The Internet age is colliding with our highly politicized world in today's headlines...
Workers are on strike at two Amazon warehouses in Germany. Verdi, a German trade union with more than 2 million members, says the workers aren't paid as much as other retail workers. Amazon says they aren't retail workers. It argues they're logistics workers and paid well for it. It's the first time Amazon workers have gone on strike.
Over in France, things are even stranger... Socialist President Francois Hollande's government wants to impose a tax on smartphones and tablets. The proceeds will be used to promote French art and culture. Hollande's predecessor, Nicholas Sarkozy, has said he doesn't want the Internet to become "the Wild West… a lawless place where people are allowed to pillage artistic works with no limits."
In France, they complain about innovation destroying the culture and make new laws and taxes to combat it. In the U.S., we do some of that. But we also had the late Apple CEO Steve Jobs inventing iTunes and saving the music industry from itself. I (Dan Ferris) will never claim the U.S. is a bastion of freedom, but at least it's not France.
Meanwhile, here in the good ol' U.S.A, the Senate has passed a new bill that would allow states to collect sales tax on Internet transactions. It's supported by mega-retailers like Wal-Mart, Target, Best Buy, Home Depot, and Amazon. Republican House Speaker John Boehner is unlikely to support the new law... but you never know. If the law passes the House of Representatives, it'll go to the President's desk.
I doubt the Amazon strike will amount to much. But I don't know how all this Internet tax business will play out. All I know is when you tax something, you get less of it. If the mega-retailers get their way, they'll wind up with less competition.
That's the true purpose of most regulation. It's often enthusiastically supported by the biggest players in the industry in question. For example, H&R Block is the biggest tax-preparation firm. It supports licensing of tax-preparers. H&R Block is happy to see the government put its smaller competitors out of business through licensing requirements.
The irony is that your average politico will sell regulations as a plan to "protect the little guy." In reality, regulatory schemes screw the little guy by reducing his choices, and often raising the price of the goods and services he buys.
Internet sales taxes will just make life more expensive for those who can least afford another expense. Unfortunately, most of these poor ignoramuses will never figure that out, and they'll keep voting for the people who are most likely to make their lives more difficult and expensive.
Standard & Poor's, the world's largest credit-ratings firm, is a typical beneficiary of government regulation. S&P probably wouldn't be No. 1 if it weren't also one of the Securities and Exchange Commission's nine designated Nationally Regulated Statistical Ratings Organizations (NRSROs). If you're not one of these firms, you're not allowed to do business. It's a standard competition-reduction scheme designed to benefit incumbents.
S&P and most other NRSROs are paid by issuers, the firms whose securities they rate. That's a very obvious and very large conflict of interest. That conflict was on display during the financial crisis, when S&P gave its coveted triple-A rating to garbage securities stuffed with subprime loans.
S&P said in a roundtable discussion today that changing the issuer-paid model would cause conflicts and uncertainty in the marketplace. One participant said his firm tried to get investors to pay instead of issuers, but investors didn't want to pay. Gee, that's funny... NRSRO Egan-Jones has had no trouble getting investors to pay. It's been in business since 1995.
Payroll-processing giant Automatic Data Processing (ADP) has been surging lately. Its shares have regularly posted new 52-week highs and did so again Monday and last Friday. Revenues exceeded forecasts and earnings met estimates last quarter. The market loved it, and ADP hit $70 a share last Thursday for the first time since 1998.
I recommended shares of ADP in Extreme Value in the fall of 2008, shortly after Lehman Brothers failed, when almost nobody thought buying stocks was a good idea, let alone one tied directly to employment numbers. Extreme Value readers are up 120%. They've compounded their money at close to 19% a year in ADP.
As I pointed out in October 2008, ADP has a large advantage when it comes to making money...
Aside from charging fees for payroll processing and tax-payment processing, ADP is able to make money simply by holding your tax payments long enough to earn interest on them. ADP has 585,000 customers worldwide. Imagine all the thousands of people at each company, getting a paycheck every week or two. ADP gets a piece of that action and collects interest on the tax money every time.
Dr. David "Doc" Eifrig – who recommended ADP to his Retirement Millionaire subscribers last year – noted in March 2012 that the company has a massive footprint...
ADP is nearly everywhere. It provides software and services to administer payroll, tax compliance, benefits, health insurance management, and more. No customer accounts for more than 2% of its revenues, which means it's well-diversified. And it enjoys extreme loyalty among clients because switching costs are so high.
