October 31, 2011
October 28, 2011
October 27, 2011
Comment on Model Portfolio activity
European folks reached some sort of agreement which is better than the Repubs
and Dems can do here. In celebration markets around the world jumped higher
with the major market measures here up 2% at the open and over 3% at the close.
The S&P 500 broke through the 1250 resistance and closed at 1285 which suggest a new trading range. With the pop we switched
Alcoa to the same number of shares of Boston Scientific, and AK Steel for a
plus scratch. We just don’t have a handle on the metals stocks. We added to
Chico’s and repurchased Medtronic. We traded out of Ingersoll Rand for $4 per
share profit and added Symantec to accounts as it dropped today although
earnings were good. Management suggested that sales in the next quarter would
only be up about 5% when analysts were expecting more. We used the GM money
from yesterday for the purchase.
3rd Quarter GDP was up 2.5%, not so bad and a lot better than the bears had been
October 26, 2011
Comment on Model Portfolio activity
announced inline earnings and tanked. We sold GM since if the street doesn’t
like Ford they will find something wrong with GM’s report. With our large Ford
holdings we have major exposure to autos. Nokia released its Lumia 800 Windows
7 based phone and the reviews were positive. We repurchased shares in accounts
in which we sold XLF last Friday.
The markets opened 1% higher and
then gave it all back after an hour of trading to turn negative by 11AM before
rallying in the final hour with the S&P 500 moving back up to 1124 by 2PM.
So it looks like 1125 is/will be major resistance on the upside and 1200 and
then 1170 are the support levels on the S&P 500. Our thought is that the
October 3 bottom at 1080 holds. Mutual Fund year end is appropriately on
Wonderful Rant by Matt Taibbi: http://www.rollingstone.com/politics/blogs/taibblog/owss-beef-wall-street-isnt-winning-its-cheating-20111025
Wall Street Isn't Winning – It's Cheating
I was at an event on the Upper
East Side last Friday night when I got to talking with a salesman in the media
business. The subject turned to Zucotti Park and Occupy Wall Street, and he was
chuckling about something he'd heard on the news.
"I hear [Occupy Wall Street]
has a CFO," he said. "I think that's funny."
"Okay, I'll bite," I
said. "Why is that funny?"
"Well, I heard they're
trying to decide what bank to put their money in," he said, munching on
hors d'oeuvres. "It's just kind of ironic."
Oh, Christ, I thought. He’s
saying the protesters are hypocrites because they’re using banks. I sighed.
"Listen," I said,
"where else are you going to put three hundred thousand dollars? A
"Well," he said,
"it's just, they're protests are all about... You know..."
"Dude," I said.
"These people aren't protesting money.
They're not protesting banking.
They're protesting corruption on Wall Street."
"Whatever," he said,
These nutty criticisms of the
protests are spreading like cancer. Earlier that same day, I'd taped a TV
segment on CNN with Will Cain from the National
Review, and we got into an argument on the air.
Cain and I agreed about a lot of the problems on Wall Street, but when it came
to the protesters, we disagreed on one big thing
Cain said he believed that the
protesters are driven by envy of the rich.
"I find the one thing
[the protesters] have in common revolves around the human emotions of envy and
entitlement," he said. "What you have is more than what I have, and
I'm not happy with my situation."
Cain seems like a nice enough
guy, but I nearly blew my stack when I heard this. When you take into
consideration all the theft and fraud and market manipulation and other evil
shit Wall Street bankers have been guilty of in the last ten-fifteen years, you
have to have balls like church bells to trot out a propaganda line that says
the protesters are just jealous of their hard-earned money.
Think about it: there have
always been rich and poor people in America, so if this is about jealousy, why
the protests now? The idea that masses of people suddenly discovered a
deep-seated animus/envy toward the rich – after keeping it strategically hidden
for decades – is crazy.
Where was all that class
hatred in the Reagan years, when openly dumping on the poor became fashionable?
Where was it in the last two decades, when unions disappeared and CEO pay
relative to median incomes started to triple and quadruple?
The answer is, it was never
there. If anything, just the opposite has been true. Americans for the most
part love the rich, even the obnoxious rich. And in recent years, the harder
things got, the more we've obsessed over the wealth dream. As unemployment
skyrocketed, people tuned in droves to gawk at Evrémonde-heiresses like Paris
Hilton, or watch bullies like Donald Trump fire people on TV.
Moreover, the worse the
economy got, the more being a millionaire or a billionaire somehow became a
qualification for high office, as people flocked to voting booths to support
politicians with names like Bloomberg and Rockefeller and Corzine, names that
to voters symbolized success and expertise at a time when few people seemed to
have answers. At last count, there were 245 millionaires in congress,
including 66 in the Senate.
And we hate the rich? Come on.
Success is the national religion, and almost everyone is a believer. Americans love winners. But that's just the
problem. These guys on Wall Street are not winning – they're cheating. And as much
as we love the self-made success story, we hate the cheater that much more.
In this country, we cheer for
people who hit their own home runs – not shortcut-chasing juicers like Bonds
and McGwire, Blankfein and Dimon.
That's why it's so obnoxious
when people say the protesters are just sore losers who are jealous of these
smart guys in suits who beat them at the game of life. This isn't
disappointment at having lost. It's anger because those other guys didn't
really win. And people now want the score overturned.
All weekend I was thinking
about this “jealousy” question, and I just kept coming back to all the
different ways the game is rigged. People aren't jealous and they don’t want
privileges. They just want a level playing field, and they want Wall Street to
give up its cheat codes, things like:
FREE MONEY. Ordinary people
have to borrow their money at market rates. Lloyd Blankfein and Jamie Dimon get
billions of dollars for free, from the Federal Reserve. They borrow at zero and
lend the same money back to the government at two or three percent, a valuable
public service otherwise known as "standing in the middle and taking a
gigantic cut when the government decides to lend money to itself."
Or the banks borrow billions
at zero and lend mortgages to us at four percent, or credit cards at twenty or
twenty-five percent. This is essentially an official government license to be
rich, handed out at the expense of prudent ordinary citizens, who now no longer
receive much interest on their CDs or other saved income. It is virtually
impossible to not make money in banking when you have unlimited access to free
money, especially when the government keeps buying its own cash back from you
at market rates.
