Wednesday, January 30, 2008

The Fed is Now on the Right Track

The Fed is now on the right track. The best evidence of this is that the financials have outperformed the overall stock market since the first of the year. The surprise .75% cut last week sent many high quality banks up 5-10%. Even after today's late-day selloff in the face of the Fed's .50% cut, Bank of America and Wells Fargo, two top quality banks, finished higher. Bank subprime losses sent the whole market down at midyear, creating recession worries. The bottoming of strong banks is a good sign that the market now believes that the big banks have adequetly reserved for future losses, and that the Fed's rate cuts will put a floor under the economy, ensuring increased bank loan demand and better profits ahead. The other sign for a more optimistic view on the economy is that the consumer staples have rolled over in recent weeks. We have been suggesting here recently that such a possibility was possible. If investors are selling consumer staples, which are relatively insensitive to the economy, and buying financials, which are at the heart of the problems, the beginnngs of a new bull leg may be nearer than anyone thought, even two weeks ago. I have complained for months about the Fed's slow-footed approach to the unfolding subprime crisis. In my mind, the .75% cut last week, was the signal that they are now firmly in a sprint to solve the problems. That is good news for us all.

Thursday, January 24, 2008

Dividends Talk: Boeing, GE, US Bancorp

I believe that dividend increases are good for many reasons, not the least of which, it means I'm getting a "raise." But there is another important message that dividend increases offer and that is what academia calls, "signalling." Signaling is the idea that since a dividend hike, unlike earnings, is a voluntary action by the board of directors, and since the board can pay any amount of dividends they wish, or none at all, that this unencumbered action has meaning as much about the future as the past . Thus, dividend actions take on great importance during crises. The reason is obvious -- if a business is suffering, it might want to keep the capital (real money) instead of paying out to shareholders in the form of dividends. I believe three recent dividend hikes by major companies give us good clues about business prospects in three important areas of the economy. GE recently raised their dividend by 10.7%. That is in line with their average annual increase of the past 5 years. If there is a signal in GE's dividend hike, and I firmly believe there is, it is that their business is growing at a reasonably steady pace. Their international business is carrying the load and will continue to do so. Probably a bigger signal is that GE Credit does not likely have a big closet full of risk that might end up in the headlines. I thought the GE hike was slightly better than I would have expected, therefore, I think it is good news for them and the global economy. Boeing (BA). Lately BA has been flying like a company with two left wings. Rumor has it, the Dreamliner may be renamed to the "Maybe Later Liner." Not a catchy name, and not likely to catch many more orders until they can prove that their tower of babel production strategy will work. Having said this, BA recently raised their dividend 14.3%, a solid showing and a signal that they are confident that better times are coming. US Bancorp (USB): In the middle of the recent melt down, with investors beating all the banks with an ugly stick, USB raised their dividend 6.2%. That is less than half of their average hike of the last 5 years, but, in light of all the unknowns about the economy and the credit crisis, I was pleased with the increase. Here's the reason: A constant 6% growth rate would double USB's current dividend of $1.70 in 12 years. Based on today's price of $33.50, that would mean that in 12 years I would be making about 11% on my original investment. Now that may not make our friends in the private equity crowd get excited, but it's plenty good for me, especially when you consider that a ten-year US T-Bond yields just over 3.5%. Dividends talk. Most of them have a pretty straightforward message. Some dividend hikes, however, are purely to "buy" shareholders. Those are the ones you have to watch out for. The three companies above have made generous dividend hikes in a very worrisome time. That tells me that they are confident about their businesses in the coming year. That's a nice bit of good news to go along with the flood of gloom and doom that we have to contend with everyday. We own the above three stocks and have for a long time. This discussion is for information purposes only.

