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TIP OF THE WEEK - Spot changes in price trends and momentum using the MACD

Spot changes in price trends and momentum using the MACD

Jason Brizic

August 5th, 2011

I love the moving average convergence-divergence indicator (aka the “Mac-Dee”) because it allows me to spot changes in price trends and momentum.

Developed by Gerald Appel in the late seventies, Moving Average Convergence-Divergence (MACD) is one of the simplest and most effective momentum indicators available. MACD turns two trend-following indicators, moving averages, into a momentum oscillator by subtracting the longer moving average from the shorter moving average. As a result, MACD offers the best of both worlds: trend following and momentum. MACD fluctuates above and below the zero line as the moving averages converge, cross and diverge. Traders can look for signal line crossovers, centerline crossovers and divergences to generate signals. Because MACD is unbounded, it is not particularly useful for identifying overbought and oversold levels.

I use the commodity channel index (CCI) for identifying overbought and oversold levels.  To learn more about the CCI see this tip of the week: http://bit.ly/q2loA8 

Now back to the MACD.  The standard MACD is the 12-day Exponential Moving Average (EMA) less the 26-day EMA. Closing prices are used for these moving averages. A 9-day EMA of MACD is plotted with the indicator to act as a signal line and identify turns. The MACD-Histogram represents the difference between MACD and its 9-day EMA, the signal line. The histogram is positive when MACD is above its 9-day EMA and negative when MACD is below its 9-day EMA.

Interpretation

As its name implies, MACD is all about the convergence and divergence of the two moving averages. Convergence occurs when the moving averages move towards each other. Divergence occurs when the moving averages move away from each other. The shorter moving average (12-day) is faster and responsible for most MACD movement. The longer moving average (26-day) is slower and less reactive to price changes in the underlying security.

MACD oscillates above and below the zero line, which is also known as the centerline. These crossovers signal that the 12-day EMA has crossed the 26-day EMA. The direction, of course, depends on direction of the moving average cross. Positive MACD indicates that the 12-day EMA is above the 26-day EMA. Positive values increase as the shorter EMA diverges further from the longer EMA. This means upside momentum is increasing. Negative MACD indicates that the 12-day EMA is below the 26-day EMA. Negative values increase as the shorter EMA diverges further below the longer EMA. This means downside momentum is increasing.

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In the example above, the yellow area shows MACD in negative territory as the 12-day EMA trades below the 26-day EMA. The initial cross occurred at the end of September (black arrow) and MACD moved further into negative territory as the 12-day EMA diverged further from the 26-day EMA. The orange area highlights a period of positive MACD, which is when the 12-day EMA was above the 26-day EMA. Notice that MACD remained below 1 during this period (red dotted line). This means the distance between the 12-day EMA and 26-day EMA was less than 1 point, which is not a big difference.

Signal Line Crossovers

Signal line crossovers are the most common MACD signals. The signal line is a 9-day EMA of MACD. As a moving average of the indicator, it trails MACD and makes it easier to spot turns in MACD. A bullish crossover occurs when MACD turns up and crosses above the signal line. A bearish crossover occurs when MACD turns down and crosses below the signal line. Crossovers can last a few days or a few weeks, it all depends on the strength of the move.

Due diligence is required before relying on these common signals. Signal line crossovers at positive or negative extremes should be viewed with caution. Even though MACD does not have upper and lower limits, chartists can estimate historical extremes with a simple visual assessment. It takes a strong move in the underlying security to push momentum to an extreme. Even though the move may continue, momentum is likely to slow and this will usually produce a signal line crossover at the extremities. Volatility in the underlying security can also increase the number of crossovers.

Chart 2 shows IBM with its 12-day EMA (green), 26-day EMA (red) and MACD (12,26,9) in the indicator window. There were eight signal line crossovers in six months: four up and four down. There were some good signals and some bad signals. The yellow area highlights a period when MACD surged above 2 to reach a positive extreme. There were two bearish signal line crossovers in April and May, but IBM continued trending higher. Even though upward momentum slowed after the surge, upward momentum was still stronger than downside momentum in April-May. The third bearish signal line crossover in May resulted in a good signal.