Your average chimpanzee
couldn't fuck up that business plan, which makes it all the more incredible
that most of the too-big-to-fail banks are nonetheless still functionally
insolvent, and dependent upon bailouts and phony accounting to stay above
water. Where do the protesters go to sign up for their interest-free
CREDIT AMNESTY. If you or I
miss a $7 payment on a Gap card or, heaven forbid, a mortgage payment, you can
forget about the great computer in the sky ever overlooking your mistake. But
serial financial fuckups like Citigroup and Bank of America overextended
themselves by the hundreds of billions and pumped trillions of dollars of
deadly leverage into the system -- and got rewarded with things like the
Temporary Liquidity Guarantee Program, an FDIC plan that allowed irresponsible
banks to borrow against the government's credit rating.
This is equivalent to a trust
fund teenager who trashes six consecutive off-campus apartments and gets
rewarded by having Daddy co-sign his next lease. The banks needed programs like
TLGP because without them, the market rightly would have started charging more
to lend to these idiots. Apparently, though, we can’t trust the free market
when it comes to Bank of America, Goldman, Sachs, Citigroup, etc.
In a larger sense, the TBTF
banks all have the implicit guarantee of the federal government, so investors
know it's relatively safe to lend to them -- which means it's now cheaper for
them to borrow money than it is for, say, a responsible regional bank that
didn't jack its debt-to-equity levels above 35-1 before the crash and didn't
dabble in toxic mortgages. In other words, the TBTF banks got better credit for being less responsible. Click on freecreditscore.com
to see if you got the same deal.
STUPIDITY INSURANCE. Defenders
of the banks like to talk a lot about how we shouldn't feel sorry for people
who've been foreclosed upon, because it's they're own fault for borrowing more
than they can pay back, buying more house than they can afford, etc. And
critics of OWS have assailed protesters for complaining about things like
foreclosure by claiming these folks want “something for nothing.”
This is ironic because, as one
of the Rolling Stone editors
put it last week, “something for nothing is Wall Street’s official
policy." In fact, getting bailed out for bad investment decisions has been
de rigeur on Wall Street not
just since 2008, but for decades.
Time after time, when big
banks screw up and make irresponsible bets that blow up in their faces, they've
scored bailouts. It doesn't matter whether it was the Mexican currency bailout
of 1994 (when the state bailed out speculators who gambled on the peso) or the
IMF/World Bank bailout of Russia in 1998 (a bailout of speculators in the
"emerging markets") or the Long-Term Capital Management Bailout of
the same year (in which the rescue of investors in a harebrained hedge-fund
trading scheme was deemed a matter of international urgency by the Federal
Reserve), Wall Street has long grown accustomed to getting bailed out for its
The 2008 crash, of course,
birthed a whole generation of new bailout schemes. Banks placed billions in
bets with AIG and should have lost their shirts when the firm went under -- AIG
went under, after all, in large part because
of all the huge mortgage bets the banks laid with the firm -- but
instead got the state to pony up $180 billion or so to rescue the banks from
their own bad decisions.
This sort of thing seems to
happen every time the banks do something dumb with their money. Just recently,
the French and Belgian authorities cooked up a massive bailout of the French
bank Dexia, whose biggest trading partners included, surprise, surprise,
Goldman, Sachs and Morgan Stanley. Here's how the New York Times explained the bailout:
To limit damage from Dexia’s
collapse, the bailout fashioned by the French and Belgian governments may make
these banks and other creditors whole — that is, paid in full for potentially
tens of billions of euros they are owed. This would enable Dexia’s creditors
and trading partners to avoid losses they might otherwise suffer...
When was the last time the
government stepped into help you "avoid losses you might otherwise
suffer?" But that's the reality we live in. When Joe Homeowner bought too
much house, essentially betting that home prices would go up, and losing his
bet when they dropped, he was an irresponsible putz who shouldn’t whine about
being put on the street.
But when banks bet billions on
a firm like AIG that was heavily invested in mortgages, they were making the
same bet that Joe Homeowner made, leaving themselves hugely exposed to a sudden
drop in home prices. But instead of being asked to "suck it in and cope" when
that bet failed, the banks instead went straight to Washington for a bailout --
and got it.
UNGRADUATED TAXES. I've
already gone off on this more than once, but it bears repeating. Bankers on
Wall Street pay lower tax rates than most car mechanics. When Warren Buffet released his tax information,
we learned that with taxable income of $39 million, he paid $6.9 million in
taxes last year, a tax rate of about 17.4%.
Most of Buffet’s income, it
seems, was taxed as either "carried interest" (i.e. hedge-fund
income) or long-term capital gains, both of which carry 15% tax rates, half of
what many of the Zucotti park protesters will pay.
As for the banks, as
companies, we've all heard the stories. Goldman, Sachs in 2008 – this was the
same year the bank reported $2.9 billion in profits, and paid out over $10
billion in compensation -- paid just $14 million in taxes, a
1% tax rate.
Bank of America last year paid not a single dollar in taxes --
in fact, it received a "tax credit" of $1 billion.
There are a slew of troubled companies that will not be paying taxes for years,
including Citigroup and CIT.
When GM bought the finance
company AmeriCredit, it was able to marry its long-term losses to AmeriCredit's
revenue stream, creating a tax windfall worth as much as $5 billion. So even though AmeriCredit is
expected to post earnings of $8-$12 billion in the next decade or so, it likely
won't pay any taxes during that time, because its revenue
will be offset by GM's losses.
Thank God our government
decided to pledge $50 billion of your tax dollars to a rescue of General
Motors! You just paid for one of the world's biggest tax breaks.
And last but not least, there
GET OUT OF JAIL FREE. One
thing we can still be proud of is that America hasn't yet managed to achieve
the highest incarceration rate in history -- that honor still goes to the
Soviets in the Stalin/Gulag era. But we do still have about 2.3 million people
in jail in America.
Virtually all 2.3 million of
those prisoners come from "the 99%." Here is the number of bankers
who have gone to jail for crimes related to the financial crisis: 0.
Millions of people have been
foreclosed upon in the last three years. In most all of those foreclosures, a
regional law enforcement office -- typically a sheriff's office -- was awarded
fees by the court as part of the foreclosure settlement, settlements which of
course were often rubber-stamped by a judge despite mountains of perjurious robosigned evidence.
