My High Dividend Stocks Blog

My High Dividend Stocks
This is my high dividend stocks site where I help site members find high dividend stocks with earning power and strong balance sheets.

A First Look at Lennar (LEN)

I know some people that work for Lennar (LEN), so I’m always interested in how their employers are financial positioned.  The bottom lines is that I think Lennar is going lower from today’s market price of $17.93.

Lennar (LEN)

Share price: $17.93

Shares: 187.01 million

Market capitalization: $3.35 billion

Bonds: $4.8 billion outstanding

Here is a graphic of Lennar’s bonds outstanding and their due dates:  The good news is that nothing is due until 2013.

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What does Lennar do to earn money?

Lennar builds and sells new homes targeted at value-oriented, first-time, and move-up purchasers in 14 states across the country. In 2010, the company delivered approximately 11,000 homes at an average price of roughly $240,000. Lennar also provides title and mortgage-related services. Outside of its core operations, Lennar maintains investments in a portfolio of numerous joint ventures and operates a distressed real estate focused unit, Rialto Investments.

Lennar’s stock price peaked in 2005 just above $60 per share.  Since then the stock price has lost 70% down to today’s $17.93.  I think it will go lower when the world reenters recession sometime in the next year.

Morningstar’s take (not mine)- Lennar sits poised to reap major economic gains from an eventual rebound in housing. The firm has fortified its operations and balance sheet amid the collapse in demand during the last few years. Core construction benefits from streamlined designs, more centralized purchasing, and closer-to-order building practices. Overhead cuts of more than 50% from peak further ensure that eventual increases in revenue fall meaningfully to the bottom line. At the same time, Lennar has bolstered its balance sheet with liquidation of once-bloated inventory, multiple debt refinancings to extend maturities, and strategic equity sales during the last several years. The company also has reduced risk by trimming its once voluminous joint venture portfolio to stable partners, reducing contingent recourse debt liabilities by approximately $1 billion or 80%.

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DIVIDEND RECORD

Lennar has paid a dividend every quarter since 1988 as far as I can tell with the Google Finance data.  However, it cut its quarterly dividend from $0.16 to $0.04 in the 4th quarter of 2008.  The dividend has remained at $0.04 for thirteen consecutive quarters.

Dividend: $0.04 quarterly

Dividend yield: 0.8% ($0.16 annual dividend / $17.93 share price)

Dividend payout ratio: 33.3% ($0.16 annual dividend / $0.48 mean EPS estimate for 2011)

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EARNING POWER – Lennar’s six year average adjusted earnings is ($2.40) per share.  If you believe that the new housing market will recover in the next few years (I don’t), then you would ignore the “bust” years of 2007 – 2009.  Today’s Lennar does not resemble the Lennar of 2006, so throw out that year also.  This leaves you with 2010 and most of 2011.  Lennar has an earning power of $0.495 per share at 187.01 million shares in the past 2 years (assuming $0.16 EPS in 4Q 2011).

                        EPS                   Net Inc.             Shares               Adj EPS

2006                 $3.69                $593.9 M           160.7 M             $3.18

2007                 ($12.31)            ($1,941.1 M)     157.7 M             ($10.38)

2008                 ($7.00)             ($1,109.1 M)     160.6 M             ($5.93)

2009                 ($2.45)             ($417.1 M)        170.5 M             ($2.23)

2010                 $0.51                $95.3 M             188.9 M             $0.51

2011E               $0.48 E             $87.76 M E        187.01 M           $0.48 (mean estimate)

Six year average adjusted EPS = ($2.40)

Quarterly earnings results for 2011:

            Q1        $0.14                $27.4 M                                     $0.146

            Q2        $0.07                $13.8 M                                     $0.073

            Q3        $0.11                $20.7 M             187.01 M           $0.11

            Q4        $0.16 E             $29.9 M E          187.01 M           $0.16 E

            Total     $0.48 E             $87.76 M E        187.01 M           $0.48 (mean estimate on Morningstar.com)

If you believe the new housing market will not recover in the next few years, then do not buy Lennar because it is barely profitable in the last six quarters.  A continued recession will likely return them to unprofitability.

If you believe that the new housing market will at least stabilize in the next few years, then use the following valuations to help you buy low:

Consider contrarian buying below $3.96 (8x the 2 year avg. adjusted EPS)

Consider value buying below $5.94 (12x the 2 year avg. adjusted EPS)

Consider speculative selling above $9.90 (20x the 2 year avg. adjusted EPS)

Lennar is currently trading at 36.2 times the two year average adjusted earnings.  This is highly speculative pricing.

BALANCE SHEET

Lennar has stabilized its balance sheet since the end of 2010.  It has more than enough money to cover short term liabilities.

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Book value per share:  $14.28

Price to book value ratio: 1.26 (that’s pretty good)

Current ratio: 6.48 in the latest quarter (that’s really good; over 2.0 is good)

Quick ratio: 1.91 in the latest quarter (that is also very good; over 1.0 is good)

CONCLUSION

I think that the new housing market will not recover in the next few years because the US government is taking actions to stabilize then stimulate the housing market.  The market price system is being retarded by government intervention and accounting rules changes that are incentivizing banks not to put all the bank owned properties on the market (this is known as the shadow inventory).  There will be an eventual turnaround in the new housing market because of increased populations, but it is many years away.  Please visit this link (http://tinyurl.com/7fx5o2b ) to read many articles on the ill-fated housing recover based on the Austrian economics perspective.

