The scariest chart ever - to a Keynesian!!
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Monday, October 31, 2011
Sunday, October 30, 2011
Sprinting to bankrupcy unless Sprint (S) can profit?
A friend of mine recently tweeted that he thought that Sprint Nextel (S) should be bought because he believes it hit the bottom three days ago at $2.39 per share. I haven’t paid much attention to Sprint because it hasn’t paid a dividend since the end of 2007. Sprint does not know how to earn profits; it only knows how to lose less than in previous years. Their only hope is their pricing of plans and customer service because AT&T and Verizon both offer 4G & 4G LTE network services, and they both offer iPhone 4 and iPhone 4S smartphones on their networks.
Sprint Nextel (S)
Share price: $2.72
Shares: 2.996 billion
Market capitalization: $8.14 billion
Bonds: $18.5 billion
It amazes me that Sprint went from $1.35 in November 2008 to $6.45 May 2011. There is a lot of speculating going on in this stock because the fundamentals are just plain horrible.
DIVIDEND RECORD
Sprint has not paid a dividend since the end of 2007. It paid an annual dividend of $0.50 from 2001 to 2004, then it cut its dividend to $0.30 in 2005, and in 2006 – 2007 it cut the dividend to $0.10 annually. Sprint offers no current income to its remaining shareholders.
EARNING POWER
EPS Net inc. Shares Adj EPS
----------------------------------------------------------------------------
2006 $0.45 $1,327 M 2,972 M $0.44
2007 ($10.27) ($29,580 M) 2,898 M ($9.89)
2008 ($0.98) ($2,796 M) 2,863 M ($0.94)
2009 ($0.84) ($2,436 M) 2,886 M ($0.81)
2010 ($1.16) ($3,465 M) 2,988 M ($1.16)
2011E ($0.93)* ($2,786 M) 2,996 M ($0.93)
*mean loss according to Wall Street estimates I looked up on Morningstar.com
Sprint would have to lose $0.40 per share in 4Q2011 to meet the mean Wall Street estimates. I don’t think that will happen since the iPhone 4 users start adding to Sprint’s revenues in 4Q2011. I think Wall Street analysts have set the bar so low than even Sprint can beat their estimates.
Results from the first three quarters of 2011:
1Q ($0.15) ($439 M) 2,992 M ($0.15)
2Q ($0.28) ($847 M) 2,994 M ($0.28)
3Q ($0.10) ($301 M) 2,996 M ($0.10)
----------------------------------------------------------------------------
Total ($0.53) ($1,587 M) 2,996 M ($0.53)
Six year average adjusted earnings per share is ($2.22). I wouldn’t buy Sprint until it becomes profitable for several years.
BALANCE SHEET
Sprint’s balance sheet is frightening. Assets are falling more than liabilities, so equity keeps disappearing. It will be interesting to see
Book value per share: $4.35 as of 3Q2011
Price to book value: 0.625 (this is good, but book value keeps shrinking)
Current ratio: 1.12 (over 2.0 is good)
Quick ratio: 0.49 (over 1.0 is good)
CONCLUSION
Sprint offers no dividend, no profits, and shrinking shareholder equity. These three facts do not add up to safety of principal and a satisfactory return. The purchase of Sprint at $2.72 per share is speculative. AT&T (T) and Verizon (VZ) offer high dividends, profits, and increasing shareholder equity.
Almost everyone who has bought Sprint stock in the past 12 years has lost large amounts of money. This company has forgotten how to make money. It will take a few profitable years and some hefty dividends to attract me to their stock. Sprint offers no safety of principal with its horrible yearly losses and the bad economic backdrop. What is their unique selling proposition? As best I can tell it is the download speed of their 4G network. They claim it is up to 10x faster than their 3G service. AT&T and Verizon both make the same claims. Perhaps they have the largest 4G network, but that doesn’t come across in their advertisements. It will take huge infrastructure costs to build out their 4G network. The large yellow circles mask the smallness of their 4G network. I’m not impressed after visiting the Verizon and AT&T websites to examine their 4G offerings. Sprint is sprinting to bankruptcy.
For example, there are many areas in Denver that you would only get good 4G service while outside on the street. Most people are inside their work locations most of the day.
DISCLOSURE I don’t own Sprint Nextel (S)
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Saturday, October 29, 2011
Budget Deadlock in Washington
Budget Deadlock in Washington
by Gary North
Recently by Gary North: Not Theirs To Occupy
The debt ceiling battle led to a compromise. Congress and the President promised to submit to mandatory budget cuts. A bipartisan super committee was set up to put together a package of debt reduction cuts totaling several trillion dollars over supposedly a decade. If the committee deadlocks, the cuts will begin automatically on January 2, 2013. These must be $1.2 trillion in cuts, or $120 billion a year.
As expected by everyone, the committee is deadlocked. The Democrats want $3 trillion in debt reduction, mainly from tax increases. The Republicans will not grant this.
Democratic sources told CNN that at the meeting Tuesday the plan was presented to the 12-member committee by Sen. Max Baucus, D-Montana, the Finance Committee chairman. A majority of the six Democrats on the super committee supported the proposal but sources declined to say which member or members disagreed.
The plan would have made cuts to entitlement programs such as Medicare and Medicaid, which the Democratic sources described as a major concession from their party. In return Republicans were asked to go along with between $1.2 and $1.3 trillion in new tax revenue.
An unnamed Republican aide expressed anger that some Democrat had leaked the details of the deal to the press. I mean what kind of stab in the back is this? Telling the public what's in store for them! This is clearly an outrage. It means, the aide said, that the Democrats think the super committee will fail.
Did anyone in his right mind expect it to succeed? The August deal to extend the ceiling and thereby avoid shutting down some government agencies temporarily was based on a sham solution.
The politicians want no responsibility for cuts. There was no record of which Democrats opposed the leaked deal. Some did. Everything is being kept hidden. There is an election year coming up.