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Centerline Crossovers

Centerline crossovers are the next most common MACD signals. A bullish centerline crossover occurs when MACD moves above the zero line to turn positive. This happens when the 12-day EMA of the underlying security moves above the 26-day EMA. A bearish centerline crossover occurs when MACD moves below the zero line to turn negative. This happens when the 12-day EMA moves below the 26-day EMA.

Centerline crossovers can last a few days or a few months. It all depends on the strength of the trend. MACD will remain positive as long as there is a sustained uptrend. MACD will remain negative when there is a sustained downtrend. Chart 3 shows Pulte Homes (PHM) with at least four centerline crosses in nine months. The resulting signals worked well because strong trends emerged with these centerline crossovers.

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There are more examples available at StockChart.com’s chart school: http://stockcharts.com/school/doku.php?id=chart_school:technical_indicators:moving_average_conve

I believe that the best opportunities to buy high dividend stocks at low prices can be identified when the MACD is below the centerline and after bullish signal line crossover.  I perform fundamental analysis first to decide what stocks to buy.  Next I use the MACD, CCI, and Bollinger Bands to time my purchase or sale of stocks.

I used this technique to buy gold at $840 per ounce in December 2009.  Gold has amazing fundamentals given the historic fiat money printing be perpetrated by the Federal Reserve.  Then I examined the technical indicators.  The MACD (the black line) was below the centerline and it had just crossed above the signal line (the red line).

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What works for commodities works for stocks as well.  I’ve been following SeaDrill (SDRL) for about six months.  Their chart shows how the MACD can help time a purchase.  I think SeaDrill should be bought at around $15.00 per share.  The MACD showed a steady decline in momentum during the first six months of 2010.  In June 2010 the MACD crossed the centerline into negative territory, then in July it turned upward and did a bullish signal line crossover.  The stock price bottomed at $16.64 just before these technicals came together

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AT&T’s MACD signaled a reversal in November 2008 and March 2009 along with the CCI and it Bollinger Bands.

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Pick one of your favorite stocks and type its ticker into the Ticker Symbol field.  Here is the link to the chart with the MACD and CCI set up for you:

http://stockcharts.com/h-sc/ui?s=$SPX&p=W&b=5&g=0&id=p16270535585

Was the best time to buy your favorite stock when the MACD met my criteria above and in the linked CCI Tip of the Week?

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SeaDrill drilled lower. Should you buy it?

SeaDrill (SDRL) took a beating yesterday.  The stock price dropped over 10% while the broader market dropped 4%. 
 
SeaDrill is not low enough to buy yet despite the huge drop yesterday.  Consider buying SDRL when it drops to $15.12.  I wrote about SeaDrill in June.  That analysis still stands: http://bit.ly/SeaDrillJun2011.  I'm concerned that the dividend is not safe.
 
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Bernanke get hammered, tells truth about US economy

This is absolutely hilarious and sad at the same time.

http://www.zerohedge.com/news/bernanke-gets-hammered-tells-truth-about-us-economy

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A First Look at VeriSign (VRSN)

A friend asked me to take a look at VeriSign (VRSN).  This stock has paid some recent special dividends that were quite high yielders.  For those of you who are not familiar with VeriSign here is what the company does to earn money:

VeriSign, Inc. is a provider of Internet infrastructure services. It provides domain name registry services and infrastructure assurance services. Its business consists of Naming Services segment, which consists of Registry Services and Network Intelligence and Availability (NIA) Services. Registry Services operates the authoritative directory of all .com, .net, .cc, .tv, and .name domain names and the back-end systems for all .jobs and .edu domain names. NIA Services provides infrastructure assurance to organizations and is consisted of VeriSign iDefense Security Intelligence Services, Managed Domain Name System Services and Distributed Denial of Service mitigation. On August 9, 2010, it sold its Authentication Services business, which included Business Authentication Services, User Authentication Services and its investment in VeriSign Japan K.K. In November 2010, it ceased the operations of its Content Portal Services business.

