Avi Salzman from Barron's called this morning for my reaction to ExxonMobil's earnings press release, which reported second-quarter earnings down 66% compared to the second quarter of 2008. He was up against a tight deadline, so it was a short conversation. I'll tell you exactly what I told him...
I don't worry about one quarter of earnings at ExxonMobil – or even a year or two. Exxon is a long-term business, like property and casualty insurers. You don't speculate on Exxon. You buy it at a good price and hold it. Between its cash and treasury shares, ExxonMobil has more than $240 billion of buying power. That's enough to buy almost any publicly traded oil company in the world, more than enough to assuage the fears of anyone afraid Exxon isn't growing reserves fast enough.
One thing I didn't get a chance to tell Avi is that it's easy (and not too smart) to get worried about one quarter's earnings, especially when that quarter is being compared to the same period in 2008... when oil hit its all-time high of more than $140 a barrel.
I've been telling my readers to buy ExxonMobil at less than $66 a share for three years. Since then, every time the stock gets below that level, it doesn't stay there long. During that time, ExxonMobil has reduced its overall share count by approximately 18% and paid out another 6% in cash dividends for a total payout of about 24% in three years.
ExxonMobil bought back $12.7 billion worth of stock in the first half of 2009 and says it'll buy another $4 billion worth next quarter. In addition, it will pay a dividend that has risen at an average annual rate of 5.5% for 27 years. It's on pace to pay out about 8% of its market cap in dividends and share repurchases this year.
ExxonMobil is the World Dominating oil franchise, a fact that trumps all other considerations. My latest World Dominator pick is up 28% in three months. The one before that made Extreme Value readers 53% in six months.
We told you Tuesday how Jeremy Grantham, of Grantham, Mayo, Van Otterloo, and I have been banging the drum for high-quality stocks for a couple years now. You may now add Bill Gross' voice to the chorus. In his latest missive, he sings a familiar and timely tune...
In his August investment outlook, the manager of the world's largest bond fund wrote, "There is no investment potion for this new environment other than steady income-producing bond and equity investments in companies with strong balance sheets and high dividend yields."
Like Grantham (and me, too!), Gross cautioned against low-quality stocks and bonds... "A journey to 3 percent nominal GDP means default/haircuts for assets on the upper end of the risk spectrum, as well as extremely low yielding returns for government and government-guaranteed assets at the bottom end."
Investors in risky assets will get "haircuts" because economic growth will only be 3% compared to the 5% to 7% average for the past 15 years...
Gross also stressed the importance of "tangible earnings growth," saying stocks will be valued on increased dividends, not "green shoots hope."
Finally, he also said investors should favor debt in emerging markets where growth prospects are "tilted upward." I've got three extremely well-financed emerging-market recommendations in Extreme Value, one each in Latin America, Asia, and Eastern Europe.
For more on my World Dominator and emerging-market picks, click here.
Things are getting worse for the largest commercial real estate broker in the world, CB Richard Ellis (CBRE). The Los Angeles-based company announced a $6.6 million loss for the quarter, compared to a $16.6 million profit a year earlier. Revenue was down 27% to $955.6 million.
Faced with plunging leasing and sales transactions, CBRE increased business in its property management arm. It now gets 42% of its revenue from management contracts, up from 32% a year ago.
Results were in line with analyst expectations, only because the company ruthlessly cut costs... Earlier this year, CBRE said it would cut as much as $500 million in expenses through layoffs and budget tightening. Now, it plans to save an extra $100 million. And according to Will Marks, an analyst following CBRE, "Chapter 11 is far out of the question at this point."
Hmmmm... If Chapter 11 were truly out of the question, why mention it at all?
The New York Times presents a compelling reason why government-sponsored mortgage modifications aren't working, and it's not because the banks don't have the infrastructure to handle it...
"If [mortgage companies] do a loan modification, they get a few shekels from the government," said David Dickey, who led a mortgage sales team at Countrywide and Bank of America, leaving in March to start his own mortgage advisory firm, National Home Loan Advocates. By contrast, he said, the road to foreclosure is lined with fees, especially if it is prolonged. "There's all sorts of things behind the scenes," he said.
When borrowers fall behind, mortgage companies typically collect late fees reaching 6 percent of the monthly payments.
Banks exist solely to make large profits, so until the government can match the money banks will make from borrowers in foreclosure, we wouldn't expect this "failed" mortgage modification trend to change.
However, another government-sponsored stimulus program, the so-called "cash for clunkers" is working too well. Under the program, consumers who trade in an older vehicle for a new, more fuel-efficient model are eligible for up to a $4,500 government rebate. Chrysler said its dealers saw a two-year high in traffic last weekend. Toyota and Hyundai both said traffic is up considerably since the government initiated the plan last Friday.
Car dealers are now worried the $1 billion stimulus could run out as soon as next month and are asking the government for more stimulus cash...