Monday, January 21, 2008

Give Us Meat, Not Cake

In recent days, Ben Bernanke, Fed Chairman, has fallen on his sword and said that the Fed stands ready to provide the liquidity to stave off any severe economic slowdown. Additionally, he made a speech before Congress in which he said he believed the US economy needed an economic stimulus package. My recollection is that on the day he spoke of the need for a stimulus, the market fell nearly 300 points. President Bush, in recent days, has also spoken about the need for an economic stimulus package, perhaps $150 billion. His speech was ignored in the US and is said to have been the cause for the shellacking that international stocks took on Monday, the reason: foreigners don't think it is enough. President Bush and Fed Chairman Bernanke are only making things worse by talking about things that might or might not happen. They need to act. Here is my suggestion. Mr. Bernanke, the markets are telling you that the Fed needs to cut rates. Do it Monday morning. Do not wait for the the big pow wow on the 29th and 30th. Surprise the markets with your boldness. Gain the wind gauge as the sailors say. Do not let the markets gyrate madly over the next week, only to give them about what they are expecting. This is becoming a giant game of chicken. The markets beat us up day by day and you give us a little tea and cake. The markets know it's not enough and the beating starts again. Give us some meat and give it to us when we are not expecting it. President Bush. Do not leave the US economy is the shape in which you took it over in 2001 -- almost in recession. If the economy truly needs a short-term stimulus package, get it done. Don't talk and hint and blame. Just call one of the loyal opposition who has a habit of getting things passed through both sides of the isle. You will be helping the American people no matter who wins in November. Please don't play the sad game of stalemate politics. That has been going on for far too long.

Saturday, January 19, 2008

I Am Ashamed of Wall Street

I have loved investing since I read my first Wall Street Journal. I remember my excitement in my early years when the Forbes magazine would arrive. I would read it cover to cover almost before taking a breadth. As I have been in the business, I have dearly loved working with clients and trying to fit an investment plan to meet their investment needs. At times, over the years, I have found that dealing with one crisis or another seemed to call for more courage than I believed I possessed. Gradually I came to understand that the tough spots, in actuality, were how a person gained mental toughness and acquired an ability to go in the opposite direction of the herd, which I have also found is almost always the wisest path to follow. Last week I was taking a long drive with my 26-year old son, and as we drove, we were talking about the subprime crisis and its impact on the economy. It was mostly a conversation about how I thought the economy could handle such a blow and what he thought of what I thought. Then he said something very interesting, "Dad, how could something like this happen?" I responded, "Son, I am ashamed to say that I don't know." I went on to talk about greed and fear and risk and reward, but after a while I grew silent. He said, "Is something bothering you?" I said, "Yes it is, son. I am ashamed of Wall Street." He said, "But dad aren't you a part of Wall Street? For one of the the few times in my life, I found my self saying something that before that moment I don't think I knew. "No, son," I answered, "it has always been my goal -- that our firm could count, so to speak, on Wall Street. But this subprime debacle has left me with a feeling that I have not been able to describe until this moment. I am no part of Wall Street. I am ashamed off Wall Street. I am ashamed of the greed that is epidemic there. I am sick of what I will call Wall Street white lies, where they tell you half the truth, but not the other half. But mostly, I am ashamed of how little regard Wall Street has for the average investor in this country. They truly act like all the money in the world is theirs. I am ashamed of Wall Street and the crazy risks it is now clear they have taken. I am ashamed of the kind of men and women whose exalted sense of their own importance could make them think that slicing and dicing bad loans, at the end of the day, would make them something other than bad loans. Son, that is hubris, that is foolishness, and now we must all pay for their stupidity. Son, you know I believe more in capitalism than almost anyone I know, and to me Wall Street has always stood for free markets and capitalism. But with this subprime mess, it is clear that they are not capitalists at all. They are alchemists. They believe if you rub lead and pig iron together long enough you get gold. No son, I am not Wall Street, thank goodness they never invited me in." If there is any good news in my diatribe, it is that Wall Street types are not what makes the economy of the US great. That is done by corporations large and small who care about their customers and give their shareholders a fair shake. My calling out Wall Street for being something other than what I, and most other people, thought they were does not diminish investors' economic or stock prospects an iota. Indeed, the the egregious greed and foolishness exhibited by Wall Street in recent years can serve us all better by making us realize that all of the noise that they are making about this "can't miss" idea or that one is just noise, or maybe ever better, as sure sign to go the the other direction. I had been planning to write this letter for a week, but didn't know if it was my place, or if this was the right time. I decided to write it after I received an email and a subsequent telephone call from a trusted friend and client, who echoed almost exactly what I had been feeling. I have included his email here it here with his permission. Greg. I'm am rapidly loosing respect for the "geniuses" on Wall Street. Oh hell! I lost it a long time ago. Where have their minds been.? What were they thinking? Don't any of them have an ounce of respect for the economy of the (God help him) average investor? The more I read of this "Subprime mess'" the more it sickens me. Doesn't anybody out there believe that there are consequences to everything we do.? (One of he first lessons I learned in Med School.)Fear and Greed.Fear and Greed! I read of twisted Machiavellian financial dealings and arrangements which I cannot even begin to understand. These men are supposed to be educated and responsible. If they are not all fools they are acting like they are. Even Bernanke does"t seem to be helping. And Washington? Oh boy! If Physicians acted like this we'd all be dead.