Lennar is speculatively priced at over 36 times it 2 year average earnings.  It has a puny dividend yield below the S&P 500 average.  And its balance sheet is nothing to boast about.  Its Rialto real estate fund/portfolio is heavily dependent on short term financing and an economic rebound that isn’t going to happen thanks to the Keynesian fools that run the Federal Reserve and the US government.  Pass on Lennar until much lower prices and higher dividend yields.

Just for giggles I looked up the earnings for the past 10 years on Morningstar.com (unadjusted).  With boom and bust years of the past ten years its average EPS only comes out to $0.73 per share.  The stock price would have to fall to $8.71 just to equate to 12 times its ten year average EPS.  That’s not even value pricing.  Lennar is overpriced by any measurement you wish to consider.

DISCLOSURE – I don’t own Lennar (LEN)

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Dirty, rotten financial scoundrels in Europe.

Desperate European Financial Tricks - LewRockwell.com Blog
by Michael S. Rozeff on Nov 6, 2011 8:42 AM
The problem in Europe, for both banks and governments, is insolvency everywhere one looks. This was brought about by too much debt and too much financial leverage by issuing debt. The only known solutions are (a) default, and (b) printing money to pay off the debts (inflation).

Europe is trying to solve the problems by neither method. Their solution, as it has similarly been attempted by the US, is to issue more debt and create more leverage. One means of doing this is to create a new financial intermediary, called the EFSF (European Financial Stability Facility). The Fed also invented such "facilities" and such acronyms. They're just coverups for creating more debt combined with doses of both partial defaults, inflation, and accounting fakery by which bond values remain overstated on the books of banks. In the EFSF, the European states indirectly issue bonds by standing behind bonds issued by the EFSF. This process is then "levered" (a misnomer in this case) by issuing credit default swaps, or guarantees of the debts of the insolvent recipients of the money.

The net result is simply that government (sovereign) debt issuance rises and the burdens fall upon the hapless taxpayers. Another result is that the credit market prices become distorted (bubbles). I cannot think of another stage beyond this end game that will avoid the only known solutions of default or inflation. They've begged the Chinese for a bailout, but that doesn't seem to be working at the moment. It is the longstanding joint and integrated marriage between the State and the fractional-reserve central bank fiat money system that is causing this mess. In the end, this marriage must fail.

I wonder in what monetary system direction the rest of the world, mainly the BRIC countries, will go. The main player is China. China is playing several games simultaneously. First, it is increasing its gold. It is seriously building up the yuan as a currency by allowing and encouraging its gold convertibility. This path challenges the West's currency system, even though China also has big banking flaws too. Second, China is playing along with the West by working for a greater role in the IMF and a greater role for other currencies and gold in the SDR. We also know that China is gradually reducing its holdings of US treasuries and making direct investments worldwide. These too challenge the US. It is also bulking up militarily, not with war in mind, but also as a challenge to US power and to back up a greater global presence.

Why these two paths? China does not want a chaotic end to the western monetary system. That creates economic and political problems in China. However, should monetary chaos happen, it would prove temporary and China would emerge the stronger, relative to the West. However, western chaos increases the odds of political instability and frictions, even wars. I think China prefers to gain position gradually and to cooperate with the West as a peaceful entity. The US actually is the more antagonistic and the more threatening. This is why China pursues two divergent paths. It prefers to build up its currency, but it also prefers that the West not suddenly collapse monetarily.

So now we have the spectacle of Euroland wanting Chinese financial investment. And China and much of the rest of the world must be wondering what they ever saw in the euro, especially if Europe chooses inflation over default. Already doubting the dollar and now doubting the euro, there is ever more incentive to go for gold as a basis for the yuan. There is no good reason for the Chinese to get sucked into the quicksand of the Euroland difficulties. Their future does not lie with the euro.

TIP OF THE WEEK - There ain't no thing such as a free lunch. My tip will still cost you a small amount of time.

There ain’t no thing such as a free lunch.  My tip will still cost you a small amount of time.

Jason Brizic

November 4th, 2011

The Austrian school of economics offers a unified theory of economics.  You probably learned in high school or college the concept of “micro” and “macro” economics.  I’m here to tell you that there is no “micro” and “macro” economics.  There is only one economics based on various economic laws that can’t be overcome by politicians or central banks actions.  The price system, supply and demand, and marginal utility are few examples of economic laws that can be escaped.  There ain’t no thing as a free lunch.  In other words, resources are scarce and will be allocated by individuals who own them.  The dominant economics taught in schools is Keynesian economics.  It teaches that there is such as thing as a free lunch.  Their economics can be distilled down to the slogan, “Federal deficits overcome recessions.”

This video explains the battle between the Austrians and the Keynesians with clarity and humor.  It stars F.A. Hayek (Austrian) vs. John Maynard Keynes (Keynes himself):

Governments and central banks are everywhere in this world interfering with the markets.  Austrian economics offers a causal explanation of how these groups will effect capital and human actions.  Your investments are capital, so you have a vested interest in seeing that it is protected from the harmful actions of governments and central bankers.

You can’t beat something with nothing.  The ideas of Austrian economics can defeat the crackpot theories of Keynesian economics and the Ludwig von Mises institute is determined to do just that.