VeriSign (VRSN)

Market price: $29.99

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Link to the chart: http://stockcharts.com/h-sc/ui?s=VRSN&p=W&b=5&g=0&id=p95244304300

Shares: 166.40 million

Market capitalization: $4.99 billion

Dividend record: Some hefty special dividends in the past 18 months; no quarterly dividend

Dividends:          $3.00 (8.79% yield) December 16th, 2010

                        $2.75 (7.93% yield) May 5th, 2011

                        $3.00 (8.78% yield) December 20th, 2011

Earning power: $1.12 per share five year average adjusted EPS @ 166.40 million shares

(Earnings adjusted for changes in capitalization)

            EPS                   Net inc.             Adj. EPS

2006     $1.53                $383 M              $2.30

2007     ($0.63)             ($149 M)           ($0.90)

2008     ($1.87)             ($374 M)           ($2.25)

2009     $1.28                $246 M              $1.48

2010     $4.64                $831 M              $4.99

Five year average adjusted EPS was $1.12 per share

Consider buying VRSN below $13.44 per share (12 times average earnings)

Consider selling VRSN above $22.40 per share (20 time average earnings)

VRSN is trading at 26.77 times average earnings.  That pricing is speculative.

Balance sheet: That is a hideous balance sheet that shows no pattern of growing equity!

Image004

Book value per share: $3.13

Price to book value ratio: 9.58 (BAD)

Current ratio: 2.34 (GOOD) Current assets exceeds current liabilities by more than double.

Quick ratio: 2.16 (GOOD) Current cash exceeds current liabilities by more than double.

Disclosure: I don’t own VeriSign (VRSN).  I wouldn’t consider buying it above $13.44 per share.

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AGNC reports 2Q2011 financials. Dividend in jeopardy and it is speculatively priced.

American Capital Agency Corp (AGNC) is nearly speculatively priced despite its low advertised PE ratio.  This company remains dangerously leveraged.  Higher interest rates and another credit crisis will destroy its profits.  But the yield remains huge until they cut their dividend.

Headline from a few days ago "American Capital Agency Reports $1.36 Earnings, $26.76 Book Value Per Share, Adds Two Directors"

Let's take a look at 2nd quarter financials

American Capital Agency Corp (AGNC)

Market price: $27.92

Shares: 178.51 million shares

Market Capitalization: $4.983 billion

Dividend record: 9 quarters of $1.40 dividend payments

Dividend: $1.40/share quarterly

Dividend yield: 20% ($5.60 annual dividend / $27.92 share price)

2nd quarter EPS: $1.36

Dividend payout ratio: 103% ($1.40 dividend / $1.36 EPS)  It gets harder and harder to pay that $1.40 dividend as the company continues new equity offerings to finance its leveraged finance.  AGNC will have to pay $250 million per quarter in dividends going forward (178.51 shares x $1.40 dividend).  They only earned $177.8 million this quarter.  Not good.

Earning power: $1.46 per share @ 178.51 million shares

(earnings adjusted for changes in capitalization.  There were only 15 million shares at the end of 2008.  They issue massive amount of shares to pay for their leverage.  There are over 178 million shares now)

                        EPS       Net inc.             Adj. EPS

2006                 -           -                       -

2007                 -           -                       -

2008                 $2.36    $35.4 M             $0.19   

2009                 $6.78    $118.6 M           $0.66

2010                 $7.89    $288.1 M           $1.61

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

2011-03            $1.48    $133.5 M           $0.75

2011-06            $1.36    $177.8 M           $0.99

2011-09            ?           ?155.7 M?          ?0.87?

2011-12            ?           ?155.7 M?          ?0.87?

3 year average adjusted earnings (2008-2010) = $0.82 per share

4 year average adjusted earnings (2008-2011E*) = $1.46 per share

* I'm assuming that AGNC will earn the average of the first two quarters of 2011 which was $0.87.  This is conservative.

Based on the four year average:

Consider buying AGNC at or below $17.82 (12 times avg earnings)

Consider selling AGNC at or above $29.20 (20 times avg earnings)

AGNC is trading at 19.1 times average earnings assuming that the second half of 2011 will be the same as the first half.  This is almost speculatively priced.  Don't be fooled by the low PE ratios you see on Google Finance (3.97), Morningstar (forward PE 5.6), and Yahoo Finance (P/E ttm: 4.27)

Balance sheet: skyrocketing assets and liabilities due to ~8x leverage; equity going up

Image001

Book value per share: $26.76 ($4776.646 M equity / 178.51 M shares)

Price to book value ratio: 0.999

Disclosure: I don't own AGNC and I don't plan on owning it.

