'A European problem'... Focus on France... U.S. companies buy back tons of stock... Contrarian or victim... $100 million for Fannie and Freddie execs...
"The marketplace is saying that this is not just an Italian problem, this is now becoming a European problem," Larry Fink, CEO of BlackRock, said on CNBC this morning. "Liquidity is vanishing."
We won't dwell on Europe today, as we all know the situation – too much debt, soaring yields, and fragmented leadership. But it's worth noting the opinion of the CEO and chairman of the world's largest asset manager, with $3.3 trillion under management.
Fink noted the divergence of triple-A-rated European countries from the benchmark German bund. The spread between the bund and debt from Norway and the Netherlands moved 20 basis points (bps) in one day – the biggest moves in history. Fink also said you need to watch France, the European Union's other supposed iron-clad credit. In the midst of the subprime crisis, France was trading 10-20 basis points off Germany. Today, the spread jumped 23 basis points to 187.9 bps, an all-time record.
Italian 10-year debt hit 7.07% today, then dropped below 7%. Spanish 10-year yields increased 19 bps to 6.22%. The euro dropped below $1.35 – an important benchmark.
While everyone is focusing on Italy today, Fink warns the markets should focus on other countries... the next shoes to drop. With these soaring spreads, we won't have to wait long...
Executives of publicly traded companies are notoriously bad capital allocators. They overpay for companies. They make purchases using stock when it's undervalued. They pay cash when the stock is dear. And they repurchase shares at the worst times.
It's no surprise that today, U.S. companies are buying back shares at the highest rate in four years. A Bloomberg report attributed the purchases to companies "taking advantage of record-high cash levels and low interest rates to purchase equities at valuations 15% cheaper than when the credit crisis began." Companies have authorized more than $453 billion in repurchases this year, putting 2011 on track to be the third-highest annual total behind 2006 and 2007. Do you remember what happened after 2007?
"If the corporate community really agreed on the idea [that] we're heading to a recession, they wouldn't be buying back their stock," James Paulsen, chief investment strategist at Wells Capital Management, which oversees about $333 billion, told Bloomberg. "That says something about their expectations. That's a testament from CEOs, corporate managements saying they are way undervalued and they have a positive outlook on the future."
Our friend, expert resource investor Rick Rule, likes to say, "you're either contrarian or a victim." We know which camp Paulsen falls into. We hope you won't make the same mistake.
Yesterday, two of Doc Eifrig's Retirement Millionaire recommendations made the "New 52-week Highs" list – Abbott Laboratories and McDonald's. These two companies are the perfect example of stocks Eifrig seeks out for his readers: They're safe; they consistently grow sales and increase dividends; and they've survived through lean times. In his latest issue, Doc explains the qualities he looks for in his portfolio companies…
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[W]e simply search out companies with long histories of growing or stable sales. If a company has endured lean years in the past and has come out strong, it can probably do it again in the future. |
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We want to see healthy cash flows because they tell us the company is making cold, hard cash and not just reporting accounting tricks with its earnings (like with Enron). |
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And we want to see a clear pattern of rewarding shareholders with dividends and stock buybacks. Dividends compounded over time are the most consistent avenue to big returns. I've told subscribers many times that "dividends don't lie." Companies can't fake a cash payment like they can manipulate other items on the balance sheet. If you're going to cut a dividend check, you have to have the cash to cover it. And a rising dividend is like a magnet drawing shares higher. |
Also, in that issue, Doc explains why he chose Abbott Labs... And how his readers made nearly 23% in 10 months.
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We knew [Abbott] had grown revenues 38% through the financial downdraft of 2008... We knew it consistently brought billions of dollars in cash flow each year... And we knew it had increased its dividend for 38 consecutive years. |
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The stock paid out 55% of its earnings in dividends... But we bought anyway. Our simple strategy told us this was not a fatal flaw, that the company's strong management knew how to overcome this issue. |
Recently, Doc found what he thinks is the next Abbott Labs. It's a super-safe company with a healthy dividend that he believes will return 12%-15% a year for the next 15 years. And Warren Buffett just loaded up on the stock. To learn more about Retirement Millionaire and start adding safe, dividend-paying companies to your portfolio, click here...
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New 52-week highs (as of 11/14/11): Enterprise Products Partners (EPD).
Some great feedback on UniCredit's dire situation. Do you live in Europe? We'd love to hear any "boots on the ground" stories you have about the economy. Send them here.
"You guys had great call on the Unicredit fiasco. $10,6 bn Q3 losses due to writedowns in Ukraine and Kazakhstan. Hmmm not to mention the hunk of Greek bonds, the Italian debt they must hold and countless other former E European assets they may have. I'd like to know what price they've marked Greece down to. As Porter said the amount of debt of other banks (also loaded with the same crap!) that they have will also be a problem not exiting their radar for a while. So as and when Porter does a highland fling on the call (as I'm sure he will) have him take a look at that element then see if raising 50% of the current capitalisation via a rights issue has much hope of succeeding. Their best chance is get in before '12 coz when the doors open in Jan there's a whole load of refinancing piling up. €200bn from Italy alone as well as circa €600bn from the stress test banks.
"There's many a European bank preferring not looking under the carpet at the moment. Keep up the vigilance." – Paid-subscriber P
"I like your 'turd' saying. I devised a similar one of my own many years ago: 'You can present me a turd wrapped in gold foil, but it's still offal.' Great minds think alike." – Paid-up subscriber Douglas McOmber
Regards,
Sean Goldsmith
Baltimore, Maryland
November 15, 2011