This was the first proposed plan. The committee has not gone public with anything in two months. It has a deadline for announcing a plan: November 23. That is less than one month away. If Congress and the President refuse to accept a plan, or if no plan is offered, then cuts will begin a year later.
So, phase one deadlock is here. There is little likelihood that members of the super committee will put their careers on the line and vote publicly for cuts that specific special-interest groups can identify. There would be retaliation in November 2012.
THE IMPORTANCE OF POLITICAL SYMBOLS
The debt ceiling extension had a back-up plan: mandatory cuts, imposed by no one in particular, beginning on January 2, 2013. That gives the politicians a year to find a way to defer the cuts.
The cuts can be blamed on no one in particular. But the cuts will start hurting special interests. One of the main targets will be the military. The Pentagon will howl.
I think the reason why Obama is pulling out all U.S. troops from Iraq in December is to take advantage of the deadlock. He is willing to accept these cuts in the Pentagon's budget in 2013. They will not be blamed on him in 2012. After all, this was part of a bipartisan compromise. Those Republican voters who were committed to keeping troops in Iraq "for as long as it takes" – with "it" being undefined, open-ended, and forever – will not be able to pin the tail on the Democrat donkey. The cuts in the Defense budget will come because Republicans in Congress demanded this budget compromise. This is Obama's moment of opportunity. One of his campaign promises was to pull the troops out of Iraq. He is finally doing it. He gets a Republican cover. He can say that these reductions are part of his good-faith attempt to conform to the budget compromise made in August 2011.
The deadlock in the super committee transfers to the President the right to pick and choose the cuts he will make. Constitutionally speaking, the House must introduce all spending bills. In fact, the President has possessed this power for two generations. Obama has been granted a license to cut as he sees fit. It is clear that his first cut is the cost of keeping troops in Iraq.
The name of the political game is to defer taking unpopular political actions. The Congress is a master of this game. The public put pressure on Congress last summer to do something symbolic to defer the debt crisis "with honor." The looming debt ceiling limit was a convenient hammer for the minority of Tea Party-leaning Republicans in the House of Representatives to use to force the Republicans to agree to something resembling a balanced budget.
Of course, the budget is not going to be balanced. The Congressional Budget Office has projected $1 trillion annual deficits through 2020. But the Tea Party Republicans demanded a fig leaf: $1.2 trillion in cuts over a decade, beginning in 2013 at the latest.
These cuts are symbolic. But symbols are important in life. They are important in politics. Someone has to propose cuts, and some special-interest groups must suffer cuts. Special-interest groups resist all cuts.
EMERGENCIES ALLOW DEFERRAL
Politicians will label their spending programs with whatever emergency is available. In Eisenhower's era, Congress passed spending bills in the name of national defense. The best example is the interstate highway system. In 1956, Eisenhower signed into law the National Interstate and Defense Highways Act. In 2001, terrorism was the catch- all. The homeland security law had been sitting in Clinton's files for years in 2001. He just did not introduce it. The time was not ripe. Today, it's job creation.
As the U.S. economy heads into a recession in 2012, an election year, the government is running a deficit of over $1 trillion. This is four years after the recession of 2008 and the bailouts in September and August of that year. Unemployment is still over 9%. Businesses refuse to borrow. New businesses, which provide most increases in employment, are locked out of the bank loan market.
The voters are most concerned over the rotten job market. The deficit is a nagging concern, but unemployment is on the front burner. The politicians know this.
So, as the economy slows, and unemployment rises, Congress will be able to come before the public and call for emergency increases in spending. It is unlikely that unemployment insurance will be cut off. Other programs will receive funding. But new large-scale programs are less likely in an election year. Republicans will block them.
It is doubtful that Obama will get another stimulus package passed in the House. He keeps proposing big spending plans in the name of job creation. Why? Because he knows the House will reject these bills. He can go to the voters in the name of the Democrats in 2012 and claim that the Republicans are to blame for the lousy job market.
For the first two years, he blamed Bush. This year, that strategy has failed to gain traction. It is now his labor market. So, he is setting up Republicans in the House for the great tail-pinning in 2012. He will cease blaming Bush and instead blame Republicans for their refusal to pass his stimulus bills.
He may not get away with this. His rhetoric is no longer drawing crowds. The word magic has worn off. But it is clear what his strategy is: propose, propose, propose; blame, blame, blame. He has the mainstream media on his side. He also has academia.
THE KEYNESIAN ESTABLISHMENT
His political strategy assumes that Keynesianism is true, that the best way to create jobs is for the government to borrow or tax or inflate in order to get the economy rolling again. It assumes that money extracted from the private sector by force today (today's taxes) or promise of future force (tomorrow's taxes) will be used to create jobs, while money left in the private sector will not.
The political economy of the world is built on this assumption: in the USA, in Europe, and in mercantilist Asia. At the center of the modern economy, according to Keynes and his disciples, are the state and the central bank.
In contrast to the Keynesian worldview is Austrian School economic theory, which argues that there is no center. There is decentralized capital in the broadest sense: money, tools, skills, and vision. The absence of any center is the basis of creativity and growth, including job growth. Other schools of free market economics accept this same outlook to one extent or another, but all of them insist on the need for a central bank.
President Obama is relying on the Keynesian analysis to justify additional stimulus spending laws. But he faces a major obstacle. His $787 billion "shovel-ready" law of February 2009 has not led to a strong job market. This job market has been the most resistant since the Great Depression. The unemployment rate stubbornly refuses to come down. This is creating problems for Keynesian economists. They are calling for even greater stimulus spending. But this is no longer politically marketable. The voters have had enough. They know the spending will not lead to unemployment at 5%.
This is not the first time that economic reality has put a crimp in Keynesian theory. The Keynesian outlook was called into question in the 1970s by stagflation. By the end of the decade, the monetarists had gained considerable influence in Washington and in academia. Academia worships power, and monetarism seemed to be the wave of the future. It looked as though Keynesianism was in retreat. The 1980s and 1990s brought a boom and a rising stock market. Keynesianism seemed vulnerable.