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Why a Debt Default Would Be Wonderful

Why a Debt Default Would Be Wonderful

by Tom Mullen

Recently by Tom Mullen: Can Ron Paul Really Be Right About Everything?

 

   

While it is likely that the two parties in Congress will reach a deal before the August 2 deadline, I can’t help reflecting on how wonderful it would be if they didn’t. While Congressman Ron Paul has correctly pointed out that the government has already defaulted at least three different times in its history, and continues to default every time it prints new money, it is not quite the same as an “on-the-books” failure to make a timely payment. That is exactly what America needs.

Politicians, mainstream economists, and the media tell us that a U.S. government debt default would be catastrophic. Treasury bonds would be downgraded, interest rates would soar, and the massive government spending that has supposedly fueled the present (jobless) recovery would be severely curtailed, plunging the U.S. and possibly the world back into a deep recession.

Perhaps that is true. However, a debt default by the federal government would still be a blessing to American society for several reasons.

First, one must remember that all government spending represents a redistribution of wealth (what we regular folks call “stealing”). The government forcibly confiscates money from those who have earned it and spends it for the benefit of someone else. The most insidious way that the government does this is by borrowing. When it borrows, it is confiscating money from people in the future – some of whom are not even born yet – to hand out to their special interest supporters today. To the extent that it would prevent or decrease this, a default would result in a more just society.

However, even if one doesn’t care about justice or property rights, a default would help correct the very malinvestment that has caused the crisis in the first place. As I’ve said before, the entire U.S. economy is really one, huge bubble of misallocated resources, caused by at least a century of government intervention. Most people recognize that the government’s backing of mortgages, together with monetary inflation by the Federal Reserve, were the primary causes of the housing bubble. However, most people fail to recognize this same dynamic in almost every sector of the economy.

The government also backs student loans for people to go to college. Just like it did to the housing industry, this has inflated the price of higher education far beyond what could be supported by real demand. That in turn has led to the creation of millions of jobs in the education sector that only exist because the government redistributes wealth to back those loans. When the government funds are no longer there, the price of education will plummet, just as housing prices did. All of those people will be out of work.

Healthcare is another sector with all of the same intervention-related problems. Government subsidy creates artificial demand, inflating the price and driving the misallocation of resources to the healthcare sector. The industry is not forced to innovate in terms of delivering its services in more efficient ways because the customers are forced to buy its products (if you doubt this, just withhold the Medicare portion of your payroll taxes and see what happens). This also directs employees into the healthcare sector that would not be supported by natural market forces. When the government can no longer subsidize it, the bubble will pop, just like housing and education. Again, massive unemployment for misallocated human resources.

Banking, research, agriculture, energy, automobile manufacturing – there is not one sector that anyone can name where government is not overriding the voluntary transactions that market participants would otherwise engage in. Wherever the government is spending taxpayer money, it is overriding the choice that the taxpayer would have made if he had been allowed to keep his money and spend it as he pleased. As F.A. Hayek pointed out in The Road to Serfdom, the government has never and can never make better choices than millions of market participants acting in their own self-interest. They simply lack the information necessary to do so.

So, wherever the government is spending money to try to boost some aggregate statistic, it is making the problem bigger, not smaller. If government spending is creating jobs, they are not real jobs. A real job is a voluntary contract between a buyer of services (an employer) and a seller of services (an employee). If that job is created because of government spending, then a third party is introduced into the transaction who is not acting voluntarily. Government-created jobs force taxpayers to purchase services from employees because it is not profitable for the employers in that sector to purchase them. Forcing taxpayers to purchase them doesn’t make those jobs any more profitable. It just depletes the capital available to create profitable jobs elsewhere.

The prospect of perhaps tens of millions more people unemployed may seem frightening, but that day is coming regardless of what politicians do in Washington. Economic laws are like the laws of nature. They will assert themselves in the end. Any job that requires the government to borrow more money to subsidize it is also a job that depends upon the lenders continuing to lend. As we have seen in recent Treasury bond auctions, those days are coming to an end. Raising the statutory debt ceiling only allows more phony jobs to be created, setting up more employees for the painful correction.

