December 31, 2013

December 27, 2013

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 are.

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.
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December 20, 2013

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.

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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.
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Below are two articles by other folks  that we thought we especially cogent.

Ford Motor Company Stock Is Getting Destroyed and Should You Care?

By Daniel Miller

http://www.fool.com/investing/general/2013/12/19/ford-motor-companys-sell-off-continues-what-invest.aspx#.UrRkD-JFZCM
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: F )  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 previously guided.

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."

Now what: 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!

Also 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: GM   ) which ended 2012 with a staggering $27.8 billion underfunded pension plan. 

As 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.

Most 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. 
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Jeff Saut: Fed Taper Will Likely Not Happen in 2014, and Notes on the 'One % Read more:

http://www.minyanville.com/business-news/markets/articles/Jeff-Saut-Fed-Taper-Will-Likely/12/16/2013/id/53050#ixzz2nf4xRcTv

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 stock market 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 escape.

-- 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 and luck.

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:

The pessimists overlooked three big news stories this year.

1. Americans' debt burdens are as low as they've been in a generation.
2. Health care cost growth has plunged.
3. The federal budget deficit has fallen off a cliff.