Buffett: 'Up yours, NBER!'
"We're still in a recession." So said uber-investor Warren Buffett's statement. And it sounds a lot like he's calling the National Bureau of Economic Research (NBER) a liar. On Monday, the NBER said the 18-month U.S. recession ended in June 2009.
Buffett defines a recession differently than the NBER. For Buffett, a recession is over when inflation-adjusted GDP per person returns to its pre-recession level. The NBER puts the end of the recession at June 2009 because that's when it says the trough in business activity occurred. That was the bottom.
Buffett says "a great majority" of the 80 operating businesses in his Berkshire Hathaway conglomerate are coming back slowly. He says Burlington Northern Santa Fe railroad shipments are "61% of the way back." The carpet, brick, and insulation businesses haven't rebounded as much, but they're improving, he said.
Last week, an analyst for the financial research firm Morningstar said fair value for General Motors was $134 per share. This week, the Washington Post points out this just happens to be the exact number the government needs to hit in order to recover its entire $50 billion investment in the automaker.
Neil Barofsky, the special inspector general for the Troubled Assets Relief Program, calculated the government's $134 estimate. Barofsky put the number in a letter to a senator.
Morningstar's report glowed, calling GM's earnings potential "excellent, because it finally has a healthy North American unit and can focus its marketing efforts on just four brands instead of eight." Morningstar analyst David Whiston also said, "We think it is critical for investors to know that GM now makes excellent car models as well as light trucks."
Question for Morningstar: Do you really want to buy what Uncle Sam is selling?
I'm not saying a bubble is developing in the bond market, but I do wonder what some investors are thinking... Microsoft says it sold $4.75 billion of debt at maturities of three, five, 10, and 30 years. The three-year, $1 billion issue set a record for tiniest coupon: 0.875%. That's 25 basis points (0.25%) over Treasurys. Thomson Reuters/IFR says it's the lowest coupon they're aware of going back to 1970. Microsoft's new five-year debt pays 1.625%. Its new 10-year debt pays 3%, and the 30-year debt pays 4.5%.
Bankrate.com puts jumbo money-market account rates at 1.01%. Microsoft pays less interest than an FDIC-insured savings account. That implies – with $1 billion of tangible evidence – that Microsoft's triple-A credit is a safer bet than the full faith and credit of the U.S. government.
And what will Microsoft do with the money it's borrowing at record low rates? It's paying some of it out to shareholders. On Tuesday, Microsoft raised its quarterly dividend payout by 23%, to $0.16 a share. Microsoft will also continue buying back stock. It had $23.7 billion of share repurchase authorization left as of June 30, 2010. Over the last 10 years, Microsoft has returned $170 billion to shareholders via dividends and share repurchases.
Not everybody gets to borrow at 1% or so... Gannett, the company that publishes USA Today, just sold $500 million of bonds, half maturing in five years, half maturing in eight years. The five-year coupon is 6.375%. The eight-year coupon is 7.125%. Five-year Treasurys are yielding around 1.31% today. So Gannett is paying 5.065% over Treasurys and 4.75% over Microsoft.
Maybe that's how bonds will be priced from now on – spread over Microsoft. After all, who deserves its triple-A rating more, Uncle Sam or Microsoft? I'll take MSFT every time. But with the stock around nine times free cash flow, I don't get why you'd ever buy the bonds.
Investors who want their share of government largesse should consider Wal-Mart shares...
According to a Wall Street Journal blog post, Bill Simon, Wal-Mart's CEO of U.S. business, spoke last week at a Goldman Sachs conference and described the activity in a typical Wal-Mart store near midnight on the first of the month...
...it's real interesting to watch, about 11 p.m., customers start to come in and shop, fill their grocery basket with basic items, baby formula, milk, bread, eggs, and continue to shop and mill about the store until midnight, when government electronic benefits cards get activated and then the checkout starts and occurs. And our sales for those first few hours on the first of the month are substantially and significantly higher.
Simon also gave us an idea of how deeply dependent many Wal-Mart customers are on government payments for basic needs:
And if you really think about it, the only reason somebody gets out in the middle of the night and buys baby formula is that they need it, and they've been waiting for it. Otherwise, we are open 24 hours – come at 5 a.m., come at 7 a.m., come at 10 a.m. But if you are there at midnight, you are there for a reason.
New Highs: Atlantic Power (AT), Market Vectors Gold ETF (GDX), Silver Wheaton Corp. (SLW), WR Berkley Capital Trust II (WRB-PA), DirecTV (DTV), iShares Silver Trust ETF (SLV), Altria Group (MO).
