Morning News: February 15, 2011
Posted by Eddy Elfenbein on February 15th, 2011 at 7:34 am

Deutsche Boerse, NYSE Boards to Vote Today on Combining

Asian Markets End Mixed: China Flat Despite Below-View CPI

Inflation Hits Nearly 5 Percent in China, With Food Costs Soaring

Bank of Japan Tones Up Economic Optimism, Keeps Rates on Hold

Train Strike Adds to Debt-laden Portugal’s Woes

Companies Raise Prices as Commodity Costs Jump

Bernanke Would Defend Lehman Actions to His `Deathbed’

FedEx Cuts Forecast, Citing Fuel and Weather

Elop, Ballmer Give Nokia-Microsoft Software Accord Hard Sell

Marriott to Split Into Two Companies

The Stop-Loss Myth

Paul Kedrosky: Google Goes After Content Firms Again

Joshua Brown: Advising Social Media Millionaires

Howard Lindzon: The Rich are Early and Late…Because They Can Afford to Be

The Federal Reserve Pays More in Taxes than the Bottom Two-Thirds of American Earners Combined
Posted by Eddy Elfenbein on February 14th, 2011 at 10:28 pm

Here’s a look at three sources of revenue for the federal government: individual income taxes, corporate income taxes and payments from the Federal Reserve. The chart is in billions of dollars and the numbers come from President Obama’s budget.

What’s fascinating is that the Fed’s payments are getting to be a hefty share of the government’s revenue (although the White House projects it will fall off soon). For 2010 and 2011, the Fed’s share is equal to 8.4% and 8.3% of individual income taxes respectively.

Given the heavily skewed nature of income taxes, the Federal Reserve pays more in taxes than a hefty slice of America.

We don’t yet have the income tax distribution figures for 2010. The latest are from 2008 and they show that the bottom 50% of taxpayers paid 2.7% of all income taxes. The second quartile (25% to 50%) paid 10.96% of all income taxes.

Assuming that same distribution held in 2010 and will hold in 2011, and by using some very rough interpolation, we can estimate that the Federal Reserve will probably pay more in taxes this year and last year than the bottom two-thirds of all Americans combined.

Update: David Merkel helpfully tweets: “The Fed doesn’t pay taxes; they remit excess seigniorage revenue to the Treasury, which they gather through punishment of savers.”

Buffett Makes Some Moves
Posted by Eddy Elfenbein on February 14th, 2011 at 10:11 pm

According to the latest filings, Warren Buffett has made some changes to his massive portfolio which included trimming two stocks on our Buy List (FISV and BDX).

Berkshire sold off 5 million shares of Bank of America Corp., 187,000 Comcast Corp. shares, 6.5 million Lowe’s Cos. shares and 3.6 million shares of Nike Inc.

Berkshire also unloaded 1.9 million shares of Becton, Dickinson & Co., 3.9 million shares of Fiserv Inc., 6.1 million shares of Nalco Holding Co. and 3.4 million shares of Nestle.

And Berkshire reduced its stake in Bank of New York Mellon Corp. just three months after it revealed a new investment of nearly 2 million shares in the bank. At year end, Berkshire held 1.79 million shares of BNY Mellon.

Besides investments, Berkshire owns more than 80 different subsidiaries, including clothing, insurance, furniture, utility, jewelry and corporate jet companies.

Looking at Netflix’s Valuation
Posted by Eddy Elfenbein on February 14th, 2011 at 7:18 pm

Here’s a look at Netflix’s stock along with its earnings-per-share. The stock is in blue and it follows the left scale. The earnings are in gold and follow the right scale. Wall Street’s projections are in red.

I’ve scaled the ratios at a ratio of 40-for-1 so whenever the lines cross, the P/E Ratio is exactly 40. That’s much higher than I normally use but the chart would be difficult to read at a ratio less than that. At this earlier post, I used a ratio of 20-for-1 and we’ve run so far past that.

Here’s a comparison of the P/E Ratio of the S&P 500 and that of Netflix. It wasn’t too long ago that they were similar.

50-DMA Streaks
Posted by Eddy Elfenbein on February 14th, 2011 at 1:20 pm

The S&P 500 is very close to doubling from the March 2009 low. The intra-day low from March 6, 2009 was 666.79. To double that, we need to hit 1,333.58. We’ve been as high as 1,331.64 today.

The S&P 500 continues to hold above its 50-day moving average. We’ve been above it every day since September 2, 2010. This is the 11th longest streak since 1932.

Federal Reserve’s Profits Projected to Fall
Posted by Eddy Elfenbein on February 14th, 2011 at 11:03 am

By law, the profits of the Federal Reserve are limited to 6%. Every dime over that goes right to the U.S. Treasury. Lately that’s been a big fat wad of cash, since — frankly — it’s just about impossible for a central bank to lose money.

Obama’s latest budget projects that the Fed’s payment to the Treasury will decline sharply over the next few years:

Fed deposits will reach a record estimated $79.5 billion in the fiscal year ending Sept. 30 before declining 53 percent through fiscal 2015 to $37.4 billion, according to the budget released today. The central bank’s annual remittances averaged $33.3 billion from fiscal 2007 through 2009.

The central bank’s increased payments reflect income from $2.3 trillion in mortgage and Treasury securities it’s purchasing as part of efforts to revive the economy after the worst financial meltdown in seven decades. Declining payments would reflect higher short-term interest rates in a “much stronger” economy that’s generating more tax revenue, Fed Chairman Ben S. Bernanke said last week.

