Morning News: April 10, 2013
Posted by Eddy Elfenbein on April 10th, 2013 at 7:36 am

U.S. Seeks Less Austerity in Euro Zone

BoJ Bazooka Sends Japanese Debt Reeling

The Mystery of China’s Export Numbers

WTO Cuts 2013 Trade Forecast After Record Slow Growth In 2012

Obama Budget Targets Millionaires, Replaces Sequester Cuts

Obama Nominee Pledges Case-by-Case Review of Gas Exports

Lenders Used Aid to Repay TARP

Retiree Health Benefits: Facing Extinction?

Scant Relief in Foreclosure Payouts

Trading Case Embroils KPMG

First Solar Issues Optimistic Guidance; Shares Jump 48%

Blackstone Solicits Partners for Dell Bid

J.C. Penney: A National Disgrace

Jeff Carter: New Pitching Idea for Startups

Howard Lindzon: Momentum Wrap – Back Near All-Time Highs. Here Comes The Sun?

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So What if We Had a Flat Tax?
Posted by Eddy Elfenbein on April 9th, 2013 at 10:24 am

Last year, the CBO released a report on historical effective tax rates. I ran through the data with an odd goal in mind. I wanted to see if I could replicate the existing tax burden with a simple flat tax.

I don’t mean to say that I’m a flat tax advocate. I simply wanted to look at what Americans actually pay and see if I could mimic the real thing with the simple rules of a flat tax.

The answer is, not really, at least not very accurately. The CBO report only gave me eight data points to work with.

Still, this type of analysis has value. In fact, there are emerging fields of study, like Chaos Theory, that look to find simple rules that lie beneath highly complex structures.

Here’s what I was able to come up with. The graph below is my Faux Flat Tax going back to 1979. The blue line follows the left scale and is the flat tax rate. The black line follows the right scale and is the standard household deduction. The deduction is in 2009 dollars.

For 2009, I came up with a tax rate of 29.81% and a deduction of $41,541. So every penny a household makes under that is completely tax free. Every penny above it is taxed at 29.81%. That includes everything—income taxes, social security, Medicare, corporate taxes, the whole shebang. And most importantly, we can abolish the IRS (wait for applause).

I realize these aren’t quite the numbers that most flat taxers have in mind, but my goal is mimicry. I took the current tax code “as is” and tried to be revenue neutral. Obviously, if I had more data points I could be more accurate.

Looking at the table does reveal some interesting information. When the two lines rise, the tax code becomes more progressive (higher taxes on the rich and less on the poor). When both lines fall, the reverse happens.

What I find interesting is that despite using just eight data points, there seems to be some continuity through the years. So even if I had much more data, I think this is a reasonable approximation of what a clear-the-table flat tax would look like.

Notice, for example, how the two lines tended to track each other somewhat for most of the 1980s and early 90s. So there was some method to the madness. The relationship only broke down over the past few years as we’ve seen larger deductions and lower tax rates. The big spike in deductions near the end represents the effect of the payroll tax holiday.

One of the drawbacks of my flat tax is no matter how impressive my R-square is (.9994 in 2009), any small deviation can be rather unpleasant for certain taxpayers. That’s the messiness of using a simple model to replace a complex one. The flat tax doesn’t quite capture the right “bend” of the current tax burden. For example, under my flat tax, households making $93,800 would have a tax hike of more than $1,400. I don’t think they would be terribly impressed by my stab at being revenue neutral.

As a general rule, my flat tax is close to the current burden but it tends to be slightly more progressive. The major reason is due to social insurance taxes. Since so many lower-income workers are completely exempt from any taxation under my theoretical flat tax, it’s made up for with higher taxes at the upper end.

Let me explain how I got my numbers. I apologize but this is going to get mathy. In the data files of the CBO report, Tab 1 has the effective tax rates and Tab 3 has the pre-tax income for eight subsections; the lowest four income quintiles, plus four subsections for the top quintile (percentiles 81 to 90, 91 to 95, 96 to 99 and the Top 1%).

If you run a scatter plot with the X-axis being the eight income points and the Y-axis being the tax paid (income times effective tax rate), you get this:

That’s for 2009. Using the trend line function, I added a linear trend line and the linear equation is also included. In the equation, y = mx + b, m is our flat tax rate and b/m is the deduction. As you can see, that’s how I got 29.81%.