That means that every single
time a bank kicked someone out of his home, a local police department got a
cut. Local sheriff's offices also get cuts of almost all credit card judgments,
and other bank settlements. If you're wondering how it is that so many regional
police departments have the money for fancy new vehicles and SWAT teams and
other accoutrements, this is one of your answers.
What this amounts to is the
banks having, as allies, a massive armed police force who are always on call,
ready to help them evict homeowners and safeguard the repossession of property.
But just see what happens when you try to call the police to prevent an improper foreclosure.
Then, suddenly, the police will not get involved. It will be a "civil
matter" and they won't intervene.
The point being: if you miss a
few home payments, you have a very high likelihood of colliding with a police
officer in the near future. But if you defraud a pair of European banks
out of a billion dollars -- that's a billion, with a b
-- you will never be arrested, never see a policeman, never see the inside of a
Your settlement will be worked
out not with armed police, but with regulators in suits who used to work for
your company or one like it. And you'll have, defending you, a former head of
that regulator's agency. In the end, a fine will be paid to the government, but
it won't come out of your pocket personally; it will be paid by your company's
shareholders. And there will be no admission of criminal wrongdoing.
The Abacus case, in which
Goldman helped a hedge fund guy named John Paulson beat a pair of European
banks for a billion dollars, tells you everything you need to know about the
difference between our two criminal justice systems. The settlement was $550
million -- just over half of the damage.
Can anyone imagine a common
thief being caught by police and sentenced to pay back half of what he
took? Just one low-ranking individual in that case was charged (case pending),
and no individual had to reach into his pocket to help cover the fine. The
settlement Goldman paid to the government was about 1/24th of what Goldman
received from the
government just in the AIG bailout. And that was the toughest
"punishment" the government dished out to a bank in the wake of 2008.
The point being: we have a
massive police force in America that outside of lower Manhattan prosecutes
crime and imprisons citizens with record-setting, factory-level efficiency,
eclipsing the incarceration rates of most of history's more notorious police
states and communist countries.
But the bankers on Wall Street
don't live in that heavily-policed country. There are maybe 1000 SEC agents
policing that sector of the economy, plus a handful of FBI agents. There are
nearly that many police officers stationed around the polite crowd at Zucotti
These inequities are what
drive the OWS protests. People don't want handouts. It's not a class uprising
and they don't want civil war -- they want just the opposite. They want
everyone to live in the same country, and live by the same rules. It's amazing
that some people think that that's asking a lot.
October 25, 2011
Comment on Model Portfolio activity
It’s Tuesday so naturally stocks
sold off because the trend has been higher for the last week. On a positive
note a few of the former momentum high flyers are being taken to the woodshed
and we suggested in earlier posts that such negative action needed to occur
before a meaningful uptrend could continue. Happily the run of the mill stocks
are puttering along- slightly lower today- but out of the limelight. Netflix
is down 40% today and 66% in the last few months. First
Solar is down 25% today and 66% in the last few months. And the list goes
continue a constructive attitude towards the stocks we own. We added to Zion
Bank and AKS today as they announced inline earnings but the shares sold off.
DreamWorks announces after the close and tomorrow we have Ford and Sprint.
also added Chico’s to accounts from which we sold Urban yesterday. CHS is less
volatile and earnings and sales are on track to grow again after a few mixed
October 24, 2011
Comment on Model Portfolio activity
the S&P 500 at 1250 (major resistance) and the light volume rally today we
sold a few stocks to raise cash ahead of Turnaround Tuesday. We eliminated
Urban for a small gain and sold Research in Motion for a scratch. We also
reduced Alcoa in some accounts where we have been trading around a core
October 21, 2011
Comment on Model Portfolio activity
added Huntington Bank to accounts when it sold off Thursday on earnings and
sold XLF for a trading profit on Friday afternoon.
October 18, 2011
Comment on Model Portfolio activity
sold U.S Steel at $22 for a loss in most accounts ahead of earnings on October
25 because Goldman placed a sell on the shares today with a $20 price target.
When a large firm changes its rating right ahead of earnings we think it
prudent – in this take no prisoners market - to move to the sidelines. Goldman
also upped AK Steel to neutral ahead of earnings. AK Steel (originally Armco
Steel) manufactures flat rolled steel for the auto industry. Goldman Sachs changed its rating of AK Steel to
neutral. The upgrade was based on the belief that all the bad news was priced
into the stock, and the current price had limited downside. We bought an
equal number of shares of it at $7.70 to keep our steel exposure with fewer
dollars on the line and room to add more if Goldman (Heaven forbid!!) is early
on its call.
also traded GM for a plus scratch in the accounts that held X as we changed our
mind about increasing our GM exposure.
in IBM today after earnings has limited the advance on the DJIA by 80 points.
Apple reports tonight as does Juniper
Express Scripts, Medco Face
Increased U.S. Scrutiny on Merger
(Bloomberg) A second
congressional committee is planning to examine antitrust concerns raised by Express Scripts Inc. (ESRX)’s
proposed purchase of competitor Medco Health Solutions Inc. (MHS),
congressional aides said.
The combined company would be
the largest U.S. manager of pharmacy benefits for employers, insurers and union
health plans. Senator Herb Kohl, a Wisconsin Democrat who leads the Judiciary
subcommittee on Antitrust, Competition Policy and Consumer Rights, plans a
hearing on the acquisition in November, his spokeswoman, Lynn Becker, said in
Express Scripts’ $29.1 billion purchase
is already under review by the Federal Trade Commission, and states have opened
inquiries into the sale out of concern that the combined company will command
too much market power, St. Louis-based Express Scripts has said. A House
subcommittee on competitive issues held a hearing on the sale in September.
Kohl’s hearing “is fully
warranted and would help shine a light on a number of costly middlemen
practices that needlessly drive up prescription drug costs and would only grow
worse should this merger be approved,” said B. Douglas Hoey, chief executive
officer of the National Community Pharmacists
Association, in an e-mail.
Hoey’s group and the National Association of Chain
Drug Stores, an
organization representing companies including Walgreen Co.
(WAG), are lobbying
the FTC and Congress against the combination of Express Scripts and Franklin
Lakes, New Jersey-based Medco.
Express Scripts CEO George Paz
told members of the House subcommittee that the acquisition would result in
“safer and more affordable” drugs. A spokesman for Express Scripts, Brian Henry, declined to comment on
Kohl’s plans for a hearing.