The administration’s budget estimates Fed deposits of $65.8 billion on fiscal 2012; $47.4 billion in 2013; $38.2 billion in 2014; $37.4 billion in 2015; and $41 billion in 2016.

Less money from the Fed means that everyone would be doing better.

Netflix Is Still Way Too Expensive
Posted by Eddy Elfenbein on February 14th, 2011 at 9:26 am

I regret that I must admit that I have a terrible track record with Netflix (NFLX). Last April, I called Netflix “the absolute worst stock to buy.” Not only was I wrong, but I was horribly wrong. The stock has soared dramatically ever since.

On top of that, I got an email from the CEO telling me I had misspelled the name of the company. (For the record, it’s Netflix, not NetFlix. Consider yourself warned.)

Let me clear up a point of confusion about investing. Stock analysis isn’t about predicting the future; it’s about making reasonable judgments about the future. Everyone is going to be wrong. If I could predict the future accurately, well…I wouldn’t be bothering myself with stocks.

Still, it’s important to learn from your mistakes. The judgments of the market can be very humbling. I’ve looked at the numbers and I still think Netflix is dramatically overpriced. Unfortunately, I don’t have the ability to say that it won’t become evermore overpriced.

Let’s look at some of the math. For 2010, Netflix had a net profit margin of 7.4%. The current market value is $12.2 billion. Assuming the margins stay constant, Netflix will need to generate revenues of $165 billion to earn its market value back. That works out to about $500 per every person in North America.

Now let’s add some context. Last year, Netflix generated revenues of $2.1 billion. This year, they’re projected to generate revenues of $3.1 billion. We’re at the point where people are only buying Netflix because they think they can dump the shares off at a higher price to someone else. This is also known as “the Greater Fool Theory.” The problem isn’t that it doesn’t work. It does work, just for everyone else.

Obama to Unveil $3.7 Trillion Budget
Posted by Eddy Elfenbein on February 14th, 2011 at 8:10 am

Today is the day President Obama submits his budget to Congress. Of course, the actual budget that finally passes will look quite different from what we see today. This may be the first major confrontation between the White House and the new GOP-led House of Representatives. Within the fight, the Tea Party will most certainly be applying pressure to House Republicans.

Looking at the budget, the numbers aren’t pretty. The budget will total $3.7 trillion. This year’s deficit is projected to hit $1.6 trillion, which would be the largest ever. That comes to nearly 11% of the economy.

According to the President Obama’s projections, the deficit will fall to $607 billion by 2015 which is still 3.2% of the economy. If there’s ever a time we need to get several quarters of 6% or 7% GDP growth, this is it.

The problem is that borrowing costs are starting to rise. Bloomberg somehow got hold of a Treasury presentation to bond dealers saying that interest expense on the debt will rise from 1.3% of GDP in 2010 to 3.1% of GDP by 2016. Higher interest costs, of course, make the budget outlook even worse.

The long end of the yield curve has risen substantially over the past few months. On Friday, the 30-year yield closed at 4.71%. Last August 26, the yield stood at 3.53%. I think it’s very possible that the bond market may play a role in any budget confrontation. The bond and currency markets can serve as virtual parliaments so even if the budget flies through Congress, the budget can still be effectively vetoed by investors. This is exactly what happened in Greece and Ireland.

Stay tuned; we’re about to see if our leaders are serious or not.

Morning News: February 14, 2011
Posted by Eddy Elfenbein on February 14th, 2011 at 7:44 am

NYSE-Deutsche Boerse Merger Is Free With Derivatives: Real M&A

China’s Trade Surplus Shrinks as Nation Imports More

France’s Lagarde Hopes To Deliver Indicative Guidelines at G-20 This Week

Merkel’s Permanent Euro-Rescue Plan Needs Opposition Backing

Obama to Submit $3.7 Trillion Budget, GOP Promises Fight

Housing Crash Is Hitting Cities Once Thought to Be Stable

Clothing Prices to Rise 10% Starting in Spring

Icahn Again Extends Dynegy Offer, but Shares Tendered Dwindle

GE to Buy U.K.’s John Wood Unit for $2.8 Billion

Hong Kong Stock Preview: China Southern, Golden Harvest, PICC

Credit Suisse Pads Capital with 6 Billion Swiss Francs in Coco Bonds

Chapter 11 for Borders, New Chapter for Books

EchoStar to Buy Hughes for $1.35 Billion

Joshua Brown: How Ballmer Snagged Nokia For Free

James Altucher: How Stevie Cohen Changed My Life

So Long Hosni!
Posted by Eddy Elfenbein on February 11th, 2011 at 2:55 pm

I’ve been gripped by the dramatic scenes from Egypt. I won’t even pretend to say that this has any effect on U.S. financial markets.

Whatever the cause, the stock market is up today and the Buy List is at a new year-to-date high. The year is just six weeks old and the Buy List is already up over 6% for the year.

I’m pleased to see that Ford (F) is having a good day. I wasn’t pleased with Ford’s earnings miss but the company keeps making the right moves. Yesterday they announced that they’re going to cut down their debt by another $3 billion. Last year, they cut down their debt by $14.5 billion. Ford said this recent move will save them $180 million in annual interest payments.

JP Morgan Chase (JPM) and Reynolds American (RAI) are also having good days. Leucadia National (LUK), Moog (MOG-A), Stryker (SYK) and Wright Express (WXS) are all at fresh 52-week highs.