Sunday, October 30, 2005

Economy Watch -- What's Right with This Picture?

There was big news on Friday. News that was a shock to us all. News that changes paradigms, mind sets, and bottom lines. News that assaults our notion of "what's going on 'round here." This news had nothing to do with Scooter Libby or the bloodsport that politics has become. This news was so good, that I could find almost no mention of it in the Sunday version of the New York Times, and it generated only a brief mention in my local paper. This "good news" that the media chose to ignore was that in spite of the hurricanes, the US economy grew at an inflation-adjusted rate of 3.8% for the third quarter. Remarkably, this was a higher rate of growth than the previous quarter's 3.3%. Pardon me, but I thought Katrina et al, were sending us into certain recession. Isn't that what the "Main Stream Media" told us; isn't that what the headlines in your local paper said? There is something else the MSM is not reporting: strong corporate profit growth of nearly 13% vs. a year ago. The odd thing about this is one of the few industries that is in a recession is the media business. Newspaper circulation is plummeting, network television viewership is collapsing, and movie theatre box office receipts are trending lower. Maybe that is the reason the media in this country are so disconnected from reality in their reporting, they are depressed from observing their own fate. This is the opposite of the orchestra playing waltzes as the Titanic sank. The MSM are like the choir singing dirges on Easter morning. Stay tuned, I'll keep you informed about the true state of the economy and profits. There are lots of economic releases coming. We expect some softening, but, as we said in our recent quarterly letter, the downtick will be followed by a big uptick as the rebuilding of the damaged areas reaches full speed.

Thursday, October 27, 2005

Dividend Talk - Carnival Cruise Lines

I have been watching recent dividend increases from large corporations for clues they might offer about the company's projections for the year to come. In some respects, we are flying blind with regards to the real strength of the economy and corporate profits because of the disruptions of recent storms. I took a very positive read from Paychex's 23% hike a few weeks ago, because of its implications for employment. Today I take another positive read from Carnival Cruise Lines. This week CCL hiked its dividend 25%. Our dividend discount model was estimating a 13% hike and Value-Line was estimating a 7% increase. Let me see here, let me count the ways that CCL is in the eye of the storm. 1. Many of their main bases of operation are along the coast of the United States; 2. They consume huge quantities of petroleum; 3. They do not sell an essential service, and their customers have to travel long distances to reach them; and 4. They have a terrorist threat because cruise ships are a known target. This does not sound like a recipe for surprisingly good news, but their 25% hike is just that. Again in my judgment, as in the case of Paychex, a 12%-13% hike would have been fine with investors and Wall Street. So, why a 25% dividend hike, unless it says something about next year's business? They know they are in the eye of the storm. They know the aforementioned four points. They go to bed with them every night and wake up with them every morning. I believe the answer to that question is obvious: Come heck or high water they think their business is going to be better in spite of the obstacles than does Wall Street, and in my judgment they are putting their money out to prove it. This kind of dividend talk is priceless, because it is tangible, comes from the source, and, finally, because most people ignore it. We do not own CCL in any of our styles of management, but as a result of this dividend action, we are studying it very closely. We'll comment later on our final decision, but either way, as a signal, CCL's hike is valuable.

Monday, October 24, 2005

I'm for Ben

Today Ben Bernanke was announced as the successor to Federal Reserve Chairman Alan Greenspan and the Dow Jones jumped 170 points. Wall Street is voting with their dollars and it is clear they like the new man. This morning before the announcement, I was asked by a friend about the strong rumors that Bernanke was going to get the job. I said that ever since he was appointed Chairman of the Council of Economic Advisors, he was considered the front-runner for the job, but I was surprised that he was apparently getting it, and I thought it might take awhile to get used to him. He was a virtual unknown among investment people even 4 years ago. He had built a strong reputation in academic circles while at Princeton University for his study of the Great Depression and the Fed's role in it. My friend said what is your gut feel of the guy? I said three things come to mind immediately. He is said to be utterly brilliant, he is a strong believer in encouraging the private sector to grow the economy instead of the government, and he is a bit of an unusual duck. I'm guessing the stock market's uptick today was its approval that his positions are considered to be along the lines of Alan Greenspan's. He is considered by many as a supply side proponent, meaning he favors low taxes on income and capital gains. His brilliance was on display when he began talking about the possibility of deflation in 2002 and 2003. It is dangerous stuff to talk about deflation because the word in many economists' minds has a direct link to the depression. When he was not shouted down by the economic elite of this country, it was clear that, even though I did not know who he was, the power-elite did. I remember I had the clear impression that his statements were so bold that he would not be saying them if they did not have the blessing of Alan Greenspan. When I looked into who Ben Bernanke was, I found a somewhat unusual man for the job of operating in the public light. He wore a beard and did not like to wear suits. He wore cowboy boots and rode a motorcycle. I remember the Wall Street Journal commenting that if he were to become Fed Chairman things would be a whole lot different during Fed reports on capitol hill. Whereas Mr. Greenspan would humor every question and drone on for indeterminable minutes on the esoterics of economics, Ben did not suffer fools well, and his speaking style was short and . . . short. Today's Wall Street Journal had a funny piece about President Bush noticing that Ben had on light socks with his dark suit at a formal occasion and suggesting to him that black socks might be more appropriate. At the next Council of Economic Advisors Ben arrived early and passed out light socks to all the members, who were then wearing them when the president arrived. Ben Bernanke is a character, but he is no fool, and he possesses one of the great minds of our time on economic theory and how to apply it in the real world. I have been a fan of Alan Greenspan's since the beginning. I remember that rumors appeared soon after he was appointed Fed Chairman that outgoing chairman Paul Volker did not think he was tough enough to handle the politics of the job. I'm glad Mr. Volker was wrong. The same questions will, no doubt, be asked of Ben Bernanke. Time will tell, but most guys I know who ride motorcycles are not all that easy to push around. If white socks can give the market a boost, count me in, Ben.