Here’s the Flat Tax Data I used for the computations. Columns B through I have the household incomes for the eight groups (note that the definition for household income changed in 1986), columns J through Q have the taxes paid and columns R through Y have the effective tax rates.

On lines 35 to 66, I list the flat tax info. Column B has the tax rate by using the SLOPE function. On Column C, I get the deduction by using the INTERCEPT function.

Morning News: April 9, 2013
Posted by Eddy Elfenbein on April 9th, 2013 at 7:34 am

China’s Stocks Rise Most in 2 Weeks After Inflation Slows

In Berlin, Treasury Secretary Talks Up Policies To Spur Demand

European Leaders Keep Telling Themselves The Same Huge Lie — And It’s Ruining The Economy

Emerging Asian Economies on Track for Solid Growth, Development Bank Says

Christie’s to Be First Foreign Independent Auction House in China

Bernanke Says Fed to Press Banks to Curb Liquidity Risk

Fannie Mae Profit May Swell Treasury Coffers as Debt Limit Looms

Ford Focus Grabs Global Sales Crown as World Buys Small

GE Buys Lufkin for $3.3 Billion as Immelt Adds to Energy

Billabong in Talks Over $300 Million Takeover

5 Things Ron Johnson Did Right At JC Penney

Caribou Coffee Closings: Chain Reveals Massive Nationwide Shutterings, Chicago Area Hit Hard

Wary of China, Companies Head to Cambodia

Cullen Roche: Economic Surprise Indices Turning Lower

Joshua Brown: Merrill: How to Play the Bond Market

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The Yen Continues to Weigh on AFLAC
Posted by Eddy Elfenbein on April 8th, 2013 at 1:58 pm

AFLAC ($AFL) is back below $50 and the culprit isn’t hard to spot — the weaker yen. Since October, the yen has gotten hammered by the U.S. dollar.

In March, the yen staged a quick relief rally, but that recently collapsed. It now takes 99 yen to buy one U.S. dollar. In October, it took just 78. I think we’re going to break 100 soon.

The reason for the big change is that Japan’s new government is aggressively trying to weaken its currency in order to help their economy. The Nikkei Index has responded by shooting up from 9,000 to as high as 13,200. That’s a huge move for such a short time period.

AFLAC said in their 10-K that if the yen averages 100 for this year, that will shave 87 cents off their operating earnings-per-share. At 100 yen to the dollar, AFLAC’s earnings range would be $5.99 to $6.19 per share for 2013.

R.I.P.: Margaret Thatcher
Posted by Eddy Elfenbein on April 8th, 2013 at 12:30 pm

Margaret Thatcher died today at the age of 87. Here’s the intro of a post I a wrote few years ago comparing Britain in the 1970s to General Motors:

In 1979, the British economy was in free fall. Inflation was spiraling out of control. The unions were demanding commensurate pay increases, and when they didn’t get them, they struck. The country that had stood up to the Luftwaffe was failing apart. The garbage men went on strike and soon piles of “rubbish” dotted the countryside. Even the gravediggers went on strike and corpses were gruesomely left unburied.

The winter of 1978-79 was called the Winter of Discontent, echoing the opening lines of Richard III. The situation was so bad that Her Majesty’s government had to apply for a loan from the IMF. This was back in the days when that had some sense of shame to it. You were even expected to pay it back.

A reporter asked the Prime Minister, James, Callaghan, his opinion of the “the mounting chaos in the country.” Callaghan said: “Well, that’s a judgment that you are making. I promise you that if you look at it from outside, and perhaps you’re taking rather a parochial view at the moment, I don’t think that other people in the world would share the view that there is mounting chaos.”

That was it. British socialism died right there. The commanding heights were nothing more than a literal heap of trash. The next day, The Sun‘s headline read: “Crisis? What Crisis?”

Morning News: April 8, 2013
Posted by Eddy Elfenbein on April 8th, 2013 at 8:01 am

IMF’s Lagarde Says Substantial Part of Global Economy Better

Luxembourg ‘Open’ To Bank Transparency, Luc Frieden

Italy To Pay 40 Billion Euros Of State Debt To Companies

Unemployment Woes: Americans Drop Out Of Labor Force As Job Market Stagnates

How Dismal Were March’s Job Numbers?

