open-Letter-to-Warren-Buffett

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Published in: on July 27, 2012 at 1:24 pm  Leave a Comment  

The Soveriegn Debt Crisis in Europe and What It Means to Your Investments.

European Union bureaucrats are fessing up that the Greek government still can’t pay its bills.

http://www.marketwatch.com/story/us-stocks-fall-on-greece-debt-restructure-news-2012-07-24

This news tanked markets in the US.  Anyone who is surprised by this news has not been paying attention to the sovereign debt crisis in Europe.  This crisis is going to get worse when Greece gets bailed out for a second or third time.  Portugal, Italy, and Spain will be back for more bailouts of their own.  Where will the money come from.  The European Central Bank will print Euros.  The money will go to the Northern European banks who will be scared to lend it, so they will buy more bad debt of the PIIGS.

I would stay out of the stock market until this sovereign debt crisis has run its course.  You will know it is over when stock prices drop 40% – 60% from their May 2012 highs of about 13,000 on the Dow Jones Industrial Average.  Well run companies with fat dividend yields and decent balance sheets like Safe Bulkers (SB) can have their stock price cut from $6.00 per share down to $2.50 per share like in 2008-2009.  Safe Bulkers fell precipitously from its 2008 IPO price of $19.00 per share down to about $2.50 at the height of the financial crisis.

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I’m spending my time during the sovereign debt crisis analyzing stocks to find the best ones to buy in the aftermath and at what price.  This crisis will take a long time to unravel.

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Published in: on July 24, 2012 at 11:37 am  Leave a Comment  

Do you want to know what is going on in Europe?

Nigel Farage explains the insanity going on in Europe in two minutes.

http://www.youtube.com/embed/TN_1mF-3JTI

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Published in: on July 18, 2012 at 10:38 pm  Leave a Comment  

First Look at DOW 30 Component Walt Disney Co. (DIS)

Price: $47.07

Shares: 1.79 billion

Market capitalization: $84.15 billion

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What does the company do: Disney owns the rights to some of the most famous characters ever created, including Mickey Mouse and Winnie the Pooh. These characters and others are featured in several theme parks Disney owns or licenses around the world. Disney makes live-action and animated films under several labels and owns ABC, Disney Channel, and ESPN. Disney also owns a 42.5% stake in A&E, The History Channel, and Lifetime Networks. The company generates about 25% of its sales from outside the United States.

Morningstar’s take: Disney owns a collection of valuable assets, but its media networks, which generate more than half of the company’s operating profit, are the backbone of this conglomerate.

Bonds: $11.0 billion outstanding

Times interest earned: 11 times (DIS earned $4.807 billion as of 3Q 2011 / $435 million interest expense).  That far exceeds Benjamin Graham’s recommendation of earning at least five times interest expenses.  Disney’s bonds do not threaten the dividend at all.

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Preferred stock: none.

DIVIDEND RECORD: Walt Disney Co. has paid a dividend since at least 1987.  Disney paid a $0.02 annual dividend in 1987 and it has grown that dividend to $0.60 annually today.   That is 2,900% straight-line dividend growth over 25 years or 116% annual straight-line dividend growth per year.  Disney has been a phenomenal dividend grower.  Note: they paid a quarterly dividend from 1987 until 1997.  In 1998 they switched to an annual dividend.

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Dividend: $0.60 annual dividend paid late in the year

Dividend yield: 1.27% ($0.60 / $47.07 share price) Disney will become a 6%  high dividend stock at $10.00

Dividend payout: 21.5% using the Google Finance reported EPS of $2.79 –OR- 27.7% using the average adjusted earning power of $2.16

I’d like to see Disney pay out at least 50% of their average adjusted earnings in the form of dividends.  That would work out to an annual dividend of $1.08.  Even better would be a quarterly dividend of $0.27 per share instead of the annual dividend.

EARNING POWER: $2.16 per share at 1.79 billion shares

(earnings adjusted for changes in capitalization – typically share buybacks and/or additional shares created)

Date

EPS

Net Income

Shares

Adjusted EPS

9/2005

$1.22

$2,533 M

2,089 M

$1.41

9/2006

$1.64

$3,374 M

2,076 M

$1.88

9/2007

$2.25

$4,687 M

2,092 M

$2.62

9/2008

$2.28

$4,427 M

1,948 M

$2.47

9/2009

$1.76

$3,307 M

1,875 M

$1.85

9/2010

$2.03

$3,963 M

1,948 M

$2.21

9/2011

$2.52

$4,807 M

1,909 M

$2.69

Seven year average adjusted earnings per share is $2.16

Consider contrarian buying below $17.28 (8 times average adjusted EPS)

Consider value buying below $25.92 (12 times average adjusted EPS)

Consider speculative selling above $43.20 (20 times average adjusted EPS)

Walt Disney Co. (DIS) is currently trading at 21.8 times average adjusted EPS.  This is speculatively priced; consider shorting.

BALANCE SHEET – Disney has a weak balance sheet.  The price to book value ratios and other measures of financial strength are weak.

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Book value per share: $21.26 ($38.049 B equity / 1.79 B shares)

Price to book value ratio: 2.2 (under 1.0 is good) ($47.07 share price / $21.26 BV)  Investors are paying $2.20 for each $1.00 in book value.

Tangible book value per share: $4.35 (equity – $25.113 B goodwill – $5.142 B intangibles)

Price to tangible book value: 10.8 ($47.07 share price / $4.35 TBV)  40.2% of Walt Disney’s assets are in intangibles which explains why the P/TBV increased so much.