The Ludwig von Mises Institute offers for these for no money (it will cost you time):

  1. Daily articles
  2. An excellent and enlightening blog
  3. Full length books on economics and liberty (most books are in several formats: PDF, e-pubs, and HTML, etc.) Some must read books include the following:

·         Ludwig von Mises – The Theory of Money and Credit; Human Action (read Rothbard first)

·         F.A. Hayek – The Road to Serfdom

·         Murray Rothbard – Man, Economy, and State with Power and Markets

  1. Audio of articles, lectures, and full length audio books
  2. Videos of lectures, interviews, and audio books with supporting pictures

www.mises.org

For more tips, go here:

http://www.myhighdividendstocks.com/category/tip-of-the-week

Corzine, MF Global, and AGNC

Company executives are paid to lie to shareholders.  You should know this from Enron, MCI Worldcom, Bernie Madoff, and Tycho International.  But in case you weren’t paying attention here is another example from none other than ex-Goldman Sachs chairman & CEO, Jon Corzine.  Mr. Corzine was most recently the Chairman & CEO of the now bankrupt MF Global (MF).  Here is a summary of his career:

1975 Begins his career at Goldman Sachs, building a reputation as a hard-nosed bond trader and a big risk taker.
1988 Becomes co-head of the firm's fixed-income division.
1994 Named chairman and CEO of Goldman Sachs at a time when the firm was being hit by big trading losses.
1999 Ousted from the top spot at Goldman in what was viewed by many as a power struggle with co-CEO Henry Paulson. The firm had also suffered steep bond trading losses and a delay of its IPO.
2000 Beats out Republican candidate Bob Franks for a New Jersey Senate seat, spending more than $60 million and breaking the spending record for a statewide race.
2005 Elected New Jersey governor
2007 Involved in car crash that leaves him in critical condition.
2009 Loses New Jersey governor's seat to Republican opponent Chris Christie
March 2010 Appointed CEO and chairman of MF Global.
Oct. 25, 2011 MF Global posts its biggest-ever quarterly loss as a public company.
Oct. 31, 2011 MF Global files for bankruptcy.

The poor schnook let his company release this upbeat report on October 25 -- one week ago.

* Strengthened capital and liquidity position. As of September 30, 2011, the company has over $3.7 billion in available liquidity, including $1.3 billion in available committed revolving credit facilities and $2.5 billion in total capital.

"Reflecting the stressed markets in the quarter, we deliberately chose to reduce overall market exposure in most principal trading activities and focused on preserving capital and liquidity," said Jon S. Corzine, chairman and chief executive officer, MF Global. "We also used the dislocation in the markets to add quality people for strategic roles, as well as expand our client relationships across our businesses."

Mr. Corzine continued, "We were particularly pleased with the repositioning of our mortgage, credit and foreign exchange businesses; the performance of our commodities group; and the common alignment of our brand to strategy. These efforts reflect positively on our ability to execute and deliver competitive returns to shareholders in the quarters ahead."

As of September 30, 2011, MF Global maintained a net long position of $6.3 billion in a short-duration European sovereign portfolio financed to maturity (repo-to-maturity), including Belgium, Italy, Spain, Portugal and Ireland. The laddered portfolio has an average weighted maturity of October 2012 and an end date maturity of December 2012, well in advance of the expiration of the European Financial Stability Facility in June 2013. (see supplemental table for further details)

MF Global bet on the Keynesian central bankers, banks, and politicians to solve the European sovereign debt crisis – and lost!

Pay close attention to the statements company executives make about their liquidity and revolving credit.  Then don’t believe them.

American Capital Agency Corp. (AGNC) is susceptible to the modern bank run in which short term credit is pulled without notice.  The company then no longer has access to funds necessary for their business model and they quickly go bankrupt.  AGNC had 22 lenders in 2010.  I don’t know if MF Global was one of them.  AGNC does not disclose who they make repurchase agreements with.  Check this out.

press release

Nov. 3, 2011, 2:00 p.m. EDT

American Capital Agency Corp. to Present at Sandler O'Neill East Coast Financial Services Conference

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BETHESDA, Md., Nov. 3, 2011 /PRNewswire via COMTEX/ -- American Capital Agency Corp. /quotes/zigman/110324/quotes/nls/agnc AGNC +0.36% ("AGNC" or the "Company") announced today that Peter Federico, Senior Vice President and Chief Risk Officer, is scheduled to make a presentation at the Sandler O'Neill + Partners East Coast Financial Services Conference on November 10, 2011 in Aventura, FL. The AGNC presentation is scheduled to begin at 4:05 pm ET. The presentation will be webcast live and archived for 90 days on the AGNC website in the Investor Relations section at http://ir.agnc.com .

When Mr. Federico says that AGNC’s liquidity needs are well met at the Sandler O’Neill East Coast Financial Services Conference some in the audience should stand up and read this statement from their 2010 annual reports risk factors section:

Failure to procure adequate repurchase agreement financing, or to renew (roll) or replace existing repurchase agreement financing as it matures, would adversely affect our results of operations and may, in turn, negatively affect the market value of our common stock and our ability to make distributions to our stockholders.