How The Feds Will Know If You Have Health Insurance

The Top Tax Scams to Watch For

Why Amazon’s Jeff Bezos Invested in ‘Business Insider’

Carl Icahn Refuses To Drop Proxy Fight Option In Dell Proposal, WSJ Reports

On JOBS Act Anniversary, Why Can’t Everyday People Invest In Startups?

HP Board Revamp Gives CEO Chance to Shake Off Troubles

China’s Xi Warns Against Regional Chaos as Korea Tensions Rise

The Difference In Unemployment Between People Who Graduated From College And Those Who Didn’t Is Gigantic

Deposit Insurance After Iceland and Cyprus

Roger Nusbaum: The Big Picture for the Week of April 7, 2013

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What Risk Premium?
Posted by Eddy Elfenbein on April 5th, 2013 at 1:06 pm

More fun from the Ibbotson Yearbook. Here’s a look at large-cap stocks dividend by long-term Treasury bonds, also known as the risk premium (although short-term rates are more often used).

The risk premium is one the most important ideas in finance. In short, it tells us how much you get paid to take on the risk of owning stocks instead of guaranteed government bonds. (Note: According to Ibbotson, the Treasury bond data series is based on a 20-year T-bond.)

I disagree with most mainline thinking on this issue in that I believe the risk premium is much lower than is commonly believed. Most academics think it’s around 5% or so. I think the long-run premium is probably about 2%. Eric Falkenstein thinks it doesn’t exist at all.

According to the Ibbotson numbers, large-cap stocks have outperformed Treasury bonds by an average of 3.93% per year since 1925.

But as the chart shows, that data series is very volatile. Government bonds have outperformed large-cap stocks since November 1980. That’s more than 32 years of no risk premium. Since May 1969, the risk premium has been a grand total of 0.77%. Over the last 12 years, it looks really ugly. Treasury bonds have beaten large-caps by a painful 207% to 24% margin.

Due to the ultra-low yields for Treasuries, I suspect large-caps will outperform bonds by 5% in the intermediate range. The yield on the 20-year T-bond closed yesterday at 2.6%. If we assume a 2% risk premium, that translates to a return for stocks of 7.6%, and that includes dividends which currently run around 2%.

March NFP: +88K
Posted by Eddy Elfenbein on April 5th, 2013 at 8:32 am

Yikes, this morning’s jobs report was ugly. The economy added just 88,000 nonfarm payroll jobs in March, and 95,000 of those were private sector. Wall Street had been expecting a gain of 190,000 total, and 200,000 private sector jobs. This is the biggest NFP “miss” in more than three years. The labor force participation rate has fallen to its lowest point since 1979. The Dow is off 137 points right now. January’s NFP was revised higher to 29,000, and February by 32,000. The unemployment rate fell to 7.6%. There’s now an all-time record 101.7 million Americans over the age of 16 without a job. That’s an increase of 28 million since 1999.

Here’s a look at the plunge in the labor force participation rate:

CWS Market Review – April 5, 2013
Posted by Eddy Elfenbein on April 5th, 2013 at 7:20 am

“There is only one side of the market, and it is not the bull
side or the bear side, but the right side.” – Jesse Livermore

Let me give you the briefest summation of Wall Street over the last six months: Investors worry about something that’s unlikely to happen, the financial media amplifies said worry, calming voices are ignored, the markets trends downward, the financial media then calls for civility and public-spiritedness to address the needless worry they just promoted, incredibly the world doesn’t end, the worries fade away, volatility falls and the market quietly rallies.

We’ve repeated this dance so many times I’m beginning to lose count. There was the Fiscal Cliff, the debt ceiling (remember the $1-trillion coin), the elections in Italy, the fiasco in Cyprus and the Great Rotation out of bonds. The latest worry is war rumblings from North Korea. While the rhetoric is disturbing, the reality is that Pyongyang’s bark is far worse than its bite.

What’s interesting is that the market has so far ignored the threats from North Korea. I suspect that we’re going through Apocalypse Fatigue. Michael Gayed has suggested we’re in a Honey Badger market: Whatever latest worry comes our way, stock market don’t care. I suspect he’s on to something.

