December 31, 2013
December 27, 2013
Comment on Model Portfolio activity
We added a few more issues this week. Today marks the 30th anniversary
of the Lemley Letter Portfolio. In that time it has grown from $50,000 to
$740,000 for a 9.4% compound annual return.
There may be a pullback in the first week of the New Year as
last years profits are realized but for now we plan to remain invested as we
Happy New Year. Our first post in the New Year will be on
Friday January 10 as we are taking a week to visit clients.
December 20, 2013
Comment on Model Portfolio activity
During the week- to increase exposure- we added to some
positions and initiated purchases in two housing stocks on their lows for the
year, and other depressed issues for an after year end bounce. With the gains in the
markets this year we are guessing that tax loss and portfolio pruning activity
is greater than usual.
We know we are whistling in the wind with
this comparison but:
Amazon has a market cap of $178 billion,
has $70 billion in revenues, and $130 million (million not
billion) in earnings. AMZN doesn’t earn any money because it says it is investing
for the future the day of its last quarterly earnings report- which was a loss-
the share price jumped 10%. Wall Street loves the company’s business model of
growth at any price and earnings be damned. The company has 90,000 full time
employees many of whom earn slightly more than minimum wage. Amazon destroys
jobs because it sells for cheap and undercuts brick and mortar stores in states
who have to collect sales taxes and may be less efficient but are certainly
more beneficial to the communities in which they are located.
In Contrast Ford has a market cap of $70
billion with sales of $146 billion and earnings for the year of $8
billion (billion not million). Ford just announced that earnings next
year will be flat because of the cost of Introducing 14 new auto models. That
is flat as in $8 billion in earnings. $8 billion is more
that Amazon has earned in its entire existence or will earn in total over the
next ten years. Ford employs 171,000 folks and that doesn’t
include the folks employed in ancillary industries or the dealerships. And most
of the jobs Ford creates are high wage.
Ford dropped 10% on the news. Go Figure.
Below are two articles by other folks that we thought
we especially cogent.
Ford Motor Company Stock Is Getting Destroyed and Should You Care?
December 18, 2013
While Fools should generally take the opinion of Wall Street with a
grain of salt, it's not a bad idea to take a closer look at particularly
stock-shaking upgrades and downgrades – just in case their reasoning behind the
call makes sense.
What: Ford Motor Company (NYSE:
stock is trading more than 5% lower early Wednesday after the
company announced its outlook for 2014 would bring in lower operating margin,
operating related cash flow, and will equate to lower pre-tax profits than
So what: This is a typical theme with Ford. The market
tends to overreact to bad news, sending the stock lower while reacting very
little during very positive news. The main issue here is understanding why
operating margin and pre-tax profits are expected to be lower next year. There
are two issues here to consider.
One is the fact that 2013 has been incredibly solid and profitable for
the automaker -- in fact, it's expected to be one of the best years in Ford's
history. Ford estimates that its pre-tax profit for 2013 will come in at
roughly $8.5 billion; its forecast for next year, albeit slightly lower, is
still a respectable range of $7 billion-$8 billion.
Second is the fact that Ford is undertaking the most aggressive
product launch schedule in its entire history next year. It plans to roll out
23 all-new or significantly refreshed vehicles globally, which is a drastic
increase from this year's 11 global vehicle launches. Costs associated with
converting plants to produce different designs, advertising campaigns, and a
multitude of other factors will no doubt put pressure on margins and profits. But
in reality, for long-term investors, this is a move that will improve
profitability down the road.
"This is our most ambitious launch plan ever, as we continue to
implement our One Ford plan," said Bob Shanks, Ford executive vice
president and chief financial officer, in a press release. "In 2014, we
are investing across the world to support next year's launches, but also to
drive profitable growth beyond 2014 as we serve more customers in more markets
and in more segments."
Take a step back, Ford investors, and relax. Move
your mouse away from the sell button if you're having a knee-jerk reaction to
slightly lower profitability next year as the company gears up for what should
be a great remainder of the decade.
Consider that the outlook for Ford's most profitable and highest sales
volume vehicle, the F-Series, is very strong next year. Sales are up nearly 20%
this year even with it being the oldest design among competing full-size
trucks. That all changes in 2014 when Ford launches its next-generation F-150,
and expect sales to surge in the back end of the year and help sustain
profitability. Improving housing construction and the continued energy boom, in
addition to the average age of vehicles being at a record high, will provide
plenty of demand for the Blue Oval's most profitable product.
Ford's main profit driving region, North America, is gearing up for
another solid year in 2014, and that will sustain plenty of demand for Ford's
entire lineup. That will ensure Ford's factories are running at high capacity
and not damaging margins drastically. This is not profits dropping off a cliff,
it's a small bump in the road. In addition to the U.S., Ford's full-year
automotive revenue is projected to grow roughly 10% with market share gains in
all regions other than Europe. In other words, business is still good!
consider that Ford has taken huge steps to shore up its balance sheet, doubled
its dividend, and cut the underfunded status of global pension plans nearly in
half! Ultimately, if you're a long-term investor you must realize that nothing
in Ford's business has changed for the worse, it's only a hiccup as the company
balloons new vehicle launches to continue aggressive growth globally -- and
that, as always, comes at a cost. The cost for a more profitable future is a
slight dip in 2014 pre-tax earnings.
