Author Archive

• Buy List Year to Date
  Eddy Elfenbein, November 15th, 2011 at 10:22 pm

  Our Buy List has beaten the S&P 500 for the last four years in a row and we’re just barely ahead this year as well. It looks like it may come down to the wire. Through today’s trading, the S&P 500 is up 0.01% while our Buy List is up 0.79%. That doesn’t include dividends.

  We started off the year strongly. By early May, our Buy List was leading the S&P 500 by more than 5.8%. But our lead collapsed during July and at one point in mid-September, we trailed the index by more than 1%.

  We’ve held a slight lead for most of the past few months but any sudden move from one of our stocks can change things very quickly.

  

• Reynolds American Announces $2.5 Billion Share Buyback
  Eddy Elfenbein, November 15th, 2011 at 11:43 am

  I sometimes think these announcements are done specifically to annoy me. Reynolds American ($RAI) just announced a $2.5 billion share repurchase plan. To be more specific, the plan is “up to” $2.5 billion so that includes other numbers…such as $0. Also, this isn’t all at once. The program will last for two-and-half years.

  Basically, this news is released so the company can claim that it’s releasing good news.

  I really like RAI a lot and I especially like the dividend. A little over a year ago, RAI raised its quarterly dividend from 45 cents per share to 49 cents per share. Then in February, they raised it again — this time to 53 cents per share.

  A $2.5 billion share buyback program works out to $4.30 per share which is 11% of the current stock price. I think RAI shareholders would much rather have that in cash than the hope that it will boost the share price that much.

  The company is also making an accounting change that will alter their reported earnings.

  Reynolds American generally analyzes its pension and post-retirement plan performance annually as of the end of the year. Under the change, any actuarial gains or losses outside a 10 percent range will be recognized during the fourth quarter as a mark-to-market adjustment included in pension and post-retirement expenses.

  The accounting change will be applied retrospectively to prior periods.

  As a result of the change, Reynolds American expects adjusted full-year earnings of $2.77 to $2.82 per share. Using the company’s previous accounting methodology, Reynolds American had expected $2.63 to $2.68 a share. Analysts surveyed by FactSet had expected $2.64 per share, on average.

• 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.