We use repurchase agreement financing as a strategy to increase our return on equity. However, we may not be able to achieve our desired leverage ratio for a number of reasons, including if the following events occur:

• our lenders do not make repurchase agreement financing available to us at acceptable rates;

• certain of our lenders exit the repurchase market;

• our lenders require that we pledge additional collateral to cover our borrowings, which we may be unable to do; or

• we determine that the leverage would expose us to excessive risk.

We cannot assure you that any, or sufficient, repurchase agreement financing will be available to us in the future on terms that are acceptable to us. Since 2008, there have been several mergers, acquisitions or bankruptcies of investment banks and commercial banks that have historically acted as repurchase agreement counterparties. This has resulted in a fewer number of potential repurchase agreement counterparties operating in the market. In addition, since 2008 many commercial banks, investment banks and insurance companies have announced extensive losses from exposure to the residential mortgage market. These losses reduced financial industry capital, leading to reduced liquidity for some institutions. Institutions from which we seek to obtain financing may have owned or financed RMBS that have declined in value and caused them to suffer losses as a result of the recent downturn in the residential mortgage market. If these conditions persist, these institutions may be forced to exit the repurchase market, become insolvent or further tighten their lending standards or increase the amount of equity capital or haircut required to obtain financing, and in such event, could make it more difficult for us to obtain financing on favorable terms or at all. In the event that we cannot obtain sufficient funding on acceptable terms, there may be a negative impact on the value of our common stock and our ability to make distributions, and you may lose part or all of your investment

Furthermore, because we rely primarily on short-term borrowings, our ability to achieve our investment objective depends not only on our ability to borrow money in sufficient amounts and on favorable terms, but also on our ability to renew or replace on a continuous basis our maturing short-term borrowings. If we are not able to renew or replace maturing borrowings, we may have to sell some or all of our assets, possibly under adverse market conditions.

AGNC is borrowed short and lent long like all fractional reserve banks and financial institutions.  The European sovereign debt crisis threatens to lock up the financial system in Europe and the US.  This will mostly likely negatively impact AGNC’s operations.  AGNC’s executives are Keynesian and are subject to the same boneheaded bad bets as MF Global.  Leverage works both ways.

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Is Safeway (SWY) safe at $19.00 per share?

I know several people that work for Safeway at various levels.  So I was naturally curious to discover Safeway’s dividend record, earning power, and strength of balance sheet.  I didn’t even know they paid a dividend until yesterday.

Safeway (SWY)

Share price: $19.00

Shares: 339.9 million

Market capitalization: $6.46 billion

Bonds outstanding: $5.3 billion

Safeway is one of the largest food and drug retailers in North America. The company operates stores in California, Oregon, Washington, Alaska, Colorado, Arizona, Texas, the Chicago metropolitan area, the Mid-Atlantic region, British Columbia, Alberta, and Manitoba. Safeway has a 49% ownership interest in Casa Ley, which operates food and general merchandise stores in Mexico. The company also owns a third-party gift card provider, Blackhawk.

Visit Company Website

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DIVIDEND RECORD

Safeway has been a consistent dividend grower since 2005.  The company paid no dividend prior to 2005.

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Dividend: $0.145 per quarter

Dividend yield: 3.05% (this is a decent dividend yield, but it is not a high dividend stock)

Dividend payout ratio:  34%  ($0.58 DIV/$1.70 EPS)

EARNING POWER  $1.37 per share @ 339.9 million shares

            EPS                   Net inc.             Shares               Adj. EPS

2006     $1.94                $870.6 M           447.8 M             $2.56

2007     $1.99                $888.4 M           445.7 M             $2.61

2008     $2.21                $965.3 M           436.3 M             $2.84

2009     ($2.66)             ($1,097.5 M)     436.3 M             ($3.22)

2010     $1.55                $589.8 M           379.6 M             $1.74

2011E    $1.70*              $577.8 M           339.9 M             $1.70

*mean earnings estimate according to Wall Street valuations on Morningstar.com

I think Wall Street analysts have overestimated Safeway’s ability to earn $1.70.  They’re 75% through the fiscal year, but they have only earned 51% of the analyst’s estimates.  I don’t think the company will earn another $0.82 in the fourth quarter of 2011.

Results from the first three quarters of 2011:

1Q        $0.07                $25.1 M             339.9 M             $0.07

2Q        $0.41                $145.8 M           339.9 M             $0.43

3Q        $0.38                $130.2 M           339.9 M             $0.38

Total     $0.86                $301.1 M           339.9 M             $0.88

Six year average adjusted earnings per share is $1.37.

Consider a contrarian buy below $10.96 (8x average adjusted earnings)

Consider a value buy below $16.44 (12x average adjusted earnings)

Consider speculative selling above $27.40 (20x average adjusted earnings)

Safeway is currently trading at 13.8 times average adjusted earnings.

BALANCE SHEET

Assets and shareholder equity are trending slightly down.  That isn’t good.  Safeway does not possess a strong balance sheet.

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Book value per share: $12.79

Price to book value ratio: 1.48  (this is good)

Current ratio: 0.87 (over 2.0 is good)

Quick ratio: 0.16 (over 1.0 is good)  Safeway has very little cash to cover current liabilities.

CONCLUSION

Safeway is not safe at $19.00 per share.  Its falling earnings this year and the horrible US economy will hurt the price of Safeway’s shares.  However, Safeway is a buy when its price is below $16.44.  Its mediocre dividend yield is bolstered by its growth pattern.  I need to investigate more to determine why its balance sheet is shrinking.  The Balance sheet is average right now.