The combined company would act
as an intermediary in about a third of all U.S. prescription drug sales and
would control about 60 percent of the mail-order pharmacy market, according to
the House Judiciary subcommittee on Intellectual Property, Competition and the
October 17, 2011
Comment on Model Portfolio activity
some aggressive accounts we switched Ford common to Ford warrants on a 3
warrants for 1 common basis.
-- Shares of General Motors Co. and Ford Motor Co. could rise Monday
because an analyst raised third-quarter earnings estimates for both companies.
Investment Research analyst Itay Michaeli raised his earnings estimate for GM
from 79 cents per share to $1.05, and he increased his Ford estimate to 46
cents per share from 44 cents. Michaeli also repeated his "Buy"
rating on both stocks.
a note to investors, Michaeli wrote that he expects GM and Ford to affirm their
full-year earnings targets, albeit with a cautionary tone for the fourth
also wrote that barring any major global macroeconomic setback, he expects both
companies' stocks to get a "continued bounce" after third-quarter
earnings, solid October sales and modest relief on pension obligations from the
stock market and interest rates.
called automakers' stocks "deeply discounted."
earnings estimates are above the consensus of analysts who follow the
companies. Analysts polled by FactSet expect GM's third-quarter earnings to be
94 cents per share and Ford's to be 45 cents per share. Ford is expected to
announce earnings later this month, while GM's earnings are likely to be
released in early November.
S&P strike out again:
Standard & Poor's on
Thursday October 13 cut its outlook on Walgreen Co. to negative from stable, citing the lack of progress in the drugstore chain's
negotiations with Express Script. "Contract renewal negotiations with
Express Script have been unsuccessful to date and the loss of this contract
could result in a meaningful revenue and profit decline in fiscal 2012,"
S&P said. And "the negative outlook represents our expectation of the
weak credit measures that will result from the lower earnings."
Friday October 14 WSJ:
Pharmacy giants Walgreen Co. and Express Scripts Inc. quietly announced
Friday that they've reached a deal allowing nearly one million people in Kansas
City, Mo., to continue filling their prescriptions at the nation's largest drug
store after this year.
But the Kansas City deal
doesn't necessarily signal that an agreement allowing Express Scripts clients
nationally to keep getting their prescriptions at Walgreen is forthcoming, an
Express Scripts spokesman warned.
Monday October 17: Walgreens offers price guarantee to Express Scripts (ESRX)
for Department of Defense Tricare Pharmacy Program: Co said it has
offered terms to Express Scripts that if accepted would allow Walgreens to
continue serving the Department of Defense (DoD) Tricare pharmacy program in
2012 and produce savings for the program without disrupting beneficiaries'
choice of a network pharmacy provider. Walgreens also reiterated its
earlier, rejected offer to contract separately with Express Scripts for Tricare
from other Express Scripts commercial business to avoid any disruption to
military families and retirees. Express Scripts has ignored or rejected all
previous offers made by Walgreens and continues to refuse to negotiate a
separate contract for the benefit of the Tricare program and its 6 million
October 14, 2011
Comment on Model Portfolio activity
is up 35% from its low two days ago and we are reducing the position to a more
comfortable level. We also added Research in Motion (Blackberry) to accounts
for a trade.
Sprint received a second analyst
Sprint shares are getting a boost from Credit Suisse shares
shares have been under pressure for the last week since the company held an
extremely poorly received analyst meeting in New York last Friday. But he
thinks the consensus has over-reacted, and that the situation is not nearly as
grave as it might appear in terms of the company’s need for more capital. In
particular, he thinks the economics on the Apple iPhone 4S
– the phone goes on sale today for the first time at Sprint stores as well as
through Verizon Wireless
and AT&T – are
not as bad as the Street consensus believes,
“We built a simple model that
calculates the EBITDA impact of iPhone sales,” he writes. “We think the EBITDA
drag will be lower than many believe it to be. This means that Sprint’s funding
gap is lower than many believe it to be. Finally, our model demonstrates the
value of iPhone subscribers to Sprint beyond the initial EBITDA drag.”
In short, he thinks the stock
is now a bargain.
“It is time to buy Sprint
again,” he concludes. “Investors reacted to inadequate information around the
impact of the iPhone and Network Vision on Sprint’s cash flow over the next two
years. This led to heightened liquidity concerns. Now that the dust has
settled, we believe Sprint has access to the capital they need (it is just a
question of whether they raise secured or unsecured debt and at what price)
[and] the cash drag and funding gap is less than many feared. There are still
substantial challenges ahead; however, the stock is oversold and we believe
patience (and nerves of steel) will be rewarded.”
The analyst sees potential
catalysts for the stock in Q3 and Q4 results, which he things will show
progress on margins, and in completion of a capital raise – he expects the
company to do a $1 billion to $2 billion debt offering soon after it reports Q3
Chaplin puts the value of the
company at $4.50 a share, including $1 for the core business and $3.50 for the
Network Vision piece. He sees mote potential value in the iPhone deal and
potential networking sharing contracts, but isn’t including either of those in
his valuation. His new price target is down from an old estimate of $7 – but
still way above yesterday’s close at $2.78.
October 13, 2011
Comment on Model Portfolio activity
switched a portion of our Nvdia position to Barnes& Noble. We also bought
Ford warrants equal to the shares of Nvdia we sold.
May Liberty Media announced it was willing to pay $17 per share to acquire Barnes
& Noble. Ron Burkle, a 20% owner, balked at that price. Leonard Riggio,
a 30% owner of Barnes & Noble, controls the company. In August Liberty
Media and Barnes & Noble announced that Liberty Media’s interest had
changed and instead of buying all of Barnes & Noble Liberty Media would
invest $205 million in a convertible preferred stock of Barnes & Noble
paying 7.75%. The shares are convertible to common at $17 per share and the
purchase gives Liberty Media a 16% stake. We have traded BKS for the past few
years and bought today near the low end of its yearly range for a trade.
