Komrade Obama doesn't understand much, but he seems to speak money and power fluently. To wit, Obama is shelving plans for a new tax that would have raised as much as $200 billion from corporate America, after dozens of businessmen went to Washington and lobbied Congress. I imagine "lobbied Congress" is a euphemism for "plied them with hookers, booze, and threats to their physical safety." Maybe not... Maybe that's just what I'd do.
The debate on this proposed new tax centers around one of the ways the U.S. is like no other country in the world: Instead of taxing businesses on U.S. earnings, it taxes them on worldwide earnings. But the tax is deferred until earnings are brought back to the U.S., usually in the form of dividends. Obama wanted to nix the deferral, taxing worldwide earnings regardless of repatriation.
It makes me wonder what the businessmen told those congressmen that made Obama reverse himself. The newspaper story says they made the case that if they can't grow overseas, they'll have to cut jobs in the U.S., making Obama look like a job-killer. That's plausible... but I can't believe that's all it took. They must have threatened him with something big... but what?
Hippies like to talk about speaking truth to power. But power understands power and is deaf to truth. Corporate America muscled Komrade Obama today... but how? Inquiring minds want to know.
A few weeks ago, I said the third and fourth quarters of 2008 were so miserable, this year's earnings reports would be touted as dramatic improvements and proof the economy was in recovery. The Wall Street Journal and other patsies would report "better than expected" earnings and spin, spin, spin while their 401(k) accounts rose in value.
Well, since Alcoa reported earnings last Thursday – with its first profitable quarter in a year – 78% of the 32 U.S. companies reporting earnings have beat analysts' expectations. (Miracle of miracles! We're saved!)
We've told you so many times the majority of the earnings increases came from one-time cost cuts, it's getting old. But that's what happened again this time.
If you believe the rebound is real and the country is recovering before our eyes, you need to explain why we're missing perhaps the most important ingredient in any sustainable recovery: reinvestment in businesses. Rising equity and debt markets make it easier for companies to raise capital, but most of the cash is just sitting on the balance sheet. Of the 100 largest global bond issues this year, only seven listed "expansion, investment, capital expenditures, or research and development" as the reason for raising funds, according to global investment banking analysis company Dealogic.
Corporate executives are still hesitant to reinvest in their businesses... And with all the excess capacity (extra inventory, idle factories, etc.), they won't need to make large new investments for some time, perhaps years.
By now, you know "better-than-expected earnings" is a meaningless phrase, a politically correct scam run by the Wall Street Journal, Bloomberg, and the rest of the corrupt mainstream press. The reality is, sales are still weak, which is the reason for all the cost cutting in the first place.
Take Johnson & Johnson, for example. It's the world's largest health products company, and therefore something of an economic bellwether. J&J today announced a 1.1% increase in earnings to $3.35 billion. Budget tightening, including slashing 900 jobs in the company's generic-drug department, offset declining sales. Revenue dropped 5.3% to $15.1 billion, less than the $15.2 billion a Bloomberg survey of analysts forecast.
It's not easy to hide an ongoing economic contraction in the largest economy in the world, but I know we can count on the Wall Street Journal and Bloomberg to do their best, one earnings report at a time.
The next big bellwether earnings report the market is waiting for: Intel, which reports today. Our own Jeff Clark sent out a special note to his S&A Short Report subscribers this morning, telling them he'll delay his current trading idea until after Intel reports.
I mostly don't suffer traders. Most of them are just gamblers in thin disguise. But Jeff is a rare bird, a trader so successful, he retired young and now focuses on publishing his advice, teaching his readers how to do what he did. He's one of three traders who I actually trust. To access Jeff's winning trades, click here.
Another key factor missing in this rally... share buybacks. In the five years before the credit crunch, share buybacks accounted for around one-third of growth in earnings per share.
Share repurchases are one way to get corporate profits to shareholders. Dividends are another. Standard & Poor's analyst Howard Silverblatt says the third quarter of 2009 was the worst quarter in history for dividend hikes. Of the 7,000 companies S&P tracks, only 191 raised dividends in the third quarter.
Since S&P began tracking dividend data in 1955, dividend hikes have exceeded cuts every year, averaging 15 hikes for every cut. These days, the ratio of dividend hikes to cuts is nearly 1-to-1.
Dividends, as I asserted in the September issue of Extreme Value, are more important than ever. At the peak in 2007, share repurchases outpaced dividends by 180%. Today, spending on share repurchases is about half that of dividends. Investors will see less return from the capital gains resulting from repurchases. They'll see proportionally more return from dividends.
This is why I've recommended the stocks of World Dominating franchises like Wal-Mart. Unlike the many banks and other busted financials, World Dominators are still raising their dividends, as they've done every year for decades on end. Investors and newsletter writers tend to discount these stocks, because it's virtually impossible to sell you the sun, moon, and stars by claiming they'll double in the next five minutes. It's a standard novice investor error: Focusing on the upside, when it's the downside you need to watch out for.
Long after thousands of little mining companies have flamed out... long after the options have expired worthless... long after the ETFs and mutual funds have returned little or nothing to anyone but the managers who collect fees for running them...
The World Dominating businesses like Wal-Mart will still be around and generating huge cash flows. Contrary to all the bad analysis about how they can't grow, they'll be larger, too. And they'll still be using all that cash to buy back their shares and pay ever-increasing dividends. Wal-Mart has raised its dividend every year of its existence as a public company.
Though most investors are obsessed with lottery-ticket gains, the truth is, if you buy World Dominator stocks today and hold them for five or 10 years, the odds are excellent you'll outperform all the speculators and gamblers looking for fast triple-digit gains.
In yesterday's weekly update for Extreme Value, I listed the three World Dominators that are in buying range right now. If you're buying anything else, you're practically guaranteed to lose money. To get access to my proprietary list of World Dominator stocks, click here.
New highs: iShares S&P Index ETF (IVV), Morgan Stanley Emerging Markets (EDD), Central Europe & Russia Fund (CEE), Johnson & Johnson (JNJ), Patterson-UTI (PTEN), Kinder Morgan Energy Partners (KMP), Longleaf Partners (LLPFX), EnCana (ECA), Philip Morris (PM), Silvercorp Metals (SVM), Silver Wheaton (SLW), Jinshan (JIN.TO), Rex Energy (REXX), Encore Acquisition (EAC).
In the mailbag, readers ponder Teddy Roosevelt and... me. Send your e-mails to feedback@stansberryresearch.com.
"I agree that TR never met a war he didn't like, but that all seemed to change the minute his own favorite son, Quentin, died in World War 1. It was a blow from which he never recovered, and he died a few months later a completely broken man. It almost seems as if the brute fact of favorite son's life being snuffed out actually hitting home to this famously egoistical man for him to have a change in perspective." – Chris Weber, editor Weber Global Opportunities Report
"RE: 'Ferris comment: It might still be the home of the brave, but it is definitely not the land of the free, and hasn't been for a long time'... Yet, surprisingly, you're still here making money. What's up with that?" – Paid-up subscriber Terry Moore
Ferris comment: Oh yeah, that's me... Mr. Moneybags, exploiting the system he purports to loathe and criticize. I'm such a hypocrite. You got me.
Regards,
Dan Ferris and Sean Goldsmith
Medford, Oregon and Baltimore, Maryland
October 13, 2009