Poor Sears...
Poor Sears Holdings... It just had a bad 2011, posting a $2.4 billion loss in the fourth quarter alone. So the company is responding with a series of moves it claims will make it stronger. It's selling some stores to mall developer General Growth Properties. It's spinning out some of its businesses to shareholders via a rights offering. And it's reducing inventory by almost $600 million.
That's three different initiatives, resulting in a single fact: Sears is shrinking. I'm not averse to shrinking businesses. Sometimes, getting rid of a noncore business or two makes you more profitable. But that's not what's happening at Sears. It's shrinking, and it can't get its margins up. It looks like it is slowly dying...
But that's not what Sears Chairman and hedge-fund whiz Eddie Lampert is telling the world. In a pleading, passionate letter to shareholders filed with the Securities and Exchange Commission today, Lampert says he doesn't believe the decline of Sears is a trend, but rather an anomaly. The lengthy letter spells out plans to "right the ship" by dramatically changing the business. Lampert mentions six times how he'll transform the company and/or accelerate its transformation. He insists at the end of the letter that Sears owns assets that deserve to create a good return for shareholders. It sounds desperate.
I wish Mr. Lampert and Sears' shareholders well. I like to see people succeed. But I don't know if he will. Looking at the situation from the outside, I believe it's more likely Sears under Eddie Lampert is a classic case of a great manager in a bad business...
Lampert is a legend in the hedge-fund business. But in cases like Sears, the business usually keeps its reputation, not the manager. No matter what you think of Lampert or Sears' prospects for the future, it is incontrovertible that Sears is not a wonderful business like Coca-Cola, Wal-Mart, Intel, and Microsoft. Wonderful businesses like those don't change much over the years. They just keep doing what they do and generate consistent profit margins. That's not Sears.
The market, as is often the case, vehemently disagrees with me. It's buying Lampert's heartfelt plea in a big way. As I write this, Sears' stock is up more than 20% amid heavy trading.
I suspect in another year or two, we'll realize that Sears deserves to be smaller still. Maybe Lampert will succeed in getting it sold. Or maybe he'll finally begin to monetize its real estate – perhaps his biggest promise when he took over, and the biggest failure of his tenure. Whatever the case, I won't be on board. There are too many truly wonderful businesses in the world to bother with Sears.
By now, we're sure you've heard squawking about Obama's new tax bill... Next year, the dividend tax rate would increase to the higher personal income tax rate of 39.6%. Including the phasing out of certain deductions and exemptions, the rate is 41%. Finally, if you add the 3.8% investment tax surcharge in ObamaCare, the 2013 dividend tax rate would be 44.8% – nearly triple today's 15% rate.
But dividends are paid after the corporation pays taxes on its profits. If you assume a maximum 35% corporate tax rate and a 44.8% dividend tax, the total tax on earnings paid as dividends would be 64.1%.
But fear not... These new taxes would only hit the rich... as long as you define rich as individuals making more than $200,000 a year and couples making more than $250,000.
But isn't it typical of Komrade Obama to pit the "poor" against the "rich" as a political tool to push his agenda? The ugly truth is that he's not targeting the rich so much as he's simply targeting the successful. An increase to the dividend tax rate of this magnitude will hurt all investors, including many retirees dependent upon dividend income to meet daily living expenses. And as usual, the tax hike will hurt those at the bottom of the bracket much, much more than the top of the bracket.
Like all "taxes on the rich," this is NOT a tax on the rich. It's mostly a tax on the more successful upper echelons of the middle class, the small business owners, and the family farm owners.
According to a study by the Wall Street Journal...
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Historical experience indicates that corporate dividend payouts are highly sensitive to the dividend tax. Dividends fell out of favor in the 1990s when the dividend tax rate was roughly twice the rate of capital gains. |
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When the rate fell to 15% on January 1, 2003, dividends reported on tax returns nearly doubled to $196 billion from $103 billion the year before the tax cut. By 2006, dividend income had grown to nearly $337 billion, more than three times the pre-tax cut level. |
And according to a Cato Institute study, 22 S&P 500 companies that hadn't paid dividends before the tax cut started paying them in 2003 and 2004. It's no mystery... Money goes where it is treated best. Prohibitive dividend taxes drive companies to do other things with their capital, like simply retaining the earnings or buying back stock. You can be sure these companies are already working with swarms of lawyers to find ways around this. One easy solution is to expedite cash distributions... Assuming this tax increase becomes law, we'll see lots of companies pay large, one-time "special" dividends, as they're called...
Our only solace is that the dynamism of businesses and individual investors trumps the static nature of government, laws, and taxes. Business is a moving target. Taxes and laws are stationary targets.