Ford's pension plans were underfunded by a whopping $18.7 billion
at the end of last year. That number doesn't fully
show up on balance sheets and is essentially a debt or obligation greater than
Ford's automotive debt of $15.8 billion. It's even worse for
General Motors ( NYSE:
) which ended 2012 with a staggering
$27.8 billion underfunded pension plan.
discount rates rise, which they are expected to do slowly, obligations will
shrink for corporations. Until then, Ford and others will be throwing large
sums of money at their pension plans. Ford expects to drop $5 billion this year
alone into its plan -- that's cash the automaker could spend next year to help
fund its 23 vehicle launches. Such a large obligation is something that could
drag its profits down, and likely contributed to the nearly 9% plunge in its
share price since yesterday.
Now for the good news.
people are overlooking the substantial progress Ford has made on its massive
$18.7 billion underfunded pension plan. Ford announced it cut its underfunded
status nearly in half this year -- perhaps to around the $10 billion mark.
That's a difference of roughly $8.7 billion in obligations that disappeared
this year. Compare that to the difference in Ford's 2014 pre-tax earnings
projections and you'll wonder why its share price didn't move higher. Ford
estimates this year's pre-tax earnings to hit $8.5 billion -- one of its best
years in history -- and it expects 2014 to bring in between $7 billion and $8
billion. That is not a devastating earnings decline, particularly when you
consider that Ford has beat expectations six out of the last seven quarters and
met expectations once.
Saut: Fed Taper Will Likely Not Happen in 2014, and Notes on the 'One %
Just as the commandment “Thou shalt not kill” sets a clear
limit in order to safeguard the value of human life, today we also have to say
“thou shalt not” to an economy of exclusion and inequality. Such an economy
kills. How can it be that it is not a news item when an elderly homeless person
dies of exposure, but it is news when the
loses two points? This is a case of
exclusion. Can we continue to stand by when food is thrown away while people
are starving? This is a case of inequality. Today everything comes under the
laws of competition and the survival of the fittest, where the powerful feed
upon the powerless. As a consequence, masses of people find themselves excluded
and marginalized: without work, without possibilities, without any means of
-- Pope Franciscus, Jorge Mario Bergoglio, December 15, 2013
I read the Pope’s words about inequality following a meeting of my company's
newly formed Consumer Analysts Panel. The panel consists of the firm's consumer
analysts, lodging/housing analysts, economist, senior management of the
institutional sales team, and me. Interestingly, the recurring theme over the
course of said meeting was that the top 20% of wage earners are doing fine, but
the bottom 20% are not. My company's hardlines retail analyst said the more
defensive the retailer, the worse the sales are. He also said that shopping at
the $1 stores was doing okay. In fact, the CEO of Dollar General (NYSE:DG) stated that even though there are 22,000
dollar stores in the US, the business could support another 14,000 stores. The
implication is that many folks have moved down the “food chain” in where they
are doing their shopping. Confirming that view, our restaurant analyst noted
that while “fast food” chains are doing fine, there has been an 11% contraction
in dining sales with a nominal shrinkage in aggregate demand. He also said
traffic is down about 3%. My firm's home and building products analyst
mentioned that at the Dixie Group (NASDAQ:DXYN), which is a “high-end” carpet manufacturer,
business is soaring by 20-30% year-over-year, and it can’t keep up with demand,
a further sign the 1% is doing just fine.
Accordingly, the meeting resonated with the Pope’s comments about inequality
because the central theme of my company's “consumer meeting” was about how the
higher-wage earners are doing just fine, but the lower-wage earners are not. Barron’s
recently noted, “Today, the top 10% of Americans hold 74% of the nation’s
wealth – up from 71.5% in 2007, and well above levels near 50% in France, 44%
in the UK, and 34% in Japan.” Moreover, production workers’ average hourly
earnings are up just 2.2%, year-over-year. Indeed, the infamous “One Percent”
mantra came back to mind! So who is the favored 1%? Well, last year Richard C. Morais
wrote an article about a study done by The Harrison Group and American Express
Publishing for Barron’s, which stated the following:
It’s important the public realize the much-derided 1% is a rich group, but they
are nowhere near the 400 über-rich, the Larry Ellisons and Donald Trumps that
make up the wealth mythology floridly living in our imagination. In actual
fact, the 1% looks a lot more like “regular folk” than most of us really
realize. According to the survey: 67% grew up in a middle class or poorer household,
85% made their wealth in their lifetime, 76% describe themselves as “Middle
Class” at heart, 3% is the sum total of their assets that they inherited. “This
is the triumph of the Middle Class,” says Jim Taylor, Vice Chairman of the
Harrison Group. “Even when older, the [One Percent] don’t lose the degree with
which they see themselves as the repository of the Middle Class. That means
hard work. That means the value of education. That means the value of family
This year, however, all should give thanks! Not just the 1%, but anyone who
owns a house, an IRA, a 401(k), a pension plan, etc., because household net
worth is at all-time highs of $129 trillion. Further, the Wilshire 5000
(INDEXNASDAQ:W5000), which is roughly equal to the market value of all US equities, is valued at $19 trillion versus its
2009 low of $7 trillion, which has an extremely positive “wealth effect” on
consumption for the American consumer. This is a huge positive, as is the
dramatic decline in gasoline prices. Obviously, this is a “feel good”
accelerator for the American public. As my friend Barry Ritholtz writes:
pessimists overlooked three big news stories this year.
