• Weekend Poll
    Posted by on May 1st, 2010 at 5:15 pm

    In honor of May Day, here’s a weekend tax poll:

  • Barron’s on Johnson & Johnson
    Posted by on May 1st, 2010 at 5:07 pm

    Barron’s gives some love to one of my favorite Buy List stocks, Johnson & Johnson (JNJ). Here’s an excerpt:

    One of the health-care giant’s biggest virtues is its prodigious ability to generate cash. That has helped keep its debt load low. Johnson & Johnson is one of just four U.S. industrial companies with a coveted AAA rating from Standard & Poor’s. (The others: Automatic Data Processing, Exxon Mobil and Microsoft.) At the end of 2009, the company had about $14 billion in debt, compared with shareholder’s equity of $50.6 billion. Cash flow from operations came to $16.6 billion last year, up from about $15 billion in 2008. Cash and equivalents weighed in at $15.8 billion on Dec. 31.
    The company is devoting some of its cash to its quarterly dividend, which it boosted 10.2% last month, from 49 cents a share to 54 cents — marking the 48th straight annual payout increase. At $2.16 a year, the yield is a very healthy 3.3%. Bill McMahon, president of ThomasPartners, an investment advisory firm in Wellesley, Mass., with a stake in the company, says consistent dividend increases are “a good directional signal of future returns.”
    Another priority is buying back stock. In 2007, the board authorized the repurchase of as much as $10 billion in shares; $9 billion worth has been reacquired so far.
    The cash hoard also helps Johnson & Johnson to buy companies, typically for $1 billion or less, to expand its product lines or get into new ones. For example, J&J paid $1 billion last July for an 18.4% equity stake in the biotech company Elan (ELN). In exchange, it got access to substantially all of Elan’s anti-Alzheimer’s products, including bapineuzumab, a promising drug now in Phase III trials.
    In its quest to come up with new products, Johnson & Johnson pumped nearly $7 billion into R&D last year, even as it was restructuring its operations, an action expected to trim up to $1.7 billion in annual pretax costs. The company has intensified its effort to fatten its margins, which slid in recent years as patents expired on highly profitable prescription drugs. An encouraging sign: In the first quarter, selling, marketing and administrative expenses equalled 30.5% of sales, down from 30.7% a year earlier.

  • Let Greece Default?
    Posted by on April 30th, 2010 at 11:03 pm

    A Harvard economist says yes.

    Rather than bail out Greece, therefore, the E.U. and IMF should allow it to default. This will hurt Greece’s creditors, but those entities assumed the risk when they loaned to a country long known for its profligate ways. In contrast, a bailout forces unwitting taxpayers to foot the bill for Greece’s sins. This can only breed resentment, not to mention reduced incentives for other countries to restrain their own spending.
    If Greece does default, its economy may suffer in the short term. External credit will be scare to non-existent, so Greece will have to live within it means. This will require slashed pay-scales and benefits for civil servants and drastic cuts in the number of such jobs. It will also require the repeal of Byzantine regulation, burdensome taxes and policies that force a large fraction of the population to feed at the public trough.
    But however painful this adjustment may be, it is unavoidable if Greece wants to join the first rank of nations; current policies are unsustainable from every perspective, so the sooner Greece abandons them the better.

  • Mississippi Fred McDowell
    Posted by on April 30th, 2010 at 2:46 pm

    It’s a gorgeous day here in our nation’s capital. I think I’ve had enough of earnings reports, Senate committees and weasely bankers for one week. I’m closing the laptop, shutting off CNBC and turning over the festivities to Mississippi Fred McDowell. Enjoy.

  • Is the Stock Market Anti-Obama (or Vice Versa)?
    Posted by on April 30th, 2010 at 2:30 pm

    As the S&P 500 has climbed steadily upward over the past 14 months, so have the prospects for House Republicans.
    Here’s a look at the S&P 500 along with the Intrade contract for the GOP to win the House of Representatives this fall.
    image937.png
    Just recently, the GOP’s contract hit 50 for the first time. For the record, I don’t think it means anything. Both the state of the GOP and the stock market had just gotten battered, and both have regressed to the mean. That’s all that’s going on.
    I’ve tried to warn investors not to read every bump and tick in the market as a political statement (see Kudlow, Larry for details).
    But still, it’s an interesting correlation.