The recession that began in late 2007 has brought Keynesians back into unchallenged power. The monetarists are nowhere to be seen or heard. They did not challenge the Paulson-Bernanke coup in 2008. They either said nothing or hailed the October big bank bailout as necessary. They did not challenge Obama's stimulus, either. Yes, a few did, but they were minor figures for the most part: a few hundred out of tens of thousands of economists on various payrolls.
There is not much price inflation today. This undercuts the monetarists. Their schtick rests on either double-digit price inflation (late 1970s) or double-digit price deflation (1930-33). There is surely stagnation today. Monetarism seemed to explain the 1970s: two recessions and rising consumer prices. It does not explain today's economy. This puts monetarist defenders of limited government at a disadvantage in the competitive marketplace of ideas.
Monetarism for over three decades has been the only prominent alternative to Keynesianism. The supply-siders have never had a college-level textbook. The public choice theorists have no unique monetary theory. The rational expectations economists' position is "accept the present and make no changes." Only the Austrian School has provided both a theoretical explanation for the bubbles and the busts. Only they called the recession in advance. Only they argue that decentralization is the only theoretically plausible solution to the problem of systemic unemployment: the decentralization of ownership, political power, and money creation.
This defense of decentralization dooms the Austrian School in academia. Liberal arts academia worships power. Academics did not actively criticize all aspects of the Soviet Union, Red China, and their satellite nations. The intelligentsia did criticize a few peripheral aspects of Communism, such as its limits on the freedom of speech. The intelligentsia did not criticize central economic planning in terms of its inevitable waste of resources and its decades-long failure to increase the standard of living. Academic economists publicly denied that the Soviet Union suffered from widespread poverty. They trusted the published statistics issued by the Soviet Union. The handful of economists who said that the statistics were fabricated were ignored. How many economists in 1970 had ever heard of Naum Jasny (d. 1967), who showed for years that the statistics were fake? Hardly any, and those who had heard of him usually rejected his warnings. I cited his findings repeatedly in the chapter on Soviet economic planning in my 1968 book on Marx, but who noticed? No one. (http://bit.ly/gnmror) Most important, in the eyes of academia, was this fact: the Soviets had nuclear weapons. They also had domestic power. Academia did not turn on the USSR until after the Communist Party committed suicide on December 31, 1991.
The Austrian School argues that centralized political power makes nations poorer. Some call for a lightly armed night watchman state. Others call for disarming the night watchman. All call for a vast decrease in political power, taxation, and regulation. They call for a comprehensive surrendering of power by Washington. Academia will not tolerate this. It is subsidized by the state. Its bread and butter is supplied by the state. Eliminate all academic subsidies from the state, including the state's enforcement of accreditation, and college professors would wind up at the unemployment office – the privately funded unemployment office.
This is why there will be no solution to the fiscal crisis in Washington. There is no body of academically acceptable economic opinion that can be invoked by any political faction to justify the only viable solution: the decentralization of political power and the cutting of Federal spending back to what the Constitution authorizes.
A SYMBOLIC DEFEAT
The inability of the super committee to come up with any plausible plan to balance the budget is an indicator of the present state of the economy. The automatic budget cuts that will begin in January 2013, if they even take place, are merely symbolic. They will not do much to balance the budget. But they at least will be symbols of the need to do so.
Then what of the debt ceiling? Will Republicans be able to hold the line and force a balanced budget? Ron Paul has offered the only plausible scenario for doing this. No other Washington politician in modern times has.
No one takes it seriously in Washington. They do not think he will be elected. They know he will leave Congress in 2013. They think they can safely ignore the plan.
When the symbolic budget cuts begin in 2013 – assuming they are not deferred by a new law – the voters will have a play-pretend solution to keep them asleep at the wheel. The trillion-dollar-plus deficits will continue. The Federal debt will grow.
The symbolic victory of the August debt ceiling compromise was in fact a symbolic defeat. It meant that the Congress is not serious about the cuts. There were some promised cuts, but they will be dwarfed by the deficits.
CONCLUSION
Most investors hide their eyes. Most voters hide their eyes. All but two members of Congress hide their eyes. There is universal blindness. The masses really do think that the day of reckoning will never come.
They are wrong. It will come. Deferral is a tactic, not a strategy. Blindness is a tactic, not a strategy.
October 29, 2011
Gary North [send him mail] is the author of Mises on Money. Visit http://www.garynorth.com. He is also the author of a free 20-volume series, An Economic Commentary on the Bible.
Copyright © 2011 Gary North
Link to original article on www.LewRockwell.com : http://lewrockwell.com/north/north1055.html
Friday, October 28, 2011
TIP OF THE WEEK - A Free Lesson on How to Read a Financial Report
A Free Lesson on How to Read a Financial Report
Jason Brizic
October 28, 2011
A proposed definition of INVESTMENT from “Security Analysis” 2nd ed. (1940) written by legendary investors Benjamin Graham and Christopher Dodd is particularly appropriate for this Tip of the Week.
An investment operation is one which, upon through analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.
The phrases thorough analysis, promises safety, and satisfactory return are all chargeable with indefiniteness, but the important point is that their meaning is clear enough to prevent serious misunderstanding. By thorough analysis [Graham and Dodd] mean, of course, the study of the facts in the light of established standards of safety and value. An “analysis” that recommended investment in General Electric common at a price forty times its highest earnings merely because of its excellent prospects would be clearly ruled out, as devoid of all quality of thoroughness.
The “facts” that Graham and Dodd are referring to are the financial results that are located in company’s quarterly and annual reports. You should be able to understand how the company makes a profit, what its assets and liabilities are, and how much cash is flowing into the business. In general, you should have a basic understanding of how to read a financial report.
Merrill Lynch has provided a short 52 page free report on “How to Read a Financial Report” It is available for free in PDF format at this link http://tinyurl.com/63yr4qs . I’ve read this document and it is a great introduction to the contents of the typical financial reports worldwide.