- Americans' debt burdens are as low as they've been in a generation.
- Health care cost growth has plunged.
- The federal budget deficit has fallen off a cliff.
federal outlays have declined by 1.4% month-over-month in November and have
been flat for nearly five years, federal tax receipts have surged by 2.8%
month-over-month, and personal income and corporate profits have soared. The
federal deficit has narrowed to less than 4.0% of GDP, and the CBO is
estimating it will narrow to 3.3% in 2014. I have long argued that the equity markets
do not care about the absolute of “good
or bad,” but merely if things are getting “better or worse.” I have further
opined that “things” are definitely getting better. In fact, I cannot remember
when things have been getting better for this long!
examples, read the headlines: “Capital Leaders Agree to a Deal on the Budget,”
(New York Times, 12/11/13); “Wall Street Exhales as Volcker Rule Seen Sparing
Market-Making” (Bloomberg, 12/11/13); the “WTO Seals Deal for First Time in 18
Years to Ease Trade Tensions” (Bloomberg, 12/7/13) . . . and the list goes on.
My contacts inside the DC Beltway tell me there is a “grand bargain” in the
works because the Obama administration is afraid of the negative effects of ObamaCare
on the mid-term elections. No wonder the stock market has done so well and is
likely to do so again in 2014. Maybe not at the same ramp rate (~25%) as this
year, but certainly if earnings arrive at anywhere close to what the bottom-up,
operating earnings estimates for 2014 that S&P suggests ($122.42), and if
the S&P 500 (INDEXSP:.INX) continues to trade at its current P/E
multiple of 16.45x, we have a price target of 2014.
said, while the primary trend remains “up,” there was a traders “sell signal”
registered last week when the 14-day stochastic indicator fell below its moving
average. Notably, this is just a very short-term
trading indicator, but it was confirmed by the
125 “buying climaxes” that occurred last week. A “buying climax” happens when a
stock sets a new 52-week high and then drops below where it closed the prior
week. It is also worth mentioning that the SPX has closed below its 10-day
moving average (DMA) and its 30-DMA. I had actually thought there would be more
of a sell-off on Friday with Iran backing away from the talks and Syria heating
up, but the SPX again held in the 1770 – 1784 support level often discussed in
these missives. If that level eventually fails to hold, then the SPX’s 50-DMA
at 1761.74 comes into play. If that “falls,” we would likely be into a full 5%
(1721) to 7% (1684) correction. One more thing I think I know is that certain
stocks will be sold to establish tax losses to offset gains taken in 2013. Once
that selling pressure ends, there should be at least a compression bounce for
those stocks. Three underperforming groups that certainly qualify for such a
bounce would be precious metals, base metals, and coal stocks.
call for this week: I am in Boston all week seeing accounts and speaking at an
event. The question on Wall Street will be, “Will the Fed taper?” I said
last summer that I didn’t think it would taper in September and probably will
not taper this year. I still feel that way. If correct, the ideal trading
pattern for this week would be weakness into the announcement, which would set
the stage for a “no taper” rally that spills over into the Santa rally.
Read more: http://www.minyanville.com/business-news/markets/articles/Jeff-Saut-Fed-Taper-Will-Likely/12/16/2013/id/53050#ixzz2nf4epYTd
December 13, 2013
Comment on Model Portfolio activity
During the week we added depressed home builders D R Horton
and KB Home for a pop after year end. We also took a short profit in Intel and
repurchased J C Penney in accounts. American Eagle dropped 10% on a lousy
outlook and we repurchased that issue also.
With the Budget deal sealed, a major negative for early next
year was removed from the market equation and we view that as a positive.
Once the yearend adjustments are out of the way we expect
another market rise at which time we may head to the sidelines with some of our
The huge rally this year may continue into next but our
purpose is to participate while assuming as little risk as possible. The longer
the rally extends the more dangerous it becomes. The consolidation of the past
few weeks will provide energy for a move higher but a 10% or more correction is
needed to remove longer term risk.
December 6, 2013
Comment on Model Portfolio activity
the week we switched Microsoft (at a nice profit) to Verizon which is down a
bit from its high and the price at which we last sold. We also added to Cisco
and repurchased Aéropostale after earnings. Finally, we realized a trading
profit in our GM warrants.
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