  • You Know that Goldman Rally…Yeah, About That
    Posted by on April 30th, 2010 at 1:48 pm

    050411_darthVader_hmed2_3p.hmedium.jpg
    Last week, I said to stay away from Goldman Sachs (GS) believing it was a value trap. The share had a brief rally but that came to a halt today.

    Goldman’s Shares Plunge on Inquiries and Downgrades
    Already facing investigations on two fronts into its practices in the mortgage market, Goldman Sachs came under pressure from investors as well on Friday.
    After reports on Thursday evening that federal prosecutors had opened an investigation into trading at Goldman, raising the possibility of criminal charges against the Wall Street giant, the firm’s stock was downgraded on Friday by two analysts. Standard & Poor’s lowered its rating from hold to sell, and Bank of America Merrill Lynch dropped its rating from buy to neutral, citing the mounting investigations.
    Investors responded by sending the stock down 9 percent in midday trading, to $145.89, contributing to an overall decline in financial shares on Wall Street.

    The downgrade from BofA is noteworthy because it’s so rare. It’s funny how these investment houses are so reticent about downgrading each other.
    By no means am I suggesting collusion. Heavens no, dear reader!! All I’m saying is that 1+1 equals something somewhere between 1.99 and 2.01. Any other inference you draw is entirely yours.

  • Earnings for Fiserv and Moog
    Posted by on April 30th, 2010 at 11:21 am

    We had two more earnings reports from our Buy List. After yesterday’s closing bell, Fiserv (FISV) said it made 95 cents per share for the first quarter which was a penny below Wall Street’s consensus (some services the consensus at 97 cents). The stock is getting hit by about 6.6% in today’s trading.
    Frankly, I’m not too worried about a pullback in Fiserv. The stock has had a good run so some profit-taking is to be expected. The most important news in yesterday’s report is that the company stuck by its full-year EPS forecast of $3.96 to $4.07. My forecast is for $4.05.
    Let’s remember what Barron’s said recently about Fiserv:

    Because Fiserv’s business is so steady, many investors value it on free cash flow, which has exceeded reported earnings in recent years — a favorable trend. Free cash flow hit $668 million in 2009, up from $603 million in ’08. The company is guiding Wall Street to expect more than $700 million this year. With a market value of $8.2 billion, investors are getting a free-cash-flow “yield” of nearly 9%, at a time when corporate-bond investors are happy to accept 5% or 6%. The stock historically has traded above 14 times free cash flow. With nearly $5 a share of free cash penciled in for 2011, that multiple suggests a price target near 70.

    I agree.
    Moog‘s (MOG-A) earnings report caught us by surprise. We knew it was coming soon, but didn’t realize it was today.
    Nevertheless, the company reported earnings of 55 cents a share which was three cents better than Wall Street’s expectation. Moog made 55 cents per share in the same quarter one year ago.
    This was the second quarter of Moog’s fiscal year. Overall, the company’s earnings are bouncing back nicely. In 2008, they earned $2.75 per share and that dropped to $1.98 per share last year. Last November, Moog said to expect EPS for this fiscal year between $2.15 and $2.35. They reiterated that in February. Today, Moog said it now expects $2.35 per share, so that’s good news.
    This is from the company’s press release:

    The Company’s twelve month backlog of $1.1 billion is up over 20% from a year ago.
    The Company has updated its guidance for the year. Sales for the year will be down very slightly from $2.12 billion to $2.1 billion, but the Company increased its forecast for net earnings and earnings per share. Net earnings are now projected at $107.4 million and earnings per share at $2.35, an increase of 19% over the previous fiscal year.
    “The Company’s second quarter results exceeded our plan, particularly in Aircraft and in Space and Defense,” said R.T. Brady, Chairman and CEO. “Our Components Group delivered another solid performance. Wind energy and Medical Devices sales are developing a little more slowly than we’d planned but both show signs of improvement. The overall result will be a year better than our original forecast and we’re now forecasting a 19% improvement in earnings per share.”