There are more free sources on how to read a financial report available from this Google search http://tinyurl.com/3dxe7xq
For more tips, go here:
http://www.myhighdividendstocks.com/category/tip-of-the-week
Thursday, October 27, 2011
AGNC announces pricing of public offering of common stock (again)
If you were wondering why AGNC’s stock price was down 3.87% when the DJIA was up almost 3%, then here is the reason why.
So, before the dust has even settled on AGNC’s 3rd quarter 2011 financials they offer to sell more stock to lever up over 7x. They have to keep doing this to make their $1.40 per share dividend payments and to have some assets to pledge as collateral for more repurchase agreements. This is a house of cards. Leverage works both ways – just as Lehman Bros.
American Capital Agency Announces Pricing of Public Offering of Common Stock |
BETHESDA, Md., Oct. 26, 2011 /PRNewswire via COMTEX/ -- American Capital Agency Corp. (Nasdaq: AGNC) ("AGNC" or the "Company") announced today that it priced a public offering of 37,000,000 shares of common stock for total estimated gross proceeds of approximately $1.0 billion. In connection with the offering, the Company has granted the underwriters an option for 30 days to purchase up to an additional 5,550,000 shares of common stock to cover overallotments, if any. The offering is subject to customary closing conditions and is expected to close on November 1, 2011. AGNC expects to use the net proceeds from this offering to acquire additional agency securities as market conditions permit and for general corporate purposes. Citigroup, Deutsche Bank Securities and J.P. Morgan Securities LLC are joint book-running managers for the offering. Barclays Capital Inc., Mitsubishi UFJ Securities and Nomura Securities International, Inc. are co-lead managers for the offering. Keefe, Bruyette & Woods, Inc. and Wunderlich Securities are the co-managers for the offering. The offering will be made pursuant to AGNC's existing effective shelf registration statement, previously filed with the Securities and Exchange Commission. The offering of these securities will be made only by means of a prospectus and a related prospectus supplement, when available. Copies of the prospectus and prospectus supplement may be obtained from Citigroup, Brooklyn Army Terminal, 140 58th Street, 8th Floor, Brooklyn, New York 11220; telephone: (800) 831-9146; Deutsche Bank Securities, Prospectus Department, Harborside Financial Center, 100 Plaza One, Jersey City, New Jersey 07311-3988, telephone: 1-800-503-4611; J.P. Morgan Securities LLC, c/o Broadridge Financial Solutions, 1155 Long Island Ave, Edgewood, NY 11717, telephone: (866) 803-9204. This press release does not constitute an offer to sell or the solicitation of an offer to buy shares of common stock, nor shall there be any sale of these securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. |
Link to AGNC investor relations press release: http://ir.agnc.com/phoenix.zhtml?c=219916&p=irol-newsArticle&ID=1622187&highlight=
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A first look at Hewlett-Packard (HPQ) after a 49.3% price decline
This is a first look at Hewlett-Packard (HPQ) after its 49.3% stock price decline since April 2010.
Hewlett-Packard manufactures and sells information technology products and services to businesses and consumers worldwide. With the recent EDS acquisition, we estimate services will constitute about one third of sales, slightly similar to personal computers (30%) but higher than printers (20%) and enterprise storage and servers (13%). The remainder of company sales come from software, financing, and other corporate investments.
Morningstar’s take on HPQ
Hewlett-Packard's services engagements are typically large, long-term in nature, and expensive for the customer to migrate to another vendor. HP has aggressively expanded its services offering in pursuit of the successful IBM IBM model in recent years, most notably with the acquisition of EDS in 2008. Services for HP are not simply a stand-alone offering, but rather a complementary segment to the other technology offerings. Stand-alone hardware can be quickly commodified; by wrapping software and services around its hardware strengths, HP raises customer switching costs by increasing its customers' reliance on the firm.
Market price: $27.27
Shares: 1.99 billion
Market cap: $54.18 billion
DIVIDEND RECORD
HPQ has paid an $0.08 quarterly dividend since 1998 with the exception of 4Q2009 (no dividend). Hewlett-Packard is not a dividend grower that keeps up with price inflation. Price inflation has eroded about 39% of the dollars purchasing power since 1998, yet the dividend remained the same over this time period. This is the same effect as a gradual dividend cut. They finally increased the dividend to $0.12 per share in 2Q2011.
Dividend: $0.12 quarterly
Dividend yield: 1.76% ($0.48 DIV/$27.27 share price)
Dividend payout ratio: 11.3% ($0.48 DIV/$4.26 EPS according to Google Finance)
EARNING POWER $3.99 EPS @ 1.99 billion shares
EPS Net inc. Shares Adj EPS
2006 $2.18 $6,198 M 2,852 M $3.11
2007 $2.68 $7,264 M 2,716 M $3.65
2008 $3.25 $8,329 M 2,567 M $4.19
2009 $3.14 $7,660 M 2,437 M $3.85
2010 $3.69 $8,761 M 2,372 M $4.40
2011E $4.67E $9,293 M E 1,990 M $4.67 E
6 year average adjust earnings = $3.99 per share
Consider contrarian buying below $31.92 (8x avg. earnings)
Consider value buying below $47.88 (12x avg. earnings)
Consider investment buying between $47.89 and $79.79 (12x – 20x avg. earnings)
Consider speculative selling above $79.80 (20x avg. earnings)
BALANCE SHEET
Hewlett-Packard’s balance sheet is completely stagnant.
Book value per share: $17.69
Price to book value ratio: 1.5
Current ratio: 1.15 TTM (over 2.0 is good)
Quick ratio: 0.70 TTM (over 1.0 is good)
CONCLUSION
Hewlett-Packard’s dividend is pathetic. HPQ could be a high dividend stock if the executives would choose to pay 80% of earnings as dividends instead of 10%. A $0.80/quarterly dividend would result in an 11.7% dividend yield and might get investors a reason not to sell the stock like they have since its $53.86 top in April 2010. The company’s earnings have held up for the past five years, so something else is the cause of the stock’s decline since April 2010. HQP does not have a strong balance sheet. Shareholder equity is stagnant. Don’t buy HPQ despite its low valuation until you know why the stock has lost 49.3% of its share price since April 2010. A bear market in stocks informs me that there will be opportunities to buy HPQ at much lower prices.