Thursday, January 17, 2008

Dividend Investing is a Good Thing in a Bad Market

It's a good time if you are a dividend investor. Stocks may be crumbling day after day, the headlines may be crying: Recession Looms. Big banks may be taking write offs like some sort of plague and selling pieces of themselves to countries the size of Delaware that just happen to have assets the size of Texas. As dividend investors, if we have done our homework, our companies' cash dividends are unchanged or growing. Our cash dividends are big enough to produced a reasonable rate of return, even without capital gains; and as the market goes down, our cash rates of return for new purchases is actually getting better. If you think about it, bad markets are actually good markets for dividend investors.

Thursday, January 10, 2008

I Like Ben Bernanke, . . . But

Thursday, November 01, 2007 The Fed Got it Wrong! My prediction that the Federal Reserve would lower their target rate by 50 basis points was wrong, but in my judgment, they will see the error of their ways and continue to cut rates very soon. I do believe, however, that they missed the opportunity to stay out ahead of the unfolding worries in the subprime market. Notice the dateline. I am not speaking of the Thursday January 10, 2008, statement by Fed Chairman Ben Bernanke that, "We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks." That was a good thing, a very good thing, and will ultimately lead to a bottoming in the markets. My dateline goes back to the Fed's failure to cut rates by 50 basis points in late October 2007, and Bernanke's subsequent statement before a joint session of Congress that the risks between inflation and recession were "balanced." Any seasoned strategist knew as Bernanke was giving his economics lesson to Congress, that he was wrong, and the reason they knew he was wrong was the way the market reacted to the October 2007 quarter point cut, and to his speech. The markets were saying that the economy was slowing faster than the economic data were suggesting. The Fed chose to trust their lagging data, and the economy and investors have paid for it, with stocks down more than a 1,000 Dow points since that time. None of us expect stocks to go up all the time, and none of us expect that the Fed will call it right every time, but if central banks around the world learned anything in the Alan Greenspan era, it was that you ignore the markets at your peril. Here's the reason: there are macroeconomic research firms around the globe that have economic measurement tools every bit as good as those of the Fed, and they operate in real time. They learned from Greenspan about how "on-time-deliveries," the price of scrap steel, and the sales of heavy duty trucks could give important clues to the "real time" economy. These economic analysis firms have also developed scores of measurement tools that include changes in the prices of securities in their economic projections. I give credit to Alan Greenspan for his sensitivity to the markets and the coaching he did when he thought that the markets were off base. The relationship between the markets and him became simpatico, and market volatility fell and markets prospered. The new Federal Reserve has now blown its first opportunity in crisis management -- in the sense of getting out ahead of the market and speaking boldly about the risks of the subprime meltdown and then to take the unmistakable lead in helping to solve it. When Bernanke spoke before Congress, I told our investment policy group that he reminded be of the smartest guy in the class, just before the biggest bully smacked him in the nose. I like Ben Bernanke, and I have every confidence that the Fed he leads can solve the financial ills that face our country. But for crying out loud, Dr. Ben, don't play professor with us. The bullies on Wall Street will beat you like a drum, and us with you. Nevertheless, thank you for taking charge today. You may win us over yet. I for one am hoping that you do.