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DISCLOSURE  I don’t own any positions in Safeway (SWY).

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A scary chart for Keynesians on Halloween

The scariest chart ever - to a Keynesian!!
 
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Sprinting to bankrupcy unless Sprint (S) can profit?

A friend of mine recently tweeted that he thought that Sprint Nextel (S) should be bought because he believes it hit the bottom three days ago at $2.39 per share.  I haven’t paid much attention to Sprint because it hasn’t paid a dividend since the end of 2007.  Sprint does not know how to earn profits; it only knows how to lose less than in previous years.  Their only hope is their pricing of plans and customer service because AT&T and Verizon both offer 4G & 4G LTE network services, and they both offer iPhone 4 and iPhone 4S smartphones on their networks.

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Sprint Nextel (S)

Share price: $2.72

Shares: 2.996 billion

Market capitalization: $8.14 billion

Bonds: $18.5 billion

It amazes me that Sprint went from $1.35 in November 2008 to $6.45 May 2011.  There is a lot of speculating going on in this stock because the fundamentals are just plain horrible.

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DIVIDEND RECORD

Sprint has not paid a dividend since the end of 2007.  It paid an annual dividend of $0.50 from 2001 to 2004, then it cut its dividend to $0.30 in 2005, and in 2006 – 2007 it cut the dividend to $0.10 annually.  Sprint offers no current income to its remaining shareholders.

EARNING POWER

                EPS                         Net inc.                Shares                  Adj EPS

----------------------------------------------------------------------------

2006       $0.45                     $1,327 M              2,972 M                $0.44

2007       ($10.27)                ($29,580 M)        2,898 M                ($9.89)

2008       ($0.98)                  ($2,796 M)          2,863 M                ($0.94)

2009       ($0.84)                  ($2,436 M)          2,886 M                ($0.81)

2010       ($1.16)                  ($3,465 M)          2,988 M                ($1.16)

2011E    ($0.93)*               ($2,786 M)          2,996 M                ($0.93)

*mean loss according to Wall Street estimates I looked up on Morningstar.com

Sprint would have to lose $0.40 per share in 4Q2011 to meet the mean Wall Street estimates.  I don’t think that will happen since the iPhone 4 users start adding to Sprint’s revenues in 4Q2011.  I think Wall Street analysts have set the bar so low than even Sprint can beat their estimates.

Results from the first three quarters of 2011:

1Q          ($0.15)                  ($439 M)              2,992 M                ($0.15)

2Q          ($0.28)                  ($847 M)              2,994 M                ($0.28)

3Q          ($0.10)                  ($301 M)              2,996 M                ($0.10)

----------------------------------------------------------------------------

Total      ($0.53)                  ($1,587 M)          2,996 M                ($0.53)

Six year average adjusted earnings per share is ($2.22).  I wouldn’t buy Sprint until it becomes profitable for several years.

BALANCE SHEET

Sprint’s balance sheet is frightening.  Assets are falling more than liabilities, so equity keeps disappearing.  It will be interesting to see

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Book value per share: $4.35 as of 3Q2011

Price to book value: 0.625 (this is good, but book value keeps shrinking)

Current ratio: 1.12 (over 2.0 is good)

Quick ratio: 0.49 (over 1.0 is good)

CONCLUSION

Sprint offers no dividend, no profits, and shrinking shareholder equity.  These three facts do not add up to safety of principal and a satisfactory return.  The purchase of Sprint at $2.72 per share is speculative.  AT&T (T) and Verizon (VZ) offer high dividends, profits, and increasing shareholder equity.

Almost everyone who has bought Sprint stock in the past 12 years has lost large amounts of money.  This company has forgotten how to make money.  It will take a few profitable years and some hefty dividends to attract me to their stock.  Sprint offers no safety of principal with its horrible yearly losses and the bad economic backdrop.  What is their unique selling proposition?  As best I can tell it is the download speed of their 4G network.  They claim it is up to 10x faster than their 3G service.  AT&T and Verizon both make the same claims.  Perhaps they have the largest 4G network, but that doesn’t come across in their advertisements.  It will take huge infrastructure costs to build out their 4G network.  The large yellow circles mask the smallness of their 4G network.  I’m not impressed after visiting the Verizon and AT&T websites to examine their 4G offerings.  Sprint is sprinting to bankruptcy.

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For example, there are many areas in Denver that you would only get good 4G service while outside on the street.  Most people are inside their work locations most of the day.

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DISCLOSURE  I don’t own Sprint Nextel (S)

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Budget Deadlock in Washington

Budget Deadlock in Washington

by Gary North

Recently by Gary North: Not Theirs To Occupy

 

   

The debt ceiling battle led to a compromise. Congress and the President promised to submit to mandatory budget cuts. A bipartisan super committee was set up to put together a package of debt reduction cuts totaling several trillion dollars over supposedly a decade. If the committee deadlocks, the cuts will begin automatically on January 2, 2013. These must be $1.2 trillion in cuts, or $120 billion a year.

As expected by everyone, the committee is deadlocked. The Democrats want $3 trillion in debt reduction, mainly from tax increases. The Republicans will not grant this.