DISCLOSURE
I don’t own Hewlett-Packard.
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Tuesday, October 25, 2011
American Capital Agency Corp. (AGNC) report 3Q2011 financials after the market closes today.
American Capital Agency Corp. (AGNC) is a high dividend stock yielding 19.5%. AGNC reports today after the close of the US markets. Here is the 3 year chart of AGNC. It is topping out. More to follow in the next few days following the earning release this afternoon.
American Capital Agency Corp (NASDAQ: AGNC) is expected to report their earnings today for quarter ended Jun 2009. Revenues are expected to come in at $22.10M. Shares of American Capital Agency Corp traded higher by 1.05% or $0.3/share to $28.86. In the past year, the shares have traded as low as $22.03 and as high as $30.76. On average, 7038620 shares of AGNC exchange hands on a given day and today's volume is recorded at 3092686. The shares are currently trading below the 200-day moving average but above the 50-day moving average. The stock may be range bound between these two levels where the 200-day moving average of $28.86 represents resistance and the 50-day moving average of $27.74 would be an area of support.
Link to original source: http://www.tickrwatch.com/2011/10/earnings-preview-nasdaq-agnc-nyse-arb.html
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Monday, October 24, 2011
A Review of Safe Bulkers (SB) 3Q2011 Financials
There was nothing special or concerning in Safe Bulkers (SB) third quarter 2011 financial report.
http://www.safebulkers.com/sbpr101711.pdf
This stock is a value buy under $7.00 per share, but there is significant downside risk due to deteriorating world economic conditions. The dry bulk shipping market has an oversupply of ships and demand for shipping services at current prices is eroding due to a worldwide recession. I think there will be another opportunity to buy SB for $2 - $3 per share like in March 2009.
DIVIDEND RECORD
Safe Bulkers is a high dividend stock. It is currently yielding 8.93% ($0.60 annual DIV/$6.72 share price).
Safe Bulker’s dividend record remains unchanged. The company management will pay its 14th consecutive dividend payment since the company’s IPO in 2008. The dividend is unchanged at $0.15 per share. The dividend payout ratio increased to 53.5% ($0.15 DIV/$0.28 EPS) from 45.5% last quarter ($0.15 DIV/$0.33 EPS). I will become concerned when this value goes above 80%. There diminished earnings are more than enough to pay the dividend in the future.
EARNING POWER
Safe Bulkers’ earning power will continue to decline as the world economic recession continues. Several of its ships will have to take extremely low charter rates in the next few quarters. The ships at the bottom of this graph will need to find charters in the dismal spot market. The Pedhoulas Leader, Venus Heritage, and Venus History have charters that end in October 2011. The Andreas K and the Panayiota K have charters that end in April and May 2012 respectively. These ships will be a drag on earnings.
Net income for the third quarter of 2011 decreased by 10% to $19.8 million from $22.0 million during the same period in 2010. Net income for the first nine months of 2011 decreased by 16% to $66.2 million from $78.5 million during the same period in 2010. The company’s management reported that the decrease in net income was mostly attributed to: slightly higher net revenues offset by a lower time charter equivalent (TCE) rate, higher vessel operating expenses, increased depreciation, losses on interest rate derivatives contracts, a decrease in interest expense, and some other small financial costs. For details see their financial statement (linked above).
From Zack’s we read: Safe Bulkers (NYSE:SB - Snapshot Report) had sales growth of 1.4% during the last fiscal year. The company has reported $165.6 million in sales over the past 12 months and is expected to report $196.9 million in sales in the next fiscal year. http://www.zacks.com/research/get_news.php?id=293l8525 .
The higher sales will come from some newbuild ships that are starting service in 2012. Yawn! Nothing exciting here and that’s good. At least you can understand how Safe Bulkers earns its profits (unlike financial institutions and insurance companies).
BALANCE SHEET
Current asset decreased quite a bit. They gained possession of the MV Venus History on September 9th, 2011. That accounts for the gains in Vessels, net. And they received some advances for vessel acquisition. All that added up to a 2.9% increase in total assets.
It is nice to see Safe Bulkers paying down some of their debts. Total liabilities at the end of December 2010 were $561.239 million. Total liabilities have dropped to $510.035 million as of September 2011. This improved their overall balance sheet, but they are a little strapped for cash right now.
Book value per share improved from $3.70 in December 2010 to $4.50 in September 2011. This is a nice increase of 21.6% in book value per share.
CONCLUSION
Safe Bulkers remains a buy below $7.00. There is downside risk due to the world economy in recession. You will have an opportunity to buy below book value. I’m waiting for lows like in March 2009 (approx $2.00 - $3.00 per share). I don’t own Safe Bulkers yet.
The left side of the following chart scares me. Nothing has been solved in the world economy. There is another financial crisis coming. SB’s stock price will be a victim. That huge decline is more than enough to wipe out any high dividend gains.
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Don't Trust Those Seasonally Adjusted Jobless Numbers
“Don’t trust those seasonally adjusted jobless numbers” is the title of an excellent Minyanville.com article by Lee Adler. Mr. Adler goes beyond the Bureaucracy of Labor Statistics drivel to give you the real scoop on the state of jobless claims. The bottom line is that we are still in the recession that started in 2008. This is not good for the stock market.
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Sunday, October 23, 2011
The Evil 1%
The Evil 1%
Recently by Llewellyn H. Rockwell, Jr.: The Dawn of Late Fascism
The "occupy" protest movement is thriving off the claim that the 99% are being exploited by the 1%, and there is truth in what they say. But they have the identities of the groups wrong. They imagine that it is the 1% of highest wealth holders who are the problem. In fact, that 1% includes some of the smartest, most innovative people in the country – the people who invent, market, and distribute material blessings to the whole population. They also own the capital that sustains productivity and growth.