Saturday, January 05, 2008

Buy Stocks When They Have the Sniffles

This is the third in a series of excerpts of a meeting I had with an investment savvy long-time friend and client.

Friend: I agree that the banks will be back and that their losses can be replaced with new capital, but it seems to me that the clouds are going to hang over them well into 2008, so in my mind there is no rush to add to them. You know I am a fan of growth. Are their any growth stocks that look cheap to you? I mean in the sense of 1994 when growth stocks were trading at about the same PE as utilities?

GCD: I see lots of stocks that are trading cheap to their growth. In fact, you can throw a dart at the Wall Street Journal and chances are you will hit a cheap stock.

T. Rowe Price, the big money manager is probably as cheap a growth stock as I am aware of.
Over the past twenty years, they have grown their dividend over 20% per year, and in the past twelve months they hiked it over 40%. They are really distancing themselves from the money management crowd, and one big reason is that nearly two-thirds of their assets are in retirement accounts. Money is just pouring into the big corporate retirement plans, and T. Rowe has focused on that area for many years.

Our Dividend Valuation Chart projects that TROW will reach close to $70 per share in the coming year. That would be over a 25% return from its present price of $55.

Friend: Again, I like the company and I like the industry, but I don't like the timing. If you buy TROW, you are betting that stocks will rise in the coming year. That is not a sure bet.

GCD: Never is, but you and I both know if you wait long enough price will intersect its dividend value.

Friend: I guess we also know that if you wait for the sun to shine and the band to play, stocks are seldom cheap. I saw that you bought TROW for me, and I was wondering what you were thinking. Glad to hear that it makes sense, unlike some of the stinkers you have bought for me over the years.

GCD: Is that a debatable point?

Friend: No, if there would have been too many stinkers, we wouldn't be talking.

GCD: I can see that you are in your usual good form. Happy New Year, and thank you for the trust you have shown me all these years.

Friend: Don't get weepy eyed on me. It's just a business meeting.

GCD: I have known a lot of people in this business, but I can count on one hand the number of people who have the faith you do in the stock market. When everyone else is wringing their hands -- like today -- you are thinking about what we ought to be buying.

Friend: The reason is simple. People come to me with all kinds of illnesses. Some are real, some imagined. In either case they feel very ill. But I know that 99% of them are going to get better. Some will need my help, or the help of another specialists, but one way or the other, if they are a reasonably healthy person, they are going to get over their illness. I don't create health, I facilitate health. The body is an amazing machine. It can handle much more than most people think. In that regard, I think the stock market is much like the body. It's a tough old bird, and there are plenty of specialists around to help it along when it gets the sniffles.

As more and more people have gotten into the investing game, it has become something resembling Las Vegas. They want to bet on anything that moves from the next elevator door to open to how much a particular stock will go up or down in a day. In the gambler's way of thinking a company that catches a cold, or heaven forbid, the flu, is a goner. I know that is not true. Indeed, I know that, in time, most companies, like most people, will get over their symptoms and go back to work. It's just a matter of time.

Thus, the reason I get interested in buying during bad times is because I know the traders are selling all companies they believe are under the weather, so to speak. Since I believe in the vast majority of cases the illnesses will pass, it just makes good sense to buy great companies when they have the sniffles. After all, when the sniffles clear up, the traders will be back to bid up their prices. It's worked for 25 years.

GCD: I'm a witness to that. Thanks again for your time.