There are, however, stealth movements occurring within the market that we need to pay attention to. Since the middle of March, the market has become more defensive. A lot more defensive. The more-conservative sectors have led the more-aggressive sectors. In a few cases, the divergence has been rather stunning. The Healthcare ETF ($XLV), for example, has beaten the S&P 500 for the last 12 days in a row. Both Utilities ($XLU) and Consumer Staples ($XLP) have been recent leaders as well.

The move towards defensive stocks is telling us something. Coupled with the recent drop in gold, this suggests that investors are finally shying away from risk. The price of gold actually fell below the S&P 500 for the first time since May 4, 2010 (see chart above). I won’t go so far as to say this portends a bear market, but it may spell an end to the market’s appetite for risk.

What to do now: Investors should remain calm and make sure they own high-quality stocks such as the ones on our Buy List. Dividends are especially important right now. A 3% yield might not seem like a lot, but traders will swim to those lifeboats if things get rough. Earnings season starts next week, and I expect that the gap between winners are losers will grow even wider. Patience and discipline are our keys.

Updates on Every Buy List Stock

This week, I want to do something a little different. Since there hasn’t been much news lately, and since earnings season is about to begin, I thought I’d offer a brief update for every stock on the Buy List.

AFLAC ($AFL) broke above $53 earlier this week before pulling back. Later this month, we’ll find out how much the weaker yen has been biting away at AFL’s bottom line. After showing a little strength recently, the yen plunged again on Thursday. Yen or not, I still like AFLAC’s market position. The shares are a buy up to $54.

Bed Bath & Beyond ($BBBY) will report fiscal Q4 earnings on April 10th. On the last earnings call, BBBY said to expect Q4 earnings to range between $1.60 and $1.67 per share. The Street had been expecting $1.75, so the stock got spanked. The good news was that the stock became a very good bargain, and I sounded the alarm in mid-February. The stock has rallied very nicely since then. I’m going to keep our Buy Below at $65. I suspect BBBY will earn about $1.70 per share, give or take, but I’m more interested in hearing their outlook for the rest of 2013. Stay tuned.

CA Technologies ($CA) got off to a great start this year but has pretty much stagnated ever since. In January, I predicted the company would beat earnings, and that’s exactly what happened. On the surface, CA appears to be a dull company, but don’t let that fool you. The stock currently yields just over 4%. CA is a good buy up to $27.

Cognizant Technology Solutions ($CTSH) has drifted lower in recent weeks. If you don’t own CTSH, this is a good opportunity. The IT outsourcer soundly beat earnings in January and guided higher for Q1 and the entire year. CTSH said it sees full-year 2013 earnings of at least $4.31, which means the stock is going for 17.3 times earnings. Buy up to $82.

CR Bard ($BCR) has been rather sluggish this year. In January, the company warned that this year will be rough, but 2014 should be very good. The stock isn’t in my doghouse just yet, but I want to hear better things from them before I’m willing to raise my Buy Below price. For now, Bard is a buy up to $102.

DirecTV ($DTV) has been one of our best performers of late. Last week, I raised DTV’s Buy Below to $59 after it beat earnings by 42 cents per share. This is an excellent stock, but I think the shares may take a breather for a bit around $55 since it’s run up so quickly.

FactSet Research Systems ($FDS) has found a base around $90 per share. If you recall, the stock took a beating after reporting decent earnings. At least, I thought they were decent. Traders, however, seemed to disagree. Don’t let the sell-off scare you: FactSet is a very good company. FDS remains a buy below $95.

Fiserv ($FISV) made a new 52-week high on Monday. Fiserv is as solid as they come. Q1 earnings are due out on April 29th. Fiserv is a buy up to $88.

Ford Motor ($F) had a good sales report for March. Earnings should be out around the middle of the month. The Street currently expects 39 cents per share, which is flat from a year ago. Ford is doing well, but Europe may still be an anchor. Ford is a buy up to $15 per share.

Harris Corp. ($HRS) may be the single-best value on our Buy List right now. The stock took another hit after Oppenheimer said that Harris is running below its full-year revenue forecast. For now, I trust Harris’s record more than Oppenheimer’s. Earnings are due out at the end of the month. Harris is a buy up to $53 per share.