But what I like best about ADP is it's tied so closely to the economy. The more people who are employed, the more money ADP makes.
The U.S. jobless rate fell to a four-year low of 7.5% in April. It's expected to drop through the rest of this year, according to a Bloomberg survey. As long as the employment news is good, ADP shares will likely rise, even though they're already trading at 24 times earnings. (Meanwhile, the S&P 500 is trading around 16 times earnings.)
ADP also does a decent job of returning cash to investors. The company has raised its dividend every year for the past 37 years. It bought back $415 million in stock last quarter and repurchased $747 million in shares last year.
ADP's ability to earn interest on tax withholdings could really give it a boost if interest rates tick back up. When rates rise, its lower share count from share buybacks, combined with the higher revenue at virtually no extra cost, will turbocharge its earnings. This will help ADP earn higher returns on invested capital than the vast majority of businesses.
Liquefied natural gas (LNG) exports from the U.S. might be just around the corner...
News out of Washington D.C. suggests companies looking to export LNG are about to get the green light.
Regular readers are familiar with our coverage of the huge boom in North American oil and gas. New technologies have allowed us to unlock vast amounts of oil and gas deposits. The next step in this boom is to export our huge new supplies to the rest of the world... specifically, the growing Asia markets.
Last week, President Obama said U.S. natural gas exports could "facilitate lower costs" for other nations. Though he didn't say when or how many licenses he'd approve, some analysts believe it's just a matter of weeks.
David Leiter, president of Washington lobbying firm ML Strategies, told Bloomberg a decision is possible within "weeks and not months." John Tobola, general counsel for Freeport LNG, a company in line for export approval, said he expects "action in this quarter."
According to a Bloomberg report, some energy lobbyists don't expect a decision until the new energy secretary is sworn in. Obama's choice is Ernest Moniz. Senate Majority Leader Harry Reid, a Democrat like Obama, told Bloomberg that could happen this week as leaders agreed to bring Moniz's candidacy to the floor for a vote.
Policymakers have been dawdling for months over the decision to export natural gas. The Department of Energy submitted an export study in December. The report gave the green light...
For every one of the market scenarios examined, net economic benefits increased as the level of LNG exports increased.
However, some still believe we should keep our gas on U.S. soil. Companies that use natural gas as a feedstock – like Dow Chemical – argue unlimited overseas sales could erode the energy cost advantage for manufacturers. They say prices will increase if we open up the market. Foreigners will compete with domestic users, which will bid up the price. That may be so in the short term. But as Porter told readers last month, the benefits far outweigh any temporary price rise...
We know consumers fear exporting crude oil and other energy resources will lead to higher prices. In the short term, they may. But the small, temporary increases to domestic prices will lead to a vast economic boom as demand for our energy products could produce hundreds of billions in profits for our domestic oil and gas industry. This boom will inevitably lead to increases in production and lower prices for energy everywhere.
With the U.S. sitting on such an abundance of natural gas, it makes sense to export. Asian countries can't get enough natural gas. (And they're paying multiples of what we pay here in the U.S.)
Japan pays more than $16 per thousand cubic feet (mcf) for its gas. Here in the U.S., it goes for a little less than $4 per mcf today. Sure, you have to convert it into LNG and ship it to the other side of the planet. But that still beats the high prices Japan pays. And it beats prices in Europe, where natural gas goes for $10-$11 per mcf. Opening up exports from the U.S. will create a true global market for natural gas.
In the June issue of Retirement Millionaire, Doc Eifrig told readers why he's still bullish on the market today...
The nominal price of the S&P 500 is at its all-time high. But its price-to-earnings ratio (P/E) – around 16 times – is near its historical average of 16-17 times.
Remember... we're in the midst of an economic recovery with historically low interest rates. In that environment, stocks (especially ones returning cash to shareholders) should command a significant premium over their historical valuations.
Given that... stock valuations are on the cheap side.
So if the market is hitting new highs but it's not overvalued on a (P/E) ratio... that tells me corporate earnings (the "E" in the P/E ratio) – the best possible indicator of the economy – are reaching new highs...
The profit margins for companies in the S&P 500 stock index have reached around 13.5%. That's about as high as they get. Companies are operating at peak efficiency, suggesting that creative accounting won't increase earnings figures from here... only true organic growth will.