But there is another 1% out there, those who do live parasitically off the population and exploit the 99%. Moreover, there is a long intellectual tradition, dating back to the late middle ages that draws attention to the strange reality that a tiny minority lives off the productive labor of the overwhelming majority.
I’m speaking of the State, which even today is made up of a tiny sliver of the population, but is the direct cause of all the impoverishing wars, inflation, taxes, regimentation, and social conflict. This 1% is the direct cause of the violence, the censorship, the unemployment, and vast amounts of poverty, too.
Look at the numbers, rounding from latest data. The U.S. population is 307 million. There are about 20 million government employees at all levels, which makes 6.5%. But 6.2 million of these people are public school teachers, whom I think we can say are not really the ruling elite. That takes us down to 4.4%.
We can knock of another half million who work for the post office, and probably the same who work for various service department bureaus. Probably another million do not work in any enforcement arm of the State, and there’s also the amazing labor-pool fluff that comes with any government work. Local governments do not cause nation-wide problems (usually), and the same might be said of the 50 states. The real problem is at the federal level (8.5 million), from which we can subtract fluff, drones, and service workers.
In the end, we end up with about 3 million people who constitute what is commonly called the State. For short, we can just call these people the 1%.
The 1% do not generate any wealth of their own. Everything they have they get by taking from others under the cover of law. They live at our expense. Without us, the State as an institution would die.
Here we come to the core of the issue. What is the State and what does it do? There is vast confusion about this issue, insofar as it is talked about at all. For hundreds of years, people have imagined that the State might be an organic institution that develops naturally out of some social contract. Or perhaps the State is our benefactor because it provides services we could not otherwise provide for ourselves.
In classrooms and in political discussions, there is very little if any honest talk about what the State is and what it does. But in the libertarian tradition, matters are much clearer. From Bastiat to Rothbard, the answer has been before our eyes. The State is the only institution in society that is permitted by law to use aggressive force against person and property.
Let’s understand through a simple example. Let’s say you go into a restaurant and hate the wallpaper. You can complain and try to persuade the owner to change it. If he doesn’t change it, you can decide not to go back. But if you break in, take money out of the cash register, buy paint, and cover the wallpaper yourself, you will be charged with criminal wrongdoing and perhaps go to jail. Everyone in society agrees that you did the wrong thing.
But the State is different. If it doesn’t like the wallpaper, it can pass a law (or maybe even not that) and send a memo. It can mandate a change. It doesn’t have to do the repainting. The State can make you repaint the place. If you refuse, you are guilty of criminal wrongdoing.
Same goals, different means, two very different sets of criminals. The State is the institution that essentially redefines criminal wrongdoing to make itself exempt from the law that governs everyone else.
The State is everybody’s enemy. Why don’t the protesters get this? Because they are victims of propaganda by the State, doled out in public school, that attempts to blame all human suffering on private parties and free enterprise. They do not comprehend that the real enemy is the institution that brainwashes them to think the way they do.
They are right that society is rife with conflicts, and that the contest is wildly lopsided. It is indeed the 99% vs. the 1%. They’re just wrong about the identity of the enemy.
October 21, 2011
Llewellyn H. Rockwell, Jr. [send him mail], former editorial assistant to Ludwig von Mises and congressional chief of staff to Ron Paul, is founder and chairman of the Mises Institute, executor for the estate of Murray N. Rothbard, and editor of LewRockwell.com. See his books.
Copyright © 2011 by LewRockwell.com. Permission to reprint in whole or in part is gladly granted, provided full credit is given.
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Friday, October 21, 2011
TIP OF THE WEEK - Make Good Use of Your Drive Time
Make Good Use of Your Drive Time
October 21st, 2011
October 21st, 2011
Make good use of your commute to work time. Turn off the radio. Most people have a 23 minute commute. That is enough time to listen to an article or two on your smart phone each way to work using some cool technology.
You can go to to some of your favorite financial websites like www.seekingalpha.com and copy the text of an article into a text-to-speech web app. Or you could copy portions of a quarterly financial statement to better understand how the company makes money. Threads from discussion boards make great audio articles. They are rife with pros and cons of a stock. You can begin listening to your article In about the time it would take to print the article.
I use a text to speech web app called SpokenText. It has a free trial that does not require a credit card. I pay $30.00 a year fee to use it. I use it extensively everyday.
There a over a dozen natural sounding voices, but I use for consistently (Mike, Teagan, Charles, and Bob). These voices do not sound like the robotic voice of Stephen Hawking.
For more tips like this go to: www.myhighdividedstocks.com/tip-of-the-week
Thursday, October 20, 2011
Buyback Blowback at Kodak.
I haven't finished my analysis of Safe Bulkers' (SB) third quarter financials. So here is a good article that I read on the demise of Kodak. Mr. Englund thinks that it would have been wiser for past Kodak executives not to have bought back shares (I agree) and not to pay dividends (I don't agree). There is no evidence that Kodak would have innovated and adapted just because they would have had more capital. The owners of the company (the shareholders) should be rewarded with 50% to 80% of the profits of the company. The other 50% to 20% should be retained for innovation to gain market share.
I have a HD Kodak Zi-8 pocket camcorder which includes an external microphone jack. I will use this to produce videos for this website. Their external microphone jack was unique to Kodak, but they didn't advertise this product effectively.
There are a lot of companies buying back shares with the money they could use to improve their marketing and advertising. Their buybacks will turn out to be a waste of money when the double-dip recession hits in full force. Let Kodak be a lesson for them.