    Although it’s one of the quietest stocks on the Buy List, Moog is having a very good year. The shares are up over 30% for us and the year is only one-third over.
    Both Moog and Fiserv are excellent buys.

  • The Economy Grew by 3.2% for the First Quarter
    Posted by on April 30th, 2010 at 9:34 am

    The government reported that the economy grew by 3.2% for the first quarter. Normally, that’s not so bad but for coming out of a deep recession, it’s very unimpressive.

    Federal government spending, which includes remaining stimulus money, grew at an annualized rate of 1.4 percent in the first quarter of 2010. But this was more than offset by continued spending cuts from state and local governments, whose spending decreased 3.8 percent. It was the third quarter in a row in which state and local spending fell.
    “Government spending contracted, for all the ballyhoo about stimulus,” said John Ryding, chief economist at RDQ Economics. “This recovery is going to have to stand on the backs of private-sector demand, not on government demand, given all the current fiscal challenges.” Even though any pickup in business is welcome, modest improvement may not be enough to alleviate the pain caused by the so-called Great Recession, many economists say.
    The nation’s gross domestic product — a broad measure of goods and services produced in the country — is far below its potential, according to economists’ projections of where the economy would have been if it followed its long-term trend. Output would need to grow at least 5 percent annually for several years to get back on track — and perhaps more importantly, to lead to enough job creation to employ the 15 million Americans already out of work and the 100,000 new workers joining the labor force each month.

    Earlier this week, I took a stab at giving a letter name to this recovery. My guess for Q1 was pretty close but a tad too high (I had 3.5% instead of 3.2%). Here’s the up-to-date chart:
    image935.png
    Thanks to several emailers, I’m going to call it an N-Shaped recovery.
    Here’s a more sobering way to look at GDP. This chart shows real GDP divided by a trendline growing at 3.08% which is about the long-term rate of growth.
    image936.png
    In other words, this shows you how well GDP is doing compared with its historic growth rate. We’ve fallen off a cliff and are in the process of splatting.
    In previous recessions, the economy has snapped back sharply to its historic trendline (1.0 on the chart). By growing at 3.2% last quarter, the economy is barely making headway.
    At 0.92, we’re 8% below the trendline. This is what the NYT means by growing at 5% for a few years to get back on track. If the economy grew by 5% a year — 2% higher than the long-term trend — for four years, then we’d finally get back to something resembling normal.

  • Behold!
    Posted by on April 29th, 2010 at 3:09 pm

    When Alexander saw the breadth of his domain he wept for there were no more worlds to conquer.
    In other news:

    IHOP Introduces Cheesecake Sandwiched by Pancakes

  • Do Superstitious Beliefs Affect Investment Decisions?
    Posted by on April 29th, 2010 at 11:21 am

    An academic paper:

    Dark Omens in the Sky: Do Superstitious Beliefs Affect Investment Decisions?
    By Gabriele M. Lepori
    Psychological research documents that individuals are more likely to resort to superstitious practices when operating in environments dominated by uncertainty, high stakes, and perceived lack of control over the outcomes. Based on these findings, we suggest that the stock market represents an ideal breeding ground for superstition and then test whether superstition-induced behavior affects investment decisions. Our empirical analysis focuses on some beliefs associated with eclipses, phenomena that are typically interpreted as bad omens by the superstitious both in Asian and Western societies, and we employ a dataset containing 362 such events over the period 1928-2008. Using four broad indices of the U.S. stock market, we uncover strong evidence in support of our superstition hypothesis in four distinct ways. First, the occurrence of negative superstitious events (i.e. eclipses) is associated with below-average stock returns, which is consistent with a diminished buying pressure coming from the superstitious. Second, the size of the superstition effect is estimated to increase in times of high market uncertainty and when eclipses draw wide media coverage and public attention. Third, the negative performance of the market during the superstitious event is followed by a reversal effect of similar magnitude (10 basis points per day) on the subsequent trading days. Fourth, eclipses are accompanied by a trading volume decline. When we extend our analysis to a sample of Asian countries, we find analogous results. The patterns we document are inconsistent with the Efficient Market Theory, as eclipses are perfectly predictable events.

    If anyone needs me, I’ll be reading entrails.