October 12, 2011
Comment on Model Portfolio activity
rally today brought the S&P 500 to resistance at 1220. It backed off from
there but still closed positive on the day. With options expiring next week
this may be the top for a few days. But the tenor of the markets seems to have
Investors’ Intelligence had
34% bulls and 47% bears in the latest week. That’s why we rallied.
statistics on the 47% who don’t pay Federal income taxes. Anyone want to switch
(This is from a report from 2004)
The zero-tax filers will be
largely low-income. Indeed, 75 percent of them will earn less than $20,000
per year and 97 percent will earn less than $40,000. Fewer than 1 percent
will earn more than $75,000 per year – a group comprised largely of business
owners whose tax liabilities will be erased due to business losses, carry-overs
from prior year AMT payments, or foreign tax credits.
Zero-tax filers will be
overwhelmingly young. Looking at the age of the primary breadwinner on these
tax returns, only 22 percent are 45 years old or older. More than one-third (36
percent) are younger than age 25, and 56 percent are younger than age 35.
Interestingly, there is a large
cluster of households (22.4 percent) where the principal wage earner is between
the ages of 35 and 44. Most likely, these are modest-income families who are benefiting
most from the increased value of the child credit to $1,000...
In general, then, those who
don’t pay federal income taxes tend to be young families with children, often
headed by a single mother, where the head of household has a job and is trying
to make ends meet on a modest income and seniors trying to get by o their
social security income.
Also among the 47% are US
military personnel, military civilians, and other civilian agency personnel
deployed forward including Iraq and Afghanistan. As you know if one is abroad
for a year (actually a little over 11 months), the first $89k or so of income
is exempt from income tax.
October 11, 2011
Comment on Model Portfolio activity
Today is important. It is
Turnaround Tuesday and for the last two months the markets have reversed their
trend on this day. That they didn’t do it today is a positive—or maybe not. If
the markets can consolidate without a lot of volatility (above 1170 on the
S&P 500) that will be positive for more upside as earnings season begins
tonight with Alcoa on tap.
Yesterday there were six
downgrades of Sprint by analysts that had initiated buys on Sprint at higher prices—but there was also one upgrade.
Tech Trader Daily
October 11, 2011, 9:47 AM ET
Sprint: FBR Makes Top Pick; Don’t Mind the Funding Gap
By Tiernan Ray
After an orgy of
Sprint-Nextel (S) downgrades yesterday
— six in all — today comes a kind word from FBR Capital’s David Dixon, who
actually swapped AT&T (T) out
of the firm’s “Top Pick” spot in favor of Sprint.
Dixon has an Outperform rating
on Sprint and a $6 price target.
Dixon writes that the concerns
about a “funding gap” coming out of last Friday’s investor
presentation are a bit too much. Sprint had said that it
might need to tap public markets in future, sending its shares crashing and
leading to the downgrades yesterday.
He estimates there is $4.2
billion of capital needs not covered, based on Sprint’s need to build out its
4G network with so-called LTE infrastructure, while enduring a dilution of its
profit margin as it subsidizes Apple’s (AAPL) iPhone
for the first time.
Dixon thinks the $4.2 billion
need can be met by refinancing that much in debt maturities, pushing them to
2013, or by using a $6 billion senior-secured debt capacity. “This is familiar
territory for incoming CFO Joe Euteneuer, who successfully raised capital under
tough market conditions at Qwest in 2008–09,” writes Dixon.
Dixon thinks Sprint is doing the
right thing in going for a nationwide LTE network, rather than sticking with
partner Clearwire (CLWR) for the
majority of its 4G service:
Decoupling the company’s 4G
strategic path from Clearwire will prove to be no easy task, as this is the
cause of much investor consternation evidenced by a heated Q&A session at
the investor day. However, we believe that the company is on the right
strategic path with a well-funded business plan and we believe execution risk
is mitigated. While the risk of a Clearwire bankruptcy in the short term is
mitigated in our view, it is possible but we expect Sprint would likely bid for
portions of Clearwire spectrum in any restructuring. Furthermore, we would
expect any other potential buyer (including other buyers of alternative
potentially attractive spectrum bands) to be subject to tight build-out
conditions by the FCC, which should help drive a spectrum hosting partnership
with Sprint on the Network Vision platform.
The iPhone subsidy brings
positives and negatives.
Dixon raised his 2011 revenue
estimate to $33.4 billion from $33.3 billion, to reflect the iPhone’s
contribution, and raised his Q4 net additions estimate to a positive 260,000
from a prior estimate for a negative 190,000, and cut his churn estimate this
quarter from 1.8% to 1.7%. He also raised his 2012 revenue estimate to $35
billion from $34.2 billion.
However, Dixon also cut his
profit estimates, with this year’s EBITDA going to $4.6 billion from $5.2
billion, and cut his 2012 EBITDA estimate to $4.3 billion from $5 billion. That
will lead to negative free cash flow of $183 million this year, versus a prior
$786 million positive cash flow, and negative $1.8 billion next year, way down
from negative $406 million expected previously.
The iPhone should start to
have a positive impact on profit in 2014, he thinks.
DreamWorks Animation: At Lowest Price But Worth Highest Value
By Andrew August
l assume that like me, you
don't jump to read 14 pages of potential pabulum by some random stranger you
happen on through the internet, so I'll distill the key points of my DWA write up.
DreamWorks Animation is a
well-run company that is trading below what shareholders would receive in an
orderly run-off. The company is focused on the most profitable segment of the
movie industry and its content can be further monetized due to the brands
created by the movie characters in ways that ordinary films cannot. The company
operates in an oligopolistic industry with high barriers to entry and
TTM Net Income
FD Shares Outstanding
*Shrek, Madagascar, Kung Fu
Panda, How to Train Your Dragon
1. Value – I
estimate that in an orderly run-off, the business is worth more than $18/share,
or the current market price. The current book value is $15/share. Every $100m
the 8 films carried as inventory on the balance sheet generates in profits over
the next 2-3 years is worth $1.18/share (figure ~$200m or $2.36/share). Were
DreamWorks to sell the library and related intellectual property at the same
revenue multiple (2.2x) as the Miramax library sale, it would generate another
$321m or $3.75/share fully taxed. I believe these numbers are conservative
based on historical performance of DreamWorks movies and prior content sales.
In a run-off, DreamWorks shareholders would receive at least $5-$7/share in
excess of $15 of book value for a vague value of $20-$22/share, or 10%-25%
higher than the current price (see my full
write up for discussion and why the vague value is vaguely more
valuable than I posit here). This implies that future movies released will
destroy value, although quite the opposite is much more likely. As a going
concern, it trades at 10x earnings, but figuring out future earnings is
impossible. If it trades below run-off value, you don't really have to take a
punt on guessing what earnings will be over the next 5-10 years. If it
resembles the past, shareholders should do fine.