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Buyback Blowback at Kodak
by Eric Englund
Recently by Eric Englund: The New York Times Company Is Still Insolvent
The employment of more and better tools is feasible only to the extent that the capital required is available. Saving – that is, a surplus of production over consumption – is the indispensable condition of every further step toward technological improvement. Mere technological knowledge is of no use if the capital needed is lacking. ~ Ludwig von Mises
Eastman Kodak Company (EKC) has become another poster child pertaining to the foolishness of stock buybacks. With EKC’s roots going back to 1880, this company has been a world leader in photographic film and camera sales for well over a century. Keys to Kodak’s past success include research, development, innovation, and a keen focus on customer satisfaction. Success, however, can breed failure. EKC’s tremendous profitability, during the twentieth century, didn’t prepare it for the digital revolution. Over the years, EKC bought back billions-of-dollars worth of its common stock. Kodak’s top management, to be sure, would love to have this money back as EKC’s executive team has not yet developed a business model allowing it to profitably transition from an "analog" to a digital company. I fear time and cash are running out for this iconic company and bankruptcy is looming on the horizon.
A Brief History Of Eastman Kodak Company
George Eastman was a high school dropout who built an incredibly successful multi-national corporation. The company he founded, and which flourished under his leadership, is Eastman Kodak Company. George Eastman became interested in photography in 1878; and his vision, of bringing photography to the masses, came into focus over time. A few months before his 26th birthday, in April of 1880, Eastman founded a business to mass-produce photographic dry plates. Within five years, Eastman introduced the first transparent photographic film and this became a highly profitable product for the company. In 1888, the Kodak camera was introduced using the slogan "You press the button – we do the rest." George Eastman stated his objective was "…to make the camera as convenient as the pencil." In doing so, amateur photography became a growth industry with Kodak leading the way. Through continuous research and development, by 1900, Kodak introduced the Brownie camera; which sold for $1 and used film that sold for 15 cents per roll. This camera was highly popular and it launched Kodak, into the twentieth century, as the industry leader in both photographic film and cameras.
George Eastman’s Business Principles and Policies
Not only was George Eastman a visionary inventor and entrepreneur, he was a hard-working and astute businessman capable of successfully building a global business enterprise. Along these lines, Eastman Kodak Companyprovides the following information about its esteemed founder:
Eastman built his business on four basic principles:
- Mass production at low cost
- International distribution
- Extensive advertising
- A focus on the customer
He saw all four as being closely related. Mass production could not be justified without wide distribution. Distribution, in turn, needed the support of strong advertising. From the beginning, he imbued the company with the conviction that fulfilling customer needs and desires is the only road to corporate success.
To his basic principles of business, he added these policies:
- Foster growth and development through continued research
- Treat employees in a fair, self-respecting way
- Reinvest profits to build and extend the business
George Eastman died in 1932. His principles and policies provided a foundation upon which to build continued success.
When examining Eastman’s policy of reinvesting profits to build and extend the business, it is self-evident he desired to build Kodak’s financial strength through retaining profits. A strong balance sheet allows a company to fund research and development in order to develop new products and services to fulfill customer needs and desires. Sound financial management goes hand-in-glove with retaining market leadership.
Eastman’s policy of financial conservatism was not adhered to by executives who succeeded him; and it shows.
Kodak Is On The Brink Of Bankruptcy
Initially, it may be difficult to grasp that Kodak is on the verge of bankruptcy. Well, during fiscal-year 2010, Kodak suffered a net loss of $687 million and saw its net worth drop to negative $1.075 billion – yes, Kodak has a negative net worth. EKC’s management understands it is in serious financial trouble and stated the following in the 2010 Annual Report:
Our business may not generate cash flow in an amount sufficient to enable us to pay the principal of, or interest on, our indebtedness, or to fund our other liquidity needs, including working capital, capital expenditures, product development efforts, strategic acquisitions, investments and alliances, and other general corporate requirements. Our ability to generate cash is subject to general economic, financial, competitive, litigation, regulatory and other factors that are beyond our control. We cannot assure you that:
- our businesses will generate sufficient cash flow from operations;
- our plans to generate cash proceeds through the sale of non-core assets will be successful;
- we will be able to repatriate or move cash to locations where and when it is needed;
- we will realize cost savings, revenue growth and operating improvements resulting from the execution of our long-term strategic plan; or
- future sources of funding will be available to us in amounts sufficient to enable us to fund our liquidity needs.
These are not words spoken by an upbeat executive management team looking toward a bright future in the digital age. Management has acknowledged EKC is in deep trouble; yet they won’t tell you it is financial mismanagement that has taken this company to a state of insolvency.
How Kodak Got Into This Financial Mess
A fundamental reason Kodak has fallen into financial distress is that, over the past decades, management had not adhered to George Eastman’s policy of reinvesting profits to build and extend Kodak’s business. Stock buybacks, in fact, are the polar opposite of this reinvestment policy. Share repurchases inherently deplete cash, working capital, and equity. Such capital depletion has deprived EKC’s management of the funds needed to support the implementation of a business model allowing Kodak to transition to a profitable digital imaging company.
Over the five-year period of 2000 to 2004, Kodak generated net earnings of $3.062 billion; and EKC turned a profit in each of these five years. Moreover, at fiscal year-end (FYE) 2004, Kodak’s retained earnings position stood at $7.922 billion; which is a pretty stout number. At fiscal year-end 12/31/04, EKC’s financial condition was sound.
Kodak, by 2005, had become the leading seller of digital cameras in the United States. In fact, for Kodak, digital camera sales amounted to $5.7 billion in 2005; which was fully 50% of the company’s sales volume that year. In spite of Kodak’s No. 1 ranking, in U.S. digital camera sales, this company suffered an operating loss of $1.073 billion in 2005. It is clear this is the year in which Kodak hit the tipping point where its margin-rich, film-based photography business had been displaced by digital imaging; a commoditized business with thin margins. With digital cameras yielding slim profit margins, it is no wonder Kodak’s CEO – Antonio M. Perez – called them a "crappy business".
For Kodak, indeed, digital imaging has been a crappy business; as EKC has not turned an operating profit since 2003 (2004 was a profitable year due to significant earnings from discontinued operations). Over the past six years, Kodak has lost $2.525 billion. Retained earnings, by fiscal year-end 2010, had declined to $4.969 billion.