Monday, October 17, 2005

Thank You Brian Wesbury

Brian Wesbury is the Chief Economist at Claymore Securities in Chicago. He is a frequent contributor to the Wall Street Journal and other publications. I think you could describe him as a supply side economist. I have followed him for years and find that he offers a very fresh voice in a world too full of the weary dronings of the prophets of gloom and doom. His most recent weekly investment letter is so right on that I am sharing it in its entirety. Risk-Phobia and Faith Throughout history, adventure and risk-taking have led to great progress and wealth. Early explorers risked their lives sailing rickety ships, negotiating mountain passes and experimenting with new medical procedures. Of all countries, the United States has most embraced this model of progress. The results have been nothing short of miraculous. In the past 200 years, the number of people living in freedom, and not tyranny, has grown exponentially. US life expectancy has doubled over the past 100 years, while others have seen life expectancy grow more. While relative poverty is still with us, in most industrialized nations the lowest incomes still afford a lifestyle better than royalty had in the past. Technology allows us to see storms before they make landfall. Helicopters rescue terrified citizens from rooftops afterward. Computer-based risk management systems allow companies to find workers after a calamity, re-open businesses faster than ever before and move essential supplies to people who need them. While we will never conquer calamity, all of this saves lives and reduces risk. Despite four major hurricanes in 2004 and two monsters in 2005, the US economy continues to grow as it absorbs the damage. On the other hand, attempts to use government to reduce risk have not succeeded. The levees in New Orleans did not work as they should and intelligence systems failed at detecting the plots of 9/11. At the same time, Sarbanes-Oxley did not stop the CEO of Refco from doing immense damage to the firm he was supposed to shepherd. This does not mean we should not work at improving government. But nothing will quell the sinful nature of man or stop the immense forces of nature. These things, we will always have to live with. This brings us to the seemingly limitless fear of recent months. Volatility indices have climbed sharply, equity prices have fallen, new tropical weather systems boost oil prices, and fears of bird flu generate hundreds of thousands of words of warning in national news sources. We have no way of knowing whether or not these fears will come to fruition, we do know that history is a story of overcoming such events. We also know that these fears are most often overstated. Despite these facts, many people continue to look toward government for some reassurance that it can stop bad things from happening. They are succumbing to riskphobia and lack faith that a flexible and free market economy is an efficient shock-absorber. Looking back at the past few years should give pause to excess fear. The US economy remains robust. Jobs, incomes and profits continue to climb. Keeping faith, while others doubt, leads to progress and wealth. Brian Wesbury

Friday, October 14, 2005

Economy Watch: The One-Handed Economist

Someone once said that what the world really needs is a one-handed economist. The reason for this pithy statement is because economists are famous for making grand prognostication and then saying, on the other hand such and such could happen, which would give us a completely different outcome. Tomorrow's headlines in your local newspaper will make the case that economists keep their two-handed approach. The headline will read, "Inflation at 25 Year High." It will be true, but "on the other hand" it will not be meaningful. The 1.2% jump in the consumer price index was almost entirely caused by the surge in energy prices during and after the two storms. The core CPI rate, which excludes food and energy and is the measure of inflation that the Federal Reserve believes is most important, rose only .1%. So take your pick; either we have annual inflation of 14.4% (the 1.2% is a monthly figure) or 1.2%. My belief is that inflation is much closer to 1.2% than it is the former. I can assure you that the main stream media will get this so wrong that I will be countering their ignorance of this issue for many months to come. So now in addition to monitoring dividends hikes and economic growth, I will be commenting on the real rate of inflation on a regular basis for a while. This blog is supposed to be about dividends, but we will have to do battle with the forces of dis-information and confusion before the quiet voice of dividends can be heard at all. At .1% the core rate was actually less than the estimates. The core rate of inflation is so important because it shows the rate of inflation in the 85% of the economy apart from the very volatile food and energy sectors, and, thus, measures the spill over of high energy prices into the rest of the economy. The "one-handed" answer to how much spill over there has been is -- not much. Over the past year, the core CPI has grown by under 2%, while the CPI including food and energy, has grown at near 4%. If I am correct in my belief that oil prices will cool down as a result of sticker shock at the gasoline pumps, then the Consumer Price Index should begin trending lower in 2006. I realize this flies in the face of the headlines in your favorite news source, but to me it is almost baked in the cake.