However, the most important reason that a debt default will be beneficial is a philosophic one. It will force a complete paradigm shift in the way Americans think about the role of government. For at least a century, there has been no area of life that some special interest has not appealed to government to manage or subsidize. From the way we conduct commerce to the way we make personal decisions on food or healthcare to the way we coexist with our neighbors in other countries, nothing has been off limits. Complacency about our liberty has been one reason. The other has been the perception of infinite financial resources. The great wealth that the United States generated in its freest period provided a tax base and borrowing collateral that has always been perceived as unlimited. A debt default would shatter that foolish perception.

The default would be a bucket of cold water in the faces of a drowsy and compliant populace. It would wake people up to the reality that Thomas Paine was aware of over 200 years ago, when he wrote that government “is at best, a necessary evil.” People would realize that the government doesn’t “have our back,” other than to stick a gun in it to loot our liberty and wealth. We would no longer hear that horrid refrain from media pundits after some new government incursion or heist: “Well, the government had to do something.” Instead, we would hear the resigned chorus, “Well, the government couldn’t do anything.” And perhaps, in some glorious, enlightened future, “The government shouldn’t do anything.”

Reprinted with permission from Tom Mullen's blog.

July 30, 2011

Tom Mullen [send him mail] is a writer, musician, and business consultant. In January 2009, he published his first book, A Return to Common Sense: Reawakening Liberty in the Inhabitants of America. Visit his website.

Copyright © 2011 Tom Mullen

 
 
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What is a dollar?

 
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TIP OF THE WEEK - Read the "Mystery of Banking" if you plan to invest

Read Rothbard's The Mystery of Banking
Jason Brizic
July 29th, 2011
 
You must read Murray Rothbard's The Mystery of Banking if you are going to invest your hard earned capital in markets tossed around by the Federal Reserve.  Gary North explains below.  You will never read a Wall Street Journal the same again after reading this book.  The is part of taking the "red pill" of Austrian economics.  Ignore it at your own financial peril.
 
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My 1995 Foreword to Rothbard's The Mystery of Banking
Gary Noirth

July 29, 2011

In 1995, I turned over the publishing rights to Murray Rothbard's 1983 book, The Mystery of Banking, to the Mises Institute. I thought that the Institute would do a good job in promoting it. I was correct.

Now that the Mises Institute publishes it online for free, I know it will be widely read. But the new edition does not have my original Foreword. I thought you might like to read it.

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You have in your hands a unique academic treatise on money and banking, a book which combines erudition, clarity of expression, economic theory, monetary theory, economic history, and an appropriate dose of conspiracy theory. Anyone who attempts to explain the mystery of banking--a deliberately contrived mystery in many ways--apart from all of these aspects has not done justice to the topic. But, then again, this is an area in which justice has always been regarded as a liability. The moral account of central banking has been overdrawn since 1694: "insufficient funds."1

I am happy to see The Mystery of Banking back in print. I had negotiated with Dr. Rothbard in 1988 to re-publish it through my newsletter publishing company, but both of us got bogged down in other matters. I dithered. I am sure that the Mises Institute will do a much better job than I would have in getting the book into the hands of those who will be able to make good use of it.

I want you to know why I had intended to re-publish this book. It is the only money and banking textbook I have read which forthrightly identifies the process of central banking as both immoral and economically destructive. It identifies fractional reserve banking as a form of embezzlement. While Dr. Rothbard made the moral case against fractional reserve banking in his wonderful little book, What Has Government Done to Our Money? (1964), as far as I am aware, The Mystery of Banking was the first time that this moral insight was applied in a textbook on money and banking.

Perhaps it is unfair to the author to call this book a textbook. Textbooks are traditional expositions that have been carefully crafted to produce a near-paralytic boredom--"chloroform in print," as Mark Twain once categorized a particular religious treatise. Textbooks are written to sell to tens of thousands of students in college classes taught by professors of widely varying viewpoints.

Textbook manuscripts are screened by committees of conventional representatives of an academic guild. While a textbook may not be analogous to the traditional definition of a camel--a horse designed by a committee--it almost always resembles a taxidermist's version of a horse: lifeless and stuffed. The academically captive readers of a textbook, like the taxidermist's horse, can be easily identified through their glassy-eyed stare. Above all, a textbook must appear to be morally neutral. So, The Mystery of Banking is not really a textbook. It is a monograph.