JPMorgan Chase ($JPM) will report Q1 earnings on Thursday, April 11th. Wall Street expects $1.38 per share. Hopefully, Jamie Dimon won’t shoot his mouth off on the earnings call. JPM has pulled back over the past few weeks. Don’t let that rattle you. JPM remains a solid buy up to $52.

Medtronic ($MDT) is another good example of a stock that fell after its earnings report but has since gained back everything it lost. Like Stryker, Medtronic has ridden the healthcare rally this year. Look for good earnings next month and another dividend increase in June. Buy below $48.

Microsoft ($MSFT) is due to report earnings on April 17th. Wall Street’s consensus is for 77 cents per share. The last earnings report was pretty good. On Wednesday, the shares hit a five-month high. If volatility makes you nervous, this is an excellent low-vol stock. Microsoft is a buy up to $30.

Moog ($MOG-A) lowered the upper end of their full-year guidance by 10 cents per share in January. The CEO said they’re off to a slow start this year. After a strong rally in December in January, the shares have pulled back recently. Moog is a buy up to $50.

Nicholas Financial ($NICK) still yields a rich 3.23% even after its recent price surge. I haven’t heard any news about the buyout offer, but I wouldn’t be surprised if others are interested in NICK. The fact is that with rates so low, big investors are looking at non-traditional places to get yield like used car loans. NICK is a good buy up to $16.

Oracle ($ORCL) got hit after a lousy earnings report. I have to apologize for this one. I thought Oracle would do much better. But never count Oracle out. I’m going to drop my Buy Below down to $35.

Ross Stores ($ROST) had a good earnings report two weeks ago and the shares have rallied. ROST is a solid buy up to $62.

Stryker ($SYK) is our second-best performer this year. But don’t chase it. Earnings are due out on April 23rd. They didn’t give a Q1 forecast, but said to expect $4.25 to $4.40 per share for all of 2013. That’s probably too low. Buy SYK anytime you see it below $66.

Wells Fargo ($WFC) remains a solid buy up to $40. Look for a strong earnings report around the middle of the month.

WEX Inc. ($WXS) announced that on April 15th, they’re changing their ticker symbol to WEX. Frankly, I like this move. I hate it when ticker symbols don’t match the name. Let me add that I kept the Buy Below on WEX at $75 despite the market price being above $75. I did this because I don’t want investors to chase this one. As disciplined investors, we wait for good stocks to come to us. Well, on Wednesday and Thursday, the stock fell below $75 during the day. WEX remains a buy up to $75 per share.

That’s all for now. Earnings season kicks off next week. Remember: We’ll see earnings reports next week from JPMorgan Chase and Bed Bath & Beyond. On Wednesday, the Fed will release the minutes from their March 29-30 meeting. This might actually be newsworthy, depending on how much they talked about ending their bond purchases. Be sure to keep checking the blog for daily updates. I’ll have more market analysis for you in the next issue of CWS Market Review!

– Eddy

Morning News: April 5, 2013
Posted by Eddy Elfenbein on April 5th, 2013 at 6:51 am

Money Funds Meet Zero Yields by Breaking Buck Taboo

ECB’s Coeure Sees Euro Zone Inflation Straying Off Course

BOJ Ripples Felt in Europe as Government Bonds Rise

Kim Vows Increased Climate-Change Role to Help Ease Poverty

Finland Turns to Venture Funds to Rescue Economy

Yellen: Fed Should Focus On Jobs, Even If Inflation Edges Past Target

The Market Is In A Tug-O-War The Likes Of Which Hasn’t Been Seen In Three Decades

Regulators Probing Alleged Mortgage Insurance Kickback Scheme

Samsung Sees Big Profit Boost From Smartphones

Freeh Says Corzine’s Risky Strategy Helped Fell MF Globals

Shake-Up On Hewlett-Packard Board

Texas Refinery is Saudi Foothold in U.S. Market

Facebook Software Puts It Front and Center on Android Phones

Howard Lindzon: Don’t Be Stubborn…Retail is NOT Dead

Stone Street: Put Me in Coach!

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