A "hat tip" to Dennis Gartman, editor of The Gartman Letter, for bringing this Wall Street Journal article to our attention... Based on recent comments from Jin Liqun, the supervising chairman of the sovereign wealth fund China Investment Corp., speaking to the al-Jazeera television network this week, it's clear the Chinese understand the fundamental issues behind Europe's woes...
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If you look at the troubles which happened in European countries, this is purely because of the accumulated troubles of the worn out welfare society. I think the labor laws are outdated. The labor laws induce sloth, indolence, rather than hard working. The incentive system is totally out of whack. |
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Why should, for instance, within [the] euro zone some member's people have to work to 65, even longer, whereas in some other countries they are happily retiring at 55, languishing on the beach? This is unfair. The welfare system is good for any society to reduce the gap, to help those who happen to have disadvantages, to enjoy a good life, but a welfare society should not induce people not to work hard. |
And just as they understand it, the Chinese are exploiting it... This week, car manufacturer Great Wall became the first Chinese auto manufacturer to open an assembly plant in the European Union – Bulgaria, specifically. Apparently, it's now cheaper for China to manufacture in some parts of Europe than to manufacture domestically... What will the "They took our jobs!" sect complain about when China starts exporting jobs themselves?
Frank Curzio is off to a hot start this year... Two of the stocks in the Small Stock Specialist portfolio – Westport Innovations (WPRT) and Dendreon (DNDN) – are up triple digits in just the past few months.
Yesterday, one of his Phase 1 Investor picks – Gold Standard Ventures (GV.V) – popped 55% after announcing a high-grade gold discovery on its property. Shares are up 150% in less than two months since his recommendation. Based on the discovery, Frank believes shares have huge upside from here.
In Phase 1, Frank takes what we call a "venture capital" approach to investing... focusing on small, early-stage companies that can make investors an absolute fortune. Gold Standard fits the bill...
The junior gold miner secured the rights to explore the historic Railroad mining district in Nevada. It's one of the last unexplored areas in the Carlin Trend... which has produced more than 50 million ounces of gold since the 1960s.
The company caught Frank's attention about a year ago. Legendary hedge-fund manager Albert Friedberg bought a 19.9% stake in the junior miner at $0.95 a share. Friedberg has one of Wall Street's best track records, averaging annual returns of 19% since 2001. Forbes magazine ranked him as the top-performing hedge-fund manager in 2011.
Friedberg usually invests in large commodities and currencies. But from time to time, he has ventured into small resource stocks... usually with blockbuster results. We know of only three small junior mining stocks he's invested in... And his gains in these stocks ranged from 200% to more than 1,300%. He's never lost money in the space.
Once Friedberg took a position in Gold Standard last February, the stock jumped more than 50%. However, shares got crushed along with most junior mining stocks last year. The stock fell to $0.70 a share – 25% less than the average price Friedberg paid for Gold Standard.
Based on Friedberg's track record and the fact Gold Standard was drilling right next to where industry giants have found millions of ounces of gold, "our timing could not have been more perfect to buy," Frank says.
Frank sees plenty more upside ahead for Gold Standard. After all, the company discovered gold on just a tiny portion of its overall land holdings in the Railroad district.
However, he sees much more upside in another small junior mining stock...
Like Gold Standard, this company got crushed in 2011. Shares are trading 70% off their highs. This company has properties located in Canada's Yukon Territory. The formation is similar to the Carlin Trend in Nevada. Plus, this company already has discovered high-grade gold in this area.
Frank believes this company could see 50%-100% gains by the end of the year, simply based on valuation. If the company makes another high-grade gold discovery, the stock could easily triple from these depressed levels. Frank wrote about this company in the February issue of Phase 1. To learn more about a subscription to Phase 1 Investor, click here.
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New 52-week highs (as of 2/22/12): Guggenheim BulletShares (BSJF), Gold Standard Ventures Corp. (GV.V), Anheuser-Busch InBev (BUD), Banro (BAA), Clean Energy Fuels (CLNE), and Philip Morris International (PM).
Given Komrade Obama's plan to raise taxes on the upper middle class, we'd love to hear any and all tax strategies you might be able to share, possibly for the benefit of all your fellow Digest readers. Write us at feedback@stansberryresearch.com.
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Regards,
Dan Ferris
Medford, Oregon
February 23, 2012
Poor Sears... Komrade Obama's new 'soak the rich' scheme... Dividends follow taxes... More 'special' dividends ahead... China gets it... Curzio's gold-mining home run... Los Angeles' new Atlas Shrugged moment...