Thursday, October 13, 2005

A Dividend Star Does Some Talking

As I mentioned in the last edition, I am very interested in the dividend hikes of major companies during the fourth quarter. This is a time when many companies make dividend increases based, in part, on what kind of a year they have had, but also, influenced by their expectations for the year ahead. Paychex is a processor of payroll checks and human resources outsourcing for small and medium-sized companies. The company is a solid Dividend Star having raised its dividend for 16 years in a row and has the 4th highest dividend growth among companies that have raised their dividends for at least 10 years in a row. PAYX's dividend growth had slowed to the low double digits over the past 5 years, reflecting the after effects that 9/11 had on employment. However, their business has bounced back, solidly, over the past year in line with US employment growth. Here's the good news. PAYX just announced a 23% dividend hike. That was twice what Value-line was projecting, and 50% more than our own expectations. In our judgment, this larger-than-expected dividend hike is about as important an announcement as we could hope for in this environment. First, as it relates to PAYX, the dividend hike is at a higher rate than their earnings growth for the year and at a much higher growth rate than their hikes of recent years. The only conclusion that makes any sense to me is that they believe their business will continue to improve. Second, and even more importantly, since they are the second largest processor of payroll checks, and the largest processor for small to mid-sized companies, I believe there is a not-too-subtle message that they are bullish on employment in the coming year. This is exactly the kind of "signaling" that I believe companies do all the time with their dividends. In this case, the signal carries over to the the economy as a whole, which is vitally important because of the unknowns created by the hurricanes and the oil spikes. PAYX, it seems to me, is giving us a clear signal that they believe (as we do) that the economy will shake off the ill effects of the storms and grow at about the same rate in 2006 as it has in 2005. As I described earlier in the year, the signaling qualities of companies is a key in our overall analysis of the attractiveness of a company's prospects. Our dividend discount model values PAYX at about $40 per share. With the stock selling at just over $36 per share, it is a reasonable value. It's dividend is not high enough to qualify for our pure dividend style of management, but we do own it in our high growth portfolio. I'll report again when another major company speaks with their money.

Saturday, October 01, 2005

Dividend Increases Talk

The fourth quarter is one of the heaviest times of the year for dividend increases. Many corporate boards will be announcing to shareholders what part of 2005 corporate profits they will be paying out in dividends. But it is important to remember that dividends are as much about the future as the past. No company wants to set a dividend rate that they will have to reduce should business turn soft. With Katrina and Rita having cut a whole in near term earnings and blurred prospects for 2006, I will be very curious to see what kind of dividend increases we get, particularly for the Dividend Stars. Dividend Stars, you will recall, are companies that have consistently raised dividends for many years, even when dividends were out of fashion. Also of interest will be the dividend hikes from the oil stocks. Earnings are way up, but dividend increases have not been anywhere close to earnings growth for Exxon and Chevron. Will they share the wealth, or will they keep buying back stock. Stock buybacks are fine, but did you ever ponder the fact that stock buy backs mostly favor people selling out. Gimme the cash, I'll reinvest it if its good enough. Finally, I will become concerned about forward earnings if we see a lot of the major dividend payers hike payments by 6%-7%. A hike of this magnitude is the long-term trend and is the same thing as a punt. Dividends talk, and I want some of the key dividend companies, like GE, United Technologies, MMM, Coke, and Pepsi to be hiking payments in the 10%-15% range. In my mind that would be signaling as much about the coming year as the one just past. I continue to believe that stocks are very cheap relative to bonds, maybe as much as 20% undervalued. With 2005 earnings now expected to rise 12%-13% versus expected growth of 7% at the beginning of the year, most companies have had a windfall year. Will they reward us with windfall dividend hikes or will they revert back to long-term trend hikes in the 6%-7% range? I will chronicle important dividend announcements on the site through the end of the year. I will provide a list of the lineup in a future blog.