Those of us who have ever had to sit through a conventional college class on money and banking have been the victims of what I regard---and Dr. Rothbard regards---as an immoral propaganda effort. Despite the rhetoric of value-free economics that is so common in economics classrooms, the reality is very different. By means of the seemingly innocuous analytical device known in money and banking classes as the T-account, the student is morally disarmed. The purchase of a debt instrument--generally a national government's debt instrument--by the central bank must be balanced in the T-account by a liability to the bank: a unit of money. It all looks so innocuous: a government's liability is offset by a bank's liability. It seems to be a mere technical transaction--one in which no moral issue is involved. But what seems to be the case is not the case, and no economist has been more forthright about this than Murray Rothbard.

The purchase of government debt by a central bank in a fractional reserve banking system is the basis of an unsuspected transfer of wealth that is inescapable in a world of monetary exchange. Through the purchase of debt by a bank, fiat money is injected into the economy. Wealth then moves to those market participants who gain early access to this newly created fiat money. Who loses? Those who gain access to this fiat money later in the process, after the market effects of the increase of money have rippled through the economy. In a period of price inflation, which is itself the product of prior monetary inflation, this wealth transfer severely penalizes those who trust the integrity--the language of morality again--of the government's currency and save it in the form of various monetary accounts. Meanwhile, the process benefits those who distrust the currency unit and who immediately buy goods and services before prices rise even further. Ultimately, as Ludwig von Mises showed, this process of central bank credit expansion ends in one of two ways: (1) the crack-up boom--the destruction of both monetary order and economic productivity in a wave of mass inflation--or (2) a deflationary contraction in which men, businesses, and banks go bankrupt when the expected increase of fiat money does not occur.

What the textbooks do not explain or even admit is this: the expansion of fiat money through the fractional reserve banking system launches the boom-bust business cycle---the process explained so well in chapter 20 of Mises's classic treatise, Human Action (1949). Dr. Rothbard applied Mises's theoretical insight to American economic history in his own classic but neglected monograph, America's Great Depression (1963). In The Mystery of Banking, he explains this process by employing traditional analytical categories and terminology.

There have been a few good books on the historical background of the Federal Reserve System. Elgin Groseclose's book, Fifty Years of Managed Money (1966), comes to mind. There have been a few good books on the moral foundations of specie-based money and the immorality of inflation. Groseclose's Money and Man (1961), an extension of Money: The Human Conflict (1935), comes to mind. But until The Mystery of Banking, there was no introduction to money and banking which explained the process by means of traditional textbook categories, and which also showed how theft by embezzlement is inherent in the fractional reserve banking process. I would not recommend that any student enroll in a money and banking course who has not read this book at least twice. Of course, had I thought that there was even the slightest chance that such students would heed my advice, I never would have relinquished the rights to re-publish this book.

_____________________________

1. P.G.M. Dickson. The Financial Revolution in England: A Study in the Development of Public Credit, 1688--1756 (New York: St. Martin's, 1967); John Brewer, The Sinews of Power: War, Money and the English State, 1688--1783 (New York: Knopf, 1988).

2. The historian Paul Johnson rediscovered America's Great Depression and relied on it in his account of the origins of the Great Depression. See his widely acclaimed book, Modern Times (New York: Harper & Row, 1983), pp. 233--37. He was the first prominent historian to accept Rothbard's thesis.

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AGNC reports 2nd quarter earnings. Warning: Dividend payout ratio over 100%.

 American Capital Agency Corp. reported 2nd quarter earnings today.  I will provide analysis tomorrow.  The dividend payout ratio is over 100% ($1.40 dividend / $1.36 net earnings).  That isn't good news.  I wouldn't buy this over-leveraged mortgage REIT.  Here are the highlights. 

(RTTNews) - American Capital Agency Corp. (AGNC: News ) reported net income for the second-quarter of $177.8 million or $1.36 per share, compared to $36.86 million or $1.23 million in the comparable quarter last year.

Net-interest income for the second quarter rose to $200.9 million from $33.2 million a year ago, while total other loss was $6.1 million, compared to a total other income of $7.7 million in the prior year quarter.

Further, the company's board of directors declared a second quarter dividend of $1.40 per share payable on July 27, 2011, to stockholders of record as of June 23, 2011.