Democratic sources told CNN that at the meeting Tuesday the plan was presented to the 12-member committee by Sen. Max Baucus, D-Montana, the Finance Committee chairman. A majority of the six Democrats on the super committee supported the proposal but sources declined to say which member or members disagreed.

The plan would have made cuts to entitlement programs such as Medicare and Medicaid, which the Democratic sources described as a major concession from their party. In return Republicans were asked to go along with between $1.2 and $1.3 trillion in new tax revenue.

An unnamed Republican aide expressed anger that some Democrat had leaked the details of the deal to the press. I mean what kind of stab in the back is this? Telling the public what's in store for them! This is clearly an outrage. It means, the aide said, that the Democrats think the super committee will fail.

Did anyone in his right mind expect it to succeed? The August deal to extend the ceiling and thereby avoid shutting down some government agencies temporarily was based on a sham solution.

The politicians want no responsibility for cuts. There was no record of which Democrats opposed the leaked deal. Some did. Everything is being kept hidden. There is an election year coming up.

This was the first proposed plan. The committee has not gone public with anything in two months. It has a deadline for announcing a plan: November 23. That is less than one month away. If Congress and the President refuse to accept a plan, or if no plan is offered, then cuts will begin a year later.

So, phase one deadlock is here. There is little likelihood that members of the super committee will put their careers on the line and vote publicly for cuts that specific special-interest groups can identify. There would be retaliation in November 2012.

THE IMPORTANCE OF POLITICAL SYMBOLS

The debt ceiling extension had a back-up plan: mandatory cuts, imposed by no one in particular, beginning on January 2, 2013. That gives the politicians a year to find a way to defer the cuts.

The cuts can be blamed on no one in particular. But the cuts will start hurting special interests. One of the main targets will be the military. The Pentagon will howl.

I think the reason why Obama is pulling out all U.S. troops from Iraq in December is to take advantage of the deadlock. He is willing to accept these cuts in the Pentagon's budget in 2013. They will not be blamed on him in 2012. After all, this was part of a bipartisan compromise. Those Republican voters who were committed to keeping troops in Iraq "for as long as it takes" – with "it" being undefined, open-ended, and forever – will not be able to pin the tail on the Democrat donkey. The cuts in the Defense budget will come because Republicans in Congress demanded this budget compromise. This is Obama's moment of opportunity. One of his campaign promises was to pull the troops out of Iraq. He is finally doing it. He gets a Republican cover. He can say that these reductions are part of his good-faith attempt to conform to the budget compromise made in August 2011.

The deadlock in the super committee transfers to the President the right to pick and choose the cuts he will make. Constitutionally speaking, the House must introduce all spending bills. In fact, the President has possessed this power for two generations. Obama has been granted a license to cut as he sees fit. It is clear that his first cut is the cost of keeping troops in Iraq.

The name of the political game is to defer taking unpopular political actions. The Congress is a master of this game. The public put pressure on Congress last summer to do something symbolic to defer the debt crisis "with honor." The looming debt ceiling limit was a convenient hammer for the minority of Tea Party-leaning Republicans in the House of Representatives to use to force the Republicans to agree to something resembling a balanced budget.

Of course, the budget is not going to be balanced. The Congressional Budget Office has projected $1 trillion annual deficits through 2020. But the Tea Party Republicans demanded a fig leaf: $1.2 trillion in cuts over a decade, beginning in 2013 at the latest.

These cuts are symbolic. But symbols are important in life. They are important in politics. Someone has to propose cuts, and some special-interest groups must suffer cuts. Special-interest groups resist all cuts.

EMERGENCIES ALLOW DEFERRAL

Politicians will label their spending programs with whatever emergency is available. In Eisenhower's era, Congress passed spending bills in the name of national defense. The best example is the interstate highway system. In 1956, Eisenhower signed into law the National Interstate and Defense Highways Act. In 2001, terrorism was the catch- all. The homeland security law had been sitting in Clinton's files for years in 2001. He just did not introduce it. The time was not ripe. Today, it's job creation.

As the U.S. economy heads into a recession in 2012, an election year, the government is running a deficit of over $1 trillion. This is four years after the recession of 2008 and the bailouts in September and August of that year. Unemployment is still over 9%. Businesses refuse to borrow. New businesses, which provide most increases in employment, are locked out of the bank loan market.

The voters are most concerned over the rotten job market. The deficit is a nagging concern, but unemployment is on the front burner. The politicians know this.

So, as the economy slows, and unemployment rises, Congress will be able to come before the public and call for emergency increases in spending. It is unlikely that unemployment insurance will be cut off. Other programs will receive funding. But new large-scale programs are less likely in an election year. Republicans will block them.

It is doubtful that Obama will get another stimulus package passed in the House. He keeps proposing big spending plans in the name of job creation. Why? Because he knows the House will reject these bills. He can go to the voters in the name of the Democrats in 2012 and claim that the Republicans are to blame for the lousy job market.

For the first two years, he blamed Bush. This year, that strategy has failed to gain traction. It is now his labor market. So, he is setting up Republicans in the House for the great tail-pinning in 2012. He will cease blaming Bush and instead blame Republicans for their refusal to pass his stimulus bills.

He may not get away with this. His rhetoric is no longer drawing crowds. The word magic has worn off. But it is clear what his strategy is: propose, propose, propose; blame, blame, blame. He has the mainstream media on his side. He also has academia.