The market still has plenty of room to run. We aren't seeing as many values as we did two years ago, when stocks were priced at 12 times earnings and every fundamentally sound business looked cheap. But we still want to own stocks. We just want to be sure we own only the best names with the best prospects.
Doc also discussed why it's important to follow the old investment adage of "letting your winners run, and cutting your losers short."
Research shows a strategy that buys the 10% of stocks with the highest returns over the previous month and sells the 10% of stocks with the lowest returns in the past month generates about 1% a month – roughly double the expected return on the market. In other words, momentum wins out.
Other studies show stocks that hit a new 52-week high are more likely to outpace the market in the following week.
In other words, even though many stocks in your portfolio are likely trading around all-time highs... you should fight the urge to take profits. Stocks that outperform will usually continue to outperform.
Doc added one shareholder-friendly company that fits the bill to his portfolio this month. Last year, this company generated more than $10 billion in free cash flow. Today, the stock trades for less than nine times expected earnings. And it pays a nearly 5% dividend... If you'd like to learn more about Retirement Millionaire – and how to access Doc's latest recommendation – click here.
New 52-week highs (as of 5/13/13): Advent Claymore Convertible Securities & Income Fund (AVK), ProShares Ultra Nasdaq Biotechnology Fund (BIB), WisdomTree Japan Hedged Equity Fund (DXJ), Fidelity Select Medical Equipment & Systems Fund (FSMEX), iShares Nasdaq Biotechnology Index Fund (IBB), iShares Dow Jones U.S. Home Construction Index Fund (ITB), AllianzGI Equity & Convertible Income Fund (NIE), ProShares Ultra Health Care Fund (RXL), Sequoia Fund (SEQUX), ProShares Ultra S&P 500 Fund (SSO), Johnson & Johnson (JNJ), Prestige Brands (PBH), Targacept (TRGT), Automatic Data Processing (ADP), MGM Resorts International (MGM), 3M (MMM), Corning (GLW), Becton-Dickinson (BDX), American Financial Group (AFG), Medtronic (MDT), DCP Midstream (DPM), Altria Group (MO), and Teekay LNG Partners (TGP).
In today's mailbag, one angry subscriber... keep the rants coming to feedback@stansberryresearch.com.
"What you think of as praise? Just read the source material again, and consider where it came from. Of the three one has alzhimers, one is a scitsophrenic and the other omg! And look at this one, can't spell. Stop patting yourself on the back, and resting on your laurels. We are heading into a significant correction, and you will be tested now. All boats rose- I hope you have something to brag about when you get caught with your pants down. But then again considering what you call praise, I'm sure you'll twist it into a way of sleeping at night thinking you are awesome.
"Rest assured no one will kill you in the middle of your sleep. Your just not worth the effort. Porters jumped the shark so many times with his hires, like you, I'll bet his body odor smells like chum. Porter was interesting. Bryan, not at all." – Paid-up subscriber Chris
Regards,
Sean Goldsmith and Dan Ferris
Miami Beach, Florida and Medford, Oregon
May 14, 2013
In yesterday's Digest Premium, I (Porter) discussed why the official spot price of gold has declined while demand for physical bullion remains strong... and why I think we'll eventually see a "run on gold" in the commodities futures market.
As I explained... the volume of gold futures contracts traded on the commodities exchange represents a volume of gold roughly 400 times greater than the physical gold available in the vaults to back that trading.
As you know, our country is in a precarious financial position. I'm sure you've heard the countless stories about the enormity of our national debt. I've written volumes about it myself.
Once we reach that tipping point, I believe those who hold futures contracts will demand delivery. They won't take dollars in exchange. In that scenario... investments based on futures trading will be in trouble. But the value of real, physical bullion will explode.
Look at the price of rare gold coins. Something like a good-quality Saint-Gaudens coin hardly changes at all. If the spot price for physical bullion goes down, your coin dealer will tell you the premium over the spot price has gone way up. That tells you the real price of physical gold isn't changing.
I also want to encourage everyone to understand that gold is the only universally accepted financial asset that isn't someone else's corresponding liability. That is why it's the ultimate specie form of money.
There's one last thing I want to point out. About 18 months ago, some former partners of Goldman Sachs set up an institutional way of buying physical gold and set up storage facilities in New York and Zurich. Now, institutions can buy physical gold directly from their Bloomberg terminals. It's called the Hard Money Alliance.