 
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Analysis of Safe Bulkers (SB) 2nd Quarter Results

Safe Bulkers (SB) reported 2nd quarter financial results on Thursday July 21st, 2011.  Their board of directors declared a continuation of the $0.15 quarterly dividend.

http://bit.ly/SB2Q2011report 

The dividend is payable on or about August 31st, 2011 to shareholders of record at the close of trading of Safe Bulkers common stock on the NYSE on August 24th, 2011. Safe Bulkers has paid a $0.15 quarterly dividend since it's 2008 public offering.  They haven't established themselves as dividend growers, but the dividend yield of 8.3% is tremendous ($0.60 annual dividend / $7.21 share price).

Safe Bulkers dividend is still safe even in this horrible drybulk shipping market brought on by the global recession created by Keynesian central bank monetary expansion.  SB earned $0.27 per share this quarter and paid a $0.15 dividend.  The dividend payout ratio rose to 55.5% from 38.7% in 2010.  I don't like to see the dividend payout ratio to rise unless the dividend is increased.  But this increase in the dividend payout wouldn't worry me until it approaches 90%.  SB paid the same $0.60 annual dividend while earning an adjusted $1.55 in 2010.  The company conducted a 5 million share equity offering since 2010, so the $1.73 2010 EPS needed to be adjusted downward.

This year's annual earnings are on pace to be the lowest in the history of the company.  Safe Bulkers has earned an average of $1.90 per share over the past five years (adjusted for changes in capitalization due to share increases).  SB earned $0.41 in the first quarter of 2011.  It earned $0.27 this quarter.  Some faceless, nameless analysts expected earnings of $0.37 per share according to Reuters financial website.  Therefore, the financial press considered this quarter a earnings miss.  Let's assume that SB only earns 90% of it's 2nd quarter earnings in the 3rd and 4th quarters.    With these conservative assumptions the company would earn $1.16 per share.  This would bring the six year average EPS (adjusted) down to $1.84.  Safe Bulkers remains an extreme value stock trading at 3.92 average earnings including my hypothetical earnings estimates for the remainder of the year.  Consider buying SB below $22.08 per share (12 times average adjusted earnings).  Consider selling SB above $36.80 (20 times average adjusted earnings).  This high dividend stock is so cheap compared to other stocks!!

Coca-Cola (KO) trades at around 26 times average earnings.
Pfizer (PFE) trades at around 18.2 times average earnings.
Proctor & Gamble (PG) trades at around 16 times average earnings.

Safe Bulkers has 16 ships in it's operational fleet.  The fleet's average age is 4.4 years.  There are another 11 that will be added to the fleet over the next three years.  The company's average time charter equivalent (TCE) rate (think of as revenue per ship per day) was $27,921 in this quarter.  Estimated 2011 revenue = 16 ships x 361 operational days (99%) x $28,000 TCE = $160 million.  Only 23% of the fleet is rented out on the abysmal spot dry bulk market characterized by the Baltic Dry Index.  So only a small portion of SB's revenues are affected by the current market. Their fleet is contracted out at 59% in 2012 including the new ships joining the fleet.  If you are considering a purchase of Safe Bulkers, then you must monitor the Baltic Dry Index weekly (note: the BDI has taken a huge hit in the past three years due to the massive drop in the capesize rental prices.  Capesizes are the biggest ships.  SB owns very few of them, so the BDI can lose a larger percentage than SB's TCE in the same amount of time.)

Balance sheet (improving slightly)
Shareholder equity increased by $65.6 million.  Nearly $40 million of the additional equity came from the equity offering.

Companies with current ratios above 2.0 and a quick ratio above 1.0 are usually financially sound.  They have enough current assets to cover their current liabilities more the twice over.  The quick ratio measures cash on hand divided by current liabilities.  SB's current ratio dropped from 2.0 to 0.62 and their quick ratio dropped from 1.9 to 0.5.  The company's current ratio and quick ratio decreased due to spending money on advances to shipyards building their new ships.  These ratios should increase back to excellent levels once the new ships start producing revenues.

Conclusion: Safe Bulkers earnings miss will create an opportunity for high dividend stock investors who have done there homework to buy this excellent company at a low price.

Disclosure: I don't own Safe Bulkers, but I would like to.

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