2. Profitable Growth Runway
– As the combined tailwinds of a growing global middle class and higher per
capita revenue due to 3D take effect, revenue per film will increase, even if
reception is average. Both require very little action on behalf of the company.
The company has increased film output from 4 films every 2 years to 5 films,
which should further capitalize on this trend. The 3D film production process
adds $10-$15m in costs to each film and a rising global middle class is free.
The animated film industry is oligopolistic, communicating in plain sight
release dates to avoid competition over audiences. A focus on declining DVD
sales neglects the increasing mediums for distribution requiring desirable
content like that produced by DreamWorks. So even if the company releases the
qualitatively similar movies as it has done in the past, it will actually
achieve greater quantitative results.
3. Incremental Reduction in
Cost of Failure – The company has never been stronger with a film
catalogue that has the depth of 4 franchises – Shrek, Madagascar, Kung Fu
Panda, and How To Train Your Dragon – that can be monetized through various
licensing agreements from live entertainment to TV shows and toys. This creates
a cash stream that requires little-to-no incremental investment and is
independent of the film business. The business is debt free, which reduces
fixed costs and removes any pressure from the company to enter lousy deals to
meet payments. Both of these factors are abstract, but make the company very
robust, a necessity in an industry with uncertain film-by-film success. This
strength has allowed the company to increase its rate of film production. Every
successful film released that creates a new franchise lowers the company’s
reliance on creating successful films in the future to drive profits.
4. Management –
The full name of the company is DreamWorks Animation SKG. The SKG stands for
Spielberg, Katzenberg, and Geffen. All have a meaningful stake in the company.
Katzenberg takes all his compensation in stock options. Katzenberg has a
long-term track record of success in the animated film industry reaching back
over 20 years. He has made mistakes like anyone else, but has been able to
create numerous profitable films over his career and at DreamWorks that
outweigh the failures. Most of the uncertainty surrounding the company -
success of films, distribution agreements, and future of DVD - should be
tempered by the presence of a qualified management team and incentivized owners
among other factors. The SKG trio could have retired long ago if they were just
in it for the money.
Disclosure: I am
you thought the SEC wasn’t cracking down on the banksters:
Bank Executives with Hiding Millions of Dollars in Losses During 2008 Financial
FOR IMMEDIATE RELEASE
Washington, D.C., Oct. 11,
2011 – The Securities and Exchange Commission today charged former bank
executives with misleading investors about mounting loan losses at San
Francisco-based United Commercial Bank during the height of the financial
crisis in 2008 and 2009.
the SEC will get around to the big boys and girls by the turn of the next
October 10, 2011
Comment on Model Portfolio activity
added Walgreen. Sprint popped and dropped on Friday and this morning five
analysts jumped off the cliff by lowering their recommendations on Sprint to
hold from accumulates or buy. Sprint had an investor meeting on Friday that
obviously didn’t go well. We are maintaining our position for now.
Current Metrics Suggest Economy Is Strengthening
By Jeff Saut Oct 10, 2011 10:50 am
Machine tool orders have
soared, same-store sales for casual dining chains were up, and railcar traffic
trends are strong -- all inconsistent with an economy entering recession.
“What do you mean by an undercut
low?” was a question I received in numerous emails after last Tuesday’s
verbal strategy comments. Well, for the past few months I have been talking
about the similarities to the declines, and subsequent bottoming sequences, of
October 1978 and October 1979. Yes, I know that back then the economy was
better, the interest rate environment was different, politics were more
settled, Europe was stable, etc., but I am referencing just the pricing action
of the Dow Jones Industrials (INDU). As often stated, those aforementioned
declines were just as severe, and just as quick, as what we experienced from
the 7/27/11 intraday high of 12751.43 into the selling climax lows of August 8
and 9. Following those extreme oversold lows the major indices have pretty much
mirrored the 1978/1979 patterns by trading in a fairly tight range, rallying a
few sessions and then declining for a few to the point where participants
needed Dramamine! In those late 1970s sequences the INDU violated the selling
panic lows twice with an undercut low so often referenced in these letters.
An “undercut low” is when a
much-watched level, like the panic low of early August (1101.54 basis the
S&P 500), is violated on the downside just enough to get everyone really
bearish and cause them to sell out their portfolios. Subsequently, the indices
turn up and rally, “locking in” a low. And, that was my firm's bet last Tuesday
when in that morning’s verbal strategy comments we recommended buying the index
of your choice on the belief that we were going to experience an “undercut
low.” To be specific, I said to buy the trading vehicle of your choice and if
we rallied into the afternoon, hold on to that position for a trade. The quid
pro quo was that if we were not rallying late in the day to sell said position
and live to “play” another day. In retrospect, at least so far, the 1970s
pattern continues to track. Now one particularly observant financial advisor (FA) asked last Friday if I thought last Tuesday’s low
(1074.77) could be retested over the coming weeks. My response was, “Yes it
could, and that would still be in keeping with the October ‘78/’79
experiences.” A number of other FAs asked if last week’s collapse below 1101.54
meant we are going into another whole new “leg” to the downside toward minor
support at 1050, or major support at 1020 – 1030.
Speaking to that question, we
have always said a “decisive” break below 1101.54 was needed on a closing basis
to constitute the raising of even more cash than we already have. By decisive
we have repeatedly stated 5-10 points on the S&P 500 (SPX)
was what was meant by “decisive.” Moreover, it has to be on a closing basis to
be valid. Therefore, last Monday’s close of 1099.23 wasn’t enough; and,
Tuesday’s intraday low of 1074.77 didn’t count because that day’s closing level
was 1123.95. Yet another FA wanted to know if last week represented another Dow
Theory “sell signal.” Asked and answered I replied, “By my pencil a Dow Theory
‘sell signal’ was recorded on 8/4/11 when the INDU broke below its March 16,
2011 reaction low, thus confirming a similar break by the D-J Transportation
Average below its March reaction low.” At the time we wrote about the signal
and have spoken of it numerous times since then. To get another Dow Theory
“sell signal” would require a close below the July 2010 reaction lows of
9686.48 for the Industrials and 3906.23 for the Transports, at least by our
method of interpreting Dow Theory. Regrettably, to get a Dow Theory “buy
signal” under my methodology would require a close above the May 6, 2011 high
of 12807.36 by the Industrials with a similar close from the Trannies above
their July 7, 2011 high of 5618.25. Of course, some Dow Theorists would suggest
a close above the August 2011 closing highs of 11613.53 and 4683.96 would do
the trick, and I certainly hope they are right.