If Kodak had a positive retained earnings position of $4.969 billion, at fiscal year-end 2010, then how did it have a net worth of negative $1.075 billion? Over the decades, after all, Kodak had been a very profitable company and had built up a substantial retained earnings position. A quick perusal of Kodak’s FYE 2010 balance sheet provides an answer to this question. With $5.994 billion of treasury stock (a contra-equity balance sheet entry) leaping off of the balance sheet, it is unmistakable that stock buybacks have played a significant role in depleting Kodak’s cash, working capital, and equity over the years. When a corporation’s treasury stock position exceeds its retained earnings by over $1 billion, it shouldn’t be a surprise to see a company with a negative net worth.
Kodak’s dividend payouts, most certainly, haven’t served to preserve the company’s capital base either. From 2000 through 2008, Kodak paid out $2.757 billion in dividends; while no dividends were paid in 2009 and 2010. During the five-year span of 2004 through 2008, in which Kodak suffered an operating loss each year, this company paid out $714 million in dividends. EKC’s executives, undoubtedly, would love to have this money back almost as much as they wish the company had never engaged in stock buybacks.
Conclusion
The future is uncertain; hence it is impossible to foresee what twists and turns a business may encounter while attempting to remain on a path of customer satisfaction and profitability. Technology evolves rapidly while consumer tastes are ever changing. As Kodak has discovered, it must still develop a viable business model in order for the company to survive in the new era of digital imaging.
Kodak’s management has also discovered that reinventing their company has become a time consuming and expensive undertaking; and they are rapidly running out of money. For the very reason that the future is uncertain, Kodak should never have engaged in the financially-draining practice of stock buybacks. If Antonio M. Perez could wave a magic wand and receive back the $6 billion Kodak squandered in share repurchases, you’d witness a CEO waving his arms wildly. Kodak, accordingly, would suddenly regain the needed capital to continue the search for its own unique path to profitability in this uncertain world. Alas, it isn’t so.
Kodak’s stock, today, is selling for $1.27 per share. It once sold for $95 per share; so much for the assertion that share repurchases enhance shareholder value. I’ve never understood how people can believe weakening a company’s balance sheet, via stock buybacks, improves the value of a company.
Following all of George Eastman’s principles and policies would have prevented Kodak’s unfolding financial disaster.
October 19, 2011
Eric Englund [send him mail], who has an MBA from Boise State University, lives in the state of Oregon. He is the publisher of The Hyperinflation Survival Guide by Dr. Gerald Swanson. He is also a member of The National Society, Sons of the American Revolution. You are invited to visit his website.
Copyright © 2011 Eric Englund
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Link to original article: http://lewrockwell.com/englund/englund61.1.html
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Tuesday, October 18, 2011
Safe Bulkers (SB) reported 3Q2011 financials yesterday. It is yielding 9.13%
My current favorite high dividend stock , Safe Bulkers (SB), reported third quarter financials yesterday.
http://www.safebulkers.com/sbpr101711.pdf
In summary, they will continue to pay their $0.15 quarterly dividend. Safe Bulker’s dividend currently yields 9.13%. Their dividend payout ratio remains around a conservative 50% level. Earnings have decreased a few percentage points consistent with a horrible market in dry bulk shipping. The balance sheet results were mixed. Shareholder equity was up good, but current ratio and quick ratio were both down.
I will provide in-depth analysis tomorrow.
CONCLUSION – Safe Bulkers remains a buy below $7.00 per share. However, worldwide double dip recession will take the American stock market and Safe Bulkers lower. I think there will be opportunities to buy SB below $5.00 per share. I’m waiting to get closer to the bottom.
Disclosure: I don’t own Safe Bulkers, but I want to.
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Monday, October 17, 2011
First look at Carnival Corporation (CCL)
I recently took a cruise vacation to Mexico on Carnival Cruise Lines (CCL). This was my third cruise on Carnival spanning over a decade and I had a wonderful experience each time. I will cruise with them again. They treat their returning clients well. This got me thinking about the company as an investment.
I was pleased to find out that Carnival has a decent dividend yield of 3.0%
Carnival Corporation (CCL)
Market price: $33.25
Shares: 778.42 million
Market capitalization: $25.88 billion
DIVIDEND RECORD
Carnival was a dividend grower until 2009. They eliminated their dividend for the year of 2009. In 2010, they began paying a $0.10 quarterly dividend. Now they are paying a $0.25 quarterly dividend.
Dividend: $0.25 quarterly
Dividend yield: 3.0% ($1.00 annual dividend/$33.25 market price)
Dividend payout ratio: 40.8% ($1.00 annual dividend/$2.45 EPS according to Google Finance)
Carnival would become a 6% high dividend stock if its market price dropped to $16.66 if they kept their current dividend the same.
EARNING POWER
(Earnings adjusted for changes in market capitalization)
EPS Net inc. Shares Adj EPS
2006 $2.77 $2,279 M 823 M $2.93
2007 $2.95 $2,408 M 828 M $3.09
2008 $2.90 $2,330 M 816 M $2.99
2009 $2.24 $1,790 M 804 M $2.30
2010 $2.47 $1,978 M 778.42 M $2.54
2011E $2.45E $2.45E
Six year average adjusted EPS = $2.71
Consider contrarian buying below $21.68 (less than 8 times average EPS)
Consider value buying below $32.52 (less than 12 times average EPS)
Consider investment buying between $32.53 and $54.19 (between 12 times and 20 times average EPS)
Consider speculative selling above $54.20 (above 20 times average EPS)
BALANCE SHEET STRENGTH
I’m concerned about their low current ratio and quick ratios. They don’t have much current assets or cash assets to pay short term liabilities. This needs to be investigated before making a buy.
Book value per share: $31.12
Price to BV ratio: 1.06 (good)
Current ratio: 0.22 (over 2.0 is good)
Quick ratio: 0.11 (over 1.0 is good)
CONCLUSION
Wait for a low price below $21.68 after the US recession sets in. They will revisit the 2008-2009 lows.
DISCLOSURE – I don’t own Carnival Corporation (CCL)
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