Thanks to all those who responded to our request for feedback. We got some interesting notes below. Keep them coming. Write to us at feedback@stansberryresearch.com.
"OK, Dan, you talked me into it. Here is some feedback.
"In January 2009, I was put 1000 Goldcorp shares, a Resource Report recommended stock. I sold a $30 put instead of buying outright and got put. This Friday, 20 months later, I watched my eighth covered call expire worthless. I have a 'stink bid' in on the ninth one. Not a bad way to build wealth. Here are the figures:
$27,437 – base cost: ($30 less the put premium)
$300 – 20 monthly dividends
$9,420 – eight expired covered calls
$17,717 – adjusted base cost (current market value: $43,700)
"At this rate, I'll be free and clear in roughly 36 months (OK, tax-wise it is more pay as you go, but you get it). And unless the yellow metal is headed to oblivion, I should get there.
"So, combining Alliance techniques and education you get:
Buy gold Buy stocks using puts Sell covered calls to generate extra income.
"Seems like pretty good advice to me. Gotta go liquor up now. Cheers." – Anonymous
Ferris comment: Thanks for sharing the details of your success. As an Alliance member, you can get a consistent stream of covered call and other options strategies from Jeff Clark, Tom Dyson, and other S&A editors. The Alliance is a great deal. For a one-time fee, plus a small annual maintenance charge, you'll get all of our publications (except Phase 1) for life. That includes all the products and services we've yet to create. You'll also get invited to our annual Alliance Meeting, to be held this year in Zurich, Switzerland.
"PARANOID! Whoop whoop whoop, the black helicopters are circling your home right now. Get the guns, grab the bible and hunker down in fear. What a bunch of political loons you guys are. Too bad I like your investment advice or I'd cancel you today. Komrad Obama is looking for YOU!" – Paid-up subscriber Eric Nadelberg
Ferris comment: Maybe I'm a "political loon," but read this next bit...
"For a long time now, I have wanted to write and tell you what idiots you all are. You should stick to picking stocks since you seem to do it so well. Your politics are suspect. However, I may have to change my mind about your politics.
"I have done some research on the following information that was e-mailed to me by a friend. I am sorry to say, it seems to be true. Part of the gun law was included in an amendment to the IRS Revenue Act of 1986 and introduced on February 24, 2009. I believe the government will request information about gun ownship on the 2010 tax forms.
"In addition there is a bill in the House, H.R. 45 Blair Holt Firearm... I suppose it is possible that I have misinterpreted all of this so I have included the references for anyone who wishes to do their own research: Text of H.R.45 as Introduced in House: Blair Holt's Firearm Licensing and Record of Sale Act of 2009.
"Basically this would make it illegal to own a firearm – any rifle with a clip or ANY pistol unless: 1) It is registered 2) You are fingerprinted 3) You supply a current Driver's License 4) You supply your Social Security number 5) You will submit to a physical & mental evaluation at any time of their choosing. Each update change or ownership through private or public sale must be reported and costs $25. Failure to do so you automatically lose the right to own a firearm and are subject up to a year in jail." – Paid-up subscriber Jeanne S.
Ferris comment: Wow. I didn't know about the requirement to submit to physical and mental exams. Think about that... mental exams... It's like the old Soviet Union. If they want you out of the way, they declare you insane and off you go.
"Is the stop loss concept inviolable? I subscribe to a few of the Stansberry subscriptions, and there has been a lot of mention lately about the 'safest' stocks (e.g. Intel, Microsoft, J&J). Do stop losses apply to these safe stocks? Or, do we assume that, because they are safe, they will eventually recover their value, and are worth holding on to?" – Paid-up subscriber Brad Ward
Ferris comment: Every Stansberry editor handles stop losses a little differently. I believe I'm the only S&A editor who doesn't use stop losses. Speaking for myself, I don't feel they're necessary with stocks like Intel, Microsoft, and J&J because I think the risk of a permanent impairment to the business is nil.
"Note No. 2 to Dan regarding Extreme Value. I am a software engineer for a Fortune 500 company. While your reader may be correct that software engineers generally do not hold Microsoft products in the highest esteem, they are ingrained so firmly in corporate life that they are not going away. I, for example, work exclusively in a Windows environment at work but have a Mac at home. And new technologies, such as mobile apps, will most likely be Windows because they will need to talk to our existing desktop applications. So don't be too quick to write off 'Mister Softee' [Microsoft] just yet! I have a chunk socked away in my 401(k) per your recommendation, and don't plan on selling anytime soon. There is a nice, big moat around Redmond. Thanks. Keep up the great work!" – Anonymous
"I, too, have been in the tech industry for quite awhile (22 years so far). I work on Apple (Mac OS) and Microsoft (Windos) OSs on a daily basis. I manage development of a website (http://www.iwin.com) that runs on Linux, but delivers products exclusively for Window's users.