Whoever is correct, we have
been pretty cautious over the past two months, except for last Tuesday’s
bullish trading “call,” believing that if we are going to err it is going to be
by being too cautious. That’s why we have made very few trading recommendations
and why we have concentrated on dividend-paying stocks with strong fundamentals
that have favorable ratings from our analysts. All but two of those stocks
hopefully made their respective “panic lows” back in early August. The two
exceptions are LINN Energy (LINE) and The
Williams Companies (WMB), both of which made new reaction
lows early last week before recovering late in the week. Again this week we
offer these names for your consideration. One of the reasons for the “painful
ups and downs,” and new reaction lows referenced in last week’s letter, is that
analysts are whacking forward earnings estimates. For example, according to our
friends at Bespoke Investment Group:
“Over the last
four weeks, analysts have raised forecasts for 276 companies in the S&P
1500 and lowered forecasts for 780. This works out to a net of -504, or -33.6%
of the index, and represents the lowest level since April 2009.”
October 7, 2011
Comment on Model Portfolio activity
the markets up for the fourth day in a row this morning we took a bit of money
off the table by selling a chunk of Ford warrants and all our Disney, Applied
Materials, Nokia, Huntington Bank, Briggs & Stratton, and SPDR Financials.
We also sold the Ford, GM Hewlett Packard, and Hartford Financial that we bought
on Monday. We sold and bought back the Sprint we bought on Monday for a 50
October 4, 2011
Comment on Model Portfolio activity
The S&P 500 was down 2% at the opening; rallied back to
even; dropped 2%; rallied to down 1% then back to down 2% and in the last half
hour jumped 3.5% to close up 1.5% on the day. Thank you – rather no thanks HFT
for the combined 12% move. We suggested yesterday that the market measures
would rally today. We continue to think that another 4% to the downside is in
the cards to 1004 on the S&P 500 before the correction is fulfilled. We are
set in the stocks we want to own into year end. See yesterday’s review.<
We added Google to a few large accounts and bought shares of
Ford, GM, HPQ, S, HIG and ALU in this morning’s 2% sell off.
Cooper remarks that October 10 is the anniversary of the market correction low
in 2002 and of the all-time high in 2007. It is also the day after our birthday
which will be #68 for us.
sales- we continue to believe folks will buy cars since they won’t buy houses.
Financing is available at the most attractive levels ever.
- U.S. auto sales rose almost 10 percent in September, allaying concerns of a
double-dip recession as major automakers forecast stronger sales through the
remainder of the year. Among the Detroit automakers, General Motors Co sales rose 20 percent, while those at Ford Motor Co and Chrysler group were up 9
percent and 27 percent, respectively. Still battling to rebound from the effects
of the March earthquake in Japan, Toyota Motor Corp (Tokyo:7203.T -
News) and Honda
Motor Co (Tokyo:7267.T - News)
posted sales declines of almost 18 percent and 8 percent.
doesn’t repeat – or does it?
literally 2008 again in a sense.
S&P closed yesterday (October 3, 2011) at 1099.23.
October 3, 2008, it closed at 1099.23.
Economist Jim Ma and his team came up with a report, turning somewhat more
bearish on China after the Hong Kong/Chinese markets got really killed.
are now expecting GDP growth to slow to or below 7%, and are worried about the
exports picture (and among other things).
real estate market, Jun Ma and associates told an interesting story on the
recent weeks, the number of phone calls received by an author of this report
from China-based property agents has increased several fold, indicating a
significant rise in the urgency for developers to raise cash from selling
properties. A property consultant told us that he recently received requests to
help raise RMB10bn for cash-strapped small and medium-sized property developers
– this amount is a huge multiple of what he is used to dealing with. In the
offshore market, where many Chinese developers seek foreign currency funding
due to lack of access to domestic funds (the domestic stock, bond and trust
loan markets are closed to them due to policy tightening, and banks are also
very stringent), their USD bond yields have surged to 20-25% in past weeks from
around 10% before August. This means that even the offshore markets are now
largely closed to Chinese developers (see Figure 4).
these suggest that many developers are now under greater pressure to sell their
properties at a bigger discount in order to avoid a liquidity crisis. An
emerging consensus from potential buyers and some developers is that a 10% drop
in prices in the coming two quarters would be justified.
further decline in physical property prices will likely reduce the incentive
for developers to start new projects, and thus implying a deceleration in real
estate FAI. Note that real estate FAI by developers account for about 16% of
total FAI, and about 25% of the demand for steel, coking coal, and cement.
are now expecting to see about 10% correction in the real estate market for the
next 4-6 months. However, 10% is all they are expecting, because…
may ask why we are not projecting a 30% drop in property prices. Those who
understand China’s political economy should know that a 15% decline in average
property prices in 35 cities within a few months must be accompanied by a range
of economic and social consequences. These will include a sharp decline in real
estate transactions, a visible deceleration in real estate investments, rising
unemployment in the property construction and agency sectors, a further decline
in construction material prices, demand destruction due to inventory
destocking, and finally a worrying decline in GDP growth and the resulting
concern of social stability. In other words, the government will most likely
not tolerate a 30% drop, and probably not even 15% in our view. We expect real
estate policies will likely be relaxed way before a 30% price decline is
article originally appeared here: China Real Estate: Some Anecdotes
As Told By Deutsche Bank
Also sprach Analyst - World & China Economy, Global
Finance, Real Estate
October 3, 2011
Comment on Model Portfolio activity
folks, the S&P 500 broke support today and the next support is at 1004. We
do think there may be a Turnaround Tuesday rally tomorrow but most probably
1004 has to be tested to make the market gods content.
arrived in this morning after a weekend of stewing about which stocks we really
didn’t want to own in a break of support and JDSU and Ciena and Aéropostale
surface. And so we sold them. We don’t want to be out of the market since when
the turn comes it is going to be as volatile to the upside and so we placed the
JDSU money in Ford, we placed the Ciena money in XLF
(SPDR financials) and the Aéropostale money in Applied Materials.