THE KEYNESIAN ESTABLISHMENT

His political strategy assumes that Keynesianism is true, that the best way to create jobs is for the government to borrow or tax or inflate in order to get the economy rolling again. It assumes that money extracted from the private sector by force today (today's taxes) or promise of future force (tomorrow's taxes) will be used to create jobs, while money left in the private sector will not.

The political economy of the world is built on this assumption: in the USA, in Europe, and in mercantilist Asia. At the center of the modern economy, according to Keynes and his disciples, are the state and the central bank.

In contrast to the Keynesian worldview is Austrian School economic theory, which argues that there is no center. There is decentralized capital in the broadest sense: money, tools, skills, and vision. The absence of any center is the basis of creativity and growth, including job growth. Other schools of free market economics accept this same outlook to one extent or another, but all of them insist on the need for a central bank.

President Obama is relying on the Keynesian analysis to justify additional stimulus spending laws. But he faces a major obstacle. His $787 billion "shovel-ready" law of February 2009 has not led to a strong job market. This job market has been the most resistant since the Great Depression. The unemployment rate stubbornly refuses to come down. This is creating problems for Keynesian economists. They are calling for even greater stimulus spending. But this is no longer politically marketable. The voters have had enough. They know the spending will not lead to unemployment at 5%.

This is not the first time that economic reality has put a crimp in Keynesian theory. The Keynesian outlook was called into question in the 1970s by stagflation. By the end of the decade, the monetarists had gained considerable influence in Washington and in academia. Academia worships power, and monetarism seemed to be the wave of the future. It looked as though Keynesianism was in retreat. The 1980s and 1990s brought a boom and a rising stock market. Keynesianism seemed vulnerable.

The recession that began in late 2007 has brought Keynesians back into unchallenged power. The monetarists are nowhere to be seen or heard. They did not challenge the Paulson-Bernanke coup in 2008. They either said nothing or hailed the October big bank bailout as necessary. They did not challenge Obama's stimulus, either. Yes, a few did, but they were minor figures for the most part: a few hundred out of tens of thousands of economists on various payrolls.

There is not much price inflation today. This undercuts the monetarists. Their schtick rests on either double-digit price inflation (late 1970s) or double-digit price deflation (1930-33). There is surely stagnation today. Monetarism seemed to explain the 1970s: two recessions and rising consumer prices. It does not explain today's economy. This puts monetarist defenders of limited government at a disadvantage in the competitive marketplace of ideas.

Monetarism for over three decades has been the only prominent alternative to Keynesianism. The supply-siders have never had a college-level textbook. The public choice theorists have no unique monetary theory. The rational expectations economists' position is "accept the present and make no changes." Only the Austrian School has provided both a theoretical explanation for the bubbles and the busts. Only they called the recession in advance. Only they argue that decentralization is the only theoretically plausible solution to the problem of systemic unemployment: the decentralization of ownership, political power, and money creation.

This defense of decentralization dooms the Austrian School in academia. Liberal arts academia worships power. Academics did not actively criticize all aspects of the Soviet Union, Red China, and their satellite nations. The intelligentsia did criticize a few peripheral aspects of Communism, such as its limits on the freedom of speech. The intelligentsia did not criticize central economic planning in terms of its inevitable waste of resources and its decades-long failure to increase the standard of living. Academic economists publicly denied that the Soviet Union suffered from widespread poverty. They trusted the published statistics issued by the Soviet Union. The handful of economists who said that the statistics were fabricated were ignored. How many economists in 1970 had ever heard of Naum Jasny (d. 1967), who showed for years that the statistics were fake? Hardly any, and those who had heard of him usually rejected his warnings. I cited his findings repeatedly in the chapter on Soviet economic planning in my 1968 book on Marx, but who noticed? No one. (http://bit.ly/gnmror) Most important, in the eyes of academia, was this fact: the Soviets had nuclear weapons. They also had domestic power. Academia did not turn on the USSR until after the Communist Party committed suicide on December 31, 1991.

The Austrian School argues that centralized political power makes nations poorer. Some call for a lightly armed night watchman state. Others call for disarming the night watchman. All call for a vast decrease in political power, taxation, and regulation. They call for a comprehensive surrendering of power by Washington. Academia will not tolerate this. It is subsidized by the state. Its bread and butter is supplied by the state. Eliminate all academic subsidies from the state, including the state's enforcement of accreditation, and college professors would wind up at the unemployment office – the privately funded unemployment office.

This is why there will be no solution to the fiscal crisis in Washington. There is no body of academically acceptable economic opinion that can be invoked by any political faction to justify the only viable solution: the decentralization of political power and the cutting of Federal spending back to what the Constitution authorizes.

A SYMBOLIC DEFEAT

The inability of the super committee to come up with any plausible plan to balance the budget is an indicator of the present state of the economy. The automatic budget cuts that will begin in January 2013, if they even take place, are merely symbolic. They will not do much to balance the budget. But they at least will be symbols of the need to do so.

Then what of the debt ceiling? Will Republicans be able to hold the line and force a balanced budget? Ron Paul has offered the only plausible scenario for doing this. No other Washington politician in modern times has.

No one takes it seriously in Washington. They do not think he will be elected. They know he will leave Congress in 2013. They think they can safely ignore the plan.