"In some regards I'd agree with the 'perception' of other technologists regarding the quality of Microsoft's products. But I think there are a few relevant things being overlooked,
- Visual Studio is a Microsoft product that is quite impressive. It allows people to develop software more quickly then they could otherwise. It is a huge competitive advantage.
- The C# language enables really fast development of corporate tools and custom internal software.
- The .NET initiative was clever and has managed to retain a large population of corporate website development.
- Buying Microsoft is a 'safe' decision for Information Technology managers. I'd imagine similar to buying IBM in the '80s.
"So, I bought Microsoft. I sleep at night with no problem. I collect the dividends. The $$ do not look any different if they came from 'dumb' customers who could have got something less buggy but more esoteric. I hope to buy more before their stock buy back plan starts affecting the price. To me this is the same as buying Altria. Just because I don't like the product, doesn't mean I should refuse a reliable income stream from it." – Paid-up subscriber Anonymous
Ferris comment: Thanks for the valuable input. I agree investors should look at the quality of the business and the soundness of the investment proposition, not their emotional involvement with it.
"Is GLD a bargain relative to gold? GLD supposedly buys 1/10 oz of gold is currently $126 while gold is $1,290, so do I buy gold at a discount going to GLD or what is happening?" – Paid-up subscriber Erich Kellner
Ferris comment: ETFs have managers, and managers take fees. Like closed-end funds, they should always trade at a discount to reflect this. Otherwise, it's probably just a function of supply and demand. Perhaps more people are interested in owning GLD than physical gold. I'd never buy GLD. I can't bury it in my backyard.
"One of [our most successful businesses] is tax preparation. Extremely profitable every year.
"You see, the whole system runs on fear. We even have low-income clients who come in to have a simple return filed with just one or two W2 forms. Amazing, this they could do themselves, but they're terrified of the IRS.
"Also very profitable is refund loans. Too much money is deducted for so many people that by the time all W-2's are in they are desperate for the money and need it as fast as possible. Personally, I think it's all an unethical racket, but if we didn't do it somebody else will. We also offer check cashing next door at a low highly competitive rate. Makes about $75K each tax season.
"Porter, please tell us more, after a while, about leaving the USA for good and settling in a French castle, did you say? Of course with the Internet, S&A can be run from anywhere.
"I certainly agree with gold recommendations. I acquired most of mine back when it was $35-38/oz. or so and don't need any more. It's vaulted in Zurich. If you print this keep my name confidential." – Anonymous
"I am confused by the S&A editors interest in 'stock buy backs.' I bought a tech stock in the early 1990s that used its earnings to buy back a great deal of stock during the time I owned it, but the outstanding shares did not appear to change after adjusting for stock splits. I believe now that the stock buy backs were the used to cover the stock options given to key employees as a form of compensation (ie. labor cost) that was not reflected in the income statements. Do the buy back programs actually reduce outstanding shares or merely hide labor cost?" – Paid-up subscriber BH
"I understand why stock buy backs should be a good thing for shareholders. Ostensibly they reduce the number of outstanding shares, thereby increasing earnings per share, which in turn should increase the share price assuming the same price to earnings multiple applies. However, what actually happens when a company buys back its own shares? Are those shares retired, or are overly generous stock options issued to executives instead, at the expense of the ordinary shareholder? My guess is that is the case with many firms, but how can the ordinary shareholder determine if a company is in fact doing this? Personally, I am always much more comfortable with a company that is increasing their dividends rather than just buying back shares. I really believe this is the main reason that companies like Microsoft continue to see their shares trade at such a depressed price. I would really appreciate your comment on this." – Paid-up subscriber Tim Schneider
Ferris comment: Indeed, not all share repurchases are created equal. Some buybacks are downright stupid because the companies buy at high valuations and don't reduce the share count. Some are brilliant because they reduce the share count and take place at depressed valuations. Others are somewhere in between. We should make that distinction whenever we can.
Sometimes the shares are held in the corporate treasury. Sometimes they're canceled. You can check the treasury share counts versus the amount of shares repurchased. I've seen some good disclosures (Dun & Bradstreet comes to mind), which break out the amount repurchased as part of employee compensation and to reduce shares outstanding.
I don't think Microsoft's stock is depressed because it's repurchasing shares rather than dedicating that cash to dividends. Microsoft just raised the dividend and the market yawned.
Regards,
Dan Ferris
Medford, Oregon
September 23, 2010