We also added Alcatel Lucent to some large accounts and sold Briggs
& Stratton in smaller accounts.
Comments on the stocks we own:
Where have investors gone Joe DiMaggio??
Where have you gone, Joe
Our nation turns it's lonely eyes to you.
What's that you say, Mrs. Robinson.
Jolting Joe has left and gone away,
Hey hey hey.
Alcatel Lucent is trading at 8 times earnings and book value.
Has $2.50 per share in cash—that is what we paid for the shares we bought
today. ALU sells at 25% of sales.
Alcoa currently at $9 is trading at less than 8 times
earnings, and at 40% of sales and 4 times cash flow. In the good old days those
were buy territory numbers- not sell territory numbers.
(Reuters) - Alcoa shares fell
over 6 percent to a 52-week low on Monday after Deutsche Bank downgraded
the biggest U.S. aluminum producer amid concerns about recent metal price
declines. The bank cut Alcoa's investment rating to "hold" from
"buy" and lowered its stock price target to $14 from $20, saying it
believes industrial metals will be hurt by the European debt crisis and a
slowdown in emerging markets.
Deutsche Bank raised Alcoa to
a buy on January 3, 2011 when the shares were trading at $16.50.
American Eagle yields 3.8%. The shares trade at 12 times
depressed earnings. The CEO just bought 1 million shares at the current price.
Applied Materials yields 3.1% and is priced at 7 times
earnings--- This is a tech stock— as a net $3 per share in cash and is priced
Briggs & Stratton yields 3.4% and is priced at 210
times depressed earnings and is priced at its March 2009 low.
is Disney and is down 35% from is high in May.
DreamWorks is selling at its all-time low and just above
book value. DWA has a movie Puss & Boots coming out November 4 and box
office for it will determine near term market action. The shares are priced at
12 times earnings and are down 60% from the high this year.
Ford is priced at $15 billion (netting cash and
automotive debt) with $130 billion in sales. Automotive debt is $9 billion and
cash on hand is $21 billion. GM
is priced at priced at $10 billion (netting cash and automotive debt) with $145
billion in sales and debt of $12 billion with $35 billion in cash. Both stocks
sell at less than 5 times earnings. In the good old days auto stocks sold at 5
times earnings when boom times reigned. In recession they were priced at 10
is priced at one times sales and ten times earnings by the markets.
GE is cheap, cheap, and cheap with at 3.9% yield.
Hartford Financial trades at 4X earnings with a 2.5%
yield. Book value is stated at $45 with the share price at $16.
Hewlett Packard is at 4 X earnings; 2.2% yield with a
$20 book value and the share price is $22.
Huntington Bancshares are at 10X earnings with a 3.4%
Juniper Networks is at $18 down from $45 earlier this
year. At the current price the shares are at 13X forward earnings and there is
$6 per share in cash in the company which prices JNPR at 1.3 times revenues.
Nvdia has $4 per share in cash, growing earnings (12X) and
a new chip.
Nokia’s fate depends on how we’ll its Microsoft
operating system works and attracts buyer to its new smartphones. $5.50 share
priced is backed by $3 per share in cash and $60 billion in sales for a company
priced at $15 billion.
Northern Trust is a quality Banks priced below its 2008-
2009 low with a 3.3% yield and 40% below this year high.
XLF gives us exposure to the beaten down and abandoned
Sprint is the #3 M wireless phone provider with 50
million subscribers. We think Verizon will make a bid for them if it looks like
the AT&T/ T Mobile deal will go through. At its current price the shares
are undervalued by at least 100% versus its two larger rivals.
U S Steel is an enigma but is priced at the low end of
its range for the last ten years.
Urban Outfitters is a teen young adult cutting edge
retailer with a share price down 50% from the yearly high because it missed a
quarter. Management will correct the problems and then the momentum money will
Walgreen is a great company at an attractive price.
We plan on being in business for at least the next twenty years
and with this in mind we are changing the frequency and content of our internet posts. We will maintain our
concentration on market activity while we simplify our business day. We have been writing about the markets
for 27 years - on a daily basis for 12 years - and giving investment advice for 45 years. Our guess is that
while we haven’t seen and said it all we are pretty close to having exhausted any new words of wisdom
we might wish to convey. Markets don’t repeat but they do rhyme. By not posting dally we will be
freed up to do some summer/winter activities such as gardening/snowshoeing, riding our horses,
walking the dogs and spending a bit more time with the prince and princess when they visit. And
so we are going to end our lengthy daily comments but we will continue to post periodically when
market events warrant and/or when there is activity in the Model Portfolio.
FAIR USE NOTICE
This site contains copyrighted material the use of which has not always been specifically
authorized by the copyright owner. We are making such material available in our efforts to advance understanding of environmental,
political, human rights, economic, democracy, scientific, and social justice issues, etc. We believe this constitutes a 'fair use' of any
such copyrighted material as provided for in section 107 of the US Copyright Law. In accordance with Title 17 U.S.C. Section 107,
the material on this site is distributed without profit to those who have expressed a prior interest in receiving the included information for
research and educational purposes. For more information go to:
http://www.law.cornell.edu/uscode/17/107.shtml. If you wish to use
copyrighted material from this site for purposes of your own that go beyond 'fair use', you must obtain permission from the copyright owner.
For those folks who have accounts with us, you may now go to:
and fill out the account information and view your accounts online. If you
have trouble filling out the form, or in getting online, call and we will
help you with the process. NASD regulations require the eview
site to be secure. Thus your password must be changed every ninety days.
You will be prompted to make this change when needed.
For information on Mesirow SIPC and Excess SIPC protection SIPCmesirow.pdf.
For those clients of LY& Co and other
interested persons the Quarterly Report on the routing of customer orders under
All future SEC Rule11Ac1-6 Quarterly reports may be found by visiting the diclosures at LY& Co Clearing Broker Mesirow Financial at:
Annual offer to present clients of Lemley Yarling Management Co. Under Rule 204-3 of the SEC Advisors Act, we are pleased to offer to send to you
our updated Form ADV, Part II for your perusal. If any present client would like a copy, please don't hesitate to write, e-mail, or call us.
A list of all recommendations made by Lemley Yarling Management Co. for the preceding one-year period is available upon request.
Summary of Business Continuity Plan