When the symbolic budget cuts begin in 2013 – assuming they are not deferred by a new law – the voters will have a play-pretend solution to keep them asleep at the wheel. The trillion-dollar-plus deficits will continue. The Federal debt will grow.

The symbolic victory of the August debt ceiling compromise was in fact a symbolic defeat. It meant that the Congress is not serious about the cuts. There were some promised cuts, but they will be dwarfed by the deficits.

The fiscal numbers are not irrelevant. They do have meaning. They do point to the bankruptcy of the U.S. government. They cannot be evaded. They can be sustained only for as long as investors, especially the central bank of China, continue to fun what is obviously a suicidal fiscal policy that cannot possibly be sustained for another decade.

CONCLUSION

Most investors hide their eyes. Most voters hide their eyes. All but two members of Congress hide their eyes. There is universal blindness. The masses really do think that the day of reckoning will never come.

They are wrong. It will come. Deferral is a tactic, not a strategy. Blindness is a tactic, not a strategy.

October 29, 2011

Gary North [send him mail] is the author of Mises on Money. Visit http://www.garynorth.com. He is also the author of a free 20-volume series, An Economic Commentary on the Bible.

Copyright © 2011 Gary North
 

TIP OF THE WEEK - A Free Lesson on How to Read a Financial Report

A Free Lesson on How to Read a Financial Report

Jason Brizic

October 28, 2011

A proposed definition of INVESTMENT from “Security Analysis” 2nd ed. (1940) written by legendary investors Benjamin Graham and Christopher Dodd is particularly appropriate for this Tip of the Week.

An investment operation is one which, upon through analysis, promises safety of principal and a satisfactory return.  Operations not meeting these requirements are speculative.

The phrases thorough analysis, promises safety, and satisfactory return are all chargeable with indefiniteness, but the important point is that their meaning is clear enough to prevent serious misunderstanding.  By thorough analysis [Graham and Dodd] mean, of course, the study of the facts in the light of established standards of safety and value.  An “analysis” that recommended investment in General Electric common at a price forty times its highest earnings merely because of its excellent prospects would be clearly ruled out, as devoid of all quality of thoroughness.

The “facts” that Graham and Dodd are referring to are the financial results that are located in company’s quarterly and annual reports.  You should be able to understand how the company makes a profit, what its assets and liabilities are, and how much cash is flowing into the business.  In general, you should have a basic understanding of how to read a financial report.

Merrill Lynch has provided a short 52 page free report on “How to Read a Financial Report”  It is available for free in PDF format at this link http://tinyurl.com/63yr4qs .  I’ve read this document and it is a great introduction to the contents of the typical financial reports worldwide.

There are more free sources on how to read a financial report available from this Google search http://tinyurl.com/3dxe7xq

For more tips, go here:

http://www.myhighdividendstocks.com/category/tip-of-the-week

AGNC announces pricing of public offering of common stock (again)

If you were wondering why AGNC’s stock price was down 3.87% when the DJIA was up almost 3%, then here is the reason why.

So, before the dust has even settled on AGNC’s 3rd quarter 2011 financials they offer to sell more stock to lever up over 7x.  They have to keep doing this to make their $1.40 per share dividend payments and to have some assets to pledge as collateral for more repurchase agreements.  This is a house of cards.  Leverage works both ways – just as Lehman Bros.

American Capital Agency Announces Pricing of Public Offering of Common Stock

BETHESDA, Md., Oct. 26, 2011 /PRNewswire via COMTEX/ -- American Capital Agency Corp. (Nasdaq: AGNC) ("AGNC" or the "Company") announced today that it priced a public offering of 37,000,000 shares of common stock for total estimated gross proceeds of approximately $1.0 billion.

In connection with the offering, the Company has granted the underwriters an option for 30 days to purchase up to an additional 5,550,000 shares of common stock to cover overallotments, if any. The offering is subject to customary closing conditions and is expected to close on November 1, 2011.

AGNC expects to use the net proceeds from this offering to acquire additional agency securities as market conditions permit and for general corporate purposes.

Citigroup, Deutsche Bank Securities and J.P. Morgan Securities LLC are joint book-running managers for the offering. Barclays Capital Inc., Mitsubishi UFJ Securities and Nomura Securities International, Inc. are co-lead managers for the offering. Keefe, Bruyette & Woods, Inc. and Wunderlich Securities are the co-managers for the offering.

The offering will be made pursuant to AGNC's existing effective shelf registration statement, previously filed with the Securities and Exchange Commission. The offering of these securities will be made only by means of a prospectus and a related prospectus supplement, when available. Copies of the prospectus and prospectus supplement may be obtained from Citigroup, Brooklyn Army Terminal, 140 58th Street, 8th Floor, Brooklyn, New York 11220; telephone: (800) 831-9146; Deutsche Bank Securities, Prospectus Department, Harborside Financial Center, 100 Plaza One, Jersey City, New Jersey 07311-3988, telephone: 1-800-503-4611; J.P. Morgan Securities LLC, c/o Broadridge Financial Solutions, 1155 Long Island Ave, Edgewood, NY 11717, telephone: (866) 803-9204.

This press release does not constitute an offer to sell or the solicitation of an offer to buy shares of common stock, nor shall there be any sale of these securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction.

Link to AGNC investor relations press release: http://ir.agnc.com/phoenix.zhtml?c=219916&p=irol-newsArticle&ID=1622187&highlight=

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