It will be interesting to watch nationwide auto-loan default rates following cash for clunkers. Our bet... The people this program attracts are not the kind who need to be burdened with an auto loan right now.
New high: Life Technologies (LIFE).
In the mailbag... signs of deflation... or is it inflation? Tell us what you're seeing out there: feedback@stansberryresearch.com.
"Dan, I really don't get what is so hard about the inflation-deflation thing, but kudos to you for being the only there to at least consider deflation... That your builder friend says that lumbar is cheaper but there is no demand is proof positive that there is deflation...
"I read the crowded clothes store as proof of no deflation with disbelief. My grandmother told me that there were still lines to see the latest and best movies and 'Attendance at theatres was drastically affected, although during even the darkest days of the Depression, movie attendance was still between 60-75 million per week.' The point is even during the darkest days people will open their wallet for the new hot item.
"As far as the whole inflation rebounding once deflation is over scenario, we are in unchartered waters. Deflation has never rebounded quickly. That so many people think we are going to shows me how naive people are with regards to history.
"The whole basis for deflation is slumping demand due to people having less money in their pockets. It doesn't matter how much the government prints. What matters is if that money gets into people's hands AND they spend it.
"It's that last point that people often miss. During deflationary times, the first and smartest thing people do once they have more money is payoff their high interest debt." – Paid-up subscriber Joseph
Ferris comment: My S&A colleagues David Eifrig and Tom Dyson have more than merely considered deflation. They're both adamant deflation is what we're in for going forward. I acknowledge the huge destruction of collateral in the banking system and realize that represents destruction of the money-multiplier function of banks.
But I also realize the Fed has responded in an unprecedented manner. Its balance sheet was nearly triple pre-September 2008 levels at one point late last December, and it still has excess reserves of more than $700 billion. I don't know when or how all that new credit makes its way into the economy, but I know it eventually must. When it does, the word "deflation" will be a memory, and we could all wind up buying groceries with wheelbarrows full of cash.
"With all the negative forecasts for commercial [real estate], why is the ETF SRS still falling in value?" – Paid-up subscriber Rudy Telles
Ferris comment: The SRS is an inverse fund of the Dow Jones U.S. Real Estate Index, which is made up of 76 REITs. REIT share prices have been rising, so the SRS index has been falling. There's no law of nature that says share prices and fundamentals can't move in opposite directions. Hotel, office, retail... they're all bad and getting worse. But if they get better soon enough, the super-low share prices of early March could have been a once-in-an-eon opportunity.
As for housing, it is not reflected in the SRS, and its fundamentals are totally misrepresented in the financial press.
As recently as 2007, about 5% of the housing market was foreclosure resales. Since last September, it's been more than 50% foreclosure resales at times. It's about 45% foreclosures now. Foreclosures and low-end homes are bought by investors and first-time buyers, the weakest hands in the market. The real housing market – the strong hands who buy homes from builders and homeowners to live in them – is bad and getting worse.
Now that foreclosure moratoriums are off, we're experiencing a surge in foreclosure sales. Seasonal trends were misrepresented in the press, as housing sales rise every spring and summer, but are 21% below last year's levels.
The little bump we recently got in home prices won't last. This is the mother of all headfakes. If you bet on it being the bottom, you'll get hosed.
"The fact that he signed his comment 'anonymous' tells me he knows what he is saying is wrong. The big problem is there are too many people in this country who plan to do just what he recommended his lady to do. I'm sure that when she signed up for the credit card she agreed that the rates might go up, yet she still signed up for it. If she is tired of paying the raised rates, then pay the sucker off and quit using it. That is completely within her control, no one charges it up but her. This country has become a bunch of pantywaist crybabies who want a free ride, bring back debetors prison!" – Paid-up subscriber Karen Mize
Ferris comment: I don't know about debtors prison since that works against the task of getting creditors paid off. But I'm with you on the pantywaist crybabies. Don't forget the busybodies. Crybabies and busybodies, that's what we're living with now.
"I travel a lot on business and I frequently get to Asia. Last time I was in Bangkok, I was amazed that room rates had increased, despite a massive loss of tourists/business men. They seem to have the notion that if there are fewer customers, the way to make money is raise prices.
"Fast forward one year. I am arriving in my car at Newark Airport. The parking lots on a Wednesday afternoon are empty. There are flashing signs saying 'new rates are in effect.' You guessed it, they RAISED rates from $24 to $27 per day, under the same principle. If there is less demand for your product, raise the price. Madness." – Paid-up subscriber EM
Ferris comment: Sounds like Bangkok hotels and Newark airport parking have pricing power... or maybe it's just inflation. Hard to tell, isn't it?
Regards,
Dan Ferris
Medford, Oregon
July 30, 2009What I told Barron's this morning... Gross says buy quality, too... CBRE Chapter 11 out of the question?... NYT: Loan mods don't work... "Cash for clunkers" drying up fast...