Current ratio: 1.14 latest quarter (over 2.0 is good) ($14.537 B current assets / $12.724 B current liabilities)

Quick ratio: 0.29 latest quarter (over 1.0 is good) ($3.731 B cash and equivalent / $12.724 B current liabilities)

Debt to equity ratio: 0.33 (lower is better)

Percentage of total assets in plant, property, and equipment: 27.7% (the higher the better) Disney has massive intangible assets at 40.2% of total assets, current assets were 19.52%, and other long term assets were 12.76%

Working capital trend (w/ 3 year moving average trendline): Up slightly in the long run, but I don’t like the several year stint of negative working capital.

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CONCLUSION – Walt Disney Co. bottomed near $15.00 in early 2009 near the height of the financial crisis.  That price represented an extreme contrarian buying opportunity at 6.9 times average adjusted earnings.  The stock price has tripled since that time and has entered speculative price territory at 21.8 times average adjusted earnings.  I would consider shorting Disney above $43.20.  A return of the worldwide recession will hurt Disney’s theme park revenues and media sales.  Disney’s dividend yield is less than the S&P 500 average of 2.2%.  I wish the board  of directors would increase the payout from 27% to 50% or more.  A high payout would increase yield.  Disney’s real weakness is its balance sheet.  The price to tangible book value is horrible.  Also, Disney has weak financial strength in the current ratio and quick ratio metrics.  I would stay away from Disney until the stock drops back to the $25 to $17 dollar range.

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DISCLOSURE – I don’t own Walt Disney Co. (DIS).

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Published in: on July 13, 2012 at 10:29 am  Leave a Comment  

First Look at DOW 30 Component Microsoft (MSFT)

Bonds: $12.0 billion outstanding

Times interest earned: 78 times (MSFT earned $23.15 billion as of 6/2011 / $295 million interest expense).  That far exceeds Benjamin Graham’s recommendation of earning at least five times interest expenses.  Microsoft’s bonds do not threaten the dividend at all.

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Preferred stock: none.

DIVIDEND RECORD: Microsoft started dividend payments in 2003 biannually and maintained that pattern until the start of 2005.  In Q1 2005 Microsoft started paying a quarterly dividend of $0.08 per share.  It has grown the dividend to $0.20 quarterly today.  That is 200% straight-line dividend growth over 7 years, or 28.5% annual growth per year.  That’s pretty impressive growth.

Dividend: $0.20

Dividend yield: 2.6% ($0.80 / $30.76 share price) Microsoft is a 6% high dividend stock at $13.33

Dividend payout: 29% using the Google Finance reported EPS of $2.75 –OR- 42% using the average adjusted earning power of $1.92

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EARNING POWER: $1.92 @ 8.4 billion shares

(earnings adjusted for changes in capitalization – typically share buybacks and/or additional shares created)

EPS

Net income

Shares

Adjusted EPS

6/2005

$1.12

$12,254 M

10,906 M

$1.46

6/2006

$1.20

$12,599 M

10,531 M

$1.50

6/2007

$1.42

$14,065 M

9,886 M

$1.67

6/2008

$1.87

$17,681 M

9,470 M

$2.10

6/2009

$1.62

$14,569 M

8,996 M

$1.73

6/2010

$2.10

$18,760 M

8,927 M

$2.23

6/2011

$2.69

$23,150 M

8,593 M

$2.76

Seven year average adjusted earnings per share is $1.92

Consider contrarian buying below $15.36 (8 times average adjusted EPS)

Consider value buying below $23.04 (12 times average adjusted EPS)

Microsoft (MSFT) is currently trading at 16.02 times average adjusted EPS.  This is stock is priced for investment.

Consider speculative selling above $38.04 (20 times average adjusted EPS)

BALANCE SHEET – Microsoft has a strong balance sheet.  The only problem is the high price to book value ratios.

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Book value per share: $8.17 ($68.659 B equity / 8.4 B shares)

Price to book value ratio: 3.76 (under 1.0 is good) ($30.76 share price / $8.17 BV)  Investors are paying $3.76 for each $1.00 in book value.

Tangible book value per share: $5.50 (equity – $19.698 B goodwill – $2.756 B intangibles)

Price to tangible book value: 5.59 ($30.76 share price / $5.50 TBV)  19.03% of Microsoft’s assets are in intangibles which explains why the P/TBV increased so much.

Current ratio: 2.94 latest quarter (over 2.0 is good) ($76.86 B current assets / $26.17 B current liabilities)

Quick ratio: 2.27 latest quarter (over 1.0 is good) ($59.529 B cash and equivalent / $26.17 B current liabilities)

Debt to equity ratio: 0.17 (lower is better)

Percentage of total assets in plant, property, and equipment: 6.97% (the higher the better) Microsoft has massive current assets at 65.13% of total assets, intangibles were 19.03%, and other long term assets were 8.87%

Working capital trend: Up slightly in the long run.

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CONCLUSION – As usual, the best time to buy MSFT in recent years was in March 2009 when the stock hit bottom at $15.28.  It was a contrarian buy then at just below 8 times average adjusted earning power.  Today the stock trades for double that price.  I think the stock is overpriced given the coming worldwide recession.  Microsoft is a steady dividend payer and grower.  The dividend yield is slightly above the S&P average of 2.2%.  The best part of Microsoft is their balance sheet.  The balance sheet is strong with the exception of their price to book value ratio and tangible book value ratio.  I would ignore this stock until it drops below the $23.04 value stock threshold.

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DISCLOSURE – I don’t own Microsoft (MSFT).

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Published in: on July 5, 2012 at 10:54 am  Leave a Comment